Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's Investor 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, August 6th, 2019. 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 our host, Tim Ponder, Director of Investor Relations at Emerson. Please go ahead.
Thank you, Allison. I am joined today by David Farr, Chairman and Chief Executive Officer, and Frank Dellaquila Senior Executive Vice President and Chief Financial Officer. Welcome to Emerson's Third Quarter 2019 Earnings Conference Call. Please follow along in the slide presentation, which is available on our website. I'll start on the third quarter summary on slide three. Sales in the third quarter of $4.7 billion increased 5%, and underlying sales were up 2%. Growth was below our guidance across both businesses. Underlying orders were up 2% in June, also below the 5%-7% expectation we discussed during the second quarter earnings conference call on May 7th. Automation Solutions underlying sales were up 3% and orders up 4% in the quarter. We had expected global discrete channel inventories to clear and demand to recover, but instead, discrete end markets further decelerated in the quarter.
North American upstream oil and gas demand has yet to improve. Demand in process and hybrid end markets, however, was stable in North America and continued to be robust elsewhere. Commercial & Residential Solutions underlying sales and orders were down 1% in the quarter, primarily driven by cooler, wet weather conditions in North America. GAAP EPS was $0.97 and was $0.94, up 7%, excluding discrete tax items in the current and prior year. Through the third quarter, we've returned $1.9 billion to shareholders and completed our $1 billion 2019 share repurchase target. Today, we announced an additional $250 million of share repurchases that we will target to complete in the fourth quarter. Turning to slide four. Third quarter gross margin was down 90 basis points, and EBIT margin was down 80 basis points.
EBIT margin was up 50 basis points, excluding the Aventics, Tools & Test, and GE Intelligent Platforms acquisitions. Tax rate in both years benefited from favorable discrete items in the quarter. Turning to slide five. Third quarter underlying sales growth was led by Asia, Middle East, and Africa, which accelerated from flat in Q2 to up 3% in Q3, primarily driven by sequential improvement in the Commercial & Residential Solutions business. The Automation Solutions business also ticked up sequentially. The Americas was up 1% and remained positive across both businesses, but was slower compared to the second quarter growth of 7%. Europe was up 1% and remained positive across both platforms. Turning now to slide six. Total segment margin was down 160 basis points and was down 30 basis points excluding recent acquisitions.
Segment margin of 18.1% was approximately in line with our expectations as our businesses executed well to deliver strong profitability on lower sales growth. We guided sequential core leverage in the mid-40s, and our businesses together delivered over 70% on $120 million higher sales. As we discussed last year, we've accelerated certain restructuring programs in the second half of 2019 to position the business for a slower near-term growth environment. In Q2, we identified approximately $10 million of restructuring investments to accelerate in this fiscal year. This quarter, we've added another $20 million. Our total expected restructuring spend and other actions is now $100 million for 2019, which is up from approximately $70 million at our February investor conference. These investments will help position the company for improving profitability in early 2020.
Operating cash flow performance was solid, up 2%, and free cash flow conversion was 135% in the quarter. Our year-to-date free cash flow conversion is 88%, and we continue to expect strong cash flow performance in the fourth quarter and greater than 100% full-year cash flow conversion. Trade working capital is an opportunity for us in the fourth quarter. TWC performance was worse by 80 basis points, driven entirely by inventory, which was higher in June as sales softened late in the quarter. We expect to recover this in the fourth quarter, which will benefit cash performance. Turning on to slide seven. Automation Solutions underlying sales were up 3%, and orders were up 4% in the quarter. Underlying sales trends in the quarter remained broadly stable as follows. We saw continued strong demand across our three kinds of business, MRO spending, brownfield, and greenfield projects.
All world areas remained positive, and we continue to see healthy progress in our long-cycle project outlook, a strong project funnel, systems orders growth, and a growing backlog. There were a few areas that missed our expectations. First, North America upstream oil and gas did not recover as we expected. Customers in the Permian and other key regions continue to focus their CapEx budgets to maximize free cash flow. Also, limited pipeline capacity continued to constrain investment activity. Second, global discrete manufacturing end markets decelerated. The short cycle weakness was particularly felt in automotive and semiconductor end markets. Finally, although our projects funnel remains healthy, our customers are more cautious around capital spending. Geopolitical and trade tensions have created a more cautious business investment climate. As a result, we've seen some projects push out of the year. This has impacted our orders and sales growth expectations in 2019.
However, we've not had any project cancellations, and we continue to have confidence that projects in the funnel will be executed. For the full year, we expect underlying sales growth of approximately 5%, which is at the low end of our prior guidance. This implies a fourth quarter underlying sales growth rate of approximately 5%, a bit stronger than Q3, which is supported by steady orders growth and backlog conversion. Segment margin decreased 150 basis points and was down 10 basis points excluding the Aventics and GE Intelligent Platforms acquisition. The business delivered sequential leverage above our guidance as the management team executed well on lower growth. As mentioned, we have pulled in additional restructuring actions that we are targeting to complete this year. Including these, full-year segment margin is expected to be approximately 15%.
Turning to slide eight, Commercial & Residential Solutions underlying sales and orders were down 1% in the quarter. Growth in the Americas decelerated from 4% in Q2 to 1% this quarter, due mainly to unfavorable weather conditions, cooler, wet weather in key regions late in the quarter that slowed residential air conditioning and construction markets. Europe also decelerated late in the quarter due to weather, but preliminary July orders trended positively. The Asia, Middle East, and Africa region improved from down 15% in Q2 to down 6% this quarter, and we expect improvement to continue, with underlying sales growth turning positive as we head into 2020. The preliminary trailing three-month underlying orders in July were up slightly, a good sign. For the full year, we expect Commercial & Residential Solutions underlying growth to be approximately flat compared to up 2% in our prior guidance.
This implies a slightly positive Q4 growth rate, which is supported by expected improvement in North America air conditioning markets and continued improvement in Asia, Middle East, and Africa regions. Margin decreased 70 basis points excluding the Tools & Test acquisition acquisition. The business delivered over 40% sequential leverage on incremental sales, which was in line with our guidance. We expect full year segment margins to be approximately 21%, including additional restructuring actions pulled into the fourth quarter. Let's turn now to slide nine. Our 2019 guidance framework is updated to reflect underlying sales growth of approximately 3%, including lower than expected third quarter growth and a reduced near-term growth outlook for global discrete markets. Fourth quarter underlying growth is expected to be approximately 3.5%.
The EPS guidance range is maintained at $3.60-$3.70. We expect fourth quarter earnings per share of approximately $1.10, which is the midpoint of the full-year range. Updated full-year segment margin targets reflect reduced growth and increased restructuring spend. The fourth quarter total reported segment leverage is expected to be approximately 30% year-over-year and almost 40% sequentially compared with the third quarter. Reduced segment profit contribution is offset by lower corporate costs and a lower full-year tax rate to hold the prior 2019 EPS guidance range. We expect fourth quarter corporate costs to be approximately $150 million. The fourth quarter tax rate is expected to be approximately 21%, including a $0.05 discrete tax benefit. The 2019 full-year tax rate is also expected to be approximately 21%. We've updated our estimated ongoing operational tax rate, which includes improvements from platform reorganization actions.
We now expect our operational tax rate to be approximately 23.5% going forward as we continue to optimize our global two-platform operating structure. Expected operating cash flow is $3.1 billion, and free cash flow is unchanged at $2.5 billion. Please turn now to slide 10, and I will hand the call over to Mr. David Farr.
Thank you very much, Tim. I want to welcome everybody. Thanks for joining us today. I also want to let you know that this is Tim's next to his last earnings call. I go through this process of training semi-professional investor relations people.
They never get there.
They never quite get there. Tim has a unique opportunity that we can't talk about, but he's going to be going to it later this year, and we're breaking in another person by the time we get into the November timeframe. Tim most likely will join us for that call. I want to thank everybody for joining us today, and I want to give you an update on what we see. I want to thank the employees for joining us today. I also want to remind everybody, we actually have an extensive number of people in the queue, close to 20 people in the queue to ask questions. I definitely need to keep you to holding to the two questions rules.
We'll extend the call a little bit, maybe one minute or one hour and 15, one hour and 20 minutes to try to get as many of the questions in as possible. Clearly, as you can tell from my communications that we put out, our communications we put out last Monday and the communications today, I have sensed and continue to sense a change in the underlying business environment, which I'm sure we'll be talking about here for a few minutes, and then you'll be asking a lot of questions around it. I also want to thank all the employees for their support over the last three months in this challenging third quarter we just went through and for the year-to-date numbers, and as we drive to finish out this fiscal year in 2019 and moving into 2020. As I look at the year, it's a good year.
We have good growth in sales. We have good growth in earnings. We have good growth in cash flow. It's happened, unfolded much differently than we thought going back nine or 10 months ago, and that's what we're having to deal with right now. As you can see in the orders chart on page 10, two things. First, we have a new pup called Dune, after Doonbeg, in one of our favorite golf places in Ireland. Dune is a black and tan, sits next to Rocket. Rocket's birthday today. He's one year old, birthday is today. You can see the order trend did improve slightly for Automation Solutions. It ticked up a little bit, pulled us up a little bit. On the Commercial & Residential Solutions for the month of July, orders were a little bit better, but still slightly negative overall.
Asia-Pacific turned positive in the month of July, which is good. We're now three or four months behind what we said, more like four months behind what we said, but it's good to see that happening. You can see the industries we see. We've been seeing pretty good strength in the third quarter, between the midstream, downstream. Lots of caution around the upstream area right now. Chemical, we've had a very good quarter in power. Our orders in the PWS power business is close to 40% up for the quarter around the world as we continue to upgrade the power facilities around the world. Automotive and semiconductor and discrete really had a tough quarter. Overall, a softening in key marketplaces, but the trend lines are still positive over, but definitely slowed to way below what we thought when we started this year.
If you go forward, we've updated the what we call our large project pipeline funnel, including we actually did an upgrade of the total size of the funnel. When we give this funnel out usually two, three times a year. In February, it was around $7.6 billion, 195 projects. Today, it's 221 projects, $8.3 billion. It did increase a little bit. Clearly, another sign of things slowing down and a little bit of push out is that our committed won but not booked is now slightly over $1 billion in projects. Projects that are basically sitting out there that we've won, and we're still waiting for the final documentation and the orders to be in place so we can start booking and then obviously start doing some shipments against it.
The other key thing you'll see in this is that, down the bottom, we talk about what's been shifted out of 2019 and 2020. Basically, what we've seen, about $350 million of projects we're working on, or been working on for the last couple of six to eight, 12 months, has been shifted from 2019 to 2020. We basically have seen about $450 million of the pipeline shifted out of 2020 into 2021. Clearly, this tells you we have what I call a dynamic pipe, something's moving in, something's moving out, but clearly a slowdown. I fundamentally believe in discussions with our customer base, our organization around the world, we've been spending a lot of time on this the last couple of months, is this cycle has not ended.
This cycle is in a pause mode because of the disruption that's going on relative to the trade negotiations, the trade discussions. It's clearly causing a slowdown in some key markets, primarily USA, a little bit of Europe, and we've seen some pushback in a couple other places around the world. Our international markets have continued to hold up from the Automation standpoint. U.S. market's pushed out a little bit. The Canada market pushed out a little bit. A little bit of push out in actually sales are going out in the Middle East. Overall, still going in. I still fundamentally believe if we do get resolution to trade discussions at some point in time here between now and the next 12, 18 months, the cycle will move back up. There's not been an excessive amount of capital spent in build-out in this cycle yet.
It's way too early. I just look at what's going on inside our company as we reallocate. I'm sure we'll have a lot of questions around this issue. As I look at what's going on, I am a little concerned from the standpoint of how long this slowdown will happen. Hence, the OC got together over the last 30 days and looked at some incremental restructuring. We've looked at where we need to slow down investments, where we need to pull back investments. We've looked at where we can accelerate restructurings that we had planned in 2021, and to deal with protecting and improving our profitability in a slower growth environment. Clearly, we laid in a structure of cost from a people standpoint, organization, back in 2018, in the end of 2018, running through 2019, looked at much faster growth.
This year, for instance, we thought we'd grow around the 6-6.5%. We're now growing around that 3-3.5% range. You look at what we see going next year, I look at a very gradual growth environment at this point in time. I also want to build in the flexibility if that doesn't happen, that we could still protect our profitability and our cash flow and deliver some results for our shareholders. At this point in time, I see the slowdown lasting well into 2020. I see some resolution around what's going to happen with the trade discussions that we all face. From my perspective, that could last easily well past the election in November of 2020. That's how we're looking at it.
It is a different perspective than I did discuss, say, at Electrical Products Group in May, and even on the phone call in early May. I've come to the realization in watching our customer base and talking to our customer base, is they're going to be cautious. Therefore, from my perspective, we're going to continue to invest strategically where we can gain market share or market penetration, and then we're going to back down and protect our profitability and cash flow where necessary. We're also going through a whole prioritization on our capital projects. From this year, we pulled it back a little bit as we go through this process. Next year, we're prioritizing where we need to spend capital.
I have commitments that we have to do in capital over the next couple of years, and I'm trying to set with Frank and the OC those priorities of where we need to spend money. I have some actions I have to take and some additional manufacturing capacity in the best cost locations that we have around the world. I need to prioritize those to make sure we're doing the right way as we go forward here in 2020 and as we come back into 2021. Again, we're being proactive. We're trying to be a little more aggressive and hence our restructuring, and we'll be looking at that pretty hard between now and year-end. If we see we have other opportunities, we will take those opportunities on.
It's all about getting our cost structure in line for slower growth, improve our profitability, deliver the incremental margins that we've been committing in a different growth environment, and also positioning ourselves for when a recovery does happen in our capital base, which I believe will happen. Overall, again, I want to say it's been a good year from my perspective. It's not happened like we thought would happen. Are we totally happy about it? No. We've been dealt a hand in a little bit more challenging environment relative to trade and relative to the investment environment. My customer base is being cautious, but we're not rolling up the tent and going home.
We're going to be attacking and aggressive going after things, but we're also bringing in a cost structure line to be able to serve ourselves and also serve our customers and also build the profitability that we want to deal with. I want to thank everybody from the Emerson team. As we wrap up this year, we've got a couple more months left, and I want to thank the team as we get ready for 2020 and 2021. With that, we'll open the line. Again, I want to remind everybody, we have a lot of people in line, close to 20 or maybe more than 20 people now. I need to hold you to two questions, and we'll take as much time, up to about an hour and 15, hour and 20 minutes to get through the questions. With that, Tim, let's open it up. Okay.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today will come from Andrew Kaplowitz of Citi. Please go ahead.
Good afternoon, guys.
Good afternoon, Andrew.
Dave, how do we think about the longer-term roadmap for you guys in a more difficult macro? Particularly as we go into FY 2020, it might be difficult, obviously, to achieve the target in 2021 of $450. If we are in this longer prolonged slowdown, can you still grow double digits in EPS off the 2019 base if macro stabilize a bit here, given the high level of restructuring repurchases? How should we think about that?
From the perspective, our underlying growth rate based on the model we presented in February was close to 5%, 4.5%-5%, I believe, for this cycle here. If that number is going to be closer to 2%-3% because of slowdown, we're going to have to have more bolt-on acquisitions to allow us to be able to get that type of earnings growth. It'll be challenging for us. The key issue for me is, can we drive some incremental growth through penetration? If that's possible, then we'll try to do that. We're also going to have to be a little aggressive on the bolt-on acquisitions to allow us to integrate some more sales and profit to get that number up. That's the game plan, is to answer to where do we get that top-line growth.
If we lose about a point or two from underlying from this core business, then the acquisition game is going to be even more important to us from the bolt-on standpoint, and then we're going to have to be aggressive on integrating those acquisitions. That will be the key issue for us as we look at the next couple of years and that target we laid out in February. As you said, it's a much different macro environment. Unless something happened relative to trade early on in 2020, which then would accelerate growth potentially in 2021, that would be another scenario. I'm not banking on that right now. We're looking at an environment that's going to be a little bit less growth, and we have to deal with that.
Yeah, that's helpful. Obviously, in Automation Solutions, you've talked about 30% incrementals as the target. How should we think about underlying incrementals? If we do have this slower growth environment, given all the restructuring you're doing, can we still do 30% plus on lower growth?
That's the game plan. That's why we're going after incremental restructuring now, Andrew. We've made a commitment to get that profit margin back up. These are quality assets. We've made a lot of acquisitions within this asset space, and we need to make sure from our shareholder standpoint that we get those margins back up to what I'd say are that reasonable range. It might take us a little longer to get back to that, what I think the appropriate number is now in this combination of companies at around 19% EBIT. We're not backing off that number incrementally. That's our number for next year, and Lal and his team understand that, and that's why we're going after from a restructuring standpoint from the perspective of what we're trying to get done. If we need to, we'll do more incremental restructuring in early part of 2020.
Thanks, Dave. Appreciate it.
All the best, Andrew. Thank you.
Our next question today will come from Steve Tusa of J.P. Morgan. Please go ahead.
Hey guys, good afternoon.
Good afternoon, Steve.
Congrats to Tim, unless you're sending him to some godforsaken part of the world. I don't know where you send these people, but hopefully he's going somewhere nice.
Well, you know.
Like Connecticut.
Tucson. I'm open for suggestions. You might have to talk to his wife a little bit about this. She is a St. Louis girl. If you got an idea, it's not going to be Augusta, Georgia, I can tell you that right now.
Oh, I was just going to say that. You stole that one. I was just going to say that.
Not going to be Augusta, Georgia. Most likely he could be like I don't know. What's a tough place in Nevada? We'll get something that's real-
Area 51.
Death Valley or something like that. Area 51 or something like that. No, he's going to be going most likely to the Northeast somewhere.
Got it. I love the red exclamation points on the order trends. I think that really pops, stands out. How bad was your discrete business on order rate or revenues, either one? Are those down double digit? As a follow-up to that, within power specifically, and then a little bit less in LNG, how do you think you're doing share-wise? Because power, I would assume that's more attacking competitor install base and selling digital and that kind of stuff. Seems like there's a bit of a share gain there in power.
On the discrete side, we're not down double digit. It's a solid single digit.
Okay
I would say, Tim and I are going back forth. They're probably somewhere between 5%-8%, mid-single-digit down in the discrete side. The inventory has not come out of the system at all. Obviously, the demand slowed down as you've seen, Steve, therefore it's going to take a little longer. It could last all the way to the calendar year now to get that out. That's what we see at that point in time. The process side orders have been pretty good within the channel, since right now it's oil and gas related down around Texas, the permitting's been pretty tough. On the power side, we are very committed to the space, we've continued to bring out the next generation control system, Ovation. We've continued to bring out new services.
We've continued to be highly committed to supporting the power generation, both renewable, primary power, all different type of power, particularly around coal to gas. Based on what we're seeing right now, I would say we are winning against our key competitors out there. Obviously we're not going to back down. I think there's a unique window of opportunity as we look at this. Overall this year to date, we're up a solid single digit in orders, and I think we're going to have a good fourth quarter and a good start to next year. The industry needs to go through some reinvestments and upgrading of systems, taking old systems down and bringing up some new power plants, bringing up new gas, getting rid of coal.
These are all opportunities for us, and we're out there fighting for it, and I would say we're doing pretty well at this point in time. Again, I don't look at a quarter per share. Let's wrap it up as we finish this calendar year, but I feel good at the trend line as I look at the last 12 to 18 months versus our primary competitors in the space.
Right, but that's the OEM's installed base, correct?
Correct.
That you're going after? Yeah.
Correct.
One last one just on the macro. You seemed confident that this isn't getting worse, but then you said things extend through the election next year. How are your customers and you guys going to not at least pause a little bit before all the uncertainty around the election, unless you just have I'm sure you have confidence in the outcome, but how are you going to integrate that into your plans and your thinking?
From my perspective, we're going to work multiple plans here. From my perspective, I think we're going to look at an environment where there's very little growth, an environment where there's some moderate growth. Clearly, we still see our international business doing better than the U.S. at this point in time, and that's going to allow us to see a little bit better growth. We're going to factor in that we could be in a slugfest with real low single-digit growth for the next 12 months, and therefore you've got to get that cost line in line and really prioritize where we're going to spend money. In my opinion, I'm being very cautious or negative, but I'm very concerned about if businesses, like you said, keep pausing, and they keep reevaluating their investment, and that's going to drag the business investment world to a weaker environment.
If it doesn't happen though, and things get better, we'll be okay. I'm more worried about that it will happen, and therefore we're structuring the company to be in that environment.
Got it. Okay. Thanks a lot.
Thank you. Thanks, Steve. All the best. If you've got ideas for where we're going to send Tim, send them to me.
Our next question today will come from Jeff Sprague, Vertical Research Partners. Please go ahead.
Thank you. Good afternoon, everyone.
Good afternoon, Jeff. How you doing?
I'm doing well, thank you. Fighting through it also.
It's always fun to slugfest through this stuff. You get too easy, it gets boring.
No, exactly. Well, hey, I wanted to just pick up on your last point. You indicated, you didn't use the term, but maybe kind of the risk of just stall speed. If we get there, what really keeps us from tipping lower? I guess no one has a crystal ball, right? How would you handicap a worse outlook than what you portrayed in your opening comments there?
The key issue there is I think there is a good chance the global economy next year gets real close to that stall speed. As we finish the rest of this calendar year, which I think will be okay relative to investors and people really start reevaluating in 2020. If we sense we're going to get pretty close to that stall speed, which we've seen in the economy before, we got to think about, okay, do we have the right things done relative to our restructuring and our position in the company? Right now, I think we're going to get close to that stall speed, I don't think it's going to go all that way.
We also, as you understand, around the world, we have every Federal Reserve around the world really pushing accommodation to make sure the economies do not get to that stall speed. I think that's one thing we have going for us. The European, the Japanese, the Chinese, the American Federal Reserve Banks, whatever they're called around the world, are working very hard to make sure we don't go into that stall speed. I think there's a good chance we'll get real close to it, and hopefully the financial reserves out there can figure out how to make sure we don't go in there, because that's a little bit different environment, and it gets pretty ugly for a lot of companies at that point in time.
Yeah. Just separately, just thinking about Automation margins. It actually ended up being kind of a peculiar looking quarter, right? Your actual OP dollars are down. We're not just talking mixed effect on deals on margins, but OP dollars down.
Yeah.
Now as we look into Q4, we need to see a pretty significant step up in the OP dollars to get to that forecast. You had talked on the last call about some of the sweet things on price cost and other levers. Could you just give us a little bit more visibility on how we bridge to that Q4 automation margin number?
Yeah, I think there's a couple of things going on from the perspective we have. Obviously, the price cost continues to move our way in that fourth quarter in a positive way. They did have pretty good sequential margins improvement in the third quarter. The other thing is the restructuring actions that we took back a couple of months ago, I believe in April and May, and also some of the core restructuring that we started at the beginning of the year are starting to flow through. The Automation Solutions business, as things slowed down, as you remember, we started taking actions earlier on with that business. Some of those benefits are coming through. In the last couple of months close, even June, which was a tough month for Automation Solutions from a sales standpoint, they did very well with leverage and profitability.
The month of July, which we're starting to see right now, the same thing's flowing through again. My gut tells me right now, I feel pretty good about where they flow. The key issue there is, can they continue to get some of that backlog out that's been built over the year, or do the customers start pushing that out? Right now, I think they've got the cost structure in line for where they sit and for this tail in the year, Jeff, and I feel pretty good about the margins in the fourth quarter for these guys.
Great. Thanks, Dave. I'll pass it.
All the best to you, Jeff. Thank you very much. Have a good rest of summer.
The next question will come from Deane Dray of RBC Capital Markets. Please go ahead.
Thanks. Good afternoon, everyone.
Good afternoon, Deane.
Hey, maybe a good place to start, Dave, would be the game plan where you would augment slowing growth with bolt-on acquisitions. When I hear you say that, it kind of suggests that you're still willing to play offense here, which is a good sign. Just how do you marry the idea of going after acquisitions during a period of high uncertainty and clearly a pause and closer to stall speed?
From the perspective of some of the bolt-on acquisitions, which we work pretty aggressively all the time, fundamentally, we believe as we go into this time period, as we move into 2020, early 2021, some of the companies that we're interested in will want to get out, and we'll have the opportunity to do those bolt-on acquisitions. Historically, in times that things like to slow down, things will get kind of sloppy. Near that sloppy, we see some of these product lines pop out. We're going to try to push the pressure point up on this thing and see if we can get a couple of these to pop and give us some incremental growth to the top line. Obviously, work with the cash flow and obviously work with the earnings.
It's just going to be one of these games that we know where we're going to go, and we know where we're pushing right now. The place we're going, are they willing now to sell because of the sloppiness in the marketplace from their perspective? That's how the game's going to work. We'll just put a little bit more tension on it and from the top level down. I know every company is going to be going through a repositioning and restructuring, and hopefully we'll be able to convince some of our sellers to let a couple of these small product lines go. That's how it's going to work.
Got it. Then, as a follow-up, just to continue along the lines of this pause versus an end of a cycle, can you comment on the power, the influence of this negative feedback loop? Because you're saying right now you're slowing down your investments, you're pulling back, you're seeing customers push out projects. How does that not feed on itself and become more of a power slower, faster? To a certain extent, can you share with us how much you're seeing from your customer and being influenced by what your customers are doing versus what you're hearing from Washington? Because you are privy to a lot more specifics than anyone on this phone gets to hear. Maybe share with us some of that insight that you're getting from those channels.
A lot of projects we see, in particular around the LNG world, from the perspective of these LNG investments need to go forward. There's been major commitments made from a lot of our customer base relative to around gas versus coal versus oil, from the standpoint of what we call less carbon, decarb, and they've been commitment. From my perspective, these projects are going to go. It's just a matter of what time they're going to go and when things get resolved. I finally believe we will get things resolved relative to discussions with China. It could take a lot longer than my initial comments were always around August, September time period, and now that's obviously off the table based on what we're seeing at this point in time.
I finally look at the projects, the under-investment in the gas side, and even the under-investment in the liquids and some of the under-investments in some of the downstream work that needs to be done because we definitely need that downstream product. I see that those have to go forward. The question is, when they get my customer base or our customer base gets visibility relative to where they can do these transactions and where they can sell and not sell, then you'll see these projects going. The other issue is, if the projects in the U.S. stall, then you'll start seeing some acceleration of projects in the Middle East because of the demand for gas. China's still going to grow. China's going to need gas.
They're going to get it from the Middle East, they're going to get it from other parts of the world, or they're going to get it from the United States. As I look at right now, as I look out the next 12 months, I think as a customer base, we're all fine-tuning a little bit. If this thing drags on for a long time, and let's say the long time being 12 to 18 months, then I think you start seeing what you talked about, it's that self-fulfilling prophecy, and then we start winding backwards. I think it's way too early to see that at this point in time. Maybe from my perspective, things do get resolved sooner than we think. At this point in time, it's prudent for me, from the perspective of where we, Emerson, are in the pipeline.
We need to dial things back. After three quarters of very moderate growth in the automation business, we need to dial it back and reset for a little bit different growth environment and look and see what happens rather than waiting, because we've been waiting now for a couple of quarters, so now it's time to act. That's where we sit. Again, I'll say it, I'm still optimistic. I still believe that the world needs it, the energy, they need this type of product. The question is the timing of it more than anything else at this point in time.
Can you add anything about the caller from Washington?
Right now, nothing at all. I can't add anything other than what's going on. It's obviously very challenging negotiations and a lot of pushing back and forth. I still believe this is something that's important, and I do support it. It creates a lot of pain for me and obviously for our company, but from my perspective, I do support 100% what we're trying to get done in Washington on the long-term trade benefits, but we've got to get this thing done. We can't let this thing sit out there for another 12, 18 months dragging around, because it will definitely do what you talked about with some negative self-fulfilling prophecies.
Thank you.
Thank you very much.
Our next question today will come from Joshua Pokrzywinski of Morgan Stanley. Please go ahead.
Hi, good afternoon, guys.
Afternoon, Josh.
Dave, can you talk a little bit about this ballooning funnel of projects or I guess stuff that has been committed but not booked. How long do those typically stay out in that state? Is there any kind of leakage in that closed process where it's something where you think there's a commitment, but until the ink dries, it tends to back down. How confident are you in that booking over the next few months, quarters, whatever?
If we look at the funnel, where the funnel is growing right now, it's growing outside the United States. We had not seen a lot of growth of the bigger projects outside the United States. It was primarily North America driven large funnel project business. Now we're starting to see some of the international, be it Asia, be it the Middle East, be it Latin America, where some of the larger projects are now starting to come into the funnel, and hence, that's why that funnel is getting a little bit bigger. Going back to the won but not booked situation. The big issue for us is it's like food that's been picked and put on the shelf. There is a shelf life.
Historically, when we see this grow like this, and we have seen it before, typically that shelf life, you're looking at 12 to 18 months on these projects. These are massive projects. These are projects, typically, that are going to last three, four, five, six years. Even if they get delayed 6 to 12 months, that's not unusual. From my perspective, if you get out there past the 12, 14, 16 months and these things really start changing and nothing happens, you're going to see some reconfigure. It's way too early to say that because this number, until recently, was pretty normal. Now with this number getting up on more $1.1 billion, close to $1.1 billion, it's starting to get to a number that's got my attention.
I think the key issue for me is watch them and see what these customers start doing. These are a lot of gas projects and a lot of U.S.-based projects at this point in time. I think we got to watch it. There's nothing to overreact to, but from my perspective, these things sit out there for 12, 14, 16 months, then you're going to start seeing a reevaluation of what's the magnitude of this project, do we want to downsize it.
Got it. That's helpful. It sounds like we need to stay on top of that as a number to talk about.
Yeah.
Okay. That's helpful. Just looking at the projects that have shifted out of the pipeline, I know that there's certain between orders and sales, but if I think about that $350 million shifting from 2019 to 2020 and the $415 to 2021, we're already kind of losing maybe one or two points of sales as it pertains to that. You talked about kind of a two or three-point downshift. It seems like on the shorter cycle end of that, or some of the projects that aren't in this pipeline, that doesn't assume a whole lot more downside. Does that just speak to no excess in the system or the absence of de-stocking? I guess why couldn't we decelerate more, given that the project piece already speaks to maybe half of the deceleration you talked about?
I think it's hard to measure on a couple of months on projects moving in and out because historically, we never gave that number. There's always a lot of movement anyway. There's always a couple hundred million dollar projects moving around. I would say the number is a little bit higher than normal, to be honest, Josh. There was always a number that moved in and out of a couple hundred million dollars. I would definitely say the movement is higher than normal. Therefore, I would say it has taken about a point and a half off the underlying growth rate of the cycle right now. That's a number we're going to watch and see if there's been a bigger movement from the next time we talk. As we close out this calendar year, that'd be a good feel for it.
I think you got to wait till the end of the calendar year to get a good feel. Right now, there's always noise, and I would say it's about a point that's been taken off the underlying growth. It's moved up a tad, but I wouldn't panic yet because there's always that number sitting in there.
Got it. That's good perspective. Thanks, Dave.
Okay, good. Thank you.
The next question will come from Nicole DeBlase of Deutsche Bank. Please go ahead.
Yeah, thanks. Good afternoon, Dave.
Good afternoon, Nicole.
I just want to start with Commercial & Residential Solutions. You guys have kind of guided for flat organic growth through the year. It implies a little bit above flat, maybe like 1% in the fourth quarter, and that's a step up. Now, I know you saw a little bit of improvement in July, which is encouraging, but I guess, how much confidence do you have in that outcome? Could there still be some risk to the downside there, particularly since the year-over-year comp does get a little bit harder in the fourth quarter?
Yeah, it definitely gets harder because of our U.S. base last year. There's a couple things that we're watching very closely. One, the fact that China now and Asia Pacific now has stabilized and come above the line, that's a good sign for us. My concern would not be there. My concern would be in the USA. We've had a pretty good, what I call heat wave, humidity wave go through. That would be my concern right now. Not in the AC side, but more in the retail side. We've got it pretty well dialed down. I feel pretty comfortable about that. Europe seems to be coming back. Europe had a very challenging June because it was extremely hot there, but it's bounced back nicely in July.
I feel pretty good that we're going to be around the 0% to 1% growth rate in Bob's business in our fourth quarter, which is the third calendar quarter. I think we've got it dialed pretty close to where we see it right now. The fact that July came in decently and our orders came in decently, even I think, wasn't the 1-month order pace positive, Tim? Yes. The 1-month order pace was positive. It was positive, real close to that 1%, I think. I think we're okay there, but we'll put our AK out in orders, and we'll keep a communication around those three things. Asia, China, North America, and does Europe keep holding in there for us? Those are the three things I'm watching right now in commercial res.
Okay. Got it. Thanks, Dave. Just on Automation Solutions, you talked about things getting a little bit better in July. Maybe it's my eyesight, the chart just doesn't show a lot of improvement. If you could just talk a little bit more about the early stages of July and what's driving that better result.
I tell you what, after a tough June, if it kicks up a notch, it's better. I think what we're underlying was what, 4.5? 4.5 below the last four. Right at four. Yeah. Four. It ticked up a little bit. You can't see that in the chart because I tell you have younger eyes, Nicole, come on. It's a little bit better. What's interesting, it's not the U.S. We saw Asia, we saw China. I'm surprised no one's asked me about China yet. That's interesting. We saw a pretty good impact in China. We saw a good impact in Latin America. Our international markets actually grew order-wise, I think double digits. In North America, the U.S. business and the Canadian business was still the weakness point.
Our internationals held up nicely and therefore, right now we see that's holding up for the year. That will give us a little bit of momentum as we go into this. I think we're going to bounce somewhere between 4%-5% in orders in this fourth quarter. July was not a short month. I think it was a fairly long month for us normally and this month, it's a good representation of I think what's going on in the marketplace. I feel reasonably well about that four and a half. Given the fact I thought we'd be at 6% or 7%, I don't feel that exciting, but it's better than going the other way. Let's put it that way.
Definitely. Thanks, Dave.
Thank you very much, Nicole. Hope to see you soon.
Our next question will come from John Inch of Gordon Haskett. Please go ahead.
Afternoon, Dave.
Good afternoon, John.
Afternoon. Hey, I'm wondering if you could comment on the profitability of the large project pipeline. Is it accretive to the 16% AS margin run rate here?
Typically, large project will be 10 lower than that. We do obviously a hybrid. You're talking about large. If you look at what I call the smaller circles in there, the medium, small size circles, those are accretive to us. It's the bigger ones that typically will be the lower double-digit or 10 type number there. Right now, given the fact that projects have slowed down, the bigger projects does help us a little bit. I want to get those projects going so we can get the installed base. The mix of funnel right now, it looks pretty decent as I look at that funnel. If you look at that funnel we put out there, if you can see it, you can see there's a lot of small, medium-sized projects. The bigger project, there's only one big project left in this year.
That's a good mix as I finish off the fourth quarter, going back to our comments on profitability, and a good start for 2020. Based on that funnel, that tells me I like the mix.
these deferrals aren't necessarily putting incremental price pressure on kind of the bid quote, that sort of thing.
No
a pure deferral, right?
Yes. Correct. Typically, if you have the chart in front of you, chart 11, if you look at the bigger bubbles, and you probably have them in black and white, but I'm looking at that big bubble sitting at the end of 2019. That's a fairly large project. That would typically be a price pressure type of environment. When I look at the smaller, medium-sized ones, typically those are going to be KOB-2 type projects, and typically those are projects you already have that installed base, and therefore, the profitability's going to be around our margin, our normal margin.
Then Dave, just as a follow-up, your comments around doing some more bolt-ons here to maybe supplement some of the earnings. Can you remind us what % of your sales are, say, embedded software? What % might be standalone software? Would you be looking to kind of industrial software types of companies as part of your frame for doing more bolt-ons?
Well, if you look at the acquisitions we've done this year, a lot of them were software companies. The answer is yes, but we're doing a lot of smaller deals this year, and most of them have been tied around software. Standalone software, embedded software. Again, that is a key issue for us, and we're trying to find the type of deals that we're doing. Frank, is there a point I should mention?
Just that we showed this slide in our investor conference, the $400 million standalone software on the AS side.
Yeah.
That doesn't include the embedded piece.
Doesn't include it. Yeah.
Okay.
We did $400 million. The standalone about $400 million, and then we have a lot embedded, which we don't break out in the systems business. Yes, if you look at the deals we're doing right now, they're a lot less product, but they're more software-based, and I think that's a common trend within this automation space as we drive into the control and drive it into our customer base around specific industries. It's not a lot of them out there, so you have to court them for a long time, and we've done quite a few this year. They're smaller.
The acquisitions to me are important relative to gives us opportunities to add sales, profits, and as Frank points out to me, operations have to deliver the earnings and the synergy plans to make them accretive. That's going to be a key issue for us to drive when we can't get top line organically. We've got to get them through bolt-ons, and they've got to deliver the profits.
It sounds like those deals would be more of the strategic nature, right? Versus trying to find stuff that would supplement the earnings that are a portion of.
Yeah. Oh, yeah. When I talk about bolt-ons, okay. Yeah. I hope people don't think that. I'm not talking about going out. I'm talking about bolt-ons within our core business. Within the core business of automation, within the core mix. I'm not looking at going out to do any type of acquisition to get sales earnings or cash flow or EPS. No. These are within the core. From my perspective, if things really get slow, get to that stall speed, I think we're going to see opportunities for more of these smaller bolt-on deals coming forward, and we've got to be very aggressive in going after them and figuring out how to integrate them pretty quickly to get a little bit more growth in that 2021 time period.
Going back to the first question somebody asked me early on, do we have a path to get to the EPS closer to what we said back in February? The sales aren't going to be there right now organically unless we have a big pop in 2021. We're going to have to figure out how to end bolt-on deals within our core space to meet. That's a good point, Jeff. Thank you.
Yeah. No, thank you. I sent him to Canada.
Northern Calgary, Alberta? Where's the worst mosquito problem?
I think it's everywhere.
Okay.
Our next question today will come from John Walsh of Credit Suisse. Please go ahead.
Hi. Good afternoon.
Good afternoon.
How are you?
I guess maybe a first question around the hybrid markets. We've heard a little bit of mixed commentary out of that market. Sounds like you're still doing very well there. Is it you think it's because of your mix, because you're taking share? Hybrid covers a couple of different end markets there, maybe what you're seeing.
Yeah, exactly. From our perspective, our hybrid business, clearly we're pretty strong in terms of life sciences. We've had a pretty good run in the life sciences from the perspective. In that hybrid space, we don't have automotive, we don't have semiconductor. We have the life sciences, we have some food and beverages. We have some mining in that. That's been doing pretty good for us. The food and beverage has not been that strong for us, but it's primarily been the life sciences and the mining area that have been good for us relative to our hybrid business.
Got you. Maybe just as a follow-on, I think in maybe to Jeff's question earlier around margin levers, I think you said price cost will be positive again in the fiscal Q4, how do you think about that kind of price cost balance as you run it forward?
Right now the key issue for us is commodities have come downUnless excluding any additional aggressive tariff action other than the 10%, which is not primarily aimed at us. Industry is more of a consumer tariff approach. Now, I think our price cost balance for going into 2020 right now is pretty good. It's green. Now, those things could change. Those are the things we have to deal with. Last year at this time, you thought about tariffs were coming in. We had materials still going up. People thought we were going to see faster growth. We are looking at a little bit different type of inflationary environment. This time it's moving in the opposite way. The key issue for us is to keep our costs in line and obviously make sure we have price discipline around the price cost.
Right now, as we look at the early stages of 2020, it's green and we feel good about it and should be okay as we start the year out.
Great. Thanks for taking the questions.
All the best, John.
Thank you.
Our next question will come from Julian Mitchell of Barclays. Please go ahead.
Hi. Good afternoon.
Good afternoon, Julian.
Maybe a first question on Automation Solutions in China. You're coming up to the end of what's been a very good three-year upturn. Historically, I guess this industry in China tends to have three or four-year upturns and an 18-month downturn. Just wondered how you're assessing the market outlook in China in terms of that risk of turning down next year, and whether you'd seen any more evidence of U.S. companies perhaps being pushed down the priority list on orders, which is something I think you'd mentioned back at EPG.
Yeah. On the cycle through this month, the cycle is still pretty good. We're looking at a very solid 8%-10% Automation Solutions orders growth and sales growth. As I look at the industries we're serving, there's a lot of industries that the Chinese customer base is trying to become more self-sufficient, and so obviously less imports of final goods. That's where they're aiming their investments. I do not see that changing as we move into 2020. As my initial look at 2020 right now for China is that 8%-10% most likely is going to turn into, let's say, 6%-8%, maybe 5%-8% type of growth. We're looking at a slower growth, to your point, Julian.
I'm not looking for that drop off yet because they really haven't finished building out what they need to build out relative to the infrastructure they're trying to become more self-sufficient in the industries we serve. Relative to, let's say, what I call nationalistic tendencies for the Chinese relative to foreigners. It's not just U.S. companies, it's all companies. It could be European companies too. The trend has continued from the standpoint, we've seen some pressure points relative to some of our customers being pushed about, you need to look at alternative sources, not just foreign company sources, be it European or American. I think that trend will continue as long as the trade discussions are underway, and hopefully the trade discussions will be finalized before the foreign companies are really pushed to a smaller piece of the marketplace.
Right now, obviously, we're still okay, but it's something that we spend a lot of time. We have people going in and supporting our sales organization, our customer's organization. Lal Karsanbhai buying with Sisir. Mike's going in next week, and I'll be going in within the last of the month. We're spending a lot of time with our sales and with our customers because we're very concerned about the negative trends of nationalism, and clearly it's something we're fighting. Right now, I haven't seen anything. There's a little bit more, but not astronomical more, or we would not be growing as we're growing right now.
Very helpful. Thanks. My quick follow-up would just be around your assessment of inventory levels among your channel partners and customers. How much destock do you think is needed across automation and C&RS?
It's still too high given the fact that if you look at Emerson's inventory, with a slower June, our inventory did not come down as it normally would in June. We're a good indication of that, Julian. There's a balance sheet out there, you could see our inventory level did not drop like normal from quarter to quarter. From my perspective, as I look at the channel right now, I thought the channel would be done by the end of this third calendar quarter. I think we're going to be well into the fourth calendar quarter before that destocking's done. We sense that people are being very cautious, I think it's going to take a little longer. The demand is weaker, therefore the demand's not going to drive the destock. They're going to have to take it down very slowly.
That's how it looks to me.
Great. Thank you.
All the best to you, John.
Our next question today will come from Robert McCarthy of Stephens. Please go ahead.
Good afternoon, everyone. Thank you for fitting me in.
Good afternoon, Rob. Barely made the cutoff line.
Well, I guess I'll see you in Arkansas a little bit later in the month, right?
Yeah, I guess.
In any event. The first question, Dave. Obviously, you've been focused on niche and bolt-ons, particularly on the discrete side and kind of make your number over the longer term. The question remains, in the down cycle, you might have opportunity to look at other larger properties. How do you think of the state of the balance sheet from your ability to do a larger deal absent the use of equity? What is your outer bound at this point?
From the perspective of deals we're looking at right now, and we show the board, obviously, we made the decision to do a little bit more share repurchase. From the standpoint our deals, our acquisitions this year where it's not going to be as high. The first six months, we didn't see the pipeline being strong enough, so we made the decision to do a little bit more share repurchase. Clearly, we started this process before the stock got whacked in all the trade discussions. If I look at our leverage point, we can do a $4 billion or $5 billion type of transaction and comfortably be around that 2 debt EBITDA margin, about a little bit over that. We have plenty of room, and there's not a lot of $5 billion, $6 billion, $7 billion, $8 billion deals out there for us. I think we could get two.
The key issue, as Frank knows, is we've got to obviously dial back share repurchase a little bit, and then we'd have to demonstrate to the rating agencies that we're going to get our ratios back down, which we have in the past.
Yeah. Well, I think, Rob, there's nothing that we can reasonably foresee that would cause us to contemplate issuing equity.
Yeah.
We can do everything within the balance sheet that we can foresee.
The biggest type of level deal we'd see is a $4 billion or $5 billion. We show the board that ratio as we go through this whole process of capital allocation, which we did last month, or last June, in June, and also we did today, and we did in the finance committee this morning with Frank. We're comfortably well within the band of acquisitions we see and ability to continue to do pretty good levels of share repurchase and have the opportunity to do the deals if necessary.
Two smaller questions, if you'll forgive me. One, CapEx assumptions going forward. Have we put a cap on that or a modest reduction on that given what you're seeing in the prevailing environment? Then number 2, any sidewise look at kind of the midstream and refiners intentions around IMO and whether they're going to look to build capacity for the low sulfur distillate or what are the intentions for spending there, if you can share any?
Yeah, if I have any. Relative to capital, we've scaled capital back this year. We've had sessions here the last 60 days. Capital this year is going to be around $600 million.
Oh.
From the standpoint of next year, we have to take capital up. We have, as I've said in my, I think, in the 8-K and also in the press release, we have some issues from our standpoint of, as we've now had some of the acquisitions for two or three years, we are now doing the optimization of where we want to do some best cost manufacturing. We have some investments that we need to make in 2020 getting ready for actions we want to take in 2021 and 2022. From my perspective right now, our capital spending for the next couple of years will probably be up around the 3.5%, 3.6% level as we prepare for this move into some better manufacturing locations, and then allows us to move as we go into 2021 and 2022.
I think we're evaluating everything around the capital structure right now. Do we need to do it in 2020, or can we push it out? If I look at the numbers right now, because of what we see needed for 2021 and 2022, we will be taking capital back up in 2020 a little bit higher than it is this year. I think the same thing will happen in 2022. We try to balance this. We spend money all the time, as you well know, but I'm shaving it now, and then we're going to have to put some money back in next year.
Then on IMO, real quick?
I can't give you any more insights. I don't know. I haven't talked to anyone recently about that. I do know, if I look at the project investments on the refineries today in KOB2, it's still pretty high on the list of projects we're going after and projects we're winning. I can't give you a specific number and saying these guys have, yes, they're going to keep doing it, they're going to take it up. I can tell you right now, my folks that tell me in the field, refining bidding is still going on. They appear to be moving forward and spending in the space. That's what I see at this point in time now. Will that be something they scale back if they really start scaling capital back later this year as we move into 2020?
If I look at the project list right now, there's a lot of good refining type of projects out there.
Thanks for your time, David.
Okay. Take care. You're forgiven for asking two and a half questions.
Our next question will come.
Say 10 Hail Marys and
Our next question will come from Joe Ritchie of Goldman Sachs. Please go ahead.
Hey, Joe. How you doing? I was trying to forgive Rob before he got off and tell him you had to tell 10 Hail Marys and a couple of Lord's Prayers, but Rob ran off to the church too quickly, I guess.
He's already doing them, Dave.
Yeah. Okay. How you doing, Joe?
Doing great. Thanks for fitting me in. Obviously, look, the backdrop is challenging or has been a little bit more challenging than we all expected. I guess, at what point do you guys think about revisiting your longer-term targets for 2021? I know it's still a ways away, and a lot can happen between now and then. How are you thinking about that now, just in light of the backdrop being a little bit more challenging?
As we told the board, we had a board meeting today, as we told the board today, we'll grind 2020 here for the next three months. During that process, we'll grind the 2021 at the same time because of this very issue of, if things slow down, could it be a bump in 2021? I mean, as we grind what we hear from our customers as they finish their calendar year. We're going to be going through a two-year window here, basically, because of that issue. Going back to the question, is this a pause and then a re-acceleration, or is this going to be a grind and stall speed, and then things really slip away as we go into later 2020 into 2021?
That, we'll be doing that here as we finish this year out, and then we have a very good view by the time we finish the calendar year 2020 or 2019. That's how I want to go at it right now. I want to get a feel from my customers. Am I being too cautious, or am I being realistic? We'll get a feel for it.
Yeah. It sounds like potentially maybe an update then by the investor day next year?
Oh, for sure. I will not leave this calendar year without my upsells having an update and communicate my board, so I have a sense, because I do go out and talk, and I want to make sure I'm not looking at some crazy thing for 2021 that doesn't make sense. In fact, I got a new investor relations guy in. I can pin the other guy in and blame him for all that crap. You know how that works, Joe. You've seen some of the investor relations guys.
It's all-
Never to be surfaced again. Tim's been a good one, I have to tell you. He's a good guy.
If I could fit maybe one more in.
You can fit one more in.
I thought your commentary, Dave, earlier on seeing a slower U.S. gas/Canada gas environment was interesting. I'm just wondering, do you think the trade environment is impacting off-take agreements from happening with Asian partners and that's impacting LNG investment? Or what is it that you see that's driving that slower gas investment here in the U.S. and Canada?
100% trade discussions. 100%. Investments will not move forward in North America, and I've told the White House this, I've told anybody in Washington this, but they will not move forward because our Asia, in particular China, need the off-take, the processing, semi-processed stuff, and without some agreement, these investments will sit there. Now, they can move forward pretty quickly because of where they sit, but without the agreements going forward and some clarity around the trade discussions between the United States and China, these natural gas investments will not move forward. Even if 50% of that investment's going to be for exporting, 50% are internally, your whole process is going to change.
That's very important to, I think, what I see in Southern Texas and Southern Louisiana, and it goes back to my comment about they're going to sit there for a while for 12 to 14 or six, whatever that number is, and then they'll make that call relative. Do we reevaluate, or do we just go back to the drawing board?
That makes sense. Thank you.
You're welcome.
Our next question will come from Andrew Obin of Bank of America. Please go ahead.
Hi, yes.
Hi, Andrew.
Hi, how are you? Good afternoon.
Good afternoon.
Just a question on your investment strategy, because I know part of the strategy was to invest in service capability, flow control capability, also discrete investment to sort of update the product. How should we think about your internal investment processes given the slowdown?
We're going through a very serious prioritization of where we're going to go on the investment in the discrete through the investment around the GE bolt-on acquisition and our investment between our process side and the Ovation side, the power side. That's very important to us, and we're going to figure out how we get that done over the next two years, as we planned originally. On the service side, given the opportunity we've been seeing in KOB3, and I think KOB3 will come in at a very good number this year, because you know we're trying to keep that number well above 50% in the cycle. We're going to figure out how we can continue those investments going and not stop them. Again, it goes back to a reprioritization of what we can do and what we cannot do.
I would say in my discussions with Lal and my discussions with Ron and the other OC members, that's one area that I would say we need to figure out how to protect. We may modulate a little bit, Andrew, but that's an area I think we continue to have opportunities for growth and penetration for the long term, and I don't want to be short cycle blinded and miss this opportunity. I think you're going to see us continue to modulate and continue to move forward in that area. It's been very good for us so far.
Thanks. Just a follow-up question. You always have a very good sense of what global macro is doing, what global GFI doing, et cetera. Just looking at the world today, what would you guess is U.S. GDP and China GDP are growing at right now?
U.S. right now is growing low twos. I think it will continue to slide. It could easily go below the two at this current point in time until we get some clarity around trade. It could actually go below that 2 level next year as we move into next year. I think China has continued to grow, but I think it's more of a 3% or 4% type of growth rate in China. We've seen pretty good pockets of growth. If Bob's business, the Commercial Residential business, has back-to-back, say, two or three, four months of slightly positive growth, that tells me that things have stabilized. The global economy has definitely slowed, and from my perspective right now, we've got the Feds around the world trying to figure out how to keep that growth rate up from hitting the stall speed.
The trade issues right now are quite a big negative and being pushed back that growth rate down. That's the key offsetting going on at this point in time.
Thanks a lot, Dave.
All the best to you. Take care now.
Our next question will come from Deepa Raghavan of Wells Fargo Securities. Please go ahead.
Good afternoon, Dave.
Good afternoon, Deepa.
Okay. Automation Solutions, Dave. China continues to invest in infrastructure, and that's been helping a lot of companies there this cycle. What are some of the verticals within AS that have been performing better than you'd have thought in that region? Which are the ones that are losing some steam versus your expectations? I have a follow-up after that.
You're talking about China in specific, Deepa? Is that what you said there, China?
Yep.
Okay,
Yeah, China Automation Solutions, yes.
Yeah, from the power standpoint, we've seen China lose some steam, that they're underperforming what I thought they would underperform. There's been a shifting around of priorities within the power industry. That one has underperformed inside China from what I thought would happen earlier this year. The chemical side, now I think that process, I've seen those are held in there pretty well nicely. Some of the refining investments have held in there pretty nicely. I would say that if I look at some of the pipeline investments, they've held in there pretty well. In the beginning of the year, I believe if I went back and looked at when I gave our first forecast in China, we were talking around a 6%, 8%, 9% or something like that, 6%, 8%, 10%?
I thought it was 8%-10%.
eight%-10%?
Yeah.
That's basically where we are right now. I would say chemical's a little bit better, power's a little bit worse, and refining's a little bit better. That's where it is. We're pretty close to where we thought we would be, and as you said, it's shifting around industries a little bit, and that's how I see it right now.
Got it. Thanks for the color. My follow-up is on cost controls. Are you taking costs down along the verticals that are weak, or is that more broad-based across Emerson?
Broad-based across Emerson. We've set in motion Bob's business in the commercial residential, Bob Sharp's. He's gone through his process with his team and looking at places that we can take out layers, we can take out the situations we not necessarily need anymore. Lal's doing the same thing. We're trying to accelerate some of the integration of some of the acquisitions. We're looking at the corporate structure in the same thing. We're looking at areas that from the standpoint of things we can do simpler without as much overhead. We're trying to figure out how to do that right now, and that's how we're going at it. It's very people-focused, and that we started in April, and we'll run all the way through this calendar year to make sure that we have things tuned the way we want them tuned for this type of environment.
Great. Thanks very much. Thanks for fitting me in.
You're welcome, Deepa. Thanks.
Our next question will come from Gautam Khanna of Cowen and Company. Please go ahead.
Gautam, you got the last question. You just got underneath it. You barely got underneath that rod, that Limbo Lodge rod rod e rod.
Yeah.
I didn't know you were that limbo.
The limbo.
Yeah. Okay. What can I do for you?
I appreciate it. Well, a lot of questions have been asked and answered, but one thing I was curious about is the June board meeting. I'm just curious what the high-level framework is on buybacks. I recognize the $250 you mentioned in Q4, but is there an appetite if there's not much in the way of M&A over the next six to 12 months to really pump the repurchase activity higher?
I don't think I would pump it.
How are you feeling about that?
We show the board a range of what we see cash flow doing, what we see our capital allocation from the standpoint of, from the balance sheet, the leverage we have. We try to keep enough flexibility so if we had to do several medium, larger size types of deals, being a couple billion to $3 billion, $4 billion. I think that right now the board feels very comfortable in this range of $1 billion to a billion and a half dollars per year in share repurchase, assuming that the deal world that we're looking at is moderate of somewhere between half a billion to $1 billion per year. If we alter that and we start moving back into that $1 billion to billion and a half to $2 billion, you would see us modulate back down towards, I would say, a little bit under $1 billion in share repurchase.
We show the board that flexibility. If the deal world it's not going to stop, and I don't see us popping all our capital into share repurchase. I think we've consistently bought stock back over the years. As Tim knows, it's close to 300 million shares that we've bought back since 2000. Now, the net impact's not quite that high, but we've bought back 300 million shares. We consistently are in the marketplace, but I don't see us changing the strategy of buying on a consistent basis. I think the board feels very comfortable in the $750 million to $1.5 billion based on what our acquisitions is, and hence that's why we talked to the board about taking up a little bit higher this year.
Now with 2020 hindsight, the fact that the market's gotten weaker, it gives us some flexibility to buy some at reasonable prices.
Appreciate the color. Thank you.
Okay. Take care, Gautam. I want to thank everybody for your time. I appreciate it. As you guys know, I try to be very candid about what's going on. I do want to let you know that Rocket's one-year birthday is today, and Dune is about five, I think he's four months old. Dune is a little bit different than Rocket. Dune's a little bit more aggressive. So Rocket and Tim go together. I got to get an aggressive investor relations guy now.
I know.
That's what it is. I want to thank everybody for your time, and I want to thank the organization for everything you've done and will continue to do for the company. All the best.
The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.