艾默生電氣 (EMR) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to Emerson's Investor Conference Call.

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

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

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

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

Please go ahead.

Okay.

Thank you, Gary.

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

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

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

I'll start on Slide 3 with the full year summary.

2018 was a year of strong growth, operating performance and cash flow execution.

This slide compares our actual results to the initial 2018 guidance from a year ago, and which we over delivered on almost every metric.

Emerson underlying sales grew 8%.

Automation Solutions was up 10% underlying, with growth across all world areas.

Commercial & Residential Solutions grew 4% in 2018, following 5% growth in 2017, and has delivered 9 consecutive quarters of underlying growth.

GAAP EPS included over $0.20 of net onetime items, including $0.30 benefit of tax reform adoption, partially offset by acquisition accounting and other charges we highlighted throughout the year.

EPS growth was strong and benefited from core operating leverage as well as the lower U.S. corporate tax rate due to tax reform.

Operating cash flow of $2.9 billion is 17% of sales, and free cash flow is $2.3 billion and reflects 114% conversion, excluding noncash discrete tax items recognized in net earnings.

In 2018, we completed our 62nd year of consecutive dividend increases and returned more than $2.2 billion to investors, including $1 billion of share repurchases.

We also deployed $2.2 billion for acquisitions across both business platforms.

These acquisitions represent important components of our long-term strategy and our path to 2021 EPS of $4.50 laid out at our February investor conference.

So turning now to Slide 4. Our fourth quarter results were at the high end of guidance discussed on our third quarter conference call.

Underlying sales growth was 8% in the quarter, and September trailing 3-month underlying orders were also up 8%.

GAAP EPS was $0.97, including an $0.08 discrete tax benefit.

Excluding this item, EPS of $0.89 was up 16%.

Turning now to Slide 5. Fourth quarter gross margin was up 150 basis points on strong operating leverage and the benefit of cost-reduction actions.

Reported EBIT margin was down 30 basis points, including dilution from acquisitions that closed in the fourth quarter and the impact of a $24 million discretionary onetime 401(k) contribution to every member of our U.S. workforce, as discussed on our Q3 call.

Turning to Slide 6. From a geographic perspective, the momentum we've seen over the past year continued in Q4, with broad-based demand and favorable trends across the world areas.

Underlying sales were up 8% in both Q4 and full year.

Mature markets were up 7% in Q4 and in the full year, led by North America.

And likewise, emerging markets were up 8% in Q4 and in the full year, led by Asia.

Turning now to Slide 7. Total segment margin was down 10 basis points, including recent acquisitions.

Total segment margin was up 70 basis points to 19.9%, excluding Q4 acquisitions Aventics and Tools & Test.

This improvement reflects 30% core incremental margins in the quarter.

Q4 cash flow was very strong.

Free cash flow of $721 million is 15% of sales, and free cash flow conversion was over 125%, excluding the noncash discrete tax benefits on net earnings.

Trade working capital improved 50 basis points, driven by receivables and inventory performance.

Turning now to Slide 8. Automation Solutions underlying sales were up 9% in the quarter and up 10% for the full year.

September trailing 3-month underlying orders were up 11%.

Strong demand for MRO continued through the quarter.

KOB 2 upgrade and optimization projects also continue to drive growth across our key markets, projects like the One Emerson announced yesterday, a $32 million contract to modernize a gas processing facility in North Africa.

Strong demand continued in North America and China, with broad-based investment and project wins across our key end markets.

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

Growth in Latin America accelerated in Q4 as the investment climate continued to improve in the region, especially in Brazil and Chile.

Automation Solutions segment margin was up 80 basis points and was up 140 basis points excluding the Aventics acquisition.

This improvement was driven by leverage, the benefit the prior year restructuring actions and favorable mix.

Turning to Slide 9. Commercial & Residential Solutions underlying sales grew 5% in the quarter and were up 4% for the year.

September trailing 3-month underlying orders were up 3%.

North America growth was driven by very strong commercial and residential air-conditioning demand as well as strong demand in cold chain and professional tools markets.

China growth was driven by cold chain and air-conditioning markets, offset by lower heating demand.

Solid growth continued in Europe, reflecting favorable trends in cold chain and professional tools markets.

Margin decreased 150 basis as material inflation and other inflation was partially offset by price realization, operational leverage and the benefit of prior period restructuring actions.

Let's turn to Slide 10, which outlines our 2019 guidance framework and Q1 expectations.

With a strong macroeconomic environment and favorable trends in our short-cycle end markets as well as longer-cycle capital investments, we believe our momentum in 2018 will continue in 2019.

For the full year, we expect underlying sales growth of 4% to 7%, with Automation Solutions up 5% to 8% and Commercial & Residential Solutions up 3% to 5%.

The stronger dollar results in an FX translation headwind for the year.

Assuming October 31 FX rates hold through the remainder of 2019, we anticipate a $330 million unfavorable impact to net sales.

With solid underlying growth, we expect to deliver incremental margins of approximately 30% across our business platforms, driving GAAP EPS of $3.55 to $3.70 or growth of 3% to 7%, including over $0.20 of net headwinds from discrete tax benefits and other onetime items recognized in 2018.

Excluding these prior year onetime items, our EPS target reflects double-digit growth.

Our exceptional 2018 results and outlook for 2019 keeps us firmly on the path to $4.50 EPS in 2021, as presented at our investor conference in February.

We anticipate also another strong year in cash flow as we continue to drive operations execution and incremental cash flow from recent acquisitions.

2019 operating cash flow is expected to be $3.2 billion and free cash flow conversion north of 100%.

For Q1, we anticipate 6% to 7% underlying sales and EPS of $0.65, plus or minus $0.02.

FX is expected to be a 2-points headwind to net sales and $0.01 to $0.02 drag on EPS.

Please turn to Slide 11, which bridges our 2019 GAAP EPS guidance.

In 2018, we had discrete tax items that drove a 16.6% effective tax rate versus the 25% we expect in 2019 and going forward.

This $0.34 headwind is somewhat offset by onetime charges in 2018 that create a tailwind in 2019, including $0.09 of acquisition accounting charges and $0.03 for the onetime 401(k) contribution charge in Q4 '18.

Together, these items net to more than $0.20 headwind in 2019.

Next year, we expect to drive over $0.40 of EPS from operations execution and acquisitions or more than 10% EPS growth.

The strength of the dollar against most major currencies drives a foreign currency translation headwind next year.

Assuming October 31 rates for the remainder of '19, we expect currency to result in a $0.06 drag on EPS.

And now please turn to Slide 12, and I will hand the call over to Mr. David Farr.

Thank you very much.

Welcome, everybody.

The first thing you got to know, as many people have been following me for a long time, over a year ago, I lost Zorro.

My wife and I lost Zorro.

And exactly 14 months later, we decided to add a new member to the team.

So I'm introducing Rocket, a tricolored King Charles Spaniel, who is now 11 weeks old.

And Rocket is an individual that can move a little faster than Zorro could in the later years, a little more versatile, and he's bringing new life and energy.

As you can see in the order chart, we had a good finish to the orders, and I'll talk a little bit about orders and where I see the growth going forward in 2019.

But again, Rocket is engaged.

He is ready to go and take us to the stronger performance in 2019 and 2020 and beyond.

So I want to welcome everybody to Rocket, and I will obviously use him as I did Zorro for many years, as comparisons and jumping in earnings growth and things like that.

So with that, I want to -- first of all, I want to welcome everybody today.

I want to thank the global organization of Emerson for their support and tremendous execution over the last 12 months.

We had a very strong fourth quarter.

We did exceed what we communicated to you in August.

We said that we'll be delivering good, solid growth of around 7% and underlying sales.

And we said that EPS would be at $0.86, plus or minus $0.02, and we came in at $0.89, plus unique tax restructuring that Frank and his tax team put in, which benefits us over the long term.

So a very strong fourth quarter on top of the rest of the year.

It was an exceptional year.

Growth in earnings and sales, cash flow, returns.

Return on total capital broke through 20% again this year in 2018.

And the Emerson team did an outstanding job.

We also returned over $2.2 billion of cash to our shareholders, and we made continued excellent progress on the free cash flow to the cash dividends ratio.

This year, we've got it down to 54%.

And the OCE is totally focused on getting that number under 50% in 2019, which is basically 18 months ahead of what Frank and I presented over the last couple of years since the repositioning effort in 2016.

But more importantly, great 2018, moment of joy.

We're moving on to 2019.

And I really want to make sure the global team understands it's a great year in 2018, but we got to continue to drive the growth, the improvement in margins, the improvement in cash flow.

We need to make sure that we continue the successful integration of the acquisitions, the investments we've made over the last 2.5 years relative to the Pentair Valves & Controls, relative to Aventics, relative to Paradigm, the Textron Tools & Test business.

We need to make sure that they deliver accretion in earnings and they deliver incremental positive cash flow for the corporation for us to invest and pay back to our shareholders.

As we look at the orders, we finished the orders last year.

You can see that we had a continued trend on a positive note, I think, up in around the 6%, 7%, 8% range for several, several months.

We see that trend continuing in the first part of this year.

But clearly, the global economy is changing.

And when you think about our underlying sales growth that Tim presented on Chart 6, and I look at what we're saying this year in the 4% to 7% guide, let me give you a feel for what we see happening around the world right now tied to that 4% to 7% guide.

Last year, the United States grew over -- basically a tad [under] 9%.

We believe that U.S. growth, underlying growth, this year being a 6% to 8% growth.

We see still good momentum, and our customer base is spending money.

The U.S. economy is still solid.

It's still growing.

Yes, people can say the marginal growth rate is slipping, but it's still a pace where people are investing, including companies like Emerson.

We look at Canada, which grew last year around 12%.

We see Canada slowing down in the 5%, 6% to 8% range like the United States as they continue to invest in materials and oil and gas and those mining areas that are important to Canada.

As we look at Latin America, we see momentum in Latin America from the standpoint of -- overall, last year was 4%.

In the fourth quarter, they did 10%.

As I look at next year, I think that we're going to be in this 5%, 6%, 7%, 8%.

Maybe if we're lucky, I'll be talking in the quarters that we have double-digit quarter growth in Latin America.

It's the one area that I believe they are now kicking in.

As I said last year, they had to prove it to me, and they're now starting to prove it to me.

So I would say that, that is one of the places I feel good about.

Europe last year was around 2%.

I don't see much change.

I think Europe is going to grow in this 2% to 3%.

The economy is settled down to a lower-growth environment.

We have unique opportunities there.

But still, I don't see a very strong, robust Europe at this point in time.

Asia last year, outside of China, was 10%.

As I look at it now, I think we're aiming at 6%, 8%, 9% range, where we're seeing good investments in India, Southeast Asia.

Australia is investing well right now in some of their raw materials and mining areas, so a pretty good environment for us right now in Asia.

The China situation -- clearly, as people are concerned about it, our order pace has continued to be very strong in China in Automation Solutions.

Overall, we've delivered 17% growth last year.

I'm looking at growth in more in the 7%, 8%, 9%, maybe 10% if we see a little pickup in the second half of the year in Bob Sharp's business around Commercial & Residential Solutions.

But a slower growth, but still a pretty good growth pace for us as we see it.

I would say it's going to be driven by Automation Solutions, where last year this was driven by Commercial & Residential.

Middle East and Africa, which had a good year, around 6%.

I think we're going to see a very similar type of growth rate, 4%, 5%, 6% in Middle East and Africa.

So again, we're having all of the world area -- global world areas contributing to our growth.

Our emerging markets last year grew faster than the mature markets.

I expect that to happen again this year.

The other key issue, as we see it right now, last year at this time, the winds were basically to our back.

As I told the board today, I see crosswinds today.

We have winds cutting in front of us, in back of us, on the side.

Overall, though, it's still pushing forward, and I'm optimistic for our business profile, where we are right now, that we'll still see good underlying growth.

That's why we put the 4% to 7% underlying growth sales out there.

We'll know more as we get into February, as we see what happens relative to some of the discussions going on in Asia.

But overall, we feel very good about where we're going.

We have some issues that we have to overcome, as Tim said, relative to headwinds.

It's a little bit around $0.20.

But our incremental margins, our acquisitions and the benefits that we have from our share repurchase program clearly will help us.

On the negative side, clearly, the stronger dollar, it does hurt us at this point in time.

But we're putting forward, I think, a very good earnings forecast, a very good sales forecast.

And I think we'll continue to outperform the market as we did this year relative to our global spaces, as we performed extremely well across Emerson and around the world.

So again, I want to thank everybody across Emerson for an outstanding year, a year that's really exciting.

We have a lot of work cut out for us.

The forecast we put in place right here keeps us well on the line towards the 2021 plan that we laid out in February to the investors, both from a sales standpoint and execution around acquisitions, on our share repurchase program and then obviously, margin -- incremental margin performance.

So that's where we sit right now, and we feel good about it.

I feel good about how the team executed this year, as did the board today as we reviewed the final results with them.

And I look forward to delivering a strong performance for Emerson, for our shareholders again in fiscal 2019.

And so with that, I'll open the mic for questions and look forward to an interesting debate with my investors and sell-side analysts.

(Operator Instructions) Our first question comes from Jeff Sprague with Vertical Research.

I guess if you put up 4% organic growth, Pokey is going to be a little bit better name perhaps.

What has to happen to get down to 4%, Dave?

Those ranges you laid out there don't really seem to even bring 4% into the conversation.

I think that the range -- 4% comes into play with the following.

We do have a lot of tension with China.

And what we see would be the consequences of that, that would slow down what I would call not only China growth but all across Asia Pacific growth.

So I think that's why I'm putting that stake down there, Jeff.

You're right.

If you add up the numbers, it'd be more like a 5% at the low end.

I don't -- my core belief does not believe -- say that.

But at the same time, I want to make sure investors understand.

The concerns that I would have would be in Asia, would be around China.

I think Europe potentially could weaken.

As you know, there's a lot of political uncertainty in Europe right now.

Even though we don't have a robust growth, I'm always concerned about when the political uncertainty comes in Europe.

So those are the markets I'm worried about.

But my gut tells me we're still going to be in this solid, single-digit range.

And we're not going to be as strong this year at 7%.

7% was a really strong year.

But we're going to do better than the underlying GFI, which is probably going to be around 3.8%, 4%.

So that's how I see it.

And Dave, on the question of projects, right?

On the last call or maybe it was 2 calls ago, there was a sense that things were really kind of getting to the altar and people needed to pull the trigger or the resources weren't going to be there.

I assume that still stands.

But do you see people hitting the pause button a little bit on bigger projects because of all these uncertainties?

Or do you think the bigger projects that are in your funnel actually do start to kind of come into play here?

We believe they're going to come into play.

We review with the board today.

Lal reviewed with the board today about 6 or 7 significant projects.

We're seeing more KOB 2 right now, like you just saw one today, which is -- people, that means [kind of] business 2, which means upgrades and brownfields.

The big projects are still being worked on.

I'm going in with Lal and Mike into Japan next week on a couple of large projects for the Middle East.

So I -- right now, I don't see any delay happening.

I still believe that the larger projects will be rear-end-loaded in this year.

And then we won't really see much of that growth coming until probably 2020, but we'll see a little bit in the fourth quarter based on the projects.

But the project size are getting larger.

Right now, we saw bigger ones, as Frank saw today with Lal, reviewing with the board.

And we have seen -- we see no delay right now.

But clearly, as I said, there's a lot of crosswinds going on.

And so if some of these winds shift and do a little shear work on it, you could see a company like Emerson get sheared.

But right now, I still feel very good about it.

We'll give you an update on the overall projects in the funnel again in February.

But as we finish the year, the order pace was pretty good.

I mean, the early indication that October was decent again, a solid growth number for that green line on the Chart 12.

The concern is clearly around Commercial & Residential in Asia after -- China is really starting to pull back on some of the funding.

But I feel good about it right now.

So the new Rocket, the new day, feel pretty good.

The next question comes from Steve Tusa with JPMorgan.

So just on the first quarter, on the first quarter guide, $0.65, plus or minus, was a little bit below where I was expecting.

Anything going on in the quarter that would kind of make that below average from kind of a normal seasonality perspective?

Because if I just do kind of the way your seasonality worked last year, you need a bit of a -- a bit more EPS in kind of the final 3 quarters to kind of get to the midpoint of your range.

Obviously, it's a different portfolio than it's been in the past.

But I'm just curious if there's anything in the first quarter that plays around with that dynamic.

Nothing right now.

From my perspective, obviously, we have the currency -- probably be around $0.02 currency hit to us in the EPS.

We had some things that came through the P&L in the first quarter last year that won't come back.

I would say that we -- if we can drive a little faster growth, I think we'll be better in the execution.

From my perspective, I know there's nothing going on in the business.

I just think that after you have a good fourth quarter, [you have to come out] of the year sometimes, I'm a little bit nervous about how that first quarter comes to unfold.

But nothing is happening in the business at all at this point in time.

And let's see how the orders unfold here the next couple of months, and I'll give you a better feel for it.

But there's nothing going on at all, Steve.

Nothing.

I guess when you're thinking about a lot of the management team so far giving some pretty good color on impact of tariffs, and maybe you put that into the kind of price/cost bucket.

But what are you guys kind of seeing?

What are you incorporating over the next 12 months as far as the impact from all these new lists that are out?

Quickly, I'm going to go back to the point real quick before I go to that question.

Frank just pointed out that our -- last year, our tax rate in the first quarter was under 22%.

This year, we're going to be probably a little bit over 25%.

So we have -- there's going to be a lot of tax things going in and out as that tax reform came through and hit us.

So that's one of the biggest headwinds that we've got from the standpoint of quarter-to-quarter.

And now if we can make that 25% better, then we'll figure out how to do it.

But that's the biggest headwind that we see right now in the first quarter.

I just want to -- I just -- Frank just pointed it out...

But that shouldn't impact kind of the normal seasonality on the entire year, right?

I mean because...

No, but we're -- no.

Okay.

In fact, the whole -- yes, it will change it because of the tax rate in the first quarter.

Last year, it was a little bit under 22%.

It's 21.6%.

This year, it's going to be around 25%.

And so that doesn't impact that seasonality.

Let's go back to the -- our headwinds right now that we're looking at is -- basically, we're looking at a little bit over $100 million, assuming that the President does not implement the second tranche.

And so it's more like $120 million at this point in time.

We are obviously executing the pricing around that.

Clearly, the pricing is going in.

It does not give you any margin, so that obviously gives you a little pressure from the standpoint -- we have to figure out how to get cost reductions to offset a little bit more of that.

But pricing is going in, and we're making that happen.

But clearly, as you well know, is the number this year is significantly higher than last year, which was closer to more like the 25 effective cost impact to us.

This year, it's going to be closer to $120 million.

And therefore, we're going to have a much higher pricing in that margin.

There will be a little tad degradation to the margin because of the offsets from, obviously, the price, but you don't get leverage on that price.

But...

Does that incorporate everything you know on kind of all these lists today?

Yes.

Everything kind of...

As of today.

It's all in.

It's all in.

The only thing we don't have in there right now is that the President makes the decision on the most recent list.

He said that he may increase it to 25% on January 1. So that does not incorporate that because then we do not have that.

It's very hard for us to trigger price increases on anticipatory tariff-type stuff.

So right now, it's a little bit under $125 million, and that's what we've got set in motion, and that's how our plan is unfolded.

The next question comes from Rich Kwas with Wells Fargo Securities.

Just a follow-up on Steve's question.

So it doesn't include the 20 -- the increase of the 25%.

So do we multiply this by 2.5 times?

Or if we go to 25 -- I mean that's probably wrong.

But I mean, just can you give us a flavor for the way it goes with 25%?

Yes, our rate will be around 25%.

This year, our effective rate was 16.6% as we showed on the...

No, no, I meant the tariff -- so the tariff rate for China.

So...

Oh, no, no, no.

You can't just -- you can't multiply it.

Yes.

I mean, it's going to be -- I mean, Frank, you think -- what are you saying?

It's going to be less than $20 million?

Order of magnitude, $15 million, $20 million.

It goes from 10% to 25% under list 3.

Yes.

That's -- and I got to believe that he made this -- the President may look at it or the Congress may look and say, "Okay, which ones will go?" Some may go to 25%.

Some may not go.

So we'll keep you informed.

But I would say you'd probably think of another $10 million to $15 million on top of that, if that triggers.

Obviously, that means we have the pricing to try to offset that.

Okay.

Good.

And then on the mix of business.

So it seems like for the year, at least in Automation Solutions, more mix of MROs, still pretty healthy.

Some KOB 2 coming in.

But you're still pretty comfortable about 30-plus on a core basis for incremental margins.

And then what does that assume for investments?

Because I know you talked about making investments in '19 ahead of project activity and getting people around, et cetera.

It assumes we make the investments.

We have to be very selective when we make these investments.

I mean, this incremental margin is very important to the OCE and to the whole company.

And so we'll -- Lal and his team will be happy to make the trade-offs, and we expect them to deliver 30-plus-percent incremental margins.

And they've got to make those trade-offs where they're going to make those because we've got to make the investments in the support of the larger projects.

We've got to make the investments in the service organization as we continue to try and increase our share around KOB 3, on [kind of] business 3, the aftermarket business.

So we're going to make the investments.

We're not cutting back in that.

But this incremental margin is very, very important to us.

And their growth rate is now up and running at a good pace, which last year, it started out slower and they build up.

So Lal and his team has got to figure out how to make that margin be a little bit more efficient and deal with that world because we need him to deliver the 30% because the Commercial & Residential has had a good couple of years.

And most likely, their growth rate is going to dial back a little bit.

And so Automation Solutions has to carry a little bit heavier load right now.

Okay.

And then last one on buyback.

How should we think about buyback for '19?

$1 billion.

$1 billion.

And as I look -- as we laid out in February, our target is basically to do $1 billion between -- each year between now and 2021.

Our target is to get down the total cash flow back to our shareholders, down to a little bit under 60%, which would include getting our dividend payout better in the ratio line, too.

But we always believe in giving money back to our shareholders, but at the same time, we want to make sure we make some incremental investments and acquisitions and so on.

The next question comes from Julian Mitchell with Barclays.

Just a first question on Commercial & Resi Solutions.

I always like to have a little bit niceties before you just jump in.

I like to have a little chit chat, have a date here before you sort of jump right in and ask me to go out or something.

Well, I guess, it's a limited time, 60 minutes.

So it'll just be the last 3 or 4 questions.

So I guess they'll have to be quick.

Julian, there's rules to follow, there's rules not to follow, okay?

Yes.

Two questions is a good rule.

So I think maybe the first one around Commercial & Residential margins.

Those were down in both climate and tool and home in Q4.

Just wondered how quickly you expect the margins to recover, particularly in the climate piece.

Understanding that tool and home has acquisition impacts through the whole of 2019, when do we get climate back up?

I think it's going to be more the middle of this -- of fiscal year 2019.

Our pricing actions are going in based on our agreements with our larger OEMs.

But it does -- it takes time, and I think we probably have one more quarter of challenging margin out of them.

And I think that they've had a lot of things hit them pretty hard and they've had to offset that.

But at the same time, they are taking the actions.

So I feel comfortable that overall, our price/cost will be probably neutral this year at a much higher, higher level, because we're going to be probably north of $120 million of the pricing action to offset the tariffs and the other costs coming in.

So I think they probably have another quarter or 2 left of that, Julian.

And so -- but I think Bob and his team are highly focused on getting that margin back and getting back up and having a good margin this year, and we're banking on him to make that happen.

And so his organization's up and they're listening to him.

This is a year we need you guys to bounce back in and give the margin back to us for our -- for the shareholders.

So that's what we see right now, Julian.

And then just secondly on balance sheet usage.

You've laid out the buyback pretty clearly.

How are you thinking about the M&A environment?

The last sort of 12 months have been very busy on deals.

Do you think there's a lot of management capacity left to do a bunch more in the next 6 to 12 months?

Or you think you'd rather hold off and make sure Aventics, Tools & Test, Intelligent Platforms are all integrated well?

As we review with the board today, we most likely will be looking at significantly less than $1 million -- $1 billion of acquisitions this year.

So I would say, we're probably going to be somewhere in the $500 million to $750 million at this point in time.

The focus of integration and the focus of delivering returns to our shareholders on the acquisitions we made over the last 2.5 years is very important.

So we have $200 million relative to the acquisition from the GE.

And then I would say, as I look at it right now, we'll be somewhere -- $300 million to $400 million elsewhere.

And that's how I see it at this point in time.

If I see anything different, we will know by February.

Nothing is going to come out before February.

So I -- but right now, that's how I see it.

I see that we'll do $1 billion of share repurchase.

We'll do $1.2 billion -- a little bit over $1.2 billion in dividends.

And I would say right now, I would dial in between $500 million and $750 million on acquisitions.

And from an acquisition -- or capital spending standpoint, I would dial in $650 million, Frank?

Is that right?

$650 million.

The next question comes from Steven Winoker with UBS.

I know you like to ease into it, so I'm going to say it's important to pause and celebrate these milestones, so congrats on 62 years of increasing dividends.

Wish every company were able to do that, so very impressive.

Well, there's a lot of people that gave me a hard time and Frank a hard time.

Frank and I had a hard time when we made the decision to reposition, shrink the company and maintain a dividend.

But I felt quite strongly from this organization and from our shareholders' standpoint, that was the right thing to do.

And we're not quite out of it.

I think Frank and I want to see us get out of it this year in 2019.

And I think it is an important milestone, Steve, to support our shareholders around the world.

A lot of people depend on that shareholder -- or that dividend, including a lot of our retirees at Emerson.

Okay.

That's not one of my questions, though.

So for the 2...

I know that.

That was a moment of joy and I appreciate that moment of joy and I appreciate to have a little hug and I [didn't give you a back hand], so get on with your damn question.

All right.

So the first one is just a little more color around this 30% incremental margin in terms of the puts and takes.

So what I'm hearing so far is price, material, cost, excluding tariff.

Is that -- are you thinking that that's going to be green for this year?

And then mix sounds like it is -- you've got KOB 2 picking up, and KOB 3 as a percentage of sales sounds like it may be lower, which would be a headwind.

And then volume, leverage and productivity versus labor inflation -- wage inflation.

Just a little color for how you're getting that 30%, plus the investment you talked about.

So on the price/cost situation, we -- I believe in the end, we'll be plus or minus a couple of million dollars on green, red.

Clearly, from a pure dollar standpoint, the GP line, it's a wash.

But it's a little -- it'll be a tad -- could be [1/10th] negative on the business overall as the headwind, but not meaningful headwind relative to that.

Relative to mix, I think the mix is -- one is the United States and Canada and Latin America and -- stay reasonably strong for our growth next year, our mix with the KOB 3, which is the aftermarket and repair, and the [earliest] KOB 2, our mix should be okay.

I'd start worrying about the mix for us more in the fourth quarter of this calendar -- of this fiscal year, fourth quarter 2019 and then the fourth quarter -- our first quarter of 2020.

So I don't think the mix is going to be bad for us at this point in time.

So that's why the incremental margins this year could actually be a little bit easier for our team, who are up and running.

We have an understanding of the price/cost situations.

We've got -- I think we've got our capacity pretty well structured.

Frank and Steve Pelch, as they went through the plans, the operating plans, put the capital out there for these guys for productivity, for incremental capacity.

So right now, I feel better about the margins -- incremental margins this year than I did last year.

And that's how I feel at this point in time.

Okay.

And what is the biggest driver to support -- I mean, pretty specific about 3.8% to 4% GFI view globally given all these uncertainties.

So if you have kind of pick the biggest question that would support that in your outlook, what are the -- what is it that you're looking at?

The biggest support is U.S. If North America, which is United States, Canada, Mexico, if United States, Canada and Mexico continue to invest [and] grow, which we saw -- you think about those 4, that entity was -- last year for us was 9% at U.S., 12% in Canada and 4% in Latin America.

If they can deliver on average what I'm looking at that's forecast next year, most likely around 6%, that tells me that I'm looking at a decent year for us and that's the core place.

If we see that happening, I feel good about it.

And as I told Jeff early on, my concern remains in Asia with -- as everybody would.

But right now, we do not.

Our orders are still okay.

Obviously, Bob's business is struggling a little bit right now.

But Bob -- Lal's business is doing better.

So on the good side, North America.

On the concerned side, it's definitely China and Southeast Asia.

That's how I see it.

The next question comes from Nicole DeBlase with Deutsche Bank.

So I guess, starting with growth in AS, 5% to 8% for 2019.

I think this time 3 months ago, we were talking about maybe 9% to 10% growth.

I'm just curious.

Has anything really changed from your perspective or is it just some conservatism around some of these potential global growth headwinds?

So the key issue, as I've talked about, the 2-year window here.

I've always talked about basically a 17% to 18% type of 2-year window here.

And so with the base at 10% last year, I'm now looking -- this is -- I've been in this business a long time.

It's typically around the 17%, 18%.

A really good year would be 19% on a 2-year basis.

So we had a 17 -- as we look at the 2 years, the first year is 10%, so now it's off 7% to 8%.

So maybe my downside concern would be -- is relative to around Asia.

And so I still think, if I was putting a number on a piece of paper right now, it's going to be around 7%, 8% for Automation Solutions, with my concern being clearly that China, Asia Pacific, with the whole turmoil relative to the tariffs going on there.

But I feel good.

So from my perspective, nothing's changed in the marketplace.

The order pace is still pretty good.

But I'm always concerned about what could happen with North Asia in this next couple quarters.

Okay, got it.

That's fair.

And I guess, just kind of like elaborating a little bit on that comment, you've spent a lot of time in China, talking to your customers quite often.

Is there anything that you see and that suggests that we are seeing a slowdown?

Or is this just concerns over what could materialize over the next 3 quarters or so?

Okay.

On the Automation Solutions side, the answer is we've not seen anything at all.

The order pace is still pretty good.

On the Commercial & Residential, we are seeing it.

We will -- we'll have a tough first quarter.

We could have a tough first half.

As you know, a lot of programs that we had going underway were being -- were around the environment.

The government was supporting investments to try and improve the environment from the standpoint of burning coal and getting into cleaner energy.

They have cut that back.

And so we're going to -- after basically, I think, 7 straight quarters of over 20% growth in Bob's business in China, the funds are now starting to dry up.

And that is definitely as the government refocuses investments, and I would say Bob will have a tougher year in China and our Automation Solutions investments are still going forward.

So that's how we see the profile changing and that's where we see the negative.

So if you think about other companies that tie to that within the space you follow, I would expect them to be seeing similar type of trade-offs going on right now in China.

The next question comes from Nigel Coe with Wolfe Research.

Wolfe?

Wolfe, huh?

Where are you located?

Yes.

Grand Central, it couldn't be better for me.

It's great.

Yes, so congratulations on Rocket and congratulations on a great '18.

Thank you.

So you mentioned China and you mentioned Europe as sort of the 2 areas that you're watching the most closely for next year.

No evidence yet of problems.

But if you think about crude and you think about the U.S. dollar, what are the breakpoints on those 2 where you'd become more concerned about the next several quarters?

So from the standpoint of just the dollar strength, I get nervous in particular around Europe when the euro gets down towards parity.

We got a long way to go from there.

We've always structured our structure relative to our European competitors around parity.

I get a little tighter at $1.05 than I do -- but it's typically around parity.

So as long as the dollar stays -- and it's been pretty tight band here.

From the standpoint of just competitiveness, we're in very good shape at this point in time.

But I do have a concern if the dollar continues to strengthen and then it gets -- relative to Europe and then it gets all the way down towards parity, which there's no indication that's going to happen at this point in time.

That's where I get concerned.

Overall, relative to -- again, the dollar strength hurts us in certain cases, but also helps me from a cost structure and so my -- from the standpoint I'm buying, obviously, commodities around the world at a stronger dollar pace.

So it helps me from certain respects.

But my European competitors right now are not as, let's say, strongly in focus relative to the competitive strength as we are today.

And so I think that -- I like our hand.

We've made some major investments in being competitive in Europe.

We've got some major investments underway being competitive in North America, and then same thing in Asia.

So from a competitive standpoint, I like where we sit at this point in time.

Frank and his operations made some good investments that should help us as we get into 2019 and 2020, being stronger at competitiveness.

But the dollar gets to parity, I get nervous.

Okay.

And then the GE acquisition, I know you haven't closed it yet, but it's definitely a Tier 2 PLC supplier.

Is the ambition here to build it into something that's going to compete with Rockwell or Siemens?

Or do you have more of a niche strategy here?

Maybe competitors with your DCSs?

So, I mean, how do you see that acquisition evolving?

We will -- clearly, it's a Tier 2, but we're a Tier 6 before this.

So it's a step up.

And then I would -- you'd give me that, wouldn't you?

I think our focus, as I've talked about, I'm being very careful because the deal has not been approved by anybody yet and closed.

But clearly, our focus is going to definitely be on the core process markets of oil and gas and power and chemical.

In the hybrid space, we're very focused on the life science, food and beverage and mining.

And what we want to focus hard on is the hard integration of -- between our Ovation power platform and that DeltaV on the process side, and then basically go after the -- sort of those islands of automation sitting out there in the marketplace that we can really go after.

And then also integrate the -- as you know, we have a couple of our own PLCs that we've developed at this point in time, and try to make sure they have a place to play.

We'll get into more description of that as we get forward.

But that's the game plan we want.

And over time, it will be an investment.

But we now have the core technologies, and we have a core market presence that we can grow over time.

And many of you may or may not know, when we brought out DeltaV, we were #7 in -- seventh in the world in DCS.

So I wouldn't underestimate our ability to go after this marketplace.

And given our installed base around those core process markets and our installed base around those select hybrid spaces I went after, I wouldn't underestimate that.

You next question comes from Andrew Obin with Bank of America Merrill Lynch.

Well, I guess it's morning where I am.

How are you?

Where are you?

I'm in Beijing.

Oh, congratulations.

Has your office moved to Beijing, Andrew?

Is that what's going on or...?

Yes, we've been outsourced.

Not quite.

We've been visiting some wonderful Chinese companies.

Good, congratulations.

And how's the weather look?

Oh wow.

Oh, it's -- actually, it's quite clear.

I don't know if it's good or bad.

I've seen sunshine in Shanghai and Beijing.

I don't know if it's a good thing or a bad thing, so.

It's a good thing.

It's a good thing.

That means the investments they're making, the cleanup there, it's good for us.

So well, thanks for joining the call today.

I know that's not easy to do and I appreciate your interest in the company.

So fire away.

What are your questions, my friend?

Just a question in terms of capacity ramp up in automation systems.

How should we think about over the next 2 years?

And what does it do to incrementals in those business as you sort of bring on people to deal with the backlog?

From our standpoint, as we ramp up both on the capacity, the capital standpoint, which we basically got a good jump on this year when we spent almost $620 million of capital, up well over -- almost 30% or something like that in capital spending this year.

From a capital standpoint, typically, that hasn't hurt us too much from an incremental because of how we feather it in.

But I don't feel uncomfortable with our expansion relative to that.

I think at 30% leverage, we should be able to handle the incremental investments in people and the capital.

The business is there.

And the key issue for us is clearly to make sure we get that -- feather that capacity in around the world where it needs to feather in.

We will slow down the capital spending this year.

It'll be more in the $650 million range as we digest what we spent last year and sort of the incremental work that we want to spend this year.

But I think we're in pretty good shape.

My concern on the capacity is basically making sure that we have it in the certain locations around the world.

But the U.S. in particular has been very strong.

So my North America capacity is being stressed at this point in time and we're having to add some incremental capacity here in North America, including the United States, which we need to get up pretty quickly if we want to deliver as we get into 2020.

So I think we're in pretty good shape, Andrew.

I don't think that we're going to have an issue here relative to complaining about deleverage of the people and ramping up.

I don't see that or feel that at this time.

And just a question also for revenue growth.

What's the impact of the latest DeltaV upgrade that you just announced?

How much does it help revenue growth in 2019?

I couldn't tell off the top here.

I think it's going to be a positive.

I mean, right now, our systems business will have a good year next year.

I think that we sold -- our DeltaV system had a very good year.

I mean, our power business grew in 2018.

We were one of the few companies that grew in the power world.

We grew.

We had a very strong fourth quarter.

I would expect -- I expect our process systems down in -- out of Austin with upgrades should do pretty well.

And if we do, say, 7% growth, underlying growth for the automation business, the systems business should be north of that 7%.

I mean, the -- I would say they should be closer to 9% or 10%.

That's off the top of my head, just thinking about it.

If we grow 7% underlying for the company, then the systems should be -- the system's systems of DeltaV should be closer to 10%.

That's DeltaV, not the power, the DeltaV piece.

So I think the upgrade's going well.

The next question comes from John Inch with Gordon Haskett.

Just a bit of a follow-up on this GE acquisition.

I realize it hasn't closed.

But Dave, a lot of these GE businesses that have been sold, buyers find afterwards they were in need of investment.

Are you sort of anticipating that as well?

And is the play really more of trying to get after their installed base, where you can maybe cross-leverage a bunch of other things?

It's definitely going after the installed base.

They have a couple places they're extremely strong in their installed base, so it's -- #1, we want to play and leverage that across.

On the -- this is -- this company is more of a technology play from the standpoint of investing in technology; it's not necessarily a heavy capital play.

We will lay out -- we -- we're going to be -- when we get this deal closed, we will lay out an accelerated investment of dollars for the technology to make sure we can take it to the different process industries and the hybrid industries that GE didn't necessarily serve, but we have tremendous access to because of our DeltaV and also our instrumentation.

But to your second point, the #1 issue for us is what we want to do is tap into their installed base, take that and really leverage that with our current capabilities.

But it will take -- what we're going to do is we're going to ramp up as Mr. Knight did back when we acquired Fisher and we started building on DeltaV.

We're going to ramp up our investment in the leverage of this technology, and we'll lay that out, what we're talking about, when we close it.

But that's clearly the game strategy for us.

We're going to have to ramp up their investment.

This is one asset that I have to say Jeff and his team kept the investment going in.

I was -- we're pleased at the technology and the capabilities.

And because it's not capital, it was making sure they had the right R&D, which was important, and we feel good about that, but we're going to make some more investments, for sure.

Okay.

So that makes sense.

And just in terms of the Automation Solutions business.

You guys called out that September orders were up 11%, with the implication that September's cadence was a lot better than the prior 2 months and doesn't that -- if that's the case, doesn't that give you actually a little bit more encouragement for kind of this first quarter guide here?

Or is that more of a longer-term -- those orders that get spread out?

No, I think the key issue for us is you got to keep in mind, there are incentive plans put out there for sales and orders and stuff like that.

And there's the last month.

And so the automation business had a far better year than we thought originally.

So they were gunning.

I think it does.

If we see another strong double-digit order pace in October and November, that makes me feel much better relative to the start of the fiscal year and then also, the first half of the year.

So give me how the follow-through goes.

Initial read on October is good and probably in line with what we saw here in September.

But I want to see October, November.

You've heard me say this before.

Out of the fiscal year, we should have a great year and the bonus payments for the automation guys are going to be good because they've earned them.

Now can they follow through that and does this order pattern stay in this 10%, 11%, 12% range for the next couple of months?

If that's the case, we'll have a stronger start and I'll feel better about it.

So that's how it reads right now as you think about it, John, okay?

Sounds good.

Appreciate it.

The next question comes from Joshua Pokrzywinski with Morgan Stanley.

Just to echo everyone else, congrats on the new puppy as well.

I guess to stick with that theme, the bottom end of the AS guidance, 5% looks a little bit more Zorro than Rocket here.

And you spent a lot of time talking about the sensitivity to China.

But I guess, within that, what's your sense on if we do see demand roll over, I mean, aren't there more infrastructure heavy-type end markets where traditionally, they would stimulate first?

I mean, couldn't you be kind of a casual beneficiary if things do get weaker, that self-fulfilling prophecy says that they also pick back up with stimulus?

The answer is yes.

And, I mean, we're trying to be cautious relative to the guide and from that perspective.

But my concern is, I watch China -- we've been doing this -- this is our 40th year of doing business in China.

And my only concern is that if we get into trade tensions and they decide to start saying, "Okay, Emerson, yes, you are a local company in China because we manufacture there, we are going to sort of block you a little bit." And that's my biggest concern in China.

Right now, if the China thing was moving down towards a resolution, I would sit here and tell you today that we're going to have a strong 10-plus year in China from Automation Solutions, and that means we're going to have a 7%, 8%, 9% total year for Automation Solutions.

But I'd like to have a little bit more time on that, and that's why I'm being more cautious about China because I'd like to see some resolution.

I also know how they can come back and maybe come after companies like Emerson if there's -- if the tension continues to ramp up between the 2 countries.

I don't feel that at this point in time, but I'd be foolish not to be concerned about that and paranoid about that.

And hence, I'm going to spend time going over there and work this issue.

But right now, you're right.

If they shift like they're shifting away from Commercial & Residential right now, all the Commercial & Residential businesses are getting hurt.

Automation, typically, in the past, would be helped.

That would be the norm.

So you're exactly right.

I want to see it and then I'll feel it.

But right now, I'm just being a little concerned about that -- the China, U.S. impact.

Got it, fair enough.

And then, I guess, similar question on the bottom of the range.

I know there's some discretionary investment in there and presumably, some restructuring that's going on as well.

If we hit 5%, probably the world has changed, to your earlier point.

How much wiggle room is there on the incremental margin or kind of on a dollar cost base?

Just anything we can use to conceptualize how much discretionary spend could come out if demand is weak?

Yes.

I mean, the biggest -- this is where the rub comes into play.

Let's say the world starts really starting to get struggling.

And so we start going towards a 4% or 5% underlying growth.

We're going to have to -- and for the people from Emerson on the phone and as I talked to the OC, if we go to that route, and to your point, what we're going to have to do is start cutting discretionary.

And we're going to have cut some of that incremental investment because what we're going to have to do is actually raise incremental margins.

And that would be something that we normally would do.

If our growth rate slows down to a 4% or 5% range and we thought that was where it's going to be, then we would drive higher and work on incremental margins.

That means we will start cutting back on some of those incremental investments I talked about earlier on this call and I've been talking about around the world.

If I see this normal growth rate at more than 6%, 7% range, then we can go forward and we'll be fine.

We do have flexibility.

So what we're watching, Frank and I and Steve and the 2 platform leaders are, if underlying growth is going to be more in the 4% to 5% as a corporation, then we're going to have to cut that marginal and drive higher incremental margins to make sure we can grow and hit positive earnings per share growth.

And that's the game that we're going to have to play here.

It's way too early to make that call.

But that's what -- those are the trade-offs we have, and we have those trade-offs.

We can make those trade-offs.

And so that's what we're watching right now.

We talked about that to the board.

I had a dinner last night with the board, talked about the same plan I presented you guys here today.

And this is the very question that they dived in on me, how much flexibility do you have around that?

And that will be the game we'll have to play, and we'll have to start playing very, very fast if we see underlying growth rates going towards 4% or 5%.

And so -- and you know Emerson.

We can move.

We'll start moving.

That's why I got Rocket.

He's much faster than Zorro.

At 14, Zorro sounds slow at times.

The next question comes from John Walsh with Credit Suisse.

Fun earnings season to launch into.

Yes, it is.

It's kind of busy.

I mean, and the industry's a lot different.

If you don't know all the different ins and outs of this industry, it's really hard.

Yes.

Well, it's been a good experience and it's a lot of fun.

So I guess maybe one quick modeling question and then a broader topic.

But we can do the math on the acquisition impact for '18.

Can you just kind of help us put a finer point on the acquisition impact for next year implied in the 30% segment incremental margins?

Well, we're looking -- yes, well, that's without the acquisitions.

That's just the underlying.

What we're trying -- what we want from our acquisitions here is on -- we're expecting $0.03 of earnings per share on the acquisitions we've done.

And the key issue for us is the underlying -- the growth rate is -- the incremental growth rate from the acquisition, the top line, is 5-point -- no, what is it?

Not 5 points.

What is it in this year?

2 points.

What is it next year?

4 points.

4 points.

4 points of growth.

So the top line's going to be 4 points of growth from acquisitions and we have a negative currency of 2 and then acquisitions will add EPS but will hurt the overall margins.

And so that's how we have it factored in at this point in time.

All acquisitions.

V&C will hurt the margin because they're coming up, but they're not at 18%, 19% margin yet.

Obviously, Aventics, Tools & Test, and Paradigm are all margin hurting at this point and will be for several years.

Yes, okay.

And then, I guess, just thinking about tariffs.

Clearly, you talked about your impact.

But are you seeing any market share shifts in any of your markets?

And I guess I was thinking more around Commercial & Residential side of the business.

Or has there not been any big movement in shares due to the tariffs?

There's been no big movements yet.

Clearly, in our Commercial & Residential space, there are imports, obviously, coming out of China that are being hit by tariffs.

The question will be, do those tariffs stay in place for some point in time or -- and if that's the case, then you could start seeing some share movement.

But clearly, at this time, the share has not moved and it will not move until you see some indication that they're going to stay there for a longer time and it's going -- it'd be more painful for some of the international suppliers shipping stuff in.

But not yet.

It hasn't moved yet.

And I don't think we'll start seeing that until -- if the tariffs stay in place well into 2019, then I'll think you'll start seeing some shifts.

But it's got to be well into 2019.

Again, I want to thank everybody for joining us today.

It was an exceptional year in 2018.

I want to thank the organization around the world for Emerson.

You did a great job.

Just take a deep breath, say congratulations and now we're moving on to 2019.

And as you can tell from this call here, our investors are keenly interested in us having a very strong 2019, and I fundamentally believe we have the opportunity to do that again in 2019.

So with that, goodbye.

And everyone, have good luck.

Thank you.

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