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 6, 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 ks as filed with the SEC. I would now like to turn the conference over to our host, Tim Reeves, Director of Investor Relations at Emerson. Please go ahead.
Thank you, Allison. I'm 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 Q3 2019 earnings conference call. Please follow along in the slide presentation, which is available on our website. And I'll start on the 3rd quarter summary on Slide 3.
Sales in the Q3 of $4,700,000,000 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% to 7% expectation we discussed during the Q2 earnings conference call on May 7. 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 and 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 Q3, we've returned $1,900,000,000 to shareholders and completed our $1,000,000,000 2019 share repurchase target.
Today, we announced an additional $250,000,000 of share repurchases that we will target to complete in the 4th quarter. Turning to Slide 4. 3rd 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 and Test and GE Intelligent Platforms acquisitions. Tax rate in both years benefited from favorable discrete items in the quarter.
Turning to Slide 5. 3rd 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 and Residential Solutions business. However, 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 2nd quarter growth of 7%. Europe was up 1% and remained positive across both platforms.
Turning now to Slide 6. Total segment margin was down 160 basis points and was down 30 basis points excluding recent acquisitions. Segment margin of 18.1 percent 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 $120,000,000 higher sales. As we discussed last year, we've accelerated certain restructuring programs in the second half of twenty nineteen to position the business for a slower near term growth environment.
In Q2, we identified approximately $10,000,000 of restructuring investments to accelerate in this fiscal year. And this quarter, we've added another $20,000,000 Our total expected restructuring spend and other actions is now $100,000,000 for 2019, which is up from approximately $70,000,000 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 4th quarter and greater than 100% full year cash flow conversion.
Trade working capital is an opportunity for us in the 4th 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 Q4, which will benefit cash performance. Turning on to Slide 7. 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 remain 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 and maximize free cash flow. Also limited pipeline capacity continued to constrain investment activity. 2nd, global discrete manufacturing end markets decelerated. The short cycle weakness was particularly felt in automotive and semiconductor end markets. And finally, although our projects funnel remains healthy, our customers are more cautious around capital spending.
Geopolitical and trade tensions have created a more cautious environment business investment climate. And 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 4th 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 8, Commercial and 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. And the preliminary trailing 3 months underlying orders in July were up slightly, a good sign.
For the full year, we expect Commercial and 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 region. Margin decreased 70 basis points excluding the Tools and Test acquisition. I'm sorry, 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 4th quarter.
Let's turn now to Slide 9. Our 2019 guidance framework is updated to reflect underlying sales growth of approximately 3%, including lower than expected 3rd quarter growth and a reduced near term growth outlook for global discrete markets. 4th quarter underlying growth is expected to be approximately 3.5%. The EPS guidance range is maintained at $3.60 to 3.70 and we expect Q4 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 4th quarter total reported segment leverage is expected to be approximately 30% year over year and almost 40% sequentially compared with the 3rd 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 4th quarter corporate costs to be approximately $150,000,000 The 4th quarter tax rate is expected to be approximately 21%, including the $0.05 discrete tax benefit and the 2019 full year tax rate is also expected to be approximately 21%. We've updated our estimated ongoing operational tax rate, which includes improvement 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 2 platform operating structure.
Expected operating cash flow is $3,100,000,000 and free cash flow is unchanged at 2,500,000,000 dollars 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, but Tim has a unique opportunity that we can't talk about, but he's going to be going to it later this year and I'll have we're breaking in another person by the time we get into the November timeframe, but Tim most likely will join us for that call. Again, 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 employees for joining us today. 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.
So, definitely need to keep you to holding to the 2 questions rules. We'll extend the call a little bit, maybe a minute or an hour and 15, 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 3 months in this challenging Q3 we just went through and for the year to date numbers and as we drive to finish out this fiscal year in 2019 and move 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, but it's happened and unfolded much differently than we thought going back 9 or 10 months ago. And that's what we're having to deal with right now. But as you can see in the orders chart on page 10, 2 things. First, we have a new pub called Dune after Dune Bag in one of our favorite golf places in Ireland and Dune is a black and tan next to Rocket. Rocket's birthday today is 1 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 resi solutions for the month of July, orders were a little bit better, but still slightly negative overall and age specific turn positive in the month of July, which is good. We're now 3 or 4 months behind what we said, more like 4 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 Q3 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% off 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. But 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 get an upgrade of the total size of the funnel. When we give this funnel up usually 2, 3 times a year. February was around $7,600,000,000 195 projects. Today, it's 221 Projects, dollars 8,300,000,000 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 $1,000,000,000 in projects, projects that are basically sitting out there that we've won and we're still waiting for the final documentation and orders to be placed so we can start booking and then obviously start doing some shittings 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 2020. Basically, what we've seen about $350,000,000 of projects we're working on or been working on for the last couple of 6 to 8, 12 months has been shifted from 2019 to 2020. And we basically have seen about $450,000,000 of the pipeline shifted out of 2020 into 2021. Clearly, this tells you we have what I call a dynamic pipe and some things moving in, some things 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, This cycle has not ended. This cycle is in a pause mode because of the disruption that's going on a little bit of Europe, and we've seen some pushback in a couple of places around the world. But our international markets have continued to hold up from an automation standpoint. U. S.
Markets pushed out a little bit. The Canada market pushed out a little bit and a little bit of push out and actually sales are going on in the Middle East. But overall, still going in. And I firmly 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 and build out in the cycle yet.
It's way too early. I just look at what's going on inside our company as we reallocate. But 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 the slowdown will happen. Hence, the OCE 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 people standpoint organization back in 2018 and the end of 2018 running through 2019, look at much faster growth. This year, for instance, we thought we'd grow around the 6% to 6.5%. We're now growing around that 3% to 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, but 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. And so I see some resolution around what's going to happen with the trade discussions that we all face. And from my perspective, that could last easily well past the election in November of 2020.
So 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. But I've come to the realization and watching our customer base and talking to our customer base is they're going to be cautious. And 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. But 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 bit more aggressive and hence our restructuring and we'll be looking at that pretty hard between now year end. And 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 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. So 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 tech and going home.
We're going to be attacking and aggressive going after things, but we're also bringing a cost structure line to be able to serve ourselves and also serve our customers and also build the profitability they want to deal with. So, 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 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.
And so I need to hold you to the 2 questions and we'll take as much time up to about an hour, 15 hour and 20 minutes to get through the questions. So with that, Tim, let's open it up. Thanks.
We will now begin the question and answer session. Our first question
So how do we think about the longer term roadmap for you guys in a more difficult macro? And particularly as we go into the FY 'twenty, it might be difficult, obviously, to achieve the target in 'twenty one to 4.50. But 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% to 5%, I believe, for the cycle here. If that number is going to be closer to 2% to 3% because of the 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 will be very it will be challenging for us. But the key issue for me is, can we drive some incremental growth through penetration, if that's possible and we'll try to do that. We're also going to have to be a little aggressive on the bolt on acquisitions that allow us to integrate some more sales and profits to get that number up.
But that's the game plan, it's going to have to be, where do we get that top line growth. If we move about a point or 2 from underlying from this core business, then the acquisition gains can 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 because 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. But 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.
Yes. That's helpful. And then 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 be 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 perfect number is now in this combination of companies around 19% EBIT. But 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. And if we need to, we'll do it 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 JPMorgan. Please go ahead.
Hey, guys. Good afternoon.
Good afternoon, Steve.
Congrats to Tim unless you're like sending him to some godforsaken part of the world like I don't know where you send these people, but hopefully he stays overnight.
Connecticut. Tusa, I'm willing to I'm open for suggestions. I mean, you might have to talk to his wife a little bit about this. She is a St. Louis girl.
But you might if you got an idea, it's not going to be Augusta, Georgia. I can tell you that right now. I'm just going to say that.
You stole that one, Joe. I was
just going to say that. Not going to be a gut to Georgia. Most likely, it could be like, I don't know, so what's a tough place in Nevada? We get something really, Death Valley or something like that. Area 50 water, something like that.
Now 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. But how bad was kind of your discrete business on order rate or revenues, either one? Like, are those down double digit?
And then 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 kind of attacking competitor installed base and selling digital and that kind of stuff. So it seems like there's a bit of a share gain there in power.
So on the discrete side, we're not down double digits. I mean, it's a solid single digit. But I would say Tim and I are going back and forth, they're probably somewhere between 5% to 8%, mid single digit down in the discrete side. The inventory has not come out of system at all. Obviously, the demand slowed down as you've seen, Steve.
And therefore, it's going to take a little longer. It could last all the way to the calendar year now to get that out. But that's what we see at that point in time. The process side wars have been pretty good within the channel, but since right now, it's oil and gas related down around Texas and the Permian has been pretty tough. On the power side, we are very committed to the space and we've continued to bring out the next generation control system, Ovation.
We continue to bring out new services. We continue to be highly committed to supporting the power generation, both renewable, primary power, all different type of power, particularly around coal to gas. So based on what we're seeing right now, I would say we are winning against our key competitors out there. But obviously, we're not going to back down. I think there's a unique window of opportunity as we look at this.
And overall this year, year to date, we're up a solid single digit in orders. And I think we're going to have a good Q4 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.
And again, I don't look at a quarter per share. I mean, let's wrap it up as we finish this calendar year, but I feel good of the trend line as I look at the last 12 months to 18 months versus our primary competitors in the space.
Right. But that's OEM that's the OEMs installed base, correct?
Correct.
That you're going after?
Yes. And then one last one just on the macro. You seemed confident that this isn't getting worse, but then you said things extend, I mean, through the election next year. I mean, 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 like how are you going to integrate that into your kind of plans and your thinking?
From our 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, and 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.
But 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. It's not going to be in my opinion, I'm being very, very, like I say cautious or negative, but I'm very concerned about businesses like you said keep pausing and they keep reevaluating their and that's going to drag the business investment world to a weaker environment. If it doesn't happen the way and things get better, we'll be okay. But I'm more worried about that it will happen 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 got ideas for where we're going to send Tim, send them to me.
Our next question today will come from Jeff Sprague of Vertical Research Partners. Please go ahead.
Thank you. Good afternoon, everyone. Good afternoon, Jeff. How are you doing? I'm doing well.
Thank you. Fighting through it also. It's always fun to slug faster stuff. You get too weak, you get boring. No, exactly.
Well, hey, I wanted to just pick up on your last point. You kind of indicated you didn't use the term, but maybe kind of the risk of just stall speed. And if we get there, what really kind of keeps us from kind of tipping lower? I guess no one has a crystal ball, right? But how would you handicap kind of 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 economy next year gets the global economy gets real close to that stall speed. And I think that as we finish the rest of this calendar year, which I think will be okay relative to people then really start reevaluating in 2020. We have to if we sense we're going to get pretty close to that stall speed, which we've seen in economies before, then 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 mean, I think we're going to get close to at stall speed, but I don't think it's going to go all that way. We also, as you understand, around the world, we have every Fed, Federal Reserve around the world really pushing accommodation to make sure the economies do not get to that stall speed.
So, I think that's one thing we have going for us, that means the European, the Japanese, the Chinese, the American Federal Reserve Banks, whatever they're called around the world, are working very, very hard to make sure we don't go into that stall speed. But 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. Yes. And then just separately, just thinking about automation margins, right.
So it actually ended up being kind of a peculiar looking quarter, right. Your actual OP dollars are down, right. So we're not just talking mix effect of deals on margins, but OP dollars down. So now as we look into Q4, right, we need to see a pretty significant step up in the OP dollars to get to that forecast. You 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? Yes. 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 4th quarter in a positive way. They did have pretty good sequential margins improvement in the Q3.
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. So the automation business, as things slowed down, as you remember, we started taking actions earlier on with that business. So 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 is flowing through again.
So my gut tells me right now, I feel pretty good about where they flow. The key issue there is, do they can they continue to get some of that backlog out that's been built over the year and or do the customers start pushing that out. But 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 Q4 for these guys. Thanks, Dave.
I'll pass it. All the best to you, Jeff. Thank you very much. Have a good rest of the summer.
The next question will come from Deane Dray of RBC Capital Markets. Please go ahead.
Thanks. Good afternoon, everyone.
Good afternoon, Deane.
Maybe the place to start, Dave, would be the game plan where you would augment slowing growth with bolt on acquisitions. And when I hear you say that, it kind of suggests that there's you're still willing to play offense here and which is a good sign. But 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, the things like to slow down, things that gets kind of sloppy, near that selfie, we see some of these product lines pop out. And so, we're banking 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. But it's just going to be one of these gains that we know where we're going to go and we know where we're pushing right now.
And does our the place we're going, are they willing now to sell because of the sloppiness of the marketplace from their perspective. So, that's how the game is going to work. We'll just put a little bit more tension on it and from the top level down and I know every company is going to be going through a repositioning, 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. And 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? And 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.
But maybe share with us some of that insight that you're getting from those channels.
Well, a lot of projects we see in particular around the LNG world from the perspective of these LNG investments need to go forward as 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, decarbon, they've been commitments. So, 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. And I firmly 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 it's obviously off the table based on what we're seeing at this point in time.
And so I certainly look at the projects, the underinvestment in the gas side, even the underinvestment in the liquids and some of the underinvestments 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. Now the other issue is, if the projects in the United States stalled and you'll start seeing some acceleration in projects in the Middle East because of the demand for gas. Now China is still going to grow.
China is 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. So, 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. But 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 is that self fulfilling prophecy and then we start whining backwards. But I think that's way too early to see that at this point in time. And maybe from my perspective, things do get resolved sooner than we think.
But at this point in time, it's prudent for me from the perspective of where I'm in the we, Emerson, are in the pipeline. We need to dial things back. After 3 quarters of very moderate growth in the automation business, we need to dial it back and reset for a little bit growth and different growth environment and look and see what happens rather than waiting because we've been waiting now for a couple of quarters and now it's time to act. So that's where we sit. I'm still again, I'll say it, I'm still optimistic.
I still believe that the world needs it, the energy, they need this type of products. The question is the timing of it more than anything else at this point in time.
And can you add anything about the color from Washington?
Yes. 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. Again, 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, it's 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 drag around because it will definitely do what you talked about with some negative fulfilling processes.
Thank you.
Thank you very much.
Our next question today will come from Josh Pokrzywinski of Morgan Stanley. Please go ahead.
Hi, good afternoon guys. Good 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 close process where it's something where you think there's a commitment, but until the ink drives, it tends to back down. So how confident are you in that booking over the next few months, quarters, whatever?
So if we look at the funnel, where the funnel is growing right now, it's growing outside the United States. So we're starting to see we had not seen a lot of growth of the bigger projects outside the United States, primarily in North America driven large funnel project business. So 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. Now going back to the one but not booked situation, The big issue for us is, it is like product that's food has been picked and put in the shelf. There is a shelf life.
And 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 they're going to last 3, 4, 5, 6 years. So even if they get delayed, 6 to 12 months, it's not unusual. But from my perspective, if you get out there past the 12, 14, 16 months and these things really start changing and nothing happens, then you're going to see sort of reconfigure.
It's way too early to say that because this number until recently was pretty normal. And now with this number getting up above 1,100,000,000 close to 1,100,000,000, it's starting to get to a number that's got my attention. And so 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.
And so I think we got to watch it. There's nothing to get overreact to, but it's 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. So it sounds like we need to stay on top of that as a number to talk about.
Yes. Okay. That's helpful. And then just looking at the
projects that have shifted out of the pipeline, and I know that there's certain stream orders in sales, but if I think about that 350,000,000 dollars shifting from 'nineteen to 'twenty and this 415,000,000 to 'twenty one, we're already kind of losing maybe a point or 2 of sales as it pertains to that. And you've talked about kind of a 2 or 3 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 very a whole lot more downside. Does that just speak to no excess in the system or the absence of destocking? Or I guess why couldn't we decelerate more given that the project piece already speaks to maybe half of the deceleration you talked about?
Yes. I think it's hard to measure on a couple of months on projects moving in and out because they move historically, we never gave that number. There was always a lot of movement anyway. There's always a couple $100,000,000 projects moving around. So I would say the number is a little bit higher than normal, to be honest, Josh.
But there was always a number that moved in and out of a couple of $100,000,000 So now so I think I would definitely say the movement is higher than normal. So therefore, I would say it does add taken about a point, 0.5 off the underlying growth rate of the cycle right now. And 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 got to wait till the end of the calendar year to get a good feel.
But right now, there's always noise and I would say it is about a point that's been taken off the underlying growth and 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.
Yes, thanks. Good afternoon, Dave.
Good afternoon, Nicole.
So I just want to start with commercial and residential. So you guys have kind of guided for flat organic growth for the year. It implies a little bit above flat, maybe like 1% in the 4th 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? And could there still be some risk to the downside there, particularly since the comp, the year on year comp does get a little bit harder in the Q4?
Yes. It definitely gets harder because of our U. S. Base last year. So there's a couple of things that we're watching very closely.
One that the fact that China now and Asia Pacific now has stabilized and come above the line, that's a good sign for us. So my concern would not be there. My concern would be in the U. S. A.
If all of a sudden, we've had a pretty good, what I call heat wave, humidity wave go through. That will be my concern right now, not in the AC side, but more on the retail side. But 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's extremely hot there, but it's bounced back nicely in July. So I feel pretty good that we're going to be around the 0% to 1% growth rate in Bob's business, in the 4th our 4th quarter, which is the 3rd fiscal or 3rd calendar quarter. I think we've got it down pretty close to where we see it right now. And the fact that July came in decently and our orders came in decently, even I think with the 1 month order pace positive, Tim, the 1 month order pace was positive. So it was positive real close to that 1%, I think.
And so I think we're okay there. We'll put our 8 ks out in orders and we'll keep a communication around those three things, Asia, China, North America and as Europe keep holding in there for us. So those are three things I'm watching right now in commercial res.
Okay, got it. Thanks, Dave. And then just on automation solutions, you talked about things getting a little bit better in July. I mean, maybe it's my eyesight, but 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'd tell you what, after a tough chewing, if it goes ticks up a notch, it's better. And so I think where we're underlying what's 4.5, 4.5 was last 4. Right. 4, yes. 4.
So it ticked up a little bit. You can't see that in the chart because I thought you had younger eyes Nicole. Come on. So 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. So our international markets actually grew order wise, I think double digit. And in North America, the U. S.
Business and the Canadian business was still the weakness point. So, 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. And I think we're going to bounce somewhere between 4% to 5% in orders in this Q4 or so. In July was a JADA was not a short month.
I think it was a fairly long month for us normally and this month. And so it's a good representation of what I think what's going on in the marketplace. So I feel reasonably well about that 4.5. Now 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 that.
Definitely. Thanks, Dave.
Thank you very much, Paul. See you soon.
And our next question will come from John Inch of Gordon Haskett. Please go ahead.
Afternoon, Dave.
Good afternoon, John.
Afternoon. So, hey, the 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 a tad lower than that. And so what we do obviously, the hybrid, now you talk about large. Now if you look at the what I call the smaller circles in there, the medium small sized circles, those typically are accretive to us. So it's a bigger one that typically will be the lower double digit 10 type number there. So right now, given the fact that projects have slowed down, the bigger projects does help us a little bit.
But I want to get those projects going so we can get the installed base. But the mix of funnel right now, it looks pretty decent. As I look at that funnel. I mean, 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. And so that's a good mix as I finish off the Q4 going back to our comments on profitability and a good start for 2020.
So based on that funnel, that tells me I like the mix.
So these deferrals aren't necessarily putting incremental price pressure on kind of the bid quote that sort of thing. It's just a pure deferral, right?
Yes, correct. Typically, if you have the chart in front of me, chart 11, if you look at the bigger bubbles, you probably have black or 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 environment. When I look at the smaller medium sized ones, typically those are going to be KOB 2, KOB 2 type projects and typically those are projects you already have that installed base and therefore the profitability is going to be around that our margin, our normal margin.
And 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 percent of your sales are, say, embedded software? What percent might be standalone software? And would you be looking to kind of software, 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. And so the answer is yes, but we're so we're looking if you look we did a lot of smaller we're doing a lot of smaller deals this year and most of them were 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 from the facility point, that's what
I'd say, Tim. Just that we showed this slide in our investor conference, dollars 400,000,000 standalone software on the ASR. Yes. And that doesn't include the embedded pieces.
It doesn't include them. Yes. So on the soft so we did $400,000,000 they're standalone about $400,000,000 and then we have a lot embedded, which we don't break out in the systems business. But yes, if you look at the deals we're doing right now, there are 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.
Again, it's not a lot of them out there, so you have to quarter them for a long time and we've done quite a few this year. They're smaller. And the acquisitions to me are important relative. It gives us opportunity 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, but that's going to be a key issue for us to drive.
We can't get top line organically. We've got to get them through bolt ons and they've got to deliver the profit.
But 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 Yes.
Oh, yes, yes. When I talk about bolt ons, I'm not okay, yes, yes, okay. I hope people will take that. I'm not talking about bolt ons. 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 and do any type of acquisition to get sales earnings or cash flow or EPS now. These are within the core. Clearly, 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 'twenty one.
So we're going to have to figure out how to in bolt on deals within our core space to that. That's a good point, Jeff. Thank you.
Yes. Thank you. And I sent him to Canada.
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. It sounds like you're still doing very well there. Is it you think it's because of your mix, because you're taking share, just hybrid covers a couple of different end markets there maybe what you're seeing?
Yes, exactly. So from our perspective, our hybrid business, clearly, we're pretty strong in terms of life sciences. And so we've had a pretty good run-in the life sciences from the perspective. I'm not 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. And so 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's been good for us relative to our hybrid business.
Got you. And then 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, but 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 down, excluding any additional aggressive tariff action other than the 10%, which is not primarily aimed at us, industry is more of a consumer care approach. I think our price cost balance for going into 2020 right now is pretty good. It's green. Now those things could change and those are the things we have to deal with. But last year at this time you thought about tariffs were coming in.
We had materials still going up. People thought we're going to see faster growth. And so, we are looking at a little bit different type of inflationary environment. So this time, it's moving in the opposite way. And the key issue for us is to keep our costs in line and obviously make sure we have price discipline around the price cost.
But 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.
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 3 year upturn. Historically, I guess this industry in China tends to have 3 or 4 year upturns in a 18 month downturn. So just wondered how you're assessing the market outlook in China in terms of that risk of turning down 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 ETG?
Yes. So on the cycle through this month, the cycle is still pretty good. We're looking at a very solid 8% to 10% automation and solutions orders growth and sales growth. As I look at the industries we're serving, there's a lot of industries that are the Chinese customer base is trying to become more self sufficient and so obviously less imports of final goods. So 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 Asia or for China is that 8% to 10% most likely is going to turn into, let's say, 6% to 8%, maybe 5 to 8 type of growth. So we're looking at a slower growth to your point, Julian. But I'm not looking for that drop off yet because they have not 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 in the industries we serve. Relative to, what I call nationalistic tendencies for the Chinese relative to foreigners, It's not just U.
S. Companies, it's all companies. I mean, 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 customer organization, our sales organization, our customers' organization, Lal, Caixabayano was just there. Mike's going in next week and I'll be going in within the last of the month. So 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 I mean, there's a little bit more, but not astronomical more or we would not be growing as we're growing right now.
And then 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 and RS?
It's still too high, given the fact that if you look at Emerson's inventory, we with a slower June, our inventory did not come down as it normally would in June. So we're a good indication of that, June. I mean, there's a balance sheet out there, so you could see our inventory level did not drop like normal quarter to quarter. And from my perspective, as I look at the channel right now, I think I thought the channel will be done by the end of this 3rd calendar quarter. I think we're going to be well into the 4th calendar quarter before that destocking is done.
And we sense that people are being very cautious. And so I think it's going to take a little longer because the demand is weaker. Therefore, the demand is not going to drive the stock and they're going to have to take it down very slowly. That's how it looks to me.
Great. Thank you.
All best you, John.
And our next question today will come from Robert McCarthy of Stephens. Please go ahead.
Good afternoon, everyone. Thank you for coming in.
Good afternoon, Robert. Barely made the cut off line. I mean,
Well, I guess, I'll see in Arkansas a little bit later in the month, right? Yes. 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. But 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 of deals, our acquisitions this year where it's not going to be as high. Say the 1st 6 months, we didn't see the pipeline being strong enough. So we've made the decision to do a little bit more share repurchase. Now. Clearly, we started this process before the stock get waxed in all the trade discussions.
But if I look at our leverage point, we can do a $4,000,000,000 $5,000,000,000 type of transaction and comfortably be around that 2 debt to EBITDA margin of up a little bit over that. So we have plenty of room and there's not a lot of $5,000,000,000 $6,000,000,000 $7,000,000,000 $8,000,000,000 deals out there for us. So I think rating agencies that we're going to get our ratios back down, which we have in the past.
Well, I mean, Rob, there's nothing that we can reasonably foresee that would cause us to contemplate issuing equity. And we can do everything within the balance sheet that we can pursue.
The type of deals we see here, the biggest type of level deal you'd see is a $4,000,000,000 or $5,000,000,000 So 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. And 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. 1, 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? And then number 2, any size wise 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 could share any?
Yes, if I have any. Relative to capital, we've scaled capital back this year. We've asked, we've had sessions here the last 60 days. So capital this year is going to be around $600,000,000 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 ks and also in the press release, we have some issues from our standpoint of as we've now had some of the acquisitions for 2 or 3 years, we are now doing the optimization of where we want to do some best cost manufacturing.
So we have some investments that we need to make in 2020 getting ready for actions we want to take in 2021 2022. So from my perspective right now, our capital spending for the next couple of years are probably up around the 3.5%, 3.6% level as we prepare for this move into this some better manufacturing locations and then allows us to move as we go into 2021 2022. So, I mean, we're evaluating everything around the capital structure right now. Do we need to do it in 2020 or can we push it out? But I if I look at the numbers right now, because of what we see needed for 2021 2022, we will be taking capital back up in 2020, little bit higher than it is this year.
And I think same thing will happen in 2022. So we try to balance this. We spend money all the time as you well know, but I'm shaving it now and we're going to have to put some money back in next
year. And then on IMO real quick?
I don't have I can't give you more insights. I don't know. I haven't talked to him recently about that. I do know if I look at the project investments on the refineries today in KOB 2, it's still pretty high in the list of projects we're going after and projects we're winning. But I've never I can't give you a specific number to say these guys, yes, they're going to keep doing it, they're going to take it up.
But I can tell you right now, my folks that tell me in the field, refining bidding is still going on. So they appear to be moving forward and spending in this 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 they move into 2020? But 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 2 and a half questions.
And our next question will come from Joe Ritchie of Goldman Sachs.
I was trying to forgive Rob before he got off and tell me that you had 10 Hail Marys, couple of Lord's prayers, but Rob ran off to the church too quickly, I guess.
He's already doing them, Dave.
Yes. How are you doing, Joe?
Doing great, great. Thanks for fitting me in. So 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, but 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, we'll grind 2020 here for the next 3 months. And during that process, we'll grind to 2021 at the same time because of this very issue. If things slow down, there's a bump and could it be bump in 'twenty one. I mean, as we grind what we hear from our customers as they finish their calendar year. So we're going to be going through a 2 year window here basically because of that issue.
Going back to the question, is this a pause and then a recent acceleration or is this going to be a grind in stall speed and then things really slip away as we go into later 2020 into 2021. So that's 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. So that's how we're going to go at it right now. I want to get a feel for my customers. Am I being too cautious or am I being realistic?
And so we'll get a feel for it.
Yes. I mean, it sounds like potentially maybe an update then by the Investor Day next year?
For sure. For sure. I will not leave this calendar year without myself having an update and communicate with 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 into an Investor Relations guy in, I could pin the other guy and blame him for all that crap. And so, I mean, you know how that works, Joe.
I mean, you've seen some of these Investor Relations guys. It's tough. Never to be surfaced
again. Ken has
been a good one. Ken has been a good one. I have to tell you, he's a good guy.
If I could fit maybe one more in. I thought your commentary Dave earlier on seeing a slower like U. S. GasCanada Gas environment was interesting. I'm just wondering like do you think the trade environment is impacting offtake agreements from happening with Asian partners and that's impacting LNG investment?
Or what is it that you see that's kind of 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 the Asia our Asia in particular China need these need the offtake, 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.
Because even if 50% of that investment is going to be for exporting, 50% are internally, your whole process is going to change. So, that's very important. So, 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 6 where that number is and then they'll make that call relative to we reevaluate or do just go back to drawing board.
That makes sense. Thank you.
You're welcome.
And our next question
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 investments to sort of update the product. So 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 the processor side and the Ovation side, the power side, that's very important to us and we're going to try we're going to figure out how we get that done over the next 2 years as we planned originally. On the service side, given the opportunity we've been seeing in KOB 3 and I think KOB 3 will come in at a very good number this year, because 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. But again, it goes back to a reprioritization of what we can do and we cannot do. And I would say in my discussions with Wow and my discussions with Ram and the other OC members, that's one area that I would say we need to figure out how to protect.
Now 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. So 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. And just a follow-up question. You always have a very good sense of what global macro is doing, what global GFI is doing, etcetera. 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-2s. I think there's I think it will continue to slide. It could easily go below the 2 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 like a 3% or 4% type of growth rate in China. We've seen pretty good pockets of growth. And if Bob's business, the commercial residential business has back to back, say, 2 or 3 or 4 months of slightly positive growth that tells me that things have stabilized. So, 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. But the trade issues right now are quite a big negative and being pushed back that growth rate down. So that's the key offsetting going on at this point in time.
Thanks a lot, Dave.
All the best to you. Take care now.
And our next question will come from Deepa Raghavan of Wells Fargo
Securities. Automation Solutions, Dave, so China continues to invest in infrastructure and that's been helping a lot of companies there this cycle. So what are some of the verticals within AES that have been performing better than you'd have thought in that region? And which are the ones that are losing some steam versus your expectations? I have a follow-up after that.
So you're talking about China in specific detail, is that what you said there, China?
Yes. China Automation Solutions, yes.
Yes. So 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. So that one has underperformed inside China from what I thought would happen this earlier this year. On the so the chemical side, I think that process, I've seen those are held in there pretty well nicely.
Some of the refining assets 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 know it's 8% to 10%.
8% to 10%. So that's basically where we are right now. So I would say chemical is a little bit better, power is a little bit worse and refined is a little bit better. So 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. So, we've set in motion Bob's business and the commercial residential Bob Sharp. He's gone through his process for his team and looking at places that we can take out layers, we can take out situations we've not necessarily needed anymore. While we're doing the same thing, we're trying to accelerate some of the integration and some of the acquisitions. We're looking at the corporate structure and the same thing.
So, we're looking at areas that from the standpoint of things we can do simpler without as much overhead. Trying to figure out how to do that right now and that's how we're going at it. So, it's very people focused and that we started in April, we'll run all the way to 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 putting me in.
You're welcome, Deepa.
Our next question will come from Gautam Khanna of Cowen and Company. Please go ahead.
Adam, you got the line of question. You just got underneath that you barely got underneath that rod, that limbo lodge rod. Yes. I didn't know you're that limbo. Yes.
What can
I do for you? 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 and A over
the next 6 to 12 months to really pump the repurchase activity higher? I don't think we're going to pump it. I would I mean, 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 types of deals, meaning a couple of 1,000,000,000 to $3,000,000,000 $4,000,000,000 So I think that right now the Board feels very comfortable in this range of $1,000,000,000 to $1,500,000,000 per year in share repurchase, assuming that the deal that we're looking at is moderate of somewhere between $500,000,000 to $1,000,000,000 per year.
If we alter that and we start moving back into that $1,000,000,000 to $1,500,000,000 to $2,000,000,000 you would see us modulate back down towards, I would say, a little bit under $1,000,000,000 in share repurchase. So we show the board that flexibility, but I don't see a if the deal would really it's not going to stop And I don't see us popping everything all our capital into share repurchase. I think we have consistently bought stock back over the years. It's Tim, it's close to 300,000,000 shares that we've bought back since 2000. Now the net impact is not quite that high, but we bought back 300,000,000 shares.
And so we consistently are in the marketplace, but I don't see changing the strategy of buying on a consistent basis. And I think the Board feels very comfortable in the $750,000,000 to $1,500,000,000 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. And now with 2020 hindsight, the fact that the market has gotten weaker, it gives us some flexibility to buy some at reasonable prices.
Appreciate the color. Thank you.
Okay. Take care, Colin. 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 1 year birthday is today and Dune is about 5 I think he's 4 months old, 4 months old. And Dune is a little bit different than Rocket. Dune is a little bit more aggressive. And so Rocket and Tim go together. I got to get aggressive Investor Relations guy now.
So 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 we'll continue to do for the company. All the best.
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