Emerson Electric Company (EMR) — Q2 2019 Earnings Call Transcript

Thank you very much. I am joined today by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Bob Sharp, Executive President, Commercial & Residential Solutions; and Lal Karsanbhai, Executive President, Automation Solutions. Welcome to Emerson's second quarter 2019 earnings conference call. Please follow along in the slide presentation, which is available on our website. I'll start with the second quarter summary on slide 3. Sales in the quarter of $4.6 billion increased 8%, with underlying sales up 4%. Automation Solutions was up 7% underlying with broadly healthy and stable trends in most markets. Commercial & Residential Solutions underlying sales were flat as strong North American HVAC markets were offset by a decline in Asia and the Middle East, and the impact of distributor inventory destocking and slower consumer and certain other residential markets. Trailing three-month underlying orders growth remained in the 5% to 10% range in the first two months of the quarter and moderated to 4% in March. GAAP earnings per share was at $0.84, up 11%. In the first half, we returned $1.6 billion to shareholders and completed our $1 billion 2019 share repurchase target. Turning to slide 4, second quarter gross margin was down 70 basis points and EBIT margin was down 50 basis points. EBIT margin was up 50 basis points excluding the Aventics, Tools & Test and GE Intelligent Platforms acquisitions. Tax rate of 22.3% benefited from several favorable discrete items in the quarter. Slide 5: Second quarter underlying sales growth was led by the Americas, up 7% with solid growth at both platforms. This result, while strong, was approximately 2 points lower than we expected due to moderating upstream oil and gas demand and the slowdown in the global discrete automation market. Europe growth was stable across both platforms and Q2 marked the fourth quarter of steady growth at Automation Solutions in Europe and the 10th quarter for Commercial & Residential Solutions in Europe. The Asia, Middle East, and Africa were flat and was also approximately 2 points lower than we expected due to the Commercial & Residential Solutions climate business, which improved in line with our expectations in China, but was slower in Southeast Asia and the Middle East. Turning to slide 6. Total segment margin was down 160 basis points and was down 70 basis points excluding recent acquisitions. This was below our expectations, primarily due to slower-than-expected sales. And we are taking actions to adjust investment spending and cost structure to deliver strong leverage on growth in the second half. Capital expenditures were up as we made progress on previously announced facility expansions and upgrades in our climate technologies, final control, measurement, and analytical instrumentation businesses in the U.S., China, and Southeast Asia. Because of these expansions, CapEx spending in 2019 is more first-half weighted compared to 2018. Our full-year CapEx expectation is unchanged at $650 million. Trade working capital improved 20 basis points, driven by receivables and payables performance. Turning to slide 7, Automation Solutions' underlying sales were up 9% in the quarter and up 7% on an underlying basis. March trailing three-month underlying orders were up 7% and backlog continued steady growth driven by long-cycle project wins. Underlying sales trends in the quarter remained broadly stable as follows: Strong demand continued across our three kinds of business; MRO spending, brownfield, and greenfield projects. All world areas remained positive and growth continued stably across our world areas. We continue to see healthy progress in our long cycle project outlook, a strong project funnel, steady orders conversion, and a growing backlog. There were two key areas that missed our expectations and primarily impacted growth in North America. First, upstream oil and gas was slower as Permian customers paused to assess full-year investment plans in light of oil price volatility late last year, and development in the Bakken region was somewhat delayed due to unfavorable weather. We expect growth to recover modestly in these regions through the second half. Secondly, global discrete manufacturing end markets were slower. The impact of this was exacerbated in the U.S. by some rebalancing of channel and inventory from last year's tariff impact and price increases. For the full year, we are lowering the high end of Automation Solutions expected underlying sales range from 5% to 8% to 5% to 7%, which embeds somewhat slower second half growth in North America and softer global discrete markets. For North America, we expect low single-digit growth in Q3 and mid-single-digit growth in the fourth quarter supported by improving takeaway capacity in shale regions and stronger growth in our long-cycle businesses. Segment margin decreased 90 basis points and was down 10 basis points excluding the Aventics and GE Intelligent Platforms acquisitions. This result was below expectation due to timing of expected software-related revenue, which we expect to largely recover in the second half of the year; the impact of foreign exchange losses recognized in the quarter; and slower-than-expected growth in North America. We are adjusting our investment spending plans and accelerating some cost action to protect our full-year profit margin and deliver an incremental margin of 30% excluding the Aventics and GE deals. Full-year segment margin is expected to be approximately 16.5% within the range discussed at our February investor conference.

Thank you for joining us today. I appreciate your presence. As we reflect on the second quarter and look ahead to the second half of the year, it's important to share our insights on what has transpired and our future direction. The current cycle remains intact, and we feel optimistic about it. However, as I've mentioned in earlier discussions, we are experiencing a slowdown in many of our markets. We can certainly sense this change. Nevertheless, our customers' capital spending is still on track. We've reviewed their quarterly reports and capital allocations, and during our conversations, they've affirmed their commitment to their capital programs. While the timing of expenditures is shifting, there's a strong belief in the ongoing cycle. Both Bob and Lal will provide further details in their presentations, along with insights on Q2 and our expectations for the second half. I also want to take a moment to recognize the global Emerson team for their hard work throughout this quarter amidst changing demands and sales. The results weren't as anticipated when we spoke in February. As Tim highlighted, we noticed weaknesses primarily in the U.S., particularly in Lal's sector, alongside short-term challenges in oil and gas and distribution. We underestimated the effects of earlier pricing actions on distribution inventory, which has now necessitated adjustments. We expect inventory issues to stabilize by early Q4 or Q3 of the calendar year, especially concerning Lal's business. Bob will address the challenges we faced in Southeast Asia and the Middle East, as well as our performance in China, which was down but managed fairly well. We encountered areas we couldn't overcome, and those impacts were significant. As we navigate through this challenging period, I remain hopeful that we'll emerge effectively. We've dedicated substantial time to understanding our situation and determining necessary adjustments. Both Lal and Bob are focused on maintaining profitability despite the uncertainty and are implementing measures to address potential challenges in the second half. Additionally, we are increasing our restructuring efforts to integrate faster and prioritize profitability. Lal has already accelerated initiatives related to our recent acquisitions. I want to highlight Final Control's strong performance in Q2 with notable growth in sales, profitability, bookings, and cash flow, outperforming key competitors in North America. Moreover, I want to commend our Latin America team, which achieved impressive double-digit growth in Q2. Looking ahead, Lal's business is projected to grow significantly, while Bob's is anticipated to rebound in the latter part of the year. Although earlier forecasts of 3% to 5% growth seem unlikely due to international setbacks, we are committed to aligning our costs as we approach the upcoming year. Our cash flow was solid in Q2, and our balance sheet remains robust. Working capital is back in line after a brief increase. I feel positive about our cash flow projections for the year. While a further slowdown could simplify our working capital situation, it would come at the expense of earnings. Our target for free cash flow is approximately $2.5 billion, which is crucial as we plan our capital allocation. As we analyze the marketplace, we believe our cost structure is appropriately positioned for the second half. We had a promising start in April, with Bob's business showing some recovery, while Lal's business experienced a slight decline but remained consistent with previous months. We are optimistic about reaching a 5% to 7% growth range by the end of June, which is vital for positioning ourselves for a stronger Q4 as we anticipate improved business momentum and monitor order trends closely.

Thank you, Dave. Over the weekend, there was a lot happening, but we stayed the course. As noted, the March underlying performance was approximately flat, in line with our expectations from mid-February at the investor conference. We had anticipated an upward trend by now. Our margins showed that we quickly addressed cost issues, and we are starting to see the sales results. Two key indicators to monitor during this time of year are important. USAC performed strongly, as we expected, and the recovery in China is progressing as anticipated, which I'll detail in the next chart. Our main challenges this period came from the rest of Asia, where many of our customers focus on the Middle East. Unfortunately, it remained in the 15% range, which was not what we hoped for. There are also some areas of weakness, particularly in discrete products and certain U.S. consumer items, including disposers and thermal products, where we experienced both inventory destocking and weather impacts. In April, as noted, we began to see a positive shift again. We're still aiming for a 3% to 5% sales increase in the second half, as previously discussed. Moving to chart 13, I want to provide an update on China, highlighting the distinct dynamics in heating, cooling, cold chain, and tools. For Tools & Home Products, while not large in Asia, we had a strong quarter, with a 77% increase following a significant previous quarter. Cold chain results were a bit lighter, showing some quarter-to-quarter volatility, but still robust overall, particularly in China. Heating and cooling trends improved from a 40% decline in Q1 to about a 20% decline in Q2, which aligns with our expectations. In total, China's Q1 performance was down 30%, while Q2 saw a decrease of 16%, but we anticipate a positive shift in Q3 and into Q4, which will largely depend on heating activity. Looking at chart 14 and across key verticals and geographies, we see solid strength overall, instilling confidence for the second half. North America showed good dynamics with high single-digit sales growth. Customers are expressing optimism about current conditions, although summer weather can affect outcomes. In North America, cold chain activities were mixed, but generally solid, aided by our recent acquisitions, particularly Cargo and Cooper-Atkins. Global ProTools had another strong quarter with a 5% underlying sales growth. Europe saw around 7% growth, and China performed well in Tools & Home Products. Although weather and labor impacts were noted in the U.S. construction sector, we remain vigilant. In China, we noted a solid performance across cold chain and Tools & Home Products and anticipate a spike in AC product demand with the season approaching. Manufacturers are cautious this year due to past inventory issues and are currently more reserved in releasing products until they receive reliable signals from customers. Outside Asia, the first half did not meet expectations, though we hope for improvements in the second half, aiming for even results. The Middle East has faced ongoing challenges partly due to competitive dynamics. Europe continues to exhibit steady growth for us, thanks to our solid solutions and programs. In Latin America, I want to commend Rafael and the team for achieving double-digit growth this quarter, and Canada also reported double-digit growth. We are keeping a close eye on the rest of Asia, the Middle East, and inventory trends. April's results were better than expected in terms of orders, boosting our confidence for the second half. As Dave mentioned, profit margins have developed as anticipated. We acted swiftly in late February and March after assessing the situation. We expect to see margin improvements again in the second half, supported by a favorable pricing and cost environment. Now I'll pass it over to Lal for Automation Solutions.

Thanks, Bob. Good afternoon. Let's look at slide 15. As David mentioned earlier, our investment strategy in Automation Solutions remains unchanged, and the current cycle is still on track. The long-term KOB1 greenfield opportunities available to us continue to be very strong. However, we have seen a slowdown in our short cycle business in a few markets that I will discuss shortly. On chart 15, the KOB1 greenfield project pipeline is still robust, having increased to $7.7 billion, an additional $100 million since our meeting in February. We have booked another $100 million since then, bringing the total booked amount to $450 million, with an additional $850 million committed to Emerson. The project pipeline remains mostly stable, with only minor timing adjustments. Major international oil company projects are still on track, as confirmed by their capital plans in this quarter's earnings reports. Now moving to slide 16, there are two key market changes from what we discussed in February that are affecting our short cycle business: the North American upstream oil and gas markets and the global discrete industrial distribution market. First, regarding upstream oil and gas in North America, we see substantial activity in the Permian basin. However, many wells are being capped and not completed, which is when our instrumentation and equipment would be utilized. This situation arises from three factors: First, the decline in oil prices below $45 in December prompted a pause; second, there is insufficient takeaway capacity, as current pipeline utilization is above 96%. Significant investments in two key pipelines, Sunrise and EPI crude, will reduce pipeline utilization to 88% by our fourth quarter; and third, we are seeing consolidation among players, with fewer independents and more integrated oil companies that manage capital more effectively and maintain tighter cost controls. The second area of upstream oil and gas concerns the Bakken field in North Dakota, which faced a particularly tough winter, resulting in minimal new activity. Additionally, Western Canada has faced challenges from political uncertainty regarding oil and gas infrastructure and the exit of multinational companies. U.S. refineries on the Gulf Coast require Canadian heavy oil, but there is limited takeaway capacity, primarily relying on rail transport. Pipelines like Keystone XL are needed for efficient transport, but there appears to be little progress on this front. I believe the second half of the year will be more favorable in two of these three regions as major companies continue to invest and address takeaway capacity issues. The second factor affecting margins is the slowdown in global manufacturing markets, which has negatively impacted industrial distribution channels, particularly within the automotive and semiconductor sectors. In the first calendar quarter, the channel took aggressive restocking measures due to concerns over tariffs and pricing increases in January. This resulted in higher-than-normal inventory levels, extending the burn rate and causing slower distribution activity, which we anticipate will recover this quarter. We expect discrete distribution channels to stabilize, leading to a more stable second half as the quarter progresses. Regarding other regions, Europe is seeing stabilization in industrial automation, while process automation activities there remain strong, driven by KOB3. Asia, including China and India, continues to show significant strength. Orders from the Middle East and Africa are strong as well, although we are concerned about sales conversion due to customer delays on key projects. As mentioned earlier, Latin America is performing well, particularly in Mexico due to pipeline and terminal investments and in Argentina's shale gas fields. Moving to slide 17, our underlying growth in the first half was 7%, which is 1 to 2 points below our initial expectations for the year, where we aimed for 7% to 8% growth. We are now projecting growth in the 6% to 7% range. Our first half EBIT margins were 14.7%. We continue to affirm our full-year EBIT guidance of 16% to 17%, as discussed in New York City in February. We expect improvements in the second half driven by volume leverage from three factors: First, our backlog has grown by $400 million since August 2018, which will translate into volume from backlog conversion in our longer-cycle businesses, including Final Control and systems. These long-cycle sectors are benefiting from greenfield and modernization initiatives, with order growth observed in the first half. The systems division led by Jim Nyquist is performing well, with first half orders exceeding 10%, boosted by major KOB1 projects in Asia and the Middle East and upgrades around the world. Our modular control product lines, the PK and OCC controllers, have booked $120 million since their launch, representing an annualized run rate of $180 million. The Final Control division also saw order growth over 10% in the first half, directed by Ram Krishnan and his team, demonstrating strong performance. We are continuing to invest in necessary capacity expansions in North America and Asia as well as in global service center infrastructure. Our business is surpassing competitors, with our first half performance eight points ahead of our largest North American rival. Secondly, we anticipate modest improvements in North American growth for short cycle businesses, as upstream well completions regain momentum along with improved weather conditions in the Bakken. Thirdly, we expect a strong turnaround season for North American refineries and petrochemical facilities. From a P&L perspective, price and cost conditions will provide a favorable boost in the second half of the year. Spending was initially aligned with higher growth expectations, and our management teams worldwide have swiftly adjusted priorities and cost structures to keep us within the 16% to 17% EBIT range for 2019. We're implementing three specific actions: cost-containment measures across the business, carefully managing the pace of remaining investments for the year, and allocating an additional $6 million for restructuring to quickly integrate recent acquisitions and rightsize our cost structure for 2020. On a positive note, we are satisfied with the order results for April and believe we are well positioned for a successful second half. Thank you.

Thank you very much, Lal. With that, I'd like to open the floor for Q&A and take some questions from the participant there.

Thanks. Good afternoon, everybody.

Good afternoon, Joe. Good to hear from you.

Yes, thanks for getting me on. So, I guess, my first question, Dave. Maybe provide a little bit more color on what you're seeing in the channel. We heard a little bit around channel inventories being built up in Cold Chain, discrete automation. I'm assuming on the upstream side as well. I just wanted to get a bit more color about where you think we stand on that specifically and what gives you the confidence that we're going to get through that in the next quarter or two?

Yes. From my perspective, most of the channel regarding short-term products in discrete automation relates to Bob's and Lal's businesses, particularly for the smaller instrumentation that goes through a channel. It seems that the situation began to develop late last year as our customer base slowed down in the short term, leading to a specific burn rate, which hasn't materialized yet. After extensive discussions with the channel, I believe this burn rate will be resolved by the end of our third quarter, which corresponds to the second calendar quarter. Hence, we expect some improvement in the fourth quarter. Our projections indicate that the order pace and demand, considering the inventories, suggest a stronger performance in our fourth quarter or the third calendar quarter. There are many assumptions tied to the business environment, but that's my assessment based on thorough channel checks across both the tools and consumer sectors. That's our current outlook, Joe. Also, I'd like to commend you on your HVAC report; it was excellent, and you and your team did a commendable job. It would have been nice to collaborate, but really good work overall. I understand that market well; we’ll reach out to you soon. Just had to mention it.

Hey, look, I appreciate the positive feedback, Dave. If I could follow-on maybe just one follow-on question just on. Look, it sounds like the project funnel still remains good. It sounds like you're winning some awards, KOB1 awards. I guess maybe talk to us a little bit about what’s pricing been like on the project side? And then also, as you're thinking about kind of mix for the rest of this year and into next year, should we just expect the project mix to be coming through in a little bit of lower margin on the ANS side?

I'll answer first, and then I'll let Lal speak. It's a significant issue at the moment because that's our current situation. Our backlog on the project has been increasing. The pricing of the project has remained stable, without any significant changes from a competitive perspective. It really depends on which project we are pursuing, whether it's Yokogawa, Honeywell, Rockwell, or ABB. From that angle, there hasn't been much change. I would say the projects are beginning to adjust over the next month or two, not in terms of awarding, but rather in the execution phase. With our backlog building up, we will start to see some initial phases of projects that were won late last year and early this year coming through in the fourth quarter. As Lal reviews his mix in the fourth quarter, he is anticipating a resurgence of some short-cycle projects. He has some project work coming in that may negatively impact his margins. This is also why he has expedited some of his cost actions, as he recognizes that growth was insufficient in the KOB 3 to support the initial phase. Therefore, he needs to correctly align the cost structure. I believe we are in a good position. I'll let Lal share his thoughts on this, but that's the dynamic we are currently navigating, aside from the distribution side and how we plan to move forward. Lal, do you have anything to add?

Yes, thanks David. I think nothing fundamentally changed around pricing and margin expectations on projects from what we discussed in February. Clearly, project margins are dilutive to a total, but that puts the emphasis on driving the KOB 2 and 3 and adjusting the cost structure. The functionality of pricing is really around the number of jobs available in the market and the EPC capacity. And as we see that increase, we'll see less tension on pricing. But at this point, clearly, at the beginning of the way, I say you call it the pricing is aligned with expectation that we've had and planned.

Yes, I believe one of the important aspects that Lal and his CFO, Dave Baker, have achieved as a team is effectively outlining how the sales mix will change over the next two quarters. Currently, it seems well balanced. Of course, variables can alter these assumptions, but they have clearly presented their outlook, which is where the cost actions originated. We recognized the need for additional coverage and the necessity to reduce costs further to prepare for potential shortfalls in the distribution channel. This approach represents a significant transition for us, demonstrating what Emerson is all about.

Thanks, guys.

Hi, good afternoon.

Good afternoon Julian.

Maybe a first question just around margins. Margins have been flat in both businesses for three or four years now if we include the 2019 guidance. So I just wondered when you're looking out at those goals for 2021 if you thought there was a need for a lot more urgency around extra restructuring perhaps to push those margins up in the medium term. I noticed the restructuring had gone up I think $7 million or $8 million for the current year. But wondered if you were kind of dusting off more aggressive restructuring perhaps to make sure the margins can move up next year.

At this point, we still firmly believe that it's possible to return to the 19% top range. Clearly, we are aiming for a full year in the 16% to 17% range, particularly in Automation Solutions, which is going to be very important. We're currently assessing that. If we see that business or mix is not progressing as expected, we have strategies we can pursue. However, we remain optimistic and plan to review our strategy with the Board in June for the upcoming years through 2021 for both businesses and the overall company, which will allow us to determine if any restructuring is necessary. If restructuring is needed to achieve our margin goals, we will proceed with it. For now, I don't anticipate any fundamental changes. We may need to adjust our approach this year due to changes in mix and slower growth, while also having been proactive in our spending. We are prepared for upcoming acquisitions. Overall, we feel confident, but in three to four months, we may need to reassess our strategy.

Understood. And maybe just following up. You mentioned that positions there and you've mentioned several times in the prepared remarks accelerated integration particularly of the ones in Lal's business, but also perhaps Tools & Test in Bob's. Maybe just give an update. If you look across Aventics, Tools & Test, GE Intelligent Platforms, how happy are you right now with the organic growth in those businesses and that pace of acquisition integration?

Let me start with Tools & Test. We are very pleased with how things are developing. We have combined the North America sales organization for electrical and plumbing, and we are currently working on bringing the European business closer together, which is also a significant part of our operations that will materialize soon. On the cost side, there were substantial group costs associated with Tools & Test that we managed to navigate effectively by the end. We had discussed moving away from some non-core elements, such as the communications business in California and certain hand tools operations in China that were losing money. There are additional developments underway, and I would say we are identifying numerous opportunities. We are ahead of our plans at this point. I mentioned that ProTools experienced around 5% underlying growth this quarter, so we are satisfied with the growth trajectory. Both sides have shown improvement, with significant cost reduction on the Tools & Test side and strong sales performance on the Ridge side, creating a positive synergy for Ridge’s profitability.

I think as I look at Mike, as we had organization session with them Julian, I like the progress – they’re ahead of plan. I don't see any acquisitions in Bob's business right now, in the near term – outlook. We were out looking, I don’t see anything at this point in time. But he's got his team very highly focused and there are also unique growth opportunities within his business. I feel good about that side.

I'll comment on three deals. First is Aventics, where I'm very pleased with the progress. There's been a significant integration effort from our business unit led by Manish Bhandari. The challenges we faced with the distribution channel, which I mentioned earlier, have required us to work a bit harder on the integration. Nevertheless, a lot of good work is being done, and I see it as a crucial part of our fluid power business in that discrete sector. The second deal is Machine Automation Solutions. We've made substantial progress over the last 90 days by engaging with our global channel. I've personally met with the team twice; I even took David to Charlottesville to connect with them. We're currently looking into various synergies around the KOB 1 waves we see globally, particularly where the PLC can enhance our offering.

I would say that, that business is growing, better profitability. It’s coming really good..

It looks very good early. And then last, I'll just, again, I mentioned it earlier, but the work that Ram Krishnan and the team have done around the VMV&C is just phenomenal and well ahead of our plan and it continues to outperform.

The acquisitions we are currently considering for Lal's business were presented to the Board this morning, focusing on software. We have made a couple of software acquisitions this year, though nothing major. However, these acquisitions are providing us with additional opportunities. The integration of the GE business is progressing well, particularly with the timing of the OCC and our own PLC, which is gaining traction and being utilized effectively. I am pleased with the progress so far. The team has a lot of work ahead of them. The downturn in Europe and challenges in the automotive distribution sector haven't been ideal for us, but this situation also provides us with the chance to accelerate our efforts, and I believe they will recover. Overall, I feel positive about the team's current situation.

Thank you. And thanks for the extra color in the slides like chart 10.

Well, we try to help you guys out, just to make sure that you clearly understand Emerson. I understand it. I just want to make sure that you guys understand it so...

All right.

Hey, guys. Good afternoon.

Good afternoon. And are you getting double time today, because you’re in different time zone here, Steve.

Good morning to you. Money never sleeps, Dave. Money never sleeps.

Well, that’s got to be quote of the day. Money never sleeps. Okay. Go ahead. Sorry.

But on this final one, it gets kind of silly to kind of delve into quotation activity and orders. And going back, you guys put the $850 million in kind of committed but not booked number in there. I mean how did that compare to where you were last year? Is that number like at all relevant? Or is that pretty steady as she goes?

It's relevant. It's relevant. Last – in February that number was 750, wasn’t it 750? 800?

$800 million, that should stay pretty stable, about $800 in December basically about 12 million higher.

It's up versus last year for sure. But that's the key number for us as look at it because we know those bookings are coming at us and we know those bookings will either happen this quarter or next quarter. If that number keeps growing and stays steady that's a good sign for us because that means the funnel is maturing and happening. So the reason we track that and share that with you is it tells us the confidence, relative to our growth and opportunity in the second half of the year in bookings and more importantly for the first half of 2020 in sales. That's a relevant number for us and that's why we track it and give it to you.

And the KOB. Steve, sorry, go ahead.

Go ahead, Steve.

Can those ANS bookings at any point, over the course of the second half, kind of migrate towards the double-digit range, or is that, you know, too high of a hurdle coming out of this lull?

Right. From my perspective, I'd say we stay within the band of that 6% to 8%.

Yes. And I mean it's possible you can have a three-month roll with a couple of big bookings in the month, and how we look at the three months roll, so it's possible. It is going to definitely move back up towards 8%, 9% range. There are some big projects out there that are being worked on right now. They are definitely going to come. So, yes, I mean our booking pace, we like what it is right now. So I think the opportunities are still there.

We got a few others in that committed bucket, Steve, if they do trigger will pull us up into the double-digit.

Okay. And then one last one for you, Dave. So this kind of lull here? And I guess your outlook, is that enough to kind of knock you off your – off the long-term, 2021, I think it was like 450 or something like that. Does this trajectory or at least maybe this is like a flattening in trajectory or is – do you think that that’s still an achievable target in the out years.

Right now, we're going to discuss this. I still feel optimistic about it. Frank and I haven't had that conversation yet. It could take a different form. There may be fewer acquisitions or alternative capital allocation, but I remain confident because both Lal's and Bob's businesses are showing signs of recovery. I am not reconsidering my stance at this time. Frank and I are in discussion about it as we prepare to present to the Board next month regarding the next three years, which includes 2021. So I maintain a positive outlook.

Okay. Thanks a lot, guys. I appreciate it.

Steve, thanks for calling in from China. Good luck with Jamie tomorrow, okay, be nice to him.

Hi. Good afternoon.

Good afternoon, John.

Wanted to have a little conversation around the 5 to 7 underlying growth here for Automation Solutions, kind of what could put us at the lower end of that range and then, obviously, you kind of have already discussed the high end of the range.

I will take a shot. I think the one key issue at the lower end of the range is the channel. If the distribution channel does not come back and it takes all the way to the end of fiscal year, they work off the inventory that would cause that lower range that would put a lot of pressure on us clearly. That's the one area that we see right now. I would also say that it could be some of the projects we have booked and won that we're building on right now, get pushed out a couple of months. So those are the two things, I would see that push us back out but it – we’ve done a lot of work in this right now. We feel good about it, but we're going to push and shove around the world and make sure we stay within that range. Lal, anything you want?

I agree, David. I think I have more confidence in the stabilization and improvement in the North America upstream market in the second half versus the first half. We could slip into the discrete channels. We're watching carefully. We miss that call, it slides to the lower range. I have confidence, however, in the strong turnaround season based on what I see today. That puts us – moves us to the upper end as well as the shippable backlog that we have in our longer cycle businesses that will impact the second half.

Okay. John?

Yes. And then just thinking about the April orders commentary. In December, you kind of broke out a bunch of different markets for your automation business. Obviously, you've talked about upstream oil and gas. You've talked about discrete. But if we were to think about those other buckets is there kind of just the general deceleration? Or are parts of those you talked about the turnaround season and how you think that plays out? I mean is refinery accelerating? Is midstream accelerating? LNG kind of maybe some color on those submarkets there for us.

Yes, we will do our best. We did not launch in the same way initially. It's quite a lot of work to break it down like that. However, upon reflection, we are definitely seeing a resurgence in spending from the petrochemical sector. Currently, the LNG products are being developed. Initially, some projects are brownfield expansions, and the larger projects will impact us more significantly in 2020 and 2021. We're observing a general increase in investments from our companies. The power sector experienced a significant slowdown in the first half of the year, but upgrades in bookings have exceeded sales, indicating a better second half in that area. Overall, we are noticing a more promising pace of spending and upgrades in the business globally. That’s the extent of our insights at this time.

I'll add one, Dave, around the midstream reach we have seen an uplift in activity over the quarter versus the wellhead. Clearly, as the pipelines are being built, that takeaway capacity is being built we see that. Obviously, there's less of our instruments and equipment on that pipe than there is at the wellhead, but we have seen that midstream activity strength, particularly, in North America. But I echo Dave's comments. The LNG markets are strong. We see the projects moving into FID and we're working across the confidence right now very aggressively.

Thank you, Johnny.

Yes, thanks good afternoon guys.

Good afternoon Gautam, how are you doing my friend?

I am doing well. A lot of questions asked and answered. I wanted to just make sure I understood. Just putting it altogether on the Automation Solutions side, Do you still have confidence in kind of 30% plus incrementals in 2020-2021 as we move through given all the moving parts. Project timing KOB 3 what have you, integration opportunity with the recent acquisitions, do you still feel comfortable that we're going to net to 30% plus incrementals as we move through?

Yes, this is Gautam Lal. Part of the reason for the cost containment measures we implemented in the second half, along with the restructuring we're currently executing, is to provide some insurance regarding the market conditions and the expected recovery in the latter part of the year. As we carry out these initiatives, we anticipate achieving the 30% range in EBIT leverage that we've previously discussed.

We are revisiting the earlier question. If we do not see the margins improving in the second half of the year, we will need to take action. Lal is aware of this because we have outlined a plan. We have strategies for acquisitions and for our core business to return to profitability. If we are unable to achieve that, we will need to adjust our cost structure. Lal and his team are knowledgeable about the margin business and are also responsive to the dynamics surrounding our KOB 1, 2, and 3 segments. We are adaptable and understand our responsibilities. This team is united, and we can have open discussions about our situation. We will make necessary adjustments if we cannot reach our goals, but I feel confident in Lal and his team's current dedication.

And as you said David earlier on, we’re having a good year. We're having a good year as an organization as a business. It's shape of the year has changed a little bit on us, and the short cycle, the pressures we felt in the second quarter has pressured the margins. And we took actions there. And we do have some second half recovery based on what we saw in the second quarter. And as that unfolds we'll be watching it month-by-month very, very careful. But at least based on what we saw in April that's positive. The fluid situation, Gautam, but we fully understand what we have to do as shareholders.

Thank you for that and thank you for all the substance on this call. I have a question on form, though. Obviously, Dave, this is a little different kind of call. You put your business leaders to the forefront. You put a lot of detail in about cost takeout, restructuring and then positioning for growth. Given its last season of Game of Thrones, are we seeing kind of a bake-off happening here, or how would you...

No. I ain’t going anywhere. There's no bake-off going on. Rob, what kind of bull? I am not going anywhere, there is no bake-off. No, there is no bake-off.

But I guess in all seriousness, was this prompted by the environment and you felt you needed to get your leaders on the phone, or is this just something to raise the aggregate profile?

No. There are two reasons we did this. First, when we spoke to investors in February, we presented a plan, and I felt that plan has changed. It’s crucial for the investors to know that the two platform leaders, Bob and Lal, are involved and collaborating with Frank and me to achieve our goals for the corporation, the company, and the shareholders. Engaging them is important, and it's also essential for leaders like Lal and Bob to have the opportunity to interact and explain their experiences, particularly under the scrutiny of the board and the investors. Both have successfully led businesses at Emerson and don’t need proving themselves again. I know their performance is excellent. This is about providing you with the information necessary to make a more informed decision regarding Emerson's long-term value and capabilities. And by the way, it’s still 2019, not 2021.

Understood.