Emerson Electric Co.
Q4 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's Investor Conference Call. During today's presentation by Emerson's 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, November 7, 2017. 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 differ materially from those discussed today is available on Emerson's most recent Annual Report and on Form 10-K as filed with the SEC. I would now like to turn the conference over to our host, Tim Reeves, Director of Investor Relations at Emerson. Please go ahead, sir.

[[0GL7XZ-E Tim Reeves]:]

Thank you, Keith. I'm joined today by David Farr, our Chairman and Chief Executive Officer; and Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer. Today's call will summarize Emerson's fourth quarter and fiscal 2017 results. A conference call slide presentation will accompany my comments and is available on Emerson's website. A replay of this conference call and slide presentation will be available on the website for the next 90 days. I will start with the fiscal year summary, as shown on page three of the slide presentation. We had a strong second half and finish to 2017 as demand strengthened in key served markets and economic conditions improved in most world areas. Our full year results exceeded growth and EPS targets communicated at our Investor Conference, and exceeded the updated EPS guidance provided on our Q3 earnings call. Underlying sales growth was 1% in the year. Reported sales grew 5% to $15.3 billion, including the results of the Valves & Controls acquisition, which closed on April 28. Profitability in the base business, excluding Valves & Controls, was solid. EBIT margin expanding 70 basis points to 17.9%. Adjusted earnings per share increased 8% to $2.64, excluding $0.10 of Valves & Controls first year acquisition accounting charges. Finally, solid earnings in trade working capital performance resulted in strong operating cash flow generation of 8%, and free cash flow of $2.2 billion, reflecting 130% conversion of net income and a new high for Emerson's 14.5% of sales. In 2017, we completed our 61st year of consecutive dividend increases and returns $1.6 billion of cash to shareholders. We closed out the year with September trailing three months underlying orders up 11%. We're encouraged by the continued strength in orders and note that these trends are consistent with expectations communicated at the Electrical Products Group Industry Conference in May when we laid out our top line expectations for fiscal 2018. Turning to slide 4. In the fourth quarter, demand remained favorable across both platforms, and the company delivered 3% underlying growth. Reported sales grew 13% to $4.4 billion, including the results of the Valves & Controls acquisitions. Sales were negatively affected by the hurricanes that hit Texas and Florida, and we expect to recover these sales over the next 12 months. Adjusted earnings per share was up 12% at $0.83, which includes Valves & Controls operations, but excludes $0.06 of first year acquisition accounting charges. Turning to slide five. Profitability in the quarter was affected by the Valves & Controls acquisition, excluding both the first year acquisition accounting charges as well as dilution from operations. Gross margin was down 40 basis points to 43.2%. This decrease was driven by the declining ClosetMaid business, which was divested early in October, and by unfavorable mix as disruption resulting from Hurricanes Harvey and Irma. EBIT margin increased 130 basis points to 19.7%, driven by the benefit of restructuring investments and lower restructuring spend in the quarter. Turning now to slide 6. In the first half of fiscal 2017, underlying sales were down 1%, with strong demand in many commercial & residential solutions end markets, offset by slower global automation investment. Industrial business spending began to pick up in the second quarter as oil and gas prices stabilized and global economic conditions began to trend favorably. Full year 2017 underlying sales were up 1%, with reported sales up 5%. In the fourth quarter, we saw a continued strength in most world areas, with emerging markets up slightly and mature markets up mid-single-digits. Growth was led by North America, including robust growth in Canada and, Asia, where sales in China continued to be very strong and began to run up against tougher prior year comparisons. Outside of China, the rest of Asia grew low-single-digits in the second half, a reversal of first half performance, supported by improving demand in automation end markets. Middle East and Africa region was down in the year and in the quarter, but orders here have turned positive. And turning now to slide 7. Total segment margins, excluding Valves & Controls, improved 150 basis points to 21.5%, driven by the benefits of restructuring actions, lower restructuring spend and leverage on higher volume. Corporate and other charges increased $57 million, due to $56 million of Valves & Controls first year acquisition accounting charges. $44 million of this total related to inventory revaluation, which is charged to cost of goods sold, and $12 million is related to backlog amortization, which is charged to other deductions. We increased capital spending in the quarter 21% to $176 million, reflecting our more positive outlook on the global business environment. Trade working capital, excluding Valves & Controls, improved 90 basis points to 14.4% during the quarter, driven by execution around inventory management and accounts receivable collections. Turning to slide 8, Automation Solutions. September three-month underlying orders were up 15%, supported by energy-related life sciences and chemical markets, with KOB 3 demand continuing strong through the quarter and an increasing mix of KOB 2 small and mid-sized projects focused on expansion, upgrades, and optimization of existing facilities. Our underlying sales grew 3% in the quarter, and net sales grew 18% to $2.9 billion, including results from the Valves & Controls acquisition. Underlying sales growth of 10% in North America was supported by continued investment by shale customers, midstream upgrade and automation investments, and strong growth in Canada, reflecting a recovery in unconventional oil and gas investments. The Control Systems and Solutions business returned to growth in the quarter, reflecting investments in small and mid-sized system projects. Latin America remained down and has not yet begun to recover. Middle East and Africa was down but underlying sales – underlying orders here have turned positive. Our funnel for tracking large projects continues to grow, and we expect to have better visibility on timing of these projects in the first calendar quarter of 2018 as our customized – as our customers finalize capital budget plans for the year. Margin, excluding Valves & Controls, improved 300 basis points to 20.2%, reflecting the flow-through of benefits from restructuring actions, lower restructuring spend, and leverage on higher sales. In 2018, we expect strong KOB 3, an increasing mix of KOB 2 projects to drive 5% to 7% underlying growth. Turning now to slide 9, Commercial & Residential solutions. September three-month underlying orders were up 5%, led by broad-based demand in Asia, as well as continued strength in professional tools in oil and gas and construction-related markets. Sales increased 4%, with underlying sales of 3%. North America underlying sales were down 1% due to cooler summer temperatures and the impact of hurricane disruption during the quarter. Growth of 14% in Asia was led by China air conditioning and refrigeration markets. Excluding China, the rest of the region was up high-single-digits in the quarter. Margin declined 110 basis points to 23.5%, excluding the divested ClosetMaid business, margin was 24.7% and declined 60 basis points when compared with the prior year on the same basis. The decline was driven mainly by mix as cooler weather and disruption from hurricanes slowed higher-margin compressor replacement business. In 2018, we expect continued favorable end markets to drive underlying sales growth of 3% to 5%. Let's turn now to slide 10 and walk through our 2018 outlook. With an improving global economic picture and momentum in our key served markets, we expect underlying sales growth of 4% to 6% next year, with Automation Solutions underlying sales of 5% to 7%, and Commercial & Residential Solutions underlying sales of 3% to 5%. Our operating cash flow target is $2.8 billion, and we expect to convert free cash flow at over 100% of net income, in part by leveraging the working capital opportunity we see at Valves & Controls. Our adjusted EPS guidance is $2.75 to $2.95, or growth of 4% to 12%. Adjusted EPS excludes two items, $0.03 of Valves & Controls first year acquisition accounting charges related to inventory and backlog amortization; and $0.06 tax-related loss on the divestiture of the ClosetMaid business, which closed early in the first quarter and will drive a Q1 tax rate of approximately 40%. We expect Valves & Controls operations will be slightly accretive in 2018 including charges for our intangibles amortization and anticipated restructuring spend. And now, I will turn the call over to Mr. David Farr.

[David N. Farr:]

Thank you very much, Tim. Welcome, everybody. And before I get into some other slides, I want to share – first of all, I want to thank all the people across Emerson after delivering a very strong year, outstanding year, strong growth at the top-line, strong order growth, as you saw in the second half of the year, very good performance relative to profitability in the margins, outstanding cash flow with our cash flow – the dividend – free cash flow to dividend ratio only being at 56%, which we, a year ago, we thought would be around 62%, so very good performance. From my perspective, the people across this company rose to the challenge that we put on their back as we went through the repositioning effort, as we moved into early parts of fiscal 2017 and I'm extremely proud of it. As I look at where we see 2018 at this point in time, I see orders continuing to be at high levels. I will share a chart with you in a few minutes, saying that the preliminary October looked at 12% underlying growth for the total corporation, with Automation at 15% and Commercial Residential at 7%. As I've also said to everybody over the last six months, as we've seen our order pace pick back up, particularly around the Automation Solutions, I want to make sure we understand the mix of this as we go through the last three months of this fiscal year, as we move into the January, February time period for a couple of reasons. One, our KOB 3, which is day-to-day MRO improvement of the facilities has been strong and continues to be the same pace. We're starting to see some of the KOB 2, which is smaller minor upgrades and our backlog is starting to build, our backlog built in the fourth quarter versus last year. We expect that to continue to happen. I want to make sure we see a steady pace as we continue to see our orders pace stay strong and also our backlog builds and we see that mix of business as we see our customer base start telling us what their capital budgets are going to be. As you know, our capital budget for next year's going to be up nearly 15%. We're talking and planning to be from about $480 million to $550 million in capital, so we are investing in the company. And if you look at the tax reform bill right now, there's a lot of focus on encouraging people to spend capital. So from my perspective right now, we're trying to be very careful relative to the pace of business, relative to our sales forecast. We have not changed the sales forecast, what I've been communicating now for several months, with the underlying growth rate of the total corporation in the 4% to 6% range; Automation Solutions in the 5% to 7% range; and Commercial Residential in the 3% to 5% range. I'll say it again, I want to see the pace of the orders over the next three to four months, I will then, at that point in time, upgrade the forecast and expectations that we see in our base business. Clearly, the momentum is on our side right now, the order pattern is consistently stayed within that band and now, as I said, we from time-to-time will go at the high end of that band which we did in September, and we are there in October. I'd expect us to see some pretty good pace along those lines. From a standpoint of the cash flow and profitability, we will continue to have very good profitability in the base business. Looking at decent conversion across this company, in the 30s on a combined basis, as we look at the two businesses, again, I will refine that as I look at the mix of business and as we go forward, that makes a big difference. Clearly right now, as the KOB 3 stays strong, KOB 2 starts coming in, profitability should be reasonable in the business. If we move towards that 7% type underlying growth rate automation or even better, then we're going to have start investing and to handle this growth in the top of business, so we'll be looking at all those trade-offs as we go forward. Right now, I feel good about where we sit at this point in time. Backlog building, orders good, world areas are all kicking in except for Latin America at this point in time. Commercial Residential is running at extremely high levels at this point in time. Order pace still is good. Clearly, we have an issue relative to North America with the three hurricanes and also the bad earthquake down in Mexico. I fundamentally believe we'll work through that and that will be a positive for us. But again, we need to see what happens here as move into that season and they start replacing some of those units. But profitability, again, at Commercial Residential is pretty good. We are upping our restructuring in the Commercial Residential next year and some capital spending as we get ready for repositioning for capital, or for capacity, and also as we look at further consolidation across the Commercial Residential under Bob Sharp and Jim Lindemann effort, and they're making great progress as you can see in the profitability and the cash flow. Cash flow, I think, will be north of $2.8 billion. We put a number out there, $2.8 billion. I fundamentally believe that we'll be north of that. I also fundamentally believe our free cash flow will be conversion of around 120% to 125%. Again, those are different numbers than we put in the press release. This is where I feel we are at this point in time. We have a lot of momentum within the process of integration of Valves & Controls. And for your information, and I'll share a chart with you in a few minutes, Valves & Controls orders for the month of October three month were all – (16

[Operator:]

Thank you. We will now begin the question-and-answer session. And the first question comes from Scott Davis with Melius Research.

[Scott Davis:]

Hi. Good afternoon, guys.

[David N. Farr:]

Good afternoon, Scott.

[Scott Davis:]

I'm dying to ask about Rockwell, but I'm not going to because you...

[David N. Farr:]

You can ask me and I'll give those statements, if you want to just ask me, and I'll say, you know.

[Scott Davis:]

I've got very thin skin, so. Anyway the question I want to ask this is.

[David N. Farr:]

You start your own company, it's because you got thin skin.

[Scott Davis:]

Just today, only today. If I got the stock right once in a while, my skin would get a little thicker, but anyways.

[David N. Farr:]

You can't get everything right, Scott, come on.

[Scott Davis:]

I'm going to ask a roundabout question that isn't exactly Rockwell, but – and it's more about size of deals. And if you think in terms of, you've about bolt-on acquisitions and, even in hindsight, Pentair Valves business wasn't really all that big in the grand scheme of things. But are we to maybe take away from the Rockwell gig that you are comfortable putting together or putting out or looking at bigger stuff? And does it have to be automation? I mean, is there – would you invest in – I mean discrete automation, say. Would you invest in other kind of automation assets to get you to this maybe not the same exact place, but get you to a place that's a little bit different from where you're at right now in discrete?

[David N. Farr:]

Yes. I think that, from our perspective, as I communicated using that slide relative to the process automation and hybrid space, we are willing to explore significant acquisitions we've said it over the years in to expand that business presence around the hybrid space, around the discreet area. As we've gone through this whole repositioning effort, Scott, our focus is highly focused on automation as we define automation today in the Commercial Residential. At this point in time, I think we have big opportunities, both small, medium, and larger opportunities. Clearly, with this type of transaction, move like we did with Rockwell it's a very compelling strategic fit between our two companies. I fundamentally believe organization today can digest larger strategic deals, but they have to be within these two spaces. We are very focused at this point in time. We think there's unique opportunities there and we'll continue to play that. But from my standpoint, we move on after a certain point in time. We start looking at other opportunities which we have in our plate within the automation, but don't look for me and this management team and this board at this point in time to move outside these two spaces, these two platforms.

[Scott Davis:]

Okay, fair enough. And then just as a follow-on, I mean you talked about taking CapEx up 15% next year and oftentimes what we see is when CapEx goes up, kind of core expenses go up. I mean, do your operating expenses need to come up which is kind of a backdoor way of saying, are we going to see a full operating leverage in 2018 before – I mean, you mentioned after debt (39

[David N. Farr:]

From my perspective, where we are in this curve I'm interested in having appropriate leverage which means we've got to have a three in front of us. And...

[Scott Davis:]

Okay.

[David N. Farr:]

And the reason – yes, as you spend capital, now we've been planning and systemically stepping into the capital and I think we can manage that from the standpoint, as you know we don't really cut capital real deep nor do we go crazy on the upside, we just have a couple of larger projects that will be some big capital numbers which is, so it's not a lot of them, there's like three or four major capital spending projects, that we have a big chunk of that. So we could easily handle that and still have good leverage. The key thing for me is I've been communicating outside as I've watched the Automated Solutions orders which have continued to do well double-digit. From my standpoint as I see that mix of biz happening, we start seeing growth rates of the first five then six then seven and seven-plus or eight then that's where we're going to have start triggering the investments that we need to support our customers on a global basis. So I think in the early stages, we want to see the appropriate leverage. And then, over time, we're going to have to take some of that leverage and invest it. But as we get into 2018, my sign is I want to have the appropriate leverage and the key thing for me right now is see the whites of the eyes of the growth rate, the top line. And what that means I want to see the Automation business going to the high-end of the range we gave you. I want to see Commercial Residential business moving towards that 5% which I think they can. And then we'll start saying, okay guys, how do we invest and maybe get a little bit more growth? But that's I'm in the period right now that I want to see it. I want to, if you've ever surfed, I'm going to ride at the front of the wave for a while here as we have been riding in the last six months. I do not want to ride behind the wave which means I would not have appropriate leverage.

[Scott Davis:]

That's very clear. Thank you, Dave, and good luck with all the stuff.

[David N. Farr:]

Thank you very much, Scott. And good luck with your company, too, by the way.

[Scott Davis:]

Thank you.

[Operator:]

Thank you. And the next question comes from Steven Winoker with UBS.

[Steven Eric Winoker:]

Thanks. Good morning, Dave and all.

[David N. Farr:]

Good morning, Stevie. Are you free to talk now with your new firm, huh?

[Steven Eric Winoker:]

Well, well, no views or opinions just questions still.

[David N. Farr:]

Okay.

[Steven Eric Winoker:]

So, Dave, I don't want to dive into Rockwell either than that Scott said but there's a question without Rockwell. If Rockwell does not happen as you've talked about in the past, what's your ability to either partner or just organically do something that's been so difficult to build on the discrete side and the hybrid side, can you make something work internally within internal organic investment and the right partnership that actually make a dent in that market?

[David N. Farr:]

I think there are ways to do it outside a strategic fit like with Rockwell. There are ways to do it. There are through acquisitions and there are through joint ventures and partnerships. There are ways to do it. As we've looked at the process side as we continue to invest in the hybrid side, we know that in order for us to be successful in a good time period, we're going to have to do that. And so, that's why the focus is really picking up and we have opportunities, we talk opportunities again with the board today. And so I think that you'll see us that we'll be pushing there. It clearly is a more building approach versus a very large one strategic move at one time but there are opportunities there and we have, as you can see, the return of sales growth and the probability and cash flow is allowing us to do to be go out and find these opportunities for us for the future. So I think we're in a good position right now. And I think the opportunities are out there and people see that we are very, very focused and very true to be a global automation house. Our customers see this and our competitors see this. And so I think that we're well-positioned to do more even outside if something didn't happen to Rockwell.

[Steven Eric Winoker:]

And that product as well as installed base in technology?

[David N. Farr:]

Yes, it is. It's across the board. I mean obviously, from the standpoint of, just in the hybrid and the discrete side, we need clearly some different channels, we need some different technologies and that's why you have to do the acquisitions or ventures. But I think we have the capability to do it internally, but I think to get there faster and get there on a timely manner and do it right for our customers, we will – most likely we'll have to do the right type of acquisitions or right type of joint ventures.

[Steven Eric Winoker:]

Okay, great. And then you talked about this recovery potentially being more of a two-year recovery and some of the things that you're waiting to see. How much of what you're seeing is sort of MRO catch up versus new capacity, upgraded capacity in the initial discussion? And when you think about that GFI growth that you normally talk about the kind of acceleration once you hit 4% or GFI hits 4%. How should we think about it in that context because it feels like we're right in the middle or right at the beginning of all this happening? So some perspective on that one...

[David N. Farr:]

We are definitely beginning to see and so what we're seeing right now as we look at the order pace and our sales pace over the last six months or seven months with Automation Solutions, it's heavily what we called the KOB 3 the service MRO type of base, what our customer base have had to reinvest and to improve their efficiencies, improve their quality, to improve their obviously safety. And we're now starting to see what we called the KOB 2 side where they're doing – starting to do some minor expansions. We fundamentally believe this recovery in the initial phases will be heavy on the KOB 3 and KOB 2 throughout all of 2018. And what I'm trying to watch right now is the pace of the KOB 3 is pretty steady at this point in time, will accelerate a little bit more if there's more capital being allocated in the January, February, March budgets of our customer base. If that's the case and you're going to see more short-term investments, which will be good for us. And then we'll start to see in the KOB 2 minor expansions, which also help us late in 2018 and early in 2019. I fundamentally don't believe the bigger projects will start happening to us. We're bidding on them right now, but they will not really start happening until late 2018 early 2019. But the pace of the recovery is pretty much similar to what we see in the past, except we have a customer base that I think are being a little bit more cautious. Now with the price of commodities, all sorts of commodities firming and go in the right way, we might see some acceleration. I also see my customer base getting more healthy from a cash flow standpoint. And so those are all good signs. So I'm encouraged that we're going to see improve capital and reallocation towards the type of spending that we see in automation, which will be good for companies like us.

[Steven Eric Winoker:]

Okay. I'll pass it on. Thanks, Dave.

[David N. Farr:]

Thank you very much, Steven. Welcome back.

[Steven Eric Winoker:]

Thanks.

[Operator:]

Thank you. And the next question comes from Christopher Glynn with Oppenheimer.

[Christopher Glynn:]

Thanks. Good afternoon, Dave.

[David N. Farr:]

Good afternoon, Chris.

[Christopher Glynn:]

Hey, I was wondering the Valves & Controls margin outlook, it looks like you had a little bit of negative EBIT in the second half of 2017 there. Do you think 5% is a good level for next year or kind of work and back to that by the second half of 2018 maybe?

[Frank J. Dellaquila:]

No. I think we'll be better than that as we exit the year.

[David N. Farr:]

Yes.

[Frank J. Dellaquila:]

We'll still be running uphill in the first half of the year. But it should be when we lapped the thing, at the end of May, we should be accretive and we should be heading towards good high-single-digits as we go into the second half of the year.

[David N. Farr:]

Yeah. From the standpoint of, I mean, we want to get double of that. We want a one in front (46

[Frank J. Dellaquila:]

Again, that's operations that's without the amortization and then the restructuring is going to be lumpy. So we're building in the certain amount of restructuring in. But depending on how things develop, we might end up doing more next year, so we don't have a really good beat on that right now.

[David N. Farr:]

I like the pace. I like most of these guys doing a good job. The whole organization of Valves & Controls there with Final Control's getting engaged, and so I would say we're slightly ahead of where we thought we'd be right now. And what I'm looking for without the amortization and restructuring, I want 10% and then we'll go from there to 12%, and then we'll go there – I mean, that's what I'm looking for and so for the guys like Ram and your team out there, I'm thinking 10% for the year, and I'm sort of like a target-driven type of guy if you haven't figure that out.

[Christopher Glynn:]

Okay. Sounds like that would screen well against the EPS range. And then...

[David N. Farr:]

I communicate over the conference call as all the people listen to our conference, I got 80,000 people listening right now the conference call.

[Christopher Glynn:]

You've given me stage fright. Hey, the free cash flow guidance looked again exceptionally strong, great conversion. As you transition out of fiscal 2018, is there a challenge in the near-term to holding the absolute levels of cash flow into 2019?

[David N. Farr:]

If we have a continued improvement in our profitability, continued improvement in growth and with what we have with the Valves & Controls opportunities, in the Final Control area, I think we still have a good run of cash flow conversion opportunities both in 2019 and 2020. I think if we map out and we look at how do we get to $3.3 billion of operation cash flow in 2020, we have to continue and convert well north of 100% and that's going to be a lot of that is getting the cash, basically $400 million, $500 million of cash that we see in the Final Control balance sheet right now converted into cash flow. And I feel very good about it. We've done this over the years very well, and I think with a little bit of growth and improvement in profitability and investments we need to make there, I feel good about getting that $300 million to $400 million of cash flow over the next three years, and I don't think it's a one – I don't think it's a two year thing here. I think we've got several years of run with it.

[Christopher Glynn:]

Great. Thank you.

[David N. Farr:]

You take care. All the best to you.

[Frank J. Dellaquila:]

Appreciate it.

[Operator:]

Thank you. And the next question comes from Rich Kwas with Wells Fargo Securities.

[Rich M. Kwas:]

Hey, good afternoon Dave.

[David N. Farr:]

Good afternoon, Rich.

[Rich M. Kwas:]

So just on – from a customer standpoint, with your key customers, are you hearing from the customers that it's important to have the full suite of offerings and solutions. And is this – have seen evidence of that, because we can't see that on our end and just curious if that's partly the motivating factor. I mean, obviously, there's clear reasons why this could came together. But just curious if there's any evidence from customers that they want this?

[David N. Farr:]

We're seeing more and more requests on the larger projects in certain industries that they want to see an integrated solution both on DCS and on PLC and other type of control end-to-end customers, and particularly they're going into the industrial Internet of thing and they're more software, and they're more management control. So we're seeing this requests both in the power industry, in the chemical industry, in the pharmaceutical industries. We're seeing this across the various industries these days, in oil gas. And so customers are asking for this. And I think that it is an opportunity for us in the United States to put two very strong players together with a strategic fit to create a better solution for our customers, and our customers are clearly asking for this. I can find – I'm sure you can find examples of customers that are saying no, but I can find there's more customers saying yes. And so I fundamentally believe that this is the right thing to do for our customers to keep them competitive, to allow them to produce more efficiently, especially with the newer technology when they want to use less and less people out there. So the answer is, yes, we're getting asked.

[Rich M. Kwas:]

Okay. And then just as we think about fiscal 2018 guidance, can you quantify the sales that were lost in the quarter and how meaningful that could be for 2018? And then just on China for Commercial Residential Solutions, it was a great year in 2017. What's your growth outlook here with the comps being pretty tough?

[David N. Farr:]

Okay. So, on the hurricane. So, I got all my friends out there, my auditors, my friends, and everything like that. My fundamental gut – and this is David Farr speaking from – see I only have 36 years of experience, business experience, so I'm a young kid compared to Tim. I think there is an impact around $30 million to $40 million in the quarter. It's not a huge number. And don't ask me to go audit that because I won't spend a nickel on it. This is just my intuition seeing what I saw from our customer bases and saw what went on in across the key markets. There was a lot of devastation and I want to thank my organization for rising up and helping people in their own company, but also people outside their own company, as we went through this tough time. It will spread out over the whole year because it's going to be – it's going to take time, obviously, in the residential marketplace to rebuild. It will take time in the automation space and the projects that were delayed. So I don't think you can see a meaningful bump. I just know it's there and I know, over time, we will get that back. And I think we'll get that back over the next 10 to 12 months. And so, it's a positive wind to our back that's all I can say to you there. Now let's go to China. We had it very good in China. We grew in total, I think, a little over 10% globally for the whole year, what was that – what was the number for the whole year, Tim? I know – Tim doesn't have 36 years of experience in this industry, so still looking at the book. I mean he's taking awhile. What did we grow in China?

[[0GL7XZ-E Tim Reeves:]

Hold on, 15.4%.

[David N. Farr:]

15.4% for the whole business for everybody. So from my standpoint this year, as I look at the momentum we see in orders and Automation Solutions and opportunities still on Commercial Residential, I'm looking in the high-single-digit. It will be a lot tougher. But I will be disappointed if we don't approach the 10%. We may not get to 10%, but basically what I'm seeing the activity around Automation Solutions and orders based on what I'm hearing early stages out of the Commercial Residential, it's going be tougher. But I still think that we're going to be looking at – I think we're going to be in that 8%, 9% 10% range, still a good year. And we do well in China, as you well know. I'll be there next week.

[Rich M. Kwas:]

Okay, great. Thank you.

[David N. Farr:]

You take care. Great talking to you, Rich.

[Rich M. Kwas:]

Yes.

[Operator:]

Thank you. And the next question comes from Robert McCarthy with Stifel.

[Robert Paul McCarthy:]

Good afternoon, Dave, and gang.

[David N. Farr:]

Good afternoon, Rob. Where you're hiding out today? You hiding here in St. Louis, or where are you hiding out?

[Robert Paul McCarthy:]

Suitable undisclosed location like Boston. In any event, since we can't talk about Rockwell – so we can't talk about my favorite topic, Rockwell. Let's just talk about – maybe you can talk about incremental margins over the next couple of years from Automation Solutions given the fact that you have two scenarios, one which kind of a stair-step of growth and the other maybe more explosive growth which will lead to more investment and the relative mix. But how do we think about kind of incremental margins structurally in that business over the next couple of years and maybe take into account the accretion such that it is Valves & Controls?

[David N. Farr:]

What we've been talking to the team about internally on this, I want to get back to 19% over the next couple of years here by 2020. That means that so incrementally they're going to have to be in the 30s as we go forward here. Some of it's going to be, obviously, the improvement of Valves & Controls, some of it will be across the other businesses. But even with what I would look as a good recovery, a very solid recovery, I fundamentally believe we can get back into that 19% by 2020. Now, as you know, we peaked close to 21% in this space, clearly with Valves & Controls, it's going to take us a lot to get back over that 20%. But I fundamentally believe that we can get back to 19% within this next three-year window. And we'll get into that – into with the opportunities that I see there. I don't see why we can't do it. I mean it's – we should be able to do that.

[Robert Paul McCarthy:]

Okay. And then, just as a follow up on Valves & Controls. Obviously, one of the potential strategic value that could be coming out of it is, obviously, reversing some of the under-penetration you had in the Kingdom. And you did travel over to Saudi, I think, with Trump and – The President, excuse me, in May. But how do you think...

[David N. Farr:]

You should be more respectable there. Come on, I mean, I...

[Robert Paul McCarthy:]

Yeah. No, no. El Presidente.

[David N. Farr:]

Yeah. It's hurting me, Rob. Not just – I'm the Chairman, you know, what I'm saying.

[Robert Paul McCarthy:]

But in any event, you have been over there, but obviously we've had some pretty interesting kind of Game of Thrones headlines over there. I mean how do you think about in the context of maybe getting share back there, the outlook for the Middle East? And then, where do you see the risk on the geopolitical side as well, given the fact that you've been in the region recently?

[David N. Farr:]

A couple of things. One, we are making headway. We have been given approvals to be able to sell back and come off the list to sell our full product offering in the Kingdom. I will be back in the Kingdom in January. We are opening a whole new innovation center right there in support of Aramco. And – so I'll be in there meeting with the CEO of Aramco and talking to them. Our capabilities are well respected and known within the Kingdom and what we have to offer. They fundamentally understand that our processes, our disciplines around our business on Automation Solutions is different, and that we'll make sure that we follow the rules and regulations. We followed their local content and stuff like that. So I like where we sit right now with the Kingdom and the opportunities and we'll continue to invest and we'll continue to go. I mean clearly, there is some shaking out. I mean clearly they have a different political system than we do where someone says you're going to go and you're going to go and come in, it's not like an elected process. We're watching this. But I feel still very good. I'm seeing them – our business pick up in orders in the Kingdom. Across the Middle East, clearly, I think we're going to have a better year. And from my perspective, I look at, again, the combination of the potential compelling strategic fit between Rockwell and Emerson, to me it looks pretty good even in the Middle East, too. Both of us do well there and I think we have opportunities there. So I feel okay with the Middle East. I think we're going to have a decent year in the Middle East. And clearly, there's always risk relative to political and also war issues relative to the Middle East, but feeling pretty good about that. Right now, I like where we are.

[Robert Paul McCarthy:]

Good luck with your November.

[David N. Farr:]

Thanks.

[Operator:]

Thank you. And the next question comes from Joe Ritchie with Goldman Sachs.

[Joseph Ritchie:]

Hey. Good afternoon.

[David N. Farr:]

Two more. Hello, how are you doing?

[Joseph Ritchie:]

Well, hey, thanks for fitting me in. So maybe sticking to Rob's last question on incremental margins. So, Dave, you talked about 30% over the next few years in Automation Solutions. I'm just trying to understand your guide here. You've got mid-single-digit type growth across your businesses and it seems like you've got lower incrementals baked in for this year. So help me understand what's going on in both Automation Solutions and C&RS just from a margin standpoint?

[David N. Farr:]

I mean, I think that we have baked in the 30%. I mean, I – the only headwinds we have at the macro level at this point in time, if you look at those EPS, is obviously clearly the impact of the tax rate and also the impact we have probably neutral relative to corporate around the final tranche of our – we've gone to an annual stock incentive program. It is a three year incentive program. The headwinds are pretty neutral there. So I think, right now we're giving you the – if we approach 6% we'll have obviously a little bit higher earnings, if we approach the lower end we're going to have less earnings. I feel we'll give you more details around the pieces in February, but I feel right now we have a forecast that's very doable one with the way the wind's going at this point in time. So there's no hidden agendas in that number at all.

[Joseph Ritchie:]

Okay. And I guess maybe just sticking for that, well, for one second just of the price, what's your embedded price cost for 2018?

[David N. Farr:]

Pretty neutral.

[Joseph Ritchie:]

It's neutral.

[David N. Farr:]

Right now, it's pretty neutral. It might be slightly negative, but it's pretty neutral at this point in time. I mean, there's a lot of moving parts but it's going to be better this year than it was last year. And so, clearly, we're having to deal with net material inflation, we're going to have to – we figure out some pricing and it's going to be more rear end loaded as we come out of this. But I think it's pretty well focused at this point in time. And I feel pretty decent about it. It'll gets tougher in the first couple of quarters and get easier. So I like where we are right now in this area, too. I think we're in a good position.

[Joseph Ritchie:]

Got it. And maybe if I could follow-on with one last thing.

[David N. Farr:]

Go ahead.

[Joseph Ritchie:]

Look, the orders have been great in Automation Solutions, right? And what's interesting is if you kind of look across the rest of the space, and the value chain, power and chemical CapEx has been a pretty lively discussed negative from a lot of your peers. I'm just curious, what you're seeing in that end market, because I think those two end markets still represent at least a quarter of your Automation Solutions business. So be curious to hear what you're seeing there?

[David N. Farr:]

We're seeing our customer base; we're winning right now in this space. We brought some unique technologies out and we've been able to help in this area. So we've been winning across the board. If I look at all of my end markets, if I look at all the key markets I serve, for oil and gas to powered to chemical to pharmaceutical, the mining – even mining is doing well for us right now because of the support that V&C got for us – gave us. We're seeing a pretty good momentum. And we've had good spending capabilities in the power and the chemical, people are upgrading and they are investing in the technologies for the improvement in productivity and efficiency. So we've seen a different marketplace than everybody else. And so we've been clearly gaining in this space. And as you well know, we are very focused, we have a lot of new products coming out and I think we're winning at this point in time. So I feel, I like the fact that we're outperforming a lot of people in that space right now, it's good news.

[Joseph Ritchie:]

Got it. Thanks. Thanks, Dave.

[David N. Farr:]

Okay. One more question here. Thank you. I appreciate everyone. I can't get to everybody, but call Tim Reeves.

[Operator:]

Okay. Thank you. And that last question is from Gautam Khanna with Cowen and Company.

[David N. Farr:]

Okay.

[Gautam Khanna:]

Thank you...

[David N. Farr:]

Gautam?

[Gautam Khanna:]

...for fitting me in guys. Yes?

[David N. Farr:]

I can hear you. Not as well of course. I can hear it. Go ahead. Go ahead.

[Gautam Khanna:]

Okay. Good. Good. So, Dave, you mentioned, you've done – you and the rest of your team has done a heroic job of improving the balance sheet over the past couple of years and you mentioned in your scripted remarks that you're going to remain disciplined. I was wondering if you could give us some insight in how you assess the opportunity cost of your capital. If you can give us any sort of metrics on what type of a hurdle rate you have for acquisitions in terms of cash on cash returns? What type of weighted average cost of capital you and the board look at to measure that type of return? And then as a follow-up if you can talk about whether there are enough independent discrete properties out there in discrete automation to allow you to kind of do this on a niche basis or do you have to go big. So any sense for financial framework and then can it be done outside of a Rockwell type sauce (01

[David N. Farr:]

Okay. So, the first one, I'm not going to give you that much insight because that's, obviously, something that we, as a company, think about. And we've made very strong returns over the years and some people say, I have done some good ones and some bad ones. We've all done good ones and bad investments. But from our standpoint, what I mean by discipline, we will make sure that we will create value for our shareholders from the standpoint of what we see and a combination of any strategic large transaction such as a Rockwell and we have to support that within our own board. We have to support that with our own sense of risk assessments. Again, we've done certain things like – I think Pentair Valves & Controls would be a classic example. And someone says it was a small deal, but at $3.15 billion, it's not a small deal. It's a pretty big deal. And I think we stayed disciplined on what we thought we could make an adequate return on that. Clearly, it's also size – we risk assess something depending on where they happen we size the company, the technologies. Clearly, a transaction like Rockwell is well within our known space. We are a major player in automation, so we feel less risk around that. It's all I can tell you that this is something that we really feel quite strongly about. But at the same time, I'm not going to kill the company I run today to make a transaction happen. Now relative to the opportunities out there, the answer is yes. There are smaller opportunities out there that we can, over time, continue to make acquisitions, someone asked me – someone talked about that, yes, they're smaller. Yes, I can do some joint ventures. I can do some technology sharing. So there are things we can do. So we will make a decision. We're a healthy company. We'll move forward and make the other investments if we're not able to make the very large strategic acquisition that we talked about. But right now, there are other opportunities out there that we think got them that can make sense for us. It will take us longer to go that route, but we're a successful company, we'll continue to make those investments. But we're going to stay very focused on this automation space and the commercial residential space.

[Gautam Khanna:]

But to your point on discipline – I just want to be clear, in terms of the delta between whatever return you promised to the board and your weighted average cost of capital on a large transaction, is that – it doesn't have to be a much wider gap, i.e., you anticipate a much higher return to compensate for the opportunity cost of that capital or are you willing to go lower for something there?

[David N. Farr:]

No, I will not. I mean if you go lower below your lower cost of capital, you're obviously destroying value. And that's not something this board nor I. We have never known we've made deals. Now we have had acquisitions that did not pan out. Clearly, we made mistakes, but we would not normally go in there and say we're going to destroy value. That's not what I – I have a fiduciary responsibility as a Chairman and CEO of this company to make sure, as does this board, to make sure you make the right strategic deals. If I can't demonstrate in a reasonable level of risk assessment with discussion amongst the board members and their advisors, then I can't deliver or say we can make value then we're not going to do that. So that's how we look at this thing. We've been involved in transactions and deals for a long, long time, and we will continue to do that way. So I'm going to break it off here.

[David N. Farr:]

I want to thank everybody for joining today. And then the key issues, couple points I want to make. Emerson today has a very strong business profile where the two platforms are doing well. I think the momentum is very positive on our side. I think we had a very good 2017 outlook for even a better 2018 relative to our standpoint of growth and profit improvement and cash flow. Clearly, I think that the Rockwell opportunity has tremendous strategic fit with Emerson. It clearly fits in the opportunities for our customers and for technologies and for the communities and for our employee base, it's very positive and something we're really going to work hard at. However, we do have options outside the window, so we're not going to make this forever. It's a finite situation. At some point in time, as I told my board today, to their board meeting, that we will move forward. If we're not able to engage and do it, then we have other opportunities we can move forward on and continuing to invest in the company, continuing to prosper as a company and continue to do well for our shareholders. So with that, I want to again thank everybody for joining us, I want to thank all the employees for having a great 2017 happen and now look forward to a strong 2018. Thank you very much everybody.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.