Patrick Goris - VP, IR Keith Nosbusch - Chairman & CEO Ted Crandall - CFO.

Scott Davis - Barclays John Inch - Deutsche Bank Shannon O'Callaghan - UBS Rich Kwas - Wells Fargo Securities Steve Tusa - JPMorgan Richard Eastman - Robert W. Baird Jeremie Capron - CLSA Nigel Coe - Morgan Stanley Steve Winoker - Sanford C. Bernstein Julian Mitchell - Credit Suisse Robert McCarthy - Stifel Nicolaus.

Welcome to Rockwell Automation's Quarterly Conference Call. [Operator Instructions]. At this time, I would like to turn the call over to Patrick Goris, Vice President of Investor Relations. Mr. Goris, please go ahead..

Good morning and thank you for joining us for Rockwell Automation's third quarter FY '15 earnings conference call. With me today are Keith Nosbusch, our Chairman and CEO and Ted Crandall, our CFO. Rondi Rohr-Dralle is here as well, as Rondi and I transition today.

Our agenda includes opening remarks by Keith that include highlights on the company's performance in the third quarter and some context around our updated outlook for FY '15. Then Ted will provide more details on the result as well as our sales and adjusted earnings-per-share guidance. As always, we'll take questions at the end of Ted's remarks.

We expect the call to take about one hour today. Our results were released this morning and the press release and charts have been posted to our website at www.RockwellAutomation.com. Please note that both the press release and charts include reconciliations to non-GAAP measures.

A webcast of this call is accessible at that website and will be available for replay for the next 30 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 forecasted 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. With that, I will hand the call over to Keith..

Thanks, Patrick and good morning, everyone. Thank you for joining us on the call today. I hope that all of you in New York will find a cool spot, given the heat forecast coming.

Before I get started, I would like to take a moment to formally introduce Patrick Goris, who as I mentioned on the last call, has taken over IR responsibilities with Rondi's upcoming retirement. Patrick joined Rockwell Automation over nine years ago and he has been be finance leader of our architecture and software segment for about four years now.

Patrick, welcome to your first official earnings call. I'll start with some highlights for the quarter, so please turn to page 3 in the slide deck. I'm pleased with our performance in the quarter as we delivered another quarter of solid earnings growth, despite a year-over-year decline in sales due to a large currency headwind.

Organic sales growth was 2.2% with higher growth in architecture and software. EMEA with 4% organic growth was our highest growth region this quarter, driven by emerging countries. Safety continues to do well and was up double digits.

As you remember, we're the market leader in industrial safety control and this growth reinforces its importance to our OEM and process initiatives. Logics grew slightly above the architecture and software growth rate. Process reflecting underlying market conditions was down 3% in the quarter.

Margin expanded 200 basis points in the quarter which contributed to adjusted EPS growth of 7%. Free cash flow continues to be very strong. Ted will elaborate more on Q3 financial performance in his remarks, but I will add a few comments about our performance through three quarters this year.

Our revenue diversification efforts, whether from a geographic or vertical perspective, are yielding results. We have shown that we can continue to grow even if an important vertical like oil and gas is contracting significantly.

Excellent execution and strong productivity drove a 210 basis point improvement in segment margins, resulting in double-digit EPS growth in spite of lower sales. Our ability to generate cash remains excellent, with strong free cash flow conversion through three quarters. These are very good results in a slow growth environment.

Let's move on to market conditions and economic indicators and what we expect to see in our business for the remainder of the fiscal year. Global GDP and industrial production growth forecasts have softened since April. For the U.S., we experienced 3% growth in Q3 and expect about the same in Q4.

Our full-year growth rate will be lower than we thought one quarter ago. Automotive and consumer remain the strongest verticals in the U.S., oil and gas, the weakest. As expected, we saw improved growth rates in EMEA during the third quarter. We expect continued modest improvement in this region led by consumer, particularly life sciences.

In Asia, India is doing well and we're seeing good growth there. China, however, continues to slow and third quarter sales were flat year-over-year. We're not seeing improvement in the China market as capital spending remains very constrained. While oil and gas entire are down year-over-year in China, we continue to grow in consumer and auto.

We now expect China sales to be about flat for the year. China does remain a very important longer-term growth opportunity for us. We just do not see a short-term catalyst for growth. Market conditions in Latin America remain [indiscernible].

Mexico continues to be the bright spot, while other countries including Brazil, Argentina and Venezuela are in a recession. Auto and consumer are growing above the region average and oil and gas is growing in Mexico. Other heavy industries including mining are weaker. With all of that said, let's move on to our updated guidance for FY2015.

We told you a quarter ago that we expected higher growth rates in the second half of this year. Since then, the outlook for industrial production has weakened and our third quarter organic sales performance came in somewhat below our expectations.

While sequential growth will continue in Q4, we know longer expect higher year-over-year growth in the second half and we're lowering the midpoint of our full-year organic sales growth guidance by 1 point. Assuming a smaller headwind from currency, we continue to expect FY '15 reported sales of about $6.4 billion.

In spite of lower organic growth, improved margin performance enables us to narrow the adjusted EPS guidance range to $6.55 to $6.70. At the midpoint, this would represent a 7% increase in adjusted EPS on about a 3.5% year-over-year decline in reported sales. Ted will provide more detail around sales and earnings guidance in his remarks.

I just have a few closing comments. While the market conditions may not be ideal, I like our competitive position. We have a differentiated portfolio of products and services and dedicated employees, distributors and partners that are committed to provide the best service to our customers globally.

We remain focused on innovation and I am confident in our ability to deliver attractive shareholder return while we continue to invest in profitable growth opportunities. Before I turn it over to Ted, let me take a moment to mention Rockwell Automation's TechED 2015, an important annual training event we hosted in June in San Diego.

During the event, customers, distributors and partners learned from industry leaders on how to achieve operational excellence with expert-led sessions, hands-on labs and innovative presentations. Our June event was a resounding success with about 1,800 attendees from 45 countries and all 50 states.

This event is a good example of how we, together with our distributors and partners, continue to help our customers optimize their operations. Our main customer event of course is Automation Fair which will be held in Chicago this year on November 18 and 19. The investor meeting is scheduled for the 19th.

Please mark your calendars as we hope to see you all there. With that, I'll turn it over to Ted.

Thanks, Keith. Good morning to everyone on the call. I'll start on page 4, third quarter key financial information. Sales in the quarter were $1.575 billion, 4.5% lower than Q3 last year. Organic growth was 2.2% but currency translation reduced sales in the quarter by 6.8%. Reported sales were up about 1.5%, sequentially.

Organic growth was 2%, sequentially. Segment operating margin was 21.8% in the third quarter, up 200 basis points from Q3 last year, despite the reported sales decline. The year-over-year margin increase was primarily due to the high organic sales and strong productivity, partially offset by modestly increased spending.

General corporate net was approximately $22 million in Q3, up about $4 million compared to a year ago. Adjusted earnings per share were $1.59, up $0.10 or 7%, compared to the third quarter of last year. The adjusted effective tax rate in the quarter was 27.9% compared to 27.6% in Q3 last year.

We now expect our full year adjusted effective tax rate to be about 27%. That's about 0.5 point higher than are previous guidance, primarily due to a different distribution of pre-tax income across geographies. The adjusted effective tax rate in Q3 spiked a bit due to the year-to-date adjustment to the new higher full-year tax rate.

Free cash flow for Q3 was $267 million, another very strong result. Free cash flow conversion on adjusted income was 123% in the quarter. Our trailing fourth quarter return on invested capital was 33.1%. A couple of items not shown, average diluted shares outstanding in the quarter were 135.5 million, down about 3% compared to last year.

Also during the third quarter, we repurchased 956,000 shares at a cost of about $115 million. Year-to-date, we have repurchased 3.65 million shares at a cost of $410 million. In November, we talked about a full-year repurchase target of $470 million. We're running about 16% ahead of that pace for June.

At the end of the quarter, there was $642 million remaining under our share repurchase authorization.

Moving on to the next two slides which present the sales and operating margin performance of each segment, both for the third quarter and year-to-date, I'll start with the architecture and software segment on page 5 and I'll focus my comments on the third quarter results.

On the left side of the chart, architecture and software segment sales were $684 million in Q3, down 4.4% compared to Q3 last year. Organic growth was 3.1%. Currency translation reduced sales in the quarter by 7.5% compared to prior year. Sequential organic growth was 1.8%.

Moving to the right side of the chart, on the 3.1% organic growth, A&S margins were 29.2%, up 60 basis points compared to Q3 last year, with the volume leverage on organic sales growth and productivity partly offset by higher spending.

Turning to page 6, this is the control products and solutions segment, in the third quarter control products and solutions segment sales were $892 million, down 4.6% year-over-year on a reported basis, with organic growth of 1.6%. Currency translation reduced sales by 6.3%. Organic growth for the product businesses in the segment was 5.3%.

Organic sales for the solutions and services portion of the segment declined by about 1%. The book-to-bill in Q3 for solutions and services was 1.1%, better than last quarter and a little better than Q3 last year. Sequential organic growth for the controlled products and solutions segment was 2.2%.

CP&S delivered very strong operating margins at 16.1% in Q3, up 310 basis points compared to last year. In addition to the contribution from organic growth, year-over-year productivity was particularly strong in this segment.

Moving to the next slide, page 7 provides a geographic breakdown of our sales and shows organic growth results for the quarter in the nine months through June. Keith covered a good deal of the third quarter results in his comments. I'll maybe just add a couple of additional notes.

As you can see on the slide, the organic sales growth in the quarter was driven largely by the U.S. and EMEA, offsetting a continued decline in Canada and with Asia-Pacific and Latin America up only slightly compared to the same quarter last year. Canada was down almost 8% compared to Q3 last year. This region had the largest oil and gas exposure.

As Keith mentioned, the EMEA organic growth in Q3 was largely driven by the emerging countries. Emerging countries were up mid-teens with modest growth in mature Europe. In Asia, India grew double digits while China was flat as Keith said and mature Asia declined in the quarter. Our Latin America growth was 1.1% in the third quarter.

Mexico experienced organic growth in the mid-teens but that was largely offset by declines in the balance of the region. As a final note on this slide, overall emerging market organic growth in Q3 was 5.8%, despite the flat China. Please turn to the next page which is our updated FY '15 guidance.

As Keith mentioned, we're revising the full-year guidance at the midpoint. We're reducing organic growth expectation for the full year by one point. Keith talked to those changes which are primarily related to the U.S. and China. We now expect a little less headwind from currency.

Previous guidance called for the combination of currency translation and acquisitions to reduce sales by 5.8%. We now expect that to be about 5.5%. We expect reported sales of approximately $6.4 billion at the midpoint. The previous guidance called for organic growth of 1.5% to 4.5%.

The new guidance is for organic growth of 1.5% to 2.5%, a more narrow range with only one quarter to go in the fiscal year. Our operating margin performance has continued to be very strong through the first nine months and we expect that to carry forward into the fourth quarter. For the full year we now expect operating margin to be about 22%.

That's a little above the prior guidance. As I mentioned previously, we now expect an adjusted effective tax rate for the full year of 27%. That's up 50 basis points from the prior guidance. Given the lower organic sales, somewhat higher margins and a headwind from a higher tax rate, our new EPS range is $6.55 to $6.70.

Higher margin is offsetting the lower sales. We've remained within a couple of cents of the previous guidance midpoint, despite losing about $0.05 to the higher tax rate. Given our strong cash generation through the first nine months, we now expect conversion on adjusted income to be about another 110% for the full fiscal year.

With better cash flow conversion and given that our year-to-date spending on repurchases was at a rate above our original full-year repurchase target of $470 million, we now expect to spend at least $525 million on repurchases for FY '15. There are a few other items not shown here that I think are generally of interest.

We expect general corporate net expense to be approximately $85 million for the full year. That's up about $5 million from the previous guidance. We continue to expect average diluted shares outstanding to be about 136 million for the full year and we expect process sales to be about flat on an organic basis for the full year.

With that, I'll turn it back over to Patrick..

Before we start the Q&A, I just want to say that we have quite a few callers in the queue today and we'd like to get to as many of you as possible. Please limit yourself to one question and a quick follow-up. Then you can get back into the queue if you want to ask another question on a different topic. Operator, let's take our first question..

The first question comes from the line of Scott Davis at Barclays. Please go ahead..

Can you give us a sense, Keith and Ted, if you can separate out oil and gas as best you can? I know you said Canada is down about 8%.

Can you give us a sense how much oil and gas you think was down and a little bit of forward look in that regard? If there's a book-to-bill or anything else you can share to help us understand how close we're to a bottom there?.

Oil and gas in Q3 was down about 10% and we would expect for the fiscal year, it would also be down 10%, maybe a little bit better which gets us through Q3 down 7% on a year-to-date basis. I think it's a little too early for us to say that we know it's a bottom. Certainly, the next quarter will give us a good picture.

If we're able to be steady state again in the third quarter I think we have our answer. It's become very mixed, however, as to spending. Obviously, you picked up Canada. The U.S. is definitely down as well, but Mexico was up. The Middle East remains reasonably solid.

What we're seeing is a transition into more OpEx spending than specifically upstream exploration spending. We're hoping that we can convert some of the production dollars in CapEx into OpEx as we go forward..

Okay. I'm curious your views in China. You sequentially got more bearish. Some of the other companies have as well. What's your sense on the region? What I am asking, I think, really is that there was all of this hope there would be a secular shift from labor to capital that you would see more automation spend.

It sounds like folks are so nervous about demand dynamics and just not wanting to spend.

Do you see this more as a short-term issue? How do your local guys feel about the one, two, three year outlook?.

We definitely feel that there is a short-term issue at this point, a lot of that driven by what's the liquidity. It's still difficult for small and midsized customers. The rates are still reasonably high. We had expected to see in China growth in the second half of the year which was not the case.

Particularly, I think the currency is hurting a little bit. Their exporting OEMs are suffering because of that. I think we have seen a pickup in some of the infrastructure investments, but that's typical China behavior.

We believe the transportation industry, automotive is mixed with some of the leading companies still investing, but the slowdown in consumption is, I should say, in auto purchases is hurting. The majority of the market, [indiscernible] is slowing because of overcapacity now.

Yet we continue to see growth in the consumer industries, mainly the food and beverage areas, particularly with the concerns for safety and the ongoing expansion of the middle class which quite frankly, is why we continue to stay positive on China in the long term.

Certainly in the short term, there are spending concerns both from a company standpoint as well as individual standpoint. I think we have to see how the current phenomenon, the stock market transition the last couple of weeks, what will be the long-term impact of that as well..

The next question is from John Inch at Deutsche Bank. Go ahead..

Obviously, all eyes are on 2016. For most of the companies, it's calendar, but in your case it's fiscal. What I would like to ask you, Keith and Ted, is as you literally add up all of these trends around the world, you are currently putting up very slow, low-single digit organic growth.

It's actually better than lots of companies, but it's still pretty slow. Do you see anything in your front log, your mix, your initiatives that prospectively should call for 2016 to be an improvement from that trend or perhaps even a deceleration in some manner? Obvious China is decelerating and it's a pretty important region for you.

Then you called out EMEA improving. I don't want to put words in your mouth, but it sounds like there's really nothing on a net basis, but you guys are insiders.

What are you thinking there?.

What we’re thinking as we're going to reserve commentary on 2016 until November, so that's our first thought. To just to give you a little flavor for what currently is going on and that is our front log and quotation is stable. I wouldn't say we're seeing a meaningful change in the activity.

Obviously, the concern that we have talked about is the declining industrial production. That's been a pretty consistent drum beat starting in the spring time frame now, but when you look at the forecast for industrial production, it shows improvement as we go through 2016.

I would say there's mixed messages at this point and that's one of the reasons we want to get a couple of more months here and get a better feel before we give our 2016 guidance..

Keith, some companies, not against the quarters backward but looking, they have called out trends in the June quarter with very weak May and then an improving June, July.

Did you see any of that? If so, was there in the commentary you can give overall about the way the quarter progressed?.

The quarter did get stronger as we went April through June. June would have been the strongest month in the quarter. That, I guess, you could say would be the trend for the quarter..

Although, I would say that's pretty typical for us works for us..

Yes. That's not unusual in our business. I would say that July with the holiday and everything started out slow..

Just last, the commentary, Keith, I think is apparent for China. You have over the last couple of years put in through a lot of initiatives with lower-end product, as part of the bifurcation in the market right there between consumer and heavy industry.

Are you seeing and are you satisfied with the adoption rate of those lower-end microcontroller products? Obviously you're very strong in large controller.

What's happening in smaller controller? Could that be a Rockwell specific source of improvement in 2016 in China, even if the overall market doesn't improve?.

Certainly, we believe that is one of the areas that we should be able to grow in. That's heavily influenced by our success in the OEM market and that's what a lot of it is targeted for. I did mention OEMs were weaker, particularly exporting OEMs, because of the exchange rate, particularly into Europe.

I think our product portfolio continues to get better to serve that market. We call that the mid-range market and that's our controllers, our drives which is a very strong portfolio as well. That will continue to be an area that we expect better than market performance in China. Certainly, has been an area of focus for us this past year in particular.

We've still got to get a better little traction..

John, at the risk of cutting that answer a little too fine, I do want to draw upon I think we have a better opportunity in mid-range and a larger opportunity in mid-range than in microcontrollers..

The next question comes from the line of Shannon O'Callaghan at UBS. Please proceed. .

Maybe just a quick margin question, obviously CP&S, really strong margins, you mentioned the productivity.

It also looks like the product mix was favorable, but maybe just some more thoughts on why that came in so strong and if that productivity is sustainable?.

Yes, so I talked about actions we took at the end of last year, some restructuring actions. That structural productivity contribution to CP&S is probably about half of the productivity that we're seeing in that segment and certainly, why that segment is running stronger than A&S.

The other half is what I would call normal sourcing actions and lean and Six Sigma productivity projects that we always have in the pipeline. I think we probably tended to underestimate a little bit as we have gone to this year the level of productivity we were driving in CP&S.

I would say it's been stronger on the solutions and services side of that business than on the product side, but I do think it will be sustained. I think as we go into Q4 the margin comparisons get a little bit tougher, but I think we will sustain that productivity..

Yes, the only comment I would make in addition is, I think we're also benefiting by the mix. As solutions grow at a faster rate going forward, that will have some downward pressure on margin..

Okay.

And then just in terms of when you look at verticals that are actually growing, what kind of investments are you seeing customers make? Our customers actually willing to make, it might not be capacity but a major redo a plant or whatever, are they willing to stick their necks out and make a real investment? Are these kind of smaller necessity kind of upgrades that you're seeing?.

I think it depends on the geography. For example, the two verticals that are growing the best for us are automotive and then consumer. In automotive, there's a lot of greenfield investment, particularly in Mexico and a couple of the emerging markets, including China in that comment. In the mature markets, as you know in the U.S., the U.S.

automotive companies are continuing to invest in new platforms so it's not necessarily capacity as much as new models and refurbishing their lines. In particular, we see longer-term investment in the power train side of the business because of the fuel standard improvements that are mandated, new engines, new transmissions which you are now seeing.

I think that would be the area that we see there. With respect to the [indiscernible], it's pretty much the same story, emerging markets with the growing middle class and the greater need for automation and for protecting the safety of the product. We see more investments in automation.

When we see it in the mature markets, it's really driving modernization of some of the new lines to update the existing installed base and also to deal with new, more flexible packaging to drive productivity. I think that's where we're seeing the greatest growth in those two verticals and it varies between mature and emerging markets..

The next question is from the line of Rich Kwas at Wells Fargo Securities. Go ahead, please..

Can you comment on the competitive framework in China right now? There's been one of your largest competitors out there saying that pricing has been more competitive there.

What is your angle on that? What's your view at this point?.

In China, pricing is always competitive but it tends to be the nature of the culture as well to some degree. I would say we're not seeing significantly different activities, but there is fewer large projects. I think on the few there are, what you traditionally see is a more competitive environment.

I think that remains the case on the few large projects that are out there. I think that would include some of the infrastructure investments that our taking place. They tend to now require a more competitive bid.

I would say the area that is probably the greatest impact and it's not necessarily a pricing phenomenon, it's just a situation of currency which is the exporting Chinese OEMs are less competitive now because the RMB is pegged more to the dollar and therefore with the euro weakness against the dollar, the European OEMs our more competitive.

That hurts the exporting OEMs in China, particularly into the European market. I would say that's not necessarily a pricing issue. It's more of a currency issued there..

You've seen the impact from that in the last couple of quarters that have been part of the slowdown?.

Yes, we have. I think that is part of it..

I guess this is a question for Ted, on the margins, if you back out FX you've got a very high incremental again. In the past, you've talked about organic growth having being in that mid-single digit range to get to that 35% incremental on an organic basis.

How should we think about it as we move out the next several quarters in terms of momentum on productivity and how much that can help sustain the margin versus what you need in terms of underlying demand improvement?.

I think I would still give the same guidance we have always talked about which is if we get organic growth falling into the low-single digits, it will be harder for us to drive conversion margins in the 30%, 35% range. I think what you are seeing this year is really a combination of two things. One is our productivity is above average this year.

We've talked about that in previous quarters. The other thing is we're getting about 1% price this year on low organic growth. That also tends to help with the conversion margin..

Okay. Just a quick one, Ted, you had a very strong CP&S margin quarter here. Typically, you see a nice sequential ramp in the fourth.

Just given the base level is higher here, how do we think about that just shorter term?.

I think we're certainly going to see an acceleration in volume in CP&S just because fourth quarter is always our highest solutions and services shipment quarter. Normally, we would see some expansion of margin consequent to that, even though we're going to have a significant negative mix impact..

The next question is from Steve Tusa at JPMorgan. Go ahead..

On that margin side, I guess just to ask the question a little bit differently as John was talking about in this low-growth environment and the trend for the second half of this year carrying into next year, can you still improved margins? There was such an amazing performance this year.

I'm just wondering if your conversion is below the 30%, can you still improved margins in that environment?.

Without talking specifically about 2016 because as Keith said, we're not giving guidance on 2016 yet, I would say generally our expectation is even at low levels of organic growth, 2%, maybe even 3%, 2% to 3% range, even at those levels we think we should be able to drive some level of margin improvement generally, but not the 30%, 35% conversion that we would expect at higher rates of organic growth..

Okay.

Just to Mexico, how strong was Mexico? Then within Mexico on oil and gas front, should we think about Pemex there obviously? What's the flavor of the Mexico oil and gas strength that you're seeing?.

Yes, Mexico for the quarter was up, I think, mid-teens. That was, once again, a strong quarter of growth for us. When you were talking oil and gas in Mexico, you're talking Pemex. Of course, they have a supply chain there, but Pemex drives it. It's 100% of the business and they are continuing to invest and modernize.

They are modernizing their platforms and also their transportation areas. That has been the area of growth as opposed to significant new drilling that's going on. We do see an opportunity with some of our install base to be able to participate in the upgrades and the modernization that's going on..

Okay.

One last quick one, process for the fourth quarter, what you expect that growth rate to be for the fourth quarter for total process?.

Process for the fourth quarter, we expected to be right around flat maybe a little negative, but overall for the fiscal year, flat..

The next question is from Richard Eastman at Robert W. Baird. Go ahead, please..

Keith, could you maybe speak just a little bit to the EMEA commentary. You mentioned emerging countries in EMEA were plus mid-teens. I'm curious.

What is the industry exposure there and the market exposure, as well as which countries are you speaking to there?.

Sure. We're speaking to Turkey. I would say the Middle East, when you think of the Middle East in my commentary, think of it as the oil industry in the Middle East which is now broader than just oil. Think of it as Saudi Arabia, the Emirates, Abu Dhabi. Then sub-Saharan Africa would be the other one and Central and Eastern Europe.

It's pretty much the rest of Europe, Middle East and Africa and we sold good growth. Other than Turkey in the quarter, we saw strong year-over-year growth. Actually, we also saw growth in Russia, but that was the delivery of a project. We're certainly seeing less opportunity with respect to orders.

Once again, that's the lumpiness of our solutions business which is prevalent throughout that entire region..

Are the end markets, it sounds like spend, Middle East spend on oil and gas is still holding its own and the other markets slant towards consumer, food beverage, that type of thing?.

Yes, just to clarify the Middle East, the Middle East is expanding and other areas. Some of our growth there was in metals. Because of the low cost of energy, they do attract energy intensive industries. The other was in wastewater project as they continue to build infrastructure for their population.

I would say oil and gas is the primary, but we had two very significant projects in metals and wastewater in the Middle East. In the Eastern Europe, a lot of it does tend to be the consumer related industries, per your comment. When we talk about sub-Saharan Africa, it tends to be heavier in mining than anything else at this moment.

The resource industries typically lead. We also see some consumer as the population growth is starting to attract some of the multinational food companies to invest..

Then a last follow-up here, Ted, when I look at the low end of the FY2015 organic growth guide, so the 1.5% core growth, as the fourth quarter plays out and the trend seems to play out, I suspect the A&S business would still trend line out at low-single digits through the fourth quarter, simply because it's got the consumer facing exposure and processor and auto.

The CP&S when you pick up the all in gas exposure, the process, that could likely be a negative number in the fourth quarter year-over-year, despite the fact it should be up sequentially? Would that be the trend?.

I do think our solutions and services business will be down slightly in the fourth quarter year-over-year. Our products business will be up..

The next question is from Jeremie Capron at CLSA. Please go ahead. .

I wanted to follow-up on Scott's question around oil and gas. I get a sense from your commentary that you think we may be approaching a bottom at least in terms of year-on-year contraction. I think your guidance implies double-digit contraction in Q4 and then we will have to see what happens.

Wouldn't that be a rather weak down cycle here, particularly as you compare to what happened in mining? I think it took a good two years for your business to find a flow there? Do you think it's fair to assume that starting next year oil and gas would not be a major drag on your business anymore?.

No, I don't think that's what I was trying to say. What I was trying to say is we aren't ready to call it stabilizing. We'll need at least another quarter to see if the declines that we saw in Q3 start flattening out or if we're going to see continued reduction in Q4.

Right now we're calling, to your point, exactly right, we're expecting a double-digit decline in oil and gas in Q4 and depending on at what level that comes in, we'll have a better feel for going forward.

I do think to the point of your question, I don't think we will see a significant increase in spending until we see an increase in the price of oil. I think those two will be a very connected. At this point, I think we're still at too low of a level to see meaningful incremental investment, no matter where the bottom is.

I think we still need to see higher oil prices to drive new investment, as opposed to just OpEx spending to improve productivity and their cost structure..

Okay. And shifting gears here a little bit here, the free cash flow looks very strong, conversion rate, well above 100%. We've seen that for a few quarters now.

Can you help us understand what is driving this and as a consequence do you see upside to your share buyback target that was set earlier in the year and I think you explained you're trending ahead.

How should we think about buybacks going forward?.

I would say the biggest factor influencing the higher conversion on adjusted income is better working capital management. Working capital has not increased at the rate we expected, despite the fact I'm talking on a constant currency basis, despite the fact we've had about 2% organic growth. That's the biggest factor.

As it relates to share repurchase, we originally set a target in November of about $470 million and as I mentioned in my comments, we now think we will spend at least $525 million this year. We ran ahead of pace through nine months and I think we will run at pace or higher in Q4.

Obviously, that will depend on whether there's any acquisition spending in Q4 and also to an extent on stock price..

The next question is from Nigel Coe at Morgan Stanley. Please proceed. .

I want to understand and maybe it's a dumb question, but when you say productivity, Keith and Ted, what you mean by that? Are we talking here about when the factory is more productively, especially cost control? What does that actually mean?.

All of the things you've talked about. You can think about this in part as volume leverage that we're getting organic growth. You can think of it as lean and Six Sigma projects which are there to reduce costs, the efforts of our strategic sourcing organization to influence material costs.

Margins in our solutions businesses which relates a lot to basically selection of projects and then the execution on those projects. In addition to all of that, savings we got from restructuring actions that we took late last year..

Okay. And then digging down the next layer, we've got SG&A down 5%, just under 5% year-over-year which is slightly more than sales growth. Normally we would expect SG&A to be a bit stickier than sales.

How does all of those actions you just referred to, how is that impacting SG&A line?.

I don't think the actions we've taken have had a big effect on SG&A. I think what you're looking at in the 5% decline is more the effect of currency translation year-over-year. With that said, we've not had large spending increases either in SG&A..

Okay. Just final one, maybe I'm wrong but mining, I think last quarter you mentioned expectation of maybe some growth in mining in the second half of the year. It sounds like that's gone a little bit weaker.

Is that fair? Maybe add some color to what you have seen on mining?.

I think if we look at the year-to-date results, mining is actually slightly up for us year-over-year. The performance in any quarter is going to bounce around a little bit. I suspect for the full-year, mining's going to be either flat or slightly up for us this year..

Your next question comes from Steven Winoker at Bernstein. Please go ahead..

Last quarter, you had talked about as part of the margin discussion, that spending was a bit slower in first half than originally expected, especially R&D efforts. I think you're up 2% compared to 4% you might expect in the second half on R&D. You talked a lot about this.

Can you may be hit the R&D side a little bit? On all of the spending side, are you no longer anticipating bringing that up? What's going on with the projects?.

Last quarter, we talked about spending up about 2% in first half and the expectation that it would be up about 4% and second half. We did not accelerate a lot of spending in the third quarter and we now think that our spending for the second half will be up about 3% instead of 4%. As part of the margin improvement that's reflected in the guidance..

Okay, all right. All of that's really coming in the fourth quarter now..

I would say, not all of it, but back weighted..

Quickly on the solutions versus services down 1%, obviously, I assume solutions was down significant and service is stable.

Can you put color around that?.

If I recall correctly, services was actually up year-over-year in the quarter. You are correct. The decline was all due to solutions..

Okay.

Any number around that?.

I don't know that offhand..

Okay. Keith, a bigger picture of your question, given the unique picture that you guys are in. What I'm seeing across the sector now, what's your view? I know it's a big question here, but what your view of world manufacturing, excess capacity and excess inventory? You've talked about automotive. You've talked about consumer a little bit.

Are their particular spots where you think the world is in a significant excess capacity situation other than the oil and gas commentary in mining?.

I think the one we've been talking most about, historically, is metals. I would say metals is still definitely in an overcapacity situation, particularly metals in China which has not reduced their capacity. You've seen capacity taken out of the U.S. and that's happened over a number of years. I still think we have overcapacity there.

I think we're beginning to see, at least in China, some overcapacity in the tire industry. They still have overcapacity in their overall automotive industry, but it tends to be in the domestic suppliers, the second and third tier automotive companies that are losing market share.

Many of those are state-owned, so they are very difficult to close and to reduce. But I would say that's where we've seen the overcapacity. I would think in most of the other industries, it's not an overcapacity situation. In the emerging markets, it's about creating capacity, particularly for the growing middle class and consumers.

In the mature markets, it's about modernization and reducing cost and improving business performance and investments are going into that. An output of that would be some capacity expansion, but they are not making the investments due to capacity expansion.

I would say, if you take China in particular, independent of overcapacity, there is a need to deal with the escalating labor cost. That's just a natural tailwind for automation investment as well. We do see some benefit there, independent of some of the other comments I made..

The next question is from Julian Mitchell at Credit Suisse. Please go ahead..

The first question, I just wanted to circle back the gross margin expansion you've seen and the extent to which you think that mix has been a help there this year or if you think the mix you've seen in 2015 is fairly typical, assuming no big changes in the overall demand environment?.

I would say if you looked on a year-to-date basis, the mix is slightly favorable this year. It's had a small positive effect on margin. I think for the full-year, I'd expect that to be about the same..

Understood.

Secondly, I guess if you think about the appetite, the customer appetite around large project activity, if we exclude extractive industries for a second, metal, mining, oil and gas, how is the appetite for that kind of project spend changed? Is a very different versus three months ago? Your comments sound a little more cautious, but you have a decent book-to-bill..

I don't think large project activity has changed a lot in the last three months. I think one of the things we've seen is with industrial production rates slowing and that been true pretty much globally, maybe with the exception of EMEA, with industrial production rates slowing, what we're seeing is somewhat less MRO and small project activity..

Thank you. This comes from Robert McCarthy at Stifel. Go ahead, please..

First and I apologize if you've already talked about it on the call, did you cite what the book-to-bill was for services and solutions was on the quarter and what Logix growth rate was?.

Yes. The book-to-bill for solutions and services was 1.1 and Logix growth rate in the quarter was 3.5% organically..

Do you have any outlook for what you expect the fourth quarter for Logix?.

We expect Logix in the fourth quarter to grow less than 3.5%, but still positive..

Okay. And then, the final question is in terms of Canada, in terms of [indiscernible], you have a big global balanced mix in terms of your productive capacity, but clearly the Canadian dollar has moved against you.

Have you called out what kind of the headwind has been on transactional basis there?.

No, I don't think we have. I don't think we have ever talked about specific currency transactional headwind..

Okay. Was it material or not? I guess it wasn't..

I'm stopping to think about it. We manufacturing in Canada and export to the U.S. and we also manufacture in the U.S. and export to Canada. I'm trying to think of what that balance will be..

Okay. It sounds like it's relatively balanced. For some other industrials, they got nipped by that. Don't worry about it. I'll leave it there..

Okay. Thank you, Rob..

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

That concludes today's conference call. At this time, you may now disconnect. Thank you..