艾默生電氣 (EMR) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Emerson's Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) This conference is being recorded today, May 1, 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 our host, Tim Reeves, Director of Investor Relations at 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 second quarter 2018 results.

The accompanying slide presentation is available on our website.

I'll start on Slide 3 with the second quarter summary.

Sales in the second quarter of $4.2 billion increased 19%, with underlying sales up 8% and strong growth across both of our business platforms.

Demand conditions remained favorable and were consistent with our first quarter.

The U.S. and China led growth, and trends were favorable across all world areas.

Underlying orders have trended in the 5% to 10% range that we expect to continue through the year.

Profitability continues to be strong.

In the base business, excluding Valves & Controls, EBIT margin was up 170 basis points on solid incremental margins.

Price/cost remained neutral in the quarter.

GAAP EPS increased 31% to $0.76.

We continue to buy back shares.

In Q2, we repurchased 3.6 million shares.

And in the first half, we've repurchased over 11.4 million shares and returned almost $1.4 billion to shareholders through both dividends and share repurchases.

Q2 wraps up a strong first half for Emerson.

And overall, the quarter was stronger operationally than we had anticipated a few months ago.

Turning to Slide 4. Second quarter gross margin was up 40 basis points, excluding Valves & Controls, and EBIT margin was up 170 basis points.

A quick note on our first half profitability.

In the first half, gross margin, excluding Valves & Controls, was up 100 basis points, and EBIT margin was up 130 basis points, driven by operating leverage, the benefits from prior period restructuring actions and execution around normal ongoing cost-reduction efforts.

Price/cost in the first half was approximately flat, and we continue to expect a neutral price/cost impact in the full year.

Turning now to Slide 5. From a geographic perspective, the momentum we've seen over the past few quarters continued in the second quarter, with broad-based demand and favorable trends across the world areas.

Mature markets were up high single digits, led by North America.

Europe was flat in Q2 and in the first half, but order trends here are favorable, and we expect solid growth here in the second half.

Emerging markets were up high single digits in the second quarter, led by China, which continued to deliver robust growth across both business platforms.

In the first half, Emerson total -- total Emerson underlying sales were up 8%.

Turning to Slide 6. Total segment margin, excluding Valves & Controls, was up 130 basis points in Q2.

And in the first half, the segment margin was up 100 basis points, again excluding Valves & Controls.

The acceleration of growth across our businesses has resulted in modestly higher working capital levels, and we expect strong free cash flow conversion in the second half.

Turning to Slide 7. Automation Solutions underlying sales were up 10% in the quarter and 10% in the first half.

Favorable trends continued, with strong demand across Process, Hybrid and Discrete end markets, led by North America and China.

Strength in oil and gas was driven by MRO, small and mid-size projects and turnaround activity.

Demand in chemicals markets was supported by petrochemical and specialty chem upgrade and optimization projects.

Our global power business, whose markets have seen a steep decline, grew net sales and orders in the first half, reflecting strong participation in plant retrofit and greenfield investment activity.

Automation Solutions segment margin was up 20 basis points and was up 240 basis points excluding Valves & Controls.

Improvement was driven by operational leverage and the benefit of prior period restructuring actions.

Our Final Control team continues to hit key milestones, and the Valves & Controls business is integrating very quickly into the broader Final Control business.

With Valves & Controls, we are on track with synergy plans, and we are seeing the margin improvement read through.

Turning now to Slide 8, Commercial & Residential Solutions.

Underlying sales grew 4% in the quarter and 4% in the first half.

In China and in broader Asia, strong demand continued in air conditioning and refrigeration markets.

Growth in North America reflected strong demand for professional tools, while air conditioning demand slowed due to cooler weather and timing of channel inventory stocking.

However, the underlying economics for air conditioning markets remains positive, and we expect solid growth in the second half.

Margin decreased 10 basis points, as material inflation and mix was partially offset by operational leverage, higher price realization and the benefit of prior period restructuring actions, and aided by the divestiture of the ClosetMaid business, which was sold in October of 2017.

Let's turn now to Slide 9, which outlines our updated full year guidance.

Please note that this framework does not include the impact of the recently announced Tools & Test acquisition.

We will provide an update to guidance after the transaction close, which is expected in the fiscal fourth quarter.

We expect total Emerson underlying sales to grow 7%, at the high end of the previous guidance range, with Automation Solutions up 8% and Commercial & Residential Solutions up 5%.

The GAAP EPS range is increased $0.05 at the midpoint to a new range of $3.10 to $3.20 or growth of 22% to 26% compared with the prior year.

This guidance assumes a neutral price/cost impact, as we continue to offset material inflation with price realization and cost-reduction efforts.

The expected effective tax rate for 2018 is 25% to 27%.

And now please turn with me to Slide 10, and I will hand the call over to Mr. David Farr.

Thank you very much, Tim.

I appreciate it.

First of all, before I talk about this slide, I want to welcome everybody.

And I want to thank everybody across Emerson for a tremendous quarter, the Emerson people around the world, including our new acquisitions from the Valves & Controls and the Paradigm and the Cooper-Atkins.

I want to thank all those people as they've integrated very quickly and understand the core principles of Emerson.

We had a very strong quarter and a very strong first half of our fiscal year.

I also want to let you know that with me today, I have a brand-new Stan Musial autographed bat from a longtime friend and also a shareholder, who figured I needed a new baseball bat, given that Tim's been taking the brunt of the other baseball bats for a while, and he keeps breaking them.

But I do have a new Stan Musial bat, with my Rally Monkey holding onto the handle for good luck.

Now back to the chart on Tools & Test.

I wasn't here for this acquisition, but you have to understand, these are 2 unique brands, Greenlee Tool and Klauke, that we wanted to acquire for many, many, many years.

As you all know, I ran Ridge Tool at one time, and we used to talk to the folks at Textron about these 2 acquisitions, these are unbelievable unique brands, very powerful brands.

And like the Valves & Control acquisition, we see unique capability of integration, unique capability of taking these brands, along with our core brands in this area here, and making it much stronger and creating significant value for our shareholders.

Yes, some people might say it was an expensive acquisition, but there's not many assets like this out there.

You can count on one hand the brand recognition of assets in this space, be it Ridge Tool, be it Milwaukee, be it Greenlee, be it Klauke, be it -- you can go work a couple more, but there are not many brands like it.

And that's why we're so unique about it, and I'm really glad that the CEO of Textron made the decision to really focus on other businesses, like we did, when we made our decision a couple of years ago.

But very strong opportunities and growth, and we really look at the leverage opportunities between some very powerful brands and creating a strong business for our customers, but also for our shareholders.

And I was not able to join the phone call because I've been on the road.

I was on the road around the world for 13 days, seeing what's going on in the world of Emerson, and it is going well.

And I'll talk a little bit about that in a second.

But first of all, I want to again say strong execution by both platforms.

Emerging markets is emerging.

As we talked about in February, I think they'll take a stronger role in growth in the second half of this year and going into 2019 and 2020.

As I see it unfold right now, I like what I see relative to some of the emerging markets.

The only emerging market that we have not seen really kick into growth at this point in time is Latin America, and it's been sporadic, 1 quarter up, 1 quarter down.

But I think that, that will kick in.

But the world of Asia, the world of Middle East, Africa, the world of Eastern Europe, all kicked in very strongly, and I see good, strong growth opportunities for the next several years.

As I went out and talked to customers as I was in Germany and Italy, the Middle East, Singapore and then also the Philippines, the project business is building.

As we've been talking about, the small and medium-size projects are the first ones out of the chute, and they continue to build along those lines, which is very, very good.

And I'm really glad to see that.

But now I'm starting to hear about larger projects, which are being formed and starting to be bid on, which will really solidify our growth opportunities as we move into 2019 and 2020.

But the shape of the recovery is good, with the U.S. clearly leading this right now.

But from my perspective, we're going to see the emerging markets come in and drive faster growth versus the mature markets as we get into 2019 and 2020.

Overall, both businesses are executing around the profitability, around the investments.

I feel very good about the growth rates.

We're separating ourself from the pack in many, many markets, like China, like the Middle East and a couple other key markets, like India, around the world.

And I like what's happening at this point in time.

Cash flow is still on track to deliver around $2.9 billion for the year.

Clearly, right now, our growth rate is running a tad higher than we'd said originally.

Therefore, we have a little bit of working capital, primarily around receivables, as we -- as the growth has kicked in.

But from my perspective, nothing of a concern yet.

As I look at the total year, and Tim mentioned it already in the slide, we see our growth rate around the 7%, plus or minus, a little bit there.

We like where we are at this point in time.

As I look at the Automation Solutions business, it looks like it has some upside.

Commercial Res really depends on getting a stronger weather pattern, which we're starting to get right now relative to some warmth and some better weather for construction.

But overall, we're shaping up to have a 7% -- good, solid, 7%-plus type of underlying sales growth for the year, with a good, solid earnings per share in this $3.10 to $3.20 range at this point in time, excluding any of the impact of the acquisitions.

For the third quarter, as we said, we see a very good underlying growth rate.

It's somewhere in the 7% to 7.5% range.

We're looking at earnings per share.

And I'm telling you, the one -- given the range, as you guys try to map out the year, as we raise the guidance for the year, we see right now $0.85, plus or minus a couple of pennies, along with that 7% to 7.5% range of underlying growth.

So we're -- another good progression, another good quarter.

And clearly, we have -- we're obviously seeing a pretty good fourth quarter coming at us, but that's -- we'll see what happens as the cycle continues in the Automation Solutions.

But that's what we see at this point in time.

But I'll open the floor up for questions.

Overall, again, I feel -- I want to thank everybody for the strong execution around the world in both platforms and the integration of the businesses that we made acquisition-wise.

Very good job.

And we're looking forward to another solid quarter as we move into this third quarter in our fiscal year 2018.

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

(Operator Instructions) Your first question will come from Jeffrey Sprague of Vertical Research Partners.

I ask this question, almost kind of tongue in cheek, but there's a lot of people out there that are kind of saying the cycle is over and this is as good as things get.

You must have listened to the CAT call.

You must have listened to the Caterpillar phone call.

Yes, no catcalls on this call, right?

No catcalls on this call.

So how do you feel about the longevity of the activity that's unfolding in front of you?

And is there any particular thing that you are concerned about from a macro standpoint?

I mean, I don't think the cycle is any different than I've been talking about over the last 6 to 12 months.

I think that 2018 is going to be a good year for us.

I think 2019, for the automation space, could be slightly better, depending on where we finish, Jeff, because I've always talked about if we have a stronger 2018, it will take a little bit away from '19.

But I still see a very good 2019, based on the project business at this point in time.

I'm always worried about any type of trade wars.

I'm always worried about any type of confrontation in the Middle East or something like that.

But right now, the customer base has the money.

The pricing is staying up relative to the commodities, and they need to invest.

So I feel good about it.

And we have a lot of great new technology coming out.

The timing of the integration of Valves & Control and that support of that organization as they come in and leverage across what we're seeing across Emerson right now has been very, very positive for us.

So I'm very optimistic.

I've said that I thought that Automation Solutions could have a stronger growth year in 2019 and 2018.

I still believe that.

The cycle has not peaked.

Interesting.

And then just on V&C.

Obviously, you gave us the margin progression ex V&C, and we've got the acquisitive effect on sales.

But there's a little bit of other M&A going through automation now, like Paradigm and the like.

Could you just put a little bit of finer point on the underlying V&C margin execution in the quarter, kind of where it's at and where it's at relative to the plan?

Yes, I'll let Tim answer that.

I'll let Tim answer because he thought this would come up, and he's got the numbers here.

He talked to the -- he talked to Ram up in -- but it's progressing like we thought it would.

The orders are extremely strong.

I just saw some orders from Europe, and they're doing well.

But Tim, why don't you tell them how they are progressing?

So the, yes, the history since we closed on the business last April, it's been in the sort of 4% to 5% range, and that excludes the restructuring and the amortization.

And so what we saw through the first quarter was kind of still in that range, and we expected Q2 to be up and start to track toward the double-digit margins in Q4, and we did see that.

So it was up -- it's high single digits in Q2.

We expect high single digits Q3, and then we should be into low double digits Q4.

It's getting harder and harder for us to be able to manage it.

I mean -- well, we're going to try to give you an indication where it's going.

It's definitely moving that way, but the integration is going, and it's getting tougher and tougher, so -- but it's progressing well.

I mean, if you look at the overall profitability of the Automation business, if we are having problems with V&C, it's big enough to move it.

But Paradigm is not big enough to move it.

But right now, I like -- from a working capital standpoint, a sales standpoint and the profitability standpoint, we're making great progress.

We got to visit a lot of sites around the world.

Frank was with me.

And so we got to spend some time.

And so, Jeff, I think we're in the slot there right now, and the business has picked back up, so our timing is pretty good in this one.

The next question will be from Scott Davis of Melius Research.

You said you were just in the Mideast, and your orders were -- or sales, actually, were pretty darn strong.

And have we officially seen a turn?

Do they have any money over there for projects?

Yes, they have turned.

And it's been turning now for 3 or 4 months.

And I was a little bit more cautious late last year.

It's turned.

The money is coming -- you've got money in Saudi.

You've got money in Kuwait.

We're seeing money coming out of Africa now, even in North Africa.

They're having to put money back in.

For them to get the revenue, they have to invest and get the oil and the gas out.

We're seeing Qatar starting to put some money back in.

So the answer is yes, and our KOB 3 and KOB 2 business right now is very good.

So they're putting the money back into repairing and upgrading and trying to get a little bit more from productivity.

And the bigger projects are coming and the bidding, and that will, again, be coming down the road.

But very active right now, and I think that we have a good couple of years here, I think, at this point in time.

Okay.

And Dave, one of the things that got us more positive on your story was just the utility market innovation.

You've made some comment -- positive comments about utility, but give us a sense -- I mean, it feels like that market's been dead for many, many years.

Is there some real legs behind an upgrade cycle on automation side and the utility side globally?

So when you break it down globally, you look at the emerging markets, there's a lot of new capacity and upgrades going on, and so we're seeing that.

But in the mature markets, primarily North America, what we're seeing is enhancement investment into the current capacity.

There's not a lot of new capacity going into the U.S. right now, but they're investing in trying to make their facilities more productive.

And given our installed base in North America of all the power plants, we have a very good inside run there.

And then also, with our new embedded PLC, which we're going after that -- that's a very active product -- project for us inside the utility marketplace, too.

So right now, we're seeing positive orders, as we did last year, in North America and on a global basis.

We are -- we have continued to invest in this space.

We have continued to make the necessary new product investments.

And I think that a lot of our competitors have been backing off, and I think they're giving us an opportunity here that -- and you know me, Scott.

You've known me for a long time.

I seize opportunities.

And I was up in Pittsburgh last week and spent a whole day with them.

And we're looking at how we continue to widen the gap of our penetration around the world.

And I think that -- I feel good about the next couple of years in our power industry, and it's a very -- it drives a lot of other core products at the same time.

So every -- I mean, from a transmitters to control valve and instrumentation, it really drives other good businesses for us.

So I'm more optimistic than you are.

The next question will be from Steve Winoker of UBS.

It's good to hear your conviction on the cycle.

That's great.

Hopefully, it will offset some of the negativity.

I've been around a while, and I've been through 3 cycles.

This cycle has not ended.

Period.

Now I'm not going to talk to you on numbers or anything, I'm just saying it's not ended.

Dave, on the cash flow side, so you obviously addressed it in your comments, but I want to maybe hone in there a little bit on your conviction around hitting that $1.5 billion-plus -- I guess, it's $1.5 billion to $1.6 billion in the second half.

You took the guidance on cash flow down just a little bit, a tick.

It's growth-related.

You got the working capital moves.

You guys are great on cash normally.

Just any -- I guess, any risks that we should be aware of in you making that number?

No, I mean, not at all.

I think that the conversion rate will move around based on the growth of earnings coming up and what we're seeing -- if we're going to have -- and we took the growth rate up a tad for the whole corporation.

As I've talked -- or when I openly talk about it, once we start crossing around the 6.8%-plus range, there's -- it's a tougher line for us to continue to take -- keep that working capital totally, totally in check.

So from my perspective, we can deliver the hard cash, and yet the conversion rate is going to be a little lower because the earnings -- it's just the way the cycle is going to be and the timing of, say, September sales.

So I don't have a -- I'm not less convicted.

I feel good about the cash flow.

If I grow faster -- let's say we grew 7.5% for the whole year.

That puts a lot more pressure on us.

But I'll take the growth in the sales.

I'll take the growth in earnings.

And then we'll get the cash off -- we'll get the working capital off the balance sheet when things slow down a little bit.

So it's -- we're at that cusp right now, Steve, when we're -- these growth rates, where we're -- we actually have to put some money on the balance sheet versus when we take it off.

So that's -- we're in that fine line right now, but I wouldn't worry about our cash flow.

I mean, the cash is good.

It's just -- we're growing a little faster, which is good.

I mean, more cash or less growth?

What do you want?

Give me a choice.

Yes, Dave, I want both, all right?

Come on.

You know that.

Did you ever run a business?

I want both, too, but I also have to be realistic.

Yes, yes.

Well, you're hitting it out of the park, right?

So pricing versus inflation, you were worried about this.

Pricing versus inflation, you've been worried about that.

But are you less worried these days?

Or are you going to be (inaudible)?

I don't worry about -- I think that right now, we're under control.

Yes, I would say right now, we're probably flat.

I mean, as we said all year long, we're flat.

I always felt that we'd be slightly plus or minus a couple of million dollars in this.

We're flat.

The whole issue around the tariffs, around the disruption, around the steel pricing, the prices ran up.

They've drifted back down.

We're all out there working.

It's part of the reason -- we're probably moving products around the world a little bit right now, trying to get positioned for this.

I worry about it more in 2019, Steve, than I do now, because I think we have to make sure we understand where things are trending, and then we're going to have to get the pricing action in place.

In certain cases, we're putting double prices in this year.

We're having to tweak because of material cost.

But I -- we are -- we've been waiting for this upturn in inflation for about 4 years, after having 5 years of negative, and so now we're moving pretty quickly.

So I think we got this under control.

I mean, we're going to be plus or minus a couple million dollars.

I'm not too worried about it.

But there's a wildcard out there.

And all of a sudden, tariffs come in, and we start seeing a knock-on effect of tariffs.

That could cause problems for all of us in the industrial world.

But right now, it's under control, but it's a wildcard I worry about, to be honest.

The next question will be from Steve Tusa of JPMorgan.

So just to be clear on that power commentary, you talked about you're taking market share.

I mean, the big installed base in the market here...

I didn't say taking market share.

I said, I think people walked away from the marketplace.

I didn't say -- but I think we're doing pretty well, yes.

Well, obviously, if they're walking away from the marketplace, and you guys are winning business, that means you're taking share.

And it's, I mean, my understanding that most of the controls are kind of like OEM-related.

I mean, this is not something that Rockwell necessarily has a huge presence in, especially in the U.S. So like, I would assume that the share gains are coming from some of the legacy OEM controllers here in North America, at least that's what we've seen in the channel from meeting with the guys at POWER-GEN.

Is that a correct assumption?

That is a correct assumption.

But the other thing out there, [the islands of] automation in power plants are out there, and so we're going after that.

And so we have parts of a power plant where it's been a PLC-type structure and a -- we now have our OCC100, which we now -- to embed and hook up to our control system.

We're bringing a lot more cybersecurity into play here.

So there's a lot of places that the power companies are investing.

And we've been positioning ourself from just being a control system to have a much broader product offering, so therefore, we can serve these power plants.

And we're actually investing in our organization to go out to power plants, when a lot of companies are backing away from that.

And on a global basis, you're still seeing power -- original power going in.

You're seeing power plants.

You're going to see an enormous amount of power plants going in, in Asia over the next 5, 10 years.

So right now, North America, we're winning in a good way.

Yes, it's good to be the control systems guy in that scenario.

On climate, what's going on in the U.S.?

I mean, all these guys put up pretty good numbers, all the OEMs.

I think they talked down a bit the second quarter, given weather comps, but how are you kind of explaining the channel dynamics there?

Is this kind -- Goodman's the only one we really haven't seen this quarter.

Is that kind of a customer-specific timing dynamic reflected in your numbers?

It's more of a timing and when -- them ramping up the new production on the A/C units system versus the heating.

It was a very cold, wet spring, early cycle.

And so we didn't have an early ramp-up like we had a little bit more last year.

So I mean, it's more of a timing issue for us.

As you know, we're not always in sync with the OEMs, the manufacturers here.

So right now, the function for us is -- we need some good production, and we need some good building going on in the housing markets, or our residential piece will be kind of low single digit this year.

But I'm not too worried about it right now.

I think a lot of it is -- will keep coming.

If I get into May and we get down to EPG and I'm starting to see that things are still weak on it, then we're going to have a tougher year in North America.

Fortunately, our European business -- fortunately, our Asia business is still going well.

Fortunately, our other -- the other markets, the refrigeration market, all those markets are going well.

But the one market that has been weak the last couple months has been our North America A/C.

And so hopefully, we'll see a little heat come in here, a little dry weather, and we'll see some orders pop in.

But that's what we see right now.

I don't -- I'm not too concerned about it.

We've had this before, Steve, you know that.

The next question will be from Robert McCarthy of Stifel.

Two questions.

One, just in terms of the cycle, particularly in Process, could you just kind of walk through kind of what you thought the trough was, just give us a little bit of a history lesson, and how long this cycle could really go here, just given what we're seeing in underlying oil prices and demand?

I mean, is it fair to say that we could see this go for several years beyond what may be more early mid-cycle for the underlying economy?

So it peaked globally around 2014.

It troughed in mid/early 2017.

It was -- as you well know, we had a very good run.

It went on for several, several years.

We had very high levels, and then it dropped pretty hard as people cut way back.

What's different in this cycle is because I think people are going to be very, very cautious about committing new capital for new production from the oil and gas and areas like that.

But they're going to invest in the core business they already have.

If they already have some wells DUC-ed, how do they expand that without going out and spending for the big, big finds and things like that.

And I -- what I see right now is people are being much more cautious, and they're trying to be -- they're going to try to incrementalize this a little bit, adding a little bit over time, to the point that one of them may break and say, "Okay, I've got to put more money into it." But it's -- I mean, that's why I think that we can have a good, solid 2 years here, with 2019 being pretty good.

But right now, I -- my visibility in the cycle is solid, at least 3 to 4 years.

And from the perspective of I think there's been some underinvestment, and the question is, does the demand stay there in the low [oil] area for energy?

And does the price of energy stay at a good price like it is right now?

So it's hard to go beyond 3 years, Rob.

But I see 2 solid years, and I see a good third year.

That's about as far as I can see at this point in time.

The key thing for me is going back to the -- the large projects are starting to form.

So as I see these large projects starting to build out around the world, that gives me a little bit more of an indication where the cycle is going to go to.

So we'll know more about this as they get out towards the end of the calendar year this year, as I look at the project business we have going out, and I see bigger and bigger projects coming at us.

But right now, I like what I see, and it's shaping up.

It's good for us because the small and medium ones are easier to execute on and have typically better profitability.

On that note, with the integration of Valves & Controls, could you just talk about how the progress has been, particularly on 2 specific things?

One is the trade working capital and the attendant cash and what the trajectory is there and then further, the potential revenue synergies from getting back into the Kingdom and some others, the world, where perhaps you were under-penetrated or under-indexed when it was in Pentair's hands and what the opportunity and the trajectory could be there as kind of a sweetener to the integration?

The working capital is happening.

I mean, on the Final Control business, there's Ram and his team, right now, they're doing extremely well with this integration.

I would say a couple of other places we've had in automation where we've had tougher working capital challenges, but Ram's team is doing a very good job of getting this out and cleaning it up, and we feel good about that.

The integration is going well.

We're very deep in the process right now of exiting a business we had in Europe, which we knew we were always going to exit.

It was going to cost us some money.

We're in the process of getting that done.

Hopefully, we'll get it done before the -- this fiscal year or maybe even before the end of this quarter.

Relative to the project work and relative to the integration of sales, that is actually going much faster than we anticipated.

And as we've said in February, I think that's been one of the pleasant surprises of the organizations of the Pentair Valves & Control business and then our Automation business coming together.

And we're getting acceptance, and we're hiring people to start working jointly together.

So I thought that maybe we'd have a little bit more of a pause this year on growth, and I think we're going to have a better growth mode out of this, the Final Control business this year, than I thought.

And I think a lot of that is going to be tied around the co-selling and the synergies.

Relative to the Kingdom and Aramco, we've been -- Aramco, to their credit, has been working extremely hard to get -- they have to go visit all the facilities, and they have to sign off on all the facilities.

As I look at the progress, because I'm going to try to meet with the CEO of Aramco next week, they pretty much have visited every facility now.

And we're now getting down to anything they've asked us to clean up and do it like that.

So we're starting to get bids.

So I think we're going to see more of an impact on that in 2019, which again, is a little bit faster, because Aramco historically was pretty slow at getting back out.

So net-net, great integration on the cost, working capital, but pleasantly, positively surprised on underlying growth rate in orders, which is great to see from the perspective of Ram and his whole team around the world, and I'm very pleased with that.

The next question will be from Julian Mitchell of Barclays.

Maybe just a first question on Europe.

Yes, that had been sluggish for you and many others in terms of fixed asset investment for a while.

The soft data there looked a lot better for 12 months.

Now that's started to slow, and your own numbers in terms of orders in automation, for example, are pretty sluggish still.

So I just wondered, are you sort of -- do you still believe there will be a fixed asset investment recovery in Europe?

Or do you still think maybe...?

Yes, I feel very strongly.

Julian, I feel very strongly that we will deliver 5% growth in Europe this year, underlying sales growth this year.

I see the projects.

I see the winning going on.

It took us -- it took a while.

I think that on the commercial res side, we've been doing pretty well there.

And they're doing well.

They're pretty well in line for that.

The automation -- and we were there.

And Frank was with me, and we were talking about this European review.

We see the projects.

And so I firmly believe that the orders are coming, and we're going to see this -- around a 5% underlying growth rate in Europe.

It just it took them longer for it to gear back up.

They had some very strong first half 2017 middle -- Eastern Europe projects that we won and did well on, and it's just taken longer for us to get geared back up in the Western Europe part.

I agree that the overall economy, the numbers are slowing down a little bit.

But I don't think it's going to impact what we see going for both '18 and '19.

I think the investments are starting to happen.

The money is starting to flow.

And so I think the industrial world, in particular, has struggled this quarter in Europe, in Western Europe, but I think it's going to start -- the investments are going to start flowing back out, and I feel good about the orders and sales at this point in time.

I could eat my words on this, but that's -- after meeting with this team and going through a battle with them for about 1.5 days, I feel good about it.

Understood.

And then my follow-up would just be around the, I guess, the sort of orders trajectory within automation.

I mean, as most of the strength you're seeing in that March figure, for example, that's still MRO-related, I guess.

When you're trying to think about the larger projects, what's your latest view on when you think those might start to hit the orders rate, rather than just being part of conversations and quotations activity?

I -- we'll start seeing some happen this quarter.

We'll start having some bookings coming in on some good-sized projects, which will create a lumpiness in our order pattern.

The reason our order pattern has been pretty stable for the automation business for the last several months is because we're still booking the small, medium-sized projects, which are good, but we're starting to book or bid and win, and also lose, larger projects, which I think we'll start seeing them being booked in the third quarter, some in the fourth quarter.

Again, most of that is not going to help us this year, but it's going to help us build to '19, which builds a stronger '19, which I feel will be there.

The other thing I see in '19 is I see the emerging markets being a key -- playing a key role for us, and that's why I feel good about 2019 in the automation business.

But you're going to start seeing some -- I wouldn't be surprised if you aren't seeing some spikes in some orders and some project wins here in this quarter.

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

So in fiscal '19, I know you're not guiding fiscal '19, but...

Definitely not guiding fiscal '19.

I mean, I'm still kind of one of these crazy CEOs that will talk about more than 2 quarters or 2 months.

No, that's right.

I appreciate that, actually.

'19, obviously, you're going to have some lift in margins at the Valves & Controls business.

But you are facing this mix dynamic with more project activity growing, presumably at automation?

So I just wondered, what should we -- should we expect incremental margins at Automation Solutions to dip down, or do you think they can stay in the mid-30s as we transition the mix, [if I remember you wrote on the] project?

Doing the logic and connecting the dots, you just put out there, Gautam, which are very relevant dots for this connection, I firmly believe the margin pressure will be in this 30% to 35% range.

This year, I think we're going to be probably around closer to 35%.

So I think that what's going to happen is the pressure will be to push that margin down because of the project business.

And then what we have to make sure is that we manage the incremental investments as we grow.

And so that's what the challenge is going to be for 2019, because the projects will be kicking in.

Some of the MRO business will probably be slowing down.

I'm hoping we'll have some -- still some good mix and some North American investments going on.

So we maybe have a better mix going our way.

But that's going to be the pressure point we have.

And then, clearly, we're going to be pushing real hard on V&C to get that double-digit margin that we exit '18 with and to move it up quickly as possible, so to help offset some of that dilution.

But that's the game we're going to be facing there.

But I still feel good about the margin progression that we laid out and getting to that 19% that we -- I think it was 2020, 2021?

I still feel good about that.

But the gain next year is exactly what you said, the projects come in, we got to start figuring out how we squeeze as best we can to maintain the margin improvement record as we go forward.

Got it.

But north of 30% incremental is still on the table for next year?

Yes, yes.

For all the automation guys out on the phone that are listening to this call, to Mike Train and team, north of 30%.

If Gautam says it, you have to deliver.

Ignore the CEO of Emerson, but talk to Gautam.

Right, right, of course.

Right, right.

I was going to say Latin America is still lagging.

I was wondering maybe if you could parse which -- I thought we were getting some strength in Mexico and else -- and Brazil.

But I wanted to know like what specifically is kind of holding that region back?

Are you seeing any pockets of strength within Latin America, and what's sort of the last...?

Yes, we are.

We actually -- last quarter, we saw good progress in Mexico, down in Chile and Argentina.

This quarter, Brazil kicked in and Mexico dropped off.

Our Mexican customer base is struggling a little bit relative to some projects and some business and small projects.

And that's -- so this quarter, Mexico will hurt us.

So I've gone from -- I was a believer they were going to come through, to now I'm starting to doubt it again for a while here until this election gets done.

But right now, it's -- Mexico's the one who held us back.

The rest of the region, be it Brazil, be it Chile, be it Argentina, they're doing much better.

So if we get Mexico back online and growing again, I -- right now, I'd say maybe fourth quarter, we'll see some growth return to that marketplace.

But that's the last of the global region -- or emerging markets to turn back up.

Fortunately, it's not the largest.

I mean, we have other markets much larger than they are now.

But it's still, I'd like to see them all come back into sync.

And I think it will, because there's been under-investment down there.

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

So hopefully, you can expand on the comments on China being robust for automation.

And so to see and hear the comments strong across Process, that's not surprising, given the context of everything that -- on this call and even Hybrid.

But in your answer, can you also touch on where strength is in discrete markets?

We don't often hear you talk about that.

So maybe some color, maybe some applications, if you could.

So from our perspective, in the downturn, we worked -- in the sort of the global downturn, we worked very, very hard to go after -- continue to go after the mid-tier Chinese customers in the chemical area, the refining area, the pharmaceutical area and the gas area, natural gas area.

And we are seeing them investing in a big way at this point in time.

So when we're going in, we're selling -- and also the power area, from the standpoint of upgrading the power systems and making them cleaner.

So we're seeing broad investments in our marketplace around -- the markets, we have chemical area, the mid-tier markets, and they're taking our total package, be it systems instrumentation, they're taking discrete products with them.

We're seeing investments going on in pharmaceutical right now, as China is investing in their own pharmaceutical industry.

And we are continuing to see very strong investments in refining, as China is trying to become more self-sufficient on refining the finished product and for their own marketplace.

But across the board, if you look at the industries, and we just had a review in Singapore on what's going on in China right now, and Dominic -- and is doing a great job.

He's the Head and President for us in China.

Most of the markets are very strong across everything we serve at this point in time.

And it's a lot of the smaller emerging players in our end customer base that are investing in the space.

And they're investing in smaller type of projects, but we're winning on broad-based projects, which is good.

And the reason the discrete's coming through is because pharmaceutical, some of the chemical and some of the power area, we're starting to see some of our efforts of new product generation starting to have a pretty good penetration.

So when you grow 20% in a quarter in China, in both businesses, you know you're doing something right.

And that's what we did in the last quarter.

And I think we're going to have a very good -- I think I talked about having growth this year, most likely around 10% to 12%.

I'm now looking at China being very strong this year, being north of 15% for Emerson.

And because we've really invested in people, we've invested in innovation, and we're really pushing hard in this market space right now and our customers are liking what they see from us.

So we're in a good zone, and I'm sure people are going to start gunning for us real soon.

But I like where we are at this point in time.

Good to hear.

Got it.

And that 15% is for fiscal 2018?

Correct.

Got it.

And then just a follow-up on the Valves & Controls question.

You hinted that there's a divestiture coming.

And I know you can't give a lot of specifics, but I'd be interested in kind of directionally, how material of -- is that business to the overall Valves & Controls?

And will you benefit from this addition by subtraction?

Is it a lower-margin business?

So will that help you get to your double-digit target?

It will help us more next year.

Let's put it that way.

It is a small business.

You're talking less than $20 million in size, and you're talking about a business that breaks even.

And it's -- and we've had -- this has been the mark from day 1, and the technology and product line, that it's not interesting; a marketplace we're not interested.

We have a couple more that we've been working on, we -- where we're trying to sell them.

And so this one will be done.

And yes, we'll probably get a little bit of help this year, in all honesty, Deane, but it's going to help us more next year from the standpoint as we start running the year into 2019, it will help give us a nice margin, because we won't have that dilutive impact in there.

But it's very small.

It's not that big.

But overall, what I really am hoping to see is, when it clears, is see the businesses growing this year where I thought we might not grow this year and actually go backwards.

So that's the good sign right now of the integration process.

But small divestitures that we have to deal with and we'll hopefully get them all done this year, early first -- the first quarter of next year.

But Frank and his team are working hard on them right now.

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

A question on cash from V&C, unlocking it, so referencing some of Rob's question earlier.

So a couple hundred million dollars was kind of the target over a multiyear time frame.

Where are you right now?

How do you feel about that in terms of pulling that in sooner?

And any thoughts around timing around it, pulling that in?

I don't think -- I mean, I think our goal is north of $200 million in this -- by 2020.

I don't think we're going to go -- be able to go any faster, Rich, because right -- we're going through right now is I have a lot of pressure on Ram and his team.

I think we're going to get over $50 million this year.

The goal for me is really to get their manufacturing regionalized and globalized, which is a new concept for them.

And that's so -- that's important to me.

So I want to be able to manufacture.

We -- our business in Asia right now in China is taking off, and they don't manufacture the product in Asia.

They ship it around the world.

So my focus right now is, "Okay, guys, give me the manufacturing strategy with investments we have to make for the next couple of years so we can localize." And that allowed me then to get -- to be a little more aggressive on the working capital.

I mean, we'll get the $200 million out of it by 2020, but the issue really -- the gold mine for me is to be more regionally located, manufacturing-located, which allows me to run with less working capital.

And that would make a much bigger number on a combined basis down the road, which is that's my goal from that standpoint, from a cost and just the working capital basis.

But I feel good about it.

I mean, we're going to end up getting north of $200 million off this, and we're going to do it in a very systematic approach.

And I think we're getting the cost structure and the competitive nature, and the sales force is working hard.

And now we're talking -- we talked in Italy.

Frank was with us, we were talking about new products and innovation for the first time in a long time with these guys.

And so we're working to help each other try to accelerate innovation, which is something that you know that's a mantra of -- with inside Emerson, and we work very, very hard in innovation.

And so this is something I -- they're exciting me with the concepts and opportunities for me right now, and not just from working capital, but just from growth opportunities, which would be great to see.

Right.

So it sounds like that there's some tail -- even some tail opportunity beyond 2020 with regards to working capital, though, to just kind of grind it out...

Yes, I think so, Rich.

From my perspective, they are running around 50%.

I want to get them down to 30%.

In reality, I think that Ram's business should be thinking about low 20s.

And so -- but this is going to take a more regional manufacturing approach, and that will take time.

So -- but that's a lot of dollars, when you start thinking about it.

You take that percentage of sales.

And so that's the way I think -- the model I see for these guys, if they want investment, this is what I want back from them.

But I know it's going to take me capital, which I'm willing to put in.

But if I can run that business in the low 20s with trade working capital on a global basis with better margins, I'm going to create value for our shareholders and our customers, too.

Right.

And then early returns on Paradigm?

I saw some interesting stuff then at OTC and with regards to some of the software and folding that into the system and whatnot.

What's been -- has it expanded share of wallet early on here?

Or what's the early read?

Not much change.

I think this one's probably 12 months out.

We -- this one is -- you do need -- going back to my comment on one of the earlier questions about the bigger projects, this is where you need bigger projects, where they start investing in bigger chunks in software.

And those are still to come.

I mean, what they're going on right now is they're looking at existing fields, existing investments, so it's only small amounts of investments going on.

What I -- what we're looking for is to gear up and it's okay, let's go look at a new location and really do some more software work.

So I would say that one is going to be more helpful for us in 2019 and 2020, when the bigger projects come.

But still doing okay.

And then it gives us the time to get integration underway.

And we had an organization session last week, talking about some new teams and some ways we want to manage this business.

So Paradigm, the timing is good, and we'll make good money on this one over the long term.

The next question is from Simon Toennessen of Berenberg.

My first question is on Automation Solutions in Asia.

Obviously, very strong China numbers you had again there.

But it seems Asia grew 7%, which is probably mostly China.

So can you talk a bit what's holding you back, like in Asia and China, and how you see that panning out in the second half?

Our Asia businesses grew a solid single digit outside of China.

And I mean, China is important, but I mean, it's still -- it's not -- it's probably only half of our business, if that at all right now, I couldn't tell you off the top of my head.

Historically, it was around anywhere between 45% and 52%.

So they're grabbing numbers for me, Simon, so I can make sure I'm not -- yes, so we had good -- first half growth is single-digit type of business for us, good growth.

What's holding us back primarily is the initial investments are just starting to happen in Southeast Asia and Australia.

So Australia had gone through a very difficult time period, and they're just starting to invest.

So that's -- the 2 weaker markets we're seeing right now are Southeast Asia, Singapore, Malaysia, Thailand and Australia/New Zealand.

And so what we're starting to see is that's starting to pick back up.

And I would expect us to see that moving into a solid single digit, which is normal for a mature -- the more mature emerging market for us.

So that's what's holding us back right now.

But the projects, the business is starting to happen.

And I would say they're going to see a stronger second half than they did in the first half.

And I expect China to hold in there very nicely for us, Simon.

Got it, Dave.

The second question on C&RS in China.

Obviously, again, another strong quarter.

Can you maybe give us a bit more color on the development of the heat pumps business and how you're seeing that for fiscal '18?

The heat pump market has stayed -- is pretty strong.

And now -- I think we're now on our seventh or eighth double-digit growth China business for commercial residential.

That is a good record for us, for you to have 7 straight quarters, and I think that we'll probably have 8 or 9. So what's going on right now?

What we're starting to see is it's starting to move over into the industrial marketplace, the heat pump versus the coal or versus the gas, and it's starting to move into what I'd call the commercial marketplace.

So the first wave has been in -- around homes or the consumer marketplace.

Now it's starting to move into the industrial space, and it's starting to move into the commercial space.

And we're also starting to see where some, potentially, some hot water space, where they're heating water for the industrial applications or restaurants.

So we're starting to see the application of the government's trying to encourage companies to get away from coal and try to get away from heating oil to either to heat or warm water.

And we're now starting to see growth starting to happen outside the residential market.

So that's why this is sustained a little bit longer, and we're encouraged by that.

And we're hoping this will take hold as we leave this year so we can have growth in 2019, because clearly, after 8 or 9 good solid double-digit growth quarters in Asia -- or China for these guys, we're going to have some really difficult comparisons.

So we're trying to drive a broader marketplace right now, Simon, and we're the only one that can do this because of the size of our compression and our sizes, electronic and scale capabilities here.

So, so far, it's going well.

I'm going to be there in June.

I'm going to a couple of sites.

I'm going to do a site review in Suzhou.

I'm hoping to see some of these new products and some of those market expansion going well.

And [Hengke] and his team are doing a great job in trying to get this to new markets.

We've got to get away from just the consumer, the individual homes, to the industrial and to the commercial space, which is starting to happen.

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

So Dave, maybe just talk about capital deployment a little bit.

When tax reform got passed, you were one of the few CEOs to talk about additional CapEx investments.

So I was curious to see if there was any update there on internal projects.

And then secondly, just on the M&A side.

Obviously, the Greenlee-Klauke acquisition recently.

Be curious like how the pipeline is going today, what you're seeing perhaps on the Process side, whether there's any opportunities there.

Any color there would be great.

Good.

So as we talked about, I did come out, and I've talked to my board about this a lot, on the capital allocation.

Given our balance sheet, given the cash flow generation and the benefit of the tax rate for us as we get into 2019 and 2020, we have obviously, tremendous flexibility here.

So from our perspective right now, the -- our share repurchase program, we're going to be looking at $1 billion this year in our fiscal year.

From a capital spending standpoint, we're looking -- we took it up, and we're targeting to get up towards, what is it, Frank, 575?

I think that -- no more increase to that.

I mean, I think that's, right now, that's where we are at this point in time.

It can slip a quarter or 2, but we're ramping up.

And as I talked earlier, we're trying to encourage investments relative to our globalization standpoint.

So we want to invest capital to become more productive and faster and more efficient.

So we're going to keep doing this for the next couple of years.

At the same time, this year, I mean, right now, Frank, are we close to $2 billion?

Where are we sitting on acquisitions at this point in time?

We have 1 point...

(inaudible)

8 with 5, 13 -- $1.4 billion, $1.5 billion.

We -- I firmly believe that we have opportunities this year, Joe, to get over $2 billion.

We do have a couple we're working on right now in the automation space.

So we're trying to frontload this.

As we talked about trying to get a certain amount of acquisitions done incremental, bolt-on acquisitions done within a couple of years, the first 3 years, we're trying to get them as close as possible to give us a chance to work them.

We are seeing opportunities for companies like the Textron situation, where the boards make the decision to refocus the company.

We're seeing more and more opportunities like that out there.

And we're starting to see some initial assets being shown within the Baker Hughes GE business.

And so I think the opportunities are out there for us.

We're going to have a couple of good years of acquisitions, but they're very much focused on bolt-ons, and I would say the majority of them will still be in the automation space, even though we've made 2 good acquisitions in the commercial residential space.

But our best opportunities right now continue to be in the automation and our allocation -- we had liked, as we talked about, I'd like to put as much acquisition at work and the bolt-ons and the incremental acquisition opportunities versus just share repurchase.

No, that's super helpful, Dave.

I guess my one follow-on, if you go back to the Textron acquisition, I have some familiarity with that asset.

And right now, like clearly, the margins aren't where they need to be.

And I'm just curious, when you think about maybe Greenlee specifically, what is it about your channel or your go-to-market, maybe footprint optimization, that's going to allow you to get the margins to be at a much more sustainable and higher level?

We are much more of an intense company relative to footprint optimization than Textron was.

And from our standpoint, I mean, on running this business and being intimately involved with this business -- the business internally right now, there's no reason why the Greenlee and Klauke can't -- couldn't run better.

I just think they need to optimize the manufacturing, they need to optimize the investments that are already there.

It's not going to be necessarily the channel per se.

We do have some channel leverage.

I just feel that we can run this business a much better way than they ran it from an operational standpoint, and it's right into our wheelhouse, which is what we're good at.

I also think they have some businesses in there they should not be in and they're not the leaders in, and we are going to quickly evaluate what we're going to do with those businesses.

And I got Frank over here worried about that because -- but I'm just telling you what I think.

I mean, I know what's inside that, and I think we have some opportunities to tune it better and make them -- and make sure they're worth being in, that's what I'm saying.

The next question will be from Andrew Kaplowitz of Citi.

So let me ask you about Commercial & Residential Solutions in the context of [your] margin performance.

You had mentioned, for the company, relatively flat price versus cost.

Margins were down a slight bit year-over-year, but you had the ClosetMaid divestiture, it's a tailwind.

So maybe talk about what was the impact from inflation or mix, because you talked about slightly weaker U.S. residential.

Are you investing more in the business?

And how should we think about margin moving forward?

We are definitely investing more in the business right now.

We are investing in some next-generation technologies that are going to be hitting here in the U.S. and also hitting very heavily in Europe in the next couple of years.

So we are -- we have ramped up some investments around technologies, some innovation.

As you know, this space, from the commercial standpoint, there's going to be some new regulations come into play, and we have to be ahead of that from the standpoint of offering a solution to our customer.

And if we do that, then we win that space, and then we win that space for quite some time.

And we're trying to add more value to that.

So the actual value proposition is higher for us.

The -- on the price/cost business within the commercial residential, we're basically off a quarter or 2 right now, so in this space, we're being squeezed a little bit, but I know that we will, within 2 quarters, we'll get that back and back in line.

It's -- we trade back and forth with -- from our customer base.

We go back and forth in this issue.

So I think that we're getting closer, but we'll be under the pressure for the next quarter in this space, too.

It's hurt us a little bit.

But it's not a big number, but I just know that it's a negative pressure, not a positive pressure.

And so -- from that perspective.

And the other thing is, just from the mix within our global businesses, where Asia is a good business, but it's not nearly as profitable as say, our U.S. business or our European business.

So we have a lot of -- some also mix going on.

But I'm not going to complain at the level of profitability.

We're still going to raise this margin up over the next couple of years, but it's going to come from the investments and the growth of these new technologies, not by driving a ton of cost out.

We're continuing to optimize it, but I really want to drive a little bit faster growth and drive a faster mix towards that profitability.

Yes, that's helpful, Dave.

And then Automation Solutions orders, you talked about March has still been good.

You told us not to be concerned last quarter when they do slow a little.

But you told us on this call that large projects could start to kick in sooner rather than later.

So do you still think that 5% to 10% range is sort of right for the year?

And any indication on how April looks at this point?

I don't have any April numbers at this point, but the Automation Solutions number is really holding in there solid, a very solid 7% right now.

And I would expect a couple of months.

I mean, if we start getting larger projects, as I mentioned earlier, that could pop up towards that 10% range.

Again, starting to get tougher comps, but the orders are holding in there, so we feel very good about this 7% range for the whole year for all of Emerson.

But I like where we sit right now.

The trend lines are ticking up a little bit and on both businesses, which is a good sign.

And so as we get into EPG, I'm going to try to give you guys a little bit more color down at EPG of what I see after -- we'll have April on board, we'll have the early indication of May, and we'll see what's going on here in the U.S. But right now, the trend lines are going the right way and that's why we felt good about taking that number up to 7% underlying growth at the high end.

And I'm hoping that Automation Solutions does a little bit better, too, in the second half this year.

Yes, with that, I'm going to wrap up.

I want to thank everybody.

Again, I want to thank all the Emerson people, all employees around the world now for their effort.

And I also want to thank the shareholders joining us today for this call.

Again, a very good second quarter, a very solid first half this year.

And now we just have to deliver the second half of this year.

But as we look at the third quarter, we're looking somewhere, again, I'll repeat it, 7% to 7.5% underlying sales growth.

We're looking at our earnings of around $0.85, plus or minus a couple pennies.

That's what it looks like to us right now, and I really can't call it any closer than that.

But it's, again, another good solid quarter for us.

And hopefully, that will continue as we move into the fourth quarter.

Thank you.

Thank you, Mr. Farr.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.