艾默生電氣 (EMR) 2019 Q3 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, August 6, 2019.

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.

Thank you, Allison.

I'm 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 Third Quarter 2019 Earnings Conference Call.

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

And I'll start on the third quarter summary on Slide 3. Sales in the third quarter of $4.7 billion increased 5% and underlying sales were up 2%.

Growth was below our guidance across both businesses.

Underlying orders were up 2% in June, also below the 5% to 7% expectation we discussed during the second quarter earnings conference call on May 7.

Automation Solutions' underlying sales were up 3% and order is up 4% in the quarter.

We had expected global discrete channel inventory to clear and demand to recover, but instead discrete end markets further decelerated in the quarter.

North American upstream oil and gas demands have yet to improve.

Demand in process and hybrid end markets, however, was stable in North America and continued to be robust elsewhere.

Commercial & Residential Solutions underlying sales and orders were down 1% in the quarter primarily driven by cooler wet weather conditions in North America.

GAAP EPS was $0.97 and was $0.94, up 7%, excluding discrete tax items in the current and prior year.

Through the third quarter, we've returned $1.9 billion to shareholders and completed our $1 billion 2019 share repurchase target.

Today, we announced an additional $250 million of share repurchases that we will target to complete in the fourth quarter.

Turning to Slide 4. Third quarter gross margin was down 90 basis points and EBIT margin was down 80 basis points.

EBIT margin was up 50 basis points excluding the Aventics, Tools & Test and GE Intelligent Platforms acquisitions.

Tax rate in both years benefited from favorable discrete items in the quarter.

Turning to Slide 5. Third quarter underlying sales growth was led by Asia, Middle East and Africa, which accelerated from flat in Q2 to up 3% in Q3, primarily driven by sequential improvement in the Commercial & Residential Solutions business.

However, the Automation Solutions business also ticked up sequentially.

The Americas was up 1% and remain positive across both businesses, but was slower compared to the second quarter growth of 7%.

Europe was up 1% and remained positive across both platforms.

Turning now to Slide 6. Total segment margin was down 160 basis points and was down 30 basis points excluding recent acquisitions.

Segment margins of 18.1% was approximately in line with our expectations as our businesses executed well to deliver strong profitability on lower sales growth.

We guided sequential core leverage in the mid-40s and our businesses together delivered over 70% on $120 million higher sales.

As we discussed last year, we've accelerated certain restructuring programs in the second half of 2019 to position the business for a slower near-term growth environment.

In Q2, we identified approximately $10 million of restructuring investments to accelerate in this fiscal year.

And this quarter, we've added another $20 million.

Our total expected restructuring spend and other actions is now $100 million for 2019, which is up from approximately $70 million at our February investor conference.

These investments will help position the company for improving profitability in early 2020.

Operating cash flow performance was solid, up 2%.

Our free cash flow was -- conversion was 135% in the quarter.

Our year-to-date free cash flow conversion is 88%, and we continue to expect strong cash flow performance in the fourth quarter and greater than 100% full year cash flow conversion.

Trade working capital is an opportunity for us in the fourth quarter.

TWC performance was worse by 80 basis points driven entirely by inventory, which was higher in June and sales softened late in the quarter.

We expect to recover this in the fourth quarter, which will benefit cash performance.

Turning on to Slide 7. Automation Solutions' underlying sales were up 3%, and orders were up 4% in the quarter.

Underlying sales trend in the quarter remained broadly stable as follows: we saw continued strong demand across our 3 kinds of business, MRO spending, Brownfield and Greenfield projects.

All world areas remained positive, and we continue to see healthy progress in our long cycle project outlook, with strong project funnel system orders growth and a growing backlog.

There were a few areas that missed our expectations.

First, North America upstream oil and gas did not recover as we expected.

Customers in the Permian and other key regions continue to focus their CapEx budgets to maximize free cash flow.

Also, limited pipeline capacity continued to constrain investment activity.

Second, global discrete manufacturing end markets decelerated.

The short cycle weakness was particularly felt in automotive and semiconductor end markets.

And finally, although our project funnel remains healthy, our customers are more cautious around capital spending.

Geopolitical and trade tensions have created a more cautious environment -- investment -- business investment climate.

And as a result, we've seen some projects push out of the year.

This has impacted our orders and sales growth expectations in 2019.

However, we've not had any project cancellations and we continue to have confidence that projects in the funnel will be executed.

For this full year, we expect underlying sales growth of approximately 5%, which is at the low end of our prior guidance.

This implies a fourth quarter underlying sales growth rate of approximately 5%, a bit stronger than Q3, which is supported by steady orders growth and backlog conversion.

Segment margin decreased 150 basis points and was down 10 basis points, excluding the Aventics and GE Intelligent Platforms acquisition.

The business delivered sequential leverage above our guidance as the management team executed well on lower growth.

As mentioned, we have pulled in additional restructuring actions that we are targeting to complete this year.

Including these, full year segment margin is expected to be approximately 15%.

Turning to Slide 8. Commercial & Residential Solutions underlying sales and orders were down 1% in the quarter.

Growth in the Americas decelerated from 4% in Q2 to 1% this quarter, due mainly to unfavorable weather conditions, cooler wet weather in key regions late in the quarter that slowed residential air conditioning and construction markets.

Europe also decelerated late in the quarter due to weather, but preliminary July orders trended positively.

The Asia, Middle East and Africa region improved from down 15% in Q2 to down 6% this quarter, and we expect improvement to continue with underlying sales growth turning positive as we head into 2020.

And the preliminary trailing 3 months underlying orders in July were up slightly, a good sign.

For the full year, we expect Commercial & Residential Solutions underlying growth to be approximately flat compared to up 2% in our prior guidance.

This implies a slightly positive Q4 growth rate, which is supported by expected improvement in North America air-conditioning markets and continued improvement in Asia, Middle East and Africa region.

Margin decreased 70 basis points excluding the Tools & Test acquisition.

The businesses delivered over 40% -- I'm sorry, the business delivered over 40% sequential leverage on incremental sales, which was in line with our guidance.

We expect full year segment margins to be approximately 21%, including additional restructuring actions pulled into the fourth quarter.

Let's turn now to Slide 9. Our 2019 guidance framework is updated to reflect underlying sales growth of approximately 3%, including lower-than-expected third quarter growth and a reduced near-term growth outlook for global discrete markets.

Fourth quarter underlying growth is expected to be approximately 3.5%.

The EPS guidance range is maintained at $3.60 to $3.70, and we expect fourth quarter earnings per share of approximately $1.10, which is the midpoint of the full year range.

Updated full year segment margin targets reflect reduced growth and increased restructuring spend.

The fourth quarter total reported segment leverage is expected to be approximately 30% year-over-year and almost 40% sequentially compared with the third quarter.

Reduced segment profit contribution is offset by lower corporate costs and a lower full year tax rate to hold the prior 2019 EPS guidance range.

We expect fourth quarter corporate cost to be approximately $150 million.

The fourth quarter tax rate is expected to be approximately 21%, including a $0.05 discrete tax benefit.

And the 2019 full year tax rate is also expected to be approximately 21%.

We've updated our estimated ongoing operational tax rate, which includes improvement from platform reorganization actions.

We now expect our operational tax rate to be approximately 23.5% going forward as we continue to optimize our global to platform operating structure.

Expected operating cash flow is $3.1 billion, and free cash flow is unchanged at $2.5 billion.

Please turn now to Slide 10, and I will hand the call over to Mr. David Farr.

Thank you very much, Tim.

I want to welcome everybody.

Thanks for joining.

Hey, I also want to let you know that this is Tim's next to his last earnings call.

You know I go through this process of training semi-professional Investor Relations people.

They never get there.

They never quite get there, but Tim has a unique opportunity that we can't talk about.

But he's going to be going to it later this year.

And I have -- breaking in another person by the time we get in to the November timeframe.

But Tim, most likely, will join us for that call.

Again, I want to thank everybody for joining us today and I want to give you an update in what we see.

I want to thank the employees for joining us today.

I also want to remind everybody, we actually have an extensive number of people in the queue, close to 20 people in the queue to ask questions.

I definitely need to keep you to holding to the 2 questions rules.

We'll extend the call a little bit.

Maybe a minute -- 1 hour 15, 1 hour 20 minutes, to try to get as many questions as possible.

But clearly, as you can tell from my communications that we put out -- our communications we put out last Monday, and the communications today, I have sensed and continue to sense have changed in the underlying business environment, which I'm sure we'll be talking about here for a few minutes, and then you'll be asking a lot of questions around it.

I also want to thank all the employees for their support over the last 3 months in this challenging third quarter we just went through and for the year-to-date numbers and as we drive to finish out this fiscal year in 2019 and moving in 2020.

As I look at the year, it's a good year.

We have good growth in sales.

We have good growth in earnings.

We have good growth in cash flow.

But it hasn't unfolded much differently than we thought going back 9 or 10 months ago, and that's what we're having to deal with right now.

But as you can see in the orders chart on Page 10, 2 things.

First, we have a new pup called Doon, after Doonbeg, one of our favorite golf places in Ireland.

And Doon is the little black and tan, sits next to Rocket.

Rocket's birthday is today.

He's 1 year old.

Birthday is today.

You can see the order trend did improve slightly for Automation Solutions.

It ticked up a little bit, pulled us up a little bit.

On the Commercial & Residential Solutions, for the month of July, orders were a little bit better, but still slightly negative overall.

And Asia Pacific turned positive in the month of July, which is good.

We're now 3 or 4 months behind what we've said, more like 4 months behind what we've said, but it's good to see that happening.

You can see the industries we see.

We've been seeing pretty good strength in the third quarters, between the midstream, downstream.

Lots of caution around the upstream area right now.

Chemical, we've had a very good quarter in power.

Our orders in the PWS power business is close to 40% up for the quarter around the world as we continue to upgrade the power facilities around the world.

Automotive and semiconductor and discrete really had a tough quarter.

But overall, softening key marketplaces.

But the trend lines are still positive over, but definitely slowed to way below what we thought when we started this year.

You go forward, we've updated the what we call our large project pipeline funnel.

Including -- we actually did an upgrade of the total size of the funnel.

When we give this thought, about usually 2, 3 times a year.

In February, it was around $7.6 billion, 195 projects.

Today, it's 221 projects, $8.3 billion.

It did increase a little bit.

Clearly, another sign of things slowing down and a little bit of pushout is that our committed won, but not booked, is now slightly over $1 billion in projects, projects that are basically sitting out there that we've won and we're still waiting for the final documentation on orders we've placed so we can start booking, and then, obviously start doing some shipments against it.

The other key thing you'll see in this is that, on down the bottom, we talk about what's been shifted, 2019 and 2020.

Based on what we've seen, about $350 million of projects we're working on for the last couple of 6 to 8, 12 months has been shifted from 2019 to 2020.

And we basically have seen about $450 million of the pipeline shifted out of 2020 into 2021.

Clearly, this tells you we have what I call a dynamic pipe, and some things moving in, some things moving out.

But clearly, a slowdown.

I firmly believe in discussions with our customer base, our organization around the world.

We've been spending a lot of time on this in the last couple of months.

This cycle has not ended.

This cycle is in a pause mode because of the disruption that's going on relative to the trade negotiations, the trade discussions.

It's clearly causing a slowdown in some key markets, primarily USA, a little bit of Europe, and we're seeing some pushback in a couple of places around the world.

But our international markets have continued to held up from an automation standpoint.

U.S. markets pushed out a little bit.

The Canada market pushed out a little bit.

And a little bit of pushout in, actually, sales, are going on the Middle East.

But overall, still going in.

And I firmly believe if we do get resolution to trade discussions at some point in time here between now and the next 12, 18 months, the cycle will move back up.

There's not been an excessive amount of capital spend and build-out into the cycle yet.

That's way too early.

I just look at what's going on inside our company as we reallocate.

But I'm sure we'll have a lot of questions around this issue.

As I look at what's going on, I am a little concerned from the standpoint of how long this slowdown will happen?

Hence, the OCE got together over the last 30 days and looked at some incremental restructuring.

We've looked at where we need to slow down investments, where we need to pull back investments.

We've looked at where we can accelerate restructurings that we had planned in 2021, and to deal with protecting and improving our profitability in a slower growth environment.

Clearly, we laid in a structure of cost from people's standpoint, organization, back in 2018 -- and of 2019 -- running through 2019, look at much faster growth.

This year, for instance, we had thought we'd grow around the 6% to 6.5%.

We're now going around that 3%, 3.5% range.

You look at what we see going next year.

I look at a very gradual growth environment at this point in time, but I also want to build enough flexibility if that doesn't happen, that we could still protect our profitably and our cash flow, and deliver some results for our shareholders.

At this point in time, I see the slowdown lasting well into 2020.

And so I see some resolution on around what's going to happen with the trade discussions that we all face.

And from my perspective, that could last easily well past the election at the -- in November of 2020.

So that's how we're looking at it.

It is a different perspective than I did discuss, say at Electrical Products Group in May and even in the phone call in early May.

But I've come to a realization in watching our customer base and talking to our customer base, is they're going to be cautious.

And therefore, from my perspective, we're going to continue to invest strategically where we can gain market share, our market penetration, and then we're going to back down and protect our profitability and cash flow where necessary.

We're also going through a whole prioritization on our capital projects.

From this year, we've pulled it back a little bit as we go through this process.

Next year, we're prioritizing where we need to spend capital.

I have commitments that have to do in capital over the next couple of years and I'm trying to set with Frank and the OCE.

Those priorities of where we need to spend the money.

I have some actions I have to take and some additional manufacturing capacity in the best cost locations that we have around the world.

So I need to prioritize those to make sure we're dealing the right way as we go forward here in 2020, and as we come back into 2021.

Again, we're being proactive.

We're trying to be a little bit more aggressive.

And hence, our restructuring and we'll be looking at that pretty hard between now and year-end.

And if we see we have other opportunities, we will take those opportunities on.

It's all about getting our cost structure in line for slower growth, improve our profitability, deliver the incremental margins that we've been committing in a different growth environment, and also positioning ourselves for when a recovery does happen in our capital base, which I believe will happen.

So overall, again, I want to say it's been a good year from my perspective.

It's not happened like we thought would happen.

Are we totally happy about it?

No.

We've been dealt a hand in a little bit more challenging environment relative to trade and relative to the investment environment.

My customer base is being cautious, but we're not rolling up the tech and going home.

We're going to be attacking and aggressive going after things, but we're also bringing the cost structure in line to be able to serve ourselves, and also serve our customers, and also build the profitability they want to deal with.

So I want to thank everybody from the Emerson team as we wrap up this year.

We've got a couple of more months left.

And I want to thank the team as we get ready for 2020 and 2021.

With that, we'll open the line.

Again, I want to remind everybody, we have a lot of people on the line, close to 20 or maybe more than 20 people now.

And so I need to hold you to 2 questions.

We'll take as much time, up to about 1 hour 15, 1 hour 20 minutes to get through the questions.

So with that, Tim let's open it up.

Tim?

(Operator Instructions) Our first question today will come from Andrew Kaplowitz of Citi.

So how do we think about the longer-term road map for you guys and the more difficult macro?

And particularly as we go into FY '20?

It might be difficult, obviously, to achieve the target in '21 of $450 million.

But if we are in this longer prolonged slowdown, can you still grow double digits in EPS off the 2019 base if macro stabilize a bit here given the high level of restructuring repurchases?

How should we think about that?

From the perspective -- our underlying growth rate base in the model we presented in February was close to 4%, 4.5% to 5% I believe, the cycle here.

If that number is going to be closer to 2% to 3% because of the slowdown, we're going to have to have both -- more bolt-on acquisitions that allow us to be able to get that tempo growth.

It will be very -- it'll still be challenging for us, but the key issue for me is, can we drive some incremental growth through penetration?

If that's possible, then we'll try to do that.

We'll also going to have to be a little aggressive on the bolt-on acquisitions to allow us to integrate some more sales and profit to get that number up.

But that's the game plan stands to be, is where do we get that top line growth.

If we lose about a point or 2 from underlying -- from this core business, then the acquisition game is going to be even more important to us on a -- from a bolt-on standpoint.

And then, we're going to have to be aggressive on the -- integrating those acquisitions.

That will be the key issue for us as we look at the next couple of years and that target we laid out in February because as you said, it's a much different macro environment.

Unless something happened relative to the trade early on in 2020, would extend and would accelerate growth potentially in 2021.

That will be another scenario.

But I'm not banking on that right now.

We're looking at an environment that's going to be a bit less growth and we'll have to deal with that.

That's helpful.

And then, obviously, in Automation Solutions, you've talked about 30% incrementals as the target.

How should we think about underlying incrementals if we do have this slower growth environment.

Given all the restructuring you're doing, could we still do 30% plus on lower growth?

That's the game plan.

That's why we're going after incremental restructuring now, Andrew.

As you know, we've made a commitment to get that profit margin back up.

These are quality assets.

We've made a lot of acquisitions within this asset space, and we need to make sure, from our shareholder's standpoint, that we get those margins back up to what I say are that reasonable range.

It might take us a little longer to get back to that what I think the corporate number is now on this combination of companies that run 19% EBIT.

But we are not backing off that number incrementally, that's our number for next year.

And Lal and his team understand that, and that's why we're going after from a restructuring standpoint, from the perspective of what we're trying to get done.

And if we need to, we'll do more incremental restructuring in early part of 2020.

Our next question today will come from Steve Tusa of JPMorgan.

Congrats to Tim, unless you're like sending him to some godforsaken part of the word like -- I don't know where you send these people, but hopefully he's going somewhere nice.

To Connecticut.

Tusa, Tusa, I can -- I'm willing to -- I'm open for suggestions.

I mean, you might have to talk to his wife a little bit about this.

She is a St.

Louis girl.

But you might -- if you got an idea, it's not going to be Augusta, Georgia.

I can tell you that right now.

Oh, I was just going to say that.

You stole that one.

I was just going to say that.

It's not going to be Augusta, Georgia.

Most likely, it could be, like -- I don't know, so what's a tough place in Nevada?

Like something really -- Death Valley or something like that.

Area 51.

Area 51 or something like that.

No, he's going to be going, most likely, to the Northeast somewhere.

Got it.

Got it.

I love the red exclamation points on the order trend.

I think that really pops, stands out.

But how bad was kind of your discrete business on the order rate or revenues, either one leg?

Are those down double-digit?

And then as a follow-up to that, within power, specifically, and then a little bit less in LNG, how do you think you're doing share wise, because power, I would assume that's more kind of attacking competitor install base and selling digital and that kind of stuff.

So it seems like there's a bit of a share gain there, in power.

So on the discrete side, we're not down double digits.

I mean it's a solid single-digit.

But I mean I would say, Tim and I are going back and forth.

They're probably somewhere between 5% to 8% mid-single-digit down in the discrete side.

The inventory has not come out of system at all.

Obviously, the demand slowed down, as you've seen, Steve.

And therefore, it's going to take a little longer.

It could last all the way to the calendar year now to get that out.

But that's where we see it at that point in time.

The process site where it's been pretty good within the channel.

But it sits right now in oil and gas related down around Texas and the Permian has been pretty tough.

On the power side, we are very committed in this space, and we've continued to bring out the next generation control system, Ovation.

We've continued to bring out new services.

We continued to be highly committed to supporting the power generation, both renewable, primary power, all the type of power, particularly around coal and gas.

So based on what we're seeing right now, I would say we are winning against our key competitors out there.

But obviously, we're not going to back down.

I think there's a unique window of opportunity as we look at this paper and overall this year, year-to-date, we're up a solid single digit on orders and I think we're going to have a good fourth quarter and a good start to next year.

The industry needs to go through some reinvestments, and upgrading of systems, taking old systems down and bring up some new power plant, bringing up new gas, get rid of coal.

These are all opportunities for us, and we're out there fighting for it, and I would say were doing pretty well at this point in time.

And again, I don't look at a quarter for sure.

I mean, let's wrap it up as we finish this calendar year.

But I feel good at the trend line as I look at the last next 12 to 18 months versus our primary -- our competitor's in this space.

Right.

But that's OEM -- that's the OEM's installed base, correct?

Correct.

That you're going after?

Yes.

Yes.

And then, one last one, just on the macro.

You seemed confident that this isn't getting worse, but then you said things extends through the election next year.

I mean, how are your customers and you guys going to not at least pause a little bit before all the uncertainty around the election?

Unless you just have -- I'm sure you have confidence in the outcome, but like how are you going to -- how are you going to integrate that into your kind of plans and your thinking?

From our perspective, we're going to work multiple plans here from my perspective.

I think we're going to look at an environment where there's very little growth in environment.

There's some moderate growth.

Clearly, we still see our international business doing better than the U.S. at this point in time.

And that's going to allow us to see a little bit better growth.

But we're going to factor in that we could be in a slugfest with real low single-digit growth for the next 12 months.

And therefore, you've got to get that cost line in line, and really prioritize we're going to spend money.

It's not going to be -- in my opinion, I'm being very -- let's say, cautious or negative.

But I'm very concerned about business was like you said, keep pausing, and then keep reevaluating their investment.

And that's going to drag the business investment world to a weaker environment.

If it doesn't happen though and things get better, we'll be okay.

But I'm more worried about that it will happen.

And therefore, we're structuring the company to be in that environment.

Our next question today will come from Jeff Sprague of Vertical Research Partners.

I want to just pick up on your last point.

You kind of indicated you didn't use the term, but maybe kind of the risk of just stall speed.

And if we get there, what really kind of keeps us from kind of tipping lower?

I guess no one has a crystal ball, right?

But how would you handicap kind of a worst outlook than what you portrayed in your opening comments there?

The key issue there is, I think there is a good chance the economy, next year, gets -- the global economy gets real close to that stall speed.

And I think that as we finish the rest of this calendar year, which I think we'll be okay relative to investments in people, then really start reevaluating in 2020.

We have to -- if we sense we're going to get pretty close to that stall speed, which we've seen the comments before, then we've got to think about, okay, do we have the right things done relative to our restructuring and our position in the company?

Right now, I mean, I think we're going to get close to that stall speed, but I don't think it's going to go all that way.

We also, as you understand, around the world, we have every Federal Reserve around the world really pushing in combination, to make sure that economist do not get to that stall speed.

So I think that's one thing we have going for us, that -- the European, the Japanese, the Chinese, the American Federal Reserve Banks, whatever they're called around the world, are working very, very hard to make sure we don't go into that stall speed.

But I think there's a good chance we'll get real close to it, and hopefully the financial reserves out there can figure out how to make sure we don't go in there.

Because that's a little bit different environment and it gets pretty ugly for a lot of companies at that point in time.

Yes.

And then, just separately, just think about the automation margins, right.

So it actually ended up being kind of a peculiar looking quarter, right?

Your actual OP dollars are down, right?

So we're not just talking mix effect of deals on margins, but OP dollars down.

So now as we look into Q4, right, we need to see a pretty significant step up in the OP dollars to get to that forecast.

You had talked on the last call about some of the discrete things on price/cost and other levers.

Could you just give us a little bit more visibility on how we bridge to that Q4 automation margin number?

Yes.

I think there's a couple of things going on from the perspective we have.

Obviously, the price/cost continues to move our way in that fourth quarter in a positive way.

They did have pretty good sequential margins improvement in the third quarter.

The other thing is the restructuring actions that we took back a couple of months ago.

I believe in April, and April and May.

And also some of the core restructuring that we started at the beginning of the year are starting to flow through.

So the automation business, as things slowed down as you remember, we started taking actions earlier on with that business.

So some of those benefits are coming through.

In the last couple of months close, even June, which was a tough month for Automation Solutions from a sales standpoint.

They did very well with leverage and profitability.

The month of July, which we're starting to see right now, the same things flowing through again.

So Mike tells me right now, I feel pretty good about where they flow.

The key issue there is, do they -- can they continue to get some of that backlog out that's been built over the years?

Or do their customers start pushing that out?

But right now, I think they've got the cost structure in line for where they sit, and for this tail end of the year, Jeff.

And I feel pretty good about the margins in the fourth quarter for these guys.

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

Maybe a good place to start, Dave, would be the game plan where you would augment slowing growth with bolt-on acquisitions.

And when I hear you say that, it kind of suggest that there's -- you're still willing to play offense here, which is a good sign.

But just how do you marry the idea of going after acquisitions during a period of high uncertainty, and clearly, a pause and closer to stall speed?

From the perspective of some of the bolt-on acquisitions, which we work pretty aggressively all the time, fundamentally, we believe as we go into this time period as we move into 2020, early '21, some of the companies that we're interested in will want to get out and will have the opportunity to do those bolt-on acquisitions.

Historically, in times, that things like this slow down, things gets kind of sloppy, near that sloppy.

We see some of these product lines pop out.

And so we're banking -- we're going to try and push the pressure point up on this thing and see if we can get a couple of these to pocket, give us some incremental growth, the top line.

Obviously work with the cash flow and obviously work with our earnings.

But it's just going to be one of these gains that we know where we're going to go and we know where we're pushing right now and does our -- the place we're going, are they willing to sell because of the sloppiness in the marketplace from their perspective.

So that's how the game is going to work.

We'll just put a little bit more tension on it and -- from the top level down, and I know every company is going to -- go to be going through a repositioning and restructuring.

And hopefully, we'll be able to convince some of our seller's to let a couple of these small product lines grow.

That's how it's going to work.

And then as a follow-up, but just to continue along the lines of this pause versus an end of a cycle.

Can you comment on the power, the influence of this negative feedback loop?

Because you're saying right now, you're slowing down your investments.

You're pulling back.

You're seeing customers push out projects.

How does that not FEED on itself and become more of a power, slower faster?

And to a certain extent, can you share with us how much you're seeing from your customer, being influenced by what your customers are doing, versus what you're hearing from Washington.

Because you are privy to a lot more specifics than anyone on this phone gets to hear.

But maybe share with us some of that insight that you're getting from those channels.

Well, a lot of projects we see, and particular on the LNG world, from the perspective of these LNG investments need to go forward.

There's been major commitments made from a lot of our customer base relative to around gas versus coal versus oil, from the standpoint of what we call less carbon, de-carbon.

They've been commitments.

So from my perspective, these projects are going to go.

They're just a matter of what time they're going to go, and when things get resolved.

And I firmly believe we will get things resolved, relative to discussions with China.

It could take a lot longer than -- my initial comments were always around August/September time period, and now it's obviously of the table based on what we're seeing at this point in time.

And so I sometimes look at the projects, the underinvestment in the gas side, leaving the underinvestment in the liquids and some of the under investments in some of the downstream work that needs to be done because we definitely need that downstream product.

I see that those have to go forward.

The question is when they get -- my customer base or our customer base gets visibility relative to where they can do these transactions and where they can sell and not sell, then you'll see these projects going.

Now the other issue is, if the projects in the United States stall, then you'll start seeing some acceleration in projects in the Middle East because of the demand for gas.

Now China is still going to grow.

China is going to need gas.

They're going to get it from the Middle East.

They're going to get it from other parts of the world.

Or are they going to get it from the United States?

So as I look at right now, as I look out the next 12 months, I think as a customer base, we're all fine-tuning little bit.

But if this thing drags on for a long time, and let's say the long time being 12 to 18 months, then I think you start seeing what you talked about, this is that self-fulfilling prophecy.

And then we start winding backwards.

But I think that's way too early to see that at this point in time.

And maybe from my perspective, things do get resolved sooner than we think.

But at this point in time, it's prudent for me, from the perspective of where I am in the -- we, Emerson, in the pipeline, we need to dial things back after 3 quarters of very moderate growth in the automation business.

We need to dial it back and reset for a little bit growth in a different growth environment, and look and see what happens, rather than waiting because we've been waiting now for a couple of quarters, and now it's time to act.

So that's where we sit.

I'm still -- again, I'll say it, I'm still optimistic.

I still believe the world needs it, the energy, they need this type of projects.

The question is, the timing of it more than anything else at this point in time.

And can you add anything about the color from Washington?

Yes.

Right now, nothing at all.

I can't add anything other than what's going on.

Because obviously, very challenging negotiations and a lot of pushing back and forth.

Again, I still believe this is something that's important, and I do support it.

It creates a lot of pain for me, and obviously, for our company, but from my perspective, I do support 100% what we're trying to get done in Washington on the long-term trade benefits.

But we've got to get this thing done.

We can't let this thing sit out there for another 12, 18 months, dragging around because it will definitely do what you talked about, with some negative self-fulfilling prophecies.

Our next question today will come from Josh Pokrzywinski of Morgan Stanley.

Dave, can you talk a little bit about this ballooning funnel of projects or I guess stuff that has been committed but not booked?

How long did those typically stay out in that state?

Is there any kind of leakage in that closed process where it's something where you think there's a commitment, but until the ink dries, it tends to back down.

So how confident are you in that booking over the next few months, quarters, whatever?

So if we look at the funnel, where the funnel is growing right now, it's growing outside the United States.

So we're starting to see -- we had not seen a lot of growth with the bigger projects outside the United States, it was primarily in North America, driven large funnel project business.

So we're now starting to see some of the international, be it Asia, be it the Middle East, be it Latin America, where some of the larger projects are now starting to come in through the funnel, and hence that's why that funnel is getting a little bit bigger.

Now going back to the won, but not booked situation.

The big issue for us is, it is like -- it's like product that's been -- or food that's been picked and put in a shelf.

There is a shelf life.

And historically, when we see this grow like this, and we have seen it before, typically, that shelf life you're looking at 12 to 18 months on these projects.

These are massive projects.

These are projects.

Typically, they're going to last 3, 4, 5, 6 years.

So even if they get delayed 6 to 12 months, that's not unusual.

But my perspective, if you get out there past the 12, 14, 16 months, and these things really start changing and nothing happens, then you're going to see a -- sort of reconfigure.

It's way too early to say that because there's a number -- until recently, it was pretty normal.

And now with this number getting above or $1.1 billion -- close to $1.1 billion, it's starting to get to a number that's got my attention.

And so I think the key issue for me is watch them and see what these customers start doing.

These are a lot of gas projects and a lot of U.S.-based projects at this point in time.

And so I think we've got to watch it.

There's nothing to get -- overreact to.

But it's, from my perspective, these things sit out there for 12, 14, 16 months then you're going to start seeing a reevaluation of what's the magnitude of this project, do we want to downsize it?

Got it.

That's helpful.

So it sounds like we need to stay on top of that as a number to talk about.

Yes, most definitely.

That's helpful.

And then just looking at the projects that have shifted out of the pipeline, and I know there are certain stream orders and sales.

But if I think about that $350 million shifting from '19 to '20 and this $450 million to '21.

We're already kind of losing maybe 1 point or 2 of sales as it pertains to that.

And you talked about kind of a 2 or 3-point downshift.

It seems like on the shorter cycle end of that or some of the projects that aren't in this pipeline that doesn't assume a very -- a whole lot more downside, does that just speak to no excess in the system or the absence of destocking?

Or I guess, why couldn't we decelerate more given that the project piece already speaks to maybe half the deceleration you talked about?

Yes.

I think it's hard to measure on a couple of months on projects moving in and out because they move a -- historically, we never gave that number and there was always a lot of movement anyway, there's always a couple of hundred million dollar projects moving around.

So I would say the number is a little bit higher-than-normal, to be honest, Josh.

But there was always a number that moved in and out of a couple of hundred million dollars.

So now -- so I would definitely say the movement is higher-than-normal, so therefore, I would say, it does add -- taken about 1 point, 1.5 off the underlying growth rate of the cycle right now.

And that's the number we're going to watch and see if there's been a bigger movement from the next time we talk as we close out this calendar year, that would be a good feel for it.

I think you've got to wait to the end of the calendar year to get a good feel.

But right now, there's always noise, and I would say there's about 1 point that's been taken off the underlying growth.

And it's moved up a tad but I wouldn't panic yet because there's always that number sitting in there.

The next question will come from Nicole DeBlase of Deutsche Bank.

So I just want to start with Commercial & Residential.

So you guys have kind of guided for flat organic growth for the year.

It implies a little bit above flat, maybe like 1% in the fourth quarter.

And that's a step up.

Now I know you saw a little bit of improvement in July, which is encouraging.

But I guess how much confidence do you have in that outcome?

And could there still be some risk to the downside there, particularly since the comp -- the year-on-year comp does get a little bit harder in the fourth quarter?

Yes.

It definitely gets harder because of our U.S.-based last year.

So there's a couple of things that we're watching very closely.

One, the fact that China now and Asia Pacific now have stabilized and come of above the line, that's a good sign for us.

So my concern would not be there.

My concern would be in the USA.

If all of a sudden, there's -- we've had a pretty good, what I would call, a heatwave, humidity wave go through.

That would be my concern right there.

Not in the A/C side, but more on the retail side.

But we've got it pretty well dialed down.

I feel pretty comfortable about that.

Europe seems to be coming back.

Europe had a very challenging June because it was extremely hot there but it's bounced back nicely in July.

So I feel pretty good that we're going to be around the 0% to 1% growth rate in Bob's business in the fourth -- our fourth quarter, which is the third fiscal -- our third calendar quarter.

I think we've got it down pretty close to where we see it right now.

And the fact that July came in decently and the orders came in decently, even I think with the 1 month order pace positive, Tim?

The 1 month order pace was positive.

So it was possible we're close to that 1%, I think.

And so I think we're okay -- we'll be -- we'll put our 8-K out on orders and we'll keep good communication around those 3 things.

Asia, China, North America and there's Europe keep holding in there for us.

So those are 3 things I'm watching right now in Commercial & Res.

Okay.

Got it.

And then just on Automation Solutions.

You talked about things getting a little bit better in July.

I mean maybe it's my eyesight, but the chart just doesn't show a lot of improvement.

If you could just talk a little bit more about the early stages of July and what's driving that better result?

I'll tell you what, after a tough June, if it goes -- ticks up a notch, it's better.

And so I think we were on the line with what, 4.5?

4.5 to what was it last, 4?

Right at 4, yes.

4. So it ticked up a little bit.

You can't see that in the chart because I've probably got younger eyes, Nicole.

So it's a little bit better.

What's interesting, it's not the U.S. We saw Asia and we saw China.

I'm surprised nobody's asking me about China again.

That's interesting.

We saw pretty good impact in China.

We saw a good impact in Latin America.

So our international markets actually grew order-wise, I think double-digit.

And in North America, the U.S. business and Canadian business was still the weakness point.

So our international has held up nicely.

And therefore that -- right now, we see that's holding up for the year.

That will give us a little bit of momentum as you go into this.

And I think we're going to bounce somewhere between 4% to 5% in this -- in orders in this fourth quarter.

So and July was not a short month.

I think it was a fairly long month for us normally and -- this month.

And so it's a good representation of what -- I think what's going on in the marketplace.

So I feel reasonably well about that 4.5.

Now given the fact I thought we would be at 6 or 7, I don't feel that exciting, but it's better than going the other way.

Let's put it that way.

And our next question will come from John Inch of Gordon Haskett.

Dave, hey, the -- I'm wondering if you could comment on the profitability of the large project pipeline.

Is it accretive to the 16% AS margin run rate here?

Yes, typically, large project will be a tad lower than that.

And so what we -- we do a -- it's obviously a hybrid.

Now you talk about large, now if you look at the, what I'd call the smaller circles in there, the medium small size circles, those typically are -- those are accretive to us.

So it's the bigger ones that are typically -- will be the lower double-digit of 10 -- 10-type number there.

So right now given the fact that projects have slowed down, the bigger projects does help us a little bit.

But I want to get those projects going so we can get the installed base.

But the mix of funnel right now, it looks pretty decent as I look at that funnel.

I mean, if you look at that funnel we put out there, if you can see it, you can see there's a lot of small, medium-size projects.

The bigger project, there's only 1 big project left in this year.

And so that's a good mix as I finish off the fourth quarter going back to our comment on profitability and a good start for 2020.

So based on that funnel, that tells me I like the mix.

So these deferrals aren't necessarily putting incremental price pressure on kind of the bid quote, that sort of thing?

It's just a pure deferral, right?

No.

Yes, correct.

Typically, if you have the chart, in front of you, at Chart 11, if you look at the bigger bubbles, you probably have them black or white, but I'm looking at that big bubble, and sitting at the end of 2019, that's a fairly large project.

That would typically be a price pressure-type of environment.

When I look at the smaller or medium-size ones, typically those are going to be [indiscernible] type projects and typically those are projects you already have in the installed base and therefore the profitability is going to be around that -- our margin -- our normal margin.

And then, Dave, just as a follow-up.

Your comments around doing some more bolt-ons here to maybe supplement some of the earnings.

Can you remind us what percent of your sales are say, embedded software?

What percent might be stand-alone software?

And would you be looking to kind of software, industrial software-types of companies as part of your frame for doing more bolt-ons?

Well, if you look at the acquisitions we've done this year, a lot of them were software companies.

And so the answer is yes.

But we -- so we look at -- if you -- we did a lot of smaller -- we're doing a lot of smaller deals this year and most of them were -- have been tied around software, stand-alone software or embedded software.

Again, that is a key issue for us.

And we're trying to find the type of deals that we're doing.

From the [facility] point, Tim?

Just that we showed a slide at our investor conference, $400 million staying on software on the A/S side and that doesn't include the embedded piece.

Yes.

So we did $400 million.

The stand-alone is about $400 million and then we have a lot of embedded which we don't break out in the systems business.

But yes, if you look at the deals we're doing right now, they're a lot less product but they're more software-based and I think that's a common trend within this automation space as we drive into the control and drive it into the -- into our customer base around specific industries.

Again, there's not a lot of them out there so you have court them for a long time, and we've done quite a few this year.

They're smaller.

And -- the acquisitions to me are important relative because it gives us opportunity to add sales, profits.

And as Frank points out, operations have to deliver their earnings and their synergy plans to make them accretive, but that's going to be a key issue for us to drive.

When we can't get top line organically, we've got to get them through bolt-ons and they've got to deliver the profit.

But it sounds like those deals would be more of the strategic nature, right, versus trying to find stuff that would supplement the earnings that are... .

Yes.

Oh, yes.

Yes.

I'm -- when I talk about bolt-ons, I'm not -- okay yes, yes, okay, I hope you don't think that.

I'm not talking about going out to -- I'm talking about bolt-ons within our core business, within the core business of automation, within the core mix.

I'm not looking at going out to do any type of acquisition to get sales earnings or cash flow or EPS.

No, these are within the core.

Clearly, from my perspective, if things really get slow, get to that stall speed, I think we are going to see opportunities from more of these smaller bolt-on deals coming forward, and we've got to be very aggressive in going after them, in figuring out how to integrate them pretty quickly to get a little bit more growth in that 2021 time period.

Going back to the first question somebody asked me early on, do we have a path to get to -- EPS closer to what we said back in February?

Because the sales aren't going to be there right now organically unless we have a big pop in '21.

So we're going to have to figure out how to do -- and bolt-on deals within our core space today.

That's a good point, John.

Thank you.

I'd send Tim to Canada.

Calgary, Alberta.

Where's the worst mosquito problem?

I think it's everywhere.

Our next question today will come from John Walsh of Crédit Suisse.

I guess maybe a first question around the hybrid markets.

We've heard a little bit of mixed commentary out of that market.

It sounds like you're still doing very well there.

Is it -- do you think it's because of your mix because you're taking share, just hybrid covers a couple of different end markets there and maybe what you're seeing.

Yes, exactly.

So from our perspective, our hybrid business, clearly we're pretty strong in terms of life sciences.

And so we've had a pretty good run in life sciences from the perspective.

I'm not -- in that hybrid space, we don't have automotive, we don't have semiconductor, we have the life sciences.

We have some food and beverages.

We have some mining in that -- and so that's been doing pretty good for us.

The food and beverage has not been that -- has not been that strong for us but it's primarily been the life sciences and the mining area that's been good for us relative to our hybrid business.

Got you.

And then maybe just as a follow-on.

I think and maybe to Jeff's question earlier around margin leverage.

I think you said price/cost will be positive again in the fiscal Q4.

But how do you think about that kind of price/cost balance as you run it forward?

Right now, the key issue for us is commodities have come down, excluding any additional aggressive tariff action, other than the one -- the 10%, which is not primarily aimed at us -- our industry, it's more of a consumer tariff approach.

I think we'll be -- our price/cost balance for going into 2020 right now is pretty good.

It's green.

Now those things could change and those are the things we have to deal with.

But last year at this time, we thought about tariffs were coming in, we had material still going up.

People thought we were going to see faster growth.

And so we are looking at a little bit different type of inflationary environment.

So this time it's moving in the opposite way.

And the key issue for us is to keep our costs in line and obviously make sure we have price discipline around the price/cost.

But right now, as we look at the early stages of 2020, it's green, and we feel good about it and it should be okay as we start the year out.

Our next question will come from Julian Mitchell of Barclays.

Maybe a first question on Automation Solutions in China.

You're coming up to the end of what's been a very good 3-year upturn.

Historically, my guess this industry in China tends to have 3 or 4 year upturns and a 18 month downturn.

So I just wondered how you're assessing the market outlook in China in terms of that risk of turning down next year.

And whether you'd seen any more evidence of U.S. companies perhaps being pushed down the priority list on orders, which is something I think you'd mentioned back at EPG.

Yes.

So on the cycle through this month, the cycle is still pretty good.

We're looking at a very solid 8% to 10% Automation Solutions orders growth on sales growth.

As I look at the industries we're serving, there's a lot of industries that are -- their Chinese customer base is trying to become more self-sufficient.

And so obviously, less imports of foreign goods, so that's where they're aiming their investment.

I do not see that changing as we move into 2020.

As my initial look at 2020 right now for Asia -- for China is that 8 to 10 most likely is going to turn into, let's say, 6 to 8, maybe 5 to 8 type of growth.

So we're looking at slower growth to your point, Julian.

But I'm not looking for that drop off yet because they have not -- they really haven't finished building out what they need to build-out relative to the infrastructure.

They're trying to become more self-sufficient in the industries we serve.

Relative to, we'll take what I call nationalistic tendencies for the Chinese relative to foreigners, it's not just U.S. companies, it's all companies.

It could be European companies, too.

The trend has continued from the standpoint we've seen some pressure points relative to some of our customers being pushed about, you need to look at alternative sources not just foreign company sources, be it European or American.

I think that trend will continue as long as the trade discussions are underway and hopefully the trade discussions will be finalized before the foreign companies are really pushed to a smaller piece of the marketplace.

Right now, obviously, we're still okay.

But it's something that we spend a lot of time.

We have people going in and supporting our customer organization, our sales organization, our customers' organization.

Lal Karsanbhai was just here.

Mike's going in next week.

And I'll be going in in about -- within less than a month.

So we're spending a lot of time with our sales and with our customers because we're very concerned about the negative trends of nationalism.

And clearly, it's something we're fighting.

Right now, I haven't seen anything.

I mean, there's a little bit more, but not astronomically more or we would not be growing as we're growing right now.

Very helpful.

And then my quick follow-up would just be around your assessment of inventory levels among your channel partners and customers.

How much destock do you think is needed across automation and C&RS (sic) [CR&S]?

It's still too high, given the fact that -- if you look at Emerson's inventory, we -- with a slower June, our inventory did not come down as it normally would in June.

So we're a good of indication of that, Julian, if you -- I mean, I -- there's a balance sheet out there so you could see our inventory level did not drop like normal from quarter-to-quarter.

And from my perspective, as I look at the channel right now, I think -- I thought the channel would be done by the end of this third calendar quarter.

I think we're going to be well into the fourth calendar quarter before that destocking is done.

And we sense that people are being very cautious.

And so I think it's going to take a little longer because the demand is weaker, therefore the demand's not going to [try to [destock we're going to have to take it down very slowly.

That's how it looks to me.

And our next question today will come from Robert McCarthy of Stephens.

The first question, Dave, obviously, you've been focused on niche and bolt-ons particularly in the discrete side and kind of make your number over the longer term.

But the question remains in a down cycle, you might have opportunity to look at other larger properties.

How do you think of the state of the balance sheet from your ability to do a larger deal, absent the use of equity?

What is your outer bound at this point?

For the perspective of deals we're looking at right now, we show the Board, obviously, we made the decision to do a little bit more share repurchase from the standpoint our deals, our acquisitions this year were not going to be as high for us.

Say in the first 6 months, we didn't see the pipeline being as strong.

So we made the decision to do a little bit more share repurchase.

Now clearly, we started this process before the stock got whacked in all the trade discussions.

But if I look at the -- if I look at our leverage point, we can do a $4 billion, $5 billion type of transaction and comfortably be around that 2 debt-to-EBITDA margin, we're up a little bit over that.

So we have plenty of room and so there's not a lot of $5 billion, $6 million, $7 billion or $8 billion deals out there for us, So I think we can get through it, the key issue, as Frank knows, is we've got to obviously dial back share repurchase a little bit and then we'd actually demonstrate to the rating agencies that we're going to get our ratios back down, which we have in the past.

Yes.

And I mean, Rob, there's nothing that we can reasonably foresee that would cause us to contemplate issuing equity.

We can do everything within the balance sheet that we can foresee.

The type of deals we see here.

The biggest type of level deal we'd see is a $4 billion or $5 billion.

So we showed the Board that ratio as we go through this whole process of capital allocation, which we did last month or last June -- in June.

And also, we did today and we did in the Finance Committee this morning with Frank.

We're comfortably well within the band of acquisitions we see and ability to continue to do pretty good levels of share repurchase and have the opportunity to do the deals if necessary.

Two smaller questions, if you'll forgive me.

One, CapEx assumptions going forward.

Have we put a cap on that or a modest reduction on that given what you're seeing in the prevailing environment?

And then number two, any sideways look at kind of the midstream and refiner's intentions around IMO and whether they're going to look to build the capacity for the low sulfur distillate or what is -- what are the intentions for spending there, if you could share any?

Yes, if I have any.

Relative to capital, we've scaled capital back this year.

We've asked -- we've had sessions here in the last 60 days.

So capital this year is going to be around $600 million.

We -- from the standpoint of next year, we have to take capital up.

And we have, as I said in my -- I think in the 8-K and also in the press release, we have some issues from our standpoint of -- as we've now had some of the acquisitions for 2 or 3 years, we're now doing the optimization of where we want to do some best cost manufacturing.

So we have some investments that we need to make in 2020 getting ready for actions we want to take in 2021 and 2022.

So from my perspective right now, our capital spending for the next couple of years will probably be up around the 3.5%, 3.6% level as we prepare for this move into this -- sort of better manufacturing location and then it allows us to move as we go into '21 and '22.

So I think we're evaluating everything around the capital structure right now.

Do we need to do it in 2020 or can we push it out there?

I -- if I look at the numbers right now because of what we see needed for '21 and '22, we will be taking capital back up in 2020, a little bit higher than it is this year.

And I think the same thing will happen in '22.

So we try to balance this but we spend money all the time, as you well know.

But I'm shaving it now and then we're going to have to put some money back in next year.

And then on IMO, real quick.

I don't have -- I can't give you more insights.

I don't know.

I haven't talked to anyone recently about that.

I do know if I look at the project investments on the refinery say in KOB 2, it's still pretty high in the list of projects we're going after and projects we're winning.

But I never -- I can't give you a specific number to say these guys, yes, they're going to keep doing it, they're going to take it up.

But I can tell you right now, my folks, they tell me in the field, refining bidding is still going on so they appear to be moving forward and spreading in this space.

That's what I see at this point in time now.

Will that be something they'd scale back if they really start scaling capital back later this year as we move into 2020.

But if you look at the project list right now, there's of lot of good refining type of projects out there.

And our next question will come from Joe Ritchie of Goldman Sachs.

So obviously, look, the backdrop is challenging or has been a little bit more challenging than we all expected.

I guess at what point do you guys think about revisiting your longer-term targets for 2021?

I know it's still a ways away and a lot can happen between now and then.

But how are you thinking about that now just in light of the backdrop being a little bit more challenging?

As we told the Board -- we had a Board meeting today.

As we told the Board today, we'll grind 2020 here for the next 3 months.

And during that process, we'll grind at 2021 at the same time because of this very issue of, the things slow down, there's a bump -- a big bump to '21, I mean that, as we grind, what we hear from our customers as they finish their calendar year.

But we're going to be going through a 2-year window here basically because of that issue.

Going back to the question.

Is this a pause and then a reacceleration or is this going to be a grind in stall speed and then things really slip away as we go into later 2020 into '21.

So that -- we'll be doing that here as we finish this year out and then we have a very good view by the time we finish the calendar year 2020 or 2019.

So that's how we're going to go at it right now.

I want to get a feel from our customers, am I being too cautious or am I being realistic?

And so we'll give it [some thought].

Yes.

I mean, it sounds like potentially maybe an update then by the Investor Day next year.

Oh, for sure, for sure.

I will not leave this calendar year without my own-self having an update and communicate to my Board, so I have a sense.

Because I do go out and talk and I want to make sure I'm not looking at some crazy thing for 2021 that doesn't make sense.

Besides, I got a new Investor Relations guy and I can pin the other guy in and blame him for all that crap and so.

I mean, you know how it works, Joe, you've seen so many Investor Relations guys.

Never to be surfaced again.

Tim's been a good one.

Tim's been a good one, I have to tell you.

He's a good guy.

If I can -- if I could fit maybe one more in.

I thought your commentary...

You can fit one more in.

I thought your commentary, Dave, earlier on seeing a slower like U.S. gas/Canada gas environment was interesting.

I'm just wondering like do you think the trade environment is impacting offtake agreements from happening with Asian partners and that's impacting LNG investment?

Or what is it that you see that's kind of driving that slower gas investment here in the U.S. and Canada?

100% trade discussions, 100% because (inaudible) will not forward in North America, and I've told the White House there, as I've told anybody in Washington is, they will not move forward because the Asia -- our Asia, particularly China, need these -- need the offtake, the processing, semi-process stuff.

And without some agreement, these investments will sit there.

Now they can move forward pretty quickly because of where they sit.

But without the agreements going forward and some clarity around trade discussions between the United States and China, these natural gas investments will not move forward.

Because even if 50% of that investment is going to be for exporting, 50% are internally.

Your whole process is going to change.

So that's very important.

So I think what I see in Southern Texas, in Southern Louisiana and it goes back to my comment about they're going to sit there for a while for 12 to 14 or -- whatever that number is, and then they'll make that call relative do we reevaluate or do we just go back to the drawing board?

And our next question will come from Andrew Obin of Bank of America.

Just a question on your investment strategy because I know part of the strategy was to invest in service capability, flow control capability, also discrete investments to sort of update the product.

So how should we think about your internal investment product -- processes, given the slow down?

We are going through a very serious prioritization of where we're going to go, either investment in the discrete through the investment around the GE bolt-on acquisition and our investment between our Process side and the Ovation site, the power side because that's very important to us and we're going to try -- we're going to figure out how we get that done and over the next 2 years as we planned originally.

On the service side, given the opportunity we've been seeing in KOB 3. And I think KOB 3 will come in at a very good number this year because you know we're trying to keep that number well above 50% in the cycle.

We're going to figure out how we can continue those investments going and not stop them.

But again, it goes back to our reprioritization of what we can do and what we cannot do.

And I would say in my discussions with Lal and my discussions with Ram and the other [OCE] numbers, that's one area that I would say we need to figure out how to protect.

Now we may modulate a little bit, Andrew, but that's an area I think we continue to have opportunities for growth and penetration for the long term.

And I don't want to be short-cycle blinded and miss this opportunity.

So I think you're going to see us continue to modulate and continue to move forward in this area.

It's been very good for us so far.

And just a follow-up question.

You always have a very good sense of what global macro is doing, what global GFI is doing, et cetera.

Just looking at the world today, what would you guess is U.S. GDP and China GDP are growing at right now?

U.S. right now is growing 1, 2s.

I think there's -- I think it will continue to slide.

It could easily go below the 2 at this current point in time until we get some clarity around trade.

It could actually grow below that 2 level next year as we move into next year.

I think China has continued to grow.

But I think it's more like a 3% or 4% type of growth rate in China.

We've seen pretty good pockets of growth.

And if Bob's business, the Commercial & Residential business has back-to-back, let's say 2, 3 or 4 months of slightly positive growth, that tells me that things have stabilized.

So the global economy has definitely slowed.

And from my perspective right now, we've got the Feds around the world trying to figure out how to keep that growth rate up from hitting the stall speed.

But the trade issues right now are quite a big negative and being pushed back that growth rate down.

So that's the key offsetting going on at this point in time.

And our next question will come from Deepa Raghavan of Wells Fargo Securities.

Automation Solutions, Dave.

So China continues to invest in infrastructure and that's been helping a lot of companies there this cycle.

But what are some of the verticals within AS that have been performing better than you'd have thought in that region?

And which are the ones that are losing some steam versus your expectations?

I have a follow-up after that.

So you're talking about China specific, Deepa, is that what you said there, Deepa?

Yes.

China Automation Solutions, yes.

So from the power standpoint, we've seen China lose some steam.

They were underperformed where I thought they would underperform.

There's been a shifting around of priorities within the power industry.

So that one had underperformed inside China from what I thought would happen earlier this year.

On the -- so the chemical side, I think that process, I've seen those are -- held in there pretty well nicely.

Some of the refining investments have held in there pretty nicely.

I would say that if I look at some of the pipeline investments, they've held in there pretty well.

And in the beginning of the year, I believe if I went back and looked at when I gave a first forecast in China, we were talking around a 6%, 8%, 9% or something like that.

6%, 8%, 10%?

I thought it was 8% to 10%.

8% to 10%.

And so that's basically where we are right now.

So I would say chemical is a little bit better.

Power's a little bit worse.

And refining is a little bit better.

So that's where it is, we're pretty close to where we thought we would be and, as you said, it's shifting around industries a little bit.

And that's how I see it right now.

Got it.

My follow-up is on cost controls.

Are you taking costs down along the verticals that are weak?

Or is that more broad-based across Emerson?

Broad-based across Emerson.

So we've set in motion Bob's business in the Commercial & Residential, Bob Sharp, he's gone through his process with his team, and looking at places that we can take out layers.

We can take out the situation we've not necessarily needed anymore.

Lal's doing the same thing.

We're trying to accelerate some of the integration and some of the acquisitions.

We're looking at the corporate structure in the same thing.

So we're looking at areas that, from the standpoint of things we could do simpler without as much overhead.

We're trying to figure out how to do that right now and that's how we're going at it.

So it's very people-focused and near -- we started in April and will run all the way through this calendar year to make sure that we have things tuned the way we want them tuned for this type of environment.

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

Well, a lot of questions have been asked and answered.

But one thing I was curious about is the June board meeting.

I'm just curious what the high-level framework is on buybacks?

I recognize the $250 million you mentioned in Q4.

But is there an appetite if there's not much in the way of M&A over the next 6 to 12 months to really pump the repurchase activity higher?

How do you go about that?

I don't think I would -- I mean we show the Board a range of what we see cash flow doing, what we see our capital allocation from the standpoint of -- from the balance sheet, the leverage we have.

We try to keep enough flexibility.

So if we had to do several medium, larger-size types of deals being a couple of billion, do $3 billion, $4 billion.

So I think that right now the Board feels very comfortable in this range of $1 billion to $1.5 billion per year in share repurchase.

Assuming that the deal that we're looking is moderate of somewhere between $0.5 billion to $1 billion per year.

If we alter that and we start moving back into that $1 billion to $1.5 billion to $2 billion, you would see us modulate back down towards, I would say a little bit under $1 billion share repurchase.

So we show the Board that flexibly.

But I don't see that the deal will really -- it's not going to stop and I mean -- I don't see us popping everything -- all our capital into share repurchase.

I think we've consistently bought stock back over the years.

As Tim knows, it's close to 300 million shares that we've bought back over -- since 2000.

Now the net impact's not quite that high.

But we've bought back 300 million shares.

And so we consistently are in the marketplace.

But I don't see us changing the strategy of buying on a consistent basis.

And I think the Board feels very comfortable in the 750 to 1.5 billion based on what our acquisitions is.

And hence, that's why, we talked to the Board about taking it up a little bit higher this year.

And now with 2020 hindsight, the fact that the market's gotten weaker, it gives us some flexibility to buy some at reasonable prices.

I want to thank everybody for your time.

I appreciate it.

We -- as you guys know, I try to be very candid about what's going on.

And I do want to let you know that Rocket's 1-year birthday is today and Doon is about 5. I think he's 4 months old.

And Doon is a little bit different than Rocket.

Doon is a little bit more aggressive.

And so Rocket and Tim go together, I've got to get an aggressive Investor Relations guy now.

So that's what it is.

I want to thank everybody for your time, and I want to thank the organization for everything you've done and will continue to do for the company.

All the best.

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