洛克威爾自動化 (ROK) 2016 Q3 法說會逐字稿

Welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded.

(Operator Instructions)

At this time I would like to turn the call over to Mr. Patrick Goris, Vice President of Investor Relations. Mr. Goris, please go ahead.

Good morning. Thank you for joining us for our third-quarter FY16 earnings release conference call. With me today are Blake Moret, our President and CEO, and Ted Crandall, our CFO.

Our results were released earlier this morning and the press release and the charts have been posted to our website. Both the press release and charts include reconciliations to non-GAAP measures. A webcast of this call will be available at that website for replay for the next 60 days.

Before we get started, I need to remind you that our comments will include statements related to the expected future results of our Company and are, therefore, forward-looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. So with that, I'll hand the call over to Blake.

Thanks, Patrick, and good morning, everyone. Thank you for joining us on the call today. As you probably all know by now, I succeeded Keith Nosbusch as President and CEO earlier this month. While Keith remains Chairman of our Board, I am honored beyond words and humbled to lead this great Company. I thank the Board for the opportunity.

As several of you mentioned on the call last quarter, Keith had a tremendous run as CEO. He transformed Rockwell Automation into a technology Company, based on intellectual capital; expanded our served markets; and increased market share by enhancing the value we provide to our customers. As a result, Keith generated exceptional financial returns for share owners during his tenure.

On a personal note, I would like to thank Keith for demonstrating how to win the right way, by focusing on long-term customer value and rock solid integrity. So certainly big shoes to fill, but I'm very confident that with our dedicated employees, experienced management team, and best-in-class partners, we can continue to build on our track record of differentiation, above market revenue growth, and superior financial returns.

With that, I'll start with some key points for the quarter, so please turn to page 3 in the slide deck. The quarter was generally in line with our expectations. Year-over-year organic sales were down about 1 point more than we expected and margins were somewhat better. As we projected, sales in our product businesses picked up compared to the prior quarter.

Orders in our solutions and services businesses improved sequentially but solutions and services, orders and sales, came in below expectations, particularly in the US and Canada. Globally, the vertical picture is pretty much the same as in prior quarters. Heavy industry end markets remain challenging, with oil and gas, and mining the weakest verticals.

Oil & gas was down over 30% in the quarter, more than we expected. Consumer and auto both continued to grow. Organic sales in the US and Canada were down 8%. Heavy industries, including oil and gas, accounted for almost all of the year-over-year decline. In the US, we experienced some delays in larger projects generally, but particularly in heavy industry end markets, affecting our solutions and services businesses.

In China, conditions remain stable and we saw another quarter of sequential revenue growth as consumer and auto continue to outperform heavy industries. As expected, sales were down mid-teens in the quarter. I'm encouraged, however, that orders in China were up year over year.

EMEA had an excellent quarter with over 5% organic sales growth. I'm particularly pleased with our continued progress with machine builders in this region. Home and personal care and food beverage were the strongest verticals in this region. In Latin America, sales were up 8%, led by Mexico, where strength remains broad-based across most verticals.

Let me add a few comments about the quarter. Our Process business was flat compared to the prior quarter and down 20% year over year. Logix was down 3% compared to last year, but grew 4% sequentially.

And I'm pleased that, as expected, Architecture & Software margins improved and were up 300 basis points sequentially. This contributed to our strong segment margin performance in the quarter, of over 21%. Ted will elaborate more on Q3 financial performance in his remarks.

Let's move on to our outlook for the fourth quarter of FY16. We expect continued improvement in our product sales, but the weaker third-quarter solutions and services orders and sales performance has caused us to reduce our sales outlook for the fourth quarter.

We still believe we will see modest sequential sales improvement in the second half of the fiscal year, but not as much as we anticipated in April. Globally, we expect heavy industries to remain weak and see a continued positive outlook for the consumer and automotive verticals.

Taking all these factors into consideration, we are lowering our full-year FY16 organic sales guidance to down about 4% at the midpoint, 1 point lower than our April guidance, and are revising our adjusted EPS guidance to a new range of $5.80 to $6. Ted will provide more detail around sales and earnings guidance in his remarks.

Before I turn it over to Ted, let me add a few comments. Given the recent leadership transition, I recognize that many of you have questions about my vision for Rockwell Automation, and what changes you can expect. I'll have the opportunity to share my thoughts with you in more detail at our annual Investor Day at Automation Fair in November this year, but here are some initial points.

Rockwell Automation will continue to focus all of our passion and knowledge on making our customers more productive. We will do that by building on the strong foundation Keith built and maximizing customer value by understanding our customers' best opportunities for productivity, combining our differentiated technology and domain expertise, to deliver positive business outcomes for our customers and continually simplifying their experience.

Understanding fosters loyalty; combining technology and expertise increases customer share, preserves margins, and reduces cyclicality. Simplification drives productivity for our customers and for us. Above market growth will come from share gains, new value from the connected enterprise, and acquisitions used as catalysts to accelerate our strategy.

We are very well-positioned to bring the connected enterprise to life for our customers given our technology, domain expertise, partners, and market access. We are implementing a growing number of pilots to quantify this new value, and I'm pleased with the progress and diversity of these customer engagements.

Expansion of these pilots to multiple locations may take some time to play out and the pace will vary from vertical to vertical, customer to customer. However, we continue to earn the position of trusted partner, of new customers every day, as a single integrated business, focused exclusively on making them more competitive.

Finally, I'd like to thank our employees and partners for their continued dedication, and serving our customers. With that, Ted?

Thanks, Blake, and good morning, everybody. I'll start on page 4, third-quarter key financial information. Sales in the quarter were $1.474 billion, 6.4% lower than Q3 last year. Organic sales declined 4.8%, and currency translation reduced sales in the quarter by 1.8%.

As Blake said, the organic sales decline was about 1 point worse than we expected and the shortfall was primarily in our solutions and services businesses in the US and Canada. Currency was in line with our expectations. Segment operating margin was 21.1% in the third quarter, down 70 basis points from Q3 last year, primarily related to the lower sales, and unfavorable currency impact, partly offset by lower incentive compensation costs.

Operating margin improved sequentially by 1.8 points. General corporate net was approximately $17 million in the quarter compared to $22 million in Q3 last year. Adjusted earnings per share was $1.55, down $0.04, or 3% compared to the third quarter of last year. The adjusted effective tax rate in the quarter was 25.1%, compared to 27.9% in Q3 last year. We recognized a favorable discrete tax item in the current quarter, and we're also benefiting this year from the R&D tax credit.

Free cash flow for Q3 was $250 million, free cash flow conversion on adjusted income was 123% in the quarter. Our trailing four-quarter return on invested capital was 32.6%. A couple of items not shown here, average of diluted shares outstanding in the quarter were 130.8 million, down about 3.5% compared to last year.

Also during the third quarter, we repurchased 1.1 million shares, at a cost of about $122 million; year to date, we've repurchased 3.5 million shares, at a cost of $370 million. In November, we talked about a full-year repurchase target of $500 million. We're running very close to that pace through June. At the end of the quarter, there was $1.075 billion remaining under the previous share repurchase authorizations.

The next slide presents the sales and operating margin performance of our Architecture & Software segment, both for the third quarter and year to date. I'll focus my comments on the third quarter results. On the left side of this chart, Architecture & Software segment sales were $666 million in Q3, down 2.5% compared to Q3 last year. Organic sales declined 1.3%. Currency translation reduced sales in the quarter by 1.6%. Sequential organic growth was about 4.5%.

Moving to the right side of the chart, A&S margins were 27.6%, down 160 basis points compared to Q3 last year, primarily due to lower sales and unfavorable mix and currency impacts, offset, in part, by lower incentive compensation costs. Operating margin improved sequentially by 300 basis points.

Turning to Page 6, this is the Control Products & Solutions segment. In the third quarter, Control Products & Solutions segment sales were $808 million, down 9.4% year over year on a reported basis, with organic sales down 7.5%.

Currency translation reduced sales by 1.9%. Sequentially, organic sales for Control Products & Solutions declined by 1.5%. On a year-over-year basis, organic sales for the product businesses in this segment declined about 4.5%. Organic sales for the solutions and services portion of this segment declined by about 10%.

The decline in the solutions and services portion of this business was about $15 million larger than we expected. And this was primarily in heavy industry verticals in the US and Canada. The book-to-bill in Q3 for solutions and services was 1.04.

Particularly in the US, we saw a larger amount of project delays in our solutions and services businesses in Q3, and we expect this trend in delays to continue into Q4. Consequently, we'll have reduced our previous projections for sales in this business for the fourth quarter. CP&S operating margin was 15.7%, down 40 basis points from 16.1% in Q3 last year. We consider that to be good margin performance on a significant top line reduction. The impact of lower sales was partly offset by productivity, and lower incentive compensation costs.

Moving to the next slide, page 7 provides a geographic breakdown of our sales, and shows organic growth results for the quarter and the nine months through June. As you can see on this slide, the organic sales decline in the quarter was driven by the US, Canada, and Asia-Pacific, with healthy organic growth in EMEA and Latin America. Blake already provided some regional color so I will just add a couple of notes.

We experienced a year-over-year decline of 1% in total emerging market organic sales, with a decline in China more than offsetting growth in the balance of the emerging countries. Blake mentioned the weakness in heavy industry, including oil and gas being down over 30% year over year in Q3 that was a larger decline than we expected. Previously, we expected oil and gas to be down about 20% for the full year. We now expect a decline of about 25%.

Please turn to the next page, which is our updated FY16 guidance. So as Blake said, we're revising full-year guidance and narrowing the guidance range. Given the sales and order misses in our solutions and services businesses in Q3, and a related reduced outlook for Q4, we're reducing the guidance midpoint for organic sales from a decline of minus 3% to minus 4%.

You can think of the new guidance range as plus or minus about $50 million, so roughly minus 3% to minus 5% organically. We now expect currency to be a little more negative for the full year but still at about minus 3%. We expect reported sales of approximately $5.85 billion at the midpoint. We continue to expect segment operating margin to be a little lower than 20.5% so no change from previous guidance despite the reduced top line.

We now expect an adjusted effective tax rate for the full year of about 24.5%, about 0.5 point lower than previous guidance and primarily due to the favorable discrete item in Q3 that I mentioned earlier. Taking into account lower organic sales, our operating margin expectation, and a modestly lower tax rate, the new guidance range for adjusted EPS is $5.80 to $6.00.

That puts us $0.05 lower than previous guidance at the midpoint. As usual, there are a lot of moving parts but basically the earnings contribution that we lost due to lower solutions and services organic sales, we mostly offset with somewhat lower spending and a lower tax rate. We continue to expect about 100% conversion of adjusted income to free cash flow.

There are a few other items not shown here that I think are generally of interest. We continue to expect general corporate net expense to be approximately $75 million for the full year. We continue to expect average diluted shares outstanding to be about 131 million for the full year. And finally, our guidance continues to include a provision for potential restructuring charges of about $10 million in the fourth quarter. And with that, I'll turn it over to Patrick for the Q&A.

Before we start the Q&A, I just want to say that we would like to get through as many of you as possible so please limit yourselves to one question and a quick follow-up. Thank you for that. Operator, let's take our first question.

(Operator Instructions)

Scott Davis, Barclays.

Hi. Good morning, guys.

Good morning.

One of the things and welcome, Blake, to your first solo call.

Thanks, Scott.

You guys have done a pretty good job in this down cycle we're experiencing right now, holding margins, keeping the wheels on and such. And when you think about -- your changing guidance, kept margins flat versus prior guidance, what -- how much of that is this lowered compensation dynamic and how sustainable is that? When you think about -- when you think about going into next year, you start thinking about compounding years of a lower compensation at some point, I would imagine it's -- you risk losing some people so how do you think about that dynamic?

Yes. So Scott, to your first question, in terms of the April guidance to July guidance, there is no difference in the savings from lower incentive compensation. It's the same in both numbers.

But to your question about sustainability, I mean, you're correct, and what we've been saying all year that when our sales and earnings start to improve once again, we will have to restore the incentive compensation to more normal levels and so at some point, we're going to have a headwind in our margins related to that.

Okay. That's fair. And then, as a quick follow-on, when you think about project, large project delays, are they being delayed because of macro conditions? Are they being delayed because of shortage of labor? What is the primary cause?

Yes. Typically, it's because the users don't need the additional capacity so I don't think the shortage of labor is as big an issue as the users going slower on planned upgrades or capacity expansions.

Okay. That's what I thought. All right. I'll pass it on. Thank you, guys.

John Inch, Deutsche Bank.

Thanks. Good morning, everyone.

Morning.

Morning. Oil and gas, can we talk about that for a second -- down over 30%? You've got companies like Halliburton and Dover that perpetually call the bottom and say things are going to get better and then ITW basically said, no, we wouldn't call it the bottom. I understand you're not an oil and gas company but based on your front log and the impacts is this thing going to sequentially continue to dribble down here and get worse? Or what do you think on that front? And what's maybe baked into your guidance for the fourth quarter?

So John, so this is Ted. We were a little bit surprised by the Q3 results. We did not expect to see a sequential decline in the oil and gas business. It was largely driven by Latin America, which was also a surprise to us.

And it was related to some project push-outs in the quarter. Because it was project specific, it's a little bit hard to call whether this is a trend or whether it's just something unique to this quarter. I don't think we're comfortable calling a bottom in oil and gas but we're not expecting further sequential decline in Q4.

Ted, Latin America, by that, do you mean Pemex and in that context, you don't have to be an oil forecaster. You could probably look at Pemex or whatever customer it is and try and ring fence the impact. I mean, is there anything you can say on that front? Are we talking Mexico and then just my other comment is this a customer-related issue or do you think it's just more broad?

The only thing I would say is this was broader than Pemex. We saw this across oil -- across Latin America. And so Pemex was part of it but not the largest part of it.

Yes. Well, maybe it's Zika-related. Can I ask you about the down 20% process? Honeywell didn't put up results like that. What -- I realize you're not Honeywell but -- and maybe this is a dovetail question for Blake. I mean, process has been one of Keith's signature focal points and I understand markets are weak but why is process down 20%? Was there any incremental color you can provide? And I would be curious, Blake, on your own thoughts toward how you are going to prioritize process or how you're thinking about it in the context of strategic opportunities?

Yes. Thanks, John. First of all, process remains at the top of the list in terms of our growth opportunities. It's the large part of our served market, and we continue to invest in technology, in domain expertise, and in market access, to take share in process.

One of the factors I think contributing to our reductions in process is we don't have the same historical installed base to be able to mine recurring revenue in the form of service contracts from those process systems that may have been installed 20 or 30 years ago. So it's -- that's one of the primary factors that we don't see the hedge, if you will, against the volatility in the project-based business.

John, I think the other -- I'm not an expert on Honeywell but I think Honeywell's exposure in oil and gas is much more downstream-oriented than ours and I think that's another factor the performance. And then the biggest thing for us in process is simply that a lot of our process business is solutions related. Our solutions exposure is much more heavy industry-related and with oil and gas down significantly and mining down significantly, it's hard for us to post better numbers in process.

Yes. No. Honeywell's definitely downstream, for sure. So that -- so just a last one. So just the process then, is this dovetailing -- I realize there's a lot of Venn diagram overlaps in Rockwell's results. Is this dovetailing with the Canada-US being a little worse? So what you're saying is your process business hasn't been there 30 years. So there's a lot more new project reliance so if there is some heavy industry push to the right which I'm assuming encompasses oil and gas, is this also explaining process -- is this all part of the same thing, if you will?

Yes. That's right.

Okay. Got it. Thank you.

Nigel Coe, Morgan Stanley.

Thanks. Good morning. And Blake, congratulations on the job.

Thanks.

Yes. So just to follow on to Scott's question. I think there's going to be a lot of questions on the impact of the compensation tailwinds. And I know that, Ted, you mentioned it's the same as the April quarter -- sorry, the Q2, fiscal -- could you just maybe try and help us to quantify what that tail could be as we think about next year's numbers?

Well, so, I can't -- I don't think I want to try to do 2017 guidance, especially on a specific number like incentive comp but I can quantify it for this year. We have consistently said that the year-over-year savings that we got from incentive comp this year was tens of millions of dollars, but less than $50 million.

And that's obviously for the fiscal year rather than the quarter.

That was for the full fiscal year 2016.

Okay. And then that range is still valid -- okay, that's very helpful. Thanks. Thanks, Ted. And then, just thinking about the way that the quarter developed. It's obviously -- your guidance for 4Q is very similar to 3Q so it doesn't feel like there's a whole lot just changing. But there's obviously a big debate about auto and actually, Mexico as well.

I mean it Mexican IP is close to negative; it's just not really there. Mexico's been a bright spot, so first of all are you seeing any signs of tired legs on the auto cycle and some of the CapEx investments? And secondly, any signs of weakening in Mexico, just given the quite weak data that we see on the macro front?

Well, so, on auto, we saw growth in auto in Q3, as we expected, and we're expecting Q4 to be a good quarter. In Mexico -- Mexico was not quite as good as we were thinking it could be in Q3, primarily around heavy industry, and I think our expectations for Mexico in Q4 now are a little lower than they were a quarter ago. Okay. That's probably fair. Thanks Ted.

Steve Tusa, JPMorgan.

Thanks a lot. Good morning. Congratulations, Blake, best of luck.

Thank you.

The Latin America oil and gas weakness I assume it -- is a lot of that offshore-related? Or is there a mix there?

Yes. There's a mix. When we talk specifically about Pemex, that's going to be inclusive of both offshore rigs as well as onshore production, and then, when we look at Brazil, again, a mix, that would be a little bit heavier on the offshore side but of course, Brazil, is very weak as they remain in a recession.

Okay. And I think a lot of these guys asked a lot of good questions so far so I'll take the high level one. What are you seeing out there? How do you think this economy is trending over the next 12 months? I know we've got these project delays. Are these project delays -- do they represent pent-up demand or because of this capacity situation we're in, what do you see from just a broad ISM or broad CapEx perspective out there from an appetite perspective as you talk to customers about the pipeline of activity? What's your sense of -- how do you characterize these environment for the next 12 months to 18 months?

Yes. Steve, speaking specifically of the US, we would characterize the US market as stable. We are seeing some growth in consumer but continued weakness in heavy industry, including oil and gas.

And Steve, I think, more than anything else, this is just -- what we're seeing is constrained capital spending in heavy industry.

Right. And so is that a phase -- does anything else pick up -- if that -- if those declines moderate, is there anything else you see there that can accelerate going forward? Is there just -- oh man, I just wish we got a little catalyst, there's a big pipeline of opportunities. Or just hand to mouth, more hand to mouth?

So if we look beyond oil and gas, and we look for some of the pockets of relative strength, in heavy industries, pulp and paper, we do see growth in pulp and paper. In water, wastewater, we had a good Q3 and we expect continued growth there. Chemicals, the chemical industry continues to benefit from the lower cost feedstock from natural gas and so we see strength in chemical as well.

Okay. Thanks a lot.

Julian Mitchell, Credit Suisse.

Hi. Thanks and welcome, Blake. My first question would be around the US demand trends that you talked about. I think a lot of companies have seen pretty weak but steady demand the last few months in the US. Clearly things seem to be disappointing for you, so is that something that got worse as the quarter went on or was it something that was true pretty much of the whole last three or four month period?

So Julian, there is some different questions there. The first thing I would say is, from a quarterly progression point of view, this was a pretty typical quarter where we actually saw improvement as the quarter progressed.

In terms of overall US market conditions, it's a little bit mixed right now. I mean, our product sales in the US were up sequentially, pretty much exactly as we expected and I'd say we're seeing a positive demand trend on the product side.

It was really the solutions and services businesses where we saw the unexpected decline and it appears to be very much related to heavy industry. As you know, we've got more exposure in solutions and services to heavy industry and a better exposure in product sales at consumer and automotive and I think it's that dichotomy in the performance of those respective verticals that's causing that result.

Understood. Thank you. And then just within the margins within CP&S -- they've been extremely resilient in the last nine months. I was curious if you're seeing in your backlog, in the context of the weak orders and book-to-bill, if you're seeing anything from mix or worse pricing that suggests that those margins in CP&S come under a little bit more pressure in the next three to six months?

So if anything in CP&S, we're benefiting from a little bit of favorable mix because the product sales growth has been outpacing solutions and services sales growth, specifically as it relates to pricing. On the product side, we saw about the same level of pricing in Q3 as we have seen in the earlier quarters this year. On the solutions and services side, in a down market like this, things tend to get more competitive but I wouldn't say we're expecting any significant impact on margins in Q4.

Great. Thank you very much.

Richard Eastman, Robert W. Baird.

Yes. Welcome, Blake.

Thanks, Rick.

Just a quick couple thoughts, if you will, on EMEA. I think the reference there on the growth rates -- just under 6%, was really around the more machine builders market but could you maybe go one level deeper on the machine builders market and where -- what is the exposure there? Is it on the consumer side? Is it exports?

So just maybe a little better sense of what the customer base on the machine builder side looks like in EMEA and how sustainable that mid-single digit growth rate might be here over the next couple quarters?

Yes. Well, Rick, you said it. It is centered on the consumer side and food and beverage, so a classic OEM success story for us in Europe would be a packaging machine builder who's benefiting, quite frankly, from some of our recent product releases and our core platforms. And as they tried to be more competitive, as they go after the mid-range type of machines, especially in emerging markets, we've given them some new functionality that's allowed them to better compete and so we're seeing growth in that segment of the OEM market.

And just maybe as a follow-up question, I did -- I just wanted to follow up on the CP&S business again. Looking at maybe the fourth quarter core guide, it does appear though as the CP&S business should seasonally show some fourth-quarter strength over the third quarter? And is the backlog in your commentary around pricing and the solutions business -- does the op profit in the fourth quarter respond to that higher volume sequentially?

Yes. So, Rick, I think everything we have talked about around the weakness that we saw in solutions and services orders in Q3 and the delays that we think are going to carry over into Q4, the typical significant revenue uptick we get from Q3 to Q4, primarily related to our solutions and services businesses, we don't think we're going to see that this year, at least not to the same extent.

And so that's going to have an impact on operating -- we're not going to get that same volume leverage, operating margin impact that we normally have in Q4. The other two things going on in Q4, in Q3, spending came in a little bit lighter than we expected and I think there's going to be some catch-up of that in Q4. And then, I mentioned in my comments, we've got about $10 million of potential restructuring charges sitting in Q4 as well.

And that is -- the $10 billion of restructuring, presumably, that's a pre-tax number. That's included in your guidance or excluded?

Included.

Okay.

And that is a pre-tax number.

And so just to clarify, though, the revenue in CP&S for the fourth quarter will be lower than it was in the third?

No.

No. Just the (multiple speakers).

We just won't have the magnitude of increase we typically see.

Correct. I understand. Okay. Thank you.

Shannon O'Callaghan, UBS.

Good morning, guys. And welcome, Blake.

Thanks, Shannon.

Hey, Blake. Can you fill out your thoughts on the connected enterprise update you gave and some of the pilots you talked about the number increasing and the nature of the timing and how you see it developing?

Sure. Well, just to set the context, the connected enterprise really is at the heart of the Company's overall strategy. And so while we sometimes focus on the new value that comes from the connected enterprise, with the networks, network services, security, and information management software, it really begins with our core platforms.

And so the functionality that I talked about for a machine builder, those same products include the functionality that enables that higher level productivity. So just let me give an example with that same packaging OEM. They're using our new products, some of our recent CompactLogix releases, Motion, PowerFlex drives, to get more performance out of their machinery and more flexibility and to be able to perform safety functions more elegantly.

When that equipment is shipped to, say, a food producer, we enable faster line integration with our software, we can provide network design services to remove bottlenecks, and we can remotely monitor that line and 100 other lines around the world to benchmark performance and maximize uptime. So the data that can be turned into information to make better decisions already exists in our plan for drives and controllers.

And we've been asked by users in a wide variety of industries to get involved with pilots to quantify that value so they are starting small so that they can have a discrete opportunity to look at the benefits of this new functionality before they roll it out to multiple locations. And that's going to take a little while to play out and each customer is going to move at their own pace but we are very encouraged by the early progress.

Okay. Great. Thanks. And then, Rockwell has always made great use of the partnership network as well as alliances over the years; is any of that changing? There's a lot of partnerships seeming to be formed out there, GE with Microsoft recently and that's been one of your alliances for a long time as well.

I mean, does that change anything? Do you guys need to adapt at all in terms of your historical approach to partnerships and alliances? Or is it still the same approach?

No. Shannon, it's still the same approach. We don't anticipate any changes in our strategy. The closeness to Microsoft from the recent announcement because most of these partnerships are non-exclusive.

And at the end of the day, it's bringing positive outcomes to the user, combining the technology and the domain expertise, that count. So that particular partnership is a lot around infrastructure and some of the specific cloud-level functionality. What we talked about in terms of new value, importantly, is scalability.

And so a lot of the benefit that we can bring to a user is going to happen without having to leave the four walls of a plant. But we continue to work closely with Microsoft and Cisco and AT&T and a host of other partners to be able to bring the functionality that, that customer needs to make them most productive

Okay. That's great. Thanks a lot.

Jeffrey Sprague, Vertical Research Partners.

Thank you. Good morning, everyone, and congrats, Blake.

Thanks, Jeff.

So just a couple things, a lot of ground covered here. I just wanted to come back to the tempo of demand and what's going on. And specifically, I just want to think about what's happening with MRO. Ted, you made some comments about products which maybe I could read the MRO but then it sounded like it's a little bit more about end markets as opposed to maintenance and repair and upgrades. Can you just address that, so we're looking at CapEx under pressure? But are we still looking at starvation of MRO and OpEx?

Yes. I don't think we're looking at starvation of MRO and OpEx and I think, Jeff, the health that we're seeing in product demand is indicative of some reasonable level of MRO spending ongoing. My comments about the vertical exposure on the product side was more related to projects.

Okay. And on growth spending, Ted or Blake, how is that tracking relative to revenues this year? And is that a headwind or a tailwind to probability?

Well, I'm not going to break out growth spending; I'll just talk about spending generally. Our sales are going to be down, if we're right about the guidance, by about 4% organically year over year; spending, I think is going to be close to flat year over year.

So on balance, it's just a little bit of a headwind to the margins. When you look at within spending, I think what you would see is our R&D spending is actually up year over year a little bit in absolute dollars and up considerably as a percent of sales because of the sales decline and we've seen some reduction year over year in the SG&A areas.

And then, just one for Blake, it dovetails with a couple of the earlier questions but just thinking about acquisitions, Blake, the nature of the way Rockwell has distilled its portfolio down does not lend itself to big acquisitions, right? You end up doing acquisitions of vertical software expertise and the like.

Do you see that changing with the change in competitive landscape and the technology propagation that's going on? Do you need to be more active on the M&A front? Do you see that as a likelihood the next couple of years?

Well, Jeff, acquisition still remain an important part of our growth strategy and I look at acquisitions as catalyst to identify strategic growth opportunities for the Company. So we're not going to get into acquisitions that take us into lines of business that we don't understand. But to speed up activities that we've already begun internally, I see it as an important part of our overall growth plan.

We remain focused on organic growth first. But then, acquisitions as catalyst are in the second position. We have a strong pipeline now. We are pursuing acquisitions now, and we're not constrained by any small size limit. The ones we've done recently have happened to be on the smaller side, but we'll look at bigger ones, too, if they make sense and if they fit that model.

Thank you.

Andrew Kaplowitz, Citigroup.

Good morning, guys. Blake, congratulations.

Thanks, Andy.

So China, down mid-teens in the quarter but orders up year over year; you mentioned consumer and auto still doing well there. I think your guidance before was for China to be down high single digits to about 10% for the year; is that still the case? And are you seeing any signs of tire and heavy industry at least bottoming, given some stability in China over the last couple of quarters?

So your first question, I think China is going to be down about 10% year over year. That's our expectation, given the Q3 performance and what we're looking at for Q4. I would characterize China generally, including heavy industry, as stable. It doesn't seem to be getting a lot worse, but I would not say that we've seen -- that we think we've turned the quarter yet either.

And Andy, on the specific comment around tire. From a worldwide standpoint, there are a number of greenfield tire plants that are under construction or under design around the world. A lot of those are heading towards North America and Mexico.

So it's a bit of an issue of timing and which machine builders win the big portions of those facilities to determine where those will hit. We have a strong position in tire. That's going to be reinforced with these new greenfields but, again, we're not exactly sure where all of those orders are going to be placed.

Okay. Thanks for that and I think I know the answer to this but I'll ask it anyway. Have you seen any improvement at all in metals and mining at this point or at least signs of a bottom? It might be too early for actual improvement but what about incremental discussions in this space?

No. Here and there, there are consolidations of steel mills and mines as people are trying to get productivity. We participate in some of the ongoing productivity projects within metals and mining. But the low cost of the resources and the overcapacity is still putting pressure on those verticals.

All right. Thanks, guys.

Steven Winoker, Bernstein.

Thanks and good morning, all. Just to put a finer point on one of your earlier answers, you said that auto saw growth in Q3 and expecting a good Q4 but last quarter, you said it was specifically 3% up. What was the number this quarter?

Yes. So auto was up less -- about 1% this quarter.

Okay. And powertrain growth, were you are taking some share?

Yes. I mean, the powertrain is proceeding as we expected. We've gotten some great commitments this year and I'd say we're on track for the $20 million incremental that we've been talking about.

Okay, great, and Ted, one other thing. On the whole restructuring question, you've got this $10 million placeholder for 4Q. When we had talked about this in the prior quarter, you had talked about $10 million, potentially $20 million? What did you end of executing in the third quarter? And why holding off longer given the broader environment that you're looking at?

Yes. So a couple different pieces to that. First, we've always talked about, in our normal course of business, would expect to spend about $10 million on restructuring over the course of the year, and this year, we had provided for an additional $10 million. We have spent some on restructuring earlier in the year. But given the slowdown that we saw in the solutions and services businesses in Q3, and the revised outlook for Q4, we are now taking that into account as well as assessing what we think we're going to see it at least in the first half of next year.

And we're going through a careful assessment of, one, do we need to adjust the cost structure and, two, if we don't need to adjust cost structure, do we need to do some reallocation of resources so that we can get positioned for where we think the best growth opportunities will be next year? So it is a combination of both of those things that have caused us to put some potential restructuring charges into Q4.

Okay. All right. And I know we've talked a lot about the fourth quarter but just so I'm just trying to get some clarity in terms of how you're thinking about that progressing. You've got 4.5 points of easier comps, I guess up 2.2%, to down 2.3% from Q3 to Q4 in 2015. You're calling for roughly down 4% organic growth on top of that in the fourth quarter.

You've mentioned the solutions and services pressures going into the fourth quarter but given the lapping of the comps at this point, are you thinking about at least -- and I know we don't take guidance for a little while for 2017, but are you thinking about exiting 2016 at that weaker rate for some time to come? Or can you picture this is actually probably just a shorter-term issue?

So we're going to defer any discussions about 2017 until we provide guidance in November. But I would say particularly in the solutions and services businesses, our comparisons start to get a little bit easier after Q4.

Okay. All right. Well, aren't they -- and they're getting easier in Q4, too, though, right?

Well, not necessarily in solutions and services.

Okay. That's just a -- the broader segment.

Yes.

Okay. I'll leave it there. Thanks.

Joe Ritchie, Goldman Sachs.

Thank you. Good morning and congratulations, Blake.

Thanks, Joe.

Yes. My first question, maybe just a little bit of clarification on China auto. With the light vehicle tax stimulus potentially rolling at the end of this calendar year, have you guys sensed that you've gotten any benefit from the tax stimulus being in place in the first place?

No. We haven't seen any direct impact from that stimulus on accelerating or increasing the number of projects in the pipeline.

Okay. Great. And then, maybe a couple quick hits on the margins. Ted, did you -- this year, was there any impact from the FX hedges? I know last year you had some gains come through. Was there anything that was impacting your margins this year on the FX side?

Yes. I mean, that's something else we've been talking about all year. I mean, our hedges are rolling year over year and they're rolling with a lower benefit. So we've still got hedge gains this year but lower hedge gains than we had a year ago and it's about $13 million on a year-over-year basis.

Got it. The $13 million is incrementally lower than last year? Is that the right way to think about it?

Yes.

Okay. All right. Great. And then maybe just on the 4Q margins, I know last year, you guys had elevated R&D spend. Your margins in your A&S segment were down pretty significantly on a year-over-year basis and so are there some potential tailwinds that we should expect in the fourth quarter, from just a comps perspective?

Well, there are always a lot of puts and takes on a year-over-year basis but I think I'd repeat what I said earlier about fourth-quarter margins. Sequentially, it's likely margin will be down a little bit Q3 to Q4. We don't expect to see the same pop in solutions and services sales that we normally see.

So we're not going to have that volume leverage this year, that same volume leverage. I think sequentially, spending is going to be a little bit higher in Q4 and we've got that potential restructuring charge sitting in Q4 where there was very little restructuring charge in Q3. So for -- those are all of reasons that I think we're going to see a little bit lower sequential margin.

Okay. Got you. That's helpful. Thank you.

Operator, we will take one more question.

Jeremie Capron, CLSA.

Thanks. Good morning. And welcome, Blake.

Thanks, Jeremie.

Just a quick question on the cash flows here. We've seen quite a bit of change in terms of your geographic mix now with North America business coming under pressure. I wonder how does this affect your ability to continue to return excess cash to shareholders in a tax efficient way? And are you willing to take on more debt as you did last year to continue with this strategy? Thanks.

Yes. So, subject to what our acquisition spending is, we continue to be committed to deploying our full excess free cash flow to shareowners, either through dividends or share repurchase. And as you mentioned, we did that last year and it required taking on a little bit more debt. I think you're going to see the same thing this year.

And so I think the answer to your question is yes. There was another question in there about weakness in the US and I'm guessing you're asking about distribution of cash flows. I would say that has not changed significantly for us as a consequence of the US market conditions.

Thanks very much and good luck.

Thank you.

Thanks.

Okay, that concludes today's call. Thank you for joining us.

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.