Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's Conference Call. During today's presentation by Emerson Management, all parties will be in a listen only this conference is being recorded today, February 6, 2018. Emerson's commentary and responses to your questions may contain forward looking statements, including the company's outlook for the remainder of the year.
Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent report on Form 10 K as filed with the SEC. I would now like to turn the conference over to your host, Tim Reeves, Director of Investor Relations of Emerson. Please go ahead, sir.
I am joined today by David Farr, Chairman and Chief Executive Officer and Frank Deliquillah, Senior Executive Vice President And Chief Financial Officer. Today's call will summarize Emerson's first quarter 2018 results. The accompanying slide presentation is available on our website. So I'll start with the first quarter summary on Slide 3. Sales in the quarter of $3,800,000,000 increased 19% with underlying sales up 7%, reflecting continued favorable trends in our end markets and a strengthening macroeconomic environment.
We closed out the quarter with December trailing 3 month underlying orders up 7% and we expect to stay in a 5% to 10% range as we go forward. Profitability was strong. In the base business, excluding valves and controls, gross margin was up 170 basis points and EBIT margin was up 70 basis points. GAAP EPS increased 9% and was up 18% excluding current and prior year tax items. We accelerated share buybacks as discussed on our November 28 conference call, and it total, we repurchased over 7,800,000 shares in the quarter.
And together with dividend payouts, we returned over 800,000,000 to shareholders in Q1. Overall, the first quarter performance was stronger operationally than we had anticipated a few months ago. Turning to Slide 4. 1st quarter gross margin was up 170 basis points, excluding valves and controls, margin improvement was driven by operating leverage and the benefits from prior year restructuring actions. Price cost in the quarter was approximately flat, Other deductions increased $55,000,000 due to valves and controls 1st year acquisition accounting charges, foreign exchange losses, and higher amortization expense.
Turning to Slide 5. From a geographic perspective, demand was broad based with both mature and emerging markets accelerating in the quarter. MatURE markets grew mid single digits, led by the U. S. And robust growth in Canada.
Europe was flat. However, orders are trending favorably, and we expect positive results in Europe in the second quarter. Emerging markets were up high single digits led by China, which was up 23%, excluding China, the rest of Asia was up mid single digits. Latin America was up 4%. Middle East And Africa was down 5%, but orders here are trending favorably, and we expect growth in the 2nd quarter.
Turning to Slide 6. Total segment margins, excluding valves and controls, improved 70 basis points to 18.6% driven by leverage on higher volume and the benefits of prior period restructuring actions. Corporate and other charges increased $50,000,000 including $25,000,000 of Valves And Controls first year acquisition accounting charges. Operating cash flow was $447,000,000, an increase of 37000000 dollars or 9% versus the prior year. Free cash flow of 351,000,000 was up 13%.
Trade working capital, excluding valves and controls, improved 20 basis points to 18.2% driven by execution around accounts receivable collections and payables management. Turning to Slide 7. Automation Solutions underlying sales grew 9% in the quarter and was led by North America and Asia. North America underlying sales were up 14%, reflecting continued investment by Shale customers, midstream upgrades and high teens growth in Canada. Asia underlying orders sorry, Asia underlying growth was up 13% with China up 22% and the rest of projects and continued favorable trends in key discrete and industrial markets.
Margin excluding valves and controls improved 120 base points to 17.8 percent, reflecting leverage on higher sales and the benefits from prior period restructuring actions. December 3 month underlying orders were up 7%, reflecting strong global energy related life sciences and chemicals markets. We are raising our full year sales guidance for Automation Solutions. The first quarter results and orders trends support full year 2018 underlying sales growth of 6% to 8%, up from prior guidance of 5% to 7%. Turning now to Slide 8.
Commercial And Residential Solutions, underlying sales increased 5% with reported sales flat reflecting the divestiture of the Closet Maid business on the 1st day of the quarter. Demand was led by Asia with China up 24% and the rest of Asia up high single digits. North America underlying sales were up 1% as steady demand for professional tools was offset by difficult prior year comparisons in residential air conditioning markets as a period of late season hot weather led to strong channel replenishment orders in the prior year. Margin increased 20 basis points to 20.1 percent, reflecting leverage on higher sales and the Closet Made divestiture, partially offset by warranty costs. Overall, started in the second half of twenty sixteen.
December 3 month underlying orders were up 5 percent, reflecting strong global demand in air conditioning, refrigeration and construction related markets. For commercial and residential solutions. The 1st quarter results and orders trends support full year 2018 underlying sales of 4% to 6% up from prior guidance of 3% to 5%. Let's turn to Slide 9, which summarizes the impact of U. S.
Tax reform. On an ongoing basis, Emerson will benefit from a lower percent and in 'nineteen and thereafter, approximately 25%, which reflects a full 5 to 6 points improvement from historical levels. The table on the right steps through the impact of adoption related items on our first quarter results. A repatriation tax on foreign earnings of $185,000,000 was offset by a $98,000,000 reduction of our net U. S.
Deferred tax liability $130,000,000 repatriation reserve accrued in prior periods. The net impact of these items in the 1st quarter was an income tax benefit of $43,000,000 or $0.07 of EPS. Turning to Slide 10, which steps through changes to our EPS guidance. The table starts with our November 7th adjusted EPS guidance, which excluded two items 1000 controls first year acquisition accounting charges and a tax related loss on the divestiture of the ClosetMate business. These items totaled $0.07 in the quarter in the first quarter results and were offset by the $0.07 benefit of tax reform items discussed on the prior slide.
As these adjustment items are offsetting, we will guide only on a GAAP basis going forward As shown here, we are raising the low end of our guidance $0.30 and the high end $0.20 based on stronger operational performance, higher share repurchases and the benefit of a lower tax rate. Finally, let's turn to Slide 11, which outlines our updated guidance. We expect underlying sales up 4% to 6%. GAAP EPS of $3.05 to 3 $0.15 is up 20% to 24% versus the prior year or up 11% to 15% excluding the impact of tax reform. We expect operating cash flow We are increasing our capital spending reflecting our more positive outlook on the global business environment.
In addition, we provided 2nd quarter guidance of underlying sales up 7% and GAAP EPS up 21 percent to $0.70. And now, I will turn the call over to Mr. David Farr.
Thank you very much, Tim. I want to welcome everybody and I truly appreciate you joining us for this conference call. I also want to thank, the the global Emerson organization for the tremendous performance and a very strong start to the new fiscal year of 2018. With sales underlying sales up 7%. Margins improving underlying margins improving EPS up 9% at GAAP at $0.61, truly having a very strong start to the 1st quarter of our new fiscal year.
And cash flow up 9% approximately $450,000,000. So a very strong start. And as Tim just explained, we're raising the total guidance for the year. And we will be going back to the measure that I believe in quite strongly and it's called GAAP. And, with the tax reform activity and our performance now and the repositioning running through the company we now can return back to reporting and discussing GAAP earnings which I think is a relevant measure, for our corporation.
Again, I want to thank the global team for a tremendous execution, in particular, around the Final Control team under Mike Train and Ram and, support of Ed, which will update you a little bit at the conference next week, but clearly doing a great job of integrating and getting some great momentum around the orders, the sales, and profitability. So a really, a really good job well done. As we look at the world today, I feel very good about the trends we're seeing. We always knew our order pattern would have to slow down from the very fast pace coming out of the big hole in particular around the automation business, but the pace of dollars of automation orders are maintaining a very high level per month on a roll basis. And so it's a good number on a 3 month roll basis.
How we look at it and we knew this would happen. The underlying orders are actually very good around the world and it's why we've always felt that it would slow down into this band we see right now. And we'll generate, as we look at it, 6% to 8% are aligned sales growth for Automation Solutions business. And that is a very good number. I've never felt as we talked about a numerous times now.
I've never felt the first year out of the box would be a double digit year. We did not see that, and we'll continue to not see that. However, we see a very strong 2 year recovery here a little bit differently than we've seen in the past. And I've been through several recoveries, as you all know, on the Automation Solutions business. But overall, the trend line is very good.
We're seeing very good orders, again, at commercial residential, maintaining this, you know, 5, 6 maybe 7% underlying orders and really seeing some pretty good pattern and support. And they're well into their second 2nd year now of the recovery and very good momentum both in the underlying business and also new technologies. As you look at the world of Emerson, automations and commercial residential in North America continues to be pretty good. We have a very good start. I don't see that changing.
I see our U. S. Business being strong for the year and I feel good about that. And I see continued investments. In fact, as I look at the underlying gross fixed investment trend lines, which have bumped up from that since tax reform has passed, it does look at a very good pace of business for our for the next 2 years and the U.
S. And North America around fixed investment, which is very good. 2nd, if you look at seeing going on in Asia, China had another very good quarter, both in orders and sales. And I see no indication that we will actually slow down. We will have a very good year in Asia and China, and I expect in particular, China expect a solid double digit growth in orders and sales, which at first, I didn't think was going to happen, but now as I see the pace of business investments, I feel better that we should see 10 plus percent sales growth in China, which is an improvement.
Relative to the rest of Asia, the order of pattern continues to improve. We're seeing the good cycle of businesses, and I feel very good about where we sit at this point in time. Across Asia Pacific, even outside of China. Just coming back to the Middle East and Africa, yes, we had sales were still slightly negative, but we've now seen 3 or 4 or 5 months of orders pattern improving, going positive. And I, as this expects, we had to fill the hole We filled the hole.
And now from the backlog standpoint, and now we'll start seeing, I would expect positive sales as we go into the second quarter. And I think we're on a a start of a good run of investments in that region, which we haven't seen for the last couple of years, but I feel good about where we sit at this point in time. The last key market is Latin America. We've been waiting for the turn, and we've got it. We had a positive sales quarter after basically 12 negative quarters out of Latin America.
And order pattern looks pretty good. Sales pattern looks pretty good. So it looks like, Latin America's turn for us, and that's on a positive surprise is a positive for me as was China. And as I look at, as Canada, I see that investment continue going up there. So there's some things that are positive for us at this point in time.
Out of Europe, our order pattern continues to be positive. And, not unusual in Europe for us. We have some quarters that are positive, some flat, some slightly negative. Overall, we expect Europe to be a very solid 5% type of growth marketplace for us this year. And we see the pace of business activity going on around that.
But clearly, as we go into the 2nd quarter, we, at this point in time, see another good solid 7% underlying sales growth which will generate good, obviously, double digit consolidated sales with the addition of our acquisitions. And no really divestiture impact of magnitude in there. So we see a very strong, double digit top line sales growth with over 7% underlying growth, and we're expecting a very solid $0.70 GAAP EPS for that second quarter around 21%. We're getting ready for our visit to New York and our annual investor which will be held at the New York Stock Exchange this year. Our fundamental focus is going to be on reviewing where we see the trend line heading, which have turned more positive, from our review last year.
We had a stronger 2017. Looks like we're having a little stronger 2018. So we're going to give you What we see is the trend line from the 16 to 21, keeping those same measures in place so you can see where we see the pluses and minus takeaways. See the profitability that we see unfolding in the business. And then most important at the end, looking at tax impact, on the overall impact relative to our cash flow and also impact to our earnings, which both will be positive from the perspective.
But we want to show the core businesses and what's going on, the impact of this faster growth, the stronger marketplaces, and then the impact of the tax reform on overall positive impact, the numbers that you'll see coming out of Emerson over the next couple of years. So as I look at it and wrap it up and go to Q and A, a very strong first quarter. Rate the year, we have momentum. We have good order patterns around the world. Everything is slightly better than I thought.
I am okay with the order pattern. I know people will might be panic because things roll, but We fully expected this and we expected this thing to trend into this line. And we'll talk further about that next week, but overall, we like where we sit today. I'm not going to talk about the long term numbers here today because that's all about what we're going to be talking about next week, but I'm here to talk about what we've seen in the quarter. But needless to say, needless to say, the OC, we're very pleased with the operations and the performance of the two platforms in this first quarter.
And we look forward to continuing to have a very strong total fiscal 2018, based on a very good start to our first quarter. So with that, I'll open the floor up for the first question.
Thank you, Mr. Far. Session. Your first question will come from Robert McCarthy of Stifel. Please go ahead.
Congrats on a strong quarter. Looks like decent momentum across the board and you called some turns in some areas. So I guess the first question I would have is with respect to China, you've put up some great growth recently and after it's been very volatile data set probably the last 18 to 24 months, but given what we seeing with the market pullback here. I mean, obviously, there's some concerns about rates, but there's also concerns about overheating in China. And could you talk about maybe the risks you see in China throughout the course of the year, how you feel about the pace and momentum of the business there?
Just give us some comfort and color around any kind of China risk.
Yes, given that I'm an expert in what's happened in the marketplace the last 3 days, I'm sure I can help you here. But, the, from my perspective, clearly, we seen a very good investment in the 2 businesses. On the commercial residence, it's been tied around the refrigeration, it's been tied around the environment. And the issue around trying to improve the quality of air. And from the perspective, can it get overheated because of the government trying to push issue too hard.
The answer is yes. As we see it right now, we do not sense that. I'll be back over there in another month. I feel good about it right now, but there is a concern from the standpoint of the investment period that maybe is a little too aggressive in historically what happen is that they would dial it back, but we don't sense that at this point in time. But that will be a concern for us as we look at this.
On the automation solution side, it's very broad based. So it's not just one type of technologies, not just one type of industry. It's a very slow, steady type of investment that they're making both for improved quality of their products and quality of their facilities inside the country, not only for their own country, but also for some of the exports around the world. So I don't sense any overheating there at this point in time, but it from my the one area I do concern about is the government trying to on a commercial residential side trying to drive the environmental issues. And at some point in time, they say, Hey, we drove too hard to just back that off.
And that will that could create that downturn. But right now, based on what I see in the order pattern, based on the customer pattern, was saying we're going to probably do 8 to 10 and now we're talking most likely we're going to be doing, I think we're going to do double digit, coming out of China. And clearly, with the commercial residential business, this quarter, they did a 20 plus percent this quarter on top of last year's 40% quarter. The odds are extremely high that that's going to get tougher and tougher as we go forward in the second half of this year and early next year, but they're still going to have growth opportunities throughout Asia, as I look at commercial residents, so they're growing across the whole region. So obviously they're concerned, but I feel decent about it right now.
As a follow-up, obviously, I think you talked pretty definitively about the positive impact of tax reform here. What it can mean. And I think there was an uptick in your own CapEx and the level of business and fixed investment spending across the board. But maybe you you could just talk about what are you expecting to see qualitatively across certain end markets or geographies driven by tax reform here that would drive the underlying macro numbers higher specifically and why it gives you confidence that perhaps, growth can accelerate and extend here?
Yes, we're from the U. S. And Manpack we were given a very, very generous tax reform package. It's very much focused on investments in this country. From a technology standpoint, capacity standpoint, something that we have not seen in this country for over 30 some odd years since the mid-80s.
And from the perspective of the companies that we communicate with and we obviously serve, they see this as an opportunity to be encouraged to make those investments and they're going to make those investments. The underlying demand in the U. S. Right now is good. So from a demand standpoint, we for the first time, we see both the demand and then we're also seeing incentives to make investments.
So what we're hearing and seeing is the upward pace of investment will continue to go on a positive way. And that will as long as is the demand stays here, both here and internationally, you're going to see, these investments continue across our base. Now you're going to see in different industries that investments will be stronger than other industries like the oil and gas industry and And some of the pipeline industries you see in the United States, that's a good thing. You're seeing some downstream. We're seeing a lot of good projects down in the gas in the downstream marketplace right now in the Gulf region.
So in general, we're seeing a lot of our customers are talking about increased investments. We're still seeing the strong, focus right now in the short term, what I call quick payback type investments, especially since you get fast depreciation in the United States, We're starting to see some of the smaller medium sized projects start getting on the books, which will be more for the second half and later part of this year and early next year. And we're seeing the discussion of the longer term projects. But they all see the benefit from a balance sheet standpoint, lower taxes, faster depreciation. And I firmly believe U.
S. Industry is not going to take not going to miss this opportunity. We're not going to miss this opportunity to invest in the infrastructure in this country to drive faster growth to drive a productivity and to drive our competitiveness. We were given an opportunity to demonstrate that we were not competitive and we were given the opportunity to demonstrate that, okay, now do something with it. And I firmly believe that business leaders in this country are going to do something with it.
And if not, than, you know, than shame on us because then we'll we deserve every hit we get coming out of Washington. From my perspective, as a CEO and as a leader of the National Association have factors. We are increasing our investments. We are focusing in the next several years where we're going to take advantage of this. And I think our customer base will be doing the same thing, Robin.
We're going to try to continue to get this information out when it becomes more and more knowledgeable. But if you look at the gross fixed investment numbers, they're trending up, and I expect that that will continue here throughout 2018 early 2019.
The next question will come from Andrew Obin of Bank of America Merrill Lynch. Please go ahead.
Just a question on automation solutions. You know, you highlighted MRO and small and medium sized projects. I would imagine These are very good for margin. What kind of visibility you sort of highlighted? You're starting to see big investments coming up in the U.
S. What kind of impact will these projects have on your margin?
Yes, it's the normal cycle we our margin, when we have funds scheduled out for the 35%, we're looking at a 35% flow through profitability on the automation solution takes into consideration that balance between the as we go into those projects into a larger projects of We're well into to tune the very large projects, which won't really start hitting until late 2019, 2020. They will obviously put more pressure on our margin. But at that point in time, our facilities are running a little bit tighter, a little more productive. And so typically we can absorb that. There's nothing unusual in the cycle right now, Andrew, other than I would say the sustained period here we're going to have because of the tax law relative to the small and medium sized projects.
I don't worry about the margin and the business, especially if we see strong investment in North America, which is our core market, we the actual the pressure will be in the positive side of the margin, not in the negative side of the margin.
Got you. And just a follow-up question. I think in your press release you sort of highlighted that you would consider looking at, I guess, wages in North America, but how should we think about inflationary pressures in 2018 given that a lot of other companies actually are also announcing wage hikes and you have raw materials going up, how should we think about inflation and price cost? Thank you.
Yeah, we we we've been and I think you guys heard me, we've been seeing underlying salary and wage increases going up now for the last 9 months. At a trend line, we're above 3%. We are not a minimum wage company. We are a company that pays for high skills. And so we have to make sure that our compensation structure from a wage and salary standpoint and a benefit standpoint, we stay competitive.
And we will have to adjust we are in a period here that clearly, it's very important for us to keep our price costs in line. And, you know, and make sure we keep ahead and we start having to tweak our prices on upward basis. As we see the commodity pressures building up, we see the wage and salary is building up, which are all good things from a mild form of inflation. But clearly, what we have to do is stay ahead of this and the that Frank and Steve Steve will be having with the 2 platform leaders is we're gonna have to be talking, okay, guys, you gotta keep putting the pressure on the price increases because We will see the upward make sure we keep our pricing in line as we go through this time frame. We are we've gone through a period where we were behind the eight ball and right now we are in sync And it's very, very important now as we stay and we stay in sync here in the next couple of quarters.
And I think, Andrew, this is a it's an issue that You know, I openly talk about it. And at this point in time, we are openly talking internally because we see the pressure is increased material, increased wages. And therefore, we're going to have to slightly bump up our pricings. Now that will create obviously a higher growth rate at the top also we have to make sure we have the resulting cost reductions and price actions that are needed. So this is an interesting time for which we have not seen for a while But we do not operate in this time period.
I feel good that we are well inside the scope of where we need to be right now.
Thank you very much.
Thank you very good. Good question.
The next question will come from Steve Tusa of JPMorgan. Please go ahead.
Hey guys, good afternoon.
Good afternoon, Steve.
So the just on kind of the cash flow and the dynamics around CapEx. When do you expect to kind of hit this run rate? And, you know, you look like you're a little bit under the kind of 3.5 this year, will you be above it for any of these years over the next couple of years?
Yes, I think that you look at okay, if you look at our capital spending, if you go by quarter, we typically smart start slower and we build up in the year how we decide the way the company is set up and what goes on inside the company. If you look at the overall, I would say that our capital will be is lumpy. We could this year we could be a tad out of 3.5%. Next year we could be a tad over 3.5%. We have We have similar projects that we might be looking at new capacity, new facility somewhere that we'll start working on.
Late this year and the major capital occurred in 2019. So it's I think on average, we'll probably somewhere in this 3, 3, 3, 4 range for the over the 5 year time period. But the key issue for me is, as I as I told my board, you know, unlike the government, which clearly had shovel revenue projects all over the place, we don't have shovel ready projects inside Emerson. If we have a project that we need to do, we do it. But what I'm looking at right now with the stronger demand in key couple of businesses and a shifting where that demand is coming around the world.
We're going to need to make some different type of investments here in North America United States to be more productive and have a lot more flexibility around our facilities, which we haven't built into them in the past. So I think this is gonna build, and I would expect 1920 will be bigger capital than this year as I look at it, facing right seat and feel right now, Steve.
As a percentage of sales, right?
You meant The
percentage of sale, correct. And the dollars are still going to go up. Yes.
And so, and when you look at your cash flow statement, there is this kind of other account. I think there might be some that's where you kind of adjust for perhaps your cash taxes versus your book taxes, I don't want to be nitpicky, but is there anything now with the lower book tax rate Anything in that kind of other account that's been a couple of $100,000,000 in the last few years, and with the new portfolio have, does that you know, shrinking size? Does that go closer to 0? Is it less of a factor?
I'm I'm I'm just trying
to kinda get to what the run rate conversion is here going forward?
Yes, let me let me, I'm going to try to grant the charge fees that you're talking about, okay? So I know I'm talking, is that in the press release or is it in the fine.
No. Just in just in it from your 10 K, 15, 16, 17 from the 10 K?
Oh, from the 10 K. I'll Got it.
I'm just trying
to get at what what the sustainable conversion is here because, you know, you guys you've talked in 2021. Is it being, it being, like, you know, 105 to 10 or something around that. Now CapEx is bumping up a little bit. You've got some of these tax coming through. So maybe just a little bit of clarity on that front.
I think what you're talking about in that add back is mainly the GAAP pension expense gets added back and then we have the cash contributions that come out of the cash flow and then it's equity I think it's added back as well. So no, I don't expect I don't expect any change in that as a function of tax reform or the different a different configuration of the portfolio.
Great. So let me, it's a good question. Given all the challenges around this world today about quality of cash and earnings. So let me, as we get I don't know what you're talking about. I'm either.
I just I just made a statement. You know me, I just made a statement. I got I got my Valley monkey. I got my, you know, I got my bull here. I got baseball bat, and these guys, it's amazing what they say when they're thinking.
But let me let me let's take a look at what we're because we're going to give you a cash forecast and we're going to give you obviously a P and L forecast next week. And let me take a look at what we think the sustainable rate is going to be. As you point out and you point out to me numerous times, I have a u unique window here right now because I have the Final Control cash opportunities, which we are obviously starting to execute on, which is gonna run now for 3 or 4 years. I have some increased amortization because of software companies coming on board from that perspective. So that helps us from a cash flow standpoint.
So the question is, as we go through this cycle, we're going to be able to run a little bit higher rate than on a conversion basis than I have historically. And I think that's a very fast, fair question. It's also a very challenging question for me to answer, but, I think that we I owe you that in the shareholders, can we run a a 110, 115 conversion. This year, we're talking about running around 120 again, which is a good number. And I and I do have some things helping me right now, but the question is we go of this cycle, is the number going to be 105110 or 112?
And I think that's a very fair question to ask.
And then one last quick one just on R and D. Are you kind of full up there on an R and D investments or RD and E or is that going to tick up and trend up as well?
The, I think the key issue for me, and as I've talked about, the trend line of our orders, our trend line and sales adds in the two key areas, if I see automation solutions really starting to take on some, some bigger projects they want to bring in some new technologies, then we're going to have to ramp up some R and D. But that will become the place if I start seeing our sales order would mean this year we're going to be more in the 8% range. And I see a pretty good filler relative to projects coming at me And we might start ramping up a couple of new technologies to make sure that we can, satisfy the demands that we see coming from our customer base for 'nineteen and 'twenty in particular around our Plant Web Internet of Things. So I think that right now we're good, but if I start seeing this growth rate pick up a little bit, which could possibly happen, then you're going to see me tweaking a little bit more engineering monies into here because I want to get ready for the next generation technologies that our customer base will be going towards, as they go into 2020 2021.
That's what we're going to be watching now. That's pivot point, that we should be at. And those are that's a place you should be pushing me. Relative Bob Sharp's business, I think At this point in time, we've continued to get Bob the monies he needs as, he's running at very high levels of profitability. Yet, unfortunate situation of quality issue in the first quarter that we had to deal with and we dealt with it, and one of its products in the, I think in the thermostat area, and we've dealt with that.
But we're giving him the money he needs relative to that next generation investments to really die out. To pull through his digitization and that in the coal chain stuff, which you'll hear him talking about. And, so I'm making sure he's got the money he needs right now because there are some good growth opportunities there for that business. So that's that's right. Makes complete sense.
Thanks for the comments. Thanks, Steve.
The next question will come from Steven Winoker of UBS. Please go ahead.
Hey, thanks and good afternoon, all.
Good afternoon, Steve. Are you legitimate? Are you legitimate? We can talk to you or what are you back in the game here or are you on vacation.
Come on, Dave. I assume you'd read every single page of that report.
Oh, that one. Oh, I used that one to put this up to sleep for the weekend. So Oh, thanks. Thanks for that, Pete.
I'll, I gotta, gotta consider that time.
See, I I'd look to look forward to see you next week. Come on up and say hi to me for a change. You've been a stranger for a couple of months.
Yep. Yep. Yep. Yep. Following compliance.
Anyway, out and good and all that.
I am I am full compliance. I mean, that's why I got my rally monkey. I got my Luvs. I got my dog here. I got a I got a bull looking at me right now, and I'm full Yep.
Yep. Yep. I'm straight straight up straight up in the hour.
So listen. I just wanted to chase up the the cash flow discussion a little more with regard to 2018, not the longer term. On page 16, on the presentation, you just give the 150 percent operating cash flow conversion on GAAP, right, step up from 130. So I just wanna make sure that that yeah. So I just wanna make sure that that the key drivers are there there in terms of the change or to what extent, what are the biggest components of that step up
That's, you're going to have you're going to have taxes there. Yeah, I get taxes there
for our guidance.
That's the difference is primarily there's 2 things going on with the, the taxes and a little bit improved profitability overall. Those will be two numbers right there. As you know, given our level profitability, if we grow a little faster and our margins are obviously we're saying we're going to have a better earnings. That helps us, but the big chunk there is the taxes
Okay. Great. And then, and as you said, you'll give us some more color on that, hopefully, in terms of the longer term.
Yeah. We're gonna try to make sure, Steve, because there's 2 big moving parts in what's happened to Emerson versus last year at this time is we have stronger underlying performance from a sales standpoint, economic standpoint, and then we have a tax reform. So I'm going to try to be as as I thought, you know, Tim worked very, very hard to be transparent with you guys. You guys may not think that was transparent in all those charts he gave but we're trying to be transparent relative to, how these numbers are impacted. We'll try to do that again next week for you.
So you can get your model set up because there's there's a rebate seeing going on right now you're going to need.
Okay, great. And then secondly, maybe diving in a little bit to the commercial residential side of things on compressors. You're talking about pricing and the need to keep pace on pricing versus costs and how hard that is. And you've been through this multiple times before. Some of the folks in that in that area certainly saying that they believe they're they have a little more, I think, a little more, pricing power themselves and comfort level with their supply base in terms of their ability to kind of hold costs as well.
What are you seeing in that part of the area relative to competition and your ability to get price in that area?
We're in for the long term in our customer base know that. And So we work very closely with them. We do get the pricing and we clearly have to make push chuds back and forth, sometimes in out sync, sometimes in sync. I think overall, this will be with the when you look at copper, you look at steel, you look at the continued commodity increases going on on the commercial residential side. There's going to have to be a trend line upward across the whole industry.
And they have to be very careful from the standpoint. And we understand that, and that's why we work closely with them. Don't let them price out of the marketplace either in the end market. So I think that there's some pushbacks always, but I think over time, we figure out to make those trade offs with changing our products to get them the price point they need, and then we can change our products to make sure that we cost price point that we need. And as you know, it's there's not one just talk of compressor, it's not just one compressor.
We can make changes within a compressor get what they need and to change that price cost structure. So there's a lot of there's going to be a lot of give and take. I think the industry right those right now are looking in the period as someone point out earlier. Potentially get a higher inflation here. And so we're going to have to start making trade offs for both of us to make sure that we both don't get eaten alive in this whole price cost situation.
I think that's being a major supplier in this industry, we have that ability to do that with our customer base and we'll continue to work that.
And you've forced mixed up in the past as well, which has helped. So I'm not sure if you see opportunity there too, mixing
up We have a window here again within the commercial standpoint and refrigerant that we will mix up in that space as the transition happens. On the residential side, it's a little bit different to the side. I think we're going to see more of a mix up on the commercial the channel in the next 12 to 18 months in North America. So it's going to be a hybrid approach here. We're going to be making some pushes and shoves.
And in the end, our we want to come out as a head just like they want to come out ahead.
All right. Thanks. And I'll see you next week and I want to hear the critiques on that report.
Definitely, I will dust it off. It must be my pillow right now. Hopefully, I didn't get too much drool on That's all right. Better than most. Okay.
See you later, my friend.
The next question will come from Rich Kwas of Fargo Securities. Please go ahead.
Automation with regards to investments, so with oil where it is, it's up much higher than a year ago and investments have picked up, but you talked about being able to maintain the incrementals a pretty healthy level of having them and without having to make significant investments. When do you see that starting to play out? And I guess that gets into some of the KOB 1 project starting to get booked. And so any color around KOB 1, what mix of the orders it is right now? And then how you see these investments getting layered in over the next year or so?
The I think the what we're seeing right now and we're going to share with you our basically our project business and what that funnel looks like. We're going to give you the snapshot which clearly is going to be bigger than the last time we shared you, which I think, Tim, when was that? On a conference call, wouldn't it?
Yes. It was on the in November, I think we did.
November. So we'll give you we're going to give you the snapshot and it'll basically it's consistent measurement across the board. What we're seeing right now are the the initial phases around the world of larger KOB 2 type of projects where people have done initial expansions or parts. And now they're going back and they're dusting that off. And that's coming back in the funnel on either on a rebid or just moving forward depending on where they feel comfortable to the cost of the project and the timing of the project, that is already starting to flow.
We're starting to see that. And I would to see more and more of those bookings as you go forward here this year. On the larger KOB 1 projects, which we're starting to bid and talk about. And I know Ed Monster is going to try to talk about one project the VCs going on right now across the Final Control in particular. We're going to start seeing more and more that come late in 2018 early 2019.
Yes, there's going to be 1 or 2 projects out there, but I think that those projects really won't start starting to play into 2019. So where I'm talking about higher incremental investments is if I start seeing, our growth rate of sales and I see sales and obviously, orders before the sales. If I start seeing that number, clearly looking like it's going to be at the high end of the 60 day and potentially have a chance to cross the across that, then we're going to have to start this year. Now the question will be is if we're growing faster, we're going to obviously leverage and that will and obviously we the numbers will look okay in the short term and we'll come back to haunt us. We'll be in 2019.
But I if we're starting to see this happen and we're starting see the the larger KOB 2. That's what I'm going to trigger off, not the KOB 1, because if I start seeing the larger KOB 2, which we're going to talk a little bit about next week, That's where we're going to have to start putting some money into play to make sure we protect ourselves from a customer perspective. Factoring sales and service organization because this business will, as you know, comes up in these products. These aren't small products or projects. And so we got to make sure we can produce them and then deliver them.
So the earliest is really next year is when you would start to see
the impact. So, okay. Yes, I mean, you're going to see you'll hear us talking about it, but the dollar level will be next year.
Okay. And then on VNC, outside the amortization, you're still tracking to exit the year in the near double digits on an EBIT margin basis or is that coming together?
Yes, I think we'll be there. I have no reason to say we won't be double digit as we lose, leave this year. And I want Ed to talk a little bit about that at Monster's going to give a presentation where he sees. The team is doing a great job. We are this month started in January February, we are moving off of the Pentair OMT system, which is that's sort of like jumping off the top of this building in a corporate here without a parachute and hoping you can land without breaking a leg.
And that's going on right now. So that's my concern this quarter is to make sure that these guys can get off that and into a normal operating system and get away from that Swiss model. But overall, I like where they are from a margin standpoint, sales and order standpoint and, they're starting to talk, which I'm really excited about, technology and where they can bring some new technologies and make some investments in technology, which that business has to make in a long, long time.
And then how about working cap real quick on that piece? Anything? I mean They're
slightly ahead of schedule. I would say that I would say for the year, they're going to deliver my gut tells me that Final Control deliver very good, cash flow number for this year. I I fundamentally believe that we will we'll have a 29. It could be a 292. I think we're gonna have a good, operating cash flow this year.
And it's gonna be driven off of the work file control delta. I mean, everyone else is important to the company, but the real delta is there. And I think that Mike Trane and his team and Ram Karcia and his team have a focus on that. They know they have a chance to deliver cash flow to us. And we'd really like to see that happen because that makes a big difference in the returns.
It also gives us the flexibility that we need from a standpoint of dividends and then share repurchase.
The next question will be from Jeff Sprague of Vertical Research. Please go ahead.
Doing well. Hey, just a couple more things on VNC, Dave, if I could.
Just give us
a sense of what's going on with their orders. Are they primed and ready to take orders, so to speak, or, you're more focused on integration here in the near term?
We're focused on orders. Clearly, there's things we want to get done from the operational standpoint, but we, if you look at our VNC business right now, we're growing in combination of Final Control And VCs. It's around 10%. And what very important to us right now is getting them into the site, which goes back, I think it was Rich asking the question. Wait, sorry, Scott, it was in call on the projects.
So what I'm trying we're trying to get them engaged on the KOB 2 projects on a full, full capability. And that's what we're trying to do at this point in time because The early stages of project is starting to happen. We are building out, as we've talked about, a Final Control Solutions package. And now for the first time, we are going out to the global customer base and saying we have here it is. And if you look at the projects, some of the biggest componentry is typically around the control package.
So that's pretty important to us. We don't want to miss the initial phases of this uptick. So, yes, we're focusing on restructuring, repositioning, make sure you deliver the profitability and the trade working capital. But in reality right now, what we're also out there working really hard and why Mike Train and Ed Monza and, Ram Caution, not Caution, I mean, Ram, Christian. I'm sorry, different Ram.
Work so hard on trying to make sure that we got the global sales organization in place. This is so important to us right now, Jeff, because cycles happening and we want to get back on track. It will make a big difference for us relative to recapturing market share that unfortunately was lost in the last downturn when the lack of attention in this business. So I like what we see right now. And if we can maintain this level of growth and underlying orders, the projects are coming and this will really set us up for a very strong 2019.
And then just on the D and C financials, Dave, the $25,000,000 of acquisition charges, is that inclusive of the run rate amortization, or is that more like step up and other
It's the step up of the Board County rule I've ever seen in my life, is diagnosed, where you have to remark write off the profit in inventory and the backlog. And so they had a lot of backlog and they clearly had a lot of inventory And this is the last phase, the last piece, well, frankly, I maybe have a couple more 1,000,000 left next quarter, but I'm not talking about it. This is the last piece of that. That's what that is right there. The last piece of that accounting revaluation of backlog and, profit and inventory.
And then just one more for me. I think, some folks are viewing the the strength is almost a glass half empty. Demand is good. Therefore, you need to spend capital. Therefore, that's a negative.
I think I heard you say at the beginning of this call that even with higher spending, you're quite comfortable that your incremental margins can traffic in the mid-30s. Does that hold looking out into 2019 2020? When you're looking at these higher levels of CapEx?
We are we're on track to get back to the levels of profitability, the 19% EBIT margin that we talked about last year with the VNC We are on track to get that in the same cycle. So even with a higher growth rate, you know, I still very feel very good at the the stronger growth rate, we're on we're on track to to get the, you know, the mid 35s, the mid thirties on the incremental margins. We feel good about that at this point time. The only place I see that we'll have to start spending money is that growth rate goes up. But given the fact that what's going to happen is that growth rate goes up, we're our spending will always be behind the growth.
So we're going to, we're going to probably have pretty good leverage. It's when you that those rates start coming in 6. So I feel very good about the margins, incremental margins out of automation business for the next couple of years. The cycle started And we have bumps in things in a quarter or 2 yet, but overall, I see no reason right now that we're slightly ahead of last year for March slightly ahead this year. And I think we'll be we'll get to that 19% that we talked about and the automation solution was D and C by the 2021.
Great. Thank you very much.
Thank you very much. Appreciate it, Jeff.
The next question will come from Christopher Glynn of Oppenheimer. Please go ahead.
Thanks. Hello, all. Hi, Chris.
Hey, Dave. You mentioned hybrid as a good source of growth in the press release today. Kind of an interesting call out given, I think that was part of the rationale on the Rockwell look. But, how efficiently would you say that market served today, from the the discrete and process sides respectively? And are you seeing any separation among the people that have been focused on it on the past 10 plus years?
No, the reason we called out the hybrids because if I look at the underlying industries that use a lot of the hybrid technology, those industries have been the strongest places for investments. They perhaps example, be a pharmaceutical. Now from my perspective, I think that you have a clear group of leaders in the hybrid space today There's 3 or 4 of us that are pretty strong. I think there's if you look at the and we'll talk a little bit about as you look at the the breakdown of others in this industry. I think there's some consolidation efforts and some squeezing that could happen here.
There's room to grow for the 4 4 major players and to take more share within that space. And I think that you're hearing a lot of key guys in this space talk about it. And I think there's plenty of room here for the next 3, 4, 5 years for us to gain into that space. But From my perspective, I think the initial phases of some of the hybrid investments underway are good, and you're going to start seeing some of the old line process, automation area, investments happening later this year going into next year. But right now, then the hybrid space is what took off the earliest.
And I think that's good. And there's room for it to run.
Okay, great. And then a bookkeeping question. On the walk from the prior adjusted EPS, you have the $0.05 to $0.15 adjustment for operations and repurchase, but you add the low end of that $0.05 to $0.15 to the high end of the prior range. Is that just conservative or if you're seeing the stronger markets, will you fund more restructuring or something?
No, we'll pay for all the rest of it. We just had a good first quarter. We beat and we raised more than we beat the first quarter. I want to make sure that we we're not setting ourselves up to some number we can't make happen. So that's what's going on here, Chris.
Think that, there's no additional restructuring underway. There's, if we have a, there's nothing hidden in here from the P and L. If we can get a little faster growth and margin conversion, you're clearly going to get their earnings. There's no hidden. There's no incremental investments I'm trying to hide here.
I'm just I'm trying to make sure that we put a forecast out for everybody that we can deliver plus or minus the pennies that we talk about every quarter. And that's all it is. And you know, it was a good beat and we raised. And that's I didn't feel like I had to go crazy on a raise.
And mechanically, you get to bring the if we're bringing the bottom end up, so you got to, that's a bigger number.
The next question will be from Well,
good seed goes unturned. Okay. What was that? Sorry. Go ahead.
I'm sorry. The next question will be from Joe Ritchie of Goldman Sachs. Please go ahead.
I just don't know. Good deed goes unpunished, Don Joe?
No. That is, that that is that is true.
I guess if I don't wanna be the heat, I should quit being CEO, but I I'd sort of enjoy being CEO, you know. It's pretty it's a lot fun.
You've, yeah, you must enjoy it. It's been it's been some time.
Almost at 17 a half years. So yeah. So, maybe maybe my starting
question here is on the just this incremental margin discussion, specifically around Automation Solutions. If I pull out the V and C impact this quarter, I get to like a high 20s type incremental margin, which is a little bit lower than I would have guessed given you guys
It's more like 40%. I mean, we could take you through that, Frank, you've got the numbers there. We've seen that. I saw if you will talk about that.
If you take out the acquisition impact and some currency headwind that we have in there, that's not obvious, it's mid-thirty mid to high grade. Okay.
All right. Okay. Got it. So that ticks that box. And I guess in terms of just, you guys have been talking about price cost being new for the quarter.
I think Dave, go back to like last quarter. I think the initial assumption was that it was going to be slightly negative in the first of the year and maybe making it up in the second half. So is there a chance then that pricecost can be positive as we progress through this year?
Boy, I wouldn't have been on that one. I think going back to those are very good questions that we asked me, but there's you look at the pieces that go into the cost side of this, there's more pieces than the cost side. They're going to are going up. So then, then we've seen in a while we're going to have to make sure we keep that price piece moving up with it. It's not going to be big dollars, but we're going to have to.
We had pretty good mix from the standpoint of some of the KOB 3 type of stuff, we had some pretty good mix in some of the businesses over the commercial residential. Right now, I think if we can I consider this, I will consider this a win for us this year for $1 green? And that's, I mean, I'll I'll buy all of everyone a drink in that one because this is what's going to be, I think, the most challenging thing for us, Joe, this year, because of this, the fact that we see a lot of moderate inflation pressures coming at us, but I feel very good that we could offset that because we've been getting ready for this for a while. And I I'll I'll repeat it again. We're gonna have to work very closely with our customers here to be doing some mix and the matches from changing here to help them solve their cost price and they're going to have to help us solve our cost price because this is not something that can be a brute force effort here or that will come back to haunt both sides of us, which I don't want to see happen, as you can imagine.
Yes. No, that makes sense, Dave. If I can maybe set one more in here, So we have to talk about
I can't go anywhere. I'm still seeing you up.
17 years in counting. If if you take the 3,000,000,000 the $3,000,000,000 or so that you have on your balance sheet right now. And you've talked in the past, a lot of that is international. Are there any is there any hindrances to bringing that cash back and getting it invested? Is there some time of timing that we should be thinking about on that cash?
No. I'll let Frank answer that first, but I'll give you my 2¢.
Joe, we're expecting to bring back well over $1,000,000,000 of it this fiscal year. I would expect bringing back a substantial chunk in the second quarter and then probably another amount that'll take us to over $1,000,000,000 later in the fiscal year. So now there are no impediments we will, we'll be bringing almost half of what we have overseas back, in the next year or so.
Yes. So we one of the good good things the tax reform does for us, it gives us freedom to make that call. We want to do it. We only have a couple of markets in the world that really our cash will get trapped. It's hard to move it around into one of those markets.
In China, we basically every about 12 or 18 months, we get cash out. We've brought out over $3,000,000,000 since I've been CEO out of China. And so we a lot more freedom, a lot more flexibility under this whole new tax reform. That gets the U. S.
Companies a lot more competitive opportunities, which we have not had in the past. And, that's one of the advances. And I'll say it again, If U. S. Companies don't take advantage of what was what Congress passed in this tax reform, then we're flaminidious.
Alright. On that note, thanks guys. Thank you.
Question will be from Dean Dray of RBC Capital Markets. Please go ahead.
Thank you and good afternoon everyone.
Good afternoon, Dean. Where are you hiding out today?
Just downtown Manhattan here. Living the dream.
Living the dream. Yes, sir. You got like your feet up in the desk, having to drink my tire or something like that right now?
No, no, no, that's for later. No. So, we've got to drill down in something as exciting as the tax reform. It's just to follow-up on Joe's last questions there. Were there any surprises as you kind of work through the angles on tax reform?
We had you pegged coming in around 27 per sense. And it looks like that benefit is significantly better for you. So what were the kind of puts and takes as you went through that? And what's that step up in further benefit in 2019?
Yes. I mean, as you know, I was very much engaged in this process. As the chairman and the NAM working with the Congress and the White House. And then also Frank's team was right with me the whole time. I think that From our perspective, we've always felt it was going to be around 5 or 6 points of just pure pure rate benefit for us.
In fact, the 11th hour, they took a little bit away, from us where we from the standpoint. But overall, We it pretty well came in line where we thought it was going to be. I was pleased and we've been positioning ourselves now for the last 12 months. So from the pure payment, we're going to have to pay the government over the next 8 to 9 years. I think that number we can minimize that number a little bit.
The overall sort of restatement of what I call fixing the deferred tax on our balance sheet, I think that's where clean there. We didn't have anything hidden in there that we had to write off. And then the other benefits that Frank and his team did is when we did the the sale of the 2 the businesses, we made the decision to go ahead and book the tax cost. So that gave us a big benefit that when we waited to bring the money back, we're actually saving about $125,000,000 of actual cash on taxes here because we waited because of lower tax rate. So overall, Frank and team, they knocked this one out of the park.
And so from our shareholders' perspective, they got a lot of benefits here, both this year and then next year, we're going to obviously get a lower tax rate. And then you look at my competitors, which are international companies, we're going to be on a tax rate now we're we're right there. We're we're we're competitive, anybody. And I I'll take my cost structure and my flexibility on anybody any day. So I like where we are right now, Joe.
And I think we're in pretty good shape.
And then if you could just clarify on the CapEx spend increase, how much of that might be influenced because of the tax advantages on CapEx?
I'm sorry. I'm sorry, Deane. I apologize, Deane. From my standpoint, there's 2 things going on. Long term, the way I went and I was pushing so hard working with Congress is we have a aging workforce in North America right now.
And as we see the underlying demand come into the next generation of products and automation, we're going to have to invest to make sure our facilities are more competitive from the flexibility and the type of stuff we want to do with our manufacturing. So the increase in capacity we're going to see is mainly around automation and some incremental capacity and flex type of capacity that we're going to need to serve this U. S. Marketplace, because has always been we stay local for serving. So we manufacture here in the region here just like we do in Europe, just like we do in Asia.
So I think we're seeing we're going to have to do is spend a little bit more money on the automation side of this company and that means we're going to have to spend some incremental capacity And I would say that we'll also bring some bricks and mortars because we're going to have to reconfigure our facilities, which always means new bricks and mortars at the same time. So I think it's going to be pretty good for non res here for the next couple of years.
Good. We'll see you next week.
See you next week, Dean. I apologize for calling you.
The next question will come from Gautam Khanna of Cowen and Company. Please go ahead.
Yes, thanks. Good afternoon, guys.
Good afternoon, Gautam. Good to talk to you again. We've been hiding on me. A little bit of that one, got it. You just ignore me on that one.
That's fair.
That's fair. I just I just gave you I just gave you everything I would take. Yeah. Yeah. That's not great.
A couple of questions. I guess, first, you mentioned one of the milestones you're sort of tracking on the VNC integration this month, but What else can we look for over the next 12 months? What are the big milestones we should be kind of paying close attention to as you integrate the business? Anything you can give us on that?
Yes. 1 of the couple there's 3 things I'm watching very closely. One is the ability for us to create the solutions package is in the final control that when we're going out to bid, that gives us competitive advantage. And what that will mean is our the order pattern opportunity within the model control will be should run higher rates than the rest of automation solutions. And that gives us a chance that means we from my perspective, that means we're regaining some of the loss presence that we didn't that we we got lost.
They got lost in the last cycle. The number 2 thing we're tracking very clear that that you'll be able to see is is the fact that we're talking about from a margin standpoint, yes, VNC is still diluting to our margin, but a less dilutive impact. And therefore, as you go into the second half of this year, you start seeing the positive impact of the VNC as we wrap around it because you're going to start seeing that live now as as we get in that second half. So another milestone we wanna watch and and something I'm watching to make sure this team gets gets their job done. And the third issue from my perspective is all around the cash flow.
If the cash flow incorporation continues to outperform in the upside and and it's a function of we're still growing nicely at profitability, but it's because the final control organization is able to get the the trapped cash and off their balance sheet from the receivables and the balance sheet from the re inventory, that if they continue to do that, that will be the 3rd thing you you'll keep hearing us talk about better cash flow over a quarter or over 6 or 9 months. And that tells me that they're getting the job done. Those are the three things I'm watching for the Final Control organization out there. And that's why I want to see happy because that means they're really bringing a better flow of cash and return and growth the corporation and hence for the shareholder, which two things are happened given the fact that tax rate went down and we're delivering on the savings and growth, that means the return from shareholder is going to be better than initially planned.
That's very helpful color. And Maybe just the last one to dovetail to your cash flow discussion. You've done a number of tuck in acquisitions, Cooper Ratkin, you mentioned cold chain and what you'll talk about next week. But can you characterize how the M and A pipeline looks right now? Do you have any what does it look like in terms of size of opportunities, what you expect might actually transact, over the next year in terms of dollars spent?
Any sort of color around that?
Yes, I'll give you some color. We right now, there's from our perspective, as we look at the transactions today, these are very much transactions, which are private transaction, We are engaging with private owners. They're part of a private equity firm trying to come out. They're part of a large corporation. And so right now, we probably have $2,000,000,000 to $3,000,000,000 that we're actively engaged in and our what we report to you is we're trying to get another $5,600,000,000, $600,000,000 done this year.
What I like in reality, what I like to see is I look at today versus the end of this calendar year, which is the end of 2018, I'd like to see us in reality get closer to $1,500,000,000 to $2,000,000,000 done. That's the type of magnitude we're working on right Now we have because of where we've been through our repositioning, we probably got ahead of a lot of our competitors and and we are relative to our ability to absorb because we've got the divestitures done. And we've got a good head start on VNC. So But what I would call the right number for me right now is not 500 for the next rest of this year. I'd like to really see a number which is more like 1 to 1a half to 2,000,000,000 type of range in this before the end of this calendar year.
And that would be to me where we should see. And that's the type of activity we're working on right now. Now may not get them done, but that's what we want to do. We want to try to get that done. And that would make our plan all the way up to 2021 a lot easier Q9 because that's front end loading the acquisitions.
Thanks a lot guys. See you next week.
Take care, Gavin. I'll see you next week and thank you very much for the time.
The next question.
With that, I'm going to wrap it up. Do you have any more questions? And is there anybody out there?
There are a few more, sir, if you wanna take them, or I can, we can move to the closing if you'd like.
I'll take one more question since you got me trapped. I'll take one more question.
I'm sorry. It will be from Andrew Kaplowitz of Citi. Please go ahead.
Okay. Andrew, how you doing, my friend?
How you how you doing, man? Just getting my number down.
I like it. You got caught you got caught you got your tail underneath the door.
Absolutely. So I just wanted to ask you about Europe, in the sense that, you know, it was down, but you'd mentioned that orders are positive there and it should be better. Europe has had very strong GDP growth, as you know. So is there anything going on there? Is there any reason why and grow low to mid single digit as you go forward here in 2018?
No, there's nothing going on. From our perspective, it's more of a timing. We had some very large businesses on the last couple of years and we're having to fill that backlog in the automation solution side. On the commercial res, we're doing okay in Europe. It's just a function of timing on the projects for us in Europe.
And clearly, from a competitive standpoint right now with the dynamic change and the dollar, you just we had a slow start to sales in the first quarter, but what is I feel good about it. When you talk to projects, we see things going on I feel good about that. So nothing unusual now. If I have another quarter that I'm disappointed in in Europe, then then I'll be, I'll be starting to say, okay, what's going on here? But, the only other thing I can tell you that it probably created that week in the first quarter in automation slips, the 1st year, if we had Our main distribution center in Germany went through an ARPU conversion in the last 6 months.
I can tell you right now, it's not gone well. And so we struggle with shipments, but that's my bad and my mistake as a CEO and we'll fix that. But overall, we're doing okay. And, you know, if we have it in the back quarter, then then we're going to figure out what the hell is going on. But right now, I feel okay.
I think everything's being done right.
Okay, David. That's helpful. So just in Commercial And Residential Solutions, in North America, want to follow-up last quarter. You had some hurricane impact and maybe there's some reconstruction work that we had here in 'eighteen. So have you seen any impact from that?
And maybe just talk about the visibility into that particular market. I mean, it was up, but it was up marginally. What do you see going forward there?
In North America? We see a very good non res marketplace in the rebuild going on. I think in the housing market, there's a lot of issues relative to around labor and ability to execute, but the timing of replacement markets, the timing of the new technologies, I mean, we really have a situation for the next 12 to 18 months. It should be pretty good for us in the U. S.
Marketplace, both in non res and residential. So I, I mean, we have to continue to execute around that. And I like where we are at this point in time in North America non res. And again, as it's lined up nicely for the automation solutions in North Commercial residential should be lined up nicely too for the rest of this year going into 2019 basins based on the factors you just threw out there, Andrew. So, you know, I like where we sit at this point in time.
Now, we have to execute around that. The key issue for us at this point in time is we have to make sure we've started to make those incremental capacities in both in capacity from equipment and also in people. And that's something that we're decent at. We've written it down and now we want to write it up a little bit here. So I think I like where we are and we should have pretty good wind to start backing this one.
Thanks Dave. See you next week.
See you next week. And again, I want to apologize for cutting you off there, Andrew. With that, I'm going to wrap it up. I wanna thank everybody. Tim, great job with the charts.
I mean, for mister Transparency, who if I can't spell Transparency, but good job there. And Frank, thank you very much. An organization out there, a really good quarter. And now we got to deliver the second quarter, folks, because our shareholders are expecting better. And since they said I sandbag them on the upgrade, I hope they're right, but we'll see what happens after that second quarter.
So everyone you take care and I'll see you in New York next week and and pray for no snow unlike Boston a few years ago when We moved to Boston and got 5 feet of snow or the heck it was. And so y'all take care. We'll see you next week at stock strength. Bye.
Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time you may disconnect your lines.