Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson Second Quarter 2018 Earnings Conference Call. During today's presentation by Emerson Management, all parties will be in a listen only mode. This conference is being recorded today, May 1, 2018.
Emerson's commentary and responses to your questions may contain forward looking statements, including the company's outlook for the remainder of the results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10 k as filed with the SEC. I would now like to turn the conference over to our host, Tim Reeves, Director of Investor Relations at Emerson. Please go ahead, sir.
Thank you, Denise. I am joined today by David Farr, Chairman and Chief Executive Officer and Frank Deliquila, Senior Executive Vice President And Chief Financial Officer. Today's call will summarize Emerson's second quarter 2018 results, The accompanying slide presentation is available on our website. I'll start on Sales in the second quarter of $4,200,000,000 increased 19% with underlying sales up 8% and strong growth across both of our business platforms. Demand conditions remained favorable and were consistent with our first quarter.
The US and China led growth and trends were favorable across all world areas. Underlying orders have trended in the to 10% range that we expect to continue through the year. Profitability continues to be strong in the base business excluding valves and controls, EBIT margin was up 170 basis points on solid incremental margins. Price costs remained neutral in the quarter. GAAP EPS increased 31 1,000,000 shares.
And in the first half, we've repurchased over 11,400,000 shares and returned to almost 1,400,000,000 to shareholders through both dividends and share repurchases. Operationally than we had anticipated a few months ago. Turning to Slide 4. 2nd quarter gross margin was up 40 basis points excluding valves and controls and EBIT margin was up 170 basis points. A quick note on our first half profitability, In the first half, gross margin excluding valves and controls was up 100 basis points and EBIT margin was up 130 basis points driven by operating leverage, the benefits from prior period restructuring actions and execution around normal ongoing cost reduction efforts.
Price cost in the first half was approximately flat, and we continue to expect a neutral price cost impact in the full year. Turning now to Slide 5. From a geographic perspective, the momentum we've seen over the past few quarters continued in the second quarter. With broad based demand and favorable trends across the world areas. MatURE markets were up high single digits, led by North America.
Europe was flat in Q2 and in the first half, but order trends here are favorable, and we expect solid growth here in the second half. The emerging markets were up high single digits in the second quarter, led by China, which continued to deliver robust growth across both business platforms. In the first half, Emerson total Emerson underlying sales were up 8%. Turning to Slide 6, Total segment margin, excluding valves and controls, was up 130 basis points in Q2. And in the first half, The segment margin was up 100 basis points, again, excluding valve and controls.
The acceleration of growth across our businesses has resulted in higher working capital levels and we expect strong free cash flow conversion in the second half. Turning to Slide 7, Automation solutions, underlying sales were up 10% in the quarter and 10% in the first half. Favorable trends continued with strong demand across process hybrid and discrete end markets, led by North America and China. Strength in oil and gas was driven by MRO, Small and midsize projects and turnaround activity. Demand in chemicals markets was supported by petrochemical and specialty chem upgrade and optimization projects, Our global power business, whose markets have seen a steep decline, grew net sales and orders in the first half, reflecting strong participation in plant retrofit and greenfield investment activity.
Automation Solutions segment margin was up 20 basis points, and was up 240 basis points, excluding valves and controls. Improvement was driven by operational leverage and the benefit of prior period restructuring actions. Our Final Control team continues to hit key milestones and the valves and controls business is integrating very quickly into the broader Final Control business. With valves and controls, we are on track with synergy plans, and we are seeing the margin improvement read through. Turning now to Slide 8, commercial and residential solutions.
Underlying sales grew 4% in the quarter and 4% in the first half. In China and in broader Asia, strong demand continued in air conditioning and refrigeration markets. Growth in North America reflected strong demand for professional tools, while air conditioning demand slowed due to cooler weather and timing of channel inventory stocking. However, the underlying economics for air conditioning markets remains positive, and we expect solid growth in the second half. Margin decreased ten basis points as material inflation and mix was partially offset by operational leverage, higher price realization and the benefit of prior period structuring actions and aided by the divestiture of the ClosetMate business, which was sold in October of 2017.
Let's turn now to of the recently announced Tools and Test acquisitions. We will provide an update to guidance after the transaction close, which is expected in the fiscal fourth quarter. We expect total Emerson underlying sales to grow 7% at the high end of the previous guidance range with automation solutions up 8% and commercial and residential solutions of 5%. The GAAP EPS range has increased 0 point 0 $5 at the midpoint to the new to a new range of $3.10 to $3.20 or growth of 22 percent to 22 26% compared with the prior year. This guidance assumes a neutral price cost impact as we continue to offset material inflation with price realization and cost reduction efforts.
The expected effective tax rate for 2018 is 25 percent to 27%. And now please turn with me to Slide 10, and I will hand the call over to Mr. David Farr.
Thank you very much, Jim. I appreciate it. First of all, before I talk about this slide, I want to welcome everybody and I want to thank everybody for across Emerson from a tremendous quarter. The Emerson people around the world, including our new acquisitions from the valves and controls, and the paradigm and the, in the Cooper Atkins, I want to thank all those people as they've integrated very quickly and understand the core principles of Emerson. We had a very strong quarter and a very strong first half of our fiscal year.
I also want to let you know that with me today. I have a brand new stand mutual autograph bat from a long time friend and also a shareholder who figured I needed a new baseball bat given that Tim's been taking the brunt of the other baseball bats for a while. It keeps breaking them. I do have a new Stanuemuso back here with my rally monkey holding on to the handle for good luck. Now back to chart on Tools and Test.
I wasn't here for this acquisition, but you have to understand, these are 2 unique brands, Greenleaf Tool and Clouka that we've wanted to acquire for many, many, many years. You all know, I ran Ridge tool at one time, and we used to talk to the folks at Textron about these two acquisitions, these are unbelievable, unique brands, very powerful brands, And like the Valves And Control acquisition, we see unique capability of integration, unique capability of taking these brands and along with our core brands in this area here and making it much stronger and creating significant value for our shareholders. Yes, some people might say it was an expensive acquisition, but there's not many assets like this out there. You can count on one hand, the brand recognition of assets in the space, be it rich tool, be it Milwaukee, be it Greenley, be it Clouka, be it. You can go work a couple more, but not many brands like it.
And that's why we're so unique about it. And I am really glad that the CEO of Textron made a decision to really focus on other businesses like we did when we our decision a couple of years ago. But very strong opportunities in growth. And we really look at the leverage opportunities between some very powerful brands and creating a strong business for our customers, but also for our shareholders. And I was not able to join the phone call because I've been on the road.
I was around the road around the world for 13 days. Seeing what's going on in the world of Emerson and it is going well. And, I'll talk a little bit about that in a second. But first of all, again, say, strong execution like both platforms. The emerging markets is emerging as we talked about in February, I think to take stronger role in growth in the second half of this year and going into 2019 2020.
As I see it unfold right now, I'd like what I see relative to some of the emerging markets. The only emerging market that we have not seen really kick into growth at this point in time is Latin America. It's been sporadic 1 quarter up, 1 quarter down. But I think that that will kick in, but the world of Asia, the world of Middle East, Africa, the world of Eastern Europe, all kicked in very strongly and I see good strong growth opportunities in the next several next several years. We, as I went out and talked to customers, as I was in Germany and Italy, the Middle East, Singapore and then also the Philippines.
The project business is building. As we've been talking about the small, medium sized projects are the first one on the shoot and they continue to build along those lines, which is very, very good. And I'm really glad to see that. But now I'm starting to hear about larger projects. Which are being formed and starting to be bid on, which will really solidify our growth opportunities as we move into 2019 in 2020.
But the shape of the recovery is good with the U. S. Clearly leading this right now, but from my perspective, we're going to see the emerging come in and drive faster growth versus the mature markets as we get into 2019 2020. Overall, both businesses are executing around the profitability, around the investments. I feel very good about the growth rates.
We're separating ourselves from the pack in many, many markets. Like China, like the Middle East and a couple other key markets like India around the world. And I like what's happening at this point in time. Cash flow is still on track to deliver around $2,900,000,000 for the year. Clearly, right now, our growth rate is is running a tad higher than we've said originally.
Therefore, we have a little bit of working capital primarily around receivables we as the growth has kicked in. But, from my perspective, nothing of a concern yet. As I look at the total year and Tim mentioned already in the slide, we see our growth rate around the 7% plus or minus a little bit there. We like where we are at this point in time. As I look at the Automation Solutions business, it looks like it had some upside commercial res really depends on getting a stronger weather pattern, which we're starting to get right now relative to some warmth and some better weather from construction.
But overall, we're shaping up to have a 7 good solid 7 plus type of underlying sales growth for the year with a good solid earnings per share in this $3.10 to $3.20 range at this point in time, excluding any of the impact of the acquisitions. For the third quarter, As we said, we see a very good underlying growth rate is somewhere in the 7% to 7.5% range. We're looking at earnings per share I'm telling you that the one I'm getting the range, because as you guys try to map up the year as we raise the guidance for the year, we see right now $0.85 plus or minus a couple pennies. Along with a 7% to 7.5% range of underlying growth. So we're another good progression, another good quarter, And clearly, we have we're also seeing a pretty good fourth quarter coming out, but that's we'll see what happens as the cycle continues in the automation solutions.
But that's what we see at this point in time. But I'll open the floor up for questions. Overall, again, feel I want to thank everybody for the strong execution around the world and the both platforms and the integration of the businesses we made acquisition wise a very good job and we're looking forward to another solid quarter as we move into this third quarter, in our fiscal year 2018. So with that, floor up for questions.
Your first question will come from Jeffrey Sprague of Vertical Research Partners. Please go ahead.
Good day, everyone. Hello, Dave.
Hello, Jeff. Good to hear from you. Hopefully, you have a good weather. It's beautiful here in the Midwest.
Son has finally come out. I think spring has finally arrived here on May 1st
a month.
It's been a
long, cold wet spring here, or I guess you can't call spring, I guess, free spring.
Hey, I asked this question almost kind of tongue and cheek, but there's a lot of people out there that are saying the cycle's over and this is as good as things get. That's You must
have listened to the cat call. You must have listened to the cat or phone call.
Yeah, no cat calls on this call, right? So, how do you feel about the longevity of the activity that's unfolding in front of you and is there any particular thing that you are concerned about from a macro standpoint?
I mean, I don't think the cycles any different than I've been talking about over the last 6 to 12 months. I think that 2018 is going to be a good year for us. I think 2019 for the automation space could be slightly better depending where we finished Jeff. As you know, I've always talked about If we have a stronger 2018, it'll take a little bit away from 2019, but I still see a very good 2019 base in the project business at this point in time. I'm always worried about any type of trade wars.
I'm always worried about any type of competition in the Middle East or something like that. But right now, the customer base has the money the pricing staying up relative to the commodities and they need to invest. So I feel good about it and we have a lot of technology coming out, the timing and the integration of Valves and Control and that support of that organization as they've come in and leverage across of what we're seeing across Emerson right now has been very, very positive for us. So I'm very optimistic. I've said that I thought that automation solutions could have a stronger growth year 2019 2018.
I still believe that. The cycle has not peaked.
Interesting. Thanks. And then just on VNC, Obviously, you gave us the margin, progression ex V and C and we've got the acquisitive effect on sales, but there's a little bit of other M and A going through automation now like Aradigm and the like. Could you just put a little bit of finer point on the underlying B and C margin execution in the quarter kind of where it's at and where it's at. I'll let
him answer that. I'll let him answer because he he thought this would come up and he's got the numbers here. He talked to the he talked to Ron up in, but it's progressing like we thought it would. The orders are extremely strong. I just saw some orders from Europe and they're doing well, but Tim, once you see once you So the, the history since we closed on
the business last April, it's been in the sort of 4% to 5% range. And that excludes restructuring and the amortization. And so what we saw through the first quarter was kind of still in that range. And we expected Q2 to be up and start to track toward the double digit margins in Q4, and we did see that. So it was up as high single digits in Q2, we expect high single digits Q3 and then we should be into those low digits in Q4.
It's getting harder and hard for us to be able to manage it. I mean, Well, we're going to try to give you an indication where it's gone. It's definitely moving that way, but the integration is going and it's going to tougher and tougher. So But it's progressing well. I mean, if you look at the overall profitability of the automation business, if we're having problems with VMC, it's big enough to move it.
The paradigm is not big enough to move it. But right now, I'd like from a working capital standpoint, a sales standpoint, And the profitability standpoint, we're making great progress. We got to visit a lot of sites around the world. Frank was with me. And so we got to spend some time with us.
So Jeff, I think we're in the slot there right now and the business has picked back up. So our timing is pretty good in this one.
Great. Thanks a lot. Very solid. Appreciate it.
I'll address you, Jeff. Thank you very much.
Yes, thank you.
The next question will be from Scott Davis of Melius Research. Please go ahead.
Hi, good afternoon, guys. Good afternoon, Scott. Where are you where are you hanging out today? New York or somewhere? How are you going?
New York. It's it's, it's where I hang my hat. But, you know, No comment. Anyways, Dave, you said you were
There's nothing wrong with New York. I I've heard New York and Frank's for New York.
Why don't you pay our taxes? You know?
Well, I don't, you know, I can't I
can't pay my spirits here. I pay half the taxes and collect more than you pay.
It's really tough when you cross the 50 percent pay level. I know that's a hard one for all of us to handle. I don't I'm not quite there. You might want to move to a lower tax state.
Well, I would take 50% of what you make, Dave, but 50% of what I'm
asking would not do much for you.
Get live. All right.
I'll focus on work here for a sec. You said you were just in the
Mid East,
your orders were, or sales actually were pretty darn strong. And it have we officially seen a turn? Do they have any money over there for projects?
Yes, they have turned and, it's been turning now for 3 or 4 months. And I was a little bit more cautious late last year. It's turned. I the money is coming, you got money in Saudi, you got money in equate. We're seeing money coming out of Africa now, even the North Africa, They're having to put money back in.
For them to get the revenue, they have to invest and get the oil and the gas out. We're seeing cutter starting to put some money back in. So the answer is yes. And our KOB 3 and KOB 2 business right now is very good. So they're putting the money back into repairing and upgrading and trying to get a little bit more out of productivity.
And the bigger projects are coming in the bidding, and that will again be coming down the road. But very active right now. And I think that we have a good couple of years here, I think, at this point in time.
Okay. And Dave, you'd one of the things that got us more positive on your story was just the utility market and Ovation. You made some positive comments about utility, but give us a sense. I mean, it feels like that market has been dead for many, many years. Is there Is there some real legs behind an upgrade cycle automation side in the utility side globally?
So when you break it down globally, if you look at the emerging markets, there's a lot of new capacity and upgrades going on. And so we're seeing that. But in the mature markets are primarily North America. What we're seeing is enhancements, investments into their current the current capacity. There's not a lot of new capacity going into the U.
S. Right now, but they're investing in trying to make their facilities more productive And given our installed base in North America of the power plants, we have a very good inside run there. And then also with our new embedded PLC, which we're going after, that's a very active products project for us inside the utility marketplace too. So right now, we're seeing positive orders as we did last year in North America and on a global basis. We are we have continued to invest in this space.
We have continued to make the necessary new product investments. And I think a lot of our competitors have been backing off and I think they're giving us an opportunity here that, and you know me, I didn't really for a long time, I see these opportunities. And we're I was up in Pittsburgh last week and spent a whole day with them and we're looking at how we how we continue to widen the gap of our penetration around the world. And I think that I feel good about the next couple of years in our power industry and it's a very It drives a lot of other core products at the same time. So every, I mean, from a transmitter to control valve and instrumentation, it really drives other good businesses for us.
I'm more optimistic than you are.
The next question will be from Steve Winoker of UBS. Please go ahead.
I've been around a while, and, I've been through 3 cycles. This cycle has not ended. Periodly.
Right. Well, I get a brand new paperwork. Yeah. I'm not
talking about numbers or anything. I just say it's not ended.
Dave, on the cash flow side, so you obviously addressed it in your comments, but I want to maybe hone in there a little bit on your conviction around hitting that $1,500,000,000 plus I guess it's $1,500,000,000 to $1,600,000,000 in the second half. You took the guidance on cash flow down just a little bit a tick It's growth related. You got the working capital moves. You guys are great on cash normally. Just any I guess any risks that we should be aware of and you making that number?
No, I mean, not at all. I think that the conversion rate will move around based on the growth of earnings coming up and what we're seeing if we're going to have as we took the growth rate up a tad for the whole corporation, as I've talked and I openly talk about it, Once we start crossing around this 6.8 percent plus range, it's a tougher line for us to continue to take keep that working capital totally fully in check. So from my perspective, we could deliver the hard cash and yet the conversion rate is going to be a little lower because the earnings, just the way the cycle is going to be and the timing of, say, September sales. So I don't have a I'm not less convicted. I feel good about the cash flow.
If I grow faster, let's say we grew 7.5% for the whole year. That puts a lot more pressure on us, but I'll take the growth in the sales. I'll take the growth in earnings and then we'll get the cash off look at the working cap off the balance sheet when things slow down a little bit. So it's we're in that cusp right now, Steve, when we're there's growth rates where we're we actually have to put some money on the balance sheet versus when we take it off. So that's we're in that fine line right now, right?
I wouldn't worry about our cash flow. I mean, the cash is good. It's just I just we're going a little faster, which is good.
Right. Right. Good problem to have.
More cash or less growth. What do you want? Give me a choice.
Yeah. I gave it. I want both. Alright. Come on.
You know that.
Do you and you
wanna run a business? I agree too. I want both too, but, you know, I also have to be realistic, you know. Yeah. Yeah.
Well, you know, just you got you're hitting out of the park, right? So pricing versus inflation, you were worried about this price diversification. You've been
worried about that, but now are you less worried these days? Or I think that
we're under control. Yes, I would say right now we're probably flat. I mean, as we said all year long, we're flat. I always felt that we'd be slightly plus or minus a couple of $1,000,000 in this. We're flat.
The whole issue around the tariffs or around the disruption around the steel pricing, the prices ran up, they drifted back down. We're all out there working. It's part of the reason we're probably moving products around the world a little bit right now trying to get positioned for this. I worry about it more in 2019, Steve, than I do now. Because I think we have to make sure we understand where things are trending and then we're going to have to get the pricing action in place.
In certain cases, we're putting double prices in this year. We're having to tweak because of material costs, but I we are we've been waiting for this upturn in inflation for about 4 years. After having 5 years of negative. And so now we're moving pretty quickly. So I think we got this under control.
I mean, we're going to be plus or minus a couple of $1,000,000. I'm not too worried about it, but there's a wild card out there. And all of a sudden, tariffs come in and we start seeing now affected tariffs. That could cause problems for all of us in the industrial world. But right now, it's under control, but it's a wild card I worry about.
To be honest.
The next question will be from Steve Tusa of JP Morgan. Please go ahead.
I got my rally monkey here, so don't be mean too. So
I'm not I'm not I'm not I'm not gonna be mean. I'm not I'm not that kind of guy. Just calling as I see it, Dave.
I always just try and call it as I see it. Well, I'm saying if I get the new job just keeping you at bay, I mean So just
to be clear on that, Power commentary, you talked about you're taking market share. I mean, the biggest install base in the
market share.
Think people have walked away from the marketplace. I didn't say, but I think we're doing pretty well, yes.
Well, obviously if they're walking away from the marketplace and you guys are you know, winning business, that means you're taking share. And it's just, I mean, my understanding that most of the controls are kind of like OEM related, you know, OEM related. Mean, this is not something that Rockwell necessarily has a huge presence in, especially in the U. S. So like I would assume that the share gains are coming from some of the legacy OEM controllers here in North America, at least that's what we've seen in the channel from meeting with your guys at power gen.
Is that correct assumption?
That's correct assumption, but the other thing out there, the islands of automation and power plants are out there. And so we're going after that. And so we have parts of a power plant where it's a being a PLC type structure and a skin, we now have our OC C100, which we now need to embed and hook up to our control system. We're bringing a lot more cybersecurity into play here. So there's a lot of places that power companies are invest and we've been positioning ourselves from just being a control system to have a much broader product offering.
So therefore, we can serve these power plants. And we're actually investing in our organization. You go out to power plants where a lot of companies are backing away from that. And on a global basis, you're still seeing power original power going in. So you're seeing power plants.
You're going to see enormous amount of power plants going in in Asia over the next 5 to 10 years. So Right now North America, we're winning in a good way.
Yes, it's good to be the control systems guy in that scenario. On climate. What's going on in the U. S? I mean, all these guys put up pretty good numbers, all the OEMs, I think they talked down a bit the second quarter given weather comps, but how are you kind of explaining the channel dynamics there?
Is this kind Goodman is the only one we really haven't seen this quarter. Is that kind of a customer specific timing dynamic reflected in your numbers?
It's more of a timing and when them ramping up the new production on the AC units system and versus the heating It was a very cold wet spring early cycle. And so we didn't have an early ramp up like we had a little bit more last year. So mean, it's more of a timing issue for us. As you know, we're not always in sync with the OEMs, the manufacturers here. So right now, the function for us is we needed some good we need some good production and we need some good building going on the housing markets or our residential piece will be kind of low single digit this year.
But I'm not too worried about right now. I think that a lot of it is it's will keep coming if I get into May and we get down to EPG and I'm starting to see that things are still weak on it, then we're going to have a tough year in North America. Fortunately, our European business, fortunately our Asia business is still going well. Fortunately, our other the other markets, the the refrigeration market, the client, although those markets are going well, but the one market that has been weak over the last couple months has been our North America AC. And so we'll hopefully we'll see a little heat come in here and a little dry weather and we'll see some orders pop in.
But that's where we see right now. I don't I'm not too concerned about it. We've had this before, Steve, you know, that. CDPG. Yes, thank you very much, Dave.
The next question will be from Robert McCarthy of Stifel. Please go ahead.
Good afternoon, Dave.
Good afternoon, Rob.
Two questions. 1, just in terms of the cycle, particularly in process. Could you just kind of walk through kind of what you
thought the trough was? Just give us
a little bit of history lesson and how long cycle could really go here, just given what we're seeing and underlying oil prices and demand, I mean, isn't it fair to say that we could see this go for several years beyond what may be more early mid cycle for the underlying economy.
So it peaked globally around 2014. It troughed in mid early 2017. It was, as you well know, we had a very good run. It went on for several, several years. We had high levels and then it dropped pretty hard as people cut way back.
What's different in the cycle is is because I think people are going to be very, very cautious about committing new capital for new production, from the oil and gas in areas like that. But they're going to invest in the core business they already have if they already have some with some wells out there, how to expand that without going out and spending up for the big, big fines and things like that. And I what I see right now is people are being much more cautious trying to be they're going to try to incrementalize this a little bit, adding a little bit of a time to the point that one of them may break and say, okay, I've got to put more money into it, but it's I mean, that's why I think that we could have a good solid 2 years here with the 2019 being pretty good. But right now, My visibility in this cycle is solid at least 3 to 4 years. And, from the perspective, I think there's been some under investment in the question is, does the demand stay there in the Loto area for the energy and does the price of energy state at a good price like it is right now.
So it's hard to go beyond 3 years, Rob, but I see 2 solid years and I see a good 3rd year. That's about far as I can see at this point in time. The key thing for me is going back to the large projects are starting to form. So as I see these large projects starting to build out around the world, that gives me a little bit more of an indication where the cycle is going to go to. So we'll know more about this as they get out towards the end of the calendar year this year.
As I look at the project business we have going out and I see bigger and bigger projects coming at us. But right now, I like what I see and it's shaping up. It's good for us because The small medium ones are easier to execute on and they're typically better profitability.
On that note, with the integration valves and controls. Could you just talk about how the progress has been particularly on 2 specific things? One is, is the trade working capital and the attendant cash. And what the trajectory is there. And then further the potential revenue synergies, from getting back into the kingdom and some others world or perhaps you were under penetrated or under indexed when it was in Pentair's hands and what the opportunity and the trajectory could be there as it's kind of a sweetener to the integration?
The working capital is happening. I mean, on the Final Control business on his Ram and his team, right now, they're doing extremely well. With this integration. I would say a couple of places we've had in our automation where we've had tougher working capital challenges, but Rom's team is doing very good job of getting this out and cleaning it up and we feel good about that. The integration is going well.
We are we're in the very deep of the process right now of exiting a business we had in Europe, which which we knew were always going to exit and it was going to cost us some money. We're in the process of getting that done. Hopefully we'll get it done before this fiscal year or maybe before the end of this quarter. Relative to the project work and relative to the integration of sales, that is actually going much faster than we anticipated. And as we said in February, I think that's been one of the pleasant surprises of the organizations of the Pentair Valves And Control business and then our automation business coming together.
And we're getting acceptance and we're hiring people to start working jointly together. So I thought that maybe we'd have a little bit more of a pause this year on growth and I think we're going to have a better growth mode out of this, the Final Control business here sooner than I thought. And I think a lot of that's going to be tied around the co selling and the synergies. Relative to the kingdom and Aramco, we've been the Aramco to their credit has been working extremely hard to get off they have to go visit all the facilities and they have to sign off in all the facilities. As I look at the progress, because I'm I'm going to try to meet with the CEO of Aramco next week.
They pretty much have visited every facility now. And we're now getting down to anything that anything they've asked us to clean up and do like that. So we're starting to get bids. So I think you're going to see more of an impact on that in 2019, which again, is a little bit faster because Aramco historically is pretty slow at getting back out. So net net, great integration on the costs, working capital, but pleasantly positively supplied surprise on underlying growth rate and orders which is great to see from the perspective of Ram and his whole team around the world.
I'm very pleased with that. See you. Thank you.
The next question will be from Julian Mitchell of Barclays. Please go ahead.
Good afternoon, Julian. How are you doing?
Very good. Thank you. Maybe just a, a first question on Europe. That have been sluggish for you and many others in terms of fixed asset investment for a while. The soft data there looked a lot better for 12 months.
Now that started to slow on your own numbers in terms of orders in automation, for example, are pretty sluggish still. So I just wondered, are you sort of you still believe there will be a fixed asset investment recovery in Europe or you starting
to think maybe I feel very strongly Junifer, very strong that we will deliver 5% growth in Europe this year, underlying sales growth this year. I see the projects, I see the winning going on. It took us a it took a while. I think that on the commercial res size, that we've been doing pretty well there and they're doing well. They're free while in line for that.
The automation and we were there and Frank was with me. We were talking about this with a European review. We see the projects. And so I firmly believe that the orders are coming and we're going to see this around 5% airline growth rate in Europe. It took them longer for it to gear back up.
They had some very strong, first half twenty seventeen, Eastern Europe projects that we won and did well on. And it's just taking longer for us to get geared back up in the Western Europe part. I agree that the overall economy, the numbers are slowing down a little bit, but I don't think it's going to impact what we see going from for both 2018 2019. I think that investments are starting to happen. The money is starting to flow.
And so I think the industrial world, in particular, has this quarter in Europe, in Western Europe, but I think it's going to start, the investments are going to start flowing back out and I feel good about the orders and sales. At this point. I'm not going to eat my words in this, but that's after meeting with this team and going through a battle with him for about a day and a half, I feel good about it.
Understood. And then my follow-up would just be around the, I guess the sort of orders trajectory within automation. I mean, is most of the strength you're seeing, in that March figure, for example, that's still MRO related, I guess. When you're trying to think about the larger projects, what's your latest view on when you think those might start to hit the orders rate rather than just being part of conversations and quotations activity?
We'll start seeing some happen this quarter. The we'll start having some bookings coming in and some on some good sized projects, which will create a lumpiness in our order pattern The reason our order pattern has been pretty stable for the automation business for the last several months is because we're still booking the small, medium sized which are good, but we're starting to book our bid and win and also lose larger projects, which I think we'll start seeing them being booked in the third quarter, some in the 4th quarter. Again, most of that not going to help us this year, but it's going to help us build the 2019, which builds a stronger 2019, which I feel will be there. The other thing I see in 2019 is I see the emerging markets being playing a key role, for us, and that's why I feel good about 2019 in the automation business. But You're going to start seeing some I wouldn't be surprised if you don't see in some spikes and some orders and some project wins here in this quarter.
Great. Thank you.
Thank you, Julian.
The next question will be from Gautam Khanna of Cowen and Company. Please go ahead.
Yes, good afternoon. Thanks.
Good afternoon, Gautam. Thank you very much, boy. Two quarters in a row I get to talk to you,
Yes. I know it's all good. So in fiscal 2019, I know you're not guiding fiscal 2019, but
definitely not guidance is what I think. I mean, I'm still kind of one of these crazy CEOs that will talk about more than 2 2 quarters or 2 months, you know?
No, that's right. I appreciate that, actually. 'nineteen, obviously, you're going to have some lift in margins at the Valves And Controls business. But you are facing this mix dynamic with more project activity growing presumably at Automation?
Yes.
So just wanted to what should we should we expect incremental margins at Automation Solutions to dip down or do you think they can stay in the mid-30s as we transition the mix? I from MROADIS project.
Doing the logic and connecting the dots, you just put out their gown, which are very relevant dots for this connection. I firmly believe the margin pressure will be in this 30% to 35% range. This year, I think we're going to be probably around closer to 35%. So I think that what's going to happen is the pressure will be to push that margin down because of the project business. And then what we have to make sure is that we manage the incremental investments as we grow.
And so that's what the challenge is going to be for 20 19 because the projects will be kicking in. Some of the MRO business will probably be slowing down. I'm hoping we'll have some still some good mix and some North America investments going on. So we maybe have a better mix going our way But, that's going to be the pressure point we have. And then clearly, we're going to be pushing real hard on V and C to get that that double digit margin that we exit 2018 with to move it up quickly as possible, so help offset some of that dilution.
But that's the game we're going to be facing there, but I still feel good about the margin progression that we laid out, getting to that 19% that we I think was 2020, 2021. I still feel good about that, but the game next year is exactly what you said. The projects come in. We got to start figuring out how we we squeeze as best we can to maintain the margin improvement record as we go forward.
Got it. But north of 30% incrementals is still on the table for year.
Yes. For all the automation guys out in the phone are listening to this call, Mike Train and team north of 30%. Got him says it, you have to deliver.
Right, right. Of course.
Don't ignore the CEO of Emerson, but talk to got him.
I was going to say Latin America still lagging.
I was wondering maybe if
you could parse which I thought we were getting some strength in Mexico and else in Brazil, but I wanted to know, like, what specifically is kind of holding that region back? Are you seeing any pockets of strength within Latin America?
Yes, we are. We actually last quarter, we saw good progress in Mexico down in Chile and Argentina. This quarter, Brazil kicked in and Mexico dropped off. Our Mexican customer base is struggling a little bit relative to some projects and some business and small projects And that's so this quarter, Mexico have hurt us. So I've gone from, I was a believer that we're going to come through.
So now I'm starting to doubt it again for a while here until this election done. But right now, it's Mexico is the one hell is back. The rest of the region, be it Brazil, be it Chile, be it Argentina, they're doing much better. So if we get Mexico back online and growing again, I right now, I'd say maybe fourth quarter, we'll see some growth return to that marketplace. But that's the last of the global region.
Although our emerging markets have to turn back up, Fortunately, it's not the largest. I mean, we have other markets much larger than they are now, but it's still, I'd like to see them all come back into sync.
And
I think it will because there's been under investments down there.
I appreciate the color. Thanks a lot.
Here, got them. All the best.
Yeah. Thank you.
The next question will be from Deane Dray of RBC Capital Markets. Please go ahead.
Thank you. Good afternoon, everyone.
Good afternoon, Dean. Good to hear from you.
Hey, and I like the choice of a Stan Musual bat too. Stand the man?
He was a very nice investor, and I won't mention his name. I've known him for a long, long, long time. He's a close friend, and he knows I love baseball Baty also knows I liked fan music a lot and I have a lot of autograph stuff from Stan. And it's a it's sitting here in my rally monkey and swinging it hard right now. So I appreciate that.
Good to hear. So,
hopefully you expand on the comments on China being robust for automation. And so to see and hear the comments strong across process, that's not surprising given the context of everything that on this call and even hybrid. But, in your answer, can you also touch on where strength is in discrete markets, we don't often hear you talk about that. So maybe some color, maybe some applications, if you could.
So from our perspective, in the downturn, we worked in the sort of the global downturn, we worked very, very hard to go continue to go out to the mid tier Chinese customers in the chemical area, the refining area, the pharmaceutical area, and, in the gas area, natural gas area. And we are seeing them investing in a big way at this point in time. So when we're going in, we're selling in also the power area from the standpoint of upgrading the power system to make them cleaner. So we're seeing broad investments in our marketplace around the markets would have chemical area in the mid tier markets. And they're taking our total package, be it systems, instrumentation, They're taking discrete products with them.
We're seeing investments going on in pharmaceutical right now as China is investing in their own pharmaceutical industry. And we are continuing to see very strong investments in refining as China is trying to become more self sufficient on refining the finished product and for their own marketplace. But across the board, if you look at the industries, we just had a review in Singapore on what's going on in China right now. And Dominic, and he's doing a great job. He's the head of president for us in China.
Most of the markets are very strong, across everything we serve at this point in time. And it's a lot of the smaller emerging players and our end customer base that are investing in the space and they're investing in smaller type of projects, but we're We're winning on broad based projects, which is good. And the reason the discretes coming through is because pharmaceutical, some of the chemical And so in the power area, we're starting to see some of our efforts of new product generation starting to have a pretty good penetration. So when you grow 20 percent in a quarter in China, in both businesses, you know you're doing something right. And that's what we did the last quarter.
And I think we're going to have a very good I think I talked about having growth this year most likely around 10% to 12%. I'm now looking at China being a very strong this year, being north of 15%. For Emerson. And, because we have, we've really invested in people. We've invested in innovation And we're really pushing hard in this market space right now and our customers are liking what they see from us.
So We're in a good zone and I'm sure people are going to start gunning for us here real soon, but, I like where we are at this point in time.
Got it. And that 15% is for fiscal 2018?
Correct.
Got it. And then just to follow-up on the valves that can Troll's question, you hinted that there's a divestiture coming and I know you can't give a lot of specifics, but I'd be interested in kind of directionally how material of, is that business to the overall valves that controls? And will you benefit from this by subtraction? Is it a lower margin business? So does that help you get to your double digit target?
It will help us more next year. Let's put it that way. It is a small business. You're talking less than $20,000,000 in size, and you're talking about business at Breakeven. And it's and we've had this has been the mark from day 1.
And the technology and product line that it's not interested in marketplace, we're not interested. We have a couple more that we've been working on. We we where we're trying to sell them. And so this one will be done in we'll probably get a little bit of help this year. I'll honestly, Dean, but it's going to help us more next year from the standpoint as we start running the year into 2019.
It'll gives us a nice margin because we won't have that dilutive impact in that. But it's that's where it's very small, and it's not that big. But overall, what I really am hoping to see is when it clears and see the businesses growing this year when I thought we might not grow this year, we can actually go backwards. So that's a good sign right now of the integration process. But small equity all divestitures that we have to deal with and we're hopefully getting them all done this year early first quarter of next year.
But Frank and his team are working hard on right now.
Great. See you, Sarah. Thank you
very much. Thank you, Dean.
The next question will be from Rich Kwas of Wells Fargo Securities. Please go ahead.
Hey, good afternoon, Dave.
Good afternoon, Rich. How you doing? You're in St. Louis today, you're in the Midwest. Where are you hanging out today?
I'm in,
I'm in, Baltimore. Baltimore. Yep. Yep. Hanging in here.
Yeah.
We're in
my armor suit. So question on cash from B And C unlocking. So the referencing some of Rob's question earlier. So a couple of $100,000,000 was kind of the target over a multiyear time where are you right now? How do you feel about that in terms of pulling that in sooner?
And any thoughts around timing around it?
I don't think I mean, I think our goal is north of $200,000,000 in this in by 2020. I don't think we're going to be able to go any faster, Rich, because what we're going through right now is I have a lot of pressure on Ram and his team think we're going to get over $50,000,000 this year. The goal for me
is really to
get their math out
string regionalized and globalized, which is a new concept for them. And that's so that's important to me. So I want to be able to match We, our business in Asia right now tries to take an off and they don't manufacture the product in Asia. They ship it around the world. So my focus right now is, okay, guys, give me the manufacturing strategy over the investments we have to make for the next couple of years.
So we can localize. And that allowed me then to get to be a little more aggressive on the working capital. I mean, we'll get the $200,000,000 out of it by 2020, But the issue really, the gold mine for me is to be more regionally located, manufacturing located, which allows me to run with less working capital. And that would make a much bigger number on a combined basis down the road, which is that's my goal from that statement, from a cost and just the working capital basis. But I feel good about it.
I mean, we're going to end up getting north of $200,000,000 off this, and we're going to do it in a very systematic approach. And I think we're getting a cost structure a competitive nature in the sales force, is working hard. And now we're talking we talked in Italy, Frank was with us. We're talking about new products and innovation. For the first time in a long time with these guys.
And so we're working to help each other try to accelerate innovation, which is something that you not That's a mantra of with inside Emerson and we work very, very hard at innovation. And so this is something I the they're exciting me with the concepts and opportunities for me right now and not just from working capital, but just from growth opportunities, which would be great to see.
Right. So it sounds like there's some tail, even some tail opportunity beyond 2020 with regards to working capital though. So it's going to
kind of grind it out. From my perspective, they were running around 50%. I want to give them down to 30. In reality, I think the I think the Bronze business should be thinking about low 20s. And so but this is going to take a more regional manufacturing approach, and that will take time.
So but that's a lot of dollars when you start thinking about, you take that percentage of sales. And so that's the way I think of the model I see for these guys, if they want investment, this is why I want back from them. But I know it's going to take me capital, which I'm going to put in, But if I can run that business in the low 20s with trade working capital on a global basis with better margins, I'm going to create value for our shareholders. Our customers too.
Right. And then early returns on Paradigm, I saw some interesting stuff down at OTC and with regards to some of the software and folding that into the system and whatnot. What's been has it expanded share of wallet early on here? It's the early read?
Not much change. I think this one is probably 12 months out. We this one is you do need Going back to my comment on one of the earlier questions about the bigger projects, this is where you need bigger projects where they start investing in bigger chunks of software. And those are still to come. What they're going on right now is they're looking at in existing fields, existing investments.
So it's only a small amount of investments going on. What I what we're looking for is the gear up is, okay, let's go look at a new location and really do some more software work. So I would say that one's going to be more helpful for us in 2019 2020 when the bigger projects come. But still doing okay. And it gives us the time to get integration underway.
And we had an organization session last week talking about some new teams and some the ways we want to manage this business. So, Paradigm, the timing is good. And we'll make good money in this one over the long term.
Okay, great. Thanks, Ian. Appreciate it.
Thanks very much Rick. Look forward to seeing EPG. Yes.
The next question is from Simon Toenison of Berenberg. Please go ahead.
Yes, thank you. Good afternoon, everyone. My first question is on automation solutions in Asia. Obviously, very strong China numbers you had again there, but it seems Asia grew 7%, which is probably mostly China. So Can you talk about what's holding you back in Asia, ex China and how you see that panning out in the second half?
Our Asia business grew a solid single digit, outside of China. And, I mean, China is important, but I mean, it's still it's not it's probably only half of our business if that at all right now. I couldn't tell you how many historically is around anywhere between 45% 52%. So they're grabbing numbers for me, Simon, so I can make sure I can I'm not. Yeah, so, so we had good first half growth is single digit type of business for us, good growth.
What's holding us back primarily is the initial investments are just starting to happen in Southeast Asia and Australia. So Australia had gone through a very difficult time period, and they're just starting to invest. So that's the 2 weaker markets we're seeing right now are Southeast Asia, Singapore, Malaysia, Thailand, and and Australia and New Zealand. And so what we're starting to see is that starting to pick back up. And I would expect us to see that moving into a solid single digit, which is normal for a mature the more mature emerging market for us.
So that's what's holding us back right now, but the project the business is starting to happen. And I would say they're going to they're going to see a stronger second half than they did in the first half. And I expect trying to hold in there very nicely for us, Simon.
Got it. The second question on CNRS in China. Obviously, again, another strong quarter. You maybe give us a bit more color on the development of the heat pumps business and how you're seeing that for fiscal 'eighteen?
The heat pump market has stayed pretty strong. I think we're now on our 7th or 8 double digit growth China business for commercial residential. That is a good record for us where you have 7 straight quarters. And I think that we'll probably have 8 or 9 So what's going on right now, where we're starting to see is it's starting to move over into the industrial Marketplace, the heat pump versus the coal or versus the gas and starting to move into what I'd call the commercial marketplace. So the first wave has been in around homes or the consumer marketplace.
Now it's starting to move into the industrial space and it's starting to move into the commercial space. And we're also starting to see where some potentially some hot water space where they're heating water for the industrial applications or restaurants So we're starting to see the application of the government trying to encourage companies to get away from coal, try to get away from heating oil to bother to heat or to, or warm water. And we're now starting to see growth starting to happen outside the residential market So that's why this is sustained a little bit longer and we're encouraged by that and we're hoping this will take hold as we leave this year so we can have growth in 2019 because clearly after 8 or 9 good solid double digit growth quarters in Asia or China for these guys, gonna have some really difficult comparison. So we're trying to drive a broader marketplace right now, Simon. And we're the only one that can do this because of the the size of our compression and our size of electronic and skill capabilities here.
So so far it's going well. I'm going to be there in on June. Going to a couple of sites. I'm going to do a site review in Suzhou. I'm hoping to see, some of these new products and some of those market expansion going well.
And Hocking and his team are doing a great job in trying to get this in a new market because we've got to get away from just the consumer, the individual homes, to the industrial and to the commercial space which is starting to happen.
The next question will be from Joe Ritchie of Goldman Sachs. Please go ahead.
So, so, Dave, maybe just talk about capital deployment a little bit. You know, when tax reform got past, you're one of the you CEOs to talk about, additional CapEx investment. So I was curious to see if there was any update there on internal projects. And then secondly, just on the M and A side, obviously, the Greenley Clock acquisition recently, be curious like how the pipeline is going today? What you're seeing perhaps on the process side, whether there's any opportunities there?
Any color there
would be great.
So as we talked about, I did come out and I've talked to my board about this a lot on the capital allocation. Given our balance sheet, given the cash flow generation and the benefit of the tax rate for us as we get into 2019 2020, We have obviously tremendous flexibility here. So from our perspective right now, the our share repurchase program, we're going to be looking at $1,000,000,000 this year in our fiscal year. From a capital spending standpoint, we're looking we took it up and we're targeting to get up towards at Wizzafranks, 575. I think that no more increase to that.
I mean, I think that's right now, that's where we are at this point in time. It could slip a quarter or 2, but we're ramping up. And as I talked earlier, we're trying to encourage investments relative to our globalization standpoint. So we want to invest capital to become more productive and faster and more efficient. So we're going to keep doing this in the next couple of years.
At the same time, This year, I mean, right now, Franco, we've said we close to $2,000,000,000 that where we've sitting in acquisitions at this point in time. We have one point $8,000,000,000 was $5,131,400,000,000. We I firmly believe that we have opportunities this year, Joe, to get over $2,000,000,000. We do have a couple we're working on right now in the automation space. So we are we're trying to front load this because we talked about trying to get certain amount of acquisitions on the incremental bolt on acquisitions done within the years, the 1st 3 years.
We're trying to get as close as possible to give us a chance to work them. We are seeing opportunities for companies like the Tekron situation where the boards make the decision to refocus the company. We're seeing more and more opportunities like that out there. And we're starting to see some initial assets being shown within the Baker Hughes GE business. And so I think the opportunities are out there for us.
We're going to have a couple of good years of acquisitions, but they're very much focused on bolt ons. And I would say majority of them will still be in the automation space, even though we've made 2 good acquisitions in the commercial residential space. But our best opportunities right now continuing to be in the automation and our allocation, we had liked to as we talked about, I'd like to put as much acquisition to work in the bolt ons and incremental acquisition opportunities versus this share repurchase.
That's super helpful, Dave. I guess my one follow on if if you go back to the Textron acquisition, I had some familiarity with that asset. And right now, like clearly the margins aren't where they need to be. And I'm just curious when you think about maybe Greenleaf specifically, what is it about your channel, your go to market, maybe footprint optimization that's going to allow you to get the margins to be at a much more sustainable and higher level?
We are much more of intense company relative to footprint optimization than run was. And from our standpoint, I mean, I'm running this business and being intimately involved with the little business internally right now. There's no reason why the Greenlane cloud can't couldn't run better. I just think they need to optimize the manufacturer to optimize the investments area there. It's not going to be necessary that channel per se, we do have some channel leverage.
I just feel that we can run this business a much better way than they ran it from an operational standpoint and it's right into our wheelhouse, which is what we're good at. I also think they have some businesses in there. They should not be in, and they're not the leaders in, and we are going to quickly evaluate what we're going to do with those businesses.
That makes sense.
Frank over here worried about that because, you know, but I'm just telling you what I think. I mean, I know what's inside that and I think we some opportunities to tune it better and make them and make sure they're worth being in. That's what I'm saying.
Makes sense. Thanks, Dave.
Thank you very much, Joe.
The next question will be from Andrew Kaplowitz of Citi. Please go ahead.
Good afternoon, Dave. Thanks for my last question. Appreciate it. Thanks for you, Andrew. That's why I mean,
I I apologize. But I gotta get out of my harassed, Andrew, a little bit because he doesn't like me right now.
I understand. I welcome it. I welcome it. So let me ask you about Commercial And Residential Solutions in the context of your margin performance. You had mentioned for the company, relatively flat price versus cost.
Margins were down slight bit year over year. You had the cause of Maine divestiture as a tailwind. So maybe talk about what was the impact from inflation or mix that you talked about slightly weaker U. S. Residential.
Are you investing more in
the business and how should we
think about margin moving forward?
We are definitely investing more in the business right now. We are investing in some next generation technologies that are going to be hitting here in the U. S. And also hitting very heavily in Europe in the next couple of years. So we are We've ramped up some investments around technology, some innovation.
As you know, this space from the commercial standpoint, there's going to be new regulations come into play, and we have to be ahead of that from the standpoint of offering a solution to our customer if we do that, then we win that space and then we win that space for quite some time. And we're trying to add more value to that. So the actual value proposition is higher for us. The on the price cost business, within the commercial residential, we're basically off a quarter or 2 right now. So On this space, we're being squeezed a little bit, but I know that we will within 2 quarters, we'll get that back and back in line.
We trade back and forth from our customer base. We go back and forth in this issue. So I think that we're getting closer, but we'll be under the pressure for the quarter in this space too. It's hurt us a little bit, but it's not a big number, but I just know the it's the negative pressure, not a positive pressure. And so from that perspective.
And the other thing is just from, the mix within our organic our global businesses where Asia is a good business, but it's not nearly as profitable to say our U. S. Business or European business. So we have a lot of some also mix going on, but I'm not going to complain at the level of profitability. We're still going to raise this margin up over the next couple of years, but it's going to come from the investments and the growth of these new technologies not by driving a ton of costs out.
We're continuing to optimize it, but I really want to drive a little bit faster growth and drive a faster mix towards that profitability.
Yes, that's helpful, Dave. And then automation solution orders, you talked about March has still been good. You told us not to be concerned quarter when they do slow a little, but you told us on this call that large projects could start to kick in sooner rather than later. So thinking on that 5% to 10% range is sort of right for the year? And any indication on how April looks at this point?
I don't have any April numbers at this point, but the Automation Solutions number is really holding their solid a very solid 7% right now. And I would expect a couple of months. I mean, if we start getting larger projects, as I mentioned earlier, that pop up towards that 10% range. Again, starting to get tougher comps, but the orders are holding in there. So we feel very good about this 7% range for the whole year for all of Emerson.
But I like where we sit right now. The trend lines are ticking up a little bit and on both businesses, which is a good sign, so as we get into EPG, I'm going to try to give you guys a little bit more color down in EPG, of what I see after we'll have April on board, we'll have the early indication of May. We'll see what's going on here in the U. S. But right now, the trend lines are going the right way, and that's why we felt good about taking that number up to 7% underlying growth at the high end.
And hoping that automation solutions does a little bit better too in the second half of this year. Yeah, with that, I'm gonna wrap up. I wanna thank everybody. Again, I wanna thank all the Emerson people, employees around the world, not their effort. And I also wanna thank the shareholders joining us today for this call.
Again, a very good second quarter, a very solid first half of this year and now we just have to deliver the second half of this year. But, as we look at the third quarter, we're looking somewhere again, I'll repeat it 7% to 7.5% underlying sales growth. We're looking at our earnings of around 85 plus or minus a couple pennies. That's what it looks like to us right now. And I really can't call any closer than that, but it's, again, another good solid quarter for us.
And hopefully that will continue as we move into the 4th quarter. Thank you.
Thank you. Mr. Farr, ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect.