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 mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, February 6th, 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 annual 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.
Thank you, Denise. I am joined today by David Farr, Chairman and Chief Executive Officer, and Frank Dellaquila, 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. I'll start with the first quarter summary on slide three. Sales in the quarter of $3.8 billion 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 three-month underlying orders up 7%, and we expect to stay in a 5%-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 28th conference call, in total, we repurchased over 7.8 million shares in the quarter. Together with dividend payouts, we returned over $800 million to shareholders in Q1. Overall, the first quarter performance was stronger operationally than we had anticipated a few months ago. Turning to slide four. First 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 to $55 million due to valves and controls first-year acquisition accounting charges, foreign exchange losses, and higher amortization expense. Turning to slide five.
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 turning 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%, orders here are trending favorably, and we expect growth in the second quarter. Turning to slide six. Total segment margins, excluding valves and controls, improved 70 basis points to 18.6%, driven by leverage and higher volume and the benefits of prior period restructuring actions. Corporate and other charges increased $50 million, including $25 million of valves and controls first-year acquisition accounting charges.
Operating cash flow was $447 million, an increase of $37 million or 9% versus the prior year. Free cash flow of $351 million 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 seven. 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 growth was up 13%, with China up 22% and the rest of the region up mid-single digits. Growth was driven by MRO spend and increasing mix of small and mid-size projects and continued favorable trends in key discrete and industrial markets.
Margin excluding valves and controls improved 120 basis points to 17.8%, reflecting leverage on higher sales and the benefits from prior period restructuring actions. December three-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%-8%, up from prior guidance of 5%-7%. Turning now to slide eight. Commercial and Residential Solutions underlying sales increased 5%, with reported sales flat, reflecting the divestiture of the ClosetMaid business on the first 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%, reflecting leverage on higher sales and the ClosetMaid divestiture, partially offset by warranty costs. Overall growth and profitability of the segment reflects a continuation of the cycle that started in the second half of 2016. December three-month underlying orders were up 5%, reflecting strong global demand in air conditioning, refrigeration, and construction-related markets. We are raising our full-year sales guidance for Commercial and Residential Solutions. The first quarter results and orders trends support full-year 2018 underlying sales of 4%-6%, up from prior guidance of 3%-5%.
Let's turn to slide nine, which summarizes the impact of U.S. tax reform. On an ongoing basis, Emerson will benefit from a lower tax rate. For the full year 2018, we expect a consolidated tax rate of 25%-27%, and in 2019 and thereafter, approximately 25%, which reflects a full five to six 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 million was offset by a $98 million reduction of our net U.S. deferred tax liability and $130 million repatriation reserve accrued in prior periods. The net impact of these items in the first quarter was an income tax benefit of $43 million 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, valves and controls first-year acquisition accounting charges, and a tax-related loss on the divestiture of the ClosetMaid business. These items totaled $0.07 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 growth of 5%-7%, with Automation Solutions up 6%-8% and Commercial and Residential Solutions up 4%-6%.
GAAP EPS of $3.05-$3.15 is up 20%-24% versus the prior year or up 11%-15% excluding the impact of tax reform. We expect operating cash flow of $2.9 billion, and we expect to convert free cash flow at 120% of net income. We are increasing our capital spending outlook to $575 million or approximately 3.4% of sales, reflecting our more positive outlook on the global business environment. In addition, we provided second quarter guidance of underlying sales up 7% and GAAP EPS up 21% to $0.70. 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 global Emerson organization for their tremendous performance and a very strong start to the new fiscal year of 2018. With 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 first quarter of our new fiscal year, and cash flow up 9% at approximately $450 million. So a very strong start. As Tim just explained, we're raising the total guidance of the year, and we will be going back to the measure that I believe in quite strongly, and it's called GAAP.
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 a 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 we'll update you a little bit about 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 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.
The pace of dollars of automation orders are maintaining a very high level of actual dollars, well over $2.35 billion per month on a roll basis. It's a good number on a three-month roll basis is 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 will generate, as we look at it, 6%-8% underlying sales growth for our Automation Solutions business. That is a very good number. As we've talked about it 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 two-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. Overall, the trend line is very good. We're seeing very good orders, again, at Commercial Residential, maintaining this 5%, 6%, maybe 7% underlying orders, and really seeing some pretty good pattern and support. They're well into their second year now of the recovery and on very good momentum both in the underlying business and also new technologies. As you look at the world of Emerson, Automation Solutions 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. I see continued investments.
In fact, as I look at the underlying growth fixed investment trend lines, which have bumped up from since tax reform was passed, it does look at a very good pace of business for the next two years in the U.S. and North America around fixed investment, which is very good. Second, if you look at what we're seeing going on in Asia, China had another very good quarter, both in orders and sales. 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, I 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 and investments, I feel better that we should see 10-plus% sales growth in China, which is an improvement.
Relative to the rest of Asia, the order 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 from the Middle East and Africa. Yes, sales were still slightly negative, but we've now seen three or four or five months of orders pattern improving, going positive. As this expects, we had to fill the hole. We filled the hole, and now from the backlog standpoint, we'll start seeing, I would expect, positive sales as we go into the second quarter. I think we're on 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 look pretty good. It looks like Latin America's turned for us, and that's on a positive surprise, is a positive for me, as was China. As I look at Canada, I see that investment continue going up there. There's some things that are positive for us at this point in time. Out of Europe, our order pattern continues to be positive. 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.
We see the pace of business activity going on around that. Clearly, as we go into the second quarter, we at this point in time see another good solid 7% underlying sales growth, which will generate good, obviously double digits consolidated sales with the addition of our acquisitions, and no really divestiture impact of magnitude in there. We see a very strong double-digit top-line sales growth with over 7% underlying growth. 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 conference, which will be held at the New York Stock Exchange this year. Fundamental focus is going to be on reviewing where we see the trend lines 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. We're going to give you what we see is the trend line from the 2016 to 2021, 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. Then most important at the end, looking at the 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. We want to show the core businesses, 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 to the numbers that you'll see coming out of Emerson over the next couple of years.
As I look at it and wrap it up and go to the Q&A, a very strong first quarter. Raise 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 might be panicked 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. 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. I'm here to talk about what we see in the quarter.
Needless to say, the OCE, we're very pleased with the operations and the performance of the two platforms in this first quarter, and we look forward to continue to have a very strong total fiscal 2018 based on a very good start to our first quarter. With that, I'll open the floor up for the first question. Thank you.
Thank you, Mr. Farr. 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. If your question has been addressed, you may withdraw from the queue by pressing star, then two. Your first question will come from Robert McCarthy of Stifel. Please go ahead.
Hey, Dave. Hey, everybody. Congrats on a strong quarter.
Hey, Rob. Thanks.
Looks like decent momentum across the board, you called some turns in some areas. 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. Given what we've seen with the market pullback here, obviously there's some concerns about rates, but there's also concerns about overheating in China. 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.
Yeah. Given that I'm an expert in what's happened in the marketplace for the last three days, I'm sure I can help you here. From my perspective, clearly we've seen a very good investment in the two businesses. On the Commercial Residential, it's been tied around the refrigeration, it's been tied around the environment, the issue around trying to improve the quality of the air. From the perspective, can it get overheated because of the government trying to push an 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.
There is a concern from the standpoint of the investment period that maybe is a little too aggressive, and historically what's happened is that they would dial it back, but we don't sense that at this point in time. That will be a concern for us as we look at this. On the Automation Solutions side, it's very broad based. It's not just 1 type of technology. It's not just 1 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 their country, not only for their own country, but also for some of the exports around the world.
I don't sense any overheating there at this point in time, but the one area I do concern about is the government, on a Commercial Residential side, trying to drive the environmental issues, at some point in time, they say, "Hey, we drove it too hard. Let's back that off." That could create that downturn. Right now, based on what I've seen in the order pattern, based on the customer pattern, I 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 digits coming out of China. Clearly, with the Commercial Residential business this quarter, they did a 20-plus % 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 here in the second half of this year and early next year. They're still going to have growth opportunities throughout Asia as I look at Commercial Residential . They're growing across the whole region. Obviously a concern, 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's an uptick in your own CapEx and the level of business and fixed investment spending across the board. Maybe 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?
From the U.S. and manufacturing base, we were given a very generous tax reform package that'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. 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. From a demand standpoint, for the first time, we see both the demand, and then we're also seeing incentives to make investments.
What we're hearing and seeing is the upward pace of investment will continue to go in a positive way, and as long as the demand stays both here and internationally, you're going to see these investments continue across our customer 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 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 downstream marketplace right now in the Gulf region. In general, we're seeing a lot of our customers are talking about increased investments. We're still seeing a strong focus right now in the short term, what I call quick payback type investments, especially since you get faster depreciation in the United States.
We're starting to see some of the small or 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. We're seeing the discussion of the longer-term projects. They all see the benefit from a balance sheet standpoint, lower taxes, faster depreciation. I firmly believe U.S. industry is 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 our 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. I firmly believe that business leaders in this country are going to do something with it.
If not, then shame on us, because then we deserve every hit we get coming out of Washington. From my perspective as a CEO and as a leader of the National Association of Manufacturers, we are increasing our investments. We are focusing 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, Rob. We're going to try to continue to get this information out when it becomes more and more knowledgeable. If you look at the gross fixed investment numbers, they're trending up, and I expect that will continue here throughout 2018 and early 2019.
Thanks very much. We'll see you next week.
See you next week, Rob.
The next question will come from Andrew Obin of Bank of America Merrill Lynch. Please go ahead.
Yes. Good afternoon.
Good afternoon, Andrew.
Just a question on Automation Solutions. You highlighted MRO and small and medium-sized projects. I would imagine these are very good for margin. What kind of visibility is 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?
Yeah. The normal cycle, our margin, when we have functions scheduled out for the 35%, we're looking at a 35% flow through profitability on the Automation Solutions. Takes into consideration that balance between as we go into those projects, into the larger projects. We're well into tune. The very large projects, which won't really start hitting until late 2019, 2020, they will obviously put more pressure on our margin. By that point in time, our facilities are running a little tighter, a little more productive. 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 small or medium-sized projects. I don't worry about the margin in the business, especially if we see strong investment North America, which is our core market.
The pressure will be in the positive side of the margin, not in the negative side of the margin.
Got you. 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. 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. I think you guys heard me. We've been seeing underlying salary and wage increases going up now for the last nine 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, we have to make sure that our compensation structure from a wage and salary standpoint and a benefit standpoint, we stay competitive, 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, make sure we keep ahead and we start having to tweak our prices on upward basis. We see the commodity pressures building up. We see the wage and salary pressures building up, which are all good things from a mild form of inflation.
Clearly, what we have to do is stay ahead of this. The sessions that Frank and Steve will be having with the two platform leaders is we're going to have to be talking, "Okay, guys, you got to keep putting the pressure on the price increases," because we will see the upward pressure on commodities, the upward pressure in salary and wages, and we must make sure we keep our pricing in line as we go through this time frame. We've gone through a period where we were behind the eight ball, and right now we are in sync. It's very, very important now as we stay in sync here the next couple of quarters. I think, Andrew, this is an issue that I openly talk about it.
At this point in time, we are openly talking internally because we see the pressure is increased material, increased salary and wages, and therefore we're going to have to slightly bump up our prices. That will create obviously a higher growth rate at the top, but also we have to make sure we have the resulting cost reductions and price actions that are needed. This is an interesting time frame, which we have not seen for a while. We do know how to operate in this time frame, and 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.
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 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 as a percentage of sales?
Yeah, I think that if you look at our capital spending, if you go by quarter, we typically start slower, and we build up in the year end. It's 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 is lumpy. This year we could be a tad under 3.5%. Next year, we could be a tad over 3.5%. We have similar projects that we might be looking at a new capacity, a new facility somewhere that we'll start working on late this year, and the major capital will occur in 2019. I think on average, we'll probably be somewhere in this 3.3%-3.4% range over the five-year time period.
The key issue for me is, as I told my board, unlike the government, which clearly had shovel-ready 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. What I'm looking at right now with the stronger demand in our 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, particularly the U.S., to be more productive and have a lot more flexibility around our facilities, which we haven't built into them in the past. I think this is going to build, and I would expect 2019 and 2020 will be bigger capital than this year as I look at it, based on what I see and feel right now, Steve.
As a % of sales, right?
As a % of sale, correct. The dollars are still going to go up. Yes.
When you look at your cash flow statement, there's this kind of other account. I think there might be some, that's where you kind of adjust for perhaps your cash taxes.
Yeah
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 $200 million in the last few years, and with the new portfolio you have, does that shrink in size? Does that go closer to zero? Is it less of a factor? I'm just trying to kind of get to what the run rate conversion is here going forward.
Yeah. I'm going to try to grab the chart, Steve, that you're talking about, okay? I know I'm talking. Is that in the press release, or is it in the slide deck?
No, just from your 10-K, 2015, 2016, and 2017 from the 10-K.
Oh, from the 10-K. Oh, got it.
I'm just trying to get at what the sustainable conversion is here, because you guys, you've talked in 2021, it being like 105% to 110% or something around that. Now CapEx is bumping up a little bit. You've got some of this tax coming through. Maybe just a little bit of clarity on that front.
Steve, 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 comp that gets added back as well.
Okay.
No, I don't expect.
that's sustainable
a change in that as a function of tax reform or the-
No
the different configuration of the portfolio.
Great.
It's a good question, given all the challenges around this world today about quality of cash and earnings. let me, as we get ready for next week-
I don't know what you're talking about.
I'm either. I just made a statement. You know me, I just made a statement. I got my rally monkey. I got my bull here. I got a baseball bat, and these guys, it's amazing what they say when they're thinking. Let's take a look at, because we're going to give you a cash forecast, and we're going to give you, obviously, a P&L forecast next week. Let me take a look at what we think the sustainable rate's going to be. As you point out, and you've pointed out to me numerous times, I have a unique window here right now because I have the Final Control cash opportunities, which we're obviously starting to execute on, which is going to run now for three or four years. I have some increased amortization because of software companies coming on board from that perspective.
That helps us from a cash flow standpoint. The question is, as we go through this cycle, are we going to be able to run a little bit higher rate than on a conversion basis than I have historically? I think that's a very fair question. It's also a very challenging question for me to answer. I think that I owe you that and the shareholders, can we run a 110, 115 conversion? This year, we're talking about running around 120 again, which is a good number, and I do have some things helping me right now. The question is, we go out of this cycle, is the number going to be 105, 110, or 112? I think that's a very fair question to ask.
Then one last quick one just on R&D. Are you kind of full up there on R&D investments or RD&E, or is that going to tick up and trend up as well?
I think the key issue for me, as I've talked about the trend line of our orders, our trend line of the sales, in the two key areas, if I see Automation Solutions really starting to take on some bigger projects where they want to bring in some new technologies, we're going to have to ramp up some R&D. That won't be commonplace if I start seeing our sales order would mean this year we're going to be more in the 8% range, I see a pretty good filler relative to projects coming at me. 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 2019 and 2020, in particular around our Plantweb Internet of Things. I think that right now we're good.
If I start seeing this growth rate tick up a little bit, which could possibly happen, 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 and 2021. That's what we're going to be watching now. That's the next pivot point that we should be at, that's the place you should be pushing me. Relative to Bob Sharp's business, I think at this point in time, we've continued to give Bob the monies he needs as he's running at very high levels of profitability.
He had an unfortunate situation of a quality issue in the first quarter that we had to deal with, we dealt with it, in one of his products, I think in the thermostat area, we've dealt with that. We're giving him the money he needs relative to that next generation investments to really pull through his digitization and the cold chain stuff, which you'll hear him talking about. I'm making sure he's got the money he needs right now because there are some good growth opportunities there for that business. That's what I see.
Makes complete sense. Thanks as always for the comments.
Thanks, Steve.
The next question will come from Steven Winoker of UBS. Please go ahead.
Hey, thanks. Good afternoon, all.
Good afternoon, Steve. Are you legitimate? We can talk to you, or are you back in the game here, or are you still on vacation?
Come on, Dave. I assumed you'd read every single page of that report.
Oh, that one. Oh, I used that one to put myself to sleep over the weekend. I'm sorry.
Oh, thanks for that, big guy. I got to consider that next time.
Oh, gosh, Steve. I 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. Just following compliance. Anyway, out and good and all that.
I am full compliance. That's why I got my rally monkey. I got my dog here. I got a bull looking at me right now, and I'm full compliance.
Yep. I'm straight up.
I'm full bullshit, by the way.
Straight up and down. Listen, I just wanted to chase up the cash flow discussion a little more with regard to 2018, not the longer term. On page 16 in the presentation, you just give the 150% operating cash flow conversion on GAAP, right? The step up from 130. I just wanted to make sure that the key drivers are there in terms of the change or to what extent, what are the biggest components of that step up?
You're going to have taxes there.
Yeah.
You're going to get taxes there.
For our guidance.
That's the difference, is primarily there's two things going on with the taxes and a little bit improved profitability overall. Those will be two numbers right there. As you know, given our level of 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. The big chunk there is the taxes.
Okay, great. As you said, you'll give us some more color on that, hopefully.
Yeah
In terms of longer term. Yeah.
We're going to try to make sure, Steve, because there's two 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, we have a tax reform. I'm going to try to be as I thought Tim worked very hard to be transparent with you guys. You guys may not think that was transparent in all his charts he gave you, 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 a rebasing going on right now you're going to need.
Okay, great. 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 cost and how hard that is, and you've been through this multiple times before. Some of the folks in that area, certainly, saying that they believe they have a little more, I think, 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 it for the long term. Our customer base know that, we've worked very closely with them. We do get the pricing, we clearly have to make push, shoves back and forth, 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 in the commercial residential side. They have to be very careful from the standpoint. We understand that, and that's why we work closely with them. We don't let them price out the marketplace either in the end market.
I think that there's some pushbacks always. I think over time, we figure out how to make those trade-offs with changing our products to get them the price point they need. We can change our products to make sure that we get the cost price point that we need. As you know, there's not just one compressor.
Right.
We can make changes within a compressor to get what they need and to change that price-cost structure. There's going to be a lot of give and take. I think the industry knows right now we're looking in the period, as someone pointed out earlier, potentially we could have higher inflation here. 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 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.
You've forced mixed up in the past as well, which has helped. I'm not sure if you see opportunity there too, mixing up-
We have a window here again in the commercial standpoint, in refrigerate, that we will mix up in that space as the transition happens. On the residential side, it's a little bit different this time. I think we're going to see more of a mix-up on the commercial in the channel in the next 12 to 18 months in North America. It's going to be a hybrid approach here. We're going to be making some pushes and shoves, and in the end, we want to come out of this ahead just like they want to come out ahead.
All right. Thanks, Dave. I'll see you next week, and I want to hear the critiques on that report.
I definitely. I will dust it off. It must be underneath my pillow right now.
Good. As long as you have it.
Hopefully, I didn't get too much drool on it.
That's all right. It's better than most.
Okay. See you later, my friend.
Thanks.
The next question will come from Rich Kwas of Wells Fargo Securities. Please go ahead.
Hey, good afternoon, Dave.
Good afternoon, Rich.
On Automation, with regards to investments, with oil where it is, it is up much higher than a year ago, and investments have picked up. You talked about being able to maintain the incrementals at a pretty healthy level without having to make significant investments. When do you see that starting to play out? I guess that gets into some of the KOB-1 projects starting to get booked. 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.
I think what we're seeing right now, we're going to share with you 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, wasn't it?
Yes. It was in November, I think we did.
End of November. We're going to give you the snapshot, and basically, it's consistent measurement across the board. What we're seeing right now are the initial phases around the world of larger KOB-2 type of projects, where people have done initial expansions or re-start, now they're going back, and they're dusting that off, and that's coming back into the funnel on either 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, I would expect 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, I know Ed Monser is going to try to talk about one project that he sees going on right now across the Final Control in particular. We're going to start seeing more and more of that come late in 2018, early 2019. Yes, there's going to be one or two projects out there, I think those projects really won't start to play into 2019. Where I'm talking about higher incremental investments is, if I start seeing our growth rate of sales, 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 68 and potentially have a chance to cut across that, we're going to have to start this year.
The question will be is, if we're growing faster, we're going to obviously leverage and obviously the numbers will look okay in the short term, and we'll come back to Hones will be in 2019. If we're starting to see this happen and we're starting to see the larger KOB 2, that's what I'm going to trigger off of, not the KOB 1. 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, both from a manufacturing, sales, and service organization, because this business will, as you know, comes up and these aren't small products or projects, and so we got to make sure we can produce them and then deliver them.
The earliest is really next year is when you would start to see the impact from that.
Yeah.
Okay.
Yeah. You'll hear us talking about it, but the dollar level will be next year.
Okay. On V&C, outside the amortization, you still tracking the exit of the year in the near double digits on an EBIT margin basis, or is that coming together?
I think we'll be there. I have no reason to say we won't be double-digit as we leave this year, I want Ed to talk a little about that. Ed Monser is going to give a presentation where he sees. The team's doing a great job. This month started in January and February, we are moving off of the Pentair OMT system, which is that's like jumping off the top of this building in a corporate here without a parachute and hoping you can land without breaking a leg. That's going on right now. 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. Overall, I like where they are from a margin standpoint, sales and order standpoint.
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 hasn't made in a long time.
How about working cap real quick on that piece? Anything?
They're slightly ahead of schedule. I would say for the year, they're going to deliver My gut tells me that Final Control will deliver very good cash flow number for us this year. I firmly believe that we'll have a 2.9. It could be a 2.92. I think we're going to have a good operating cash flow this year, it's going to be driven off of the work Final Control does. Everyone else is important to the company, the real delta is there, I think that Mike Train and his team, Ram Krishnan and his team have a focus on that. They know they have a chance to deliver cash flow to us, 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.
Great. All right. Thank you. See you next week.
See you next week, Rich.
The next question will be from Jeff Sprague of Vertical Research. Please go ahead.
Good afternoon, everyone.
Good afternoon, Jeff.
How are you? Doing well. Hey, just a couple more things on V&C, Dave, if I could.
Yeah.
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 if you look at our V&C business right now, we're growing as a combination of Final Control and V&C, it's around 10%. What's very important to us right now is getting them into the site, which goes back, I think it was Rich asking me the question. The projects Wait a second. Just got another damn call. On the projects. We're trying to get them engaged on the KOB-2 projects on a full capability. That's what we're trying to do at this point in time, because the early stages of projects are starting to happen. We are building out, as we've talked about, a Final Control solutions package.
Now for the first time, we are going out to the global customer base and saying, "We have, here it is." If you look at the projects, some of the biggest componentry is typically around the Final Control package. That's pretty important to us. We don't want to miss the initial phases, those upticks. Yeah, we're focusing on restructuring, repositioning, making sure we deliver the profitability and the trade working capital. In reality right now, what we're also out there working really hard and why Mike Train and Ed Monser and Ram Krishnan 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 this cycle is 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 to this business. I like what we see right now, if we can maintain this level of growth and underlying orders, the projects are coming, this will really set us up for a very strong 2019.
Then just on the V&C financials, Dave, the $25 million of acquisition charges, is that inclusive of the run rate amortization or is that more like step-up and other type of-
The last piece of step-up of the worst accounting rule I ever seen in my life, as Frank knows, where you have to remark or write off the profit in inventory and the backlog. They had a lot of backlog, and they clearly had a lot of inventory. This was the last phase, the last piece. Well, Frank said maybe I have a couple more million left next quarter, I'm not talking about it. This is the last piece of that. That's what that is right there. That's the last piece of that, the accounting revaluation of backlog and profit and inventory.
Then just one more from me. I think some folks are viewing the strength as 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 and 2020 when you're looking at these higher levels of CapEx?
We're on track to get back to the levels of profitability, the 19% EBIT margin that we talked about last year with the V&C. We are on track to get that in the same cycle. Even with the higher growth rate, I still feel very good at the starter growth rate. We're on track to get the mid-35, the mid-30s on the incremental margins. We feel good about that at this point in time. The only place I see that we'll have to start spending money is if that growth rate goes up. Given the fact that what's going to happen is that growth rate goes up, our spending will always be behind the growth. We're going to probably have pretty good leverage. It's when those rates start coming in thick.
I feel very good about the margins, incremental margins out of the Automation Solutions business for the next couple of years. The cycle started, we have bumps in things in a quarter or two, yes. Overall, I see no reason right now that we're slightly ahead of last year for margin. We're slightly ahead this year, and I think we'll get to that 19% that we talked about in the Automation Solutions with V&C by 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.
Hello, 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. How efficiently would you say that market's served today from the discrete and process sides, respectively? Are you seeing any separation among the people that have been focused on it on the past 10+ years?
The reason we called out the hybrid is because if I look at the underlying industries that use a lot of the hybrid technology, those industries have been the strongest places for investment. Say, for a classic example would be a pharmaceutical. From my perspective, I think that you have a clear group of leaders in the hybrid space today. There's three or four of us that are pretty strong. We'll talk a little bit about this. You look at 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 major players and to take more share within that space.
I think that you're hearing a lot of the key guys in this space talk about it, and I think there's plenty of room here for the next three, four, five years for us to gain into that space. 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. Right now, the hybrid space is what took off earliest, and I think that's good, and there's room for it to run.
Okay, great. Then a bookkeeping question. On the walk from the prior adjusted EPS, you have the $0.05-$0.15 adjustment for operations and repurchase, but you add the low end of that $0.05-$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 restructuring. 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're not setting ourselves up to some number we can't make happen. So that's what's going on here, Chris. I think that there's no additional restructuring underway. There's nothing hidden in here. If we can get a little faster growth and margin conversion, you're clearly going to get the earnings. There's no hidden incremental investments I'm trying to hide here. I'm trying to make sure that we put a forecast out in front of you that we can deliver, plus or minus the pennies that we talk about every quarter. That's all it is. It was a good beat, and we raised.
I didn't feel like I had to go crazy on a raise.
Mechanically, if we're bringing the bottom end up, so that's a bigger number.
Yeah.
Right. Got it. Thanks.
The next question will be from Joe.
No good deed goes unpunished.
Unpunished.
Unpunished. Okay. What was that? Sorry. Go ahead.
I'm sorry. The next question will be from Joe Ritchie of Goldman Sachs. Please go ahead.
Thanks. Good afternoon, guys.
I was telling him, no good deed goes unpunished, huh, Joe?
No, that is true.
I guess if I don't want to be in the heat, I should quit being CEO. I sort of enjoy being CEO. It's a lot of fun.
Yeah, you must enjoy it. It's been some time.
Almost 17 and a half years.
Maybe my starting question here is on just this incremental margin discussion, specifically around Automation Solutions. If I pull out the V&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.
No, I think it's more like 40%.
More like 40?
35, 40.
Okay.
We could take you through that big Frank, you've got the numbers there. We've seen them. I've saw people talk about that.
Okay, yeah.
If you take out the acquisition impact and some currency headwind that we have in there that's not obvious, it's mid-30s. Mid to high 30s.
Okay. All right. Okay, got it. That ticks that box. I guess in terms of just, you guys have been talking about price cost being neutral 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 half of the year and maybe making it up in the second half. Is there a chance then that price cost can be positive as we progress through this year?
Boy, I wouldn't bet on that one. I think going back to those, a very good question somebody asked me about this. If you look at the pieces that go into the cost side of this, there's more pieces in the cost side that are going up than 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 in Commercial and Residential. Right now, I will consider this a win for us this year if we're $1 green. I'll buy everyone a drink on that one.
This is what's going to be, I think, the most challenging thing for us, Joe, this year because of the fact that we see a lot of moderate inflation pressures coming at us. I feel very good that we could offset that because we've been getting ready for this for a while. I'll repeat again, we're going to have to work very closely with our customers here to be doing some mixing and matching, some 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's going to be a brute force effort here, or that'll come back to haunt both sides of us, which I don't want to see happen, as you can imagine.
Yeah, no, that makes sense, Dave. If I can maybe fit one more in here.
Go ahead.
We haven't talked about.
I ain't going anywhere. I'm still CEO.
17 years and counting. If you take the $3 billion or so that you have on your balance sheet right now, you've talked in the past a lot of that is international. Is there any hindrances to bringing that cash back and getting it invested? Is there some kind of timing that we should be thinking about on that cash?
No. I'll let Frank answer that first, I'll give you my two cents.
Joe, we're expecting to bring back well over $1 billion of it this fiscal year. I would expect to bring back a substantial chunk in the second quarter, then probably another amount that'll take us over $1 billion later in the fiscal year. No, there are no impediments. We'll be bringing almost half of what we have overseas back in the next year or so.
Yeah. One of the good things the tax reform does for us, it gives us that freedom to make that call we want to do it. We only have a couple markets in the world that really our cash will get trapped. It's hard to move it around. India is one of those markets. In China, we basically every about 12 or 18 months, we get cash out. We've brought out over $3 billion since I've been CEO out of China. A lot more freedom, a lot more flexibility under this whole new tax reform. That gives the U.S. companies a lot more competitive opportunities here, which we have not had in the past, and that's one of the advantages. I'll say it again, if U.S. companies don't take advantage of what Congress passed in this tax reform, then we're flaming idiots.
All right, on that note, thanks guys.
Thank you.
All right, Joe.
The next question will be from Deane Dray of RBC Capital Markets. Please go ahead.
Thank you, and good afternoon, everyone.
Good afternoon, Deane. Where are you hiding out today?
Just downtown Manhattan here. Living the dream.
Living the dream?
Yes, sir.
You got like your feet up on the desk, having a drink, Mai Tai or something like that right now?
No, that's for later. No.
Okay.
We've got to drill down in something as exciting as the tax reform, just to follow up on Joe's last questions there. Were there any surprises as you kind of worked through the angles on tax reform? We had you pegged coming in around 27%, and it looks like that benefit is significantly better for you. What were the kind of puts and takes as you went through that then, and what's that step up in further benefit in 2019?
Yeah. As you know, I was very much engaged in this process as the chairman of NAM, working with the Congress and the White House. Frank's team was right with me the whole time. From our perspective, we've always felt it was going to be around five or six points of just pure rate benefit for us. In fact, the 11th hour, they took a little bit away from us from the standpoint. Overall, it pretty well came in line where we thought it was going to be. I was pleased, and we've been positioning ourself now for the last 12 months. From the pure payment we're going to have to pay the government over the next eight to nine years, I think that number, we can minimize that number a little bit.
The overall sort of restatement off what I call Fixing the deferred tax on our balance sheet. I think we're clean there. We didn't have anything hidden in there that we had to write off. The other benefit that Frank and his team did is when we did the sale of the two businesses, we made the decision to go ahead and book the tax cost. That gave us a big benefit that when we waited to bring the money back, that we were actually saving about $125 million of actual cash on taxes here because we waited, because of lower tax rates. Overall, Frank and his team, they knocked this one out of the park. From our shareholders' perspective, they got a lot of benefits here, both this year and next year, we're going to obviously get a lower tax rate.
You look at my competitors, which are international companies, we're going to be on a tax rate now. We're right there. We're competitive with anybody, and I'll take my cost structure and my flexibility on anybody any day. I like where we are right now, Joe, and I think we're in pretty good shape.
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 apologize, Deane.
No worries.
From my standpoint, there's two things going on. Long term, the way I went in, I was pushing so hard working with Congress, is we have an aging workforce in North America right now. 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. The increase in capital 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. Our strategy has always been, we stay local for serving. We manufacture here in the region here, just like we do in Europe, just like we do in Asia.
I think what 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. I would say that will 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. 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, Deane. I apologize for calling you.
No worries.
The next question will come from Gautam Khanna of Cowen and Company. Please go ahead.
Yeah, thanks. Good afternoon, guys.
Good afternoon, Gautam. It's good to talk to you again. Where have you been, hiding on me?
A little bit, yeah.
Gautam on that one. You just ignore me on that one.
That's fair.
That's fair. I just gave you an opening. I wouldn't take.
Yeah. Agreed. Couple questions. I guess first, you mentioned one of the milestones you're sort of tracking on the V&C 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?
Yeah. There's three things I'm watching very closely. One is the ability for us to create the solutions packages in the Final Control that when we're going out to bid, that gives us a competitive advantage. What that will mean is the order pattern opportunity within the Final Control should run higher rate than the rest of Automation Solutions. That gives us a chance. From my perspective, that means we're regaining some of the lost presence that they got lost in the last cycle. The number two thing we're tracking very clearly that you'll be able to see is the fact that we're talking about from a margin standpoint, yes, V&C is still diluting to our margin, but a less dilutive impact. Therefore, as you go into the second half of this year, you start seeing the positive impact of the V&C as we wrap around it.
You're going to start seeing that live now as we get in that second half. Another milestone we want to watch and something I'm watching to make sure this team gets their job done. The third issue from my perspective is all around the cash flow. If the cash flow of the corporation continues to outperform in the upside, and it's a function of we're still growing nicely profitability, but it's because the Final Control organization's able to get the trapped cash off their balance sheet from the receivables and the balance sheet from the inventory. If they continue to do that will be the third thing. You'll keep hearing us talk about better cash flow over a quarter or over six or nine 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 what I want to see happen, because that means they're really bringing a better flow of cash and return and growth to the corporation and hence for the shareholder, which two things are happening. Given the fact the tax rate went down and we're delivering on the savings and growth, that means the return for my shareholder is going to be better than initially planned.
Now, that's very helpful color. Maybe just the last one to dovetail to your cash flow discussion. You've done a number of tuck-in acquisitions, Cooper-Atkins, you mentioned cold chain-
Yes
What you'll talk about next week, can you characterize how the M&A pipeline looks right now? 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?
Okay.
Any sort of color around that?
Yeah. I'll give some color. Right now, from our perspective, as we look at the transactions today, these are very much transactions which are private transactions. 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. Right now we probably have $2 billion-$3 billion that we're actively engaged in. What we report to you is we're trying to get another $500 million, $600 million done this year. In reality, what I like to see, if 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 $1.5 billion-$2 billion done. That's the type of magnitude we're working on right now.
Because of where we've been through our repositioning, we probably got ahead of a lot of our competitors, and where we are relative to our ability to absorb, because we've got the divestitures done, and we've got a good head start on V&C. What I would call the right number for me right now is not $500 million for the rest of this year. I'd like to really see a number which is more like $1 billion to $1.5 billion to $2 billion type of range before the end of this calendar year. That would be, to me, where we should see. That's the type of activity we're working on right now.
We may not get them done, but that's what we want to do, and we want to try to get that done, and that would make our plan all the way out to 2021 a lot easier to execute on, because that's front-end loading the acquisitions.
Thanks a lot, guys. See you next week.
Take care, Donovan. 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. Any more questions? Is there anybody out there? Up there?
There are a few more, sir, if you want to take them, or we can move to the closing, if you'd like.
I'll take one more question since you got me trapped.
I'm sorry.
I'll take one more question.
I'm sorry. It will be from Andrew Kaplowitz of Citi. Please go ahead.
On second thought. Okay, Andrew, how you doing, my friend?
How you doing, man? Just getting under the bell. I like it.
Andrew, you got your tail underneath the door.
Absolutely. I just wanted to ask you about Europe in the sense that it was down, but you mentioned that orders are positive there, and it should be better. Europe has had very strong GDP growth, as you know. Is anything going on there? Is there any reason why it shouldn't grow low to mid single digits 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 over the last couple of years, and we're having to fill that backlog on the Automation Solutions 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. Clearly, from a competitive standpoint right now with the dynamic change in the dollar, we had a slow start to sales in the first quarter. The orders, I feel good about it. When you talk to projects, we see things going on. I feel good about that. Nothing unusual.
Now, if I have another quarter that I'm disappointed in Europe, then I'll be starting to say, "Okay, what's going on here?" The only other thing I can tell you that probably created that weak in the first quarter in Automation Solutions in the first year, our main distribution center in Germany went through an Oracle conversion in the last six months. I can tell you right now it's not gone well. We struggle with shipments. That's my bad and my mistake as a CEO, and we'll fix that. Overall, we're doing okay. If we have another bad quarter, then we're going to figure out what the hell's going on. Right now, I feel okay because I think everything's being done right.
Okay, David, that's helpful. Just in Commercial and Residential Solutions in North America, I just wanted to follow up. Last quarter, you had some hurricane impact, and maybe there's some reconstruction work to be had here in 2018. Have you seen any impact from that? Maybe just talk about the visibility into that particular market. 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 from the rebuild going on. I think in the housing markets, there's a lot of issues relative around labor and ability to execute. The timing of replacement markets, the timing of the new technologies, we really have a situation for the next 12-18 months that should be pretty good for us in the U.S. marketplace, both in non-res and residential. We have to continue to execute around that, and I like where we are at this point in time in North America non-res. Again, as it's lined up nicely for the Automation Solutions in North America, Commercial and Residential Solutions should be lined up nicely too for the rest of this year going into 2019 based on the factors that you just threw out there, Andrew. 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're starting to make those incremental capacities both in capacity from equipment and also in people. 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. I like where we are, and we should have pretty good wind to our back in this one.
Thanks, Dave. See you next week.
See you next week. Again, I want to apologize for cutting you off there, Andrew. With that, I'm going to wrap it up. I want to thank everybody. Tim, great job with the charts. For Mr. Transparency, who probably can't even spell transparency, but good job there. Frank, thank you very much, and the organization out there, a really good quarter. Now we got to deliver the second quarter, folks, because our shareholders are expecting better. Since they said I sandbagged them on the upgrade, I hope they're right. We'll see what happens after that second quarter. Everyone, you take care. I'll see you in New York next week. Pray for no snow, unlike Boston a few years ago when we moved to Boston and got five feet of snow, or heck, it was. You all take care.
We'll see you next week at Stock Exchange. 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.