艾默生電氣 (EMR) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Emerson's Third Quarter Investor Conference Call.

(Operator Instructions) This conference is being recorded today, August 7, 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 very much, Rocco.

I'm joined today by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Mike Train, Executive President, Emerson Automation Solutions; and Bob Sharp, Executive President, Emerson Commercial & Residential Solutions.

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

Please follow along in the slide presentation, which is available on our website.

Let's start with the third quarter summary on Slide 3. Sales in the quarter of $4.5 billion increased 10%, with underlying sales up 8%.

Demand conditions remained favorable, and trailing 3 months underlying orders continue to trend in the 5% to 10% range, with June orders up 9%.

Profitability improved across all metrics, with gross margin, up 220 basis points; and EBIT margin, up 180 basis points.

Price/cost was slightly positive in the quarter.

GAAP EPS was $1.12, including a $0.24 tax benefit related to the Tax Cuts and Jobs Act.

Excluding this benefit, EPS was $0.88, up 40% compared with the prior year.

Q3 cash flow is very strong.

Free cash flow of $804 million is 18% of sales, and free cash flow conversion was over 110% in the quarter.

We've continued to buy back shares.

In Q3, we repurchased 3.7 million shares.

Year-to-date, we've repurchased over 15 million shares for a total of $1 billion, and we've returned over $1.9 billion to shareholders through both dividends and share repurchases.

Turning to Slide 4. Third quarter gross margin was up 220 basis points.

This improvement includes a tailwind from prior year Valves & Controls purchase accounting charges.

This tailwind was partially offset by timing of the V&C acquisition, which closed in late April last year, resulting in 2 months of dilution from the acquisition last year versus 3 months this year.

On a comparable basis, that is excluding the impact of the prior year purchase accounting charge and the additional month of V&C dilution in the current year, gross margin was up 180 basis points.

Reported EBIT margin was up 180 basis points and, on a comparable basis, was up 140 basis points.

Again, that is excluding the prior year purchase accounting charge and the extra month of V&C dilution this year.

Turning to Slide 5. From a geographic perspective, the momentum we've seen this past year continued in Q3 with broad-based demand and favorable trends across world areas.

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

Europe returned to growth in Q3 after a flat first half, reflecting steady growth in air-conditioning and refrigeration markets and improving trends in key process automation markets.

Emerging markets were up high single digits in the quarter, led by Asia.

Latin America grew 7% after being down slightly in the first half, reflecting favorable trends across both business platforms.

Turning now to Slide 6. Total segment margin was up 40 basis points, including the aforementioned timing impact of the Valves & Controls acquisition.

On a comparable basis, excluding the additional month of V&C dilution in the current year, total segment margin was up 100 basis points.

Operating cash flow was up 19% to $924 million, driven by high-quality earnings and strong working capital performance.

Trade working capital improved 150 basis points, driven by receivables and inventory improvement.

Turning to Slide 7. Automation Solutions underlying sales were up 12% in the quarter.

Strong growth continued to be driven by MRO, small and midsize projects and turnaround activity across our key end markets.

North America continued the trends we saw in the first half, with both the U.S. and Canada up in the mid-teens.

China, likewise, continued strong growth with broad-based investments and project wins across our key end markets.

Outside of China, modest growth continued across the rest of Asia, supported by solid MRO demand and improving investment activity, especially in India.

Europe turned positive this quarter after being flat through the first half, reflecting oil and gas investment in Eastern Europe and improving industrial investments across Eastern and Western Europe.

Latin America was positive this quarter after being down slightly in the first half, and the region continues to show some signs of stabilizing and improving.

Middle East and Africa growth was supported by strong MRO and improving investment across the region.

Automation Solutions segment margin was up 170 basis points, including the timing impact of the V&C acquisition.

On a comparable basis, excluding the additional month of V&C dilution in the current year, segment margin was up 250 basis points.

This improvement was driven by leverage, the benefit of prior period restructuring actions and operational improvements at Valves & Controls.

Now please turn to Slide 8, and I will hand the call over to Mr. Mike Train.

Thanks, Tim.

Pleasure to join the call again.

Steven asked me to provide a little bit of an update on our large projects, although we shared that with you at the February Investor Meeting, and we've updated it for today's discussion.

On Slide 8, you'll see for August 2018, we're at about $6.8 billion in funnel size.

Now that has increased significantly since the February time frame.

We've seen projects going into the funnel, really, across all the different industry types that are listed there.

I would say at this stage of the game, we're probably not anticipating the funnel to grow anymore given that they're smaller projects that don't make the funnel and there's investment decision dates beyond 2020.

Right now, I think this is a very good set of projects that we've been -- we're working on.

There have been awards against this funnel, probably in the order of $700 million to $800 million that we've been tracking over these last 6 months.

Emerson has won a good number of those.

I'm very satisfied with our hit rate on those awards.

And generally, those have to be engineered by the EPCs before they become orders and then ultimately become sales.

So yes, there's still a little bit of that in front of us for the large part.

We are seeing great take-up in our Main Valve Partner concept.

We've launched that here in the last year, talking to customers as we've built up larger Final Control business.

We are already seeing some very serious discussions around that, and I think there's going to be end users and engineering contractors that want to take advantage of that.

So all in all, I think, again, the project pace is strong.

I think the activities are there.

I've been around the world twice in the last 4 months talking with customers.

We see customer station of EPCs are doing the pre-work, the pre-FEED, the FEED work.

And it looks pretty robust, I think, as we look forward so...

and that is Slide 8.

Slide 9, I just wanted to kind of pull in some other indicators from around the industry, if you will.

Left-hand side talks to the CapEx across their own gas value chain, so it's the upstream, the midstream and the downstream.

And really, based on what we're seeing in the global data, we are seeing that CapEx numbers are starting to lean forward, grow positively.

I think there's outlook and expectations for that.

I think those will firm up as we're talking about the 2019 year here in the next quarter or 2.

And then down the right-hand side of the chart, just some of the different perspectives, BP trying to add to their net oil capability, raising their production.

TechnipFMC is one of the many engineering contractors that recently announced their expectations.

They're seeing their backlogs on fire.

We've seen that in their numbers as well.

And then, laid out a little bit of what's going on in Mexico here.

We've had some change in the government regime there.

They're already starting to lean forward into some of the investment activities they want to put forward here.

I think they're going to be pretty robust for Emerson as we look forward here.

So I think the insight from customers, what we've seeing across the market, I think it all suggests that we've got a pretty strong automation marketplace certainly over the next 2 to 3 years.

Tim, that's it.

Thanks, Mike.

So continue now on Slide 10, Commercial & Residential Solutions.

Underlying sales were up 2% in the quarter.

In North America, air-conditioning demand accelerated versus the second quarter.

Underlying demand and macroeconomic trends remain strong, and we expect the air-conditioning growth to further accelerate into Q4.

Growth in China was impacted by timing of government subsidies for heat pumping.

Outside of China, demand remained strong across the rest of Asia in air-conditioning and refrigeration markets.

Solid growth continued in Europe, reflecting steady demand for professional tools and strong growth in air-conditioning, heating and refrigeration markets.

Margin decreased 80 basis points as material inflation and unfavorable 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.

And now if you'll turn, please, to Slide 11, and I will hand the call over to Bob Sharp.

Thanks, Tim.

First of all, I'll give everybody an update.

We closed on Textron Tools & Test right at the beginning of the quarter.

So as Q4 is reported, you'll see it starting to come into the numbers.

And I'll have to say we're off to a very good start here, very good combination.

We have merged Ridge Tool and Tools & Test together into a single professional tools organization with a single management team.

That's well underway.

A lot of activities now around our global footprint, especially from a sales coverage and customer standpoint at the beginning, a lot of work right now with optimizing our North America sales presence, and again, good progress on that.

We'll be having some actions here soon.

Focusing heavily right now on the spend.

You saw a lot of opportunities we presented as far as margin potential.

Materials is a big piece of that.

We've already done a heavy analysis of the material buy of the Tools & Test business combined with Ridge and have a number of activities underway, certainly applying Emerson's terms around payables and other things with the some very good, quick progress there.

So overall, good organization.

We've had several meetings with these management teams and employees throughout the sites.

And we've gone in all the factories, doing a lot of work in the factories around safety and operational activities.

And I'll say there's a very good vibe right now as far as people feeling the combination, both from the Ridge folks as well as the Textron Tools folks, recognizing that this is a very obvious cultural combination, if you will.

And everybody's seeing some good opportunities and really good reaction from the customers as well.

So we've talked about synergies.

You see synergies around $40 million, a lot of that cost-driven.

Also a number coming from sales in the time.

And then cash flow.

These 2 businesses, combined, generate very good, healthy cash flow, and we see a tremendous opportunity to increase that combination over the next 4 or 5 years as we have the plan that plays out.

Good start there.

Chart 12.

I think it is on Asia.

Certainly, China was a change.

We have enjoyed a very nice string of extreme growth, I'll say, in China and certainly had some amount of a pause here in Q3.

Very much time to heating as they start getting in focus to heating season and release some government contracts and subsidy activities and things.

Clearly, some pause in that activity.

I will say July was a good month.

August is looking well.

And as we show here, we're expecting to be back on a double-digit track in Q4.

For this year, cold chain, commercial AC, heating, all 20-plus percent kind of growth dynamics.

Residential AC, up in the 10% territory.

So certainly, we would have liked to have seen a stronger number in Q3 but do not see that as any sign of any fundamental change right now.

The market is going well.

And as we've talked about recently, the industrial heating side of things has really actually kicked in quite a bit, and we certainly see quite a bit of visibility on that one as that one, frankly, is just getting started after the residential play.

So overall, you can see the map here shows -- there's a number of areas in the coldest environments, the low ambient environments of north, the Scroll technology we have.

It's a very good fit for that when you get into the south and more in the sanitary and residential, where the performance factors aren't quite as critical.

A good presence in total.

We also continue to have some very excellent solutions activity.

Major convenience store chain in China, we've been working with on a monitoring solution that pulls in information from their refrigeration as well as the HVAC, lighting and other parts of the locations.

There's a number of other franchises and customers that that's relevant to.

And then certainly, with the cold chain activity going in China, supermarkets and all the other infrastructure build-out remain strong.

Here's highlighting some integrated Scroll rack solutions.

And Cooper-Atkins is also playing into both of these kind of opportunities as well as we have a chance to internationalize that business.

So again, we would have liked to have seen a stronger Q3 in China but fundamentally feel good about how things are playing out and how Q4 will get us back here.

All right.

Thanks, Bob.

So we turn to Slide 13, which steps through our changes to our EPS guidance.

The table starts with our May 1 GAAP EPS guidance of $3.10 to $3.20.

As shown here, we are raising the guidance range $0.05 for stronger performance and $0.24 for a onetime tax benefit in Q3 associated with clarifications on U.S. tax reform implementation.

The $150 million tax benefit in Q3 drove a 6% GAAP tax rate and reduced our full year expected tax rate from 25% to 27% to approximately 19%.

Also included in the guidance update is $0.06 in Q4 for purchase accounting and restructuring charges associated with the Tools & Test and Aventics acquisitions.

For these acquisitions, we expect to have little, if any, additional purchase accounting charges carryover into fiscal 2019.

And finally, as discussed on our call -- on our Q1 call, in response to U.S. tax reform legislation, the company reviewed U.S. comp and benefits programs and has enacted numerous improvements.

As part of this, in the fourth quarter, we will take a charge of $24 million or $0.03 per share for discretionary onetime 401(k) contribution to every member of our U.S. workforce.

The net impact of these changes is to raise our GAAP guidance range $0.20 to $3.30 to $3.40.

Please turn now to Slide 14, which outlines our updated full year guidance.

And please note that this framework now includes the sales and earnings impact of the recently closed Tools & Test and Aventics acquisitions.

We expect total Emerson underlying sales to grow 7.5%, with Automation Solutions up 9% and Commercial & Residential Solutions up 4.5%.

The GAAP EPS range of $3.30 to $3.40 represents growth of 30% to 34% 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 reduced to 19% due to the onetime benefit in Q3, and we expect the tax rate in 2019 and thereafter to be 25%.

The fourth quarter will be our fifth consecutive quarter of strong sales and earnings per share growth as Q4 of last year was the first time since our strategic repositioning that we delivered both strong sales growth and earnings per share growth.

In this fourth quarter, we expect 7% to 8% underlying growth and earnings per share of $0.86, plus or minus $0.05, including the $0.09 of acquisition charges and onetime 401(k) contribution shown on the bridge.

For 2018, we expect free cash flow conversion of 110%, reflecting our high-quality earnings.

This guidance is in line with our prior guidance of 115%, excluding the onetime tax benefit in the third quarter.

And now please turn to Slide 15, and I will hand the call over to Mr. David Farr.

Thank you very much, Tim.

I also want to thank Bob and Mike for joining us today and updating everybody.

We'll obviously be in the call to answer questions for the people who want to ask questions.

As you look at the order trend chart, the trends continue to stay within the band that we outlined in February of 2018 at the conference in New York.

In total, I expect this will continue in the fourth quarter.

We expect this to be at the high end of this band as we've moved up towards greater than 5%.

Automation Solutions orders will continue to do well.

From the standpoint of both Mike's business and Bob's business, Mike's now starting to come into tougher and tougher comps because last year, at this time, he had a very strong July, and it will start to continue to bounce up against that.

Bob's business clearly has been positive in the 5% to 10% range.

Now it's a little slower over the last couple 2 years.

And so his comparisons are getting tougher and tougher.

But overall, I feel very good about the momentum.

The pace of business is not slowing down.

Our growth and opportunities are out there, and we're seeing our customers continue to spend.

We are seeing the impact, the positive impact, of the new tax law in the United States, and people are spending money.

And we are clearly getting that pace of business.

If you look at our North America sales and orders, they've been very strong since the enactment of the tax law.

But I want to thank everybody for joining us today.

One thing you might notice in the first page, we had a recent STEM program, and I was addressing my new employees.

And I have one in the front row here in the little green outfit, you'll go back and look at that photograph, and she was asking me a great -- question.

Her parents are shareholders, and she was asking me a very delicate question.

She said, "Mr.

Farr, are you going to break the dividend string in 2019?" And I said, I see no reason to break the dividend string in 2019.

And she said, "Good.

I'll be able to afford to buy some more milk or whatever I needed for eating here." So she was very diligently asking me questions about the dividends, which was quite interesting.

Yes, they're very good shareholders, and I like those type of shareholders.

As you know, one of the things that we've been doing and working across the company since the new platform structure is to make sure we have the right benefit structure, the right compensation structure across the global world.

Clearly, we try to make sure that we're making the right enhancements to stay competitive.

And as we said in the press release, we continue to make changes to our package and -- both on the health and medical side, also parental leave improvements, better vacation plans.

And now the most recent one is the improvement in our 401(k), and we're making a onetime contribution to our U.S. employees, which is going to cost us around $24 million.

But it's all about making sure we have the best group of employees that we need around the world as we continue to enhance our benefits around the world.

In today's competitive environment, this is very, very important, and we wanted to make sure that we did it.

We'll continue to tune things a little bit, but the major actions have been undertaken.

And we'll continue to make sure that we stay competitive on a global basis, but that's extremely important to us.

If you look at everything that's going on, it's been a very good 6 months.

If I look at the improvement of sales, I look at improvement of orders, I look at our gross margins, our EBIT margins, our cash flow, both businesses are operating at very high levels of performance.

We had 2 days of planning conference with the new Final Control business.

The total integration of V&C was outstanding.

They are ahead relative to sales expectations.

Our orders this year in both businesses are growing.

We did not expect the orders of V&C would recover so fast, but they're growing in line with the Final Control and the whole Process business, which is exciting to see.

We're seeing improvement in profitability.

We're ahead of our margins that we expected, and we're seeing very strong cash flow, as you can see in our cash flow conversion from the total company.

What a really great job by both Mike's and Bob's organization and around the world, and I want to thank these teams globally for doing an outstanding job.

Mike and Bob, we really appreciate that.

If I look at the global market today, we have all our global businesses now basically in the markets growing.

We have the various marketplaces showing positive growth both in orders and sales.

When we first started the year, we still had a couple of markets that had not recovered, started growing.

But now you see -- in total, you're seeing all our markets growing.

And as I look at the order pace and I look at the interest in business right now, that's a good thing to have as you move into 2019.

If you remember, we talked about that initially, the mature markets would take over and grow first, which we've seen.

We are now starting to see the emerging markets take off.

And I would expect to see our emerging markets, sometime in early 2019, outgrow our mature markets.

Our mature markets will continue to grow at a good pace, but I expect the emerging markets to take off as investments continue to go forward.

As you look at the performance, last year at this time, our underlying sales were growing around 4%.

We grew underlying sales 8%.

As we go into the fourth quarter -- last year, underlying sales were growing 3%.

We're talking about underlying sales growing around the 7.5% range at this point in time.

Comparisons are getting tougher, but the pace of business remains to be very strong, and we have very good momentum across this company in many areas.

So I'm very, very pleased about that.

But I know that Bob now has his hands wrapped around and his team have their hands wrapped around the acquisition of the Textron Tools & Test business.

They're quickly going about how they can integrate.

They're quickly going about how they can grow this business, how they can improve the profitability.

You clearly see, like we saw in V&C, the profitability of the segment will be hurt by this acquisition because it's clearly lower profit margin than we have today.

But they have plans to get that margin back up and stop it from being dilutive in a relatively short time period.

I also see improvements relative to cash flow, which is very important to us relative to that acquisition.

But equally important, the organizations are working together very quickly, and it's really exciting to see.

We closed Aventics a couple of weeks ago.

And Mike -- or Mike and his team reported to the board today as did Bob and his acquisition and talked about what they see and what they see after the first couple of weeks, in Bob's case after the first 30 days.

A lot of opportunities here, and they continue to work.

And both of them will have a negative impact on initial margin but will work its way through to make sure they contribute to overall profitability as we move into 2019.

But from the standpoint of where we stand with V&C and these 2 other major acquisitions -- we've done a lot of acquisitions in the last 18 months.

And I would expect us to have bolt-on opportunities going into 2019 but I would -- not the same magnitude of what we've done here the last 18 months.

But very strong performance, earnings and cash flow.

And I fully believe that, as I said early on in the year, V&C will contribute to our overall earnings for the year, and they will contribute very strongly in cash flow.

And their margins are getting to where they need to be, as we talked about.

In fact, they're ahead of plan as we move forward here.

So really running well going into that fourth quarter.

I would like to make one other comment relative to the corporate organization and, in particular, around Frank's team and Alex Peng and his team relative to tax, the tax planning with the new tax laws.

We were really well prepared, and we were able to take advantage of our tax laws and really minimize the impact of the overall cost to the corporation.

The true-up of picking up this much money, $150 million, both earnings and cash over time, are really reducing our rate for the quarter.

Again, investing in people, investing back in the company.

But really, this is a great job by Frank and Alex and the whole team down there on behalf of all shareholders to make sure that we have the right rate structure and make sure that we're doing the right thing on a global basis for tax payments and really helped us for the quarter and also for -- as we move forward into the coming years.

Our effective tax rate will be in this 25% range.

That's down 5 or 6 points from where it used to be.

And so that's a lot of value creation, and the question for us is how we put that money to use to grow the company a little bit faster, more profitable and use that cash flow to also pay back more money to the shareholders over time, too.

So I'm very pleased.

And Frank, and you know I -- the team's done a great job, and I appreciate that.

As I look at that fourth quarter and I look at where we're headed in the fourth quarter, as we sat here 3 months ago talking about the third quarter, we talked about a quarter there would be, plus or minus, I believe, around -- I said $0.85, plus or minus $0.02.

I mean, that's based to how I think I'm thinking within a $0.05.

It's difficult for us to call within a $0.05.

And I know people always think when we say plus or minus, it's always going to be plus.

You should never think that.

When I say that, I'm trying to give you the best range that I can give you at that point in time.

As we look at the fourth quarter, we feel the momentum right now gives us about 7.5% underlying growth.

We see pretty good growth relative to acquisitions.

The currency will hurt us as we end the fourth quarter, but I still believe that we'll be over 10% on a GAAP basis.

And clearly, the comps are getting tougher and tougher, but we have strong momentum going to this quarter.

I expect this quarter to be, as we're saying here, around $0.86, plus or minus $0.02 to $0.03.

Clearly, we'll push for the quarter ending and see what we can do, but we -- that's about the range we see right now and the pace of business as we look at everything that we're dealing with across this company.

And again, operations are doing well and performing well.

And it was a very good quarter, and we hope to continue to drive this the next couple of quarters.

And I don't see any reason why not at this point in time.

But every day is a new day in this world, and we'll see what happens.

But the momentum is behind, really with us right now and also from the standpoint of strong opportunities around the world for orders and for growth and for process improvements.

I like what we see at this point in time.

And so we have a lot more positive working for us than we do against us.

So with that, I open the door -- or I'm sorry, the phone for calls, and we'll take some Q&A, and we look forward to talking with you.

(Operator Instructions) Today's first question comes from Nicole DeBlase of Deutsche Bank.

So I guess last quarter, on the second quarter call, you commented that you expected Automation Solutions organic growth could accelerate in 2019.

And we now have another quarter under our belt.

Things are stronger than expected.

Order growth was really healthy.

So I guess would you sit here and make that same comment today, Dave?

Yes.

The issue, as I've always said early on in the beginning of the year, Nicole, where I saw -- I looked at this, the 2-year type of band of growth.

We always felt that the growth was going to accelerate throughout the year.

We thought this year would be maybe more of a -- not double digit.

We didn't think we'd cross that 10% mark.

Clearly, now as I look at the 2 years, I've always felt that we would have somewhere around 16% to 18% and 19% combined growth.

We have a lot of momentum right now, and so we have a stronger front-end load.

And so from my perspective right now, I'm looking at probably equal years from this standpoint.

I don't see -- there are certain things our customers can work on.

And as Mike said, as we've seen the funnels come up towards this top number, it could go maybe a little bit higher.

But at some point in time, they only can work on so many projects.

So the momentum is pretty strong.

We're going to have obviously a stronger year this year.

We're getting close to 10% for the whole year underlying growth rate for the automation business.

And therefore -- so I'm looking next year, probably going to be in that 9% to 10% of range now because I'm looking at that combined -- I look at the 2-year cycle for this business, and it's not any different than I said last year or earlier this year.

I said if we have a 7%, 8%, then I expect us to be a 9%, 10% next year.

So now I'm looking more equal-equal, Nicole, for the year just based on the way -- our customer base.

And Mike, do you want to add anything to that?

Yes.

I'd say we've seen very strong KOB 3 in the aftermarket business throughout the year.

It's been probably stronger than we even anticipated in February.

And it's been good for our business.

It's a relatively fast-turn business.

I think that's helped contribute to the second half here in a major way.

The KOB 1 projects, the greenfield projects, will come along.

They have their pace.

As you said, David, they've got to get engineered.

And I think -- again, I think there was a lot of pent-up demand on the KOB 3 side, and we've seen a lot of that come through here as these customers have felt better with their cash flows and other settings.

So I can't tell you that it can't be a double-digit year next year, but I think something in that 7%, 8%, 9% range right now feels about right.

And we'll obviously have to play it out and see what happens.

Yes.

I mean, historically, we've seen a 2-year cycle.

We look back at our cycles, where typically, when we're taking off on combined basis, it's that 16%, 17%, 18%, 19% on a 24-month time period.

So that's how I look at it.

I thought we were going to be less front end-loaded.

Now it looks like we're stronger.

But it's going to be a good year any way I look at it, Nicole.

Right now, our backlog, our growth and orders are strong, so we're very positive about it.

Now we got to make sure we have enough people.

That's a big issue now.

Got it.

And I guess for my follow-up, I know you've talked about in the past that one of your top concerns from a macro perspective is trade war.

So I have to ask, have you quantified the risk to Emerson from the tariffs that have been enacted today?

And I guess just level of flexibility in your supply chain and your manufacturing footprint to handle what we're seeing today.

We have quantified it.

We've not gone out publicly.

It's not that huge of a number relative to what we're doing.

The teams have done a great job of offsetting both with material containment or pricing actions.

We're staying slightly green.

I think that will be the case for the fourth quarter and again next year.

Obviously, Bob's business is more challenging.

He has less flexibility in the short term.

Over the long term, he can adjust.

We have the flexibility around the world.

We talked about this before, where today, one of our global strategy is to have that flex manufacturing capability, and we've had that flex manufacturing capability.

And fortunately, our businesses are not in the, let's say, the bulls-eye of a lot of the tariff activity.

So it's smaller and we can react to it.

So just as much as maybe some of our competitors are hurt, we're helped and vice versa.

It's been a pretty good trade-off.

But I don't like the way it's unfolding, and hopefully, things would settle.

But right now, it's manageable, as we told the board.

And next year, what will happen is we'll have to have more material containment.

We'll have to have a little bit more pricing.

And clearly, it's creating an inflationary environment, which helps us both at the top line, faster growth, but also forces us to do a lot more material containment around it.

So it's very manageable at this point in time, even with the current actions underway.

And I have much bigger issues in the world than that.

And the next question today comes from Julian Mitchell with Barclays.

Maybe a first question just on the incremental margins in automation.

I think you've been pretty clear on the top line drivers.

Your incremental margins in the third quarter, I think, were close to 30% or so.

So I just wondered when you're looking at the good progress on Valves & Controls and the changing mix of sort of revenues in AS over the next 12 months, do you think that 30% level is a good incremental margin to aim at?

If you look at the true underlying performance, we're around 35% for the quarter.

And as we talked about -- this is Julian, correct?

Yes.

Julian, as we talked about, what Mike's having to do right now with the faster order pace running at 12% -- 10%, 12%, Mike is starting to have to -- and we talked about this, he'll have to start adding some incremental people around the world to deal with the projects.

So I feel very comfortable in this 30%, 35% range at this growth level.

If the growth level slows down, then we'll expect that to go up a little bit higher.

But right now, we're having to put people in place.

We're having to make investments both from a capacity and from a capital standpoint and to take care of some of this growth.

Many of Mike's businesses right now in North America are actually getting back to peak performance in the last cycle in actual sales.

So what that means is we're having to get our plants geared up.

We're having to get the people geared up.

And that's something that we got to make sure we stay ahead of given our presence around the world and given how fast we're leading out of this relative to our competitors.

I feel very good about the margin at this point in time.

But Mike and I also have to keep that in the debate back and forth, what's the right balance of it, adding new people, adding new capacity.

And that's not -- it's a debate that we have a lot.

But I think our margin right now -- this quarter's around 35%.

I think we're going to stay in this 35% range.

And if we have to drift it down a little bit for Mike, then we'll do that.

But also, if he slows, we're going to take it back up.

So that's how we see it right now.

Mike, anything you want to add from a Julian standpoint?

No, I think that's right.

Again, we've had a very nice mix of business so far.

Turnarounds, KOB 3, North America, all been...

Very good.

All been very positive, very good for us.

We don't see -- going back to both what Nicole asked and what you're talking about here, our project load right now, if you look it, it's still very KOB 1-, KOB 2-centric.

The big projects have just started coming.

And as I -- you know me, Julian.

I like to take guesses.

So as I look at the project funnel right now, what Mike's talking about and his business are talking about, it looks to me like it's really 2020, 2021 that the KOB 1 mix are really going to put pressure on us.

And then -- but we have to get ready for that -- up to that because it looks like that's where those projects -- the bigger projects are heading.

I mean, if you look -- a classic example, if you look at what happened to ExxonMobil last quarter, I mean, I've always felt that our industry under spent and was not ready for the downturn.

And you saw that from the standpoint, now people are having to spend -- quickly have to spend on maintaining their facilities, and the production is having to come up much faster.

And if they not had maintained their facilities, they're not ready for this, they obviously suffer.

And this is happening across the world in this case, and it's something we saw because they cut so deeply from a capital standpoint.

So that's where we are.

And then just maybe for my follow-up, switching to Bob's business.

The North America growth has been pretty soft in the last few quarters, I guess, in commercial and resi.

It looks like the -- in residential, I track at least, the OEMs have seen high single-digit growth on average the last couple of quarters.

I just wondered, is there just some timing that's weighing on the commercial and resi North America numbers, some market share moving around?

Or just kind of what's going on there?

And when do you see that North America piece reaccelerating?

Before -- and I'll let (inaudible) keep in mind, too, also our OEMs have been getting price now for 18 months.

They're getting some very large price increases.

And so some of those numbers, I mean, they had good underlying volume but some of those numbers also -- are price inflated.

So Bob, why don't you answer that question now.

Yes, I think you're going to see that pretty heavily.

And I think everybody knows that we've got material clauses that we do with our -- especially the large U.S. OEMs on pricing.

And when the -- in deflationary time, we enjoy that a lot.

If you remember back in '16, we had over 2 points of EBIT margin improvement for Climate.

And obviously, now that's in a different zone.

But again, that's kind of normal.

That is certainly widening the sales reported numbers as well.

I think we've got a pretty strong presence in the industry.

We think we know very well what's going on.

We don't see participation issues.

Frankly, there are some advantages.

You've probably seen, in the industry, a compressor manufacturer very recently announcing that they are going to be moving away from the industry.

And frankly, there's a lot of activity right now we're involved with, with helping out some customers respond to that quickly.

So that's good news for us.

301, there are some compressors coming this way.

We don't ship compressors from here to China, but there are compressors that come in this way from some of the competition.

From China to here.

From China to here.

That has also created some conversations, let's say, with OEMs.

So again, there's a gap right now, no question.

We model it 100 different ways.

And frankly, I can't say we ever found the perfect way to correlate between what we report and what they do.

There's distribution, there's timing, there's prebuild, there's a lot of things that play out.

But overall, again, we think we understand our position in this space, and that it's playing out pretty normally, I guess.

Julian, it's -- we watch it very closely because everyone reports around this space here, and we play with all the players.

I mean, I would expect Bob and his business here will probably be up pretty good for the next 5 to 6 months of good order pace.

These guys do a lot of moving around and shuffling and replace the backlog with pipeline.

So overall, I feel -- we feel very good about it, and we'll see how it unfolds.

But it's definitely a different mix this year than we've seen in the past.

Service levels, service type of -- server products have been different this year, how service has been doing.

And so it's a good year overall, so.

Yes.

I mean it's good.

And Q4, it's been a warm quarter and we feel good about the way this quarter is playing out as well.

And our next question today comes from Steve Tusa of JPMorgan.

On this climate thing, what will your volumes grow in kind of North America resi for the year now, kind of on a seasonal adjusted basis?

I mean, I guess, your fiscal year is kind of aligned with their calendar year, the OEM's calendar year.

I'm just curious what that number will be ultimately.

What do you think it will be when all is said and done?

What will the volume numbers be for this year?

Yes, yes, like mid-singles?

I mean, it just seems like that.

I just wanted to get a number on the board.

Well, we'll get a number to you.

And to be honest, the compressor shipments this year are hitting an all-time high for us.

I think, yes.

We are hitting an all-time high.

And so the plants are running pretty strong right now.

And a lot of our customers are starting to level load more production, Steve, versus where they used to try to cycle.

We're starting to see more and more customers to try to keep things level, which moves us out more.

So we're not seasonal.

I mean, it's a different view than we -- we're starting to see some different habits in our customers now.

In the last 2 years, we've had quarters where it's been down in a quarter and we've had quarters that have been high single and some double-digit.

So even quarter-to-quarter, there can be a several-point swing.

And I guess, I'm just kind of struggling a little bit with the fourth quarter because you just -- you said about 6 ways from Sunday, $0.86 and maybe plus, maybe minus.

Normal seasonality to us looks more like $0.90.

And I'm just trying to figure out if climate is bouncing back and the orders here at Automation, quite frankly accelerated, did you pull something forward here into the third quarter?

It doesn't seem like that.

No, no, no.

We didn't.

But you also got to keep in mind, the $0.86 we're taking care of the one-time accounting stuff for Aventics, we're taking care of the $0.03.

And so, I mean, in real life, so those are the restructuring.

So you're taking -- you're right.

I mean, normally, but we -- we're also taking care of some issues as we close some deals and as we do the one-time 401(k).

So that -- I mean I'm -- as you well know, Steve, I really can't call a quarter within a nickel.

And so, when I look at that and say, that feels about right and it would be, as you said, the normal seasonal thing would be in the -- around that 90 plus, if you -- that's why if you -- that's what we've got to deal with relative to the -- that's what's going on.

So you're not that far off.

It's -- just don't forget about the $0.06 and the $0.03 from what we're doing there.

Right.

And then, I guess, just as a follow-up to that on Climate.

You guys have these kind of escalators that, I guess, that would mean your pricing is going to kind of lag by maybe a quarter to a quarter plus relative to raw materials.

It's not necessarily like, hey, we're an OEM, and we're going to do a price increase at the beginning of the year and then this kind of unusual price increase in the middle of the year.

You guys are bit more on a rolling basis.

So I mean, if raws kind of stabilize here, can you be, in Climate, green at some point here in 2019 and start to kind of flip the other way for a period of time given the way your escalators are working?

Yes, it depends on the timing of when it happens.

Again, if it happens later in the year, that's difficult because we're still carrying that drag.

But again, you saw it happen when it turned unfavorable on us about 18 or so months ago.

Like you said, it takes a quarter or 2 to sink in.

Then as it subsides or even stabilizes, that's about the same kind of a lag time to go the other way.

We'll start seeing the benefit -- we'll see the benefit the next -- coming in now and early next year, 2019.

So...

Outside the lags, we are green already.

And it;s going to play out that way, again through next year.

Steve, we work a very fine line with our OEM's, because we know that -- we're trying to make sure they stay competitive, we stay competitive, but all sides, we're trying to keep it really tight around that plus or minus line relative to the price/cost type of situation.

Yes.

One last one for you.

Valves & Controls.

What will -- what kind of revenues for that business finish at in 2000 -- in fiscal '18?

I don't think the revenue's going to change much.

I think they're going to be slightly -- on a reported basis, they're going to be slightly down because of the divestitures and the product lines we got rid of.

But the underlying growth rate is now growing.

So now, next year we're going to have a growth.

And so the underlying order growth is around 9%, 10%.

So they were slightly down because of what we've divested and what we're getting out of.

But now they're coming off and, if you look at the order pattern, they are growing faster.

So now they're going to start growing.

So overall, we're going to grow that business.

And it's going to -- we've got a good couple of years here between that business and what we're trying to do with it.

And our next question today comes from Steven Winoker of UBS.

So listen, on Page 8 for you and Mike, that large project funnel.

I just want to go back to that.

And the resilience of that sliver that's the large -- there are large, large projects in the 2018 time frame through 2019.

How resilient are those in terms of the decision dates?

All of this macro turmoil, you've already addressed it a little bit.

Once these things get started, they are very hard to stop.

And how deep into that do you think we are for that kind of KOB 1 and 2?

I'd say to this -- we'll call them the megas, the big ones.

But we showed you a little depiction of that when we were together in February.

If I drew that chart again, it would look similar, some megas and a lot of smaller projects.

And kind of the positions, timing-wise, similar.

The big space there is the LNG space.

There are 10-plus projects there that are on the mega, mega sizes.

They are gearing up.

Again I've been around the world to meet the EPCs, to specifically touch those projects.

They are doing a lot of work right now, getting ready.

We're doing a lot of budgetary quotations to them so they can plan their projects.

You're talking about trying to tie up some capacity.

I told them they better start reserving capacity.

You can just see this valve wave come in and they need to start thinking that way.

They want all of our valves, they want -- all the engineers that work on these projects, they need to get in line with this pretty early, and they are doing that.

They are doing that.

How does that relate to that $700 million to $800 million number that you gave over the -- in terms of awards versus your wins?

And should we think about therefore that piece of it stepping up significantly?

Yes, the largest ones, they're still out there -- a lot of the awards are big dollar size.

Yes, these -- most of the awards have been in the $1 million to $10 million range.

I mean, you've got a couple of bigger ones but most of them are smaller.

But yes, they're not in the $100 plus.

And we've had -- we get -- when we get an award, it could be for a piece of the business.

So we might get systems early or we might get the valves early.

So we're tracking all of the puts and takes around that.

So take $800 million out of the funnel, we saw about $2 billion at the end of the funnel, just to kind of make all the math work out.

So that's what I kind of think.

I don't think we'll see the funnel getting larger because I think anything that works at [$70, $80 oil] is identified.

It's out there.

If it's going to have a decision day within 2.5 years, it's got to be worked right.

Steve, what goes on at the CEO level in these projects, without giving my perspective on what goes on here, is the projects, they have been prioritized right now.

But the prioritization will change.

And what will happen is, The CEOs, executives, will look at simply the people, the location, the world.

There might be issues popping up in regions of the world where they need more gas and they need more oil, where we need to more -- issues relative to our own manufacturing.

They will move some of these projects.

You can see a project move 6 months in, 6 months out.

These projects will slip, moving in and out.

But what we see is we track them and we move them back, you would see other ones come in front.

So right now, what we've been seeing is the projects have been moving around a little bit.

Sort of like -- it's like a motion.

You -- this doesn't look like a motion but these things are moving.

But the funnel is pretty tight and consistent and where some of these projects are moving around is pretty good right now.

But what we didn't have in February, and we don't have it here now is that we had only a few of the, what we call the big megas sitting in 2019, early 2020.

We now look at that chart and there's a lot more of the megas coming in, in late 2019 or early 2020.

So that tells me, when I made my earlier statement, I think these -- our KOB 1 business is really going to start getting up there in that level in the late 2020, '21 type of period because that's what's going to happen.

So that's where we are right now.

If the funnel shakes out pretty nicely, we might get up to $7 billion total, but that's a lot of work going on out there at this point in time.

Dave, I don't think you put a final point but if you could, on the July order experience in AS and maybe -- and then CR&S, too.

It was -- Mike was real close, around 10% and [ARS] is probably very consistent with where we were before, so in the 3% to 4% range.

That's very preliminary numbers.

And we pushed them hard to get a number for this call here.

But I still think we're in a good side of that band.

And so overall, we're in pretty good shape.

Okay.

And just lastly Mike -- sorry, Bob, we talked a lot about cold chain and Asia commercial opportunity when we last saw each other.

This China heat pump subsidies push out slightly, doesn't change any of the math you've got on a -- kind of a 1-year view, 2-year view?

No, not at all.

Like I said, cold chain this year, we're going to be in the high teens, let's say, territory.

We've done a lot of things to put that organization together for a full solutions play.

The cargo and Cooper-Atkins acquisitions, we are putting infrastructure in Asia and Europe to internationalize.

So no, those are progressing well.

Steve, I think I want to -- I'm going to ask Bob or Mike to comment.

I mean, no one's really talked much or asked quite a bit -- Mike had a phenomenal quarter in China.

And it's very broad-based, because we were just over there and we did a review.

And your sales were 20-some-odd percent for the quarter?

Orders have been very strong.

So we're seeing -- Mike, you want to comment?

We're seeing very broad across all industries, a lot of new players coming in and starting to build stuff both in China and moving outside it.

And that's been a very pleasant surprise over the last couple of quarters.

You may want to comment.

China has been strong for us.

I think locally we've seen a lot of -- state owned is busy.

A lot going on with the privately owned enterprises.

We've seen these chemical companies rise up over the last 5, 6, 7 years.

They're getting very serious.

They don't want to buy the mid-tier products anymore.

They want a high-qual stuff and they're leaving the borders.

We've got one that we're working on that's going to go to Louisiana, add to gas prices.

But China, for us, is broad based.

And again, I think I referenced February.

There's a refining lane that's going to come at us in China, a smaller one in India to go along with it.

A lot of spend there.

Power is still very solid for us.

We saw the nuclear plant start up here in the last few months.

So we've got some of those behind us now so we can get on to the next ones that we've been ready to work on.

I was -- I'd say I was impressed.

I think it's -- China really, really surprised us.

I was impressed when I was there with Mike and his team, just recently.

Bob was there too.

Bob tried to get run over in a car.

And I said -- you were with me.

I didn't try because I was next to you.

But I would think that the broad base of all these orders, and the type of industries going on and the customer list -- and one of the things -- good thing with this cycle is a lot of the smaller players that we are competing against do not have financing.

They don't have the money to get access to money.

And so the big multi-national companies have made -- continue to make investments, which we continue to do, including upgrading our manufacturing capability in China with the V&C stuff is -- we are really, really actually separating ourself again in China.

And outside of China, we'll see -- we're talking a lot about China.

Commercial, we're in the double digit outside of China in Q3 and we were in Q2 also.

So there's plenty of activity going on in Asia, broadly.

And our next question today comes from Jeff Sprague of Vertical Research.

Hey, Jeff, you notice how are our orders and sales stayed pretty consistent and how they sort of track together?

Yes, that's amazing.

I cover a bunch of companies.

That just doesn't happen.

One of the disciplines we have, Sprague, and a lot of people will give me a hard time -- are our releasing orders.

All these guys would go, "(expletive), I can't believe he'd say that." But the issue is one of the disciplines we have across this company is making sure the order pace and monitoring and what we tell you guys is consistent because if we don't get an order and eventually get sales, something's up, going on.

So I just had to tweak you a little bit, my friend.

Well, I always give you credit for those orders but thanks for calling it out.

I guess even the kids in the audience probably know that if sales don't catch up with orders then the orders aren't real, right?

I have to -- I'll explain that -- that was the next question I had gotten.

She asked about the dividends.

She didn't quite get the connection between -- I mean, I tell the guys the orders are great but without a sale, I can't pay a dividend.

These guys hear me say that all the time.

So hey, obviously, things look extremely robust and everything you said about projects sounds very encouraging.

How do you put in context the fact, though, that you're looking at CapEx and your sort of market's actually now exceeding the 2014 peaks when oil prices are lower and there's other maybe countervailing forces?

Would that reflect that maybe some of those projects just got truncated in '14 and didn't happen?

Or just what kind of big picture perspective would you add to that?

Well, I think as we came off of '14 and the peak, there were projects that were planned and did not move, and they got parked and they kind of idled, and they got resurrected and a little bit of pre-(inaudible) work has been done on them and now people are making those decisions to move forward.

So we've certainly seen some like that, that have been hanging out there for a couple of years, Jeff.

Yes, I think, Jeff, that biggest issue that we have seen in North America is North America has been very strong in this capital.

If you look at the GFI in the U.S., you'll see the numbers are quite strong, is that the pressure on our customer base was so enormous relative to cut capital so quickly that, that they stopped stuff very quickly in North America.

They did not stop as quickly internationally as in North America.

That's why we see our North America bounce back.

And so I'm sitting there in the valves control conference, the Final Control, and we're seeing North America numbers coming back to levels we saw in '14 so quickly.

And that tells me that things were cut off abruptly and they had to come right back on and they were ready to do it and I think that's a very good observation because that's what we're seeing right now.

One other insight there is the movement of energy to different parts of the world has gone up.

The U.S. is exporting LNG.

It was not doing that back in 2014.

So we're seeing terminal and midstream spend build.

They are all good things for us.

(inaudible) We're seeing it in Mexico.

We're seeing it in the Middle East.

We're seeing it in Asia.

So I think, those are some of the things that are different.

And each different person becomes a throttle too in those projects.

Right?

I mean, it's happened before in the peak.

The other thing I would say that with the -- talking about V&C, I think V&C, the Valves & Controls, they did not have the capability of manufacturing the products here in the United States.

And one thing Mike's team has got on it right -- rapidly is now, we have huge opportunities here in North America that we get -- are addressed very quickly with our channels.

And the markets turned our way.

So we're now getting V&C products in to customers that they've never been in before.

Now we're having to quickly accelerate manufacturing and spend money.

That gives us another little bumpier North America that we were not anticipating.

My hat's off to Rob and his team and Mike for getting that done because that was not easy to do.

We still have 18 months, 24 months of fairly big investments to make here.

But it's -- things move to our way pretty quickly and the team executed very rapidly and the timing of the V&C acquisition has been perfect, as I look at it.

I'd say, all across the platform, everybody stepped up.

Everybody is going fast.

We needed them.

Very clear.

Just one quick thing.

There's obviously been a disconnect in Automation as you kind of absorbed incremental versus underlying as you digested V&C.

Should those numbers be very similar now in 2019?

You've got a little Aventics noise.

But should be kind of what we see is what we get on the incrementals?

V&C is on a good path to improve.

They will continue to improve.

We're not there yet.

Aventics, a sizable number, it's going to come in lower.

It's going to average us down.

We'll work that over time, take a couple of years.

I think the big issue is what we're having to go through right now is we're having to spend some different capacity and some investment both in sort of the some of the service centers around the world.

And I think we're going to -- we'll probably still have one more year of a slight dilution there from impact.

But the profitability is going to be still very good, but I don't think it'll be quite accelerating as you're thinking there, Jeff.

I still see some dilution impact.

I still see some incremental investment that we're making faster than we originally planned.

And our next question today comes from Nigel Coe, Wolfe Research.

Yes.

So I just wanted to go back to the reported funnel.

Obviously, a very impressive buildup of projects.

I just wanted to broaden out Jeff's question.

What do you think this implies for the broader cycle?

I mean I'm talking here about some of your shorter type of businesses.

And the other question is, the view out there is they're late cycle.

But my view of this is that we know -- probably, mid-cycle.

Any views there, Dave?

Yes, I'll give you my 2 cents.

First of all, this is my gut feeling, as you well point out to me.

I mean, I've been in the business a long time, almost since when AT&T have been around, so this is my best view of this, okay.

It's a little bit different cycle.

I think we're early stages in this cycle.

I don't think we're -- there's been such significant underinvestment.

There's stronger growth globally.

There's a shift in energy usage to the gas and alternative fuels.

But oil is still used quite strongly all around the world as a commodity.

So what we see right now is a fairly large investment of -- right now, early on, to fine-tune the facilities and to deal with short-term capacity and then -- in long term.

So I think we're earlier cycle on this process.

And so that's why -- I mean, I feel very good about this point in time.

And from the standpoint of where we see the projects going, it's going to be, as Bob said, it's going to be a people-capacity issue for not only our customers, but also all of us too at the same time.

But right now, I think we've got it under control.

It's going to take a little bit more investment and use of technology.

I feel pretty good about where we are in that cycle.

I'd just add, 4 quarters ago, we were still negative.

I mean, we just lifted it a year ago.

And so this year, obviously, to comp against that, we've been able to focus these nice growth rates.

But I think the momentum's there.

We're going to grow next year along the lines we've talked about earlier.

And again, I think, these -- some of these projects are 3, 4-year, 5-year length playouts with the sales and everything coming with them.

And unless something really wild happens in the world, this stuff is going to happen.

They have not been exploring.

They have not been developing.

They're still reducing reserves.

Some of these guys have gotten extra cost, they're behind.

They've got to move.

So I think it's going to be pretty robust here -- I would still call it early cycle.

Historically, Nigel, I've been talking about it 2 years but if you go and look at 3 years and the bottom is the 3 years in the beginning to the peak and then next year down.

You're typically talking on average around 26% to 28%, 29% 3-year type average numbers that will grow.

And so we're just starting into that cycle at this point in time.

On average, you can take the 3 years and average it out.

Good.

I want to go back to the 2-year comments.

You mentioned the 2-year cycle.

So what you're saying now is 3 years, so if that is 2 years of 8%, 9% growth, then third year would be in that slightly lower rate of growth?

Yes, 6% to 8%.

That's historically where we've seen.

Okay, good.

And then the follow-up question.

So with the dilution on Aventics and Textron hitting in 4Q, it sounds like you've got a tailwind to M&A in 2019.

Can you just maybe fill in some gaps on '19?

You've given us the tax rate but how about corporate?

I think this year was a doubled year on the benefit.

So how does corporate look into next year?

And any other color on '19 would be helpful as well.

So the corporate cost, expense standpoint?

Yes.

Well, I mean, I think we're in pretty good shape for the year because a couple of things happened.

We no longer have an overlap relative to our long-term performance year plan because we've now got totally that -- so we don't have that delta.

The pension right now is still looking good.

I think our pension costs are coming down.

The -- from an acquisition standpoint, I mean, my plan -- we've done on average what, $1.5 billion to $2 billion over the last 2 years.

I think we're going to be less than $1 billion next year at this point in time.

So from a corporate standpoint, we're in pretty good shape.

We're in pretty good shape there.

I don't see anything extraordinary coming at us at this point in time.

We're still trying to manage the capital.

You guys think it's real easy to spend money.

Sometimes it takes time to spend money.

And we're managing at that.

We're trying to get production geared up from that standpoint.

But overall, I think the cost containment is pretty good.

We're just selecting, making -- having to make some investments to deal with the long-term -- the projects that Mike sees coming out him.

We want to make sure we're ready.

We don't want to lose them, and we want to make sure we can serve our customers on a global basis.

And that's a good example of capital right, because commercial construction, ability to execute is limited by the industry (inaudible).

The corporate overlap, is that about $50 million of benefit next year?

I don't know.

I haven't looked at that tightly.

We'll talk to you in a week or so.

Nigel, we haven't looked at 2019 that tightly yet.

The answer is, we haven't looked at that closely yet.

Gee, we're trying to get the fourth quarter done.

It will be a positive.

I don't know -- It will be a positive I can tell you -- I can't size it.

God, I wish I was that good.

Our next question today comes from Andrew Obin of Bank of America Merrill Lynch.

How are you guys?

Not too bad.

we're still trying to calculate some corporate costs.

Frank's barely got the tax planning done in the third quarter and now he can't give you a total year corporate cost for next year.

What's wrong with you, Frank?

I mean, what are you thinking?

What should we do with this budget -- his bonus this year?

You know?

I think you should raise it.

(inaudible)

That's very smart, Andrew.

Just a question on taxes.

It's interesting that it took you guys until this quarter to figure out that you guys want to give this 401(k) contribution.

There's still tax adjustments.

When you talk to your customers, how far along do you think they are in figuring out their taxes?

And what kind of impact the new tax structure will have on their behavior?

Because I would imagine, you guys are more sophisticated than -- among the more sophisticated guys.

So it took you like 9 months to figure this out.

What do you think they -- your customer base in terms of figuring out, okay, what do I do with these taxes?

There's couple of things going on here.

One, the treasury when they passed the law back in December hadn't really promulgated the laws yet.

So I mean, it took a long time for them to get all the rules and regulations out.

So as you know, this year, everyone had provisionals.

We took provisionals and we took a provisional in our first quarter, correct, Frank?

Yes.

And so everyone has done that.

Now because we're a [9 30] company, the laws have been promulgated and we have a clear vision of what's going on.

So I would expect most companies are calendar year companies.

So I would expect them to really get in this sort of -- figure it out in November -- of late November, December, this -- time frame.

We just happen to get -- the rules came out a couple of weeks ago, a month -- about 30 days, about 45 days.

We were able to get this thing hammered out pretty quickly and so we moved forward with all these ins and outs of this and we got it clean.

Most companies will take all the way to the end of this calendar year to clean this up because there's a lot of things going on around the rules and regulations on the tax laws.

And that's why I wanted to thank Frank and rest of those guys because there's a lot of work here and you've got to make sure once you make that call that you don't reverse it.

And I don't want to reverse it.

So we're paying taxes along those lines.

Anything else you want to add to that, Frank?

No, I mean, I think that our large customers obviously have a good sense of it.

But many of them are calendar year, so they'll probably, as Dave said, wait until the end of the year.

Smaller customers, it's hard for me to generalize.

I mean, I think they figured out the CapEx portion of it pretty quick in terms of getting the accelerated deduction.

So I mean, I think it's pretty well known -- some of this clarification just came out in the last week, so it's still moving around on us.

Relative to the 401(k), we've been planning things and studying things.

And we looked at all the benefits, and this is the last big thing we wanted to do.

And typically, we look at things like this will be more in the fourth quarter for us when we do things for our employees, our fiscal fourth quarter.

And so that's why we did that.

I mean, could we have done it earlier?

The answer is yes.

But this was after we looked at everything we were trying to do and magnifying and looked at everything and so we made the decision to do it.

And it's normal when we go out and communicate increases and everything, this is one more way you could just thank the employees for what they've done for us.

Sure.

Just a follow-up on the funnel.

My understanding is that a big debate in the industry is that large international oil companies are sort of committed publicly to returning money to shareholders and at least publicly, they have not committed to CapEx in 2019 or 2020.

So some of the funnel that you are seeing, are you actually having discussions with people other than -- it seems like Exxon is the only one that got shellacked over it.

But are you having discussions with people who have not publicly committed to spending money that in fact, they are thinking about it?

Oh, absolutely.

Absolutely.

I would say every customer's in that funnel with something.

They've all got their priorities, they've all got their programs.

They don't like to talk about it in public.

Tax is going up a lot next year, I don't know.

But it's built in, they're working on it.

Yes, I think -- we talked about this early on, Andrew.

The first phase of capital this year were short-term stuff, these guys.

A lot of that was payback, quick payback.

They may not be publicly talking to you guys.

But they know that we've got -- they've got to increase their reserves.

They've got increase the sales, the top line.

So investment discussions are underway and they're -- it's happening and it's also, from a competitive standpoint, they're not going to tell people where they've gone for their money because that's a competitive advantage.

So I think that you may not be seeing it, but we see it because we have to work with not only the Exxon Mobils and the BPs or the Shells, but we also working with the EPCs right now.

So the EPCs are getting very busy.

And so all these different things are coming together.

So going back to what Nigel said, I think this is fairly early on in the medium size, the large-sized projects at this point in time.

I like where we are at this point.

And I'm more worried about how am I going to produce it now as I get into late 2019, early 2020.

And there's LNG projects too.

These guys are partnering with each other and then they're going to a partner of EPCs.

So there's some complexities around all of that.

But once they kind of get lined up, I think, as you said, it's got to go.

Total project in LNG right now, you see out there, what's the total magnitude of projects you're seeing be discussed, the total number?

Over $1 billion out there.

For us, what's the total projects?

What's the total project?

Oh, my god.

I mean, 5% to 10% of it.

So $1 billion for us.

5%.

Maybe it'll be 20...

There's a lot going on out here, Andrew.

And our next question today comes from Gautam Khanna of Cowen and Company.

A lot of questions have been asked and answered.

But on the incremental margins, just to get it calibrated, the 2 acquisitions, Aventics and Tools & Test, bring with it how much of intangibles amortization next year and on an ongoing basis?

Recognize a few quarters have a lot of those one time.

Give us one second, we'll give you the numbers here, my friend.

The full year amortization for Tools & Test we gave at $25 million.

And then Aventics should be in the same ballpark.

So it's about $50 million on a run rate basis for the 2 of them.

Got it.

And so net of that, we're still talking north of 30 incrementals?

That's where we want to drive.

I like South.

He likes South, but I'm like North.

I'm talking with my shareholders.

Okay.

Just want to be clear.

And getting back to your earlier comment, Dave, about next year not being as rich in M&A opportunities so that -- is that a function, or there's opportunity out there?

Or is there some internal constraint given the amount of activity you're doing just to integrate what you've got, let alone grow?

It's not internal constraint.

It's a function of what we're trying to get our hands on right now, Gautam.

And we -- if you look at the acquisitions of V&C, you can look at the Textron acquisition, you look at the Aventics acquisition, all 3 of those major acquisitions in the paradigm have been -- we have been working on for years.

So it's just a function of what we see we're working on right now and trying to entice and encourage it.

We may have something new come out of the blue, we don't know about at this point in time.

But I'm just looking at what we see working on and that we think we can shake loose as a cooperation with where the acquisition has come from.

And that's just -- it goes in cycles like that.

So we're working very, very hard and as we get into '19 and early '20 to try and shake loose a couple of more good ones -- a nice little bolt-on acquisitions.

It just takes time.

That's how to do it.

Okay, thank you very much.

I want to thank everybody for joining us today and very much appreciate you joining on the call.

Again, Mike, and Bob, Frank, your whole teams out there around the world, thank you very much for what you accomplished this quarter, and we've got one more quarter to get done this year, then we can go home and have a drink.

Thank you very much, everybody.

And thank you, sir.

Today's conference is now concluded.

I thank you now for attending today's presentation.

You may now disconnect your lines, and have a wonderful day.