Good morning, ladies and gentlemen. Welcome to the Emerson Investor Update conference call. All participants will be in listen-only mode. Should you need assistance, please signal our conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw from the question queue, you may press star, then two. 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.
Thank you, Denise. I am joined today by Bob Sharp, who is our Executive President of Commercial and Residential Solutions Platform, and Mark Bulanda, the 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 the tools and test equipment business from Textron. Please note that the accompanying slide presentation is available on our website. Now I will turn the call over to Mr. Bob Sharp.
Thanks, Tim. Good morning, everybody, or evening as it is here in China, about three-quarters of the way, I guess, around circling the world. Had a really nice visit today on a district heating site in Jinan, China. We talked about that in the investor meeting. Very exciting. Now I want to talk about the announcement today. Turn to slide two. 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.
At the bottom, if you notice, we had the electrical tools and joining products highlighted because we were looking at this at the time, and I'm glad to report that we've been able to close on the deal. From our view, tools and test is 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. 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 three. Our tools and test business in 2017, it was $270 million in total sales. Around 2,300 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. Frankly, they've kind of looked at the plumbing side as an opportunity, just like we've had a little bit of crimping activity. The lugs goes along with the crimping. Electrical products under the Greenlee name, a number of things, bending and cable tools, knockouts. I would say these very much mirror what we do on the plumbing side with RIDGID, with the core products, and then also with the pressing areas. Very complementary from our perspective. You see the profile of the business, a good presence in Europe. Klauke, a very strong company, very strong presence in Europe. Products going elsewhere. U.S., very strong, and then some presence in Asia and other places.
You can see the mix there of joining electrical and other products in the utility area, which relates both to the Greenlee and Klauke products to a large degree, also some communication products. Go to slide four. We look at this business and are very excited about it. Number 1, it's a very highly respected portfolio. Klauke and Greenlee brands are somewhat akin to RIDGID 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, consistent performance and cash flow generation. 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 complements us very well. Brings about $2 billion of additional space to us.
There's some channel overlap with the mechanical, electrical, and plumbing. It's complementary 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 pros. It gives us a very good offering for the trades people, again. Scales our channel presence. We've had good success in Europe. This will take us up pretty substantially in the European space, and we think that provides some enhancer opportunities for RIDGID. Certainly in the U.S., we're both strong, and we feel it comes together very nicely. Some opportunities here in Asia as well.
From a value creation, we look at this as a bolt-on acquisition, a very known 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 two and a half times what RIDGID runs on trade working capital, and we see an opportunity to close that gap. Cash flow improvement as well. Our experience with this space is it's a good, solid, dependable space, if you will, 3%-5% market growth. With channel leverage, some cross-selling synergies I talk a lot about our intention or goal to grow at a point order of magnitude above market as a way to drive value creation for Emerson.
We think this very much helps us in the tools and home products area to achieve that. Again, a very good combination. We've looked at these businesses for quite a long time, going back as far as Dave Farr's days running RIDGID, and we're really happy to be able to have this opportunity now. Go to the next chart. In 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 and continues to do so in plumbing, that's been a very good opportunity for RIDGID. 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, there really is quite a heavy data element to this.
A lot of areas that we can't see, and therefore we need the technology. Then on the tools and test side, similar again, in the adjoining, the Klauke products, and then on diagnostics, some of the Greenlee complementing the other core Greenlee products. You can almost look at this as what does an organization look like when these businesses come together as a larger professional tools business. RIDGID is comprised of some different product areas, families, and this kind of broadens that as well into a new larger business. Turning to the last chart, page six, you can see again our tools and home products business in 2017 was $1.6 billion, 23% EBIT margin. This included with the ClosetMaid business, which was still divested in 2017. Tools and test at this point, $470 million, 11% EBIT margin.
Again, 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. Not going to get into that today to a great deal as to where, but I'll 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 InSinkErator presence we have. You can see this with the 31% European mix for tools and test broadens us in Europe to double digit.
The summary, as we mentioned, $810 million. That's 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. We'll provide the accounting charges and amortization at the right time. We're looking forward to an expedient close, if you will, here with very complementary product lines coming together. With that, we'll turn it over to any questions.
Thank you, Mr. Sharp. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, you may do so by pressing star then two. The first question will come from Julian Mitchell of Barclays. Please go ahead.
Hi. Thank you, congratulations on the deal.
Thanks.
I guess the first question maybe would be around just looking at sort of broad numbers on this. Would we be right in assuming that of that $0.15 of M&A accretion target by 2021 that Emerson had talked about, that tools and tests could end up comprising around half of that number in three years' time? Also, I guess related to that, if we look at the geographic mix of tools and tests, 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. I 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. 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 we'll form your own view there, but it's certainly helpful.
Go ahead. Yeah, 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 sector we serve with the professionals, we're very comfortable operating in Europe for that. It's a good market for us.
Understood. Thank you very much.
Thanks.
The next question will come from Jeff Sprague of Vertical Research. Please go ahead.
Hey, thank you. Hey, Bob. Hey, just thinking about the margins again, you said you didn't want to get into the X's and O's here. I guess we can guess pretty well what you'll be doing, but how long do you see the path out to 20%? Is this a three-year project, five-year project? Maybe you could give us some context there, and then also just thinking about 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 drop in, or is there more in this area that you're working on?
With respect to the pyramid, we continue to work a number of targets. Certainly, there's a number of areas that I highlighted in that yellow, that acquisitions can be a part of. 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. No, it's one element 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. We also had additional capacity beyond that. 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. I don't really want to get into anything great specific. 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 perfect execution and supply chain strategies, and clearly with two 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. We'll work that out with the organization. We're attracted to the people of these businesses also, and we're always looking for good talent. Some things might be timed based on opportunities to where to best utilize people.
With the modeling we do over 2021, we showed, I think you can assume this kind of fits into that timeframe.
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 cycles. Can you give us any color there?
I think I can say broadly in this kind of contractor space, 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. I would say it's a narrower band than some of the other stuff. 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, RIDGID was affected by that. We can generally work through those swings because, again, they're not quite as shocking as double-digit kind of situations.
Okay, great. Thank you. Congrats.
Thanks.
The next question will come from Steve Tusa of J.P. Morgan. Please go ahead.
Hey, guys. Good morning, or middle of the night or evening or wherever you are there. Just following a bit on Jeff's question on the margins. Textron industrial margins have been where they are, so we have visibility into those. Where historically have these margins been? How far off of peak or trough is 11% today? Has it been pretty steady in that range over the last call it five or six years?
I guess I'd say in the visibility we have on the past performance, there hasn't been wild fluctuation, let's say. 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 similar or larger size. I think some of the dimensions of margin opportunity certainly are different going forward with the synergies that we see.
Yeah, that makes sense. Is there any investment required? Sometimes for lack of a better term, these orphaned assets that are good assets, but they're sitting in 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 tweak up the R&D a little bit," or anything like that?
The business hasn't run terribly different than what we would do with RIDGID or other parts of commercial residential. We do see some opportunities of some attention, as you kind of described.
Okay.
Which will help as far as the operating efficiencies. I think, I don't know what to say, other than I think you summarized it well with the way you described it.
Right. I guess nothing to make the trajectory on margins more back-end loaded than normal, I guess is my question. Will you come into 2019 and say, "We have this kind of 2020 or 2021 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 we need to kind of think about that as an item in the near term, understanding 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. No, I don't think you should expect it to be a highly back-end loaded picture.
Okay. 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, it is really astounding actually what it's 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, it kind of starts leveling out at some point. District heating has been a pretty significant catalyst on top of that, frankly, surprising us a little bit more than we expected. The rest of the HVAC business continues to do very well. I think that we can give you an update when we do the investor or the earnings release in, I guess that's in a couple of weeks here.
Yeah. That's great. Okay. Thanks a lot. Safe travels.
Thank you.
The final question this morning will come from Rich Clough of Wells Fargo Securities. Please go ahead.
Hey. Good evening, Bob.
Good evening.
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, [inaudible].
Okay. All right.
It's certainly something that.
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's finally come to fruition.
Okay. All right. Just on the revenue synergies. The Europe piece, is this really taking RIDGID and moving it into Europe, and then having greater scale there? Or are there some channel synergies when you look at the geographies on a broad basis?
RIDGID in Europe, we're over $100 million business. We've got a presence certainly in Europe. As you can see by the percentages that we show with Klauke being certainly the brunt of the Europe for tools and tests, it just takes us to another level of scale. 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. What I was getting at is share of wallet, if you will, right, with the customer base. There's just going to be more.
Yeah. Certainly, there's a lot of contractors that will have plumbing and electrical and other products, and the relationships that either Klauke has with those or we have with those through the RIDGID. We certainly see that as an opportunity.
Okay. Last quick one, CapEx. Is this any different as a percentage of sales versus the base business? What's kind of the run rate?
Well, it's been a little bit lighter than, again, our similar types of businesses. Getting to a previous question, we think it should probably be about in line with where we are. With that'll create some opportunities in the factories for some operational improvements.
Okay. All right. Great. Thank you.
You bet.
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 products side. We're happy about it as well as with the size. It certainly gets us a lot further toward that seven-plus goal we have for 2021 and certainly helps us with the six-plus goal that we have for this year. We're excited to have the opportunity, and if there's any Textron 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.