Good morning, ladies and gentlemen, and welcome to the Emerson Investor Update Conference Call. All participants will be in listen only mode. Please note this event is being recorded. At this time, I would like to turn the conference over to Tim Reeves, Director of Investor Relations. Please go ahead sir.
Solutions Platform and Mark Belanda, Senior Vice President of Planning And Development. Thank you for joining us this morning for discussion of the deal we announced this morning, we've signed an agreement to acquire on our website. And now I will turn the call over to Mr. Bob Sharp.
Thanks, Tim. Good. Good morning, everybody. Our evening as it is here in China, about three quarters the way I guess around circling the world. And, had a really nice visit today on the district heating site in Genan, China.
We talked about that in the investor meeting, very exciting. And now I want to talk about the, announcement today. Turn to Slide 2. In the, February analyst investor conference in New York, I showed this chart for commercial residential, cutting between the data management, the control areas, the devices and instruments, and highlight a number of areas of focus we're working on. Some of these are internal development programs.
Some have been smaller scale investments. And at the bottom, if you notice, we had, high, we had electrical tools and joining products, highlighted. And, as we were looking at this at the time. And I'm glad to report that we've been able to close on the deal. So from our view, Tools and Test is a, it's a great addition to the pyramid to the Tools And Home Product business.
We see an excellent value creation opportunity here, both in terms of enhancing the sales in this very good segment that we have And also, as you'll see, some improved margin and cash flow opportunities that we see being able to do with the tools and test businesses. Let's go to Slide 3. The Tools and Test business in 2017, it was 270,000,000 and total sales, around 2300 employees and 11 manufacturing sites and some other operations, around the world in four countries. You can see the products on the right, the joining technologies and electrical crimping in particular. They've had a little bit of pressing activity.
As frankly, they've kind of looked at the plumbing side as an opportunity, just like we've had a little bit of crimping activity. And and then the lugs, goes along with the crimping. Electrical products under the Greenleaf name, a number of things, bending and cable tools, knockouts, And I would say these very much mirror what we do on the plumbing side with rigid, with the core products, and then also with the pressing areas So very complementary from our perspective. You see the profile of the business, a good presence in Europe, Falco, a very strong company, very strong in Europe and then products going elsewhere. U.
S. Very strong and then some presence in Asia and other places. And you can see the mix there of joining electrical and then other products in the utility area, which relates both to the Greenley and Clalka products that are largely 3, and then also some communication products. Go to Slide 4. We look at this business and, I'm very excited about it.
Number 1, It's a very highly respected portfolio, Clouka, and, Greenleaf brands are, somewhat akin to Rigid in the plumbing space as far as very, iconic brands, if you will, very well known and very professional oriented, good position in the joining and diagnostics technology. And consistent performance and cash flow generation. And frankly, I think we see with some opportunities to improve based on the operating performance we get out of our similar businesses. From a market position, again, it compliments us very well, brings about $2,000,000,000 of additional space to us. There's some channel overlap with the mechanical, electrical and plumbing.
So it's complimentary in terms of the technology and space it serves. But it also has a pretty good, overlap, if you will, with channel and customer relationships, the contractor relationships, which are really key to success in a segment like this dealing with the probes. So it gives us a very good offering for the trade speed pool again. Scales our channel presence. We've had a good success in Europe.
This will take us up pretty substantially in European space and we think that provides some enhancer on opportunity for Rich. And, certainly in the U. S, we're both strong and we feel it comes together very nicely. And then some opportunities here in Asia as well. So, for a value creation, we look at this as a bolt on acquisition, a very, no one kind of an area, if you will, with some good potential margin expansion.
As I'll talk about, we do see some good opportunities coming from really a number of areas trade working capital. This business runs about 2.5 times what, bridge runs on trade working capital and we see an opportunity to close that gap. And then cash flow improvement as well. Our experience with this space is, you know, it's a good solid dependable space, if you will, 3% to 5% market growth. And with channel leverage and cross selling synergies, you know, I talk a lot about our intention or goal to grow at a point kind of order of magnitude above market as a way to drive value creation for Emerson.
And we think this very much helps us in the tools and, home products area to achieve that. So again, a very good combination. We've looked at these businesses for quite a long time, going back as far as day far as days running rigid. And, we're really happy to be able to have this opportunity now. Go to the next chart.
Again, and joining the businesses kind of parallel each other. We have the pressing products and plumbing. And as the market has converted to pressing quite heavily in continues to do so. In Plumbing, that's been a very good opportunity for Ridge. And now as we've talked about, this is an area that extends into refrigeration.
As well. And that's happening quite a bit. Diagnostics with underground technologies and some of the other areas that really is quite a heavy data element to this. A lot of areas that we can't see and there we before we need the technology. And then on the tools and test side, similar again, in the joining, the Klauka products and then a diagnostic, some of the green leaf complementing the other cord green leaf products.
So you can almost kind of look at this as what does an organization look like when these businesses come together as a larger professional tools business Ridges comprises some different product areas, families, and this kind of broadens that as well. Into a new, a new larger business. Turning to the last chart, page 6, you can see again, our tools and own products business in 2017, was $1,600,000,000, 23 percent EBIT margin, this included with deposit made business, which was still in divested in 2017. Tools and tests, at this point, $470,000,000 or 11 percent EBIT margin. And, again, we are We're growing tools and home products at this point above market, and we believe we can continue to do that with tools and tests.
With some good enhancers here. We see opportunity for about 20% EBIT margin for this business. And, it's both across sales and the leverage from that as well as a number of areas of the cost structure. I'm not going to get into that today to a great deal as to where, but I would say it's areas that are very familiar with us and the way the similar businesses we have run 20% we feel is a very comfortable synergy case to have. Geographically, we've been weighted quite heavily toward the U.
S, especially with the incinerator presence we have And, you can see this with the 31 percent European mix for tools and tests, broadens us in Europe to double digit The other areas stay similar around 12% and, U. S. Certainly stays very strong. Because of the products we have. Around 12, less than 12, what the current forecast is for 2018 as far as EBITDA will be earnings and cash accretive in fiscal 2019.
And, you know, we don't we'll provide the accounting charges and amortization at the right time. And, we're looking forward to an expedient close, if you will, here, with very complimentary product lines coming together. So with that, we'll turn it over to any questions.
Thank you, Mr. Sharp. We will now begin the question and answer session The first question will come from Julian Mitchell of Barclays. Please go ahead.
I guess the first question maybe would be around, just looking at sort of broad numbers on this, I mean, would we be right in assuming that of that $0.15 of M and A accretion target by 2021 that Emerson had talked about, that Tools and Test could end up comprising around the half of that number in 3 years time. And also, I guess related to that, if we look at the geographic mix of tools and test. It is very different from the incumbent Tools And Home Products business at Emerson. I just wondered if you were concerned that that may mean that the margin profile may struggle to get to that 20% level. Wondered if there was anything about the high exposure to Europe tools and tests that may crimp the margin upside?
Okay.
Hey, Julian. This is Tim Reeves. I'll go ahead and answer the accretion question. So the 2021 plan that we showed you in February This deal certainly helps us in a meaningful way to get there. We're not ready to say it's half, but I think as you kind of model it.
We know you're good at modeling. So, I'm sure you will form your own view there, but it's certainly helpful.
Go ahead.
Yes, it certainly fits within the model that we talked about. On a geography, frankly, we're quite happy with the European mix, this business profitability in Europe is quite good. Our own profitability in Europe is quite good. As well. Again, the kind of the technology based products, and the, the sector we serve with the professionals we're very comfortable operating in Europe for that.
It's a good it's a good market for us.
The next question will come from Jeff Sprague of Vertical Research. Please go ahead.
Just thinking about the margins again, you said you didn't want to get into kind of the X's and O's here. I guess we guests pretty well what you'll be doing. But, how long do you see the path out to 20%? Is this a 3 year project, 5 year project. Maybe you could give us some context there.
And then also just thinking about the port, the pyramid, so to speak. Does this pretty much, kind of fill what you had in mind looking at the segment and what you wanted to kind of drop in or is there more in this area that you're working on?
With respect to the pyramid, we're certainly we continue to work a number of targets And certainly, there's a number of areas that, that I highlighted in that yellow. That acquisitions can be a part of. So it certainly doesn't slow down our acquisition activity. Frankly, we're more throttled by available properties than things that we're interested in. They can be private companies or other things.
And, So, no, it doesn't, I mean, it's a it's it's one element of of acquisitions, but it certainly is not finishing that. It certainly runs through the base and maybe even the synergy numbers we put forward in February. But that's we talked that we also had additional capacity beyond that. So I'd say it's right in line with what we've been trying to do. And it's nice to get one of some size done.
On margins, again, We've got to go through the closing period here. We've got to, get to meet, if you will, and interact with a lot of the tools and test folks. So I don't really want to get into anything great specific. But I'll say a lot of the classic material costs, operating efficiencies. There's no one thing that goes into this.
I think it's just a perfect execution and supply chain strategies. And clearly with 2 very similar kinds of businesses, coming together into a singular group. There'll be some overhead opportunities that I think will be pretty, predictable, if you will. But we'll work that out, with the organization. You know, we're attracted to the people of these businesses also, and we're always looking for good talent.
So, Some things might be timed based on, opportunities to where to best utilize people. But when the modeling we do over 2021, we showed, I think you can, you can assume this kind of fits into that timeframe.
And just one other quick follow-up, if I could. You characterized the business as being, fairly stable, I think. Obviously, these are great brands. I'm familiar with them, but we haven't had a lot of visibility with this inside of Textron actually. How cyclical it is and how it behaves through the cycle.
Steve, can you give us any color there?
I think I can say broadly in this kind of contractor space. You know, we can have a very good year that gets up into high single digit, a tough year, maybe dips negative, but not a huge degree. So, you know, I would say it's a it's a narrower band than, some of the other stuff. And, I think we've been able to manage when those cycles do occur. Certainly, when the oil and gas and the oil fields hit us, in the past couple of years, Ridge was affected by that.
But we can generally work through those swings, because again, they're not quite as shocking as a double digit kind of situations.
Okay, great. Thank you. Congrats.
The next question will come from Steve Tusa of JP Morgan. Please go ahead.
Just following a bit on Jeff's question on the margins. Again, Textron Industrial margins have been where they are. So we have visibility into those. But where historically have these margins been? How far off of, I guess, peak or trough, is 11% today, or is it been pretty steady in that range over the last, call it, 5 or 6 years
Yes, I guess I would say in the visibility we have on the past performance, there hasn't been wild fluctuation, let's say. And, with regard to going forward, I think that, The key is that the business will be in a bit different situation, if you will, as far as groups together with another business of of similar or larger size. And, so I think some of the dimensions of, margin opportunities certainly are different going forward with the synergies that we see.
Yes, that makes sense. Is there any investment required sometimes prolact of a better term, these orphaned assets that are good assets, but they're, sitting in a perhaps a non core position in the portfolio are run for cash. Anything you've seen on the product side that, Hey, in the beginning here, we're going to have to put up tweak up the R and D a little bit or anything like that?
The business hasn't run terribly different than what we would do with with Ridge or other parts of commercial residential. But we do see some opportunities of some some attention as you kind of describe, which will help as far as the operating efficiencies and So I think other than I think you summarized it well with the way you described it.
Right. But I guess nothing to make the trajectory on margins more back end loaded than normal? I guess my question, when you come into 'nineteen and say, we have this kind of 2020 or 'twenty one target, but 2019 is going to be relatively subdued because of some investments we have to make. I mean, we've seen some companies, do that here recently, I'm just curious as if to if we need to kind of think about that as an item in the near term, understand you've got tremendous opportunities over the next 3 to 4 years.
Right. Certainly, some of the things we're looking at will take a little bit longer than others, but I would say there's also some really early stage stuff. So, no, I don't I don't think you should expect it to be a highly backend loaded picture. Okay.
And then one last question.
As soon as we close and get going, we've got some opportunities to get going with.
One last question for you. You said you were in China. How is the China HVAC business doing these days?
My concentration today is on district heating and it is really it's really astounding actually was doing. We talked in the investor call about how some of the residential stuff would kind of, let's say peak or it's still running very high with the subsidies and changes, but it kind of starts leveling out at some point. Distributing has been a pretty significant catalyst on top of that, frankly, surprising us a little bit more than we expected. And then the rest of the HVAC business is it continues to do very well. You know, I think that we can give you an update when we do the investor or the earnings release and I guess that's in a couple of weeks here.
And the final question this morning will come from Rich Kwas of Wells Fargo Securities. Please go ahead.
Hey, good evening, Bob. So it sounds like this wasn't an auction. This is something that you were working on for some period of time.
I don't know that we want to get into exactly what the process was. I'm not sure.
Okay, all right.
I think the way to take it, Rich, is that, for years, the leadership has always looked at Textron and saw the synergies. And it finally come to fruition.
Okay. All right. And then just on the revenue synergies. So the Europe piece, is this really taking ridge and moving it into Europe? And then having greater scale there, or is there some channel synergies when you look at the geographies on a broad basis?
Well, you know, Ridge in Europe, we're over $100,000,000 business. So we've got a we've got a presence certainly in Europe. And, you know, Klauk, as you can see by the percentages that we show with Klauk being certainly the the brunt of the Europe for tools and test, it just takes us to another level of scale. And, and again, with a channel complement, that'll give, I think, both products an opportunity to have some distribution opportunities that may not have existed.
Right. So what I was going to share a wallet, if you will, right, with the customer base, there's just going to be more?
Yes. Certainly, there's a lot of contractors that will have plumbing and electrical and other products. And, the relationships that either Klauca has with those or we have with those through the rigid yes, we certainly see, that is an opportunity.
Okay. And then last quick, when CapEx is this any different as a percentage of sales versus the base business? What's kind of the run rate?
Well, you know, it's it's been it's been a little bit lighter. Then again, our similar types of businesses and, getting to a previous question, we think that we think it should probably be about in line with where we are. And with that, that'll create some opportunities in the factories for some operational improvements.
And ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Robert Sharp for any closing remarks.
Okay. Thank you. Again, as we talked about, all of these layers of the pyramid are important to us. This certainly gives us a lot of strength in the tools and home product side. And so we're really, we're happy about it as well as with the size.
It certainly gets us a lot further toward that 7 plus goal we have for 2021. And, certainly helps us with the 6 plus goal that we have for this year. So we're just, we're excited to have the opportunity and we there's any text around tools and test folks out there listening. We look forward to the opportunity to engage with you, and we think we've got some good opportunities for the combined business.
Thank you sir. Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. At this time, you may now disconnect.