Welcome to the Emerson second quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note that this event is being recorded. At this time, I would like to turn the conference over to Tim Reeves, Director of Investor Relations. Please go ahead, sir.
Thank you very much, Denise. I am joined today by David Farr, Chairman and Chief Executive Officer, Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer, Bob Sharp, Executive President, Commercial & Residential Solutions, and Lal Karsanbhai, Executive President, Automation Solutions. Welcome to Emerson's second quarter 2019 earnings conference call. Please follow along in the slide presentation, which is available on our website. I'll start with the second quarter summary on slide three. Sales in the quarter of $4.6 billion increased 8%, with underlying sales up 4%. Automation Solutions was up 7% underlying, with broadly healthy and stable trends in most markets. Commercial & Residential Solutions underlying sales were flat as strong North American HVAC markets were offset by a decline in Asia and the Middle East, and the impact of distributor inventory destocking and slower consumer in certain other residential markets.
Trailing three-month underlying orders growth remained in the 5%-10% range in the first two months of the quarter and moderated to 4% in March. GAAP earnings per share was $0.84, up 11%. In the first half, we returned $1.6 billion to shareholders and completed our $1 billion 2019 share repurchase target. Turning to slide four. Second quarter gross margin was down 70 basis points, and EBIT margin was down 50 basis points. EBIT margin was up 50 basis points, excluding the Aventics, Tools and Test and GE Intelligent Platforms acquisitions. Tax rate of 22.3% benefited from several favorable discrete items in the quarter. Slide five. Second quarter underlying sales growth was led by the Americas, up 7%, with solid growth at both platforms.
This result, while strong, was approximately two points lower than we expected due to moderating upstream oil and gas demand and the slowdown in global discrete automation markets. Europe growth was stable across both platforms, and Q2 marked the fourth quarter of steady growth at Automation Solutions in Europe and the tenth quarter for Commercial & Residential Solutions in Europe. Asia, Middle East and Africa was flat and was also approximately two points lower than we expected due to the Commercial & Residential Solutions climate business, which improved in line with our expectations in China, but was slower in Southeast Asia and the Middle East.
This was below our expectations, primarily due to slower than expected sales, and we are taking actions to adjust investment spending and cost structure to deliver strong leverage on growth in the second half. Capital expenditures were up as we made progress on previously announced facility expansions and upgrades in our climate technologies, final control and measurement and analytical instrumentation businesses in the U.S., China and Southeast Asia. Because of these expansions, CapEx spending in 2019 is more first halfway than compared to 2018. Our full-year CapEx expectation is unchanged at $650 million. Trade working capital improved 20 basis points, driven by receivables and payables performance. Turning to slide seven. Automation Solutions underlying sales was up 9% in the quarter and up 7% on an underlying basis. March trailing three-month underlying orders were up 7%, and backlog continued steady growth, driven by long-cycle project wins.
Underlying sales trends in the quarter remained broadly stable as follows. Strong demand continued across our three kinds of business, MRO spending, brownfield, and greenfield projects. All world areas remained positive, and growth continued across our world areas stably. We continue to see healthy progress in our long-cycle project outlook, a strong project funnel, steady orders conversion, and a growing backlog. There were two key areas that missed our expectations and primarily impacted growth in North America. First, upstream oil and gas was slower as Permian customers paused to assess full-year investment plans in light of oil price volatility late last year, and development in the Bakken region was somewhat delayed due to unfavorable weather. We expect growth to recover modestly in these regions through the second half. Secondly, global discrete manufacturing end markets were slower.
The impact of this was exacerbated in the U.S. by some rebalancing of channel inventory from last year's tariff impact and price increases. For the full year, we are lowering the high end of Automation Solutions' expected underlying sales range from 5%-8% to 5%-7%, which embeds somewhat slower second half growth in North America and softer global discrete markets. For North America, we expect low single-digit growth in Q3 and mid-single digit growth in the fourth quarter, supported by improving takeaway capacity in shale regions and stronger growth in our long-cycle businesses.
Segment margin decreased 90 basis points and was down 10 basis points excluding the Aventics and GE Intelligent Platforms acquisitions. This result was below expectation due to timing of expected software-related revenue, which we expect to largely recover in the second half of the year, the impact of foreign exchange losses recognized in the quarter, and slower than expected growth in North America. We are adjusting our investment spending plans and accelerating some cost actions to protect our full-year profit margin and deliver incremental margin of 30%, excluding the Aventics and GE deals. Full-year segment margin is expected to be approximately 16.5% within the range discussed at our February investor conference. Turning to Slide eight. Commercial and Residential Solutions underlying sales were flat in the quarter, as were March's trailing three-month underlying orders. North American residential and commercial air conditioning markets were strong, and our global professional tools markets were favorable.
These positives were somewhat offset by the impact of distributor inventory rebalancing and slower pace in certain consumer and residential markets. We continued to see improvement in China through the quarter, in line with the plan we discussed at our February investor conference. However, Southeast Asia and Middle East markets were slower than expected, putting our expected Asia recovery 2-3 months behind plan. Given the slower than expected start to the year, we are lowering our 2019 underlying sales target to approximately 2%, which embeds second half underlying growth of 3%-4%. Through the second half, we expect China trends to continue to improve and markets across the rest of Asia to follow. Margin decreased 150 basis points, excluding the Tools and Test acquisition.
Compared with the first quarter, price cost trended favorably and helped the business deliver over 40% sequential leverage on incremental sales, in line with our expectations. We expect the price cost tailwind and leverage on higher sales to drive strong sequential and year-over-year leverage in the second half. Full-year segment margin is expected to be approximately 22%, consistent with the plan we laid out at our February investor conference. Turning now to Slide 9. Our 2019 guidance framework is updated to reflect underlying sales growth of 4%-5.5%, reflecting lowered growth expectation for Automation Solutions in North America and for Commercial & Residential Solutions in Asia and the Middle East. By quarter, we expect approximately 4.5% underlying growth in Q3 and 5.5% underlying growth in Q4. Modest acceleration in the fourth quarter growth reflects improvement in our Automation Solutions long cycle businesses and upstream markets in North America.
The high end of the EPS guidance range is decreased $0.05 to $3.60-$3.70, with Q3 at approximately $0.94 and Q4 approximately $1.13. We expect the full year tax rate to be approximately 23%. Please turn to Slide 10, which bridges our second half 2019 GAAP EPS guidance. In 2018, we had favorable discrete tax items in the second half, somewhat offset by $0.09 of one-time charges in Q4 2018, including $0.06 of acquisition accounting charges and $0.03 of one-time 401(k) contribution charge. Together, these items net to more than $0.20 headwind in the second half. Strong operational contribution is weighted toward the fourth quarter and is supported by expected volume leverage, a strengthening price cost tailwind, lapping of the Section 301 tariff impact, and actions we are taking to rightsize investment plans and other spending.
Additionally, we are increasing our full-year restructuring spend to accelerate approximately $8 million of actions into the third quarter. Total 2019 restructuring is increased from $72 million to approximately $80 million and sets up a strong cost structure across both platforms in Q4 and heading into 2020. We expect the fourth quarter to deliver particularly strong sequential and year-over-year operating leverage as the benefits from the price cost tailwind and reduced investment and discretionary spend build through the second half. In the fourth quarter, these items, together with a modest benefit from aforementioned accelerated restructuring, are expected to contribute $0.08-$0.09 of operational EPS. On the right, we've shown our expected sequential profit cadence by business in Q3 and Q4, excluding recent acquisitions. Both businesses will deliver strong results reflecting operational execution, improving price cost tailwinds, and reduced investment spending.
Please turn to Slide 11. I will hand the call over to Mr. David Farr.
Thank you very much, Tim. I want to thank everybody for joining us today. I truly appreciate it. As we look at what's happened in the second quarter and what's going on as we see in the second half, we really want to make sure everyone understands what we've seen and where we're going to go. Clearly, the cycle's still intact. We feel very strong about the cycle. As I said in February, and I've said a couple of times as I've had investor meetings throughout the last several months, the tapping of the brakes is truly happening in many of our marketplaces. We can feel it. However, we've had to adjust to deal with that. As I look at the capital spending of our customers, it's still intact.
We've been checking everyone's reported from a quarter standpoint and their capital allocation standpoint for the year, only in our discussions with the customers. They still have the capital program set in place. How they spend it, timing, these things are moving. They still feel very strongly about this cycle, and I feel good about this cycle. Both Bob and Lal will comment on this as they go through their presentation. Basically, we want to give you some insights about the Q2 and also what we see in the second half. Before we talk a little bit more, though, I do want to thank the global Emerson team. They worked hard through this quarter as we've seen the quarter unfold, the shifting of the demands, the shifting of the sales, and the actions necessary to deliver what we could deliver from a sales and profitability and cash flow.
It wasn't what we expected when I sat here on the phone in February. We talked in New York in February. Clearly, as Tim recognized, the U.S. was an area that we saw the weakness, in particular around Lal's business, which he'll give you some insights, around the short-term oil and gas and also around the distribution. Clearly, we underestimated the impact of distribution pipe being filled with price actions that unfolded in late 2018 from us and from other people as we dealt with the tariffs and we dealt with the material inflation. Clearly, people decided to put the inventory in place to avoid some of the pricing and then now having to work that off. The timing of that work off still has to unfold.
We finally believe it'll be more closely aligned in our early fourth quarter or the early third quarter of the calendar year, in particular around Lal's business. I'll let Lal talk about that. In Bob's business, we talked incrementally. Margins were key for Bob, and he delivered that, and he delivered over 40% incrementally. The big issue we missed, Bob will talk about that, really was around the Southeast Asia business, leaving Southeast Asia and the Middle East business. China was down, but I think we have that pretty well intact and really shaping, Bob will talk further about that. There are pockets and areas that we could not overcome and pockets and areas that we missed, the tapping clearly happened. We still feel that as we go through this third quarter, there is clearly, as I would say, we're going through two big mountains.
We're going through a gap right now, I still feel good about how we come out of that gap, that's why we give you very specific forecasts around the quarters because we see this mapping out. We spent a lot of time. I brought the teams in, both from the OCE and then also Lal's team and Bob's team at the highest level, we sat down, we spent many, many hours several times. What's going on? What do we need to know? What do we need to do adjusting, what do we have to do? We've also taken actions, both Lal and Bob's business taken actions to ensure we deliver the profitability with the uncertainty in case business does not come back in the second half. How do we deliver that profit margins? In addition, we've also increased our, what I would call restructuring charges.
We're going to go after areas that we feel that we can integrate faster and with a slowdown in the decision to focus on those profitability. Both Lal and Bob continue to look at areas, Lal in particular has already accelerated some areas and a lot around acquisitions we made in recent years. A couple call-outs I want to call out. I want to call out the final control. Final control had a very strong second quarter, both in sales, profitability, bookings, cash flow. They've continued to outperform their key North America competitors. I also want to make a special call-out to my Latin America team, who I abused for a couple of years, for the second quarter, they had double digit over 10-plus % growth. In fact, more than 10% growth across their business.
That's very good, I guarantee these guys are focused very hard on delivering that for the whole year, it's very, very important. As I look at the cost actions that these guys are undertaking, Lal's business is still going to grow very strongly. He's still going to grow 5%, 6%, 7%. I see Bob's business coming back in the second half, clearly in that 3%-5% range was what we thought would be the whole year. With the miss in particular around international, it's clear that's not going to happen for the whole year. We want to make sure we have our costs in line as we leave this year as we move into that second in the first half of 2020. I applaud the guys for taking these actions.
Even when you're growing, we got to take these actions and make sure we do the right things as we focus on what's right for the long-term cost structure of this company. From the cash flow, we had a good second quarter. I think our balance sheet, and Frank would agree with that. Balance sheet, Frank talked about this at Board today. We're in very good shape with the balance sheet. I think our working capital we got in line after the first quarter is a little bit high, but we got it back in line, and I feel very good about the cash flow for the year. If the business slows down a little bit more, it's easier for us from a working capital standpoint, but obviously we lose the earnings side of that. I feel good about approximately $3.2 billion.
I feel good about the free cash flow around $2.5 billion, which are very important to us as we look at the total company from a capital allocation standpoint. As we look at that second half of the year, I think we have in focus right now what's going on in the marketplace. I think we have our cost structure in place. I feel that the organization globally is focused very hard on delivering the second half. We had a good start with April. As you look at the order trend chart, from the standpoint Bob's business kicked back up a little bit in April. He went positive on a 3-month roll. Lal's business, as we expected in April, dipped down a little bit further. We're still right in that range we were in the March 3-month roll.
We finally believe that as we look at this forecast, we will be back in the 5%-7% range on 3-month roll as we leave June. That's key. From the standpoint of positioning ourself for a stronger fourth quarter, a couple of things happen. Obviously easier comparisons, but clearly we see the pace of business picking back up. That's what you're going to obviously watch as we look at the order trends and we communicate to you on the order trend charts. That's what's so good about us doing this from that perspective. I want to thank the organization out there. It was a quarter that unfolded a lot different than anyone thought. These guys reacted very quickly. As you know, I also refer to this, I have my hands in the reins right now. I've put the horse up a little bit.
I've got the reins a little tighter, I think Bob and Lal are reacting, this team are reacting to that. We have made commitments to the Board, we have made commitments to our shareholders, we are focused very hard in committing that second half to deliver the year we laid out. I want to thank everybody for doing that. I'm going to turn it over to Bob to go first, then Lal will follow, then we'll do Q&A. Again, I want to thank everyone for joining us today, I look forward to the Q&A and talking about what's happening. Bob, it's all yours.
All right. Thanks, Dave. If you saw the Derby over the weekend, Dave pulled the reins, but he stayed in the lane as well.
Yeah.
No DQ. As you've seen, the March underlying was around flat. This wasn't in line with our expectation, which is, in mid-February, in the investor conference, we thought would be moving up by now. As you did see with the margins, we reacted quickly to that on the cost side. Now we got to have the sales play out. Two key indicators we really watch, especially this time of year in these conditions, U.S. AC was very strong as expected. The China recovery is playing out as expected. I'll show you that in the next chart. The key challenges we had were, as Dave mentioned, the rest of Asia, which a lot of our customers in the rest of Asia are then selling to the Middle East, so a lot of it Middle East-oriented. It stayed down in the 15% kind of territory, which we were not looking for.
We had some pockets of weakness, as Dave mentioned. In addition to some of the discrete products, some of the U.S. consumer-oriented stuff, disposers, vacs, some Therm-O-Disc kind of general product, clearly saw both some inventory de-stocking dynamics playing out, as well as some weather impact. Again, that's really what played out in March very quickly against us. April, as Dave mentioned, has ticked back to the positive. We continue to expect upward movement to support that 3%-5% sales in the second half that we talked about as well. If you look at chart 13, again, the China update specifically. I showed last time the verticals between heating and cooling, cold chain, and tools and home products, because there are very different dynamics playing out.
Starting from the bottom, tools and home products, not a big business in Asia for us, but a solid amount, especially of disposers and RIDGID Pro Tools. You can see a very strong quarter, 77%, on top of a very big one in the first quarter. Cold chain, a little lighter, but there's some volatility here, as you can see by the way the quarters go, and still staying solidly positive. We continue to have a good outlook for cold chain in total in Asia, especially China, as we continue to do more solutions activity. Then heating and cooling, which is the big trend line driver here. We mentioned it was down 40%+ in the first quarter, improved to a 20% in the second quarter, and it's on the trend we're looking for.
China in total, Q1 was down 30%, Q2 was down 16%. We do see this playing out into the positive in this quarter, in Q3, continuing to play out. Q4 is going to be largely driven by what happens with the heating activity that comes out. We'll be watching that as well. If you go to chart 14. If you look across the key verticals and the geographies, again, overall, some really solid strength. We are confident about the second half. First of all, North America, again, a good dynamic, high single-digit sales in the quarter. You hear our customers speaking very positively about how things are going and how it looks. It's always weather dependent, of course, in the summertime, but right now it's looking very solid. North America cold chain.
There is a little mixed activity here. I think, again, when you start getting into the general industrial activity and de-stocking and stuff, we see some of that. Overall, solid activity and some good uplift continues from some of the acquisitions we did, especially the Cargo and now the Cooper-Atkins acquisition. RIDGID Pro Tools had another very solid quarter, very strong quarter, around 5% underlying for sales. It's quite broad. Europe was up around 7%. You saw the China numbers reflected in tools and home products, very good. Overall, again, some weather and labor kind of impacts in the U.S. We'll continue to watch the construction indicators, certainly. China, as I mentioned in the previous chart, cold chain, tools and home products continued strong. AC and heating. Again, this is the time of the year when the AC products are developing.
Last year, our OEM customers bought into that because they expected very rapid activity once the season started. Frankly, they got stuck with some inventory when that happened, when the market turned. They're being more shy about that. I'll say right now, their quotation activity is substantially higher to their customers right now. It's just that they're not going to release anything until they've got the clear signal from their customers, because this also relates to their financing capability right now. Outside of Asia, again, first half did not develop as we were looking for. We are looking for improving trends. We'd like to get even territory in the second half. Certainly the Middle East in particular has continued to have some challenges, partly probably because of some of the competitive dynamics that are playing out because of challenges elsewhere and people looking in new spaces.
Europe, again, continues on a steady growth for us. It continues to be a story of our good solutions activity and programs in what is otherwise a relatively low-growth market in Europe with some of the dynamics. Latin America, I'll give a shout-out to Rafael and the team. They did double digits this quarter. We always tell them we'd give them a shout-out if they did that. Canada also for us, was double digit in the quarter. Again, we are watching very closely, especially rest of Asia and Middle East, some of this inventory activity. Even April has turned out in line or actually a little above our expectations on orders. We're confident about how the second half is going to play out. Profit, as Dave mentioned, has developed as we said it would.
We got on this very quick, around late February, March, when we saw what was going on. You saw it in the sequential margin. We're going to see that again in the second half, and we have a rather healthy tailwind in the second half on price cost, which gives us some confidence. I'll turn it over to Lal now for Automation Solutions. Thanks, Bob.
Thanks, Bob. Good afternoon. Let's turn to slide 15. As David said earlier, the investment thesis in Automation Solutions has not changed, and the cycle is intact. The long-term KOB1 greenfield opportunities in front of our business continue to be very robust. We have, however, experienced a slowdown in our short cycle business in a couple of markets that I will discuss on the next chart. On chart 15, the KOB1 greenfield project funnel remains strong. It has actually increased to $7.7 billion, an additional $100 million since we met in February, so very robust. We have booked an additional $100 million since February, for a total book of $450 million, and have an additional $850 million committed to Emerson. The funnel remains relatively intact, with very few minor movements related to timing.
The bulk of the major international oil company projects are holding, as evidenced in their affirmation of capital plans in this quarter's earnings announcements. Let's turn to slide 16. There are two fundamental market changes that from what we discussed in February, both impacting that short cycle business, the North America upstream oil and gas markets, and the global discrete industrial distribution market. Let's first talk about upstream oil and gas in North America, and it's really related to three areas. The first is the Permian Basin, in which we continue to see good well drilling activity. However, the wells are being capped and not completed. It is in this completion process that our instrumentation and equipment is utilized. There are three reasons for this. One, there was a pause given the lower oil prices, sub $45 in December. Two, a lack of takeaway capacity.
The current pipeline capacity utilization is running north of 96%. Although this has been an area of significant investment in the construction and expansion of two key pipelines, Sunrise and EPIC Crude, will take capacity utilization down to 88% by our Q4. Thirdly, consolidation of players. There are less independents and more of the integrated oil companies that have better capital management and cost controls. The second area on upstream oil and gas is the Bakken field in North Dakota, which has suffered from a very difficult winter in the northern Midwest, in which very little new activity took place. Thirdly, Western Canada, which has suffered from both political hesitation around oil and gas infrastructure investment and multinationals exiting. The U.S. refineries on the Gulf Coast need the Canadian heavy oil, but there's little takeaway capacity to get it there. Today, predominantly rail is being used.
There are needs for pipelines such as the Keystone XL. However, there doesn't seem to be a whole lot of movement on any of these. I believe that the second half will be very positive, more positive in two out of these three regions, as majors continue to support investment and takeaway capacity issues are solved. The second impact in the market was the global manufacturing end markets that slowed and have negatively impacted the industrial discrete distribution channels. The slowdown is predominantly in the automotive and semiconductor sectors, and the channel took aggressive restocking actions in the first calendar quarter with concerns over tariffs and price increases in January. This, above what I call above normal levels of inventory in the channel, has extended the burn rate and resulted in slower than expected distribution activity, which we expect to recover in the current quarter.
We believe the discrete distribution channels have started to stabilize as we go through the quarter and expect a relatively more stable second half. A quick comment on the other world areas. Europe is stabilizing from an industrial automation perspective, and the process automation activity in Europe remains strong, driven by KOB3. Asia continues to be very strong, including China and India. The Middle East and Africa orders are strong. Although we do have a concern around sales conversion, as customers have pushed back some deliveries on key projects that we have won. As Bob and David alluded to earlier, Latin America is very strong, driven by Mexico pipeline and terminal investment in Argentina shale gas in the fields. Let's turn to slide 17.
The first half growth was underlying growth of 7%, which is one to two points lower than we planned coming into the year, in which we assume that 7%-8% for the year and are looking in the 6 to 7 band. The first half EBIT margins were 14.7%. We do maintain our guidance for the full year EBIT in the 16%-17% band, as discussed in New York City in February. The second half improvement is supported by volume leverage driven by three factors. One, our backlog has increased by $400 million since August of 2018. The volume will be driven by backlog conversion in our longer cycle businesses, final control, and systems. A number of positives in these longer cycle businesses will continue to benefit from greenfield and modernization activity and grew orders in the first half.
The systems business run by Jim Nyquist continues to win with first half orders above 10%, driven by large KOB1 projects in Asia and the Middle East, modernizations and systems upgrades around the world, and our modular control product families, the PK and the OCC controller, have booked $120 million since launch. Year-to-date bookings represent an annualized run rate of $180 million. The final control business also grew orders over 10% in the first half, led by Ram Krishnan and his team, and continues to outperform. We continue to invest in key capacity regionalization in North America and Asia and global service center infrastructure. The business is outpacing competition, as David mentioned. Our first half growth was eight points greater than our largest North American competitor.
Secondly, we see modest improvement in North American growth in the short cycle businesses, recovering upstream, well completions, as well as takeaway issues are solved and improved weather conditions in the Bakken. Thirdly, we say we expect a strong turnaround season in the North American refineries and petrochemical complexes. From a P&L standpoint, price costs will be a more favorable tailwind in the second half of the year. Spending was originally geared at a higher growth level, our management teams around the world have responded quickly to reset priorities and cost structure in keeping us in the 16%-17% EBIT band for 2019.
Three specific set of actions: cost containment actions across the business, managing the pace of the remaining investments for the year, and pulling up approximately $6 million of incremental restructuring in response to two opportunities, more quickly integrating the recent acquisitions, and rightsizing our cost structure for 2020. On a positive note, we're happy with how April came in from an orders perspective, we believe we are well set here to deliver the second half. Thank you.
Thank you very much, Lal. With that, I'd like to open the floor for Q&A and take some questions from the participants here.
Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing your keys. If at any time your question has been addressed, you may withdraw from the question queue by pressing star then two. Your first question today will be from Joe Ritchie of Goldman Sachs. Please go ahead.
Thanks. Good afternoon, everybody.
Good afternoon, Joe. Good to hear from you.
Yeah. Thanks for getting me on. I guess my first question, Dave. Maybe provide a little bit more color on what you're seeing in the channel. We heard a little bit around channel inventories being built up in cold chain, discrete automation, I'm assuming on the upstream side as well. I just want to get a little bit more color about where you think we stand on that specifically, and what gives you the confidence that we're going to get through that in the next quarter or two.
Yeah. From the standpoint, what we're seeing, I think most of the channel relative to the short-term products, be it in discrete automation or Bob's business or Lal's business relative to some of the small instrumentation that go through a channel. From my perspective, it built up late last year as our customer base slowed down in the short term. They had a certain burn rate, which has not happened yet. As we look at this model and talking to the channel, because we've spent a lot of time now talking to the channel, it looks to me like this burn rate will be done by the end of our, what I would say, our third quarter, which will be the second calendar quarter. It's going to help us more in the fourth quarter.
If we do the projection, what we see from the standpoint of our order pace and the demand out there based on the inventories, it looks to me like it'll be more in our fourth quarter or the third calendar quarter. That's how we built this quarter out. Clearly, a lot of assumptions relative to the business environment, but that's what it looks like. We've gone out and done a lot of channel checking to make sure we understand that both from the tool standpoint or the consumer side and Lal's business as he looked at the distribution channel here. That's how we see it right now, Joe. By the way, I want to make a call out to you. Your report on the HVAC report was very good. I think you and your team did a good job there.
It'd been nice if you talked to us, but did a very good job there. I do understand that mark a little bit, Joe. We're going to talk to you, Joe. You just have to get in line.
We'll give you a call.
I just had to take a shot. You know me, Joe. I had to take a shot. Come on.
Hey, look, I appreciate the positive feedback, Dave. If I could follow on maybe just.
Yeah.
One follow-on question just on, look, it sounds like the project funnel still remains good. Sounds like you're winning some awards, the KOB1 awards. I guess, maybe talk to us a little bit about what's pricing been like on the project side. Also, as you're thinking about mix for the rest of this year and into next year, should we just expect the project mix to be coming through at a little bit of a lower margin on the Automation Solutions side?
I'll answer first. I'll give mine, then I'll let Lal. Joe, it's a big issue right now because that's where we are. Our backlog's been building on the project. The price of the projects haven't really changed. There hasn't been an increase or decrease from the standpoint of a competition standard. It depends on what the project you're going after. Is it Yokogawa, or is it Honeywell, or is it Rockwell, is it ABB? From that perspective, it hasn't really changed. The projects, I would say, are starting to shift a month or two, not to awarding, but to, what I would say, execution around the projects.
What we're seeing right now with the build up, the backlog, we're going to start seeing some of the initial phases of projects these guys won late last year, early this year, and that will start coming through in that fourth quarter. As Lal looks at his mix in the fourth quarter, he's banking on some of the short cycle stuff coming back. He's got some project work coming in that will hurt his margins, but that's also why he's accelerated some of his cost actions, because he sees that the growth wasn't there in the KOB3 to cover the initial phase here. Now he's got to get the cost structure right. I think we're in good shape, but I'll let Lal comment on that.
That's the moving dynamic we have right now, ignoring the distribution side, how we play this out as we move forward. Lal, anything you want to add?
Thanks, David. I think nothing fundamentally changed around pricing and margin expectations on projects from what we discussed in February.
Yeah.
Clearly, project margins are dilutive to the total, that puts the emphasis on driving the KOB2 and KOB3 and adjusting the cost structure. The functionality of pricing is really around the number of jobs available in the market and the EPC capacity. As we see that increase, we'll see a less tension on pricing. At this point, clearly at the beginning of the wave, midway through the beginning of the wave, I say you call it, the pricing is aligned with the expectations that we've had and planned.
I think, Joe, one of the key things that Lal, I want to call out Lal and his CFO, Dave Baker, have done a great job with his team of trying to lay out, as the sales unfold the next two quarters, how does that mix change? I think right now I look at it, and they've got it pretty well balanced. Now, obviously, something can change in the sunshine, but they laid it all out, and that's where the cost actions came from. I said, "We need a little coverage here, and you need to get the cost out. In fact, you need to get a little bit more than an X out in case things don't come in the distribution channel.
Exactly.
I give him a really special call. It's quick work on this because this is a midstream change for us. That's Emerson. That's what we do.
If I may, David, Joe, one additional point. We look at all these jobs. We look at our success rate probabilities, our intimacy with customers, where we can best place our technology and gain KOB-3 opportunities. All those go into the decision factor and our competitiveness on each of these jobs.
Yeah. Good. Thank you very much, Joe. Take care. Look forward to talking to you.
Makes sense. Thanks, guys.
The next question will be from Julian Mitchell of Barclays. Please go ahead.
Hi. Good afternoon.
Good afternoon, Julian.
Maybe a first question just around margins. Margins have been flat in both businesses for three or four years now, if we include the 2019 guidance. I just wondered when you're looking out at those goals for 2021, if you thought there was a need for a lot more urgency around extra restructuring, perhaps, to push those margins up in the medium term. I noticed the restructuring had gone up, I think, $7 or $8 million for the current year, but wondered if you were kind of dusting off more aggressive restructuring, perhaps, to make sure the margins can move up next year.
No, at this point in time, Julian, we're not. We still firmly believe we can get back to that 19% type of range. I think clearly we have a getting back for a full year into that 16%-17% range. I'm assuming you're talking about automation solutions here. That's going to be very key. At this point in time, we're looking at that, if we see things not progressing from a business standpoint, a mix standpoint, we have actions out there we can go after. At this point in time, we still feel pretty good about that. We're going to go with the board in June over the strategy of both over the next couple of years through 2021 for both businesses and the total company. That will push us again to see what type of restructures we need to have.
If we have to restructure to get the margin, we'll do it. Right now, I don't think we see fundamental change. We'll just do a little bit more this year because of the mix change and the slowdown, the growth, we got ahead of spending. Acquisitions are no different. We knew acquisitions were coming. I think that right now we feel good about, but three or four months, we might change that course again.
Understood. Maybe just following up, you mentioned acquisitions there, you've mentioned several times in the prepared remarks, accelerated integration, particularly of the ones in Lal's business, but also perhaps Tools and Test in Bob's. Maybe just give an update. If you look across Aventics, Tools and Test, GE Intelligent Platforms, how happy are you right now with the organic growth in those businesses and that pace of acquisition integration?
Bob, do you want to comment?
Yeah, let me start with Tools and Test. We are very happy with the way things are playing out. We have the North America sales organization together between electrical and plumbing. We're working now on the European, bringing that business close together, which is also a very big piece of business for us that'll be playing out soon. From a cost standpoint, obviously, there was a lot of group costs that Tools and Test had as a group, and that basically didn't even come with the business by the time we were done.
We talked at the time about getting away from some of the non-core stuff, communications business out in California, some hand tool stuff in China that frankly was losing a lot of money. There's another piece right now that's playing out. I would say everything we identified as opportunities, we are running ahead of that right now. I think I mentioned Pro Tools was around 5% underlying growth in this quarter. We're happy with the way the growth is playing out. It's really strength on both sides.
Yeah.
A lot of cost improvement on the Tools and Test side, healthy sales activity on the RIDGID side, which is a good combination with the RIDGID profitability.
Yeah. As I look at my pieces, we just had an organization session with them, Julian. I like the progress. They're ahead of plan. I don't see any other acquisitions in Bob's business right now in the near term. I'll look at it. I don't see anything at this point in time. He's got his team very highly focused, there are some unique growth opportunities within this business. I feel good about that side.
Yeah, I'll comment on three deals actually. Aventics, very happy with Aventics, Julian. Significant integration effort by our business unit that reports in. Manish Bhandari leads that business for us. Clearly impacted by the distribution channel comments that I made earlier on chart 16, that that slowed up, and that's forced us to drive some of that integration a little bit harder. A lot of good work there, and I believe a fundamental part for our fluid power business in that discrete space. The second, Machine Automation Solutions. A lot of work there. We've touched the entire global channel over the last 90 days as we've gone around the world and met that very important channel for us. I've been personally engaged with the team twice.
I took David to Charlottesville to engage with that team, we are now exploring multiple synergies around the KOB1 waves that we see around the world where the PLC can come in and add value to our offering.
Yes. I would say that that business is growing better, profitability is going to be a little bit better.
Really good. It looks very good early. The last, I'll just, again, I mentioned it earlier, but the work that Ram Krishnan and the team have done around VNC is just phenomenal. Well ahead of board plan, and it continues to outperform.
The acquisitions we're looking at in Lal's business right now are very much, we took one to the board this morning. It's around software. Another software acquisition. We've done a couple already this year, a solution. Nothing big, but again, these are coming in and are adding some opportunities for us. So far, the integration of the GE business is doing really well, especially with our timing of the OCC and the PKS, our own PLC, which has actually taken off, and we're starting to utilize them across the board. Julian, I'm very pleased right now. These guys got their work cut out for them. Clearly, the downturn in Europe and the distribution discrete business automotive was not great timing for us.
We also stepped back and get this chance to do things faster, it'll bounce back, I feel good about them right now from that perspective.
Thank you, thanks for the extra color in the slides, like chart 10.
We try to help you guys out just to make sure that you clearly understand Emerson. I understand it. I just want to make sure you guys understand it. Next.
The next question will be from Steve Tusa of J.P. Morgan. Please go ahead.
Hey, guys. Good afternoon.
Good afternoon. Are you getting double time today? Because you're in a different time zone here, Steve. Good morning to you.
Middle of the night.
Money never sleeps, David. Money never sleeps.
Okay.
Anyway.
That's got to be a quote for the day. Money never sleeps. Okay, go ahead. Sorry.
On this funnel, it gets kind of silly to kind of delve into quotation activity and orders. Going back, you guys put the $850 million in kind of committed, but not booked number in there. How does that compare to where you were last year? Is that number at all relevant, or is that pretty steady as it goes?
It's relevant. In February, that number was $750 million. Wasn't it $750 million?
Yeah.
800?
It actually stayed pretty stable, about 800.
800.
February about $80 million higher.
It's up versus last year for sure. That's a key number for us as we look at it because we know those bookings are coming at us, and we know those bookings will either happen this quarter or next quarter. If that number keeps growing and stays steady, that's a good sign for us because that means the funnel is maturing and happening. The reason we track that and share that with you is it tells us the confidence relative to our growth and opportunity in the second half of the year in bookings, and more importantly, for the first half of 2021 sales. That's a relevant number for us, and that's why we track it and give it to you.
In the KOB-
Can
Steve, sorry. Go ahead.
Go ahead, Steve.
Can those ANS bookings in, at any point over the course of the second half kind of migrate towards the double-digit range? Or is that too high of a hurdle coming out of this low?
From my perspective, I say we stay within the band of that six to eight.
Yeah. It's possible you could have a three-month roll with a couple of big bookings in a month. You know how we look at that three-month roll, so it's possible. It's going to definitely move back up towards that 8%, 9% range.
Somewhere in there.
There's some big projects out there that are being worked on right now. They're definitely going to come. Yeah. Our booking pace, we like where it is right now, so I think the opportunities are still there.
We got a few out there in that committed bucket, Steve, that if they do trigger, will pull us up into that double-digit.
Got it.
The question for the long-term.
Okay. Then one last one for you, Dave. Is this kind of low here, and I guess your outlook, is that enough to kind of knock you off the long-term 2021, I think it was like $450 or something like that.
trajectory, or at least maybe just like a flattening in trajectory, or do you think that that's still an achievable target in the out years?
Right now-
In 2021.
We're going to debate this. I still feel very good about it. Frank and I have been talking about that. It might come differently. There might be less acquisitions. It might be different capital allocation on it, Steve. I still feel good about it because the cycle's still there for both, for Lal's business and Bob's business is starting to come back. I still feel good about that. At this point in time, I'm not ready to come off that at this point at all. Frank and I are debating that because we got to go up in front of the board next month and talk about the next three years, which includes obviously 2021. I still feel good about it.
Okay, great. Thanks, Lal. Guys, appreciate it.
Steve, thanks for calling in from China. Good luck with Jamie tomorrow, okay? Be nice to him.
Thanks. I'll tell him you say hi.
Okay. Appreciate it. Thanks.
The next question will be from John Walsh of Credit Suisse. Please go ahead.
Hi. Good afternoon.
Good afternoon, John.
Wanted to have a little conversation around the 5%-7% underlying growth here for Automation Solutions. Kind of what could put us at the lower end of that range? Obviously, you kind of have already discussed the high end of the range.
I think the one of the key issues that put the lower end of range is the channel. If the distribution channel does not come back, it takes all the way into the end of the fiscal year to work off the inventory, that would cause that low range. That would put a lot of pressure on us, clearly. That's the one area that we see right now. I would also say that it could be some of the projects we have booked and won that we're building on right now get pushed out a couple of months. Those are two things I would see that push us back out. We've done a lot of work in this right now. We feel good about it. We're going to push and shove around the world to make sure we stay within that range.
Lal, anything you want to-
I agree, David. I think I have more confidence in the stabilization and improvement in the North America upstream market in the second half versus first half. Where it could slip is in the discrete channels. We're watching carefully.
Yeah.
We missed that call. It slides to the lower range. I have confidence, however, in the strong turnaround season based on what I see today that moves us to the upper end, as well as the shippable backlog that we have in our longer cycle businesses that will impact the second half.
Okay. John?
Great. Yes. Then, just thinking about the April orders commentary. In December, you kind of broke out a bunch of different markets for your automation business. Obviously, you've talked about upstream oil and gas, you've talked about discrete. If we were to think about those other buckets, is there kind of just a general deceleration, or are parts of those You talked about the turnaround season and how you think that plays out. I mean, is refinery accelerating? Is midstream accelerating, LNG kind of? Maybe some color on those sub-markets there for us.
Yeah. We'll try the best we can. We did not do that same initial launch out there. I tell you, that's a lot of work to break it down that way. If I look at it, definitely refining. We see the petrochemical guys thinking about spending back up. We now see the LNG products coming in and being worked at this point in time, the early stages of some are initially they're brownfield expansion, and the big projects will hit us more in 2020 and 2021. We're seeing a general pace of investments, just from of our companies. We see the power business, which had a very strong lull in the first half. The upgrades, their bookings have been better than the sales, therefore, we're looking at a better second half in the power area.
We see a little bit better pace of spending and just upgrading in the business we're seeing around the world. That's about the only color we have at this point in time.
I'll add one, David, around the midstream, where we have seen an uplift in activity over the quarter versus the wellhead. Clearly, as the pipelines are being built, that takeaway capacity is being built. We see that. Obviously, there's less of our instruments and equipment on that pipe than there is at the wellhead. We have seen that midstream activity strengthen, particularly in North America. I echo David's comments. The LNG markets are strong. We see the project moving into FID, and we're working across three continents right now very aggressively.
Thank you, John.
Great. Thank you for the color.
The next question will be from Andrew Kaplowitz of Citi. Please go ahead.
Hello, Andrew.
Good afternoon, guys. How you doing, Dave?
Not too bad.
Excellent. This question is probably for Bob. What do you think is going on in the Middle East market? Because oil prices only blipped down for a brief period at the end of last year. I think you mentioned competitive dynamics. Maybe you could elaborate there. Can you give us some more commentary on why you think the market along with Southeast Asia can come back over the next few months?
Okay. I think a big thing we see in Middle East, especially if you get into Saudi, the spending activity is driven by the government releasing stuff and then also the government paying for the projects. Frankly, that's kind of been tightened up pretty heavily to where our customers in the Middle East, they're caught in a little bit of a crunch, if you will. There's a lot of Chinese companies out there right now. The China market's very difficult, and they're looking for aggressive places to find some business, and they're going in.
With some other kind of rotary and other kind of products, and disrupting some of the, I'll say, the normal space or the normal technologies and things. It's a combination of those two. We were there back in January, and frankly, it felt like it was quite stabilized and everything, and we were looking for it to start moving up. It just hasn't really started moving up. In the Southeast, again, a lot of the Southeast Asia business we have is OEMs that are then shipping in the Middle East. I'll say the two are really quite closely connected. We're not calling for any major upturn in the second half. It's really just a stability, and it's been down for a while, so the comps just start getting easier in the second half more than anything.
We see the money starting to free up in the Middle East. We're getting a lot of bookings, as Lal said, but the question is now, will they start spending it? I think that our initial feel right now, the money seems to be freeing up, and that's why we feel more positive about it being a reasonable better second half than the first half, Andrew.
Thanks for that, Dave. I wanted to ask you about, you said you've watched KOB 3 very closely in the past. Obviously a bit of a slowdown here. What do you think the slowdown means for the cycle itself, both in terms of the larger projects and actually margin mix for your businesses? Obviously KOB 1 is a little lower margin than KOB 3. How do you sort of offset that mix impact, and do you worry that projects can move to the right as you see the KOB 3 stuff slowing down a bit?
Yeah. I'll answer first and then Lal. KOB 3 from our perspective, clearly, we've had a very solid run. It's still very good. We had a very good month again this month. I think the key issue for us is as they tap the brakes on spending in certain areas, in particular in the U.S. and Canada, that's clearly hurt us from a profitability standpoint. Therefore, that's why Lal and his team are taking the unique cost actions right now to assume, okay, guys, KOB 3 will not be as strong in the third quarter. We may have a weaker in the fourth quarter. What does that mean relative-- how do we protect our profitability and improve our profitability in the second half if KOB 3 does not come back to the level we want? Therefore, that's why we're taking the cost actions right now.
If it does change as we move into the first half of next year, we're going back to the question I think that Julian asked us. We're going to have to actually take additional cost actions because that means that mix is changing. We don't believe the fundamental story that we laid out, the strategy we laid out is changing. The fact that our final control business has been able to grow 10%, way above our competitor's final control business in North America tells me that we are still gaining, and I still feel good about that. Any quarter or two quarters, you could have that tapping, and that's what we're watching right now. That's why I'm still watching it. I'm going to watch it very closely how Lal's business unfolds in this third quarter.
If it doesn't come back a little bit, he's got a lot of pressures coming at him in the fourth quarter and the first quarter of next year. Lal, you want to-
Just very quickly, we watched that 50% number in KOB 3 very aggressively. We work it with structured organization and programs around the world, around service MRO, software as a business, service as a business for our models. I'll also mention that the KOB 2 business is also equally important. The modernizations, and we've continued to see modernization programs moving forward, and those are relatively margin accretive as well.
I think going back to the project push out, going back to this question you asked, Andrew, also going back to what Steve asked. When we put our orders out again, which we do from time to time, if you don't see a movement up towards the higher end of that 6%-8% for Lal, that tells us that we're seeing a push out of KOB 1. Therefore, that's going to be a concern for us. Watching the orders and our communication around that will tell you if it's unfolding or not unfolding. That's what we're going to be watching now. I think KOB 3, we have pretty well set. KOB 1 now and the timing of that's going to be important, and we'll watch it real hard.
Appreciate it, guys.
Thank you. Take care. All the best to you. Be safe.
The next question will be from Nicole DeBlase of Deutsche Bank. Please go ahead.
Yeah, thanks. Good afternoon.
Good afternoon, Nicole.
Hey there. Maybe we could talk a little bit about the cost actions that you guys are taking. Is it possible to parse out what you are doing with respect to costs versus paring back growth investments? How should we think about growth investments into 2020? It seems to me like this would probably be a push out of investments rather than a cut of investments.
Yeah. From our perspective, I don't want to break out too much information from a competitive standpoint, but we were clearly running our investments at say a 7%, 8%, 9% underlying order pace, and therefore we've had to dial it back to be more in that 6%-7% range. I think that to your timing is yes, priorities from the standpoint that we'll be pushing them back. We'll push them out a little bit more into 2020. I would not say they'll go away. These are important programs, but we try not to get ahead of the growth curve, and we clearly have in the last two quarters here, as you look at the acceleration of the investments that Lal's team's done. Therefore now what we're trying to do is bring it back into line.
We're not going to kill them, but it's just more of a timing of how this goes. The restructuring side, that's a bit different. That just goes back to, okay, we know the cost structure, we need to do this restructuring. We were talking about doing it in 2020. We now feel like we need to get ahead of this, that's why we pulled up about $10 million both in Bob's business and Lal's business. That's how we are, Nicole. I don't want to break it out, I think that your reading's right. We're just slowing it down right now. We're pushing it, slowing it so we get our growth investments in line with our actual growth. I think that's what we do, that's what you've done with your team.
That's right, David. We look at this, as you know, this is how we run the business. Aligning at point less as we think around the top line today than we did back in February, required us to look at the investment pacing, and pull back in a few spots. Some of it will be timing. We'll see how the year develops.
Yeah.
Obviously we do have opportunities around the acquisitions and around getting the cost structure right for going forward on the restructuring side.
You can imagine it's pretty significant numbers given the size of this business.
Yeah. That was really helpful actually. Thank you for the color. I guess just the second one on capital allocation. You guys finished with the $1 billion of repurchases that you expected for the full year. Does that mean we're done, or is there scope to increase that $1 billion target for 2019?
At this point in time, we are set at $1 billion. As the finance committee met last night, we did discuss if the situation arose that we had to do it, we'd go back in. Right now, we are set at $1 billion, and we're not going to move it at this point in time. Again, that will be a topic of our whole strategy review and capital allocation review with the full board in early June. I would say right now it's set at $1 billion, unless something major happens.
Okay. Thanks, Dave.
Okay. Take care.
The next question will be from John Inch of Gordon Haskett. Please go ahead.
Oh, thank you very much. Hi, Dave. Hey, everybody.
Hi. Afternoon, John.
Afternoon. I want to ask you, if we get a trade deal with China, depending on the form, do you think this leads to more orders for Emerson? I guess the corollary is, if we don't get a trade deal, what do you think the implication is, specifically for Emerson?
From our perspective right now, we don't see any change relative to a growth investment or opportunities. It would be more of a cost issue for us. We have a cost reductions, and then clearly over time, that would impact our pricing too. We would obviously get advantage. I don't see any fundamental change. I think it would solidify confidence in some of the markets that Bob serves in China. I would say his business would get better because we hear that not as much as Lal's side.
Right. I think definitely the consumer confidence, if you're in China, it's notable that people are more cautious right now on investing in homes or autos and other things. I think a trade deal, depending on what shape it's in or what form it's in.
Yeah.
A positively viewed trade deal from China from a consumer side, I think definitely will help.
It definitely have a cost.
Lal, you're pretty agnostic as to whether we get a deal or we don't in terms of the way you're planning for the business, I suppose. Is that?
Absolutely. John, from an order perspective, yes. From a cost perspective, as David said, it will hurt us if we don't get a deal done.
Got it. Dave, just as a follow-up here, Emerson, you're a pioneer in China, but you are still a U.S. company. I'm just wondering, given all of this, you can see where the context of my questions is, just trying to understand what's going on over there. Do you get a sense of any kind of a growing bias against U.S. firms, maybe on the part of government or quasi-government industry customers.
No
or anything like that? How are you dealing with that?
I was just there, on the front page of this report, that's the number 2 person at MOFCOM. A couple of years ago, she came to our grand opening. We have a new technology innovation center. I was in Beijing meeting with certain government officials and customers. From our perspective, we've had a long, long relationship. We're celebrating our 40th year there. As an American company, we have not seen any. Does it mean we've maybe had a few more checks by government officials and reviews and things like that? Yes, I have not seen anything from our perspective. As you know, we're very localized. About 90% of what we sell in China, we design in China, we manufacture in China. From that perspective, we're treated differently. It's something we have our ears and eyes open, just want to make sure.
I feel good about it right now. Again, the trade deal is something we do all want to get done, including from the Chinese perspective and the U.S. perspective. I applaud our government, I'm sure to do what's right for us as a country. I wish them well. Same thing with China, as we talk to the Chinese officials. They're all working for the best of their constituents, I think we'll come out with appropriate deal.
Perfect. Good to hear. Thanks, Dave. Appreciate it.
Take care, John. All the best.
The next question will be from Jeffrey Sprague of Vertical Research Partners. Please go ahead.
Hey, Jeff. How you doing?
Good afternoon, everyone.
Good, Dave. How you doing?
Not too bad. What time zone you in right now?
In Munich.
Munich? Oh, that's a good place.
Yeah. Siemens has got a power business if you're interested.
You know, I can't believe you're trying to sell me a Siemens power business, Sprague.
You bought a Westinghouse one once.
Okay, get to questions. Cut the BS.
Last quarter, Dave, you were looking for baseball players. You need a hockey player, right, with this Q4?
I need some more bats right now, Jose. I need some bats. I got the rally monkey out. I got the bats out. I'm probing everybody right now. It's a little bit more contact sport as we say.
Yeah. Can you help us a little bit though with specifically what's going on in price cost for you in the fourth quarter and kind of the tariffs tailwinds that you're expecting to feel there in those results?
It's going to be positive for us. First half obviously was negative.
Now as you look in the second half of the year, both Bob's business and Lal's business have helped us. We're flipping over significantly in the second and in the fourth quarter. It will have a little help in the third quarter, but it really helps us a lot in the fourth quarter.
Yeah. We would expect-
Is that $0.08 mostly price cost, or is it evenly spread between those three buckets? That $0.08 delta in Q4?
He has an $0.08 on the bridge.
Yeah. It's heavily price cost. Hi, Jeff, this is Frank. We do expect to get a pretty good tailwind that accelerates out of the third into the fourth quarter in price cost in both of the businesses.
We have pretty much all covered if there's additional tariff, not everything, but pretty close to it. Lal's business bothers a little bit more, but we're also trying to work through that, so if the president puts that additional tariff in there, we have some of that covered. We don't have it all covered. You don't have it all.
Yeah. Well, for total price cost, it's more than covered. For course, residential, it was pretty neutral in the first half in total, and it's significantly positive in the second half.
Yeah.
Right.
A big chunk of that $0.08 comes from this, and they're set. The inventory work out there hurt us a little bit in the first two quarters, or the second quarter in particular, but now we're starting to get the profit margin here in the second half.
Yeah, from our perspective-
Understood.
Sorry. From our perspective, the price cost impact, Jeff, is nearly 2x second half to first half.
Okay, great. Dave, you hit this KOB3 a couple times. Do you think KOB3 spending is kind of being preemptively squeezed out by the wave of KOB1 that's coming? Can your internal efforts like PK and other things offset that, if that is a factor?
Let me give you the way I think about it from a CEO perspective. Word comes out from top of the organization, "Guys, we need to slow down. We need to tap the brakes on spending." You got a global budget, say $100 billion, and you got to take a little bit out of the first quarter and say, "Let's slow it down and see what happens." The first place you go is in the United States, because you can control the United States. It's the same thing if you look at all cost reductions, all cost actions. The first place you go is you go in the United States because we have the flexibility in the organization. What we saw in the last three months is, as I talked about in February a little bit, I was concerned about this.
The word came out, let's slow things down a little bit, and they tapped. The way they tap is they tapped in the U.S. market. If you look other than Saudi Arabia, where we saw the biggest pullback in KOB3 was in the United States, and on top of the distribution. My fundamental belief is the capital allocation held in the communication in the quarter. If it continues to hold, that KOB3 will build back up in the late summer, early fall time period, and that we'll benefit from that. We're seeing KOB3 strong in Asia. We're seeing KOB3 strong in Europe. We're seeing KOB3 strong in Latin America, where we saw the back off in the U.S. That's typically how it unfolds.
If you ever watch us, we're more volatile in KOB3 in the U.S. because that's how the CEOs control it from my customer base.
Right. That's got to be 3 because the KOB1 isn't going to be paid this year anyway.
Yeah. Exactly right.
It doesn't save money this year.
Yeah. That's how I see it, Jeff.
Great. Thanks.
Jeff, you take care. Be safe. I do not want to buy Siemens power business. If they want to buy control systems from me, I'll gladly do that, but that's okay.
The next question will be from-
Love a beer.
Gautam Khanna of Cowen and Company. Please go ahead.
Yes, thanks. Good afternoon, guys.
Good afternoon, Gautam. How you doing, my friend?
I am doing well. A lot of questions asked and answered. I wanted to just make sure I understood. Just putting it all together on the Automation Solutions side, do you still have confidence in kind of 30%+ incrementals in 2020, 2021 as we move through, given all the moving parts of project timing, KOB3, what have you? Integration opportunity with the recent acquisitions. Do you still feel comfortable that we're going to net to 30%+ incrementals as we move through?
Yeah, this is Lal, Gautam. Yes. Part of the rationale around the cost containment that we put in place here in the second half and the incremental restructuring that we're executing in the businesses within the next four or five days, very important programs, are a little bit of insurance policy around what's going on in the end markets and the recovery in the second half. As we execute those, we get right in that 30% band that we've been talking around, even leverage.
The issue for us goes back to the question I think Julian asked earlier, Gautam. If we don't see the margin come in the second half of the year, we're going to have to take action. Lal knows that because we laid out a plan. We've got a plan for acquisitions. We've got a plan for the core business to get back to profitability. If we can't get there, we're going to have to figure out how to adjust the cost structure. Lal and his team understand that. They understand the margin business, but they also are working with a fluidity around the KOB2 and 3 in one business. I think we're pretty fluid here, we understand our jobs. That's one thing we are good about. This team sits here on the same floor. We're all here together now.
Lal's got his CFO and head of HR, as Bob does, right here on the same floor with us and with Frank, we can talk openly about what's going on. We'll have to adjust if we can't get there. I feel these guys have it in focus right now with Lal and his team.
As you said, David, early on, we're having a good year. We're having good years in organization as a business.
Yeah.
Its shape of the year has changed a little bit on us, and the short cycle pressures we felt in the second quarter has pressured the margins.
Correct.
We took action there, and we do have some second half recovery, based on what we saw in the second quarter. As that unfolds, we'll be watching it month by month very carefully. At least based on what we saw in April, that's positive.
A fluid situation, Gautam, but we fully understand what we have to do as shareholders.
No, I get it.
Good, thanks.
Just philosophically, Dave, I'm just curious how you and the board think about that 450-ish target in a way out there. Obviously, you could toggle up the buyback if you wanted to backfill. I'm just curious how you guys set the priority in terms of that financial target. Is it a goal come hell or high water, or is it something that you'll be a little more flexible around? I'm just wondering if that's something you might reconsider as early as the June board meeting.
Well, yeah, we're going to talk to the June board meeting about it's definitely going to unfold differently right now. Let's say the underlying growth rate this year is a little bit less. If we see the underlying growth rate in 2020 and 2021, obviously we adjust. If we don't see the acquisition, we have to use share repurchase. From my perspective, 450 was a realistic target when we set it last year or this year. I still believe that is the case, and the question is now is Frank and I with the business leaders or the platform leaders have to look at this and say, "Okay, what's a realistic?" For me, it's many ways we can get there. Acquisitions or no acquisitions, share repurchase, better margins. We're going to look at that, and we'll see that unfold.
We know how important that 450 is relative to our long-term valuation, and it's something that we take seriously as we unfold it. We'll see what happens as we build it up here over the next 30 days.
Appreciate it. Thank you guys.
Take care, Gautam. Good seeing you, talking to you again.
The next question will be from Deane Dray of RBC Capital Markets. Please go ahead.
Thank you. Good afternoon, everyone.
Good afternoon, Deane. How are you doing, my friend?
Real well, thanks. Just know we covered a lot of territory here. For Bob, I had a follow-up, just a clarification. Bob, you commented on the fourth quarter, a lot depends on heating activity in China. Aren't you facing a tough comp on the whole government heat pump program? How do you think that plays out?
Well, for the fourth quarter, I guess it's good now. No, we don't have a tough comp. It was last spring, May, June kind of timeframe when the heating market really collapsed, for lack of a better word, in China. The comparisons are not that difficult against that. We're not, again, on AC and heating we're talking single-digit growth in the fourth quarter, not some dramatic recovery. Last time we came out of a cycle, it grew 40% or so pretty quickly. It's not relying on something dramatic. It's really just more a matter of the normal project activity happening. There's still a high emphasis on the Blue Sky initiative. This is more industrial-oriented, so it's less about the government releasing neighborhoods like the residential stuff around Beijing was for a while.
It really comes down to the companies having funding for this, in some cases, a little nudging in some areas where the government will say, "You're in a zone where you got to stop using a boiler." If they're told that, then they either change to a heat pump or they don't have heat. It's pretty cut and dry.
Got it.
Again, there's those customers or the power companies in a region who are working with our OEMs because they're doing a full implementation. A lot of times retrofitting a boiler investment. They are asking for heavy quotations right now from the OEMs. We see that again, the OEMs are just not going to buy a compressor until they know for sure that project's funded.
Got it.
Anything else?
Yeah, just Dave, would be interested in hearing your take on the latest turn in the trade negotiations. Just to clarify, the last update, tariffs were going to hit you $125 million. Where does that stand today?
Tariff number is still good. As you well know, to go back, I've always said this thing was going to take longer. I've always felt July, August was appropriate timeframe. I've never been the guy that said this thing at the end of May. I've publicly said this, and I said it on the call here. I still believe we'll get a deal done. I think that the issue really boils where I think both parties are testing each leader, and the give and take, and I'm glad to hear they are going to go ahead and meet this week, I think this is going to go back and forth a couple more times, I still don't believe anything will happen until the August time period.
I do believe that it will get done, and I do believe that the costs will be passed through eventually. It's something we have to manage. I can't sit here and cry and hold my breath. I got to deal with them. I think as a company, we're dealing with it. From a standpoint of the country, I'm glad we're addressing this issue now than waiting. We need to get on with this issue.
Got it. Thank you.
Thank you, Deane.
The final question today will be from Robert McCarthy of Stephens. Please go ahead.
Good afternoon, everyone.
Good afternoon, Rob.
I got two questions. One is a form and one is of substance. I'll ask the one of substance first. Maybe your business leaders could just walk through the opportunity, particularly in the context of the long-term target for EPS, around cash conversion. Is there a way for you to just have superior cash conversion above what you historically have been? Maybe talk about the acquisitions and the businesses and the opportunities, so that could support a very high-quality number. Even if you fall $0.10-$0.15 short, you might have a really strong, high-quality cash number.
You guys want to take a shot at me?
Well, I guess, for the commercial residential side, though, from a working capital standpoint, we run in the single digits. The margins are obviously very strong.
Your acquisitions would be the place you were.
Acquisitions. I will say from a working capital standpoint, with Tools and Test, we are well ahead of working capital right now. That's a combination of payable terms more in line with what Emerson pays suppliers versus what Textron was paying. Inventory, significant change. DSO is not a dramatic change at this point. I would say the cash conversion, you would say, for Commercial & Residential Solutions has been outstanding and will continue to be outstanding.
I think the work and the acquisitions you've done in recent years, you're both. I think Lal's got the biggest opportunity.
No, I agree. As well, we run at very high levels of cash conversion across our automation. The acquisition do present us the opportunities to drive more of that, no doubt about it, Rob, as you pointed out, and we'll continue to press those buttons.
Yeah.
I mean, Rob, this is Frank. We can always do better, I mean, we consistently run well above 100% cash flow, free cash flow conversion, and I would expect we'll continue to do that. We'll take advantage of the opportunities we get from the acquisitions. I think we run that pretty efficiently right now, and we'll just continue to look for ways to improve.
Well, thank you for that, thank you for all the substance on this call. I have a question of form, though. Obviously, Dave, this is a little different kind of call. You've put your business leaders to the forefront. You put a lot of detail in about cost takeout, restructuring, then positioning for growth. Given it's the last season of "Game of Thrones," are we seeing kind of a bake-off happening here?
No.
How would you-
There's no bake-off. Rob, you're full of bullshit. I ain't going anywhere. There's no fucking bake-off.
I guess in all seriousness.
There's no bake-off.
In all seriousness, was this prompted by the environment, and you felt you needed to get your leaders on the phone? Or is this just something to raise the aggregate profile?
There's two reasons we did this. One, I felt very importantly, given that we were there in February talking to investors and talking to the sell side also, and investors, we laid out a plan, and I felt the plan's changed. It's one thing I can consider and communicate this. You know I consider and communicate this. I think it's very important for the comfort of the investors to know that the business, the two platform leaders, Bob and Lal, are engaged, and they're working this thing in unison with both Frank and myself to deliver what we're trying to deliver for the whole corporation, for the company, and for their shareholders. It's important for me to engage them.
It's also important for me to give everyone a chance that at the leadership level, like Lal and Bob Sharp, they have a chance to interact and explain and have this experience that we go through. That we're sitting here under the microscope at both of the board level. I did the same thing to the board today, then also from the standpoint of the investors. These two guys have been operating business at Emerson. They don't need to be caked up. I know how they perform. They perform extremely well. It was all about trying to help you all to have information to make a better decision on the value, long-term capabilities of Emerson. By the way, it's not 2021 yet, Jose. This is still 2019.
Understood.
Take care, my friends. I want to thank everyone for joining us today. I want to thank Lal. I want to thank Bob, Frank, and Tim. It was a different approach, we wanted just, as I said earlier, just to give everyone a chance to see what's going on. I want to thank the organization, I look forward to a very strong Q3 as we execute. Thank you very much, everybody.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Once again, the conference has concluded. You may disconnect your lines.