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Emerson Electric Co (NYSE:EMR)
Q3 2019 Earnings Call
Aug 6, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to Emerson's Investor Conference Call. [Operator Instructions]. This conference is being recorded today, August 6th, 2019. Emerson's commentary and responses to your questions may contain forward-looking statements including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K as filed with the SEC.

I would now like to turn the conference over to our host, Tim Reeves, Director of Investor Relations at Emerson. Please go ahead.

Tim Reeves -- Director of Investor Relations

Thank you, [Phonetic] Alison [Phonetic]. I'm joined today by David Farr, Chairman and Chief Executive Officer; and Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer. Welcome to Emerson's Third Quarter 2019 Earnings Conference Call. Please follow along in the slide presentation which is available on our website. And I'll start on the third quarter summary on Slide 3. Sales in the third quarter of $4.7 billion increased 5%, and underlying sales were up 2% growth was below our guidance across both businesses. Underlying orders were up 2% in June, also below the 5% to 7% expectation we discussed during the second quarter earnings conference call on May 7th. Automation Solutions' underlying sales were up 3% and orders up 4% in the quarter. We had expected global discrete channel inventories to clear and demand to recover, but instead discrete end markets further decelerated in the quarter.

North American upstream oil and gas demand has yet to improve. Demands in process in hybrid end markets, however was stable in North America and continued to be robust elsewhere. Commercial and Residential Solutions' underlying sales and orders were down 1% in the quarter, primarily driven by cooler, wet weather conditions in North America.

GAAP EPS was $0.97 and was $0.94, up 7% excluding discrete tax items in the current and prior year. Through the third quarter, we've returned $1.9 billion to shareholders and completed our $1 billion, 2019 share repurchase target. Today, we announced an additional $250 million of share repurchases that we will target to complete in the fourth quarter.

Turning to Slide 4. Third quarter gross margin was down 90 basis points and EBIT margin was down 80 basis points. EBIT margin was up 50 basis points, excluding the Aventics Tool & Test, GE Intelligent Platforms acquisitions. Tax rate in both years benefited from favorable discrete items in the quarter.

Turning to Slide 5. Third quarter underlying sales growth was led by Asia, Middle East, and Africa, which accelerated from flat in Q2, to up 3% in Q3, primarily driven by sequential improvement in the Commercial and Residential Solutions business. However the Automation Solutions business also picked up sequentially. The Americas was up 1% and remain positive across both businesses, but with slower compared to the second quarter growth of 7%. Europe was up 1%, and remained positive across both platforms.

Turning now to Slide 6. Total segment margin were down 160 basis points and was down 30 basis points, excluding recent acquisitions. Segment margin of 18.1% was approximately in line with our expectations. As our business is executed well to deliver strong profitability on lower sales growth. We guided sequential core leverage in the mid 40s, and our businesses together delivered over 70% on $120 million higher sales. As we discussed last year, we've accelerated certain restructuring programs in the second half of 2019 to position the business for a slower near term growth environment.

In Q2, we identified approximately $10 million of restructuring investments to accelerate in this fiscal year. And this quarter, we've added another $20 million. Our total expected restructuring stand and other actions is now $100 million for 2019, which is up from approximately $70 million at our February Investor Conference. These investments will help position the company for improving profitability in early 2020.

Operating cash flow performance was solid, up 2%, and free cash flow conversion was 135% in the quarter. Our year-to-date free cash flow conversion is 88%, and we continue to expect strong cash flow performance in the fourth quarter and greater than 100% full year cash flow conversion. Trade working capital is an opportunity for us in the fourth quarter [Indecipherable] performance was worse by 80 basis points, driven entirely by an inventory, which was higher in June as sales soften late in the quarter. We expect to recover this in the fourth quarter which will benefit cash performance.

Turning on to Slide 7. Automation Solutions' underlying sales were up 3% and orders were up 4% in the quarter. Underlying sales trend in the quarter remained broadly stable as follows. We saw continued strong demand across our three kinds of business, MRO spending, brownfield, and greenfield projects. All world areas remain positive, and we continue to see healthy progress in our long cycle project outlook, a strong project funnel, systems orders growth, and a growing backlog.

There were a few areas that missed our expectations. First, North America upstream oil and gas did not recover as we expected. Customers in the Permian and other key regions continue to focus their capex

budgets and maximize free cash flow, also limited pipeline capacity continue to constrain investment activity. Second, global discrete manufacturing end markets decelerated. The short cycle weakness was particularly felt in automotive and semiconductor end markets.

And finally, although our project funnel remains healthy, our customers are more cautious around capital spending. Geopolitical and trade tensions have created a more cautious business investment climate, and as a result, we've seen some projects push out of the year. This has impacted our orders and sales growth expectations in 2019. However, we've not had any project cancellations, and we continue to have confidence that projects in the funnel will be executed. For the full year, we expect underlying sales growth of approximately 5%, which is at the low end of our prior guidance. This implies a fourth quarter underlying sales growth rate of approximately 5%, a bit stronger than Q3, which is supported by steady orders growth and backlog conversion. Segment margin decreased to 150 basis points and was down 10 basis points, excluding the Aventics and GE intelligent Platforms acquisition. The business delivered sequential leverage above our guidance as the management team executed well on lower growth. As mentioned, we have pulled in additional restructuring actions that we are targeting to complete this year. Including these, full year segment margin is expected to be approximately 15%.

Turning to Slide 8. Commercial and Residential Solutions' underlying sales and orders were down 1% in the quarter. Growth in the Americas decelerated from 4% in Q2 to 1% this quarter, due mainly to unfavorable weather conditions, cooler weather in key regions late in the quarter that slowed residential air conditioning and construction markets. Europe also decelerated late in the quarter due to weather, but preliminary July orders trended positively. The Asia, Middle East, and Africa region, improved from down 15% in Q2 to down 6% this quarter, and we expect improvement to continue with underlying sales growth turning positive as we head into 2020, and the preliminary trailing three month's underlying orders in July were up slightly, a good sign. For the full year, we expect Commercial and Residential Solutions underlying growth to be approximately flat compared to up 2% in our prior guidance.

This implies a slightly positive Q4 growth rate, which is supported by expected improvement in North America air conditioning markets and continued improvement in Asia, Middle East, and Africa region. Margin decreased 70 basis points, excluding the Tools & Test acquisition. The businesses delivered over 40% -- I'm sorry, the business delivered over 40% sequential leverage on incremental sales, which was in line with our guidance. We expect full year segment margins to be approximately 21% including additional restructuring actions pulled into the fourth quarter.

Let's turn now to Slide 9. Our 2019 guidance framework is updated to reflect underlying sales growth of approximately 3%, including lower-than-expected third quarter growth and a reduced near-term growth outlook for global discrete markets. Fourth quarter underlying growth is expected to be approximately 3.5%. The EPS guidance range is maintained at $3.60 to $3.70, and we expect fourth quarter earnings per share of approximately $1.10, which is the midpoint of the full-year range.

Updated full year segment margin targets reflect reduced growth and increased restructuring spend. The fourth quarter total reported segment leverage is expected to be approximately 30% year-over-year and almost 40% sequentially compared with the third quarter. Reduced segment profit contribution is offset by lower corporate costs and a lower full year tax rate to hold the prior 2019 EPS guidance range. We expect fourth quarter corporate cost to be approximately $150 million. The fourth quarter tax rate is expected to be approximately 21% including the $0.05 discrete tax benefit, and the 2019 full year tax rate is also expected to be approximately 21%.

We've updated our estimated ongoing operational tax rate which includes improvement from platform rereorganization actions. We now expect our operational tax rate to be approximately 23.5% going forward as we continue to optimize our global two-platform operating structure. Expected operating cash flow is $3.1 billion and free cash flow is unchanged at $2.5 billion.

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

David N. Farr -- Chairman and Chief Executive Officer

Thank you very much Tim. I want to welcome everybody. Thanks for joining us today. Also I want to let you know that this is Tim's next to his last earnings call. I go through this process of training semiprofessional Investor Relations people.

Tim Reeves -- Director of Investor Relations

They never get there.

David N. Farr -- Chairman and Chief Executive Officer

They never quite get there, but Tim has a unique opportunity that we can't talk about, but he is going to be going to later this year, and I'll have, [Phonetic] breaking in [Phonetic] another person by the time we get into the November timeframe, but Tim most likely will join us for that call. Again, I want to thank everybody for joining us today, and I want to give you an update on what we see. I want to thank the employees for joining us today. Also want to remind everybody, we actually have an extensive number of people in the queue, close to 20 people in the queue to ask questions. So I definitely need to keep you to holding to the two questions rules. We'll extend the call a little bit, maybe a minute, or hour and 15 minutes, hour and 20 minutes to try get as many questions in as possible.

Clearly as you can tell from my communications that we put out our communications, we put our last Monday, and the communications today, I have sensed and continue to sense a change in the underlying business environment, which I'm sure will be talking about here for a few minutes and then you'll be asking a lot of questions around it. I also want to thank all the employees for their support over the last 3 months in this challenging third quarter we just went through, and for the year-to-date numbers. And as we drive to finish out this fiscal year in 2019 and moving to 2020. As I look at the year, it's a good year. We have good growth in sales and good growth in earnings. We have good growth in cash flow. But it's happened, unfolded much differently than we thought going back 9 or 10 months ago, and that's what we're having to deal with right now.

But as you can see in the orders chart on Page 10, two things, first we have a new pup called Doon, after Doon bag and one of our favorite golf places in Ireland, and Doon is black and tan sits next Rocket. Rocket's birthday, today he is one-year-old, birthday is today.

You can see the order trend did improve slightly. For Automation Solutions, it tipped up a little bit, pulled us up a little bit. On the Commercial and Residential Solutions for the month of July, orders were a little bit better, but still still slightly negative overall, and Asia Pacific turned positive in the month of July, which is good.

We're now three or four months behind what we said, more like four months, behind what we said, but it's good to see that happening. You can see the industries we see, we've been seeing pretty good strength in the third quarter, between the midstream, downstream, lots of caution around the upstream area right now. Chemical, we've got a very good quarter, and Power, our orders in the PWS power business is close to 40% up for the quarter around the world as we continue to upgrade the power facilities around the world. Automotive and semiconductor and discrete really had a tough quarter. But overall, a softening in key marketplaces, but the trend lines are still positive over, but definitely slowed to way below what we thought when we started this year.

We go forward, we've updated the, what we call our large project pipeline funnel, [Phonetic] including [Phonetic] we actually did an upgrade of the total size of the funnel. When we [Phonetic] give [Phonetic] this funnel up, usually two or three times a year; February it was around $7.6 billion, 195 projects, today it's 221 projects, $8.3 billion. It did increase a little bit clearly another sign of things slowing down and a little bit of push up is that our committed ones but not booked is now slightly over $1 billion in projects, projects that -- they're basically sitting out there that we've won, and we're still waiting for the final documentation in order to be placed so we can start booking and then obviously start doing some shipments against it. The other key thing you'll see in this, is that down the bottom, we talk about what's been shifted, 2019 and 2020, based on what we've seen about $350 million of projects we're working on, we're working on for the last couple of 6 to 12 months has been shifted from 2019 to 2020. And we basically have seen about $450 million other pipeline shifted out of 2020 into 2021. Clearly this tells you, we have, what I call a dynamic pipe, and some things moving in, some things moving out, but clearly a slowdown. I thought and I believe in discussions with our customer base, our organization around the world, we've been spending a lot of time on this last couple of months is, this cycle has not ended, this cycle is in a pause mode because of the disruption that's going on relative to the trade negotiations to trade discussions, and it's clearly causing a slowdown in some key markets, primarily USA, a little bit of Europe, and we've seen some push back in a couple of places around the world. But our international markets have continued to held up.

From the automation standpoint, US markets pushed out a little bit, Canada market pushed out a little bit, and a little bit of push out in actually sales are going on the Middle East, but overall still going in and I firmly believe if we do get resolution to trade discussions at some point in time here between now and the next 12 to 18 months, the cycle will move back up. There has not been an excessive amount of capital spent and build up in the cycle yet. It's way too early. I just look at what's going on inside our company as we reallocate, but I'm sure we'll have a lot of questions around this issue.

As I look at what's going on, I am a little concerned from the standpoint of how long the slowdown will happen. Hence the OCE got together over the last 30 days and looked at some incremental restructuring. We've looked at where we need to slow down investments, where we need to pull back investments, we've looked at where we can accelerate restructuring that we had planned in 2021, and to deal with protecting and improving our profitability and a slower growth environment. Clearly, we laid in a structure of cost from people standpoint organization back in 2018 and the end of 2018 running through 2019, look at much faster growth. This year, for instance, we thought we'd grow around the 6% to 6.5%, we are now growing around that 3% to 3.5% range.

If you look at what we see going next year, I look at a very gradual growth environment at this point in time, but I also want to build enough flexibility. If that doesn't happen then we could still protect our profitability and our cash flow and deliver some results for our shareholders. At this point in time, I see the slowdown lasting well into 2020, and so I see some resolution around what's going to happen with the trade discussions that we all face, and from my perspective that could last easily well past the election in November of 2020.

So that's how we're looking at it. It is a different perspective than I did discuss at Electrical Products Group in May and even on the phone call in early May, but I've come to the realization and watching our customer base and talking to our customer base, is they're going to be cautious. And therefore from my perspective, we're going to continue to invest strategically where we can gain market share, our market penetration, and then we're going to back down and protect our profitability and cash flow where necessary. We're also going through a whole prioritization on our capital projects. From this year, we've pulled it back a little bit as we go through this process.

Next year, we're prioritizing where we need to spend capital. I have commitments that we have to do and capital over the next couple of years. And I'm trying to set with Frank and the OCE, those priorities of where we need to spend money. I have some actions I have to take with some additional manufacturing capacity in the best cost locations that we have around the world, but I need to prioritize those to make sure we're [Phonetic] doing [Phonetic] the right way as we go forward here in 2020, and as we come back into 2021. Again we're being proactive, we try to be a little bit more aggressive, and hence our restructuring, and we'll be looking at that pretty hard between now and the year-end, and if we see, we have other opportunities, we will take those opportunities on. It's all about getting our cost structure in line for slower growth, improve our profitability, deliver the incremental margins we've been committing in a different growth environment and also positioning ourselves for and when a recovery does happen in our capital base, which I believe will happen.

So overall, again I want to say it's been a good year from my perspective. It not happened like we thought would happen. Are we totally happy about it? No. We've delved our hand in a little bit more challenging environment relative to trade and relative to the investment environment. My customer base is being cautious, but we're not rolling up [Indecipherable] and going home. We're going to be attacking and aggressively going after things, but we're also bringing our cost structure in line to be able to serve ourselves and also serve our customers and also building the profitability that we want to deal with.

So I want to thank everybody from the Emerson team as we wrap up this year. We've got a couple more months left, and I want to thank the team as we get ready for 2020 and 2021. With that, we'll open the line. Again, I want to remind, we have a lot of people in line, close to 20, maybe more than 20 people now, and so I need to hold you the two questions. And we'll take as much time up to about an hour and 15 or hour and 20 minutes to get through the questions. So with that, Tim let's open it up. Tim?

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]. Our first question today will come from Andrew Kaplowitz of Citi. Please go ahead.

Andrew Kaplowitz -- Citi -- Analyst

Good afternoon, guys.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon Andrew.

Andrew Kaplowitz -- Citi -- Analyst

Dave, so how do we think about the longer-term roadmap for you guys in a more difficult macro and particularly as we go into the FY '20. It might be difficult obviously to achieve the target in '21 of $450 million, but if we are in this longer prolong slowdown, can you still grow double-digits in EPS after 2019 base if macro stabilize a bit here given the high level of restructuring repurchases, how should we think about that?

David N. Farr -- Chairman and Chief Executive Officer

From the perspective, our underlying growth rate based on the model we presented in February, it was close to 5%, 4.5% to 5%, I believe this cycle here. If that number is going to be closer to 2% to 3% because of the slowdown, we're going to have to have more Bolton acquisitions that allow us to to get that top earnings growth. It will be challenging for us, but the key issue for me is can we drive to make amount of growth through penetration, if that's possible, we'll try to do that. We're also going to have to be a little aggressive on the Bolton acquisitions that allow us to integrate some more sales and profits to get that number up. But that's the game plan. Where do we get that top line growth if we lose about a point or two from underlying from this core business, then the acquisition game will be even more important to us from the Bolton standpoint, and then we're going to have to be aggressive on integrating those acquisitions. That will be the key issue for us as we look at the next couple of years in that target we laid out in February, because as you said that it's a much different macro environment, unless something happen relative to the trade early on in 2020, which then would accelerate growth potentially in 2021 that would be another scenario. But I'm not banking on that right now, we're looking at an environment that's going be a little bit less growth and we'll have to deal with that.

Andrew Kaplowitz -- Citi -- Analyst

Yes. That's helpful. And then I think you know, obviously in Automation Solutions, you've talked about 30% incremental that's the target. How should we think about underlying incrementals, if we do have the slower growth environment? Given all the restructuring you're doing, could we still do 30% plus on lower growth?

David N. Farr -- Chairman and Chief Executive Officer

That's the game plan. That's why we're going after the incremental restructuring now, Andrew, we've made a commitment to get that profit margin back up. These are quality assets. We've made a lot of acquisitions within this asset space, and we need to make sure from our shareholder standpoint that we get those margins back up to what I'd say, that reasonable range, it might take us a little longer to get back to that, what I think the appropriate number is now in this combination of companies that are around 19% EBIT.

But we are not backing off that number incrementally, that's our number for next year, and Lal and his team understand that, and that's why we're going after from a restructuring standpoint, from the perspective of what we're trying to get done. And if we need to, we'll do it more incremental restructuring in early part of 2020.

Andrew Kaplowitz -- Citi -- Analyst

Thanks, Dave. Appreciate it.

David N. Farr -- Chairman and Chief Executive Officer

All the best, Andrew. Thank you.

Operator

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

Steve Tusa -- JP Morgan -- Analyst

Hi guys, good afternoon.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon, Steve.

Steve Tusa -- JP Morgan -- Analyst

Congrats to Tim, unless you're like sending them to some God forsaken part of the world like, I don't know where, where you send these people, but hopefully he is going somewhere nice. [Speech Overlap].

Tim Reeves -- Director of Investor Relations

To Connecticut.

David N. Farr -- Chairman and Chief Executive Officer

[Speech Overlap] Tusa, Tusa, I'm open for suggestions. I mean, you might have to talk to his wife a little bit about this. She is a St. Louis girl, but you might -- if you got an idea, it's not going to be Augusta, Georgia, I can tell you that right now.

Steve Tusa -- JP Morgan -- Analyst

No, I was just going to say that. You stole that one, I was just going to say that.

David N. Farr -- Chairman and Chief Executive Officer

Not going to Augusta, Georgia, most likely, it could be like now. So what's the tough place in Nevada. We get something, Death Valley or something that that, Area 51 or something like that. He is going to be going most likely to the North East somewhere. Northeast somewhere.

Steve Tusa -- JP Morgan -- Analyst

Got it, got it. I love the red exclamation points on the order trends, I think that really pops, stands out. But how bad was kind of your discrete business, on the order rate or revenues either one like, are those down double digit? And then as a follow-up to that, within Power specifically, and then a little bit less in LNG, how do you think you're doing share wise? Because Power, I would assume that's more kind of attacking competitor's installed base and selling digital and that kind of stuff, so it seems like there is a bit of a share game there in Power.

David N. Farr -- Chairman and Chief Executive Officer

So, on the discrete side, we're not down double digit. I mean it's a solid single-digit but,

Steve Tusa -- JP Morgan -- Analyst

Okay.

David N. Farr -- Chairman and Chief Executive Officer

Yes, I mean I would say, Tim and I going back for, it's probably somewhere between 5% to 8% mid-single digit down in the discrete side. You know that the inventory has not come out of system at all. Obviously the demand slowed down as you've seen, Steve, and therefore it's going to take a little longer. It could last all the way to the calendar year now, to get that out, but that's what we see at that point in time. The profit side has been pretty good within the channel, but since right now it's oil and gas related down around Texas and the Permian has been pretty tough. On the power side, we are very committed to space, and we've continued to bring out the next generation control system ovation. We continue to bring out new services, we continue to be highly committed to supporting the power generation both renewable, primary power, all different type of power, particularly around coal to gas. So based on what we're seeing right now, I would say we are winning against our key competitors out there, but obviously we're not going to back down. I think there is a unique window of opportunity as we look at this.

And overall this year, year-to-date were up a solid single-digit and orders. And I think we're going to have a good fourth quarter and a good start to next year. The industry needs to go through some reinvestments and upgrading systems, taking old systems down, and bring up some new power plant, bringing up new gas, get of coal. These are all opportunities for us, and we're out there fighting for it, and I would say we're doing pretty well at this point in time, and again I don't look at a quarter per share. I mean let's wrap it up as we finish this calendar year, but I feel good of the trend line as I look at the last 12 to 18 months versus our primary competitors in this space.

Steve Tusa -- JP Morgan -- Analyst

Right, but that's OEM, that's the OEM's installed base.

David N. Farr -- Chairman and Chief Executive Officer

Correct, correct.

Steve Tusa -- JP Morgan -- Analyst

that you're going after.

David N. Farr -- Chairman and Chief Executive Officer

Yes.

Steve Tusa -- JP Morgan -- Analyst

And then one last one, just on the macro. You seemed confident that this isn't getting worse, but then you said things extends, through the election next year. How are your customers and you guys going to, you know, not at least pause a little bit before you know all the uncertainty around the election unless you just have, I'm sure you have confidence in the outcome, but like how are you going to integrate that into your kind of plans and your thinking?

David N. Farr -- Chairman and Chief Executive Officer

From our perspective, we're going to work multiple plans here from my perspective. I think we're looking at an environment where there is very little growth, and environment where there is some moderate growth. Clearly we still see our international business doing better than the US at this point in time, and that's going to allow us to see a little bit better growth, but we're going to factor in that we could be in a slug fest with real low single-digit growth for the next 12 months. And therefore, you got to get that cost line in line and really prioritize, we're going to spend money, it's not going to be, in my opinion, I'm being very, very, let's say cautious or negative. But I'm very concerned about business, it is like you said, keep pausing and then keep reevaluating our invest and that's going to drag the business investment world to a weaker environment. If it doesn't happen that way and things get better, we'll be OK. But I'm more worried about that it will happen and therefore I'm restructuring the company to be in that environment.

Steve Tusa -- JP Morgan -- Analyst

Got it, OK. Thanks a lot.

David N. Farr -- Chairman and Chief Executive Officer

Thank you. Thanks, Steve. All the best. If you got ideas for where we're going to send Tim, send them to me.

Operator

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

Jeff Sprague -- Vertical Research Partners -- Analyst

Thank you. Good afternoon, everyone.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon. Jeff. How are you doing.

Jeff Sprague -- Vertical Research Partners -- Analyst

I'm doing well, thank you. [Phonetic] Slightly through [Phonetic] it also.

David N. Farr -- Chairman and Chief Executive Officer

It's always fun [Indecipherable] stuff, you get to eat, it gets boring.

Jeff Sprague -- Vertical Research Partners -- Analyst

No. Exactly. Well, hi, I want to just pick up on your last point. You kind of indicated, you didn't use the term, but may be kind of the risk at just stall speed, and if we get there. What really kind of keeps us from kind of tipping lower? I guess, no one has a crystal ball, right? But how would you handicap kind of a worst outlook than what you portrayed in your opening comments there?

David N. Farr -- Chairman and Chief Executive Officer

You know the key issue there is, I think, I think there is a good chance the economy next year gets, the global economy gets real close to that stall speed, and I think that as we finish the rest of this calendar year, which I think will be OK relative to investment, and the people then really start reevaluating in 2020. If we sense, we're going to get pretty close to that stall speed, which we've seen the kind before, then we got to think about, OK, do we have the right things done relative to our restructuring in our position in the company. Right now, I think we're going to get close to that stall speed, but I don't think it's going to go all that way. We also, as you understand around the world, we have every Fed, federal reserve around the world really pushing accommodation to make sure the economies do not get to that stall speed.

So I think that's one thing we have going for us. That means the European, the Japanese, the Chinese, the American federal reserve bank's whatever they're called around the world, are working very, very hard to make sure we don't go into that stall speed, but I think there's a good chance we'll get real close to it, and hopefully the financial reserves out there can figure out how to make sure we don't go in there because that's, that's a little bit different environment and it gets pretty ugly for a lot of companies at that point in time.

Jeff Sprague -- Vertical Research Partners -- Analyst

Yes. And then just separately. Just thinking about automation margins right, so it actually ended up being kind of a peculiar looking quarter. Right? Your actual OP dollars are down, so we're not just talking a mix effect and deals on margins but OP dollars down from -- so now as we look into Q4, we need to see a pretty significant step up in the OP dollars to get to that forecast. You talked on the last call about some discrete things on price cost and other levers, could you just give us a little bit more visibility on how we bridge to that Q4 automation margin number?

David N. Farr -- Chairman and Chief Executive Officer

Yes, I think there's a couple of things going on from the perspective we have. Obviously the price cost continues to move our way in that fourth quarter in a positive way. They did have a pretty good sequential margins improvement in the third quarter. The other thing is the restructuring actions that we took back a couple of months ago, I believe in April, in April-May, and also some of the core restructuring that we starting to begin the year as start to flow through. So the automation business as things slowed down as you remember, we started taking actions earlier on with that business. Some of those benefits are coming through, in the last couple of months close and even June, which was a tough month for automation solutions from a sales standpoint.

They did very well with leverage in profitability, the month of July, which we're starting to see right now, the same things flowing through again. So, my gut tells me right now, I feel pretty good about where they flow. The key issue there is do they, can they continue to get some of that backlog out that's been built over the year and order that customers start pushing that out, but right now I think we've got the cost structure in line for where they sit and for this tail end of the year, Jeff and I feel pretty good about the margins in the fourth quarter for these guys.

Jeff Sprague -- Vertical Research Partners -- Analyst

Thanks, Dave. I'll pass it.

David N. Farr -- Chairman and Chief Executive Officer

All the best to you, Jeff. Thank you very much. Have a good rest summer.

Operator

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

Analyst

Thanks, good afternoon, everyone.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon. Dean.

Deane Dray -- RBC Capital Markets -- Analyst

Hi, maybe the place to start, Dave, would be the game plan where you would augment slowing growth with Bolton acquisitions. And what I hear you say that, it kind of suggests that there is, you're still willing to play offense here, and which is a good sign, but how do you marry the idea of going after acquisitions during a period of high uncertainty and clearly a pause and closer to stall speed?

David N. Farr -- Chairman and Chief Executive Officer

From the perspective of some of the Bolton acquisitions, which we work pretty aggressively all the time. Fundamentally, we believe as we go into this time period, as we move into 2020, early '21, some of the companies that were interest and will want to we'll got and we'll have the opportunity to do those Bolton acquisition. Historically in times that things like this, slow down things, that gets kind of sloppy. Near that sloppy, we see some of these product lines pop out and so we're banking, we're going to try to push the pressure point up on this thing, and see if we can get a couple of these to pocket, give us some incremental growth of the top line, obviously, work with the cash flow and obviously work with the earnings, but this is going to be one of these gains that we know where we're going to go and we know we're pushing right now, and the place we're going to, are they willing to now sell because of the sloppiness in the marketplace from their perspective. So that's how the game is going to work, we just put a little bit more attention on it, and from the top level down. And I know every company is going to be going through a repositioning and restructuring and hopefully we'll be able to convince all our sellers to let a couple of these small product lines grow. That's how it's going to work.

Deane Dray -- RBC Capital Markets -- Analyst

Got it. And then as a follow-up. But just to continue along the lines of this pause versus an end of a cycle. Can you comment on the power, the influence of this negative feedback loop, because you're saying right now you're slowing down your investments, you're pulling back, you're seeing customers push out projects, how does that not feed on itself and become more of a power slower or faster, and to a certain extent can you share with us how much you're seeing from your customer and being influenced by what your customers are doing versus what you are hearing from Washington, because you are privy to a lot more specifics than anyone on this phone gets to hear, but maybe share with us some of that insight that you're getting from those channels.

David N. Farr -- Chairman and Chief Executive Officer

So a lot of projects we see, in particular on the LNG world, from the perspective of these LNG investments need to go forward, as there has been major commitments made from a lot of our customer base relative to around gas versus coal versus oil from the standpoint of what we call less carbon, de-carbon, they've made commitment. So from my perspective, these projects are going to go. It is just a matter of what time they're going to go and when things get resolved. And I finally I believe we will get things resolved relative to discussions with China. It could take a lot longer than my initial comments, we're always around August, September time period. And now it's obviously off the table based on what we're seeing at this point in time. And so I thought when look at the projects, the under-investment in the gas side, leaving the under-investment in the liquids and some of the under-investments in some of the downstream work that needs to be done, because we definitely need that downstream product.

I see that those have to go forward forward. The question is when they get my customer base or our customer base gets visibility relative to where they can do these transactions and whether they can sell and not sell, and you see these projects going. Now the other issue is, if the project in the United States stalls then you'll start seeing some acceleration in projects in the Middle East, because of the demand for gas. China is still going to grow. China is going to need gas. They're going to get it from the Middle East, they're going to get it from other parts of the world, or they're going to get it from the United States.

So as I look at right now. If I look out the next 12 months, I think as a customer base we're fine-tuning a little bit, but if this thing drags on for a long time, and let's say the long time being 12 to 18 months, then I think you start seeing what you talked about this. It's a self-fulfilling prophecy, and then we start whining backwards. But I think it's way too early to see that at this point in time and maybe from my perspective, things do get resolved sooner than we think. But at this point in time, it's prudent for me from the perspective where I'm in, we [Phonetic] starting [Phonetic] the pipeline, we need to dial things back after three quarters of very moderate growth in the automation business, we need to dial it back and reset for a little bit growth and dividend growth environment and look and see what happens, rather than waiting, because we've been waiting now for a couple of quarters, and now it's time to act. So that's where we sit. I can now say that I'm still optimistic. I still believe that the world needs the energy, they need this type of products. The question is the timing of it more than anything else at this point in time.

Deane Dray -- RBC Capital Markets -- Analyst

And do you need to add anything about the color from Washington.

David N. Farr -- Chairman and Chief Executive Officer

Right now, nothing at all. I can't add anything other than what's going on. It's obviously very challenging negotiations and a lot of pushing back and forth. Again, I still believe this is something that's important, and I do support it. It creates a lot of pain for me and obviously for our company, but from my perspective, I do support 100%, what we're trying to get done in Washington on the long-term trade benefits, but we've got to get this thing done. We can't let this thing sit up there for another 12 to 18 months dragging around, because it will definitely do what you talked about with some negative self-fulfilling prophecies.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you.

David N. Farr -- Chairman and Chief Executive Officer

Thank you very much.

Operator

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

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Hi, good afternoon, guys.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon, Josh.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Dave can you talk a little bit about this ballooning funnel of projects or I guess stuff that has been committed, but not booked. How long do those typically stay out in that state. Is there any kind of leakage in that closed process where it's something where you think there is a commitment, but until the ink dries it tends to back down. How confident are you in that booking over the next few months quarters, or whatever?

David N. Farr -- Chairman and Chief Executive Officer

So if we look at the funnel, where the funnel is growing right now, it's growing outside the United States. So we're starting to see, we have not seen a lot of growth of the bigger projects outside the United States. It was primarily in North America driven large funnel project business. So we're now starting to see some of the international be it Asia, be it the Middle East, be in Latin America, where some of the larger projects are now starting to come into the funnel and hence that's why that funnel is getting a little bit bigger.

Now going back to the one, but not both situation. The big issue for us is, if it is like -- it's like product that's been -- food has been picked and put in the shelf, there is a shelf life. And historically when we see this grow like this, we have seen it before, typically that shelf life, you're looking at 12 to 18 months on these projects. These are massive projects, these are projects, typically, they're going to last three, four, five, six years. So even if they get delayed 6 to 12 months, it's not unusual. From my perspective, if you get out there past the 12, 14, 16 months, and these things really start changing and nothing happens, then you're going to see, -- so reconfigure, it's way too early to say that because this number until recently was pretty normal. And now with this number getting above a $1 billion, close to $1 billion, it's starting to get to a number that's got my attention. And so I think the key issue for me is watching them and see what these customers start doing. These are a lot of gas projects and a lot of US-based projects at this point in time.

And so, I think we got to watch. There is nothing to get overreact to, but from my perspective, these things sit out there for 12, 14, 16 months, then you're going to start seeing a reevaluation of what's the magnitude of this project that we want to downsize it.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's helpful. So it sounds like we need to stay on top of that as a number to talk about. [Speech Overlap] Yes, Okay that's helpful. That's helpful. And then just looking at the projects that have shifted out of the pipeline, and I know that there's been [Indecipherable] orders and sales. But if I think about that $350 million shifting from '19 to '20 and $450 million to '21. We're already kind of losing maybe a point or two of sales as it pertains to that, you talked about, kind of a two or three point down downshift. It seems like on the shorter cycle end of that or some of the projects that are in this pipeline that doesn't assume a very -- a whole lot more downside, does that just speak to no access in the system or the absence of destocking or I guess why couldn't we decelerate more given that the project piece already speaks to maybe past the deceleration, you've talked about.

David N. Farr -- Chairman and Chief Executive Officer

Yeah, I think it's hard to measure on a couple of months on projects moving in and out, because they move a lot. Historically, we never gave that number. There is always a lot of movement any way. There is always a couple of hundred million dollar projects moving around. So I would say the number is a little bit higher than normal to be honest, Josh. But there was always a number that moved in and out of a couple of hundred million dollars. So now, so I would definitely say that movement is higher than normal. So therefore, I would say it does add taken about a 0.5 off the underlying growth rate of this cycle right now. And that's a number we're going to watch and see if there has been a bigger movement from the next time we talk.

As we close out this calendar year, that'd be a good feel for it. I think got to wait to the end of the calendar year to get a good feel. But right now, there is always noise, and I would say it is about a point that's been taken off the underlying growth, and it's moved up a tad, but I wouldn't panic yet because there's always that number sitting in there.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's good perspective, thanks Dave.

David N. Farr -- Chairman and Chief Executive Officer

Okay, good. Thank you.

Operator

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

Nicole DeBlase -- Deutsche Bank -- Analyst

Greetings. Good afternoon, Dave.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon, Nicole .

Nicole DeBlase -- Deutsche Bank -- Analyst

So I just want to start with Commercial and Residential. So you guys have kind of guided for flat organic growth for the year, it implies a little bit above flat, maybe like 1% in the fourth quarter and that's a step-up. Now, I know you saw a little bit of improvement in July, which is encouraging, but I guess how much confidence do you have in that outcome and could there still be some risk to the downside there, particularly since the comp, the year-on-year comp does get a little bit harder in the fourth quarter.

David N. Farr -- Chairman and Chief Executive Officer

Yes, definitely, it gets harder because of our US base last year. So there are a couple of things that we're watching very closely. One that the fact that China now. and Asia-Pacific now has stabilized and come above the line, and it's a good sign for us. So my concern would not be there. My concern would be in the USA. If all of a sudden, we've had a pretty good what I'll call heat wave, humidity wave go through. That will be my concern concern right now, not the [Phonetic] AST [Phonetic] side, but more on the retail side. We've got it pretty well dialed down. I feel pretty comfortable about that. Europe seems to be coming back. Europe had a very challenging June, because it was extremely hot there, but it's bounce back nicely in July. So I feel pretty good that we're going to be around the 0% to 1% growth rate in Bob's business in the fourth, our fourth quarter, which is the third fiscal, our third calendar quarter. I think we've got it down pretty close to where we see it right now, and the fact that July came in decently and our orders came in decently, even I think. Tim, was it one month order pace positive.

Tim Reeves -- Director of Investor Relations

Yes, one.

David N. Farr -- Chairman and Chief Executive Officer

The one month order pace was positive. So it was positive workforce that 1% I think and so on. I think we're OK, we'll put 8-K out in orders, and we'll keep communication around those three things. Asia, China, North America, and as Europe keep holding in there for us. So those are three things I'm watching right now in commercial and Residential.

Nicole DeBlase -- Deutsche Bank -- Analyst

Okay, got it. Thanks, Dave. And then just on Automation Solutions. You talked about things getting a little bit better in July. I mean maybe it's my eyesight but the charges doesn't show a lot of improvement. If you could just talk a little bit more about the early stages of July and what's driving that better result.

David N. Farr -- Chairman and Chief Executive Officer

I'd say what, after a tough June, if it goes, takes up a notch, just better, and so I think we were underlying what 4.5, 4.5 [Phonetic] closed [Phonetic] last 4.

Tim Reeves -- Director of Investor Relations

Right, 4.

David N. Farr -- Chairman and Chief Executive Officer

4, so, so it picked up a little bit, you can't see that in your chart because I still has younger eyes, Nicole. So it's a little bit better, what's interesting, it's not the US, we saw Asia, we saw China, and [Indecipherable] answering about China yet, that's interesting. We saw a pretty good impact in China, we saw a good impact in Latin America. So our international markets actually grew order-wise, I think, double-digit, and in North America, the US business, the Canadian business were still the weakness points.

So our internationals held up nicely, and therefore, right now we see that's holding up for the year. That will give us a little bit of momentum as you go into those, and I think we're going to bounce somewhere between 4% to 5% in orders in this fourth quarter. So and July was was not a short-month, I think it was a fairly long month for us normally, and this month, and so it's a good representation of what I think what's going on in the marketplace. So I feel reasonably well. But that 4.5 now, given the fact, I thought we'd be at six or seven, I don't feel that exciting, but it's better than going the other way.

Nicole DeBlase -- Deutsche Bank -- Analyst

Definitely. Thanks, Dave.

David N. Farr -- Chairman and Chief Executive Officer

Thank you very much, Nicole, see you soon.

Operator

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

John Inch -- Gordon Haskett -- Analyst

Good afternoon, Dave.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon, John.

John Inch -- Gordon Haskett -- Analyst

Afternoon. So, I wonder if you could comment on the profitability of the large project pipeline, is it accretive to the 16% AS margin run rate here.

David N. Farr -- Chairman and Chief Executive Officer

Typically, large project will be a tad lower than that. And so what we do, that was a hybrid, now you talked about large. Now if you look at the, what I call the smaller circles in there, the medium, small size circles, those typically are -- those are accretive to us. So it's a bigger ones that typically will be the lower, lower double-digit or 10 type number there. So right now, given the fact that project has slowed down, the bigger projects does help us a little bit, but I want to get those projects going, so we can get the installed base. But the mix of funnel right now it looks pretty decent. If I look that funnel, if you look at that funnel, we put out there, you can see it. You can see, there's a lot of small, medium-sized projects. The bigger project, there is only one big project left in this year, and so that's a good mix as I finish off the fourth quarter going back to our comments on profitability and a good start for 2020. So based on that funnel that tells me I like the mix.

John Inch -- Gordon Haskett -- Analyst

So these deferrals aren't necessarily putting incremental price pressure on kind of the bid quote that sort of thing. It's just a pure deferral.

David N. Farr -- Chairman and Chief Executive Officer

Yes, correct. Typically, if you have a chart in front of you, chart 11, if you look at the bigger bubbles, [Phonetic] new prime[Phonetic]

black or white, but I'm looking at that big bubble sitting at the end of 2019. That's a fairly large project that would typically be a price pressure type environment. When I look at the smaller medium size ones typical, it was going to be KOB2 type projects and typically those are projects you already have their install base, and therefore the profitability is going to be around that our margin or normal margin.

John Inch -- Gordon Haskett -- Analyst

And then Dave, just as a follow-up. Your comments around doing some more Bolton here to maybe supplement some of the earnings. Can you remind us what percent of your sales are say embedded software, what percent might be stand-alone software, and would you be looking to kind of software industrial software types of companies as part of your frame for doing more Boltons.

David N. Farr -- Chairman and Chief Executive Officer

Well if you look at the acquisitions we've done this year, a lot of them were software companies, and so the answer is yes, but would be. So we're doing a lot of smaller deals this year, and most of them have been tied around software. Standalone software, embedded software, again, that is a key issue for us and we're trying to find the type of deals that we're doing. For the facility point out so we can,

Unidentified Speaker

We shared this slide at our investor conference $400 million [Phonetic] stand-alone thought [Phonetic]

on the AS side that doesn't include the embedded piece.

David N. Farr -- Chairman and Chief Executive Officer

Yes, so we did $400 million stand-alone about $400 million, and then we have a lot of embedded, which we don't break out in the systems business But yes, if you look at the deals we're doing right now, there are a lot, there are a lot less product but they are more software based.

And I think that's the common trend within this automation space as we drive into the control and driving into our customer base around specific industries. Again, it's not a lot of mouth there. So you have to quarter for a long time, and we've done quite a few, this year. They're smaller, and the acquisitions to me are important relative to give us this opportunity to add sales, profits, and as Frank pointed out, operations have to deliver the earnings and the synergy plans to make them a credit accretive, but that's going to be a key issue for us to drive and we can get topline organically. We've got to get through Boltons and they've got to deliver the profit.

John Inch -- Gordon Haskett -- Analyst

But, it sounds like those deals would be more of the strategic nature right versus trying to find stuff that would supplement the earnings, is that [Speech Overlap]?

David N. Farr -- Chairman and Chief Executive Officer

Yes. When I talk about Boltons, OK, yes, yes. OK, I hope you're going to think that, I'm not talking about going out there, I am talking about Boltons within our core business, within the core business of automation within the core. I'm not looking at going out to do any type of acquisition to get sales, earnings, and cash flow, or EPS. No, these are within the core, clearly from my perspective if things really get slow get to that stall speed, I think we're going to see opportunities where more of the smaller Bolton deals coming forward, and we're going to be very aggressive in going after them and figure out how to integrate them pretty quickly to get little bit more growth in that 2021 time period.

Going back to the first question. Somebody asked me early on, do we have a path to get of to that EPS closer to what we said back in February, because the sales are going to be there right now organically, unless we have a big pop in 21. So we're going to have to figure how to do Bolton deals within our core space to that -- that's a good point John. Thank you.

John Inch -- Gordon Haskett -- Analyst

Thank you. And I'd send him to Canada.

David N. Farr -- Chairman and Chief Executive Officer

Where, Calgary, Alberta where's the Eskimo problem.

John Inch -- Gordon Haskett -- Analyst

I think it's everywhere.

David N. Farr -- Chairman and Chief Executive Officer

Okay.

Operator

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

John Walsh -- Credit Suisse -- Analyst

Hi, good afternoon.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon.

John Walsh -- Credit Suisse -- Analyst

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

David N. Farr -- Chairman and Chief Executive Officer

Yes, actually, yes, exactly. So from our perspective, our hybrid business clearly were pretty strong in terms of life sciences, and so we've had a pretty good run in life sciences from that perspective. I'm not, in that hybrid space, we don't have automotive, we don't have semiconductor, we have the life sciences, we have some food and beverages, we have some mining in that, and so that's been doing pretty good for us. The food and beverage has not been that strong for us, but it has primarily been the life sciences and the mining area that has been good for us relative to our hybrid business.

John Walsh -- Credit Suisse -- Analyst

Got it. And then maybe just as a follow-on, I think. And maybe to Jeff's question earlier around margin leverage. I think you said price cost will be positive again in the fiscal Q4, but how do you think about that kind of price cost balance as you run it forward?

David N. Farr -- Chairman and Chief Executive Officer

Right now, the key issue for us is commodities have come down, excluding any additional aggressive tariff actions other than the one, the 10% which is not primarily aimed at us, industry is more of a consumer tariff approach. I think our price cost balance for going into 2020 right now is pretty good. It's green, now those things could change. And those are things we have to deal with, but last year at this time, you thought about [Phonetic] your tiers [Phonetic] were coming in. We had material still going up, people thought we're going to see faster growth. And so we are looking at a little bit different type of inflationary environments. So this time it's moving in the opposite way, and the key issue for us is to keep our costs in line and obviously make sure we have price discipline around the price cost. But right now as we look at the early stages of 2020, it's green, and we feel good about it and should be OK as we start the year out.

John Walsh -- Credit Suisse -- Analyst

Great, thanks for taking the questions.

All the best, John.

Okay.

Operator

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

Julian Mitchell -- Barclays -- Analyst

Hi, good afternoon.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon, Julian.

Julian Mitchell -- Barclays -- Analyst

Maybe the first question on automation solutions in China. You're coming up to the end of what's been a very good three year upturn. Historically I guess this industry in China tends to have three or full year upturns and a 18 month downturn. So I just wondered how you're assessing the market outlook in China in terms of that risk of turning down next year, and whether you had seen any more evidence of US companies, perhaps being pushed down the priority list on orders, which is something, I think you had mentioned back at EPG.

David N. Farr -- Chairman and Chief Executive Officer

Yes, so on the cycle, through this month, the cycle is still pretty good. We're looking at a very solid 8% to 10% Automation Solutions orders growth and sales growth. As I look at the industries, we're serving a lot of industries that are -- the Chinese customer base is trying to become more self-sufficient, and so obviously less imports of final goods that's where they're aiming their investments. I do not see that changing as we move into 2020 as well -- as my initial look at 2020 right now for China, is that 8 to 10 most likely is going to turn into, let's say 6 to 8, maybe 5 to 8 type of growth. So we're looking at a slower growth to your point Julian, but I'm not looking for that drop off yet, because they have not -- they really haven't finished building out what they need to build out relative to the infrastructure. They're trying to become more self sufficient in the industries we serve.

Relative to, what I call, nationalistic tendencies for the Chinese relative to foreigners, it's not just US companies. It's all companies, I mean, it could be European companies too, the trend has continued from this standpoint. We see some pressure points relative to some of our customers being pushed about you need to look at alternative sources, not just foreign company sources be it European or American, I think that trend will continue as long as the trade discussions are under way. And hopefully the trade discussions will be finalized before the foreign companies are really pushed to a small piece of the marketplace.

Right now, obviously, we're still OK. But it's something that we spent a lot of time. We have people going in and supporting our sales organization, our customer's organization. Lal Karsanbhai was just there, Mike's going in next week and I'll be going in and about within less of the month. So we spend a lot of time with our sales and with our customers because we're very concerned about the negative trends of nationalism and clearly it's something we're fighting.

Right now I haven't seen anything. I mean, there's a little bit more, but not astronomical more or we would not be growing as we're growing right now.

Julian Mitchell -- Barclays -- Analyst

Very helpful, thanks. And then my quick follow-up would just be around your assessment of inventory levels among your channel partners and customers. How much de-stock do you think is needed across automation and CNRS.

David N. Farr -- Chairman and Chief Executive Officer

It's still too high given the fact that if you look at Emerson's inventory, with a slower June, our inventory did not come down as it normally would in June. So we're a good indication that, Julian. There is a balance sheet out there, so you could see our inventory level did not drop like normal from quarter to quarter, and as -- and from my perspective as I look at the channel right now, I thought the channel will be done by the end of this third calendar quarter. I think we're going to be well into the fourth calendar quarter before that destocking is done. And we sensed that the people are being very cautious. And so I think it's going take a little longer because the demand is weaker. Therefore, the demand is not going to drive the de-stock, and we're going to have to take it down very slowly.

That's how it looks to me.

Julian Mitchell -- Barclays -- Analyst

Great, thank you.

David N. Farr -- Chairman and Chief Executive Officer

All the best to you Julian.

Operator

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

Robert McCarthy -- Stephens -- Analyst

Good afternoon everyone. Thank you for fitting me in.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon, Robert. Clearly made the cut offline. I mean, you know.

Robert McCarthy -- Stephens -- Analyst

well, I guess I'll see In Arkansas a little bit later in the month. Right?

David N. Farr -- Chairman and Chief Executive Officer

Yes.

Robert McCarthy -- Stephens -- Analyst

In any event. The first question, Dave, obviously you've been focused on niche and Boltons, particularly in discrete side and kind of make your number over the longer term, but I think the question remains in the down cycle, you might have opportunity to look at other larger properties. How do you think of the state of the balance sheet from your ability to do a larger deal, absent the use of equity, what is your outer bounds at this point?

David N. Farr -- Chairman and Chief Executive Officer

From the perspective of deals we're looking at right now, we showed the Board, obviously we made the decision to do a little bit more share repurchase. From the standpoint, our deals, our acquisitions this year is not going to be as high. So in the first six months, we didn't see the pipeline being strong enough, so we've made the decision to do a little bit more share repurchase. Now, clearly, we started this process before the stock gets [Phonetic] waxed [Phonetic]in all the trade discussions.

But if I look at our leverage point, we can do a [Phonetic] $4 billion-$5 billion [Phonetic] type of transaction and complete be around that too, debt to EBITDA margin of up a little bit over that. So we have plenty of room, and there's not a lot of $5 billion, $6 billion, $7 billion, $8 billion deals out there for. So I think we can get through the key issue. Frank knows, is we've got to obviously dial back share repurchase a little bit and then we had actually demonstrated to the rating agencies that we're going to get our ratios back down, which we have in the past.

Frank Dellaquila -- Senior Executive Vice President and Chief Financial Officer

Yes, I mean Rob. There's nothing that we can reasonably foresee that would cause us to contemplate issuing equity. And we can do everything within the balance sheet that we can proceed.

David N. Farr -- Chairman and Chief Executive Officer

The type of deals we see here, the biggest type of level of deal, we've seen in a $4.5 billion. So we should abort that ratio as we go through this whole process of capital allocation, which we did last month or last June -- in June, and also we did today, and we did in the finance committee this morning with Frank. And we were comfortably well within the band of acquisitions, we see inability to continue to do pretty good levels of share repurchase and have the opportunity of the deals if necessary.

Robert McCarthy -- Stephens -- Analyst

Two smaller questions if you'll forgive me. One capex assumptions going forward. Have we put a cap on that or a modest reduction on that, given what you're seeing in the prevailing environment? And then number two, any sign wise look at kind of the midstream and refiners intentions around IMO, and whether they're going to look to build capacity for the low-sulfur distillate? Or what are the intentions for spending there. If you can share any?

David N. Farr -- Chairman and Chief Executive Officer

Yeah. If I haven't, relative to capital we've scaled capital back this year. We've asked, we've had sessions here in the last 60 days. So capital this year is going be around $600 million. From the standpoint of next year, we have to take capital up. We have, as I've said in my -- I think in 8-K and also in the press release, we have some issues from our standpoint of as we've now have some of the acquisitions for two or three years. We are now doing the optimization of where we want to do some best cost manufacturing.

So we have some investments that we need to make in 2020 getting ready for actions we want to take in 2021 and 2022. So from my perspective right now, our capital spending for the next couple of years will probably up around the 3.5%-3.6% level as we prepare for this moved into this -- some better manufacturing locations and then allows us to move as we go into '21 and '22.

So I think we're evaluating everything around the capital structure right now, do we need to do it in 2020 or can we push it out, but If I look at the numbers right now, because of what we see we needed for '21 and '22, we will be taking capital back up in 2020, a little bit higher than it is this year. And I think, same thing will happen in '22.

So we try to balance this. We spend money all the time as you all know, but I'm shaving it now. And then we're going to have to put some money back in next year.

Robert McCarthy -- Stephens -- Analyst

And then on IMO real quick.

David N. Farr -- Chairman and Chief Executive Officer

I don't have -- I can't give you more insights. I don't know, I've been talking recently about that. I do know by look at the project investments on the refinery say in KOB2, it's still pretty high in the list of projects we're going after and projects we're winning, but I can't give you a specific number that say these guys have -- yes they're going to keep doing it, they're going to take it up. But I can tell you right now, m y folks that tell me in the field refining bidding is still going on. So there, so they appear to be moving forward and spending in this space. That's what I see at this point in time now, will that be something they scale back if they really starts scaling capital back later this year [Phonetic] as they [Phonetic] move it to 2020. But if I look at the project list right now, there's a lot of good refining type of projects out there.

Robert McCarthy -- Stephens -- Analyst

Thanks for your time David.

David N. Farr -- Chairman and Chief Executive Officer

Okay, thank you, you're forgiven for us in two and a half questions.

Operator

Our next question will come [Speech Overlap] and our next question will come from Joe Ritchie of Goldman Sachs. Please go ahead.

Joe Ritchie -- Goldman Sachs -- Analyst

Hi.

David N. Farr -- Chairman and Chief Executive Officer

Hi, Joe, how are you doing? I just want to forgive Rob before he got off [Phonetic] tell me retail 10 Hill a [Phonetic] couple of large players, but you know Rob [Phonetic] ran off [Phonetic] to the church to quickly, I guess.

Joe Ritchie -- Goldman Sachs -- Analyst

He is already doing them. Dave.

David N. Farr -- Chairman and Chief Executive Officer

Yes, OK. How are you doing Joe?

Joe Ritchie -- Goldman Sachs -- Analyst

Doing great, great, thanks for fitting me in. So obviously look the backdrop is challenging or has been a little bit more challenging than we all expected. I guess, at what point do you guys think about revisiting your longer-term targets for 2021. I know, it's still away and lock can happen between now and then. But how are you thinking about that now, just in light of the backdrop being a little bit more challenging?

David N. Farr -- Chairman and Chief Executive Officer

As we told the Board, we had a Board meeting, and we told the Board we'll grind 2020 here for the next three months, and during that process, we'll grind the 2021 at the same time because of this very issue of -- if things slowed down, there is a bump, could it be bump in '21. I think as we grind what we hear from our customers as they finish their calendar year, so we're going to be going through a two-year window here basically because of that issue. Going back to question, is this is a pause and then a recent acceleration or is this going to be a grind and stall speed, and then things really slip way as we go into the later 2020 and to '21. So that we'll be doing that here as we finish this year out. And then we have a very good view by the time we finish the calendar year 2020 or 2019. So that's how we're going to go with it right now. I want to get a feel from my customers. Am I being too cautious or am I being realistic and so will get a feel for it.

Joe Ritchie -- Goldman Sachs -- Analyst

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

David N. Farr -- Chairman and Chief Executive Officer

All for sure, for sure. I will now leave this calendar year without my own self have an update and communicate my Board. So I have a sense, because I do go out and talk, I now want to make sure I'm not looking at some crazy thing for '21 that doesn't make sense. I got new Investor Relations guy, and I can pin the other guy and blame him for all that crap, and so, I mean, you know how it works, Joe. You have seen some Investor Relations guy. [Speech Overlap]. Never to be surfaced again.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay, thank you.

David N. Farr -- Chairman and Chief Executive Officer

Tim has been a good one. Tim has been a good one, I have to tell you. He is a good guy.

Joe Ritchie -- Goldman Sachs -- Analyst

If I could, if I could fit maybe one more in.

David N. Farr -- Chairman and Chief Executive Officer

You can fit one more in.

Joe Ritchie -- Goldman Sachs -- Analyst

I thought your commentary, Dave, earlier on seeing a slower like US gas/Canada gas environment was interesting. I'm just wondering like do you think the trade environment is impacting off-take agreements from happening with Asian partners and that's impacting LNG investment or what is it that you see that's kind of driving that slower gas investment here in the US and Canada.

David N. Farr -- Chairman and Chief Executive Officer

100% trade discussions, 100%. Investments will not move forward in North America, and I've told the White House this, I've told anybody in Washington is they'll not move forward because the Asia, our Asia in particular China, need these, need the offtake, the processing, semi processed stuff, and without some agreement, these investments will sit there. Now, they can move forward pretty quickly because of where they sit, but without the agreements going forward and some clarity around the trade discussions between the United States and China, these natural gas investments will not move forward. So even if 50% of that investment is going to be exported, 50% internally, you whole process is going to change. So that's very important, so I think what I see in Southern Texas, in Southern Louisiana, and it goes back to my comment about, they're going to sit there for a while for 12 to 14 or what that number is, and then we'll make that call relative do we reevaluate or do we just go back to the drawing board.

Joe Ritchie -- Goldman Sachs -- Analyst

That makes sense. Thank you.

David N. Farr -- Chairman and Chief Executive Officer

You are welcome.

Operator

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

Andrew Obin -- Bank of America -- Analyst

Hi, how are you? Good afternoon.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon.

Andrew Obin -- Bank of America -- Analyst

Just a question on your investment strategy, because I know part of this strategy was to invest in service capability, flow control capability, also discrete investments to sort of update the product. So how should we think about your internal investment product processes given the slowdown?

David N. Farr -- Chairman and Chief Executive Officer

We are, going through a very serious prioritization of where we're going to go on the investment in the discrete through the investment around the GE Bolton acquisition and our invest between our process side and the [Phonetic] ovation [Phonetic] side, the power side, that's very important to us, and we are going to try, we're going to figure out how we get that done over the next two years as we planned originally. On the service side, given the opportunity we've been seeing in KOB3, and I think KOB3 will come in at a very good number this year, because you know we're trying to keep that number well above 50% in the cycle. We're going to figure out how we can continue those investments going and not stop them. But again it goes back to our reprioritization of what we can do and we cannot do, and I would say in my discussions with Lal and my discussions with Ram, and the other OCE members, that's one area that I would say we need to figure how to protect. Now we may modulate a little bit, Andrew, but that's an area, I think we continue to have opportunities for growth in penetration for the long term.

And I don't want to be short cycle blinded and miss this opportunity. So I think you're going to see us continue to modulate and continue to move forward in that area. It's very been very good for us so far.

Andrew Obin -- Bank of America -- Analyst

Thanks. And just a follow-up question. You always have a very good sense of what global macro is doing, what global GFI doing, etc. Just looking at the world today, what would your guess is, US GDP and China GDP are growing at right now?

David N. Farr -- Chairman and Chief Executive Officer

US right now is growing low-twos. I think there is, I think it will continue, I think it will continue to slide. It could easily go below the two, at this current point in time, until we get some clarity around trade to actually go below that 2 level next year as we move into next year. I think China is continue to grow, but I think it's more like a 3% or 4% type of growth rate in China. We've seen pretty good pockets of growth, and if Bob's business, the Commercial, Residential business has back to back, and you say, two or three, four months of slightly positive growth that tells me that things have stabilized. So the global economy has definitely slowed. And from my perspective right now, we've got the Fed's around the world, trying to figure out how to keep that growth rate up from hitting the stalled speed, but the trade issues right now are quite a big negative and being pushed back that growth rate down. So that's the key offset in going on at this point in time.

Andrew Obin -- Bank of America -- Analyst

Thanks a lot, Dave.

All the best to you, take care.

Operator

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

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Good afternoon, Dave.

David N. Farr -- Chairman and Chief Executive Officer

Good afternoon, Deepa.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Hi, Automation Solutions, Dave, China continuous to invest in infrastructure and that's been helping a lot of companies there, this cycle. But what are some of the verticals with an AS that have been performing better than you would have thought in that region? And which are the ones that are losing some steam versus your expectations. I have a follow-up after that.

David N. Farr -- Chairman and Chief Executive Officer

So you're taking about China in specific, Deepa, that we've set there in China.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Yes, China Automation Solutions, yes.

David N. Farr -- Chairman and Chief Executive Officer

Yes, so from the Power standpoint, we've seen, China lose some steam that they're were underperform, I thought they would underperform. There has been a shifting around of priorities within the power industry, so that one has underperformed inside China from what I thought would happen earlier this year. So the chemical side, I think that process. I've seen those are doing held in there pretty well nicely. Some of the refining asset investments have held in there pretty nicely. I would say that if I look at some of the pipeline investment, they've held in there pretty well. I mean, to begin the year I believe if I went back and looked at, when I gave first forecast on China, we are talk around a 6%-8%, 9 or something like that. 6, 8, 10?

Tim Reeves -- Director of Investor Relations

that was 8 to 10.

David N. Farr -- Chairman and Chief Executive Officer

8 to 10, so that's basically where we are right now. So I would say, chemical, a little bit better, power a little bit worse, and refined a little bit better. So that's what it is, we're pretty close to where we thought we would be. And as you said, it is shifting around industries a little bit, and that's how I see it right now.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Got it. Thanks for the color. My follow-up is on cost controls. Are you taking costs down along the verticals that are weak or is that more broad based across Emerson?

David N. Farr -- Chairman and Chief Executive Officer

Broad based across Emerson, so we've set in motion Bob's business in the Commercial, Residential, Bob Sharp, he has gone through this process with his team and looking at places that we can, we can take out layers, we can take out the situation not necessarily needed anymore. Lal's doing the same thing. We're trying to accelerate some of the integration and some of the acquisitions. We're looking at the corporate structure in the same thing. So we're looking at areas from the standpoint of things we could be simpler without as much overhead. We're trying to figure out how to do that right now. And that's how we're we're going at it. So it's very people focused and we'll run all the way to this calendar year to make sure that we have things tuned the way we want to tune for this type of environment.

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Great. Thanks very much. Thanks for setting me in.

David N. Farr -- Chairman and Chief Executive Officer

Your're welcome, Deepa.

Operator

Our next question will come from Gautam Khanna of Cowen & Company. Please go ahead.

David N. Farr -- Chairman and Chief Executive Officer

Gautam, you've got to loose [Indecipherable] some. You've just got need [Indecipherable]. You barely got [Indecipherable] . I didn't know you are that [Phonetic] limbo[Phonetic]. Okay, what can I do for you?

Gautam Khanna -- Cowen & Company -- Analyst

Well, a lot of questions have been asked and answered, but one thing I was curious about is the June Board meeting, I was curious, what the high level framework is on buybacks. So, I recognize the 250 you mentioned in Q4, but is there an appetite if there is not much in the way of M&A over the next 6 months to 12 months to really pump the repurchase activity higher.

David N. Farr -- Chairman and Chief Executive Officer

I don't think.

Gautam Khanna -- Cowen & Company -- Analyst

Are you certain about that?

David N. Farr -- Chairman and Chief Executive Officer

I mean, we show the Board a range of what we see cash flow doing, what we see our capital allocation from the standpoint of from the balance sheet, the leverage we have, we try to keep enough flexibility. So if we had to do several, several medium larger site types of deals, being a [Phonetic] $2 billion [Phonetic] to $3 billion, $4 billion. So I think that right now the board feels very comfortable in this range of a $1 billion to a $1.5 billion per year in share repurchase, assuming that the deal whether we're looking at is moderate of somewhere between $0.5 billion to a $1 billion per year. If we alter that, and we start moving back into that $1 billion to $1.5 billion to $2 billion, you would see us modulate back down toward, I would say a little bit under $1 billion share repurchase.

So, we show the Board that flexibility, but I don't see it. It's not going to stop. And I don't see us popping all our capital into share repurchase. I think we've consistently bought stock back over the years. As Tim notes, it's close to 300 million shares that we've bought back since 2,000. Now the net impact not quite that high, but we've bought back 300 million shares.

And so we can [Phonetic] just they are [Phonetic] in the marketplace, but I don't see a change in the strategy of buying on a consistent basis. And I think the Board feels very comfortable in the [Phonetic] $750 million to a $1 billion 5 [Phonetic] based on what our acquisitions is, and hence that's why we've talked the Board about taking up a little bit higher this year. And now with 2020 hindsight, the fact that the market has gotten weaker, it gives us some flexibility to buy some at regional prices.

Gautam Khanna -- Cowen & Company -- Analyst

Appreciate the color. Thank you.

David N. Farr -- Chairman and Chief Executive Officer

Okay. Take care Gautam.

I want to thank everybody for your time. I appreciate it. As you guys know I try to be very candid. A lot of what's going on. I do want to let you know that Rocket's one year birthday is today and Doon is about five, I think he is four months old. Doon is a little bit different than Rocket. Doon is a little bit more aggressive, and so, you known Rocket and Tim go together, [Phonetic] I got to get [Phonetic] aggressive Investor Relations guy now, so that's what it is.

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

Operator

[Operator Closing Remarks].

Duration: 78 minutes

Call participants:

Tim Reeves -- Director of Investor Relations

David N. Farr -- Chairman and Chief Executive Officer

Unidentified Speaker

Frank Dellaquila -- Senior Executive Vice President and Chief Financial Officer

Andrew Kaplowitz -- Citi -- Analyst

Steve Tusa -- JP Morgan -- Analyst

Jeff Sprague -- Vertical Research Partners -- Analyst

Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

John Inch -- Gordon Haskett -- Analyst

John Walsh -- Credit Suisse -- Analyst

Julian Mitchell -- Barclays -- Analyst

Robert McCarthy -- Stephens -- Analyst

Joe Ritchie -- Goldman Sachs -- Analyst

Andrew Obin -- Bank of America -- Analyst

Deepa Raghavan -- Wells Fargo Securities -- Analyst

Gautam Khanna -- Cowen & Company -- Analyst

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