Q3 2019 Earnings Call

Good day, ladies and gentlemen, thank you for standing by welcome to Emerson's Investor Conference call.

During today's presentation by Emerson management, all parties will be in a listen only mode.

Following the presentation the conference will be open for questions.

This conference is being recorded today August six 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 I see I see.

I would now like to turn the conference over to our host Tim Reid director of Investor Relations at Emerson.

Please go ahead.

Thank you Alan.

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.

I'll start in the third quarter summary on slide three.

Sales in the third quarter of 4.7 billion increased 5% 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 seven.

Automation solutions underlying sales were up 3% and orders up 4% in the quarter.

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

North American upstream oil and gas demand has yet to improve.

Demand in process and Hybris end markets. However was stable in North America and continued to be robust elsewhere.

Commercial and 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 97 cents and was 94 cents up 7%, excluding discrete tax items in the current and prior year.

Through the third quarter, we 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 four.

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 events in tools and fast and GE intelligent platforms acquisitions.

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

Turning to slide five.

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 and 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 lower compared to the second quarter growth of 7%.

Europe was up 1% and remade and remain positive across both platforms.

Turning now to slide six.

Total segment margin was down 160 basis points and was down 30 basis points, excluding recent acquisitions.

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

We guided sequential core leverage in the mid Fortys and our businesses together delivered over 70% on 120 million higher sale.

As we discussed last year, we accelerated certain restructuring programs in the second half of 2019 to position the business for 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%.

And free cash flow was a 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 a 100% full year cash flow conversion.

Trade working capital as 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 seven.

Automation solutions underlying sales were up 3% orders were up 4% in the quarter.

Underlying sales trends in the quarter remained broadly stable as follows.

We saw continued strong demand across our three kinds of business MRO spending brownfield and greenfield projects.

All world areas remain positive.

And we continue to see healthy progress in our long cycle project outlook, a strong project funnel systems orders gross 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 and maximize free cash flow.

Also limited pipeline capacity continue to constrain investment activity.

Second.

Global discrete manufacturing Edmark markets decelerated.

The short cycle weakness with 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 project 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 the 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 event picks and GE intelligent intelligent platforms acquisition.

The business delivered sequential leverage above our guidance.

As a 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 the full year segment margin is expected to be approximately 15%.

Turning to slide eight.

Commercial and residential solutions underlying sales and orders were down 1% in the quarter.

Growth in the Americas decelerated from 4% in Q2, two 1% this quarter.

Due mainly to the unfavorable weather conditions.

Cooler wet weather in key regions late in the quarter, that's flowed residential air conditioning and construction markets.

Europe also decelerated late in the quarter due to weather.

But preliminary July orders trended positively.

Asia Middle East Africa region improved from down 15% in Q2 to down 6% this quarter.

We expect improvement to continue with underlying sales growth turning positive as we head into 2020.

And the preliminary trailing three month underlying orders in July were up slightly a good sign.

For the full year, we expect commercial and 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.

[noise] margin decreased 70 basis points, excluding the tools and pets 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 margin to be approximately 21%.

Including additional restructuring actions pulled into the fourth quarter.

Let's turn now to slide.

Slide nine.

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 out outlook for global discreet markets.

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

The EPS guidance range is maintained at 360 to 370.

We expect fourth quarter earnings per share of approximately one dollar and 10 cents, which is the midpoint of the four 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.

The whole 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 five cent 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 reorganized reorganization actions.

We now expect our operational tax rate to be approximately 23.5% going forward.

As we continue to optimize our global two platform operating structure.

[laughter] expected operating cash flow is 3.1 billion and free cash flow is unchanged at two and a half 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 US today also want to let you know that this is Tim next to his last earnings call.

You know I go through this process of training semi professional investor relations people that they never get there you never quite get there, but Tim Tim has a unique opportunity that we can talk about what he is going to be going into a later this year and I have.

Breaking out another person or by the time, we get into the November timeframe, but Tim most likely will join us for that call.

Dan I want to thank everybody for joining us today and I want to give you an update on what we see I think the employees for joining us today.

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. So we definitely need to keep you to holding to the two questions rules will extend the call a little bit maybe a minute buyer, our 15 hour and 20 minutes to try to 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 contv to sense a change 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 three 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 and 2900 moving in 2020.

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

We had good growth in sales are good growth in the earnings we have good growth in cash so, but it's happened unfolded much differently than we thought going back nine or 10 months ago and that's what that's what we're having to deal with right now.

But as you can see in the orders chart on page 10, two things first.

We have a new product called doing.

After doing bag and one of my favorite Golf Places in Ireland, and doing is a black and tan.

The next rocket rockets birthday today is one year old birthday is today.

Oh, you can see the order trends did improve slightly for automation solutions. It ticked up a little bit pull this up a little bit.

And on the commercial readiness solutions for them for the month of July orders were a little bit better, but still slightly negative overall and Asia Pacific turned positive and and the month of July which is good. We're now three or four months behind what we said more like four months behind what we 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 quarter between the midstream downstream.

Lots of caution around the upstream area right now chemical we've got a very good quarter and power hours in the PW S. power business is close to 40% off for the quarter around the world as we as we continue to upgrade the power the power facilities around the world automotive in Cemig semiconductor and discrete really had a tough quarter, but overall.

Softening and key marketplaces, but the trend lines are still positive over but definitely slowed to a way below what we thought when we started this year.

Gulfport Weve update updated the what we call our large project pipeline funnel.

Importantly, we actually did an upgrade of the total size of the funnel when we give this fight a lot usually two or three times a year.

You know February was around 7.6 billion 195 projects today. Its 221 projects 8.3 billion it did increase a little bit.

Clearly another sign of a things slowing down a little bit of push out is that our committed won but not booked is now slightly over a billion dollars in projects projects that are there are basically sitting out there that we've won and there were still waiting for the final documentation and orders a place where we can start booking and then obviously start doing some shipments against it.

The other key thing you'll see in this is that.

[noise] down the bottom we talk about what's been shifted out to 2019 and 2020.

Based on what we've seen about $350 million of projects, we're working on or been working on for the last couple up six 812 months has been shifted from 2019 or 2020, and we basically have seen about $450 million other pipeline shifted out of 20, 20% to 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 last couple of months is this this cycle has not ended this cycle is going to pause mode because of the disruption that's going on relative to the trade negotiations to trade discussions, it's clearly, causing a slowdown in some key markets primarily USA.

A little bit of Europe .

And we've seen some push back in a couple other places around the world, but our international markets have continued to hold up from the automation standpoint, U.S. markets pushed out a little bit the Canada market pushed out a little bit and a little bit of push out and actually sales are going out in the middle east, but overall still going in and I still firmly believe if we do get resolution to the trade discussions at some point in time here between now and the next 12 18 months. We built this cycle will move back up there has not been an excessive amount of capital spent and build out in the cycle yet it'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 have I am a little concerned from the standpoint of how long the slow down will happen, hence the O.C. 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 our costs from people standpoint organization back in 2018, and a 40 eightv running through 2019 look at much faster growth. This year for instance, we thought we'd grow around the 6% to 6.5%. We're now growing around that 3% to 3.5% range you look at what we see going next year I look at a very gradual growth environment. This point in time, but I also want to build in the flexibility if that doesn't happen that we could still protect our profitability and our cash flow and deliver some results for the further 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 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 it electrical products group in may and even when the phone call in early may, but I've come to the realization and watching our customer base and talking to our customer base is there 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, where we 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 we have to do and capital over the next couple of years and I'm I'm trying to set with Frank and the LC those priorities of where we need to spend money I have some actions I have to take some additional manufacturing capacity in the best cost locations that we that we have around the world, but I need to prioritize what prioritize those and make sure. We're doing the right way as we go forward here in 2020 and as we come back into 2021 again, we're being proactive we are 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 slower growth improve our profitability deliver the incremental margins, we bid committee 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 from my perspective, its not happen like we thought would happen.

We totally happy about no we've been delta handed 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 test and going home, we're going to be attacking and aggressive don't after things, but we're also bringing their cost structure aligned to be able to serve.

Serve ourselves and also serve our customers and also build the profitability that we want to deal with.

So I, thank everybody from the Emerson team as we wrap up this year, we've got a couple 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 will remind everybody. We have a lot of a lot of people on line close to 20 or maybe more than 20 people now.

And so I need to hold you to two questions and I'll, we'll take as much time up to about an hour at $15 20 minutes to get through the questions. So with that said, let's open it up.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.

Withdraw your question. Please press Star then too.

Our first question today will come from Andrew Kaplowitz of Citi. Please go ahead.

Good afternoon, guys good afternoon Andrew.

Dave how do we think about the longer term road map for you guys in a more difficult macro and particularly as we go into slide 20, it might be difficult obviously to achieve the targeted 21 or 50.

But if we're in this longer prolonged slowdown can you still grow double digits in the P.S. off the 2019 base, if nacco stabilize a bit here given the high level of restructuring repurchases, how should we think about that.

From the perspective, you know our underlying growth rate based on the model. We presented in February it was with close to 5% four and a half 5% I believe the cycle here if that number is going to be closer to 2% to 3% because of slow down we're going to have to have both more bolt on acquisitions that allow us to be able to get that type earnings growth. It will be very will be challenging for us.

But that's the key issue for me is can we can we drive some incremental growth through penetration. If that's possible I will try to do that whilst we're going to have to be a little aggressive on the bolt on acquisitions that allow us to integrate some more sales and profit to get that get that number up but thats. The game plan fast speeds, where do we get that topline growth. If we lose about a point or two from underlying from this core business than the acquisition games them, even more important to us on that for the bolt on standpoint, and then we're going to have to be aggressive enough on the integrating those acquisitions that will be the key issue for US is as we look at the next couple of years and that target we laid out in February because it as you said, it's a much different macro environment unless something happened relative the trade early on in 2020, which then would accelerate growth potentially in 2021 that would be another scenario.

But I'm not banking on that right now we're looking at an environment Thats give me a little bit less growth in rapid deal with that.

Yeah. That's helpful. And then you know obviously in automation solutions, you've talked about 30% incrementals as the target how should we think about underlying incrementals. You know if we do have this slower growth environment, you know given all the restructuring you're doing can we still do 30% plus on load growth.

That's that's the game plan that's why we're that's why we're going after an incremental restructuring now Andrew.

We've made a commitment to get that profit margin back up you know. These these are quality assets. We've made a lot of acquisitions within this asset space and we need to make sure from our shareholder standpoint that we get those margins back up to I'd say, all that reasonable range it might take us a little longer to get back to that what I think the appropriate number is down this combination of companies at around 19% EBIT, but we're we're not backing off that number incrementally that that's our number for next year and loud 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 is we'll do it more incremental restructuring early part of 22020.

Thanks, Dave appreciate it.

All the best answer thank you.

Our next question today will come from Steve Tusa of JP Morgan. Please go ahead.

Hi, guys good afternoon.

Good afternoon, Steve.

Congrats to Tam unless you're like sending them to some godforsaken part of the world like Oh, I don't know where to where you send these people but hopefully.

The Connecticut chose not to so I guess I am willing to I hope I'm open for suggestions I mean, it you might want to talk to is what's a little bit about this she is a saint Louis girl, but.

You might have.

If you got an idea.

It's not going to be Augusta, Georgia, I can tell you that right Oh I was just going to say that you saw that one yet.

That's not going to Augusta, Georgia, most likely it could be like Oh. So once it was a tough place in Nevada, Yeah, we get something is real.

Yes value or segment or 50 waters I'd like to now he's going to be gone most likely to the northeast somewhere.

Got it got it I I love the the Red exclamation points on the order trends I think that that really pop stands out, but how bad how bad was kind of your discrete business with a you know on the order rate or revenues either one like are those down you know double digit and then as a follow up to that within power, specifically and then a little bit less an LNG. How do you think you're doing share wise because power I would assume that's more a kind of.

Attacking competitor installed base in selling digital and that kind of stuff. So it seemed like there was a bit of a share gain there in power.

So on the on the on the discrete side were not down double digits. I mean, it's a solid single digit but okay. I mean, I would say, yes, Tim in our going back four there's probably somewhere between five 8% mid mid mid single digit down in the discrete side.

No. The the inventory has not come out of the system at all obviously the demand slowed down as you've seen Steve and therefore, it's going to take a little longer I you know it could last all the way to the calendar year now to get that out.

But that's what we see at that point in time, the process side or has it been pretty good within within the channel, but says right now its oil and gas related down around Texas in the Permian has been pretty tough.

On the power side.

We are we are very committed to this space and we have continued to bring out the next generation control system ovation. We continue to bring out new services, we continue to be highly committed to supporting the power generation.

Both renewable primary power out of the type of power, but particularly around coal to 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 is a unique window of opportunity as we look at this.

And overall this year year to date were up a solid single digit.

An orders and I think we have a good fourth quarter and a good start to next year.

The industry needs to go through some some reinvestments and upgrading systems take an old systems down and bring us a new power plant bring up new gas get recall. These are all opportunities for us and we're out there fighting for it and I would say, we're doing pretty well at this point in time and again you I don't look at a quarter for share I mean lets wrap it up as we we finished this calendar year, but I feel good or the trend line is I look at the last 12 to 18 months versus versus our primary competitors in the space right, but that's the OEM today, that's the Oems installed base correct correct did you're going after yeah, and then one last one just on the macro you seemed confident that this isn't getting worse, but then you said things extend I mean through the election next year I mean, how how are your customers and you guys going to you know not at least pause a little bit.

Before.

You know all the A. all the uncertainty around the election unless you just have you know.

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

I know from our perspective, we're going to.

We're going to work multiple plans here from from my perspective, I think we're going to look in an environment, where there is 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 that's going to allow us to see a little bit better growth, but we're going to factor in that you know we could be at a slug fest with no real low single digit growth for the next 12 months and therefore, you got to get that cost line in line and really prioritize we're going to spend money, it's not going to be my opinion, I'm being very very let's say cautious or negative, but I'm very concerned about it.

Business, because like you said keep pausing and they keep reevaluating their investment and Thats been dragged the business investment world to a weaker environment. If it doesn't happen the way things get better we'll be okay, but I'm more worried about that it will happen and therefore, we restructured the company to be in that environment.

Got it okay. Thanks, a lot good thanks, Dave all the best if you got ideas for we're going to send Tim sounded to me.

[laughter].

Our next question today will come from Jeff Sprague of vertical Research partners. Please go ahead.

Thank you good afternoon, everyone. Good afternoon, Jeff Hi, John .

I'm doing well thank you.

Fighting through it also.

Hey, it's always fun to slug Fest and stuff you know you get to that he gets boring.

No exactly.

Hey, I wanted to just pick up on your last point to your.

You kind of indicated you didnt use the term, but may be kind of the risk of gestalt speed and if we get there.

What really kind of keeps those from kind of tip and lower I guess, no one has a crystal ball right but.

Right would you happen to have kind of a a worse outlook than what you portrayed in your opening comments there.

You know I the key issue there as I think I think there's a good chance the economy next year gets the global economy gets real close that's false speed and I think that as we finish the rest of this calendar year, which I think will be okay relative to and then people then really start reevaluation 2020.

We have to if if we sense, we're going to get pretty close that's false b, which we've seen the comments before then we got to think about okay. Do we have the right things done relative to our restructuring in our position. The company right now I mean, I think we are going to get close that stall speed, but I don't think it's going go all that way. We also as you understand around the world. We have the every fed federal reserve around the world really pushing accommodation to make sure the economies do not get to that stall speed. So I think that's one thing we have going force that many of the European that the Japanese the Chinese American or Federal reserve banks were call. It 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.

The financial reserves out there can figure out how to make sure. We don't go in there because that that's a little bit different environment and it gets pretty ugly for a lot of companies at that point in time.

Yep.

And then separately just thinking about the automation margins right. So it actually ended up being kind of UQM, you're looking quarter right. Your actual O. P dollars are down right. So we're not just talking.

Mix effect of deals on margins, but opie dollars down.

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

You had talked on the last call about some discrete things on price cost another.

Levers could you just give us a little bit more visibility on how we bridge to that Q4 automation margin number.

I think it was a couple of things going on from that perspective, we have you know obviously the price cost continues to move our way in that fourth quarter in a positive way. They did have a pretty good sequential margins improvement in the 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 May and also some of the core restructure that we started to begin the year as our startup will start to flow through so you know the automation business as things slow down as you 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 and even June which was a tough month for automation solutions from a sales standpoint, they did very well with leverage and the profitability. The month of July which we're starting to see right now the same things flowing through again. So my my gut 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 back the backlog out that's been built over the year.

And or do the customers start pushing that out but right now I think they've got the cost structure in line for where they sit in for this calendar year year, Jeff and I feel pretty good about the margins in the fourth quarter for these guys.

Great. Thanks, Dave I'll pass it all the best to John Thank you very much have a good good rest summer.

The next question will come from Deane Dray of RBC capital markets. Please go ahead.

Thanks, Good afternoon, everyone.

Good afternoon game.

Hey, maybe by the place to start Dave would be the game plan, where you would.

Augment slowing growth with bolt on acquisitions and yeah.

When I hear you say that it's kind of suggests that there's you are still willing to play offense here and which is a good sign but just how do you do you marry the idea of going after acquisitions during a period of high uncertainty in and clearly a pause and closer to stall speed.

Yeah for this from the perspective of some of the bolt on acquisitions, we which we work pretty aggressively all the time you know fundamentally we believe as we go into this time period as we move into 2020 early 21. Some of the companies that were interest and we'll want to well got we'll want to get out and we'll have the opportunity to do those bolt on acquisitions historically in times that things like this slow down things that gets kind of sloppy near that so I'll be we see see some these product lines pop out and so you know were bank yacht that we're going to try to push the pressure point up on this thing and see if we can get a couple of these the pop would give us some increment of growth the topline obviously work with the cash flow and obviously working to earnings but it's just going to be one of these gains that we know where we're going to go and we're no. We're pushing right now and does are there, but the place we're going to are they willing to not assigned as sell because the sloppiness in the marketplace from from their perspective. So that's how the game is going to work what does put a little bit more attention on it and.

From from the top level down and I know every company is going to going to be going through a repositioning and restructuring and hopefully we'll be able to convince them of our sellers built to let a couple of small product lines go.

That's all going to work.

Got it 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 or faster and to a certain extent can you share with us how much you're seeing from your customer and being influenced by what your customers are doing versus what you are hearing from Washington, because you are privy to a lot more specifics than anyone on this phone gets to here, but maybe share with us some of that.

That insight that you're getting from those channels.

So a lot of projects, we see in particular on the LNG World you know from the perspective of.

These LNG investments need to go forward as there's been major commitments made from a from a lot of our customer base relative to around gas versus coal versus versus oil you know from the standpoint of what we call less carbon the carbon they've been commitment. So so from my perspective. These projects are going to go but it's just a matter of what time is it going to go and when things get resolved an iPhone I believe we will get things resolved relative that discussions with China. It could take a lot longer than you know my initial constant comments, we're always around August September time period, and and now that's obviously off the table based on what we're seeing at this point in time.

And so I I from a look at the projects the under investment in the gas side, leaving the under investment in the liquids and somebody under investments in some of the downstream work that needs to be done because we definitely need that 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 that so then you'll see these projects going now the other issue is if the projects in the United States stalled and you'll start seeing some acceleration of projects in the middle East because of the demand for gas no. China is still going to grow China is going to need gas are they're going to get it from the middle east they're going to get it from other parts of the world are they going to get it from the United States. So.

As I look at right now I as I look out. The next 12 months I think is a customer base, we're all fine tuning a little bit but if this thing dragged on for a long time and lets say the longtime Vienna 12 to 18 months. Then I think you start seeing what you talked about this as a self fulfilling prophecy and then we start wining backwards, but I think it's way too early to see that at this point in time and you know maybe from my perspective things do get resolved sooner than we think but at this point in time, it's prudent for me for the perspective, where I am in that we amortize or in the pipeline, we need to dial things back after three quarters of very moderate growth in the automation business, we need to dial it back and reset for a little bit growth and different growth environment, and look and see what happens rather than waiting because we've been waiting now for a couple of couple of quarters and now now it's time to act so that's where we sit.

I'm still again, I'll say I'm still optimistic I still believe that the world needs. It the energy they need this type of products. The question is the timing of it more than anything else at this point in time.

And then when you add anything about the color from Washington.

Yeah, right now nothing at all I can't add anything other than what's going on is obviously, a very challenging negotiations and a lot of pushing back and forth.

Again I still believe this is something is important and I do support it it creates a lot of pain for me and obviously for the for our company, but from my perspective, It's I do support on the percent what 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 set out there for another 12 18 months drag or not because it will definitely do what you talked about with some negative sell so Phil so self fulfilling prophecy.

Thank you.

Thank you very much.

Our next question today will come from Josh Parker's Lewinsky of Morgan Stanley . Please go ahead.

Hi, good afternoon guys.

Good afternoon, Josh.

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 do those typically stay out in that state is there any kind of leakage in that close process, where it's something where you think there is a commitment but you know until you know the ink drives 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 growing is growing right now it's growing outside it outside the United States. So we're starting to see we have not seen a lot of growth of the bigger projects outside the United States was primarily in North America, driven large funnel project business. So we're now starting to see some of the international be an Asia B at the Middle East in Latin America, where some of the larger projects are now starting to come into the funnel and hence thats 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 what it is like it's like it's like product Thats been a food has been picked in putting the shelf there was a shelf life and a firm 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 3456 years. So if they get delayed six to 12 months, if not not unusual but not from my perspective, you know if you cut out there past 12, 14, 16 months and these things really start changing and nothing happens then you're going to see you yeah. So reconfigure. It. So it's way too early to say that because this number you know until recently was pretty normal and now we're just never getting above or a billion won close of doing one 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 is a lot of gas projects and a lot of us based projects at this point in time and so.

So I think you got we got to watch it is nothing that you own.

Good good overreact too, but it is 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. 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 well as a number can talk about.

Yes, Okay, that's out there and then.

And then just looking at the projects that have shifted out of the pipeline and I know that there's one screen orders and sales, but if I think about that $350 million shifting from 19 to 20 in for 15 to 21.

We're already kind of losing maybe a point or two of sales as it pertains to that and you talked about kind of a two or three point down shift.

It seems like on the shorter cycle into that or some of the projects that are in the pipeline that that doesn't assume a very.

A whole lot more downside to that just speak to you know no excess in the system or the absence of de stocking or I guess why couldn't we decelerate more given that the project piece already speaks to maybe after the deceleration you talked about.

Yeah, I think it's hard to measure.

On a couple of months on projects moving in and out because they move a lot. Historically, we never gave that number and there was always a lot of moving anyway. There's always a couple hundred million dollar projects moving around so.

I would say the number is a little bit higher than normal due to be honest.

Josh, but you know there there was always a number that moved in and out of a couple hundred million dollars. So now so I think I would definitely say the movements higher than normal. So therefore, I would say, Doug as taking about a point point and a half 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'd be a good feel for it I think got wait to the end of the calendar year to get a good feel but right now there is always noise and I would say it is about a point that's been take off the underlying growth and it's it's moved up a tad, but I wouldn't panic, yet because there's always that number sitting in there.

Got it that's good perspective, thanks, Okay. Good thank you.

The next question will come from Nicole Deblase of Deutsche Bank. Please go ahead.

Yeah, Thanks and afternoon Dave.

Good afternoon on the call.

And so I just want to start with commercial and residential. So you guys have kind of guided for flat organic growth for the year. It implies a little bit above slightly 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 an al common and could there still be some risk to the downside there, particularly since the comp steer on your comp does get a little bit harder in the fourth quarter.

Yes, definitely gets harder because of our us based last year. So.

So there's there's a couple of things that we're watching very closely one that the fact that China now and Asia Pacific now has stabilized income above the line. It's a good sign for us.

So.

My concern would not be there my concern would be in the USA. If you all sudden this we've had a pretty good what I call heat wave humidity wave go through that would be my conserve concern right, they're not in the AC side, but more on the retail side.

But yes, we've got it pretty pretty well dialed down I feel pretty comfortable about that Europe seems to be coming back you know Europe had a very challenging June because of the extremely hot there, but it's bounced back nicely in July .

So I I feel pretty good that we're going to be a round of zero to 1% growth rate in Bob's business.

In the in the fourth our fourth quarter, which is the third fiscal or 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.

That was a one month order pace positive.

Tim the one month order pace was positive so it's positive real close that 1% I think and so.

I think we're okay there were.

Well people will put an 8-K out in orders and we will keep a communication around those three things, China Asia, China, North America and is Europe keep holding in there for us. So those are the three things I'm watching right now in commercial risk.

Okay got it thanks, Dave and then just on on 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 you know the early stages of July and what's driving that better result.

I'd say, what we're after a tough tough junior if it goes goes picks up a notch, it's better and so I think what we were underlying was what four and a half <unk> four and a half what was left for.

Right at four or so so it ticked up a little bit you can't see that new chart, because I I believe younger identical gamma [laughter]. So.

It so it's a little bit better you know with the it what's interesting it's not for US we saw Asia, we saw China I'm surprised it was that's what about China. That's interesting, we but we saw a 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 or the us business and the cans can aid business was still the weakness points. So our international is held up nicely and therefore that right now we see that is holding up for the year that will give us a little bit momentum as we go into this and I think we're going to bounce somewhere between 4% to 5% and this and this and orders in this fourth quarter. So [noise].

In July was up a bit John was not a short month. It was a fairly long month for us normally and this month and so it's a good representation of of what a what I think what's going on in the marketplace. So I feel reasonably well, but that four and have now given the fact I thought we'd be at six or seven I don't feel that exciting, but it's better than going the other way, let's put that definitely thank Dave. Thank you very much to talk to you soon.

And our next question will come from John inch up Gordon Haskett. Please go ahead.

Afternoon, Dave Good afternoon, John afternoon, So hey, the I Wonder if you could comment on the profitability of the large project pipeline is it accretive to the 16%, yes margin run rate here.

You know typically a [laughter] large project will be it will be a tad lower than that and saw what we you know we do our dogs. The hybrid now you talk about large now if you look at the what I call. The smaller circles in there the medium to small size crystals. Those typically are those are accretive to us. So it's a bigger ones that typically are will be the lower.

You know lower double digit or 10 times 10 type no.

Number there so right now the <unk> given the fact that projects have slowed down the bigger projects does help us a little bit but you know.

I want to get those projects going so we can get the installed base, but the mix the funnel right now it looks pretty decent about because 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 sized projects. The bigger project is going one big Big project left in this year and so that's a good mix as I as I finish off the fourth quarter going back to our comments and 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 a it's just there's no cure a deferral right.

Yes, correct.

Typically the you know if you if you had a chart in front me a chart 11, if you look at the bigger bubbles, a new private black or white, but I'm looking at that big bubble of sitting at the end of 2019, that's a fairly large project that would typically be a a price pressure type environment. When I look at the small or medium size ones typically those going to be tail be too.

Can be two type projects and typically those are projects you're already have their install base and therefore, the profitability is gonna be around that.

Our margin 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 you remind us what percent of your sales are say embedded software or what percent might be standalone 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 as well if you look at the acquisitions. We've done this year a lot of them were software companies. So the answer is yes, but worthy.

So we're looking at if you look we did a lot of smaller where do allow smaller deals this year and most of them have been tied around software a standalone software embedded software again that is a key issue for us and we were trying to find the type of deals that we're doing for them for so you pointed out to me. It is just that we showed this slide and in our Investor Conference a 400 million Standalone soft loan yes, yes. There's that doesn't include the embedded piece doesn't doesn't yeah. So on the soft yeah. So we did 400 million the stand alone about 400 million and then we have a lot of embedded which we don't breakout the systems business, but yes. If you look at the deals we're doing right. Now there are a lot there are a lot less product, but they're more software based and I think that the common trend within this automation space as we as we drive in to the control and drive it into the you know into our customer base around specific industries again is not a lot of them out there. So you have to quarter for a long time and and we've we've done quite a few of the sure they're smaller and.

The acquisitions to me are important relative to gives us opportunities to add sales profits and as Frank points out drilling operations have to deliver the earnings and the synergy plans that meant to make them a credit accretive, but thats going to be a key issue for us to drive who can't get topline 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.

Oh, Yes, Oh, yes, I did when I talk about what it is I'm not okay. Yeah, yeah. Okay. I hope people 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 makes I'm not looking at going out to do any any type of acquisition to get sales earnings or cash flow or EPS. Now these are within the core.

Clearly from my perspective, if things really get slow get to that stall speed I think we're going to see opportunities for more of these smaller bolt on deals coming forward and we've got to be very aggressive in going after them and figure out how to how to integrate in pretty quickly to get little bit more growth in that and that 2021 time period going back to the first question somebody asked me early on do we have a path to get to the EPS closer to what we said back in February because the sales are going to be there right now organically unless we have a big pop at 21.

So we're going to have to figure how to.

In.

Bolt on deals within our core space today.

That's a good point thank you.

Thank you and I sent him to Canada.

Yes.

According to the Calgary, Alberta, Where's the worst mosquito problem.

[laughter] tickets everywhere.

Okay.

Our next question today will come from John Walsh of Credit Suisse. Please go ahead.

Hi, good afternoon.

Got you.

I guess, Oh, maybe a first question around the hybrid markets. You know we've heard a little bit of mixed commentary out of that market sounds like you're still doing very well. There is it you think it's because of your mix because you're taking share or just you know hybrid covers a couple of different end markets there may be actually.

Yeah, exactly so from our perspective, you know our hybrid business clearly, we're we're pretty strong in kind of a lifetime life Sciences, and so we've had to wherever we've got a pretty good run life Sciences, you know from the perspective I'm not you know in that hybrid space. We don't have automotive we don't have cemetery, we have the life Sciences, we have some food and beverages.

We have some mining in that and so that's 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 in the mining area has been good for us relative to our hybrid business.

Gotcha, and then maybe just as a follow on I think and maybe to jeffs question earlier around.

Margin levers 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 balances you run it forward.

You know right now the key issue for US is is commodity commodities have come down.

You know unless excluding any additional aggressive pair of action other than the one you know the 10% which is not primarily aimed at us or the industry is more of a consumer their approach.

Yes, I think it will be we are price cost balance for going into 2020 right now.

It's pretty good its green now those things could change and those are the things we have to we have to deal with but.

Last year at this time you thought about your pairs were coming in we had material still going up people thought were going to see faster growth and so you know, we're looking a little bit different type of inflationary environment. So this time, it's moving in the opposite way and you know 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, its green and we feel good about it and should be okay. As we start the year out.

Great. Thanks for taking the questions all the way all the best John .

Our next question will come from Julian Mitchell of Barclays. Please go ahead.

Hi, good afternoon.

Good afternoon Julien.

Maybe a first question on.

Automation solutions in China.

You are coming up to the end of what's been a very good three year Upto. One historically my guess this industry in China tends to have three or four year up tons 18 months.

Downturn, so just wondered how youre 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 us companies, perhaps being pushed down the priority list on orders, which is something I think you'd mentioned back at EPG.

Yeah.

So on the cycle.

You know through this month the cycles is still pretty good we're looking at a very solid 8% to 10% automation solutions orders growth.

And sales growth.

As I look at the industries, we serve and there's a lot of industries that that are the Chinese customer base is trying to become more self sufficient and so obviously less imports of fine I'm. Good so that's where they're aiming their their investments I do not see that changing as we move into into 2020.

As well as my initial look at 2020, right now for Asia or China is that eight to 10, most likely is going to turn into let's say 68, maybe five to eight type of growth. So we're looking at a slower growth to your point Julien.

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 there trying to become more as a false self sufficient in.

And the industries, we serve relative to.

With that glycol nationalistic tendencies for the Chinese relative to foreigners, it's not just US companies. It's all companies I mean, it could be a European companies to.

The trend is 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 in a foreign company sources bit European or Americas, I think that trend will continue as long as a trade discussions are underway and hopefully the trade discussions will be finalized before the foreign companies are really pushed to a smaller and smaller piece of the marketplace right. Now obviously were still okay.

But it's something that we spend a lot of time, we have we have people going in and supporting our customer organization, our sales organization or customers organization wildcard combined was this air Mike's going in next week and I will be going in at about you know within a less the month. So we spent a lot of time with their 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 is a little bit more but not astronomical more or we would not be growing as we are growing right now.

Very helpful. Thanks, and then my quick follow up would just be around your assessment of inventory levels. Among your channel partners.

And customers.

How much destock or do you think is needed.

Gross automation and Cnrs.

It's it's still too high given the fact that I mean, if you look at look at Emerson's inventory, we with the slower June our inventory did not come down as it normally would in June so were good indication that Julie if you I mean, there's a balance sheet out there. So you could see our inventory level did not drop like normal from from from quarter to quarter and and I am from my perspective as I look at the channel right now I think I thought the channel will 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 if people are being very cautious and in so I think it's going to take a little longer because the demand is weaker therefore, the demand is not going to drive the destock and theyre going to have to take it down very slowly that's how it that's how it looks to me.

Great. Thank you.

Oh Investor John .

And our next question today will come from Robert Mccarthy of Stephens. Please go ahead.

Oh good afternoon, everyone. Thank you for putting him in [noise]. After rabbit barely made the cut off line I mean, you know.

Well I guess, we'll see in Arkansas, a little bit later in the month right Dan.

In any event.

The first question, Dave obviously been focused on niche and bolt ons, particularly in discrete side and kind of make your number over the longer term, but I think the question remains in a down cycle you might have an 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.

[noise] you know from the perspective of deals we're looking at right now and we show the board. Obviously, we made the decision to do a little bit more share repurchase from the standpoint, our deals are acquisitions issuers not could be as high there first let's say the first six months, we didn't see the pipeline being strong enough. So we've made the decision to a little bit more share repurchase now clearly we started this process before the stock at whacked in the all the trade discussions, but if I look at the if I look at our if our leverage point you know, we can do a four or $5 billion type of transaction incomplete be around that too you know debt to EBITDA margin up a little bit over that.

So we have plenty of room and there is not lot of 567 8 billion dollar deals out there for US I think we can get through it. The key issue is Frank knows is we've got to obviously dial back share repurchase a little bit and then we'd have to see demonstrate to the rating agencies that were going to get the our ratios back down which we have in the past I mean, Rob there's nothing that we can reasonably foresee that would cause us to contemplate issuing equity nothing we can do everything within the balance sheet that we can that we can foresee the dike to type of deals. We see are the biggest type of level do you see we'd see as a four or $5 billion. So we felt we show the board that ratio as we go through this whole process of capital allocation, which we did last month at our last June and June and also we did today and we didn't the Finance Committee this morning with Frank.

And you know we were comfortably well within the band of acquisitions, we see and the ability to continue to do pretty good loves the share repurchase and have the opportunity to 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 you know any side wise look it kind of.

The midstream and refiners intentions around high ammo and whether they're going to look to build capacity for the the low sulfur distillate or what is what is what are the intentions for spending there if you could share any.

By having a relative to capital we've scaled capital back. This year. We've asked Weve had sessions here. The last 60 days. So capital this year is gonna 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 an 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 two or three 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 and 2020 getting ready for actions, we want to take in 2021 and 2022. So so from my perspective right now our capital spending for the next couple of years are probably up around the 3.53, 0.6% level as we as we prepare for this.

Move into a into this so Matt some better manufacturing locations and then allows us to move as we go into 21 and 22 so.

I mean, we're we're evaluating everything around the capital structure right now do we need to do it in 2020 or can we push out but I. If I look at the numbers right now because of what we see the needed for 21 and 22, we will be taking capital backup and 2020 little bit higher than it was this year and I think with same thing will happen 22. So we try to we try to balance as 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 know I can't give you more insight I don't know I haven't talked to him and recently about that you know I do know by look at the project investments on the refinery are saying kelby too it's still pretty high on the list of projects, we're going after and project, we're winning but I've never I can't give you a specific number the same these guys have yes, they're going to keep doing they're going to take it up but I can tell you right now my folks that tell me the field refining bidding is still going on so there. So they appear to be moving forward and spending in this space I. That's why I see at this point in time now will that be something they scale back if they really start scaling capital back later this year as they move to 2020, but if I look at the project list right. Now there is a lot of good refining type of projects out there.

Thanks for your time to Okay take care of any of your forgive me for asking two and a half questions.

Our next question Ken Hill Verizon.

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

Hey, Joe how are you doing I was trying to forgive right before he got off and you tell me how to tell her 10 helm areas. As you know a couple of large players, but you know Rob ran off to the church too quickly I guess [laughter] he's already doing them, Dave Yeah, I do a job [laughter] doing great great. Thanks for fitting me in I. So so obviously look the backdrop on is is challenging or spend a little bit more challenging than 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 maintains he told the board they will or will grind 2020 here for the next three months and during that process will grind a 2021 at the same time because of this very issue of you know the things slow down is a bump and it could it be bumping 21, I mean that as we grind what we hear from our customers as they finish their calendar year. So we're going to be going through a two year window here basically.

Because of that issue going back. The question is is this a this is a a pause and then then a re acceleration or is this going to be a grind and stall speed and then and then things really slip away as we go into later 2020 and 21, so that that will be doing that here as we finish this year out and then we have a very good view by time, we finished 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 for my customers am I being too cautious or am I being realistic.

And so I mean it.

We'll get a feel for yeah, I mean, it sounds like it sounds like potentially maybe an update then by the Investor Day next year all for sure.

For sure I I will not lose leave this calendar year without miles south have an update and communicate 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.

Hi, guys I got a new Investor Relations Guy and I can pin the other guy and blame him for all that crap and so I mean.

Yeah that works job, we do see some investor relation guys.

It's still there will never be surface again [laughter].

Hi, good afternoon, it's been a good one Jim has been a good what I have to tell you he's a good guy.

If I could if I could ask maybe one more in I thought your comment one more and I thought your commentary Dave earlier on.

Seeing a slower you like U.S. gas Slash, Canada gas environment was interesting.

I'm just wondering like do you think the trade environment is impacting you know offtake agreements from happening with Asian partners and that's it that's impacting LNG investment or what is it that you see that kind of driving that slower.

Yeah gas.

Investment here in the U.S. and Canada.

100% trade discussions hundred percent divestments will not move forward in North America, and I've told the White House. This October anybody in Washington is where they will not move forward.

Because the Asia, our Asia in particular, China need these needs the offtake.

The processing semi process stuff and without some agreement. These investments will will sit there now they can move forward pretty quickly because of where they said, but without the without the agreements going forward in some clarity around the trade discussions between the United States and China. These these Pat is natural gas investments will not will not move forward because even if 50% of that investment is going to be for exporting. The jobs are internally you know your whole process is going to change. So that's very important to I think what I see and southern Texas and southern Louisiana and it goes back to my comment about.

They're going to sit there for a while for 12 to 14 or sick, where that number is and then then they'll make that call relative to we reevaluate or do we do we go back to the drawing board.

That makes sense. Thank you.

Well.

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

Thanks, Yeah.

Hi, how are you good afternoon.

Good afternoon.

Hi, just a question on your investment strategy, because I know part of the strategy was to.

Investment service probability of a service capability.

Flow control capability also discrete investments are sort of update the product. So how should we think about your internal investment product processes.

Given the slowdown.

We are we're going to draw a very serious prioritization of where we're going to go on the investment in the discrete through the investment around the GE bolt on acquisition in our investor between the our our process side and the ovation side. The power side, So thats very important to us and we're going to try it we're going to figure out how we get that done over the next two years as we plan to originally.

On the on the service side, given given the opportunity we have been seeing in care will be three and I think he'll be threex, what will come in at a very good number this year.

You know because you know, we're trying to keep that number well above 50% in the cycle.

You know, we're going to figure out how we can continue those investments going and not stop them, but again it goes back to a reprioritization of what we can do and we cannot do and I would say in my discussions will while in my discussions were Ron and Neil the are those team members. That's one area that I would say we need to figure out how to protect now we may modulator 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 that area. It's very been very good for us so far.

Thanks, and just a follow up question you always have a very good sense of what a global macro is doing well with gen five doing et cetera.

Just looking at the world today, what would your gases.

Yes, GDP in China GDP are growing at right now.

You asked right now is growing low twos I think there's I think you know.

It will continue I think we'll continue to slide it could it could easily go no go below the two at this current point in time until we get some clarity around trade. It actually go below that two level next year as we move into next year.

I think China is has continued to grow but I think it's more like a three or 4% type of growth rate in China.

We've seen pretty good pockets of growth in bogs business. The commercial residential business has back to back to say two or three or four months of up slightly positive growth that tells me that things have stabilized. So you know the global economy is definitely slowed and from my perspective right now.

You know, we got the feds around the world trying to figure out how to keep that growth rate up from hitting the stall stall speed, but the trade issues right now our car 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.

Thanks, Dave.

Our best year take care now.

And our next question will come from DPL Ragavan of Wells Fargo Securities. Please go ahead.

Yeah, and then Dave you have to keep up.

So.

Automation solutions are there so China continues to invest in infrastructure and that's been helping a lot of companies now this cycle, but what are some of the verticals with an instead of being performing better than you would 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 if you're talking about China specific deeper that we've said there huh.

Okay Sino automation solutions, yeah, yeah. So.

From the power standpoint, we've seen we've seen China loose some steam that they are underperforming I thought they would underperform, there's been a shifting around of priorities within the power industry. So that one has underperformed.

Inside China from what I thought would happen. This earlier early this year on the on the on the so the chemical side I think you know that processes I've seen those are doing held in there pretty well nicely.

On the refining asset investments have held in there pretty nicely I would say that you know if I look at some of the pipeline investments they've held in there pretty pretty well. We ended begin the year I believe if I went back and looked at when I give a first forecast in China, we're talking around a six 8% nine or something like that.

Six 810, I know that the eight to 10 and so thats based on where we are right now so I would say chemicals, a little bit better power is a little bit worse and refined a little bit better. So thats, where it is we're pretty close to where we thought we'd be in as you said is shipped around industries, a little bit and that's how I see it right now.

Got it thanks for the color my follow up is on cost controls.

Are you taking cost down along the verticals that a week or is that more broad based across Emerson.

Broad based across Emerson. So you know we set in motion bogs business in the commercial residential Bob sharp he's gone through this process with his team and looking at places that we can we can do you know if we can take out layers. We can take out the situation, we know no nothing needed anymore.

While doing the same thing we're trying to accelerate some of the integration of some of the acquisitions that we're looking at the corporate structure and the same thing. So we're looking at areas that from the standpoint of things. We can do simpler without as much overhead we are trying to figure out how to do that right now and that's how we're going at it. So its very people focus in the near term that we started in April we'll run all the way to this calendar year to make sure we have things tuned the way we wanted to and for this type of environment.

Great. Thanks, very much thanks for putting me Andrew welcome deeper.

Our next question will come from Gautam Khanna of Cowen and company. Please go ahead.

God I mean, you've got the language is just just got underneath that you barely got only if that rod you know that when you know that Limbaugh logged Rob Yes, I didn't know you I didn't know your that limbo.

Yeah, Okay. So what can I do for you I appreciate it.

Well lot of questions have been asked and answered.

One thing I was curious about as the June Board meeting Im just curious what the high level framework is on buybacks I recognize the 250, you mentioned in Q4, but.

Is there an appetite if there's not much in the way of M&A over the next six to 12 months.

To really the repurchase activity higher.

I don't think were going to ultimately about that I wouldn't I mean, we show the board a range of our you know 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 we if we had to do with several several medium larger site types of deals being you know a couple of billion to 3 billion 4 billion. So I think the right now the board feels very comfortable in this range of a billion to a billion and a half.

Dollars per year and share repurchase assuming that the deal whether we're looking at is moderate of somewhere between half a billion to a billion per year. If we also that when we start moving back into that building to billion half to 2 billion you would see us modulating back down towards I would say a little bit under a $1 billion share repurchase. So we show the board that flexibility, but I don't see us if the deal what really it's not going to stop and if so I mean, I don't see us pop and 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 bought back a little since since 2000.

Now the net impact not quite that high but.

We bought back 300 million shares in so we can since they are in the marketplace, but I don't see is changing the strategy of buying on a consistent basis and I think the board feels very comfortable in the 750 to 1 billion five based on what our acquisitions is and hence that's why we talk the board about ticking up a little bit higher this year and now with 2020 hindsight. The fact that the market's gotten weaker it's gives us some flexibility by some regional prices.

Appreciate the color. Thank you, Okay take care account I want to thank everybody for your time I. Appreciate it you know we act as you guys know I tried to be very candid about what's going on I I do want to let you know that rocket one year birthday is today and are doing is about five I think these four months or four months old and.

Do it is a little bit different the rocket doing a little bit more aggressive and so I get the Iraq and Tim go together I got to get 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 we'll continue to do for the company all the best.

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