艾默生電氣 (EMR) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Emerson's conference call.

(Operator Instructions) This conference is being recorded today, February 6, 2018.

Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year.

Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC.

I would now like to turn the conference over to your host, Tim Reeves, Director of Investor Relations of Emerson.

Please go ahead, sir.

Thank you, Denise.

I am joined today by David Farr, Chairman and Chief Executive Officer; and Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer.

Today's call will summarize Emerson's first quarter 2018 results.

The accompanying slide presentation is available on our website.

So I'll start with the first quarter summary on Slide 3. Sales in the quarter of $3.8 billion increased 19%, with underlying sales up 7%, reflecting continued favorable trends in our end markets and a strengthening macroeconomic environment.

We closed out the quarter with December trailing 3-month underlying orders up 7%, and we expect to stay in the 5% to 10% range as we go forward.

Profitability was strong.

In the base business, excluding Valves & Controls, gross margin was up 170 basis points and EBIT margin was up 70 basis points.

GAAP EPS increased 9% and was up 18%, excluding current and prior year tax items.

We accelerated share buybacks, as discussed on our November 28 conference call.

And in total, we repurchased over 7.8 million shares in the quarter.

And together with dividend payouts, we returned over $800 million to shareholders in Q1.

Overall, the first quarter performance was stronger operationally than we had anticipated a few months ago.

Turning to Slide 4. First quarter gross margin was up 170 basis points, excluding Valves & Controls.

Margin improvement was driven by operating leverage and the benefits from prior year restructuring actions.

Price cost in the quarter was approximately flat.

Other deductions increased $55 million due to Valves & Controls first year acquisition accounting charges, foreign exchange losses and higher amortization expense.

Turning to Slide 5. From a geographic perspective, demand was broad based with both mature and emerging markets accelerating in the quarter.

Mature markets grew mid-single digits, led by the U.S. and robust growth in Canada.

Europe was flat.

However, orders are trending favorably, and we expect positive results in Europe in the second quarter.

Emerging markets were up high single digits, led by China, which was up 23%.

Excluding China, the rest of Asia was up mid-single digits.

Latin America was up 4%.

Middle East and Africa was down 5% but orders here are trending favorably, and we expect growth in the second quarter.

Turning to Slide 6. Total segment margins, excluding Valves & Controls, improved 70 basis points to 18.6%, driven by leverage on higher volume and the benefits of prior period restructuring actions.

Corporate and other charges increased $50 million, including $25 million of Valves & Controls' first year acquisition accounting charges.

Operating cash flow was $447 million, an increase of $37 million or 9% versus the prior year.

Free cash flow of $351 million was up 13%.

Trade working capital, excluding Valves & Controls, improved 20 basis points to 18.2%, driven by execution around accounts receivable collections and payables management.

Turning to Slide 7. Automation Solutions' underlying sales grew 9% in the quarter and was led by North America and Asia.

North America underlying sales were up 14%, reflecting continued investment by shale customers, midstream upgrades and high teens growth in Canada.

Asia underlying orders -- or sorry, Asia underlying growth was up 13%, with China up 22% and the rest of the region up mid-single digits.

Growth was driven by MRO spend and increasing mix of small and midsized projects and continued favorable trends in key discrete and industrial markets.

Margin, excluding Valves & Controls, improved 120 basis points to 17.8%, reflecting leverage on higher sales and the benefits from prior period restructuring actions.

December 3-month underlying orders were up 7%, reflecting strong global energy-related, life sciences and chemicals markets.

We are raising our full year sales guidance for Automation Solutions.

The first quarter results and orders trends support full year 2018 underlying sales growth of 6% to 8%, up from prior guidance of 5% to 7%.

Turning now to Slide 8, Commercial & Residential Solutions.

Underlying sales increased 5%, with reported sales flat, reflecting the divestiture of the ClosetMaid business on the first day of the quarter.

Demand was led by Asia, with China up 24% and the rest of Asia up high single digits.

North America underlying sales were up 1%, as steady demand for professional tools was offset by difficult prior year comparisons in residential air-conditioning markets as the period of late-season hot weather led to strong channel replenishment orders in the prior year.

Margin increased 20 basis points to 20.1%, reflecting leverage on higher sales and the ClosetMaid divestiture, partially offset by warranty cost.

Overall, growth and profitability of the segment reflects the continuation of the cycle that started in the second quarter of -- second half of 2016.

December 3-month underlying orders were up 5%, reflecting strong global demand in air conditioning, refrigeration and construction-related markets.

We are raising our full year sales guidance for Commercial & Residential Solutions.

The first quarter results and orders trends support full year 2018 underlying sales of 4% to 6%, up from prior guidance of 3% to 5%.

Let's turn to Slide 9, which summarizes the impact of U.S. tax reform.

On an ongoing basis, Emerson will benefit from a lower tax rate.

For the full year 2018, we expect a consolidated tax rate of 25% to 27%; and in '19 and thereafter, approximately 25%, which reflects a full 5 to 6 points improvement from historical levels.

The table on the right steps through the impact of adoption-related items on our first quarter results.

Our repatriation tax on foreign earnings of $185 million was offset by a $98 million reduction of our net U.S. deferred tax liability and $130 million repatriation reserve accrued in prior periods.

The net impact of these items in the first quarter was an income tax benefit of $43 million or $0.07 of EPS.

Turning to Slide 10, which steps through changes to our EPS guidance.

The table starts with our November 7 adjusted EPS guidance, which excluded 2 items: Valves & Controls first year acquisition accounting charges and a tax-related loss on the divestiture of the ClosetMaid business.

These items totaled $0.07 in the quarter -- in the first quarter results and were offset by the $0.07 benefit of tax reform items discussed on the prior slide.

As these adjustment items are offsetting, we will guide only on a GAAP basis going forward.

As shown here, we are raising the low end of our guidance $0.30 and the high end $0.20 based on stronger operational performance, higher share repurchases and the benefit of a lower tax rate.

Finally, let's turn to Slide 11, which outlines our updated guidance.

We expect underlying sales growth of 5% to 7%, with Automation Solutions up 6% to 8% and Commercial & Residential Solutions up 4% to 6%.

GAAP EPS of $3.05 to $3.15 is up 20% to 24% versus the prior year or up 11% to 15%, excluding the impact of tax reform.

We expect operating cash flow of $2.9 billion and we expect to convert free cash flow at 120% of net income.

We are increasing our capital spending outlook to $575 million or approximately 3.4% of sales, reflecting our more positive outlook on the global business environment.

In addition, we provided second quarter guidance of underlying sales up 7% and GAAP EPS up 21% to $0.70.

And now I will turn the call over to Mr. David Farr.

Thank you very much, Tim.

I want to welcome everybody, and I truly appreciate you joining us for this conference call.

I also want to thank the global Emerson organization for their tremendous performance and a very strong start to the new fiscal year of 2018, with sales -- underlying sales up 7%; margins improving -- underlying margins improving; EPS up 9% at GAAP at $0.61, truly having a very strong start to the first quarter of our new fiscal year; and cash flow up 9%, approximately $450 million, so a very strong start.

And as Tim just explained, we're raising the total guidance for the year, and we will be going back to the measure that I believe in quite strongly, and it's called GAAP.

And with the tax reform activity and our performance now and the repositioning running through the company, we now can return back to reporting and discussing GAAP earnings, which I think is the relevant measure for a corporation.

Again, I want to thank the global team for tremendous execution, in particular around the Final Control team under Mike Train and Ram and support of Ed, which we'll -- we'll update you a little bit about at the conference next week, but clearly doing a great job of integrating and getting some great momentum around the orders, the sales and profitability, so a really good job.

Well done.

As we look at the world today, I feel very good about the trends we're seeing.

We always knew our order patterns would have this slowdown from the very fast pace coming out of the big hole, in particular around the automation business, but the pace of dollars of automation orders are maintaining a very high level of actual dollars, well over $2.35 billion per month on a roll basis.

And so it's a good number on a 3-month roll basis.

It's how we look at it, and we knew this would happen.

The underlying orders are actually very good around the world, and it's why we've always felt that it would slow down into this band we see right now and will generate, as we look at it, 6% to 8% underlying sales growth for Automation Solutions business.

And that is a very good number.

I've never felt -- as we've talked about it numerous times now, I've never felt the first year out of the box would be a double-digit year.

We did not see that, and we'll continue to not see that.

However, we see a very strong 2-year recovery here a little bit differently than we've seen in the past.

And I've been through several recoveries, as you all know, on the Automation Solutions business.

Overall, the trend line is very good.

We're seeing very good orders again in Commercial & Residential, maintaining this 5%, 6%, maybe 7% underlying orders and really seeing some pretty good pattern and support.

And they're well into their second year now of the recovery and on very good momentum both in the underlying business and also new technologies.

As you look at the world of Emerson, Automation and Commercial & Residential, North America continues to be pretty good.

We have a very good start.

I don't see that changing.

I see our U.S. business being strong for the year, and I feel good about that.

And I see continued investments.

In fact, as I look at the underlying gross fixed investment trend lines, which have bumped up from -- since tax reform was passed, it does look at a very good pace of business for our -- for the next 2 years in the U.S. and North America around fixed investment, which is very good.

Second, if you look at what we're seeing going on in Asia, China had another very good quarter both in orders and sales, and I see no indication that we will actually slow down.

We will have a very good year in Asia and China.

And I expect -- in particular, in China I expect a solid double-digit growth in orders and sales, which, at first, I didn't think was going to happen.

But now as I see the pace of business and investments, I feel better that we should see 10-plus percent sales growth in China, which is an improvement.

Relative to rest of Asia, the order pattern continues to improve.

We're seeing good cycle of businesses, and I feel very good about where we sit at this point in time across Asia Pacific, even outside of China.

Just coming back to the Middle East and Africa.

Yes, we had -- sales were still slightly negative, but we've now seen 3 or 4, 5 months of orders pattern improving, going positive.

And I -- as you'd expect, we had to fill the hole.

We filled the hole and now -- from the backlog standpoint.

And now we'll start seeing, I would expect, positive sales as we go into the second quarter.

And I think we're on a start of a good run of investments in that region, which we haven't seen for the last couple of years.

But I feel good about where we sit at this point in time.

The last key market, Latin America.

We've been waiting for the turn, and we've got it.

We had a positive sales quarter after basically 12 negative quarters out of Latin America.

And order pattern looks pretty good.

Sales pattern looked pretty good.

So it looks like Latin America has turned for us, and that's on a positive surprise is a positive for me, as was China.

And as I look at Canada, I see that investment continuing to go on up there.

So there's some things that are positive for us at this point in time.

Out of Europe, our order pattern continues to be positive and not unusual year for us.

We have some quarters that are positive, some flat, some slightly negative.

Overall, we expect Europe to be a very solid 5% type of growth marketplace for us this year, and we see the pace of business activity going on around that.

But clearly, as we go into the second quarter, we, at this point in time, see another good, solid 7% underlying sales growth, which will generate good, obviously, double-digit consolidated sales with the addition of our acquisitions and no real divestiture impact of magnitude in there.

So we see a very strong double-digit under -- top line sales growth with over 7% underlying growth, and we're expecting a very solid $0.70 GAAP EPS for that second quarter, around 21%.

We're getting ready for our visit to New York in our annual investor conference, which will be held at the New York Stock Exchange this year.

Our fundamental focus is going to be on reviewing where we see the trend lines heading, which are -- have turned more positive from our review last year.

We had a stronger 2017.

Looks like we're having a little stronger 2018, so we're going to give you what we see as the trend lines from '16 to '21.

Keeping those same measures in place, you can see where we see the pluses and minus takeaways; see the profitability that we see unfolding in the business; and then most importantly, at the end, looking at the tax impact on the overall impact relative to our cash flow and also impact to our earnings, which both will be positive from that perspective.

And we want to show the core businesses and what's going on, the impact of this high -- faster growth, stronger marketplaces and then the impact of the tax reform on overall positive impact to the numbers that you'll see coming out of Emerson over the next couple of years.

So as I look at it and to wrap it up and go to the Q&A, a very strong first quarter.

Rate the year, we have momentum, we have good order patterns around the world.

Everything is slightly better than I thought.

I am okay with the order pattern.

I know people might panic because things roll, but we fully expected this and we expect this thing to trend into this line.

And we'll talk further about that next week.

But overall, we like where we sit today.

I'm not going to talk about the long-term numbers here today because that's all about what we're going to be talking about next week, but I'm here to talk about what we see in the quarter.

But needless to say, the OC, we're very pleased with the operations, and the performance of the 2 platforms in this first quarter, and we look forward to continue to have a very strong total fiscal 2018 based on a very good start to our first quarter.

So with that, I'll open the floor up for the first question.

Thank you.

(Operator Instructions) Your first question will come from Robert McCarthy of Stifel.

Looks like decent momentum across the board, and you called some turns in some areas.

So I guess, the first question I would have is, with respect to China, you've put up some great growth recently and after it's been very volatile dataset probably in the last 18 to 24 months.

But given what we've seen with the market pullback here, I mean, obviously, there's some concerns about rates, but there's also concerns about overheating in China.

Could you talk about maybe the risks you see in China throughout the course of the year, how you feel about the pace and momentum of the business there?

Just give us some comfort and color around any kind of China risk.

Yes, yes.

Given I'm an expert in what's happening in the marketplace in the last 3 days, I'm sure I can help you here.

But the -- from my perspective, clearly, we've seen a very good investment in the 2 businesses.

On the Commercial & Residential, it's been tight around refrigeration, it's been tight around the environment and the issue around trying to improve the quality of air.

And from the perspective -- can it get overheated because of the government trying to push an issue too hard?

The answer is yes.

As we see it right now, we do not sense that.

I'll be back over there in another month.

I feel good about it right now, but there is a concern from the standpoint of the investment period that maybe it's a little too aggressive.

And historically, what's happened is that they would dial it back, but we don't sense that at this point in time.

But that will be a concern for us as we look at this.

On the Automation Solutions side, it's very broad based.

So it's not just one type of technology, it's not just one type of industry.

It's a very slow, steady type of investment that they're making both for improving the quality of their products and quality of their facilities inside their country, not only for their own country, but also for some of the exports around the world.

So I don't sense any overheating there at this point in time.

But it's -- from my -- the one area I do concern about is the government trying to, on the Commercial & Residential side, trying to drive the environmental issues and at some point in time they'd say, "Hey, we drove it too hard.

Let's back that off." And that could create that downturn.

But right now, based on what I've seen on the order pattern, based on the customer pattern, I would say we're going to probably do 8 to 10.

And now we're talking most likely we're going to be doing -- I think we're going to do double digits coming out of China.

And clearly, with the Commercial & Residential business, this quarter -- they did a 20-plus percent this quarter on top of last year's 40% quarter.

The odds are extremely high that, that's going to get tougher and tougher as we go forward in the second half of this year and early next year.

But they're still going to have growth opportunities throughout Asia as I look at Commercial & Residential.

They're growing across the whole region, so obviously a concern, but I feel decent about it right now.

As a follow-up, obviously, I think you talked pretty definitively about the positive impact of tax reform here, what it could mean.

And I think there was an uptick in your own CapEx and the level of business and fixed investment spending across the board.

But maybe you could just talk about -- what are you expecting to see qualitatively across certain end markets or geographies driven by tax reform here that would drive the underlying macro numbers higher specifically and why it gives you confidence that perhaps growth can accelerate and extend here?

We're -- from the U.S. and manufacturing base, we were given a very, very generous tax reform package.

It's very much focused on investments in this country from a technology standpoint and capacity standpoint, something that we have not seen in this country for over 30-some-odd years since the mid-'80s.

From the perspective of the companies that we communicate with and we obviously serve, they see this as an opportunity to be encouraged to make those investments, and they're going to make those investments.

The underlying demand in the U.S. right now is good.

So from a demand standpoint, for the first time, we see both the demand and then we're also seeing incentives to make investments.

So what we're hearing and seeing is the upward pace of investment will continue to go on a positive way.

And that will -- as long as the demand stays here, both here and internationally, you're going to see these investments continue across our customer base.

Now you're going to see in different industries that investments will be stronger than others, things like the oil and gas industry and some in the pipeline industry as you see in the United States.

That's a good thing.

You're seeing some downstream.

We're seeing a lot of good projects down the gas -- in the downstream marketplace right now in the Gulf region.

So in general, we're seeing a lot of our customers are talking about increased investments.

We're still seeing a strong focus right now in the short term, what I call quick payback-type investments, especially since you get fast depreciation in the United States.

We're starting to see some of the smaller, medium-sized projects start getting on the books, which will be more toward the second half and later part of this year and early next year.

And we're seeing the discussion of the longer-term projects.

But they all see the benefit, from a balance sheet standpoint, lower taxes, faster depreciation.

And I firmly believe U.S. industry is not going to take -- not going to miss this opportunity.

We're not going to miss this opportunity to invest in the infrastructure in this country to drive faster growth, to drive the productivity and to drive our competitiveness.

We were given an opportunity to demonstrate that we are not competitive and we were given the opportunity to demonstrate that, "Okay, now do something with it." And I firmly believe that business leaders in this country are going to do something with it.

And if not, then shame on us because then we deserve every hit we get coming out of Washington.

From my perspective, as a CEO and as a leader of the National Association of Manufacturers, we are increasing our investments.

We are focusing the next several years where we're going to take advantage of this.

And I think our customer base is going to do the same thing, Rob.

And we're going to try to continue to get this information out when it becomes more and more knowledgeable.

But if you look at the gross, fixed investment numbers are trending up.

And I expect that, that will continue here throughout 2018 and early 2019.

The next question will come from Andrew Obin of Bank of America Merrill Lynch.

Just a question on Automation Solutions.

You highlighted MRO and small and medium-sized projects.

I would imagine these are very good for margin.

What kind of visibility is sort of highlighted, you're starting to see big investments coming up in the U.S. What kind of impact will these projects have on your margin?

You know what, in a normal cycle, we -- our margin -- normally we have [funds] scheduled out for the 35%, we're looking at the 35% flow-through profitability on the Automation Solutions.

Take into consideration that balance between those, as we go into those projects and to the larger projects.

So we're well into -- they're very large projects, which won't really start hitting until late 2019, 2020.

They will obviously put more pressure on margin.

But at that point in time, our facilities are running a little bit -- a little tighter, a little more productive.

And so typically, we can absorb that.

I -- there's nothing unusual in the cycle right now, Andrew, other than, I would say, the sustained period here we're going to have because of the tax law relative to small- and medium-sized projects.

I don't worry about the margin in the business.

And especially, if we see strong investment in North America, which is our core market, we -- the actual -- the pressure will be in the positive side of the margin, not the negative side of the margin.

Got you.

And just a follow-up question.

I think, in your press release, you sort of highlighted that you would consider looking at, I guess, wages in North America.

But how should we think about inflationary pressures in 2018 given that a lot of other companies actually are also announcing wage hikes and you have raw materials going up?

How should we think about inflation and price cost?

The -- yes, we've been -- and I think you guys heard me.

We've been seeing underlying salary and wage increases going up now for the last 9 months.

At a trend line, we're above 3%.

We are not a minimum wage company.

We are a company that pays for high skills.

And so we have to make sure that our compensation structure from a wage and salary standpoint, an investment standpoint, we stay competitive.

And we will have to adjust.

We are in a period here that clearly it's very important for us to keep our price cost in line and make sure we keep ahead and we start having to tweak our prices on an upward basis.

As we see the commodity pressures building up, we see the wage and salary pressures building up, which are all good things from a mild form of inflation.

But clearly, what we have to do is stay ahead of this.

And the sessions that Frank and Steve will be having with the 2 platform leaders is we're going to have to be talking, okay, guys, you've got to keep putting the pressure on the price increases because we will see the upward pressure on the commodities, the upward pressure in salary and wages.

And we must make sure we keep our pricing in line as we go through this time period.

We are -- we've gone through a period where we were behind the eightball.

And right now, we are in sync.

And it's very, very important now as we stay -- and we stay in sync here in the next couple of quarters.

And I think, Andrew, this is an issue that I ultimately talk about it.

And at this point in time, we are openly talking internally because we see the pressure is increased material, increased salary and wages.

And therefore, we're going to have to slightly bump up our prices.

Now that will create, obviously, a higher growth rate at the top, but also we have to make sure that we have the resulting cost reductions and price actions [earnings].

So this is an interesting time period, which we have not seen for a while, but we do know how to operate in this time period.

And I feel good that we are well inside the scope of where we need to be right now.

The next question will come from Steve Tusa of JPMorgan.

So the -- just on kind of the cash flow and the dynamics around CapEx, when do you expect to kind of hit this run rate?

And you look like you will a little bit be under the kind of 3.5% this year.

Will you be above it for any of these years over the next couple of years as a percentage of sales?

Yes.

I think that if you look at -- okay, if you look at our capital spending, if you go by quarter, we typically -- we start slower and we build up in the year-end.

It's how we decide, the way the company is set up and what goes on inside the company.

If you look at the overall, I would say that our capital will be -- is lumpy.

We could -- this year, we could be a tad under 3.5%; next year, we could be a tad over 3.5%.

We have similar projects that we might be looking at, new capacity, new facility somewhere that we'll start working on late this year, and the major capital will occur in 2019.

So it's -- I think, on average, we'll probably somewhere in this 3.3%, 3.4% range for the -- over the 5-year time period.

But the key issue for me is, as I told my board, unlike the government, which clearly had shovel-ready projects all over the place, we don't have shovel-ready projects inside Emerson.

If we have a project that we need to do, we do it.

But what I'm looking at right now with the stronger demand in our key couple businesses and a shifting on where that demand coming around the world, we're going to need to make some different type of investments here in North America, particularly in the United States, to be more productive and have a lot more flexibility around our facilities, which we haven't built into them in the past.

So I think this is going to build, and I would expect '19 and '20 will be bigger capital than this year as I look at it, based on what I see and feel right now, Steve.

As a percentage of sales, right?

Percent of sales, correct.

And the dollars are still going to go up.

Yes.

And so -- and when you look at your cash flow statement, there is this kind of other account.

I think there might be some -- that's where you kind of adjust for perhaps your cash taxes versus your book taxes.

I don't want to be nitpicky, but is there anything now with the lower book tax rate?

Anything in that kind of other account that's been a couple hundred million dollars in the last few years.

And with the new portfolio you have, does that shrink inside?

Does that go closer to 0?

Is it less of a factor?

I'm just trying to kind of get to what the run rate conversion is here going forward.

Yes.

Let me -- I'm going to try to grab the chart, Steve, that you're talking about, okay?

So I know I'm talking -- is that in the press release or is it in the slides?

No.

Just from your 10-K, it's '15, '16 and '17 from the 10-K.

I'm just trying to get at what the sustainable conversion is here because you guys -- you've talked in 2021 it being like $105 million to $110 million or something around that.

Now CapEx is bumping up a little bit.

You've got some of this tax coming through.

So maybe just a little bit of clarity on that front.

Steve, I think what you're talking about in that add-back is mainly the GAAP pension expense gets added back.

And then we have the cash contributions that come out of the cash flow, and then it's equity comp that gets added back as well.

So no, I don't expect...

So that's sustainable?

I don't expect there's going to be a change in that as a function of tax reform or a different configuration of the portfolio.

So let me -- Steve, that's a good question.

Given all the challenges around this world today about quality of cash and earnings, so let me, as we get right...

I don't know what you're talking about.

Me neither.

I just made a statement.

You know me.

I just made a statement.

I got my Rally Monkey.

I got my ball here.

I got my baseball bat.

And these guys, it's amazing what they say when they're thinking.

But let me -- let's take a look at where we think -- because we're going to give you a cash forecast and we're going to give you obviously a P&L forecast next week.

And let me take a look at what we think the sustainable rate's going to be.

As you point out and you've pointed out to me numerous times, I have a unique window here right now because I have the Final Control cash opportunities, which we are obviously starting to execute on, which is going to run now for 3 or 4 years.

I have some increased amortization because of the software companies coming onboard from that perspective, so that helps us from a cash flow standpoint.

So the question is, as we go through this cycle, are we going to be able to run a little bit higher rate than -- on a conversion basis than I have historically?

And I think that's a very fast -- fair question.

It's also a very challenging question for me to answer.

But I think that we -- I owe you that and the shareholders, "can we run a 110, 115 conversion?" This year, we're talking about running around 120 again, which is a good number.

And I do have some things helping me right.

But the question, as we go out of the cycle, is the number going to be 105, 110 or 112?

And I think that's a very fair question to ask.

And then one last quick one just on R&D.

Are you kind of full up there on R&D investments or RD&E?

Or is that going to tick up and trend up as well?

The -- I think the key issue for me, and as I've talked about the trend line of our orders, our trend line of our sales, in the 2 key areas, if I see the Automation Solutions really starting to take on some bigger projects or they want to bring in some new technologies, then we're going to have to ramp up some R&D.

But that won't be commonplace if I start seeing our sales order would mean this year we're going to be more in the 8% range and I see a pretty good filler relative to the projects coming at me, then we might start ramping up at a couple of new technologies to make sure that we can satisfy the demands that we see coming from our customer base for '19 and '20, in particular around our Plantweb Internet of Things.

So I think that right now, we're good.

But if I start seeing this growth rate pick up a little bit, which could possibly happen, then you're going to see me tweaking a little bit more engineering monies into here because I want to get ready for the next-generation technologies that our customer base will be going toward as they go into 2020 and 2021.

That's what we're going to be watching.

Now that's the next pivot point that we should be at -- that's the place you should be pushing me.

Relative to Bob Sharp's business, I think, at this point in time, we've continued to give Bob the monies he needs as he's running at very high levels of profitability.

He had an unfortunate situation of a quality issue in the first quarter that we had to deal with, and we dealt with it and one of his products in -- I think in the thermostat area.

And we've dealt with that.

But we're giving him the money he needs relative to that next-generation of investments to really [dial up] there, to pull through his digitization and the cold chain stuff that you'll hear him talking about.

And so I'm making sure he's got the money he needs right now because there's some good growth opportunities there for that business.

The next question will come from Steven Winoker of UBS.

So listen, I just wanted to chase up the cash flow discussion a little more with regard to 2018, not the longer term.

On Page 16, you had -- in the presentation, you just gave the 150% operating cash flow conversion on GAAP, right, a step-up from 130%?

So I just want to make sure that, that -- yes, so I just want to make sure that the key drivers are there in terms of the change or to what extent -- what are the biggest components of that step-up?

That's -- you're going to have taxes there.

You've got taxes there.

For our guidance.

So that's the difference is primarily.

There's 2 things going on with the taxes and a little bit improved profitability overall.

Those are the 2 numbers right there.

As you know, given our level of profitability, if we grow a little faster, our margins are -- obviously, we're saying, we're going to have better earnings.

That helps us.

But the big chunk there is the taxes.

Okay.

Great.

And then -- and as you said, you'll give us some more color around that, hopefully, in terms of longer term.

Yes.

We're going to try to make sure, Steve -- because there's 2 big moving parts in what's happening to Emerson versus last year this time, as we have stronger underlying performance from a sales standpoint -- economic standpoint and then we have a tax reform, so I'm going to try to be as I thought -- Tim worked very, very hard to be transparent with you guys.

You guys may not think that was transparent in all those charts we gave you, but we're trying to be transparent relative to how these numbers are impacting.

We'll try to do that again next week for you so you can get your model set up because there's a rebasing going on right now that you're going to need.

Okay.

Great.

And then secondly, maybe diving in a little bit to the Commercial & Residential side of things and compressors.

You're talking about pricing and the need to keep pace on pricing versus cost now, how hard that is.

And you've been through this multiple times before.

Some of the folks in that area certainly saying that they believe they have a little more, I think -- a little more pricing power themselves and comfort level with their supply base in terms of their ability to kind of hold cost as well.

What are you seeing in that part of the area relative to competition and your ability to get price in that area?

We're in it for the long term, and our customer base know that.

And so we work very closely with them.

We do get the pricing, and we clearly have to make -- push, shove back and forth, sometimes in and out of sync, sometimes in sync.

I think overall, this will be with the -- when you look at copper, you look at steel, you look at the continued commodity increases going on, on the Commercial & Residential side, there's going to have to be a trend line upward across the whole industry.

And they have to be very careful from the standpoint -- and we understand that, and that's why we work closely with them.

We don't want them priced out of the marketplace either in the end market.

So I think that there's some pushbacks always.

But I think, over time, we figure out how to make those trade-offs with changing our products to get them the price point they need and then we can change our product to make sure that we get the cost price point that we need.

And as you know, there's not one -- this talk of compressors, it's not just one compressor.

We can make changes within a compressor and get what they need and to change that price cost structure.

So there's a lot of -- there's going to be a lot of give and take.

I think the industry knows right now we're looking in a period, as someone pointed out earlier, the potential we could have higher inflation here.

And so we're going to have to start making trade-offs for both of us to make sure that we both don't get eaten alive in this whole price cost situation.

I think that being a major supplier of this industry, we have that ability to do that with our customer base, and we'll continue to work that.

And you forced mixup in the past as well, which has helped.

So I'm not sure if you see opportunity there to mixing up...

We have a window here again with -- in the commercial standpoint that we will mix up in that space as the transition happens.

On the residential side, it will be different this time.

I think we're going to see more of a mixup on the commercial -- in the channel in the next 12 to 18 months in North America.

So it's going to be a hybrid approach here.

We're going to be making some pushes and shoves.

And in the end, we want to come out of this ahead, just like they want to come out ahead.

The next question will come from Rich Kwas of Wells Fargo Securities.

So on automation, with regards to investments, so with oil where it is, it's up much higher than a year ago and investments are -- have picked up, but you talked about being able to maintain the incrementals at a pretty healthy level without having to make significant investments.

When do you see that starting to play out?

And I guess, that gets into some of the KOB1 projects starting to get booked.

And so any color around KOB1?

What mix of the orders it is right now?

And how you see these investments getting layered in over the next year or so?

The -- I think the -- what we're seeing right now in -- we're going to share with you, basically, our project business and what that funnel looks like.

We're going to give you a snapshot, which clearly is going to be bigger than the last time we shared you, which I think, Tim, when was that?

November conference call, wasn't it?

Yes.

It was on the -- in November, I think, we did.

End of November.

So we'll give you -- we're going to give you the snapshot.

And basically, it's consistent measurement across the board.

What we're seeing right now are the initial phases around the world of larger KOB 2 type of projects, where people have done initial expansions or parts and now they're going back and they're dusting that off.

And that's coming back in the funnel on a rebid or just moving forward, depending on where they feel comfortable of the cost of the project and the timing of the project.

That is already starting to flow.

We're starting to see that.

And I would expect to see more and more of those bookings as you go forward here this year.

On the larger KOB1 projects, which we're starting to bid and talk about -- and I know Ed Monser is going to try to talk about one project that he sees going on right now across the Final Control in particular.

We're going to start seeing more and more of that come late in 2018, early 2019.

Yes, there's going to be 1 or 2 projects out there, but I think those projects really won't starting to play into 2019.

So when I talk about higher incremental investments is if I start seeing our growth rate sales -- and I see sales, and obviously orders before the sales, if I start seeing that number clearly looking like it's going to be at the high end of the 6% to 8% and potentially have a chance to cut across that, then we're going to have to start this year.

Now the question will be is, if we're growing faster, we're going to obviously leverage and that will -- and obviously, we -- the numbers will look okay in the short term and it will come back to haunt us will be in 2019.

But I -- if we're starting to see this happen or we're starting to see the larger KOB 2, that's what I'm going to trigger off, not the KOB1.

Because if I start seeing the larger KOB 2, which we're going to talk a little bit about next week, that's where we're going to have to probably start putting some money into play to make sure we protect ourselves from a customer perspective, both from a manufacturing, sales and service organization because this business will -- as you know, comes up and these products -- these aren't small products or projects.

And so we've got to make sure we can produce them and then deliver them.

So the earliest is really next year is when you would start to see the impact.

Yes.

I mean, you're going to see -- you'll hear us talking about it, but the dollar, that will be next year.

Okay.

And then on V&C, outside the amortization, you're still tracking to exit the year in the near double digits on an EBIT margin basis?

Or is that coming in better?

Yes.

I think we'll be there.

I have no reason to say we won't be double digit as we leave this year.

And I want Ed to talk a little bit about that.

Ed Monser's going to give a presentation on what he sees.

The team's doing a great job.

We are -- this month, started -- in January and February, we were moving off of the Pentair OMT system, which is -- that's sort of like jumping off the top of this building in the corporate here without a parachute and hoping you can land without breaking a leg.

And that's going on right now.

So that's my concern this quarter is to make sure that these guys can get off that and to a normal operating system and get away from that Swiss model.

But overall, I like where they are from a margin standpoint, sales and order standpoint.

And they're starting to talk, which I'm really excited about, technology and where they can bring some new technologies and make some investments in technology, which that business hasn't made in a long, long time.

And then how that working capital break on that piece?

Anything...

They're slightly ahead of schedule.

I would say that -- I would say, for the year, they're going to deliver -- my gut tells me that Final Control will deliver a very good cash flow and number for us this year.

I fundamentally believe that we'll have a $2.9 billion, it could be a $2.92 billion.

I think we're going to have a good operating cash flow this year.

And it's going to be driven off of the work Final Control does.

I mean, everyone else is important in the company.

But the real delta is there.

And I think that Mike Train and his team and Ram Krishnan and his team have a focus on that.

They know they have a chance to deliver cash flow to us.

And we really like to see that happen because that makes a big difference in the returns.

It also gives us the flexibility that we need from a standpoint of dividends and then share repurchase.

The next question will be from Jeff Sprague of Vertical Research.

Just a couple more things on V&C, Dave, if I could.

Just give us a sense of what's going on with their orders.

Are they primed and ready to take orders, so to speak?

Or are you more focused on integration here in the near term?

We're focused on orders.

Clearly, there's things we want to get done from the operational standpoint.

But we -- if you look at our V&C business right now, we're growing -- the combination of Final Control and VC, it's around 10%.

And what's very important to us right now is getting them into the site, which goes back -- I think it was Rich asking the question.

And the projects -- on the projects, so what I'm trying -- we're trying to get them engaged on the KOB 2 projects on a full capability.

And that's what we're trying to do at this point in time because the early stages of the project is starting to happen.

We are building out, as we've talked about, our Final Control solutions package.

And now for the first time, we are going out to the global customer base and saying, "We have.

Here it is." And if you look at the projects, some of the biggest componentry is typically around the Final Control package.

So that's pretty important to us.

We don't want to miss the initial phases of those upticks.

So yes, we're focusing on restructuring, repositioning and making sure we deliver the profitability and the trade working capital.

But in reality right now, what we're also out there working really hard and why, Mike Train and Ed Monser and Ram Krishnan -- Ram works so hard on trying to make sure that we got the global sales organization in place.

This is so important to us right now, Jeff, because this cycle is happening and we want to get back on track.

It will make a big difference for us relative to recapturing market share that unfortunately was lost in the last downturn when the lack of attention in this business.

So I like what we see right now.

And if we can maintain this level of growth in underlying orders, the projects are coming, and this will really set us up for a very strong 2019.

And then just on the V&C financials, Dave.

The $25 million of acquisitions charges, is that inclusive of the run rate amortization?

Or is that more like step-up and other type...

The last piece of the step-up of -- the worst accounting rule I've ever seen in my life, as Frank knows, where you have to re-mark or write off the profit in inventory and the backlog.

And so they had a lot of backlog, and they clearly had a lot of inventory.

And this is the last phase, the last piece of -- Frank said I maybe have a couple more million left next quarter, but I'm not talking about it.

This is the last piece of that.

That's what that is right there.

That's the last piece of that, the accounting revaluation of backlogs and profit inventory.

And then just one more for me.

I think some folks are viewing the strength as almost a glass half-empty.

Demand is good.

Therefore, you need to spend capital.

Therefore, that's a negative.

I think I heard you say at the beginning of this call that even with higher spending, you're quite comfortable that your incremental margins can traffic in the mid-30s.

Is that whole booking out into 2019 and 2020 when you're looking at these higher levels of CapEx?

We're on track to get back to the levels of profitability, the 19% EBIT margin that we talked about last year with the V&C.

We are on track to get that in the same cycle.

So even with the higher growth rate, I still feel very good at the stronger growth rate.

We're on track to get the mid-35, the mid-30s on the incremental margins.

We feel good about that at this point in time.

The only place I see that we'll have to start spending money is if that growth rate goes up.

But given the fact that what's going to happen is if growth rate goes up, our spending will always be behind the growth.

So we're going to probably have pretty good leverage.

It's when you -- those rates start coming in sync.

So I feel very good about the margins -- incremental margins out of Automation business for the next couple of years.

The cycle started.

And we have bumps and things in a quarter or 2, yes.

But overall, I see no reason right now that -- we're slightly ahead of last year from margin.

We're slightly ahead this year.

And I think we'll be -- we'll get to that 19% that we talked about in the Automation Solutions with V&C by 2021.

The next question will come from Christopher Glynn of Oppenheimer.

Dave, you mentioned hybrid as a good source of growth in the press release today.

Kind of an interesting callout given, I think, that was part of the rationale on the Rockwell look.

But how efficiently would you say that market is served today from the discrete and process side, respectively?

And are you seeing any separation among the people that have been focused on it on the past 10-plus years?

The reason we call out the hybrid is because if I look at the underlying industries that use a lot of the hybrid technology, those industries are -- have been the strongest places for investments.

A classic example would be a pharmaceutical.

Now from my perspective, I think that you have a clear group of leaders in the hybrid space today.

There's 3 or 4 of us that are pretty strong.

I think there's -- if you look at -- and we'll talk a little bit about this.

If you look at the breakdown of others in this industry, I think there's some consolidation efforts and some squeezing that could happen here.

There's room to grow for the 4 major players and to take more share within that space.

And I think that you're hearing a lot of key guys in this space talk about it.

And I think there's plenty of room here for the next 3, 4, 5 years for us to gain into that space.

But from my perspective, I think the initial phases with some of the hybrid investments underway are good.

And you're going to start seeing some of the old line process automation areas of investments happening later this year going to next year.

But right now, the hybrid space is what took off earliest.

And I think that's good, and there's room for it to run.

Okay.

Great.

And then a bookkeeping question.

On the walk from the prior adjusted EPS, you have the $0.05 to $0.15 adjustment for operations and repurchase, but you add the low end of that $0.05 to $0.15 to the high end of the prior range.

Is that just conservative?

Or if you're seeing the stronger markets, will you fund more restructuring or something?

No.

We'll pay for all the restructuring.

We just had a good first quarter.

We beat and we raised more than we beat the first quarter.

I want to make sure that we're not setting ourselves up to some number we can't make happen.

So that's what's going on here, Chris.

I think that there's no additional restructuring underway.

There's -- if we have a -- there's nothing hidden in here from the P&L.

If we can get a little faster growth in margin conversion, you're clearly going to get the earnings.

There's no hidden.

There's no incremental investments I'm trying to hide here.

I'm trying to make sure that we put a forecast out probably that we can deliver, plus or minus the pennies that we talk about every quarter.

And that's all it is.

And it was a good beat, and we raised.

And that -- I didn't feel like I had to go crazy on a raise.

And mechanically, you get to bring -- we're bringing the bottom end up, so you get a -- it's a bigger number.

Yes.

The next question will be from Joe Ritchie of Goldman Sachs.

So maybe my starting question here is on the -- just this incremental margin discussion, specifically around Automation Solutions.

If I pull out the V&C impact this quarter, I get to like a high 20s-type incremental margin, which is a little bit lower than I would have guessed.

No, I think it's more like 40% -- 35%, 40%.

I mean, we could take you through that.

Frank, you've got the numbers there.

We've seen it.

I saw people talk about that.

If you take out the acquisition impact and some currency headwind that we have in there that's not obvious, it's mid-30s, the high 30s.

Okay.

All right.

Okay, got it.

So that ticks that box.

And I guess, in terms of just -- you guys have been talking about price cost being neutral for the quarter.

I think, Dave, and we go back to like last quarter, I think the initial assumption was that it was going to be slightly negative in the first half of the year and maybe making it up in the second half.

So is there a chance then that price cost can be positive as we progress through this year?

Well, I wouldn't bet on that one.

I think that -- I think going back, there was a very good question somebody asked me about this.

If you look at the pieces that go into the cost side of this, there's more pieces in the cost side that are going up so -- than we've seen in a while.

So we're going to have to make sure we keep that price piece moving up with it.

It's not going to be big dollars, but we're going to have to -- we had a pretty good mix from the standpoint of some of the KOB 3 type of stuff.

We had some pretty good mix in some of the businesses of the Commercial & Residential.

Right now, I think if we can -- I consider this -- I will consider this a win for us this year if we're $1 green.

And that's -- I mean, I'll buy all of us -- everyone a drink on that one because this is what's going to be, I think, the most challenging thing for us, Joe, this year is because of this -- the fact that we see a lot of modern inflation pressures coming at us.

But I feel very good that we can offset that because we've been getting ready for this for a while.

And I'll repeat it again.

We're going to have to work very close with our customers here to be doing some mixing and matching and some change in here to help them solve their cost price.

And they're going to have to help us solve our cost price because this is not something that it's going to be a brute-force effort here or they'll come back to haunt both sides, which I don't want to see happen, as you can imagine.

Yes, I know.

That makes sense, Dave.

If I can maybe fit one more in here.

We had talked about...

Go ahead.

I'm not going anywhere.

I'm still CEO.

17 years and counting.

If you take the $3 billion or so that you have on your balance sheet right now, and you've talked in the past a lot of that is international.

Are there any -- is there any hindrances to bringing that cash back and getting it invested?

Is there some type of timing that we should be thinking about on that cash?

I'll let Frank answer that first, and then I'll give my two cents.

Joe, we're expecting to bring back well over $1 billion of it this fiscal year.

I would expect to bring back a substantial chunk in the second quarter and then probably another amount that will take us over $1 billion later in the fiscal year.

So no, there are no impediments.

We will be bringing almost half of what we have overseas back in the next year or so.

Yes.

So we -- one of the good thing the tax reform does for us is it gives us that freedom to make that call when we want to do it.

We only have a couple markets in the world that really our cash will get trapped, it's hard to move it around.

India is one of those markets.

In China, we -- basically, every about 12 or 18 months, we get cash out.

We've brought out over $3 billion since I've been CEO out of China.

And so we -- a lot more freedom, a lot more flexibility under this whole new tax reform.

That gives the U.S. companies a lot more competitive opportunities here, which we have not had in the past.

And that's one of the advantages.

And I'll say it again, if U.S. companies don't take advantage of what was -- what Congress passed in this tax reform, then we're flaming idiots.

The next question will be from Deane Dray of RBC Capital Markets.

We're going to drill down on something as exciting as the tax reform and just to follow up on Joe's last questions there.

Were there any surprises as you kind of work through the angles on tax reform?

We had you pegged coming in around 27%, and it looks like that benefit is significantly better for you.

So what were the kind of puts and takes as you went through that?

And what's that step-up and further benefit in 2019?

Yes.

I mean, as you know, I was very much engaged in this process as the Chairman of NAM, working with the Congress and the White House.

And then also, Frank's team was right with me the whole time.

I think that, from our perspective, we've always felt that it was going to be around 5 or 6 points of just pure rate benefit for us.

In fact, [the level's out] they took a little bit away from us, where we -- from the standpoint -- but overall, we -- it pretty well came in line where we thought it was going to be.

I was pleased in -- we've been positioning ourselves now for the last 12 months.

From the pure payment we're going to have to pay the government over the next 8 to 9 years, I think that number -- we can minimize that number a little bit.

The overall sort of restatement off of what I call fixing the deferred tax in our balance sheet, I think that's -- we are clean there.

We didn't have anything hidden in there that we had to write off.

And then the other benefit that Frank and his team did is when we did the sale of the 2 -- the businesses.

We made the decision to go ahead and book the tax cost.

So that gave us a big benefit that when we waited to bring the money back that we are actually saving about $125 million of actual cashes on taxes here because we waited because of lower tax rate.

So overall, Frank and his team, they knocked this one out of the park.

And so from our shareholders' perspective, they've got a lot of benefits here both this year; and then next year, we're going to obviously get a lower tax rate.

And then you look at my competitors, which are international companies, we're going to be -- on a tax rate now, we're right there.

We're competitive with anybody, and I'll take my cost structure and my flexibility on anybody any day.

So I like where we are right now, Joe (sic) [Deane] . And I think we're in pretty good shape.

And then if you could just clarify on the CapEx spend increase, how much of that might be influenced because of the tax advantages on CapEx?

I'm sorry, Deane.

I thought it was Joe.

I apologize, Deane.

No worries.

From my standpoint, there's 2 things going on.

Long term, the way I went in and I was pushing so hard working with Congress is we have an aging workforce in North America right now.

And as we see the underlying demand come into the next generation of products and automation, we're going to have to invest to make sure our facilities are more competitive from the flexibility and the type of stuff we want to do with our manufacturing.

So the increasing capital we're going to see is mainly around automation and some incremental capacity and flex type of capacity that we're going to need to serve this U.S. marketplace.

Because our strategy has always been we stay local for serving.

So we manufacture here in the region here, just like we do in Europe, just like we do in Asia.

So I think what we're seeing we're going to have to do is spend a little bit more money on the automation side of this company, and that means we're going to have to spend some incremental capacity.

And I would say that we'll also bringing some bricks and mortars because we're going to have to reconfigure our facilities, which always means new bricks and mortars at the same time.

So I think it's going to be pretty good for nonres here for the next couple of years.

The next question will come from Gautam Khanna of Cowen and Company.

Couple questions.

I guess, first, you mentioned one of the milestones you're sort of tracking on the V&C integration this month, but what else can we look for over the next 12 months?

What are the big milestones we should be kind of paying close attention to as you integrate the business?

Anything you can give us on that?

Yes.

A couple -- there's 3 things I'm watching very closely.

One is the ability for us to create the solutions packages in the Final Control that when we're going out to bid, it gives us a competitive advantage.

And what that will mean is the order pattern opportunity within the Final Control will be -- should run higher rate than the rest of Automation Solutions.

And that gives us a chance.

That means -- from my perspective, that means we're regaining some of the lost presence that we -- that we got lost -- that got lost in the last cycle.

The number two thing we're tracking very clearly that you'll be able to see is the fact that we're talking about, from a margin standpoint, yes, V&C is still diluting to our margin but a less dilutive impact.

And therefore, as you go into the second half of this year, you start seeing the positive impact of the V&C as we wrap around it because you're going to start seeing that live now as we get into that second half year.

So another milestone we are watching and something I'm watching to make sure this team gets their job done.

And the third issue from my perspective is all around the cash flow.

If the cash flow of the corporation continues to outperform in the upside and it's a function of we're still growing nicely the profitability, but because the Final Control organization is able to get the trapped cash and off their balance sheet from the receivables and the balance sheet from the inventory, if they continue to do that, that will be the third thing.

So you'll keep hearing us talk about better cash flow over a quarter, over 6 or 9 months, and that tells me that they're getting the job done.

Those are the 3 things I'm watching for the Final Control organization out there.

And that's what I want to see happen because that means they're really bringing a better flow of cash and return and growth to the corporation, and hence, for the shareholder, which 2 things are happening: given the fact the tax rate went down and we're delivering on the savings and growth, that means the return for my shareholder is going to be better than initially planned.

Now that's very helpful color.

And maybe just the last one to dovetail to your cash flow discussion.

You've done a number of tuck-in acquisitions, Cooper-Atkins, you mentioned cold chain, and what you'll talk about it next week.

But can you characterize how the M&A pipeline looks right now?

Do you have any -- what does it look like in terms of size of opportunities, what you expect might actually transact over the next year in terms of dollar spend?

Any sort of color around that?

Yes.

I'll give you some color.

We -- right now, there's -- from our perspective, as we look at the transactions today, these are very much transactions which are private transactions.

We are engaging with private owners.

They're part of a private equity firm trying to come out.

They're part of a large corporation.

And so right now, we probably have $2 billion to $3 billion that we're actively engaged in.

And what we'll report to you is we're trying to get another $500 million, $600 million done this year.

What I like -- in reality, what I like to see is if I look at today versus the end of this calendar year, which is the end of 2018, I'd like to see us, in reality, get closer to $1.5 billion to $2 billion done.

That's the type of magnitude we're working on right now.

We have -- because of where we've been through our repositioning, we probably got ahead of a lot of our competitors and where we are relative to our ability to absorb because we've got the divestitures done, and we've got a good head start in V&C.

So what I would call the right number for me right now is not $500 million for the next -- rest of this year.

I like to really see a number, which is more like $1 billion to $1.5 billion to $2 billion type of range in this -- before the end of this calendar year.

And that would be, to me, where we should see.

And that's the type of activity we're working on right now.

Now we may not get them done, but that's what we want to do.

We want to try to get that done, and that would make our plan all the way out to 2021 a lot easier to execute.

I'd say that's front-end loading the acquisitions.

It will be from Andrew Kaplowitz of Citi.

So I just wanted to ask you about Europe in the sense that it was down, but you had mentioned that orders are positive there and it should be better.

Europe has had very strong GDP growth, as you know.

So is anything going on there?

Is there any reason why it shouldn't grow low to mid-single digits as you go forward here in 2018?

No, there's nothing going on.

From our perspective, it's more of a timing.

We had some very large businesses over the last couple of years and we're having to fill that backlog in the Automation Solutions side.

On the Commercial & Res, we're doing okay in Europe.

It's just a function of timing on the projects for us in Europe.

And clearly, from a competitive standpoint right now, with the dynamic change in the dollar, we had a slow start to sales in the first quarter.

But the orders, we -- I feel good about it.

When we talk to the projects, we see things going on, I feel good about that.

So nothing unusual.

Now if I have another quarter that I'm disappointed in Europe, then I'll be starting to say, "Okay.

What's going on here?" But the only other thing I can tell you that it probably created that weak in the first quarter in Automation Solutions in the first year, we had our main distribution center in Germany went through an Oracle conversion in the last 6 months.

I can tell you right now it's not going well.

And so we struggled with shipments.

But that's my bad and my mistake as the CEO, and we'll fix that.

But overall, we're doing okay.

And if we have another bad quarter, then we're going to figure out what the hell is going on.

But right now, I feel okay because I think everything is being done right.

Okay.

David, that's helpful.

So just in Commercial & Residential Solutions in North America, I just wanted to follow up.

Last quarter, you had some hurricane impact and maybe there's some reconstruction work to be had here in '18.

So have you seen any impact from that?

And maybe just talk about the visibility into that particular market.

I mean, it was up, but it was up marginally.

What do you see going forward there in North America?

We see a very good nonres marketplace in the rebuilds going on.

I think that the housing market, there's a lot of issues relative to around labor and ability to execute.

But the timing of replacement market, the timing of the new technologies, I mean, we really have a situation for the next 12 to 18 months that should be pretty good for us in the U.S. marketplace both in nonres and residential.

So I mean, we have to continue to execute around that.

And I like where we are at this point in time in North America in nonres.

And again, as it's lined up nicely for the Automation Solutions in North America, Commercial & Residential should be lined up nicely, too, for the rest of this year going into 2019, based on the factors that you just threw out there, Andrew.

So I'd like where we sit at this point in time.

Now we have to execute around that.

The key issue for us at this point in time is we have to make sure we're starting to make those incremental capacities both in capacity from equipment and also in people, and that's something that we're decent at.

We've written it down, and now we want to write it up a little bit here.

So I think I like where we are, and we should have pretty good winds to our back in this one.

See you next week.

And again, I want to apologize for cutting you off there, Andrew.

With that, I'm going to wrap it up.

I want to thank everybody.

Tim, great job with the charts, I mean, for Mr. Transparency who probably can't even spell transparency, but good job there.

And Frank, thank you very much and the organization out there, a really good quarter.

And now we've got to deliver the second quarter, folks, because our shareholders are expecting better.

And since they said that I sandbagged them on the upgrade, I hope they're right, but we'll see what happens after that second quarter.

So everybody, take care.

I'll see you in New York next week.

And pray for no snow, unlike Boston a few years ago when we moved to Boston and got 5 feet of snow or what the heck it was.

And so you all take care.

We'll see you next week at the Stock Exchange.

Bye.

Thank you.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

At this time, you may disconnect your lines.