Emerson Electric Company (EMR) — Q1 2018 Earnings Call Transcript

Thank you, Denise. I am joined today by David Farr, Chairman and Chief Executive Officer; and Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer. Today's call will summarize Emerson's first quarter 2018 results. The accompanying slide presentation is available on our website. So I'll start with the first quarter summary on slide 3. Sales in the quarter of $3.8 billion increased 19% with underlying sales up 7%, reflecting continued favorable trends in our end markets and a strengthening macroeconomic environment. We closed out the quarter with December trailing three-month underlying orders up 7% and we expect to stay in a 5% to 10% range as we go forward. Profitability was strong. In the base business, excluding Valves & Controls, gross margin was up 170 basis points and EBIT margin was up 70 basis points. GAAP EPS increased 9% and was up 18% excluding current and prior-year tax items. We accelerated share buybacks, as discussed on our November 28 conference call. And in total, we repurchased over 7.8 million shares in the quarter. And together with dividend payouts, we returned over $800 million to shareholders in Q1. Overall, the first quarter performance was stronger operationally than we had anticipated a few months ago. Turning to slide 4, first quarter gross margin was up 170 basis points excluding Valves & Controls. Margin improvement was driven by operating leverage and the benefits from prior-year restructuring actions. Price/cost in the quarter was approximately flat. Other deductions increased $55 million due to Valves & Controls' first year acquisition accounting charges, foreign exchange losses, and higher amortization expense. Turning to slide 5, from a geographic perspective, demand was broad-based with both mature and emerging markets accelerating in the quarter. Mature markets grew mid-single digits, led by the U.S. and robust growth in Canada. Europe was flat; however, orders are trending favorably and we expect positive results in Europe in the second quarter. Emerging markets were up high-single digits, led by China which was up 23%. Excluding China, the rest of Asia was up mid-single digits. Latin America was up 4%. Middle East and Africa was down 5%, but orders here are trending favorably and we expect growth in the second quarter. Turning to slide 6, total segment margins, excluding Valves & Controls, improved 70 basis points to 18.6%, driven by leverage on higher volume and the benefits of prior-period restructuring actions. Corporate and other charges increased $50 million, including $25 million of Valves & Controls' first year acquisition accounting charges. Operating cash flow was $447 million, an increase of $37 million or 9% versus the prior year. Free cash flow of $351 million was up 13%. Trade working capital, excluding Valves & Controls, improved 20 basis points to 18.2%, driven by execution around accounts receivable collections and payables management. Turning to slide 7, Automation Solutions underlying sales grew 9% in the quarter and were led by North America and Asia. North America underlying sales were up 14%, reflecting continued investment by shale customers, midstream upgrades, and high-teens growth in Canada. Asia underlying growth was up 13% with China up 22% and the rest of the region up mid-single digits. Growth was driven by MRO spend and increasing mix of small and mid-sized projects and continued favorable trends in key discrete and industrial markets. Margin, excluding Valves & Controls, improved 120 basis points to 17.8%, reflecting leverage on higher sales and the benefits from prior-period restructuring actions. December three-month underlying orders were up 7%, reflecting strong global energy-related, life sciences, and chemicals markets. We are raising our full-year sales guidance for Automation Solutions. The first quarter results and orders trends support full-year 2018 underlying sales growth of 6% to 8%, up from prior guidance of 5% to 7%. Turning now to slide 8, Commercial & Residential Solutions underlying sales increased 5% with reported sales flat, reflecting the divestiture of the ClosetMaid business on the first day of the quarter. Demand was led by Asia with China up 24% and the rest of Asia up high-single digits. North America underlying sales were up 1%, as steady demand for professional tools was offset by difficult prior-year comparisons in residential air conditioning markets, as a period of late-season hot weather led to strong channel replenishment orders in the prior year. Margin increased 20 basis points to 20.1%, reflecting leverage on higher sales and the ClosetMaid divestiture, partially offset by warranty costs. Overall, growth and profitability of the segment reflects a continuation of the cycle that started in the second half of 2016. December three-month underlying orders were up 5%, reflecting strong global demand in air conditioning, refrigeration, and construction-related markets. We are raising our full-year sales guidance for Commercial & Residential Solutions. The first quarter results and orders trends support full-year 2018 underlying sales of 4% to 6%, up from prior guidance of 3% to 5%. Let's turn to slide 9, which summarizes the impact of U.S. tax reform. On an ongoing basis, Emerson will benefit from a lower tax rate. For the full-year 2018, we expect a consolidated tax rate of 25% to 27% and, in 2019 and thereafter, approximately 25%, which reflects a full 5 to 6 points' improvement from historical levels. The table on the right steps through the impact of adoption-related items on our first quarter results. A repatriation tax on foreign earnings of $185 million was offset by a $98 million reduction of our net U.S. deferred tax liability and a $130 million repatriation reserve accrued in prior periods. The net impact of these items in the first quarter was an income tax benefit of $43 million or $0.07 of EPS. Turning to slide 10, which steps through changes to our EPS guidance, the table starts with our November 7 adjusted EPS guidance, which excluded two items – Valves & Controls' first year acquisition accounting charges and a tax-related loss on the divestiture of the ClosetMaid business. These items totaled $0.07 in the first quarter results and were offset by the $0.07 benefit of tax reform items discussed on the prior slide. As these adjustment items are offsetting, we will guide only on a GAAP basis going forward. As shown here, we are raising the low end of our guidance $0.30 and the high end $0.20 based on stronger operational performance, higher share repurchases, and the benefit of a lower tax rate. Finally, let's turn to slide 11, which outlines our updated guidance. We expect underlying sales growth of 5% to 7% with Automation Solutions up 6% to 8% and Commercial & Residential Solutions up 4% to 6%. GAAP EPS of $3.05 to $3.15 is up 20% to 24% versus the prior year or up 11% to 15% excluding the impact of tax reform. We expect operating cash flow of $2.9 billion and we expect to convert free cash flow at 120% of net income. We are increasing our capital spending outlook to $575 million or approximately 3.4% of sales, reflecting our more positive outlook on the global business environment. In addition, we've provided second quarter guidance of underlying sales up 7% and GAAP EPS up 21% to $0.70. And now, I will turn the call over to Mr. David Farr.

Thank you very much, Tim. I want to welcome everybody, and I truly appreciate you joining us for this conference call. I also want to thank the global Emerson organization for their tremendous performance and a very strong start to the new fiscal year of 2018, with sales, underlying sales up 7%; the margins improving, underlying margins improving; EPS up 9% of GAAP at $0.61, truly having a very strong start to the first quarter of our new fiscal year; and cash flow up 9% at approximately $450 million. So a very strong start. And as Tim just explained, we're raising the total guidance for the year and we will be going back to the measure that I believe in quite strongly and it's called GAAP. And with the tax reform activity and our performance now and the repositioning running through the company, we now can return back to reporting and discussing GAAP earnings, which I think is a relevant measure for our corporation. Again, I want to thank the global team for tremendous execution in particular around the final control team under Mike Train and Ram and with support of that, which we'll update you a little bit about at the conference next week, but clearly doing a great job of integrating and getting some great momentum around the orders, the sales, and profitability. So a really good job, well done. As we look at the world today, I feel very good about the trends we're seeing. We always knew our order pattern would have to slow down from the very fast pace coming out of big hole, in particular around the automation business, but the pace of dollars of automation orders are maintaining a very high level of actual dollars, well over $2.35 billion per month on a roll basis. And so it's a good number on a three-month roll basis, is how we look at it and we knew this would happen. The underlying orders are actually very good around the world, and it's why we've always felt that it would slow down into this band we see right now and will generate, as we look at it, 6% to 8% underlying sales growth for Automation Solutions business. And that is a very good number. I've never felt – as we've talked about it numerous times now, I've never felt the first year out of the box would be a double-digit year. We did not see that, and we'll continue to not see that; however, we see a very strong two-year recovery here a little bit differently than we've seen in the past. And I've been through several recoveries, as you all know, on Automation Solutions business. But overall, the trend line is very good. We're seeing very good orders again in Commercial & Residential, maintaining this 5%, 6%, maybe 7% underlying orders and really seeing some pretty good pattern and support. And they're well into their second year now of the recovery and on very good momentum both in the underlying business and also new technologies. As you look at the world of Emerson, Automation and Commercial & Residential in North America continues to be pretty good. We have a very good start. I don't see that changing. I see our U.S. business being strong for the year and I feel good about that and I see continued investments. In fact, as I look at the underlying gross fixed investment trend lines, which have bumped up since tax reform was passed, it does look at a very good pace of business for the next two years in the U.S. and North America around fixed investment, which is very good. Second, if you look at what we're seeing going on in Asia, China had another very good quarter both in orders and sales. And I see no indication that we will actually slow down. We'll have a very good year in Asia and China. And I expect – in particular, China, I expect a solid double-digit growth in orders and sales, which at first I didn't think was going to happen, but now as I see the pace of business and investments, I feel better that we should see 10-plus percent sales growth in China, which is an improvement. Relative to the rest of Asia, the order pattern continues to improve. We're seeing the good cycle of businesses and I feel very good about where we sit at this point in time across Asia Pacific, even outside of China. Just coming back to the Middle East and Africa, yes, we had – sales were still slightly negative, but we've now seen three or four or five months of orders pattern improving, going positive. And as this expects, we had to fill the hole. We filled the hole and now – from the backlog standpoint, and now we'll start seeing, I would expect, positive sales as we go into the second quarter. And I think we're on a start of a good run of investments in that region, which we haven't seen for the last couple of years, but I feel good about where we sit at this point in time. The last key market's Latin America. We've been waiting for the turn and we've got it. We had a positive sales quarter after basically 12 negative quarters out of Latin America, and order pattern looks pretty good. Sales pattern looked pretty good. So it looks like Latin America has turned for us and that's on a positive surprise is a positive for me, as was China. And as I look at Canada, I see that investment continuing to going up there. So there's some things that are positive for us at this point in time. Out of Europe, our order pattern continues to be positive; and not unusual year for us. We have some quarters that are positive, some flat, some slightly negative. Overall, we expect Europe to be a very solid 5% type of growth marketplace for us this year and we see the pace of business activity going on around that. But clearly, as we go into the second quarter, we, at this point in time, see another good solid 7% underlying sales growth, which will generate good, obviously, double-digit consolidated sales with the addition of our acquisitions and no real divestiture impact of mix magnitude in there. So we see a very strong double-digit top line sales growth with over 7% underlying growth, and we're expecting a very solid $0.70 GAAP EPS for that second quarter around 21%. We're getting ready for our visit to New York and our annual investor conference, which will be held at the New York Stock Exchange this year. Fundamental focus is going to be on reviewing where we see the trend lines heading, which have turned more positive from our review last year. We had a stronger 2017, looks like we'll have a little stronger 2018. So, we're going to give you what we see as the trend line from the 2016 to 2021. Keeping those same measures in place, you can see where we see the plusses and minus takeaways, see the profitability that we see unfolding in the business. And then, most importantly, at the end, looking at the tax impact, the overall impact relative to our cash flow and also impact to our earnings, which both will be positive from the perspective. We want to show the core businesses, what's going on, the impact of this faster growth, stronger marketplaces, and then the impact of the tax reform on the overall positive impact to the numbers that you'll see coming out of Emerson over the next couple of years. So, as I look at it and wrap it up and go into Q&A, very strong first quarter. Rate the year, we have momentum, we have good order patterns around the world. Everything is slightly better than I thought. I am okay with the order pattern. I know people might be panicked because things roll, but we fully expected this, and we expect this thing to trend into this line and we'll talk further about that next week, but, overall, we like where we sit today. I am not going to talk about the long-term numbers here today because that's all about what we're going to be talking about next week, but I'm here to talk about what we see in the quarter. But needless to say, the OCE, we're very pleased with the operations and the performance in the two platforms in this first quarter, and we look forward to continuing to have a very strong total fiscal 2018 based on a very good start to our first quarter. So with that, I'll open the floor up for the first question. Thank you.

Hey, Dave. Hey, everybody. Congrats on the strong quarter.

Hey, Rob. Thanks.

Looks like decent momentum across the board, and you called some turns in some areas. So I guess the first question I would have is, with respect to China, you've put up some great growth recently and after there's been very volatile data set probably in the last 18 to 24 months. But given what we've seen with the market pullback here, I mean obviously, there's some concerns about rates, but there's also concerns about overheating in China. And could you talk about maybe the risks you see in China throughout the course of the year? How you feel about the pace and momentum of the business there? Just give us some comfort and color around any kind of China risk.

Yeah. Given I'm an expert in what's happened in the marketplace in the last three days, I'm sure I can help you here. But from my perspective, clearly, we've seen a very good investment in the two businesses. On the Commercial & Residential, it's been tight around refrigeration, it's been tight around the environment, and the issue around trying to improve the quality of air. And from the perspective – can it get overheated because of the government trying to push an issue too hard? The answer is yes. As we see it right now, we do not sense that. I'll be back over there in another month. I feel good about it right now, but there is a concern from the standpoint of the investment period that maybe is a little too aggressive. And historically, what's happened is that they would dial it back, but we don't sense that at this point in time. But that will be a concern for us as we look at this. On the Automation Solutions side, it's very broad-based, so it's not just one type of technology. It's not just one type of industry. It's a very slow, steady type of investment that they're making both for improved quality of their products and quality of their facility inside their country; not only for their own country but also for some of the exports around the world. So I don't sense any overheating there at this point in time, but the one area I do concern about is the government trying to – on the Commercial & Residential side, trying to drive the environmental issues. And at some point in time, they'd say, hey, we drove it too hard. Let's back that off. And that could create that downturn. But right now, based on what I see in the order pattern, based on the customer pattern, I would say we're going to probably do 8% to 10%. And now, we're talking most likely we're going to be doing – I think we're going to do double-digits coming out of China. And clearly, with the Commercial & Residential business this quarter, they did a 20-plus percent in this quarter on top of last year's 40% quarter. The odds are extremely high that that's going to get tougher and tougher as we go forward here in the second half of this year and early next year, but they're still going to have growth opportunities throughout Asia, as I look at Commercial & Residential. So they're growing across the whole region. So obviously, a concern, but I feel decent about it right now.

As a follow-up, obviously, I think you talked pretty definitively about the positive impact of tax reform here and what it could mean. And I think there was an uptick in your own CapEx and the level of business and fixed investment spending across the board. But maybe you could just talk about what are you expecting to see, qualitatively, across certain end markets or geographies, driven by tax reform here that would drive the underlying macro numbers higher, specifically? And why it gives you confidence that perhaps growth can accelerate and extend here.

From the U.S. manufacturing base, we were given a very, very generous tax reform package. It's very much focused on investments in this country from a technology standpoint, capacity standpoint, something that we have not seen in this country for over 30-some-odd years since the mid-1980s. From the perspective of the companies that we communicate with and we obviously serve, they see this as an opportunity to be encouraged to make those investments, and they're going to make those investments. The underlying demand in the U.S. right now is good, so from a demand standpoint, for the first time, we see both the demand and then we're also seeing incentives to make investments. So, what we're hearing and seeing is the upward pace of investment will continue to go in a positive way, and that will – as long as the demand stays here, both here and internationally, you're going to see these investments continue across our customer base. Now you're going to see in different industries that investments will be stronger than others. Seems like the oil and gas industry and some of the pipeline industries you see in the United States. That's a good thing. You're seeing some downstream. We're seeing a lot of good projects down in the gas, in the downstream marketplace right now in the Gulf region. So in general, we're seeing a lot of our customers are talking about increased investments. We're still seeing a strong focus right now in the short term, what I call quick payback-type investments, especially since you get fast depreciation in the United States. We're starting to see some of the small or medium-sized projects start getting on the books, which will be more for the second half and later part of this year and early next year. And we're seeing the discussion of the longer term projects, but they all see the benefit from a balance sheet standpoint, lower taxes, faster depreciation. And I firmly believe U.S. industry is not going to miss this opportunity. We are not going to miss this opportunity to invest in the infrastructure in this country to drive faster growth, to drive the productivity, and to drive our competitiveness. We were given an opportunity to demonstrate that we were not competitive, and we were given the opportunity to demonstrate that, okay, now do something with it. And I firmly believe that business leaders in this country are going to do something with it. And if not, then shame on us because then we deserve every hit we get coming out of Washington. From my perspective as a CEO and as a leader of the National Association of Manufacturers, we are increasing our investments. We are focusing on the next several years where we're going to take advantage of this. And I think our customer base will begin the same thing, Rob. And we're going to try to continue to get this information out when it becomes more and more knowledgeable. But if you look at the gross fixed investment numbers, they're trending up and I expect that that will continue here throughout 2018 and early 2019.

Thanks very much. See you next week.

See you next week, Rob.

Yes. Good afternoon.

Good afternoon, Andrew.

Just a question on Automation Solutions. You highlighted MRO and small and medium-sized projects. I would imagine these are very good for margin. What kind of visibility – you've sort of highlighted you're starting to see big investments coming up in the U.S.? What kind of impact will these projects have on your margin?

The normal cycle – our margin – when we have funds scheduled out for the 35%, we're looking at the 35% flow-through profitability on the Automation Solutions. It takes into consideration that balance between as we go into those projects, into the larger projects. So we're well into tune that they're very large projects, which won't really start hitting until late 2019, 2020. They will obviously put more pressure on margin. But by that point in time, our facilities are running a little tighter, a little more productive. And so typically we can absorb that. There's nothing unusual in the cycle right now, Andrew, other than, I would say, the sustained period here we're going to have because of the tax law relative to small or medium-sized projects. So I don't worry about the margin and the business. Especially if we see strong investment in North America, which is our core market, the actual – the pressure will be in the positive side of the margin, not in the negative side of the margin.

Got you. And just a follow-up question. I think in your press release, you sort of highlighted that you would consider looking at, I guess, wages in North America. But how should we think about inflationary pressures in 2018, given that a lot of other companies actually are also announcing wage hikes and you have raw materials going up? How should we think about inflation and price/cost? Thank you.

Yeah. We've been – and I think you guys heard me. We've been seeing underlying salary and wage increases going up now for the last nine months. At a trend line, we're above 3%. We are not a minimum wage company. We are a company that pays for high skills. And so we have to make sure that our compensation structure, from a wage and salary standpoint and benefits standpoint, we stay competitive and we will have to adjust. We are in a period here that clearly it's very important for us to keep our price/cost in line and make sure we keep ahead and we start having to tweak our prices on upward basis. As we see the commodity pressures building up, we see the wage and salary pressures building up, which are all good things from a mild form of inflation. But clearly, what we have to do is stay ahead of this. And the sections that Frank and Steve will be having with the two platform leaders is we're going to have to be talking, okay guys, you've got to keep putting the pressure on the price increases because we will see the upward pressure on the commodities, the upward pressure on salary and wages. And we must make sure we keep our pricing in line as we go through this time period. We've gone through a period where we were behind the eighth ball. And right now we are in sync. And it's very, very important now as we stay, and we stay in sync here over the next couple of quarters. And I think, Andrew, this is an issue that I ultimately talk about it. And at this point in time, we are ultimately talking internally because we see the pressure is increased material, increased salary and wages. And therefore, we're going to have to slightly bump up our prices. Now that will create, obviously, a higher growth rate at the top, but also we have to make sure we have the resulting cost reductions and price actions around these. So this is an interesting time period, which we have not seen for a while. But we do know how to operate in this time period, and I feel good that we are well inside the scope of where we need to be right now.

Thank you very much.

Thank you. Very good. Good questions.

Hey, guys. Good afternoon.

Good afternoon, Steve.

So just on kind of the cash flow and the dynamics around CapEx, when do you expect to kind of hit this run rate? And you look like you'll a little be under the kind of 3.5% this year. Will you be above it for any of these years over the next couple of years as a percent of the sales?

Yeah, I think that if you look at – okay, if you look at our capital spending, if you go by quarter, we typically start slower and we build up in the year-end. It's how we decide. It's the way the company is set up and what goes on inside the company. If you look at the overall, I would say that our capital will be – is lumpy. We could – this year, we could be a tad under 3.5%. Next year, we could be a tad over 3.5%. We have similar projects that we might be looking at new capacity, a new facility somewhere, that we'll start working on late this year and make your capital occur in 2019. So I think on average we'll probably be somewhere in the 3.3%, 3.4% range over the five-year time period. But the key issue for me is, as I told my board, unlike the government which clearly had shovel-ready projects all over the place, we don't have shovel-ready projects inside Emerson. If we have a project that we need to do, we do it. But what I'm looking at right now with the stronger demand in our key couple businesses and a shifting where that demand is coming around the world, we're going to need to make some different type of investments here in North America, in particular the United States, to be more productive and have a lot more flexibility around our facilities which we haven't built into them in the past. So I think this is going to build and I would expect 2019 and 2020 will be bigger capital than this year as I look at it based on what I see and feel right now, Steve.

As a percentage of sales, right, you meant?

As a percentage of sales, correct. And the dollars are still going to go up, yeah.

And so – and when you look at your cash flow statement, there is this kind of other account. I think there might be some – that's where you kind of adjust for perhaps your cash taxes versus your book taxes. I don't want to be nit-picky, but is there anything now with the lower book tax rate? Anything in that kind of other account that's been a couple hundred million bucks in the last few years and would the new portfolio have – does that shrink in size or does that go closer to zero, is it less of a factor? I am just trying to kind of get to what the run rate conversion is here going forward.

Steve, I think what you're talking about in that add back is mainly the GAAP pension expense gets added back and then we have the cash contributions that come out of the cash flow and then it's equity comp that gets added back as well. So, no, I don't expect...

Okay.

I don't expect there's going to be...

So, that's sustainable?

...a change in that as a function of tax reform or the different configuration of the portfolio.

Great.

So let me – Steve, it's a good question, given all the challenges around this world today about quality of cash and earnings, so let me – as we get ready for next week...

I don't know what you're talking about.

Me either. I just made a statement. You know me. I just made a statement. I got my rally monkey. I've got my bull here. I got a baseball bat and these guys – it's amazing what they say when they're thinking. But let me – let's take a look at what we're going to – because we're going to give you a cash forecast and we're going to give you obviously P&L forecast next week, and let me take a look at what we think the sustainable rate is going to be. As you point out, and you've pointed out to me numerous times, I have a unique window here right now because I have the final control cash opportunities, which we are obviously starting to execute on, which is going to run now for three or four years. I have some increased amortization because of software companies coming on board from that perspective. So that helps us from a cash flow standpoint. So the question is, as we go through this cycle, we're going to be able to run at a little bit higher rate on a conversion basis than I have historically, and I think that's a very fair question. It's also a very challenging question for me to answer, but I think that I owe you that and the shareholders can we run 110%, 115% conversion? This year, we're talking about running around 120% again, which is a good number. And I do have some things helping me right now, but the question, as we go out of this cycle, is the number going to be 105%, 110%, or 112%? And I think that's a very fair question to ask.

And then one last quick one just on R&D. Are you kind of full up there on R&D investments, or RD&E? Or is that going to tick up and trend up as well?

I think the key issue for me, as I've talked about the trend line of our orders, our trend line of the sales, is in the two key areas. If I see Automation Solutions really starting to take on some bigger projects, they want to bring in some new technologies, then we're going to have to ramp up some R&D. But that will be commonplace if I start seeing our – our sales order would mean this year, we're going to be more in the 8% range, and I see a pretty good filler relative to projects coming at me. Then we might start ramping up a couple of new technologies to make sure that we can satisfy that demand that we see coming from our customer base for 2019 and 2020, in particular around our Plantweb Internet of Things. So I think that right now, we're good. But if I start seeing this growth rate pick up a little bit, which could possibly happen, then you're going to see me tweaking a little bit more engineering moneys into here because I want to get ready for the next-generation technologies that our customer base will be going towards as they go into 2020 and 2021. That's what we're going to be watching now. That's the next pivot point that we should be at, and that's the place you should be pushing me. Relative to Bob Sharp's business, I think at this point in time we've continued to give Bob the moneys he needs as he is running at very high levels of profitability. He had an unfortunate situation of a quality issue in the first quarter that we had to deal with and we dealt with it and one of his products, I think, in the thermostat area, and we've dealt with that. But we're giving him the money he needs relative to that next-generation investments to really – to pull through his digitization in the cold change stuff which you'll hear him talking about and – so I'm making sure he's got the money he needs right now because there's some good growth opportunities there for that business. So, that's what I see.

Makes complete sense. Thanks, as always, for the comments.

Thanks, Steve.

Hey. Thanks and good afternoon, all.

Good afternoon, Steve. Are you legitimate; we can talk to you? Or what – are you back in the game here or are you still on vacation?

Come on, Dave. I assumed you'd read every single page of that report.

Oh, oh, that one. That – oh, I used that one to put myself to sleep with over the weekend, I'm sorry, I did read that.

Oh, thanks for that big eye. I've got to consider that next time.

Oh, gosh, Steve, I look forward to seeing you next week. Come on up and say hi to me for a change. You've been a stranger for a couple of months.

Yeah, yeah, yeah. Just following compliance. Anyway, out and good and all that.

I am full compliance. I mean that's why I got my rally monkey. I got my dog here. I've got a bull looking at me right now. I'm full of compliance.

Yeah, yeah, yeah, I'm straight and up, straight up in the air. So listen, I just wanted to chase up the cash flow discussion a little more with regard to 2018, not the longer term. On page 16 on the presentation, you just give the 150% operating cash flow conversion on GAAP, right, step-up from 130%. So I just want to make sure that...

Operating cash flow.

Yeah.

So the – yeah, that's the differences primarily. There's two things going on with the taxes and a little bit improved profitability overall. Those are the two numbers right there. As you know, given our level of profitability, if we grow a little faster and our margins are – obviously we're saying we're going to have a better earnings, that helps us. But the big chunk there is the taxes.

Okay. Great. And then as you said, you'll give us some more color around that hopefully in terms of longer term. Yeah.

We're going to try to make sure, Steve, because there's two big moving parts in what's happening to Emerson versus last year at this time is we have stronger underlying performance from a sales standpoint, economic standpoint, and then we have a tax reform. So I'm going to try to be as I thought, Tim worked very, very hard to be transparent with you guys on it. You guys may not think that was transparent in all his charts he gave you, but we're trying to be transparent relative to how these numbers are impacting. We'll try to do that again next week for you, so you can get your models set up because there's a rebasing going on right now you're going going to need.

Okay. Great. And then secondly, maybe diving in a little bit to the Commercial & Residential side of things, on compressors, you're talking about pricing and the need to keep pace on pricing versus cost and how hard that is. And you've been through this multiple times before. Some of the folks in that area are certainly saying that they believe they have a little more, I think a little more pricing power themselves and comfort level with their supply base in terms of their ability to kind of hold costs as well. What are you seeing in that part of the area relative to competition and your ability to get price in that area?

We're in it for the long-term and our customer base know that. And so we work very closely with them. We do get the pricing and we clearly have to make push shoves back and forth, sometimes in and out of sync, sometimes in sync. I think overall, this will be – with the – when you look at copper, you look at steel, you look at the continued commodity increases going on, on the Commercial & Residential side, there's going to have to be a trend line upward across the whole industry. And they have to be very careful from the standpoint – and we understand that. And that's why we work closely with them. We don't want them priced out of the marketplace either in the end market. So I think that there's some pushbacks always, but I think, over time, we figure out how to make those tradeoffs with changing our products to get them the price point they need and then we can change our products to make sure that we get the cost price points that we need. And as you know, there's not one – just talk of compressors, there's not just one compressor. We can make changes within a compressor to get what they need and to change that price/cost structure. So there's a lot – there's going to be a lot of give and take. I think the industry knows right now we're looking in the period, as someone pointed out earlier, potentially we could have higher inflation here. And so we're going to have to start making tradeoffs for both of us to make sure that we both don't get eaten alive in this whole price/cost situation. I think that being a major supplier in this industry, we have that ability to do that with our customer base, and we'll continue to work that.

And you forced mixed up in the past as well, which has helped. So I'm not sure if you see opportunity there too, mixing up the...

We have a window here again with – in the commercial standpoint in refrigerant that we will mix up in that space as the transition happens. And the residential side, it's a little bit different this time. I think we're going to see more of a mix up on the commercial in the channel in the next 12 to 18 months in North America. So it's going to be a hybrid approach here. We're going to be making some pushes and shoves. And in the end, we want to come out this ahead, just like they want to come out ahead.

All right. Thanks, Dave. I'll see you next week, and I want to hear the critiques on that report.

Definitely. I will dust it off. It must be underneath my pillow right now.

Good. As long as you have it.

Hopefully, I didn't get too much drool on it. With that, I'm going to wrap it up. Any more questions?