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Emerson Electric Co. (EMR) Q1 2019 Earnings Conference Call Transcript

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Emerson Electric Co. (NYSE: EMR)
Q1 2019 Earnings Conference Call
Feb. 5, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Emerson First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing "*0". After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press "*1" on your telephone keypad. To withdraw your question, please press "*2". Please note this event is being recorded.

I would now like to turn the conference over to Tim Reeves. Please go ahead, sir.

Tim Reeves -- Director of Investor Relations

Thank you very much. I am 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 First Quarter 2019 Earnings Conference Call. Please follow along in the slide presentation, which is available on our website.

I'll start with the first quarter summary on Slide 3. Sales in the first quarter of $4.1 billion increased 9% with underlying sales of 4.5%. End markets remained strong for us globally, with the notable exception of our heating and air conditioning business in Asia. Commercial and Residential Solutions was down 1% underlying and was up 7% excluding the Climate Asia business. Automation Solutions was up 7%.

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Trailing three-month underlying orders remained in the 5% to 10% expected range through the quarter, with December up 7%. GAAP EPS was $0.74, up 21% and stronger than our guidance in November. First quarter cash flow was down versus prior year, impacted by accounts payable and accruals timing, which is expected to reverse in 2019. We repurchased $800 million of shares in the quarter, and through January, we completed our $1 billion repurchase target for the full year, acquiring more than 15.7 million shares.

Turning now to Slide 4, first quarter gross margin was up 20 basis points on higher sales and EBIT margin was up 110 basis points, including 60 basis points of dilution from the Aventics and Tools & Test acquisitions. Leverage on higher sales, lower incentive comps, and favorable other deductions drove strong EBIT margin performance. A tax rate of 20.9% benefited from several favorable discrete items in the quarter.

Turning now to Slide 5, the first quarter underlying sales growth was led by the Americas, where growth was strong across both Emerson platforms.

David Farr -- Chairman and Chief Executive Officer

And I would like to call out my Latin America team, who I've been pretty tough on the last three years relative to their negative growth. But I said to them, if you guys deliver 10%-plus growth this quarter and each quarter after, I'll call you out on the call. But, again, I want to thank all the Latin America team for making it happen and I look forward to seeing this continue at at least 10%-plus for the rest of this fiscal year. Thank you.

Tim Reeves -- Director of Investor Relations

Automation Solutions in Latin America was up double digits and Commercial and Residential Solutions up mid-single digits.

Europe growth was stable across both platforms and Q1 marked the third quarter of steady growth of Automation Solutions and the ninth quarter for Commercial and Residential Solutions steady growth in Europe.

Asia, Middle East, and Africa was down 2% due to the Asia Climate business, which was down more than 20% on slower heating and air conditioning markets.

Turning now to Slide 6, total segment margin was down 110 basis points and was down 50 basis points excluding the Aventics and Tools & Test acquisitions. Segment margin declined due to unfavorable price-cost impact at Commercial and Residential Solutions and certain timing items that impacted Automation Solutions. This was in line with our expectations and we continue to expect the 2019 segment leverage target of 30%, excluding the Aventics and Tools & Test acquisitions.

Capital expenditures were up as we made progress on previously announced facility expansions and upgrades in our Climate Technologies, Final Control, and Measurement and Analytical Instrumentation businesses in the U.S., China, and Southeast Asia. Trade working capital improved 10 basis points, driven by receivables and inventory performance.

Turning now to Slide 7 to talk about Automation Solutions, where sales were up 9% in the quarter and up 7% on an underlying basis. December trailing three-month underlying orders were up 12% and December backlog increased modestly versus September on strong December bookings and a successful enterprise system upgrade across the business that resulted in the planned loss of several shipping days, the impact of which was approximately one point of growth in the quarter.

Strong demand for MRO and Brownfield upgrade and expansion projects continue to drive growth. All world areas were positive and we continue to see favorable trends in capital formation for investments in LNG midstream infrastructure, as well as downstream capacity, as sovereign interests trend toward increased energy, chemical, and refining self-sufficiencies.

Segment margin was down 50 basis points and was up 10 basis points excluding the Aventics acquisition. This improvement was driven by leverage and favorable price-cost, offset mainly by the carryover impact of growth investments that were ramped up in the second half of 2018. These investments were to expand KOB1 project capacity and our global service organization capabilities. The incremental impact of these investments was approximately $20 million in the first quarter and will lessen as we go through the year and comparisons normalize.

In addition, the new revenue recognition rules reduced sales and profits in our software business by approximately $6 million, which we will recover in the year. This was the adoption of new revenue recognition accounting rules. For the full year, we continue to expect incremental margins of 30% excluding the Aventics acquisition.

Turning now to Slide 8, Commercial and Residential Solutions underlying sales were down 1% in the quarter. December trailing three-month underlying orders were down 2%. The decline in Commercial and Residential Solutions was driven by slower heating and air conditioning markets in China, a trend that began in mid-2018. Importantly, we see a path to return to growth in the second half of 2019, as comparisons ease and spending recovers in China.

Growth in the Americas was driven by strong demand in cold chain and residential air conditioning markets and solid momentum in professional tools markets. Margin decreased 150 basis points, excluding the Tools & Test acquisition, due mainly to unfavorable price-cost, which was in line with our expectations for the quarter.

We expect that the price-cost trend will reverse and provide a tailwind to margins in the second half of 2019. Over the past year, we have successfully implemented price increases behind strong material cost inflation and tariff headwinds. Going forward, we expect pricing actions to catch up and to outpace material inflation as cost pressures ease. For 2019, we continue to expect full year incremental margin of 30%, excluding the Tools & Test acquisition.

Let's turn now to Slide 9. Our 2019 guidance framework is updated to include the impact of recent acquisitions and provides our second quarter expectations. Underlying sales guidance remains unchanged and the net sales guidance is updated to reflect the impact of the A.E. Valves acquisition, which closed in December, and the GE Intelligent Platforms acquisition, which closed at the end of January.

The EPS guidance range has increased $0.05 for the first quarter tailwinds and includes $0.03 dilution from recent acquisitions, which mostly hits us in the second quarter. We expect the full year tax rate to be 24% to 25%. In the second quarter, we expect 6.5% underlying sales growth and EPS of $0.84, plus or minus $0.02. The EPS guidance builds in $0.02 of headwinds from recent acquisitions.

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

David Farr -- Chairman and Chief Executive Officer

Tim, thank you very much. I appreciate everyone joining us today and I also look forward to talking and meeting all of our key investors in New York City on February 14, 2019. If you have not signed up for the meeting, please do right away because we do have limited space where we're having the meeting in the New York Stock Exchange.

I also want to thank all of the global employees and especially our new acquisition members who are learning to work and play and plan month-to-month like we do within Emerson. These are great additions and I truly appreciate the support and effort they're putting forth, be it the Pentair Valves & Controls business, be it Aventics, be it the Textron, Greenlee Tool, and Klauke, now the A.E. Valves in Belgium and now our newest member, the GE Intelligent Platform in Virginia and Germany and worldwide. I will also be visiting you, GE people, I'll be visiting Charlottesville on March 1st to see what's going on and get an update firsthand.

So, if you look at Slide 10, the first thing you've got to know is Rocket got his first Emerson stock certificate last night. It was his fifth anniversary and so we issued a share and he got that. He was pretty excited about that, you can see, and unfortunately he's not very good with the crayon quite yet but we're still teaching him how to do that.

You can see from the orders, our order trend line is in line with what we've been talking about starting last year, this 5% to 10% range. Please keep in mind that we will bounce within this range, sometimes at the high end, sometimes the low end, and don't be surprised, like last year, we could touch bottom or even slip out for a month or so. It's the way orders go and lumpiness.

You'll also notice that the preliminary January numbers, which we are just getting in. I thank Frank and his team for pushing to get this information to us. But they're in line with the overall trend line, around the 7% range. Also, both Commercial and Residential has ticked up and moving up toward the positive line and Automation Solutions numbers stay at the elevated layer but still doing extremely well and trending very much like we thought when we talked to you in November.

You will remember I talked to you about a slowdown in China. I talked to you about slowdown in Asia Pacific. I talked to you about what we saw happening since June of 2018 and it's been baked into our schedule and we are starting to -- and we'll talk further about the upturn we're starting to see in Bob Sharp's business, in particular, around the climate technology business in China and Asia Pacific.

We went out, at Chart 11, earlier this month with information to counter misinformation based on the media's drive to drive a recession in North America. As you can see, our global orders in Automation Solutions have been trending quite strongly across broad base, and I'll have more to say about that, but I think you know what we saw in the last three months, plus 12% across all areas. I'm happy to tell you today, too, I heard Golden Pass is going to move forward, a big Exxon project with Qatar, and I understand it's a big part of Exxon's big expense here in North America of over $50 billion. And, clearly, we'll be participating in that program one way or another.

But, clearly, the orders are very good for us. They're consistent for us. The January order trend line is moving this way. I had made a comment when I was visiting investors in the month of December and early January that I would communicate a little bit differently in the first two months around what we're seeing, as I and my team are watching very, very closely what's going on in this marketplace. So far, we are seeing the trend lines we thought. We are not seeing any fundamental slowdown. We will discuss this in great detail at the presentations coming up on February 14th. I have expanded the presentations and the presenters so you can get a little bit different insight, not just listen to Dave Farr speak, which you guys have listened to for 20-plus years now, but give you some different insights. But, clearly, our world area orders are holding in very nicely.

Let's talk about Slide 12 and a different cycle. The cycle, as we see it right now, is slightly different from the last cycle, when the price of oil was running at $70.00 to $100.00 per barrel. You can see in the 2010-2014, major project awards -- very, very heavy upstream oil and gas investments, oil investments, in particular. Less in LNG, a little bit less in refining, less in chemical. As the price of oil went up, they really overinvested.

In this cycle, what we're seeing, as the price of oil is going to be bouncing between $45.00 and $70.00 per barrel, we see a different cycle. Our customer base is talking differently. They are being much more cautious. And you can see what we see at this point in time, as we look at the funnel laid out for the next couple of years, we're seeing a little bit less in the upstream oil, we're seeing more midstream, we're seeing a lot more LNG -- i.e., Golden Pass, i.e., the investment that was just announced up in Canada and Mozambique. There's a lot of investments coming down the road in LNG. We're seeing more in refining, which will be out further in this cycle. Not this year, per se, but probably 2021, '22. And we're seeing very good investment in chemical and life sciences.

We see a much more balanced play here for us, which is good for us from the standpoint of longer term order trends and also profitability. It is a different cycle than the last cycle and we'll talk more about that but my investors need to understand we do pay attention to cycles. We do understand cycles. And this one is a lot different and more favorable for us from, I'd say, a consistency standpoint and especially as we drive our KOB3 aftermarket business and try to stay above 50%, which we have seen for the last 12-18 months.

On Chart 13 is the trend line in Commercial and Residential Solutions orders. You can see that we saw this trend line dropping off in Asia. This is Asia, driven a lot by China. And we saw this starting to drop off in May and June of last year. We talked about it. We communicated it. Maybe people didn't believe it. There was a reason why we had a four on the low end of our underlying sales growth rate. We said it would be 4% to 7%. We're starting to see this trend line move up. You can see the star on the Commercial and Residential Asia number, see it trending upwards. You can also see the total Commercial and Residential getting very close to zero. China is the same way.

The issue for us as we look at the last four or five weeks, the week after week after week improvement, we're starting to see the improvement relative to orders coming out of China. Product is starting to sell through, the channel is being cleansed, and we're also starting to see government centers go in around the products that we sell and serve into that China marketplace. The government understands that they pulled back and they understand they probably went too far and they're now going to start investing in certain segments, which are good for us, especially around heating, cooling, and environmental areas. If you look at our core cold chain, if you look at our other businesses in China, they are still growing quite rapidly, and Bob will talk about that on February 14th.

But there is no guarantee but there is one thing about Emerson, as people have to understand -- we do track and this is not something that is surprising to us. We've been seeing this and we sense it's going to trend-line back up. Right now, we've entered right into the Chinese New Year so there will be a little less information coming out. But, clearly, what I see right now says I feel comfortable with the second half that we mapped out when we laid out our forecast in November for our shareholders.

If you look at Chart 14, this is Commercial and Residential Solutions, the price-cost expectations. As you know, as we go through the cycle, we got squeezed with higher material costs, our price-cost structure got out of kilter, it takes us time to get back in with our large customer base. We are now moving forward in the first half of this year. We still have not got the price-cost totally in line. It will be there by the second half of the year, as you can see on this chart, where the favorable price is now starting to help make up for the margin that we lost and absorbed and ate the cost structure over the last four or five quarters.

The first half of this year, in particular, the first quarter, we got hit, not only the down volume but also the deleverage impact of the higher material costs. Pricing is going in. It helps but not enough. From quarter to quarter, you're going to start seeing, as you look at first quarter to second quarter margins, you will start seeing the benefit of this improvement. So, incremental margins between first quarter and second quarter in Commercial and Residential will be positive, will be moving up 30%-plus. As you move into the second half, they will make up for what they lost in the first quarter. We feel very comfortable about this right now. We've been working very closely with our customers. This is a cycle we go through. We know how to manage this cycle and I feel very good about this.

The same thing can be said about Automation Solutions. When you look at the first quarter, our volume was slightly less than what we thought because of what Tim laid out relative to the new system that we put worldwide, relative to the new revenue recognition rules, relative to a couple of other things. However, when we come out of a fiscal year like 2018, where we have our highest sales in the third or fourth quarter, our costs are going in -- so, we're putting the costs in because of investments we see going forward in 2019 -- then you go into your lowest quarter, we have those investments that we made in the second half of 2018 that we have to absorb at a lower volume. Therefore, our margin gets hurt in the first quarter. It is normal. It is expected. And as we move into the second quarter and the third quarter and fourth quarter, Lal and his team will start delivering higher than 30% incremental margins to make up for the higher cost structure that was built in.

Key point -- if volumes or businesses start weakening, we obviously clearly have to take action because our volume is based on what we're laying out here, based on the orders, based on everything we're seeing at this point in time. So, either Bob's business or Lal's business, if the volumes don't recover, then we will start taking actions from the cost line. We do not see that. The market is unfolding exactly as we thought it would in the first couple months in the quarter and we feel very good about that.

If you look at Slide 15, again, I want to welcome the newest members of Emerson, the GE Intelligent Platform acquisition. It clearly is going to add about $125 million in sales this year. With the accounting impact and investments we're making, we're going to be hurt about $0.03 EPS. With the price-cost resetting of our performance shares and long-term compensation plan, with a dramatic drop-off in the first quarter of the stock price, we've clearly had a benefit in the first quarter and it's helped us for the whole year, which helps us offset this dilution. So, we raised our EPS guidance for the year.

And, by the way, folks, this is nothing new. Last year, in the first quarter, we had a hit of $40 million on P shares. We have a variable, long-term, performance-based plan in stock and it's based on variable targets. If the growth rates go up, our targets go up. If the growth rates go down, our targets go down. So, every quarter, we're marking the market. We're a little bit different. I firmly believe that you have to have some adjustment to what the markets are doing, both up or down, and therefore we mark-to-market every quarter. This is just an extraordinary quarter. The stock price dropped from $79.00 to the low $50.00s and we got hit pretty hard from that point. But the benefit side is we picked up, obviously, the P&L, which is a true P&L which we allow to flow through net of EPS impact of the acquisitions.

Mike and his team -- Mike Train and also those guys are working very hard with the new acquisition here. We'll be talking to you. Mike Train will be giving a specific presentation in New York on February 14th of what our initial expectations are with GE joining our Systems and Solutions business. This is unique technology and a capability that we're really welcoming in and we're looking forward to building out and installing over the next three, four, five years. This is not going to be a one-year move. It's going to be a multiple year move. So, I'm very excited about it.

So, again, I want to step back and say the quarter is on line with what we expected. It came in a little bit different when you look at the pieces. You look at the whole year, we still feel very comfortable with our year, both on the sales growth, profitability standpoint. Clearly, the order pace is there. From the Commercial and Residential Space, it's starting to turn up. North America was strong. It's primarily China, Asia, and the Middle East that was weak. And Automation Solutions is very strong around the world, which is a good thing to see at this point in time.

So, with that, I'll open up the mic to take some questions, Q&A from our participants. Thank you very much, everybody.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. To ask a question, you may press "*1" on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press "*2". At this time, we will pause momentarily to assemble our roster.

David Farr -- Chairman and Chief Executive Officer

Who's our leadoff hitter here? Leadoff hitter. Who's No. 1?

Operator

The leadoff is Deane Dray with RBC Capital Markets. Please go ahead.

David Farr -- Chairman and Chief Executive Officer

Man, he's batting .250. Okay, Deane. Leadoff hitter.

Deane Dray -- RBC Capital Markets -- Analyst

Good afternoon. Check my batting average. I'm much better than that, Dave.

David Farr -- Chairman and Chief Executive Officer

Are you a .300 hitter now?

Deane Dray -- RBC Capital Markets -- Analyst

We all aspire. But that does mean, .300, you failed twice out of three times. So, that's not such a good thing.

David Farr -- Chairman and Chief Executive Officer

I'm about a .100 hitter then. Okay. Deane, it's good to talk to you, my friend. What do you have on your mind?

Deane Dray -- RBC Capital Markets -- Analyst

Dave, I don't recall a time ever where you've broken in to Tim's script to interrupt in a shout out.

David Farr -- Chairman and Chief Executive Officer

Well, you have to understand that I was pretty upset with my Latin America team. They know that. I called them dead cats. And for three straight years, down orders and sales. And so I said if you have a bounce this quarter, I'll let you have it and I gave it to them. So, it is unique, Deane. You're right.

Deane Dray -- RBC Capital Markets -- Analyst

That's about as big a shout out as I've seen you do, so those guys hopefully appreciate that. Hey, just on the first question, hopefully you can expand on the comments on the oil cycle and why it's different. And you said specifically you'd see less upstream activity and here we are in a quarter where you are seeing some strong upstream. Do you think that fades? Maybe just clarify the point about seeing less.

David Farr -- Chairman and Chief Executive Officer

You know what? I think it's going to be more balanced. I think what happened last cycle, Deane, is the oil companies felt very compelled to really go out and get more reserves when the oil price was hitting at $90.00 to $100.00 and there was this huge surge of spending that was overwhelming the industry and obviously overwhelmed us. Our orders and sales in oil and gas got up to well over 40% in that cycle. So, I think they're being more careful about this.

And also they're investing much more in gas. There's a shift going on relative to energy use in the marketplace from pure oil to more gas. And I think that what's happening is there's more of a balanced approach here. And, to be honest, I think the investors were very intent on our oil company CEOs about, hey, guys, be more careful. And I think that we still see a good level of investments but my look at it right now, it's going to be spread out over multiple, multiple years.

And I see that initial wave -- we're going to talk a little bit about this in New York -- is a lot more investments coming on the LNG side at this point in time. So, it's still going to be a good number if you look at the total but it's going to be spread out and oil companies are going to take smaller bites. I mean, I'll give you an example. In our first quarter, our largest KOB1 order was $9 million. That's it. First quarter. We're still looking at smaller bites of apples, a lot of KOB3, KOB2. The KOB1 are starting to be built out and booked but they're being more cautious, which I like. I really do like that.

Deane Dray -- RBC Capital Markets -- Analyst

Great. And just as a follow-up, we've got the State of the Union tonight. Maybe just refresh us on the current, as you see it, impact from tariffs, anything on the shutdown, and hopefully we can contain it to that.

David Farr -- Chairman and Chief Executive Officer

Relative to the shutdown, there's very little impact to us relative -- maybe to some of our customers, but there's not really anything significant relative to shutdowns. I don't like shutdowns but it really wasn't any impact at all from our perspective.

On the tariffs side, it's very well-contained. The president has made it very clear the way he lays them out and so as he telegraphed them back in '17 and '18, we got ourselves positioned relative to costs, relative to backups. We have continued to work that issue. I firmly believe we will not see another significant increase in tariffs. We might see a little bit here and there. But we're getting ready for it in case something does happen. But the impact of tariffs right now is well-contained in our pricing actions, both on the Automation side and the Commercial and Residential side. And so I feel that we have that pretty well set for 2019 at this point in time. And hopefully nothing new will come up out of the woodwork, as you said, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Yes. Great. See you on the 14th.

David Farr -- Chairman and Chief Executive Officer

Thank you very much. I'm glad you hit opening. Who's gonna get cleanup here? I don't know.

Operator

Our next question comes from Gautam Khanna with Cowen. Please go ahead.

David Farr -- Chairman and Chief Executive Officer

This guy's a .225 hitter, for sure. I've got the Stan Musial bat in here and I don't even think you can swing it. I don't think you're strong enough to swing it.

Gautam Khanna -- Cowen -- Analyst

No, I'm not quite ready for baseball season. I'm still reveling in the glow of the Patriots' sixth championship.

David Farr -- Chairman and Chief Executive Officer

That was a good win. I enjoyed that. You know, I'm not too big on the St. Louis Rams -- I'm sorry, L.A. Rams.

Gautam Khanna -- Cowen -- Analyst

Who can blame you?

David Farr -- Chairman and Chief Executive Officer

Okay, Gautam, what can I do for you, my friend?

Gautam Khanna -- Cowen -- Analyst

Yeah. So, just to expand on the project pipeline, obviously, the market swooned pretty dramatically, like you mentioned, in the December quarter. It looked like people were very worried about the macros. But I did want to just get a sense for has anything slipped in your project pipeline of note? Is there any trend to discern on things that might actually be at risk that you are seeing delays on or is it steady as she goes?

David Farr -- Chairman and Chief Executive Officer

Right now, the project is steady as you go. What we need to watch -- and that's why I'm communicating a little bit deeper and broader. I mean, I'm not going to give as much detail next time we communicate relative to the list that we did this time, as you know, Gautam. But I'm watching a lot on KOB3 right now. That's what will be the sign from us. It's not going to be KOB2 or KOB1, it's going to be KOB3 initially. Projects will move forward. We'll do the work, we'll make awards, we'll do all the feed work, and everything like that. And then that will come down the pike. We should start seeing some significant project bookings this quarter and the third quarter and the fourth quarter, well into 2021.

We're going to lay out a couple of charts for you because of those very questions in the meeting on the 14th, which we see, based by world area, where the major projects are going to flow. Because it's very difficult, in going back to what Deane said earlier, it's a different cycle and we want to lay out, by industry, what we see, at this point in time, when these projects will be flowing. It's going to be much later in 2019 and early 2021. You'll see this by both the systems and the controls.

And so we haven't seen anything pushed yet but I'm watching KOB3. If the CEOs are going to make the decisions, my customer base are going to make the decisions relative to spending -- let's say they're going to spend $10 billion for the whole year. Normally, they would spend maybe $2 billion in the first quarter and sequentially spend a little bit more. Are they going to tap that $2 billion down a little bit to make sure things are OK?

So, that's what we're watching right now. Because our KOB3, as you know, has been running quite strongly. It's what our pace is right now. And I want to make sure that that's where the first sign is and we haven't seen it yet. And we're going to keep watching it and we'll keep communicating when we put orders out and talking to investors so we'll get a feel for it. But that's where you're going to see it first. Okay?

Gautam Khanna -- Cowen -- Analyst

That sounds good. And just a quick follow-up on capital allocation. You've already done $1 billion of buybacks. What should we earmark for the year?

David Farr -- Chairman and Chief Executive Officer

$1 billion. When we laid out our financial plan last year, we laid out, for a three-year plan, $1 billion, $1 billion, $1 billion. We laid out "x" dollars for acquisitions. And until we see the "x" dollars for acquisitions, which we'll talk about when we're in New York, we're not going to make any changes. Frank and I talked to the finance committee and the board today about this very issue -- that we're staying pat at $1 billion, assuming there's no dramatic drop off in the marketplace. Now, if there's a dramatic drop off, I would reopen that subject very quickly with my finance committee. But right now, assuming no dramatic drop off, we're going to hold to $1 billion. We're going to reevaluate our acquisitions that we do here in 2019. And if we see something changing, i.e., up or down, then we'll adjust our capital allocation based on that. But I try not to adjust my capital allocation too rapidly, maybe typically looking at it every 12 or 18 months. So, that's where we sit at this point in time, Gautam.

Gautam Khanna -- Cowen -- Analyst

Thank you. I'll work on the batting average.

David Farr -- Chairman and Chief Executive Officer

Good luck. All the best to you.

Gautam Khanna -- Cowen -- Analyst

Thank you.

Operator

Next is Scott Davis with Melius Research. Please go ahead, Scott.

David Farr -- Chairman and Chief Executive Officer

Here's a .310 hitter.

Scott Davis -- Melius Research -- Analyst

Good morning. Or afternoon, I should say. I'm having a cup of coffee so it feels like morning.

David Farr -- Chairman and Chief Executive Officer

You're Carl Yastrzemski. Aren't you Carl Yastrzemski?

Scott Davis -- Melius Research -- Analyst

Not sure I could carry his bat bag but nonetheless. It's been almost two years, Dave, since you did the Pentair valve deal. I think you did it around April of 2017, if memory serves me right.

David Farr -- Chairman and Chief Executive Officer

You're right on the mark. Exactly right.

Scott Davis -- Melius Research -- Analyst

Okay. And I think business conditions were still pretty tough for a couple of quarters after you closed that but do you think -- are you back kind of on the deal model or ahead of the deal model or behind? I mean, what's kind of the state of the union on that deal?

David Farr -- Chairman and Chief Executive Officer

I'm going to ask Ram to update you guys. Ram's going to present. He's going to present and part of his presentation will, just briefly, be on that because it's important. It's a big acquisition for us. From my perspective, we are ahead of the plan relative to sales, profits, and cash. Ram and his team have done a phenomenal job. The market, clearly, has turned our way. We are in a period right now, which Ram will talk about, we're making significant capital investments in that company relative to globalizing its manufacturing base. So, manufacturing in the U.S., better manufacturing in China, better manufacturing in India, better manufacturing in Eastern Europe, better manufacturing in the Middle East.

And the issue is we're trying -- as you know, we have a much more global manufacturing strategy than PNC did and they were more worried about tax planning. So, we're ahead of that. And if the orders keep holding up, which they are right now, I feel very good about this acquisition and the impact we're seeing relative to our final control business.

Scott Davis -- Melius Research -- Analyst

Okay. That's good news. And then just to follow up, I don't know -- I'm looking at Chart 13, where you've got the Commercial and Residential Asia quarters. I don't remember seeing that.

David Farr -- Chairman and Chief Executive Officer

You don't want to look at Chart 10 with Rocket? What's wrong with you, Scott? You have no sense of humor, Scott. That's your problem.

Scott Davis -- Melius Research -- Analyst

No, that's one of my many problems, Dave.

David Farr -- Chairman and Chief Executive Officer

Okay. Got you. Talk to me about Chart 13.

Scott Davis -- Melius Research -- Analyst

I mean, you know this business a lot better than we do. If you go back long history, are these huge order swings -- early 2018, way up, now way down -- I mean, are they almost -- is it more of just massive inventory swings in the channel that the customers just aren't as evolved as the Western guys and make a lot of motional inventory decisions? Or is there really that much of a sell-through delta?

David Farr -- Chairman and Chief Executive Officer

No. What happens is -- you're exactly right. We have these swings. We've always had these swings on this side of the business. The Automation Solutions cycle in China is typically more up for a long time and then drifts back down. This business, as you well know, went basically seven quarters of 20%-plus growth.

Now, what happens is the government incentivizes changes relative to efficiencies, changes relative to environmental issues, and the government makes major investments and incentives into the country for the consumer and the industrial workforce or the industrial customers. And then all of a sudden, the government makes a decision to stop. And so what happens is the channel is stuffed, because they see it coming and see it coming, and then, all of a sudden, what happens is that backlogs and it gets purged. The difference between U.S. and China is our U.S. government does not put the incentives out there to cause this. Yes, our channel is probably more disciplined but right now the channel is being worked off, plants have been pushed back, and what we're doing is we're optimizing our facilities right now for the next wave. And the next wave will start coming as we move out of this fiscal year, going into the second half of the year.

So, it's a pretty normal situation. I can't always tell which quarter it's going to happen but we know it always does. But this one was pretty clear. We could start to see it in May and June. We started hearing the government's backing off. The discussions between our two governments obviously created a little bit more of a tension there too. So, I think that's where we are at this point in time. But the channel is starting to shrink its inventory and the orders are starting to come as they start building out. So, I think the cycle has started. I can't guarantee anybody that but, as you said, we've been in the business a long time. We're marking our 40th year in China this year. So, I feel good that the cycle is just starting to pick back up. I don't see it going to 20%-plus, though. I think until the government really motivates it, I don't see it going that high again.

Scott Davis -- Melius Research -- Analyst

Okay. That's great color. Good luck, Dave. See you in New York.

David Farr -- Chairman and Chief Executive Officer

Thanks.

Operator

The next question will be from John Walsh with Credit Suisse. Please go ahead.

David Farr -- Chairman and Chief Executive Officer

The cleanup hitter.

John Walsh -- Credit Suisse -- Analyst

Yeah. Hi, how are you? Good afternoon.

David Farr -- Chairman and Chief Executive Officer

Do you play baseball, John? Do you play baseball? Did you play baseball?

John Walsh -- Credit Suisse -- Analyst

I have not in quite some time. I played rugby so a little different game.

David Farr -- Chairman and Chief Executive Officer

We cannot charge the pitcher, OK? John, good seeing you. What can I do for you?

John Walsh -- Credit Suisse -- Analyst

Yeah. So, I guess a question here around free cash flow and just the timing of when you get back the accounts payable and the accruals and just to kind of set expectations on the conversion ratios going forward here.

David Farr -- Chairman and Chief Executive Officer

From our perspective, I think it's going to be more in the second half. We'll start getting a little better improvement in the second quarter. Typically, if we have a slow start, we have to work our way through it. Frank and I, we've analyzed the heck out of this thing. Frank and I have our neck out with the board and with our investors at $3.2 billion. And the fact that we want to get to 2.5. Free cash flow this year is a very important number for us and we'll talk about it. So, I feel very good that we'll get back but I think it's going to be more in the third quarter, fourth quarter, when we start seeing it. It's going to be one of these years that I think we're going to be more rear end-loaded than we were historically. Sometimes, we're more front end-loaded. But that's where we are.

The one thing different this year, because capital took a while -- just like spending last year took a while to get ramped up into the third and fourth quarter -- capital is the same way. So, capital got ramped up in the second half and we have a strong investment profile in the first half. So, our capital is going to be more front end-loaded this year than it was last year. So, I think it's going to be more third quarter, to be honest, before I start seeing it catch up. That's where I am right now.

John Walsh -- Credit Suisse -- Analyst

Okay. Great. And then I guess just maybe another question around capital allocation. Can you give us some flavor around how the deal funnel looks, just in terms of size of the acquisitions that you'd be looking at?

David Farr -- Chairman and Chief Executive Officer

In 2019, we're looking at around $500 million of acquisitions. And right now, our funnel would say that's about what we're going to be doing. We are working, courting, and developing acquisitions for the $1 billion level and $2 billion level, $3 billion level in 2020, '21, and combined together. Those are definitely not maturing as fast as we want them. But then again, we just went through a lot of acquisitions the last two and a half years and we're trying to digest that. So, right now, it looks like $500 million this year. Maybe $400 million. Next year, maybe $1 billion, $1.2 billion. And the year after that, around the $2 billion range, based on what we're seeing in activity that we're engaging. And I just think the funnel has slowed down at this point in time. And not unusual and I expect that to start increasing as we get back into late 2019, early 2020.

Going back to my previous comment, that Frank and I talked to the finance committee this morning, is we look out and we're sitting in 2020 and we see the funnel's still not forming enough in this $1 billion or $2 billion that we're talking about, then we're going to have to revisit that capital allocation. But we'll do that at the appropriate time.

John Walsh -- Credit Suisse -- Analyst

Great. Thank you. See you in a couple of weeks.

David Farr -- Chairman and Chief Executive Officer

See you. Thank you very much, John.

Operator

The next question comes from Nicole DeBlase with Deutsche Bank. Please go ahead.

Nicole DeBlase -- Deutsche Bank -- Analyst

Yeah. Hi, Dave. Good afternoon.

David Farr -- Chairman and Chief Executive Officer

Good afternoon, Nicole.

Nicole DeBlase -- Deutsche Bank -- Analyst

No baseball jokes for me, huh?

David Farr -- Chairman and Chief Executive Officer

I was trying to think. I'm trying to think. Yeah, you could be -- I'm trying to think. We need a second baseman, .225, .250.

Nicole DeBlase -- Deutsche Bank -- Analyst

No, that's OK. I played softball when I was 6 and that was the last time I've played sports.

David Farr -- Chairman and Chief Executive Officer

Six. You'll fill in perfectly over at second base. I'm catching. I can't throw to second base anymore. My arm's gone bad so you'll have to get it on three bounces.

Nicole DeBlase -- Deutsche Bank -- Analyst

I like it. So, I guess on to business. On the Q2 outlook, when we look at the acceleration to 6.5% versus what you saw in the first quarter, I guess just the level of confidence around that and the expectation for each segment.

David Farr -- Chairman and Chief Executive Officer

I feel pretty good about the 6% to 6.5%. The big issue is going to boil down to -- historically, we look at it from, sequentially, somewhere around $250 million to $300 million sequentially. We're looking from first quarter to second quarter. We are looking at a $500 million sequential, primarily because of the improvement we're seeing in Commercial and Residential and primary climate technology. So, therefore, that's going to be something that we're staying very close to and we must stay communicating to our shareholders on because the cycle is a little bit different from Bob Sharp's business. And I feel comfortable right now based on what I'm seeing. And the key issue for me is does Bob's sequential orders coming from China and Asia Pacific continue to hold up as they're starting to build. And if they do, then I feel good that we'll make that in the second quarter.

From the backlog and the order pace that we see right now in Automation Solutions, I feel very, very comfortable with that one. The wild card for me is one you want to ask Bob in New York when he's there, the one you're going to keep asking us, as you talk to Tim, is are we seeing the China/Asia Pacific orders come that firm up for us, that gives us a little bit higher delta from the first to the second quarter. That's the key issue for us right now.

Nicole DeBlase -- Deutsche Bank -- Analyst

Okay. Thanks, Dave. And as a follow-up, you talked about how this cycle is different within AS. I guess, what does that mean for margin mix? If we look over the next several years, does it mean that the typical margin headwind that you guys see from large projects coming into the mix isn't as bad as you've seen in cycles before?

David Farr -- Chairman and Chief Executive Officer

I think what it means is the large cycle -- the projects will start hurting our margins but they'll take a while to hit. They might take a little longer. They might be spread out. Based on what I'm seeing right now, it means that, as you get into the 2020-2021 time period, if the projects fall out, I think the impact on that negative margin will be less and less. It won't be as dramatic as we saw historically. The key issue for us right now is the mix and where things happen in which industries. If the KOB3 stays up, which is our drive -- we want to get that to stay above 50% -- that helps us. And we're making investments to do that. So, what it tells me is that our margin progression, excluding the acquisitions, should be a little bit easier this time than it was back in the last cycle. That's what I see right now.

Nicole DeBlase -- Deutsche Bank -- Analyst

Thanks, Dave. See you next week.

David Farr -- Chairman and Chief Executive Officer

Okay. See you, Nicole.

Operator

The next question comes from Steve Tusa with J.P. Morgan. Please go ahead.

David Farr -- Chairman and Chief Executive Officer

He's a golfer. You can't use your 9 iron on the baseball team, Tusa. No 9 irons on the baseball team.

Steve Tusa -- J.P. Morgan -- Analyst

I'm just worried about Rocket. He got stuffed with some stock a buck higher and it wasn't even really his choice. So, he's already down on his trade.

David Farr -- Chairman and Chief Executive Officer

Well, don't do that my boy. My son is already mad about this. You've got to understand, his basis is zero. He got it from dad. What the heck, you know?

Steve Tusa -- J.P. Morgan -- Analyst

Put out some good orders, give Rocket some stock, and then stock is down on the print. It's tough. Tough day for rocket.

David Farr -- Chairman and Chief Executive Officer

Wow. Tusa. Tusa, I may not let you on my team on that one. Man, that's a low blow.

Steve Tusa -- J.P. Morgan -- Analyst

That's all right. You've got plenty of players

David Farr -- Chairman and Chief Executive Officer

I can't wait until Rocket raises his leg on you, man.

Steve Tusa -- J.P. Morgan -- Analyst

You've got plenty of players on here. Hey, just a question on the price-cost stuff. I know last quarter, you talked about $125 million or something like that, I think you mentioned, of headwinds from tariffs and stuff. But this chart suggests that it is not quite as bad as that. Maybe I'm comparing apples and oranges. And then am I right, as far as the price is concerned, and how that phases in, given you guys are a little bit more into the component kind of supply chain that you have to generally kind of wait for the right time to go to the OEMs with your kind of annual price increases, as opposed to the OEMs who can kind of get paid whenever they want to their distribution channel?

David Farr -- Chairman and Chief Executive Officer

There are a couple things there. One, we've already worked with the OEMs so the price is built in for the year along this line here. The $125 million number for the total company is still a good number, Steve. That has not changed. This is one piece of it.

Steve Tusa -- J.P. Morgan -- Analyst

Okay, got it.

David Farr -- Chairman and Chief Executive Officer

This is Section 301. And so I think what we've laid out across the board is pretty consistent and we have the $125 million match. I think that, all said and done, as the year unfolds, our price-cost numbers will be neutral to slightly green, not much different. But everything is pretty well laid out and has been discussed. The channel, which, obviously, with AS, Automation Solutions business, we've got that laid out. And then Commercial and Residential, they did the heavy lifting late last year with their OEMs and got that built in. And you're right. We have to plan out with our OEMs over multiple quarters but we've been doing this for a long time. The same thing will happen if the cost goes the other way. We'll have to plan that back out too. So, I think we're in pretty good shape. I feel good about that right now, Steve.

Steve Tusa -- J.P. Morgan -- Analyst

Okay. That makes sense. And then just -- so, this basically all means, when you look at kind of the comps on acquisition-related charges, your fourth quarter comp on margins, when you think about price-cost and the deals you've kind of done here, I mean, that should really kind of unmask a really positive trend line into kind of 2020. Correct?

David Farr -- Chairman and Chief Executive Officer

That's the game plan. That's exactly right. Our fourth quarter, based on what we're laying out right now, assuming our order patterns happen the way we want to happen, we should go into 2020 in a good pace. Exactly right.

Steve Tusa -- J.P. Morgan -- Analyst

Okay. Great. Thanks a lot.

David Farr -- Chairman and Chief Executive Officer

Thank you very much, Steve. I'll see you next week. And you can definitely join my baseball team. Just don't bring your 9 iron.

Steve Tusa -- J.P. Morgan -- Analyst

Thanks.

Operator

The next question is from Josh Pokrzywinski with Morgan Stanley. Please go ahead.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Good afternoon, guys.

David Farr -- Chairman and Chief Executive Officer

Good afternoon, Josh. What position do you want to play? You want to play left field?

Josh Pokrzywinski -- Morgan Stanley -- Analyst

I'm just here for the hot dog race and maybe Dave Farr Commemorative Bobble Head Night.

David Farr -- Chairman and Chief Executive Officer

That's a hell of an idea. We might do that at the conference.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

It's not too late.

David Farr -- Chairman and Chief Executive Officer

That is good. Josh, you got me on that one, man. Okay, what question do you have, Josh?

Josh Pokrzywinski -- Morgan Stanley -- Analyst

So, the first question on the project funnel --

David Farr -- Chairman and Chief Executive Officer

I can't believe he accused me of giving my dog a high basis stock. Run the stock up, give my dog stock at a high price, and then trash it. I mean, that is a low blow.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Can't help you there. On the project funnel, you defined a couple quarters ago, I think we stood at $6.8 billion the last time you showed us the number. Maybe this will wait until the analyst meeting but a lot of what you're talking about with KOB3 sounds like it wouldn't really fill the funnel in with a large number of dots, maybe more dollars. But any way you could size where that stands today or if there's been any pause in that funnel?

David Farr -- Chairman and Chief Executive Officer

Yeah, I can. And we are going to give you a lot of details. I've been trying to figure out ways to communicate the phasing of the funnels. And as you well know, none of our competitors do this. But I think it's important for people to understand just how we look at it. So, the number is over $7 billion right now. Tim, what is the number?

Tim Reeves -- Director of Investor Relations

$7.6 billion.

David Farr -- Chairman and Chief Executive Officer

$7.6 billion. And what we're going to show you is how this unfolds the next two, three years and how it goes by first half/second half. We're trying to phase that by industry and by world area. It's something -- I'm trying to help you all and help myself so I can communicate to you on a consistent basis. As you well know, it's an assumption based on what we're seeing but we've been in this business a long time. So, I think we're coming up with better ways and we're going to try to lay that out for you on February 14th. So, be prepared for a lot of bubbles and be prepared for a lot of charts and numbers like that by industry. And you may want to bring someone to write down faster with you because I guarantee I won't be giving this chart out. And right now, I think there's only one page with any information on it. It's going to be a page with Rocket's picture and the rest is going to be blank. So, I think this is a Dave Farr approach. You know that.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Of course. And then just shifting over to some of the M&A you've done lately. Obviously, trying to build out a discrete platform. You made that very clear last year with what the progress should look like. But I just want to be clear as we lap these acquisitions, I would imagine reengaging with some of these customers that maybe you guys did business with when you still owned the Drives brand businesses requires a bit of investment to kind of rebuild in that channel, reinvest in the product. Should we expect that to still be in investment mode as we head into next year, even as we kind of lap some of the accounting components of the M&A?

David Farr -- Chairman and Chief Executive Officer

Yeah. We're going to have Mike put out some preliminary discussion along this line. We see the GE acquisition -- GE made some good technology investment in this acquisition. From a technology standpoint, it's pretty good. We've got to make some critical investments relative to not only a stand-alone PLC control or intelligent control, we also are going to have to figure out how to embed that relative to our Ovations platform in the power and water and our Delta B within the process side. And then what we need to do is bill work and the channel work.

So, we're going to be in a good investment mode here for the next couple of years. It's not going to be a huge number to overwhelm it but this acquisition is more from a standpoint of a technology product and channel, and we're going to have to create a hybrid approach to this channel, not to absorb it all within a process channel or all within a power channel. As you said, we've got to keep that discrete channel out there and rebuild that channel. So, Mike is going to be talking about what we're seeing from an investment mode in the initial stages. But this is something that we'll unfold with you all over the next couple of years because this is all about investment and rebuilding a presence for us to grow out of going forward for the next three, four, or five years, well beyond the Dave Farr era.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. Thanks, Dave.

David Farr -- Chairman and Chief Executive Officer

Thank you very much.

Operator

The next question comes from Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe -- Wolfe Research -- Analyst

Hey, Dave.

David Farr -- Chairman and Chief Executive Officer

Hello, Nigel. How are you doing? We're looking for a catcher with an arm. My arm is gone. I'm old. And my knees are gone, my arm's gone, so can you catch?

Nigel Coe -- Wolfe Research -- Analyst

I can catch. I can catch something but I can't catch too many balls these days.

David Farr -- Chairman and Chief Executive Officer

I don't want you catching the flu or anything. I don't want the flu.

Nigel Coe -- Wolfe Research -- Analyst

I can definitely catch that. So, Dave, thanks for the incremental color here on the slides. It's really helpful. You mentioned LNG a number of times and you talked about LNG being a bigger mix going forward that it's been in the past. Would you agree that LNG is probably your biggest growth opportunity in Automation? And would you also agree that you haven't seen much of that growth yet? So, therefore, it's all to come?

David Farr -- Chairman and Chief Executive Officer

Yes. I think it is, incrementally, for the next couple of years, it is our biggest growth opportunity. And we're going to talk about that on the 14th. And, yes, the projects are just starting to unfold. There's three that have been announced already. The one in Canada, one in Mozambique. We've got the project down south here and Golden Pass, which is basically -- formally, it has said it's going to be funded by Qatar and ExxonMobil today. We know of at least three more coming down the pike. Saudi Aramco wants to make huge investments in gas.

And so we see a good wave relative to gas. And what we like about gas, you'll see the makeup in gas, it's a very broad portfolio of our products. So, when a project goes in, it's a huge project. We could get several hundred million dollars of systems, instrumentation, control, software on an ongoing basis for a long, long time. And so it is something that is really good for us relative to the long haul and something we built out over the years from an acquisition standpoint. So, I like what we see and I think we're going to have a good run at it here.

Nigel Coe -- Wolfe Research -- Analyst

And then I'll ask you -- addressing Nicole's question in a different way -- if we're going to have less upstream, less ENP type projects going forward, more LNG, more refining, more chem, what does that do to the nature of the project in terms of dollar size, in terms of Emerson content? Any appreciable margin mix? Things we should think about there?

David Farr -- Chairman and Chief Executive Officer

We're still doing some work in the market. My opinion on the project size, we're going to be smaller overall, when you look at them all, Nigel. And that's something we're trying to size. We're still working that issue. Tim and I have been pushing our people to try to come up with that because that's a very relevant question on this cycle. So, therefore, I like the project size being smaller because it means it's less volatile from the big chunks that you get in the business and the orders we saw last cycle. If it's going to be heavy LNG, it's going to be heavier chemical, a little bit of refining, that's a better long-term margin profile for me and we're just working our way through that right now. But it should be a better margin profile based on the big, big, heavy oil type of projects. But that's something we're working on. And I want to have something to show you guys and gals on February 14th on that very, very question because it's a very relevant question.

Nigel Coe -- Wolfe Research -- Analyst

Okay, Dave. See you next week.

David Farr -- Chairman and Chief Executive Officer

See you next week, Nigel. You're in catcher. Don't bring that cricket bat with you, though.

Nigel Coe -- Wolfe Research -- Analyst

Thanks, Dave.

Operator

The next question is from John Inch of Gordon Haskett. Please go ahead.

David Farr -- Chairman and Chief Executive Officer

Hi, John.

John Inch -- Gordon Haskett -- Analyst

Good afternoon, Dave.

David Farr -- Chairman and Chief Executive Officer

I know you're a baseball player.

John Inch -- Gordon Haskett -- Analyst

Well, we play hockey in Canada.

David Farr -- Chairman and Chief Executive Officer

Oh.

John Inch -- Gordon Haskett -- Analyst

Sorry to deflate the balloon.

David Farr -- Chairman and Chief Executive Officer

Well, I was up in Canada last week and you'll be happy to know I've got an Edmonton Oilers jersey right here in my conference room. It's No. 19. Was a very good hockey player. And, unfortunately, the last name says Farr and I don't play hockey. But I had to wear that when I talked to a sales organization up in Canada last week.

John Inch -- Gordon Haskett -- Analyst

Dave, you're never too old to learn, you know what I mean.

David Farr -- Chairman and Chief Executive Officer

My knees are too freaking old, John.

John Inch -- Gordon Haskett -- Analyst

You seem to be doing pretty well from my vantage point.

David Farr -- Chairman and Chief Executive Officer

Okay. What can I do for you, my friend?

John Inch -- Gordon Haskett -- Analyst

Yeah. So, ANS, are you still signed up for the 19% margins with the deals you've done? I think as you've been talking about it, it's 2021. Does that still feel about right?

David Farr -- Chairman and Chief Executive Officer

We're going to push hard to get to it. Right now, if I can be very truthful to you here, probably a tad less than 19% by 2021 with some of the deals. GE doesn't help me because the GE margin is not plus. But our target is still to get to that 19% and that's what we're trying to drive -- this whole mix base that we were just talking from the last question coming out of Nigel. But that's still our goal. I still feel good that we can get real close to it and so that's where we are at this time.

John Inch -- Gordon Haskett -- Analyst

And then to get to the CNRS guide, it looks like margins in the back half maybe have to exceed the back half 2018 margins. Does that seem reasonable based on the flip you're going to see with respect to price-cost?

David Farr -- Chairman and Chief Executive Officer

Yeah. These guys are quickly looking at it and Frank says yes. Tim says yes.

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

We're going to have to ramp in the second half.

David Farr -- Chairman and Chief Executive Officer

And the answer is yes.

John Inch -- Gordon Haskett -- Analyst

All right. So, that's reasonable. And then this is maybe a question for Frank --

David Farr -- Chairman and Chief Executive Officer

For all the people out there, you guys have got to deliver that margin in the second half on the Emerson team. I just want to remind the guys that are listening to this call. Deliver.

John Inch -- Gordon Haskett -- Analyst

They heard it. One more question for Frank. I'm trying to put the $63 million of corporate swing into context. Is this an accrual adjustment for the entire year that flows through the first quarter or fiscal quarter? And what actually happens, for instance, if the stock were to shift or swing up or down, I don't know, $10.00 to $15.00? If it went up, for instance, do you have to, all of a sudden, record a big double sort of expense on the corporate line? Or how does that work?

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

Because we have a plan where the target is variable, we have to mark-to-market every quarter. As Dave said, we've had big marks in the past but this one is unusually big because of the stock price move in the first quarter. So, essentially, all of that was due to the incentive comp, about $60-odd million of it was due to incentive comp. And we've already given some of it back and we will give some of it back in the second quarter if we stay near these levels. And as the price goes up, we will then again have to run some of that through the P&L. So, it really depends on what you assume about the stock price but, in any reasonable assumption, we'll give some of it back but there will be probably a significant part of this that will flow through the year.

David Farr -- Chairman and Chief Executive Officer

Yeah, John, what we do is we look at a model based on trend lines and we typically have the stock going up in each quarter. And so what happens, what we built into the quarter, we thought the stock would -- I mean, we didn't think the stock was going to stay at $79.00 but we didn't think it was going to go to $56.00. So, we probably had somewhere around $75.00 built in there. And so as the stock dropped off, we got the big pickup. Right now, if you look at the plan, we have that stock going up for the rest of this year. But, right now, we've already given part of the gain back. But we feel comfortable -- some of that, we picked up and we flowed it through for the year. So, that's how it works. We're unique in this regard but we've always had a variable plan and we like keeping it that way. I want to have our people -- if growth rates go up, I want our relative growth rates to go up with that and have tougher targets.

John Inch -- Gordon Haskett -- Analyst

So, would you expect corporate expense to go back to this $140 million to $150 million zone for the coming three quarters?

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

Yes, I would.

David Farr -- Chairman and Chief Executive Officer

Yes, John.

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

That's probably a good estimate, in terms of where we think we're going to be, in total, for corporate.

David Farr -- Chairman and Chief Executive Officer

You got it.

John Inch -- Gordon Haskett -- Analyst

Got it. Okay.

David Farr -- Chairman and Chief Executive Officer

Thank you very much. See you next week.

John Inch -- Gordon Haskett -- Analyst

Thanks, Dave.

David Farr -- Chairman and Chief Executive Officer

Or the 14th. That's not next week. The 14th.

John Inch -- Gordon Haskett -- Analyst

Yeah, the 14th. Valentine's Day.

David Farr -- Chairman and Chief Executive Officer

Have a sweetheart.

Operator

The next question comes from Robert McCarthy with Stephens. Please go ahead.

Robert McCarthy -- Stephens Inc. -- Analyst

From the ridiculous to the sublime. How are you doing, Dave?

David Farr -- Chairman and Chief Executive Officer

You're not going to be on my team at all. I mean, you've got any cheap jokes about Rocket?

Robert McCarthy -- Stephens Inc. -- Analyst

I'm on your team, Dave. Don't worry. I'm on your team. All right. In any event, I wanted to ask, I guess, maybe since you're not shy and you're on the sidelines --

David Farr -- Chairman and Chief Executive Officer

Who, me?

Robert McCarthy -- Stephens Inc. -- Analyst

Yeah. I don't think you're shy. What do you think about what's going on with Carrier and the spend here and do you think it changes the environment overall, with respect to the OEMs, and do you expect consolidation in this space from your vantage point? What do you expect to happen over the next couple of years?

David Farr -- Chairman and Chief Executive Officer

My vantage point right now says the consolidation does not happen. And we'll have an independent Carrier out there and that we'll be managing the similar type of customer base for the next several years. Does something happen four, five, six years out? It's possible. But my feel right now is UTC is headed toward the spend very hard. Mark and his team have worked this very, very hard. By the way, I know how hard that is. I took out 40% of Emerson that way. It's a lot of work. And so that's what I feel right now, Rob. I don't see a consolidation in this move.

Robert McCarthy -- Stephens Inc. -- Analyst

And just to follow up, in terms of China overall, away from Commercial and Residential, which is pretty clear that there's this channel adjustment that's going on, how would you say what you're seeing there? And I think in my conversations with your prior, you kind of contrasted some of your more industrial-facing, your Automation Solutions-facing business, versus the more bleeding edge of Consumer and Residential, where you would expect it a little more stable. I mean, what's your outlook there, excluding this kind of channel correction we've seen? And can you kind of talk to the growth you're seeing in China excluding that?

David Farr -- Chairman and Chief Executive Officer

You take out this channel, we're growing a solid 15% to 20%. With this piece. I mean, Bob will show you the breakdown. I know he put the chart up at the board today because our board asked the same question, as we dissect what we call the heating and cooling business in China, which is down 30% to 40%. The other two segments were up. I think, Frank, didn't he show 20% to 30%?

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

Yeah. They were up big.

David Farr -- Chairman and Chief Executive Officer

For the quarter. So, we have clearly built out a strong, more balanced business in China than, say, five or six years ago but we're still not there yet because this heating and cooling business was up 30% to 40% and it's a big business, now it dropped off. But over time, what we're trying to do is we're trying to build up a more balanced portfolio of businesses in China and across Asia that gives us a little bit more smoothing than we would see right now. It's smoother today than 10 years ago but it's not smooth enough to stop from hurting us from a quarter standpoint. But we're making great progress and Bob's going to talk about that because this is our investment direction that we're making to try to have the other parts of the business be a bigger and bigger chunk of the Asia business and give us a little bit more of a smoothing effect.

Robert McCarthy -- Stephens Inc. -- Analyst

Thanks for your time.

David Farr -- Chairman and Chief Executive Officer

Thank you. I'll see you next week, Rob. I appreciate it.

Operator

The next question comes from Andrew Kaplowitz with Citi. Please go ahead.

Andrew Kaplowitz -- Citigroup -- Analyst

Good afternoon, guys.

David Farr -- Chairman and Chief Executive Officer

Hey, Andrew. How are you doing?

Andrew Kaplowitz -- Citigroup -- Analyst

Good. You need a pitcher, right? I think you still need a pitcher.

David Farr -- Chairman and Chief Executive Officer

Yeah, you want to pitch?

Andrew Kaplowitz -- Citigroup -- Analyst

Yeah. I probably have a pretty low batting average and you won't yell at me if I do. You won't call me a dead cat like those Latin America guys, right?

David Farr -- Chairman and Chief Executive Officer

Shit, I'll definitely call you a dead cat. Don't worry about it. If you throw a couple gopher balls up there and the homeruns go out, you'll be a dead cat, for sure.

Andrew Kaplowitz -- Citigroup -- Analyst

I understand. It would be warranted.

David Farr -- Chairman and Chief Executive Officer

Okay, Andrew. Hit me.

Andrew Kaplowitz -- Citigroup -- Analyst

So, in Europe, Europe was up 3% in both of your businesses in Q1, which seems like actually a good result after 2% growth last year, especially given some slowing in the major European economies. You mentioned last quarter that you see some unique opportunities in Europe in FY '19. So, could these opportunities end up outperforming Europe and do you still think Emerson grows in Europe in the 2% to 3% range for '19?

David Farr -- Chairman and Chief Executive Officer

Our fundamental goal is to be closer to 5%. And there's a couple things going on in Europe, from a technology shift relative to Commercial and Residential, and then also some incremental investments. So, I'd say the new generational power era is different than the past that we participate in. So, our goal this year, actually, is to see a number closer to 4% to 5% for Europe. And that's what we're trying to get to from a standpoint of overall sales. And I think that the order pattern is there at this point in time and we feel good about it. Now, clearly, we've got to see a little bit better number than 3% in the second quarter. It should be more like 4%. But right now, my team is holding pretty tight to that 4% or 5% for Europe for us. Even a weaker GFI number in Europe, we just happen to be in a couple of segments which are investing and some of our customers in Europe, which are exporting products to, say, the Middle East and Africa, are seeing some upside from that perspective. So, right now, my Europe business looks decent.

Andrew Kaplowitz -- Citigroup -- Analyst

Okay. Yeah. That would be quite good.

David Farr -- Chairman and Chief Executive Officer

Yes, it would.

Andrew Kaplowitz -- Citigroup -- Analyst

And then you do seem confident that Asia orders have bottomed in Commercial and Residential Solutions. What do you need to see in orders here over the next few months to support that 3% to 5% sales growth that you have for the year? What kind of uptick should we look at? Because, obviously, the deceleration has stopped but the orders are still negative.

David Farr -- Chairman and Chief Executive Officer

Yeah. We've got to see this thing go positive in the second quarter from an orders standpoint. I think we're forecasting underlying growth for Commercial and Residential still close to flat, Frank, in the second?

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

Yes.

David Farr -- Chairman and Chief Executive Officer

What we need to see is our order pattern turn up in this second fiscal quarter, which is the first calendar quarter, and moving above that line, which it's pretty close to it. And so from my perspective -- right now, these guys are telling me that we're going to plus low-single digit. I was wrong. Low single digit, driven by U.S. and by Europe. But I think what I'm watching for is Asia and does Asia get back up to that zero line and above that line. If it does, then I feel very good that our Commercial and Residential for the year can do this 3%, 4%, 5% type of growth. And that's what I see right now, short term. On the Automation Solutions side, I'm watching KOB3 in a couple industries. On the Commercial and Residential side, right now, I'm watching China and Southeast Asia relative to their HVAC type of orders. And that's what I'm watching.

Andrew Kaplowitz -- Citigroup -- Analyst

Thanks, Dave. See you on the 14th.

David Farr -- Chairman and Chief Executive Officer

You're welcome. See you. We have time for one more call here. One more call.

Operator

All right. And that question comes from Rich Kwas with Wells Fargo Securities. Please go ahead.

Rich Kwas -- Wells Fargo Securities -- Analyst

Glad to beat the buzzer. Good afternoon, Dave. How are you?

David Farr -- Chairman and Chief Executive Officer

I've got to get going to my next meeting. How many calls is this? Fifteen? Fourteen? We'll go one more. We'll go 15. We'll go for 15. Whoever is the 15th in line, you're good. You're going to make the cut. And so we'll go 15. Not many CEOs would go 15 people on a call but we're going to do it here, OK? Let's go, Rich.

Rich Kwas -- Wells Fargo Securities -- Analyst

So, two from me. On investment, if AS order growth continues at this pace, double digits, any incremental investment here later in the year that you have to make relative to what you have budgeted or is that more of a '20 phenomenon in terms of incremental investment?

David Farr -- Chairman and Chief Executive Officer

If Automation Solutions orders stay above 10%, then they're going to be pushing us pretty hard as we leave the year on two things. A global execution sales and engineering group, service organization group, that we're going to have to start putting in very rapidly in the fourth quarter, going into the first quarter, which will raise the cost in the fourth and raise the cost in the first, and slow down the smaller quarter. That will be the pressure point there.

And, secondly, what will happen is Lal will be coming to Frank and I and saying, "Guys, we've got to pull back in some capital for capacity in a couple of places." And I know Lal and his team look at that, and Frank and Steve Pelch -- Frank from the CFO and Steve from the COO -- have this constant dialogue going relative to that. But, Rich, to your point, if we see orders staying 10%, 12% for another couple of quarters, then we're going to have to do some incremental investments in AS to be able to serve that. And right now, we're not banking on that based on our forecast, but that would be good news to deal with. But, clearly, that will create some tension for Frank and I relative to our free cash flow and allocation standpoint. So, that's what we see.

Rich Kwas -- Wells Fargo Securities -- Analyst

Okay. And then just a bigger picture question on U.S. residential. I mean, I know you don't have a lot of direct exposure to new U.S. residential construction but, obviously, the HVAC business is somewhat tied to that. What do you see right now? There's some consternation out there with regards to where we are in the cycle. From your vantage point, it doesn't seem like you're concerned about U.S. residential but what are you watching for as you go through the next few quarters?

David Farr -- Chairman and Chief Executive Officer

From our perspective, right now, the upgrade marketplace has still been very strong. If we start seeing that the upgrade/repair market, the incremental expansion of homes, if that slows down, which hasn't yet -- not the new homes but the upgrades -- then that would bother us down the road. The channel is in very good shape right now. Our customer base is in very good shape right now. So, I feel decent relative to the cycle. And as we get into -- every month, our customers are very short term oriented relative to the U.S. We're talking U.S. here. And so we see the order pattern week after week after week and it continues to fill in and Bob keeps Frank and Steve informed on this because that's important relative to us. But I'm not worried as long as the -- if the consumers' incomes are still going up and employment is still high, they're going to spend money on their current homes, which is what we see right now in the United States, which is a good thing.

Rich Kwas -- Wells Fargo Securities -- Analyst

Yeah. All right. See you next week.

David Farr -- Chairman and Chief Executive Officer

Are you going to be there on the 14th? Which I guess is next week. I stand corrected.

Rich Kwas -- Wells Fargo Securities -- Analyst

I will be there.

David Farr -- Chairman and Chief Executive Officer

Okay. Good.

Rich Kwas -- Wells Fargo Securities -- Analyst

You'll see me in person.

David Farr -- Chairman and Chief Executive Officer

Okay. Good. Let's go with the last person here, whoever this person is. Who's last?

Operator

All right. The next question then will come from Jeffrey Sprague with Vertical Research Partners. Please go ahead.

David Farr -- Chairman and Chief Executive Officer

Okay, Jeff, you're batting cleanup. We've got a guy on first and third, we're down one, we need a hit, partner.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Saving the best for last. That's the way I like it.

David Farr -- Chairman and Chief Executive Officer

You're the cleanup. Let's see if you give me a hit. I know you can't run the bases so it better be out of the infield.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Yeah. No, I need the walk off homer, Dave, because I can't run the bases.

David Farr -- Chairman and Chief Executive Officer

Okay. All we need is a frigging single, OK? I've got to get the guy home, OK?

Jeffrey Sprague -- Vertical Research Partners -- Analyst

I'm going for the walk off. There was a little beating around the bush, or maybe not even beating around the bush, kind of trying to get to this project mix over time and how it kind of plays on your margins. One of the things you said that I thought was interesting is that you're working to keep the KOB3 above 50% throughout the horizon. And I'm just wondering, in the past, when you've gotten into big spikes of project activity, how far down in the mix does KOB3 really play? And should we expect a significant margin differential because of that?

David Farr -- Chairman and Chief Executive Officer

Okay. Historically, it would drop down to 45% to 46%. And with the investments we're making both in the distribution organization and the sales service organization around the world, which are significant, we started last year, Ram is doing even more this year and the next year. We have a unique situation right now with several of our competitors, both on final control and some of our systems competitors, are pulling back in certain marketplaces and we have a unique opportunity to gain some aftermarket share. So, what we're incentivizing the organization from the standpoint of making these investments and going after that install base is to try to keep that KOB at 50%. Keep a five in front of it. Will it be 50%, 51%? I'll take a 50. And what that will do is that will smooth our margins somewhat, as the bigger projects come into play.

It also means we're gaining market share. Aftermarket. And one of the areas that -- several acquisitions we've made really did not have the aftermarket infrastructure or the aftermarket focus that we have. And so they did not -- they lost some of that business and they didn't maintain that business. So, what we're working at, Jeff, and we've really been hard at this with Ram and his team, and also Jim Nyquist, is really focusing how do we regain more and more of that aftermarket. Some of our competitors are a little bit weaker right now and we're trying to take it to them right now when the window's open. I think the window's gonna be open for another 18 months and I told Ram we've got to get it done. And so talk to him about this when you see him in New York and he's going to be talking about it in his presentation because this, strategically, long term, is good for us from a profitability standpoint and smoothing out the cycle curves a little bit too.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Yeah. That's really interesting. That's an interesting nuance. And then just one little follow-up on this investment spending question that a couple people asked. I get it. If the sales are running a lot hotter, you're going to have to spend more to kind of accommodate those sales. But just looking at this year and kind of the headwind you had to kind of get through in Q1, are you at kind of run rate investments now? Is it kind of in the base, so to speak, and not a significant headwind?

David Farr -- Chairman and Chief Executive Officer

Yes. As we move into the second quarter, we're in the run rate. Our run rate is sort of structured from an 8% to 10% top of order base here. And I think the question is that, if that order base stays at 10%, 12%, 13% for the rest of the year, the concern will be, as we move into 2020, will we have the infrastructure to deal with that. And the answer is we will have to make some incremental investments. Right now, from what we see at this run rate, we're in good shape for this year. They've got to execute in the second quarter. Lal knows that. This second quarter is very important from a profitability standpoint. And that will set up a much stronger second half for us.

Jeffrey Sprague -- Vertical Research Partners -- Analyst

Great. Thank you. See you next week.

David Farr -- Chairman and Chief Executive Officer

Take care. And I want to thank everybody for joining us and I appreciate everyone letting me have a little fun with them with baseball. I don't know why I went to baseball other than my Stan Musial bat right here and the Rally Monkey staring Tim down. He's always starting Tim down. But I appreciate everyone joining us today, asking the questions, and the engagement, which I find enjoyable. And I look forward to seeing everybody next week in New York and we're going to have a little bit of an expanded presentation from several players to give you a little bit more insight relative to our businesses -- both businesses, which are very strategic to us. Thank you very much and thanks. Bye.

Operator

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

Duration: 75 minutes

Call participants:

Tim Reeves -- Director of Investor Relations

David Farr -- Chairman and Chief Executive Officer

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

Deane Dray -- RBC Capital Markets -- Analyst

Gautam Khanna -- Cowen -- Analyst

Scott Davis -- Melius Research -- Analyst

John Walsh -- Credit Suisse -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

Steve Tusa -- J.P. Morgan -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

John Inch -- Gordon Haskett -- Analyst

Robert McCarthy -- Stephens Inc. -- Analyst

Andrew Kaplowitz -- Citigroup -- Analyst

Rich Kwas -- Wells Fargo Securities -- Analyst

Jeffrey Sprague -- Vertical Research Partners -- Analyst

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