Steven W. Etzel - Rockwell Automation, Inc. Blake D. Moret - Rockwell Automation, Inc. Patrick Goris - Rockwell Automation, Inc..

John G. Inch - Deutsche Bank Securities, Inc. Nigel Coe - Morgan Stanley & Co. LLC Richard Eastman - Robert W. Baird & Co., Inc. Charles Stephen Tusa - JPMorgan Securities LLC Richard M.

Kwas - Wells Fargo Securities LLC Jeffrey Todd Sprague - Vertical Research Partners LLC Julian Mitchell - Credit Suisse Securities (USA) LLC Joe Ritchie - Goldman Sachs & Co. LLC Andrew Kaplowitz - Citigroup Global Markets, Inc. Kristen Owen - Oppenheimer & Co., Inc.

Justin Bergner - Gabelli & Company Robert Paul McCarthy - Stifel, Nicolaus & Co., Inc..

Thank you for holding, and welcome to Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. At this time, I would like to turn the call over to Steve Etzel, Vice President of Investor Relations and Treasurer. Mr.

Etzel, please go ahead..

Good morning, and thank you for joining us for Rockwell Automation's third quarter fiscal 2017 earnings release conference call. With me today is Blake Moret, our President and CEO and Patrick Goris, our CFO. Our results were released earlier this morning and the press release and 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 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 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, Steve, and good morning, everyone. Thank you for joining us on the call today. I'll start with some key points for the quarter, so please turn to page 3 in the slide deck. This was another strong quarter for us. Organic growth was 8%, which was in line with our expectations.

I'm pleased to see that this growth was broad-based across the regions and industries. Globally, transportation continued to deliver very good growth. In consumer, food and beverage did well. Heavy industries were also up in the quarter, including good growth in semiconductor. Overall, the macroeconomic environment remains solid.

From a regional perspective, the U.S., our largest market grew 8%. We saw growth in most verticals led by strong performance in transportation. EMEA was flat year-over-year, as expected. The timing of projects is driving some quarter-to-quarter variability in our growth rates. Asia grew over 20%. We saw growth in most verticals led by semiconductor.

Most countries in the region were up including China, which grew about 20%. Latin America grew 12% with strong growth in Mexico. I'll make a few additional comments about the quarter. Acquisitions add 1.2 points of sales growth. ACP and MAVERICK are contributing technology innovation and domain expertise, and are accretive to earnings.

Our process business improved and was up 8% year-over-year organically. Including MAVERICK, process was up double-digits. Architecture & Software had another strong quarter with 10.5% organic growth. Within this segment, Logix was up 10% compared to last year. This was the third consecutive quarter of double-digit EPS growth.

Patrick will elaborate on Q3 financial performance in his remarks. We are pleased with our sales and earnings performance in the quarter. Let's move on to our outlook for the balance of fiscal 2017. As I said earlier, the macro outlook remains solid. Recent projections of industrial production growth are largely unchanged from a quarter ago.

We expect continued growth in transportation and consumer. We expect heavy industry in total to be up low single-digits for the year, consistent with our April guidance. We are still not counting on growth from oil and gas and mining for full year fiscal 2017.

Turning to guidance, considering the macro outlook and our results through three quarters, we continue to expect fiscal 2017 organic sales growth of approximately 6%. We now project fiscal 2017 sales of approximately $6.3 billion, slightly higher than prior guidance due to currency.

Based on our third quarter earnings performance, we are increasing the adjusted EPS guidance range. The new range is $6.60 to $6.80. At the midpoint, this represents 13% adjusted EPS growth for the year. Patrick will provide more detail around sales and earnings guidance in his remarks. Before I turn it back over to Patrick, let me add a few comments.

Our Connected Enterprise strategy is working and positions us well for the future. The pilots continued to deliver tangible results across multiple industries, and we are seeing customers expand pilots to more lines and facilities.

We will remain focused as a single integrated business, helping our customers succeed in the global market by enabling them to be more productive and therefore, more competitive. Our extent of industry knowledge and domain expertise help us deliver value based on each customer's needs. I want to highlight a couple of items.

First, an important announcement we made in June. We will be working in partnership with ManpowerGroup to upskill military veterans, investing in the future workforce and creating a pool of certified talent for in-demand advanced manufacturing roles across the United States. According to a recent survey, most U.S.

employers think automation will increase, not decrease, manufacturing head count, but at a higher skill level. No matter how much you automate, people remain our and our customers' most important asset. Second, I'd like to remind you that Automation Fair is in Houston this year, and we'll be holding our Investor Meeting on Thursday, November 16.

Although Automation Fair is a customer event, it's a great opportunity for investors and analysts to deepen their understanding of automation and learn more about our capabilities as well as those of our partners.

We will show how we are bringing the Connected Enterprise to life and delivering more value than ever before to our customers around the world. So please mark your calendars, and we hope to see you all there. Finally, I would like to thank our employees, partners and suppliers for their continued commitment to serving our customers.

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

Patrick?.

Thank you, Blake and good morning, everyone. I'll start on slide 4, third quarter key financial information. As Blake mentioned, we had a good sales performance in the quarter with reported sales up 8.5%. As expected, organic growth was 8.2%. Our two acquisitions from last September contributed 1.2 points of sales growth.

MagneMotion which was acquired in March 2016 is now included in organic growth. Currency translation reduced sales by 0.9% in the quarter. Segment operating margin of 21.1% was flat compared to last year.

A margin tailwind from strong organic growth and good productivity performance was offset by the restoration of incentive compensation and increased investment spending. General corporate-net expense of $17 million was also flat year-over-year. Adjusted EPS of $1.76 was up $0.21 compared to the third quarter of last year, an increase of 13.5%.

The increase in adjusted EPS is primarily due to higher sales, good productivity and a lower tax rate, partially offset by higher incentive compensation and investment spending. As I mentioned, the tax rate in the quarter was lower than last year.

The adjusted effective tax rate was about 270 basis points lower, as a result of some favorable discrete tax items contributing about $0.06 of adjusted EPS. We are pleased with continued good free cash flow performance. Free cash flow in the quarter was $285 million, or 124% of adjusted income. 12 month trailing return on invested capital was 38.8%.

A few additional items not shown on the slide, average diluted shares outstanding in the quarter were $129.9 million, down $900,000 or less than 1% compared to last year. And we repurchased about 740,000 shares in the quarter at a cost of $116.1 million.

Through three quarters, we're basically on track to spend $400 million on share repurchases this fiscal year. At June 30th, we had $643 million remaining under our existing share repurchase authorization. Moving on to slide 5, sales and margin performance of the Architecture & Software segment.

This segment had another very good quarter with 9.8% sales growth. Organic sales were up 10.5% year-over-year, currency translation reduced sales by 1% and acquisitions contributed 0.3%. Segment margin improved 0.3 points from 27.6% to 27.9% year-over-year.

Operating leverage associated with the sales growth and good productivity were partially offset by higher incentive compensation. And as expected, spending was up year-over-year mostly driven by increased R&D. Finally, currency was a bit less than a point headwind to margins in this segment.

Slide 6 provides the sales and margin performance overview for the Control Products & Solutions segment. We saw a good pickup in growth in this segment with reported sales up 7.4%. Organic sales were up 6.3%. Currency translation reduced sales by 0.8% and acquisitions contributed almost 2%.

Solutions and services organic sales growth turned positive in this segment, up over 4%. The product businesses in this segment were up about 9% on an organic basis. Book-to-bill performance for our solutions and services businesses in this segment was 1.02 in Q3 compared to 1.04 a year ago.

As expected, operating margin for this segment improved compared to the second quarter. Segment margin of 15.3% was down 40 basis points compared to Q3 of last year, primarily due to higher incentive comp more than offsetting leverage associated with sales growth. The next slide, 7, provides an overview of our sales performance by region.

Blake covered most of this in his remarks, so I will skip this slide, which takes us to the next slide, the guidance slide. As Blake mentioned, we are revising our sales and EPS guidance for fiscal 2017.

We now project sales of about $6.3 billion compared to $6.25 billion in the April guidance, an increase of less than $50 million due to a smaller headwind of currency translation. Based on currency rates, the full year headwind from currency is expected to be about 0.5 point.

We continue to project organic sales growth of about 6% and our outlook for the sales contribution from acquisitions remains unchanged at 1.5%. We expect segment operating margin to be a little below 20.5%.

We believe the full year adjusted effective tax rate will now be closer to 21%, mainly a reflection of the lower tax rate in the third quarter of this fiscal year. This would imply a Q4 tax rate of around 25%, which is closer to our underlying tax rate. The adjusted EPS guidance range is now $6.60 to $6.80.

At the midpoint, this reflects a $0.10 increase from the April guidance. The increase in EPS guidance at the midpoint mainly reflects a lower expected tax rate. A modest EPS benefit associated with the smaller currency translation headwind is offset by higher incentive compensation associated with the EPS guidance increase.

We now expect free cash flow conversion to be over 115% of adjusted income for the year. And a couple of other items, general corporate-net is expected to be a little below $75 million for the full year. And finally, consistent with our April guidance, we continue to expect average fully diluted shares outstanding to be $129.9 million.

With that, we'll move to Q&A. Steve..

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

Certainly, sir. Your first question comes from the line of John Inch with Deutsche Bank. Your line is now open..

Thank you. Good morning, everyone..

Good morning. John..

Good morning, guys.

How did China do – China was up 20%, how did China fair, heavy industry versus consumer-facing industries and could you comment on the trend of sustainability in China?.

Yes. I'd say, John, the growth we had in China was broad-based. We saw growth in some heavy industries, particularly semiconductor but also mining and metals, growth in infrastructure as well. We saw good growth in transportation, particularly in tire, and actually auto was up which was better than what we expected in that country for the quarter.

Finally, food and beverage within consumer was also up a bit. So I'd say broad-based in China, including in some heavy industries, but you didn't hear me mention oil and gas..

Okay. So I mean, historically or at least in recent years, China consumer has been sort of the bright spot as heavy industry has been negatively pressured.

Are you suggesting that there's balance in growth or is consumer still significantly ahead of heavy industry, but heavy industry is catching up? I mean, just a little more color would be great, Patrick..

I'd say it's more balanced than before. Before, it was mostly driven by transportation and consumer. This quarter we see significant growth in some of the heavy industry verticals in China..

Yeah. I think what we are seeing in a positive sense is diversification. So we haven't talked as much about semiconductor in the past, but that was significant. And that also is a big part of the automation market and metals has actually been positive for us in China.

We still look at China as fundamentally a two-speed economy where consumer, transportation, life sciences are growing faster in general, but some of the areas of heavy industries other than oil and gas are picking up..

No. Thanks for that. Is Rockwell hiring? And the context of my question is we've obviously been through this multi-period lull and now obviously growth is much better. And if you are hiring, that would sort of speak to, I guess, just sort of your own conviction in the outlook.

I mean, are you hiring and does this pose any kind of incremental headwind the way, say, comp is this year? And sort of the corollary of the question is are there any headwinds that you would call out as we head into 2018 that are going to be noteworthy to say the way compensation was, or anything that just we should – as we sort of think of our modeling, should be sort of cognizant of?.

No, is the short answer. I mean, at mid-single digits growth in fiscal year 2018, that would – the return to incentive comp would cease to be a headwind to us in the fiscal year. Regarding whether we're hiring or not, we are but we're balancing.

So, my staff is looking for areas that bring us additional growth, but also looking at areas that aren't as important anymore. And so while the net increase is not large, we're constantly dynamically rebalancing where we need people, whether it's customer-facing employees, whether it's software developers.

And so we are in the market and actively hiring, but we're also balancing to make sure that we don't create additional headwinds..

So, Blake, all else equal, you return to mid-single digit, kind of your scenario where we would expect to go back to kind of a 30% to 40% variable contribution under that framework just based on your comments?.

Yes, John. 30% to 35% is the range we've shared before..

That's right..

Got it. Thank you..

Thank you, John..

Thanks, John..

Your next question comes from the line of Nigel Coe with Morgan Stanley. Your line is now open..

Oh, thanks. Good morning, guys..

Good morning..

Just wanted to kind of just I guess a follow on – on back to John's question there. So I think you called out FX as a one point hurt to A&S margins. I think you mentioned that, Patrick.

Can you maybe just describe what impact FX is having? Is this mainly just due to the hedge movements or is there some geographic mix on sales? Any help, that would be good..

I don't think that this is an ongoing headwind. We had some significant changes during the quarter related to currency. That is impacting that. And then of course, benefit from the hedges year-over-year for this segment was a little bit less..

Okay.

So the hedge impact will sort of normalize over the next couple of quarters or so?.

Yeah. From an overall company perspective, the impact of hedges was about $1 million which was about neutral year-over-year..

Okay. Okay. That's great.

And then as I think about the investment spending, obviously, you've been talking about investment spending for some time now, but as you're launching your cloud analytics layer, is the investment spending a little bit heavier than normal or is it still very much in the run rate?.

It really is in the run rate. And as I mentioned before, as we're hiring people, we're prioritizing. So there's always a longer list of developments whether it's building out that information platform or it's our core developments in Logix and our intelligent motor control platform.

There's always going to be a longer list than we're going to get to in terms of development. So we're asking our teams to prioritize. There is additional spend that's going to the information side, including the cloud but not just that. And as we talked about in the past, there's going to be a mix of organic development.

It's a focus area for acquisitions and also leveraging the technology from our partners to make sure that that development burden on Rockwell doesn't become oversized..

Okay. That's great. A quick modeling question. You've described the tax rate of 25% normalized.

Is that the rate we should use for next year, Patrick?.

I think that will be in the range for next year at 25%, 26%, in that range. Yeah..

Great. Thanks, guys..

Thank you, Nigel..

Your next question comes from the line of Richard Eastman with Robert W. Baird. Your line is now open..

Yes. Good morning..

Good morning, Rick..

Blake, could you speak to the transportation vertical in the quarter, but specifically to the auto? And I'm curious, if we could have a growth rate on the auto and the influence geographically of auto. I presume it's Mexico and U.S..

Yeah. I'll make some comments, and then Patrick will follow up with some additional color. One of the things that we're particularly proud of with auto, which is over 20% in the quarter, is the diversity of where that's coming from. So powertrain is actually performing a little bit better than our expectations.

EV, so electric vehicle around the world is a material contributor including in Asia. And so those are very encouraging to us.

In terms of traditional internal combustion automotive, that's fairly well balanced around the world, and it's a mix of the brand owners seeking to expand into new geographies, as well as the more frequent model changeovers that we've talked about in the past. And so that diversity has contributed significantly to our growth year-to-date..

So, Rick, Blake mentioned that auto is up over 20% year-over-year in Q3. Actually, we saw double-digit growth in auto in every region except in Latin America in this quarter..

Okay..

So it's broad-based across different regions..

Okay. And just out of curiosity, you mentioned EVs, but is the – I know Rockwell has some content on the automation side at Tesla and the Model 3, in addition to the battery assembly operations, kind of the gigaplant they have.

But is there any pull forward, if you will, of automation spend given the timing on their launch with that model? Is that a noticeable blip in the third quarter and perhaps even the second quarter for auto?.

I don't think we can really attribute that growth to that specific brand owner. What we're seeing is a lot of activity at the tier suppliers for EV around the world, not just for Tesla. And so it's broad-based. There's a lot of new companies seeking to participate in that business, and we're serving a lot of them.

So, I would not attribute it exclusively to the model rebuild now..

Okay. And just last question and a follow-up. Within the CP&S business, when I look at the quarter-to-quarter incremental profitability for CP&S, what would you attribute that to? Is that to the product growth there being greater than the solutions or....

Rick, you're looking year-over-year? Or you're looking sequentially?.

I'm looking from the second quarter to the third quarter, the step up in profitability. I mean, incremental was like 85%..

Yeah. There's a couple of things. One is volume is up, right? So that is helping, we get leverage from volume. But also in the second quarter, you may recall we had the year-to-date adjustment related to incentive compensation. So we had an unusually high incentive compensation expense. We don't have that high of a headwind in the....

In the third..

... in the third quarter compared to the second. So think about volume leverage and then lower bonus incentive compensation..

In the third versus second. Okay. Thank you..

Correct..

Yeah. Thanks, Rick..

Your next question comes from the line of Steve Tusa with JPMorgan. Your line is now open..

Hey, guys. Good morning..

Good morning..

Hi, Steve..

Can you maybe just talk about kind of what's going on in the U.S. automotive, specifically in the context of the current production schedules and then just what your customers are telling you on CapEx. I know Ford's cash was a little bit weak today, and they've been spending pretty heavily.

Any kind of insights that they're giving you on – and there's also been some management changes.

Any kind of insights that they're giving you on their plans for the next couple of years?.

We've talked before about a relatively good visibility on automotive programs that goes out for a period of years and confirming the intention of continuing to spend on those programs with the brand owners, with the tier suppliers. We see that as continued strong for the foreseeable future. So certainly through the end of the year, but also beyond.

And, again, the spend with us is primarily on some of the items that I mentioned before about model changes and expansion geographically. Over time, a reduced SAAR is going to impact us, but we continue to see strong revenue for the foreseeable future. The other thing I mentioned about the U.S.

market is that's been a particularly a fertile ground for us in the information and Connected Enterprise pilots. So a lot of these brand owners are already using our smart products, our Logix and so on, but they're adding the information on top in some of the associated services.

So that's additional customer share that we're seeing even in existing operation. So even when they're not going through a model change or capacity expansion as they seek to get better visibility into their production, reducing unplanned downtime, and some of the other key drivers of that new value..

Okay. When you mix this kind of all-in and you think about the – you're guiding to kind of 6% now for the year. It looks like the fourth quarter is in that kind of 5.5% to 6% range.

Does that feel like the type of economy we're in? Is your ability to kind of sustain – I guess, if I look at just general industrial activity at least across my sector, the organic seems to be in kind of the 3% range in maybe a 2% to 3% economy.

Does this 5% to 6% growth rate kind of seem like, hey, this is sustainably what we can do given this market outgrowth in auto and the consumer dynamics in China, et cetera.

Anything unusual about kind of this year's growth rate or this is what you expect going forward?.

Well, without guiding to fiscal year 2018 organic growth....

I didn't say that. I didn't say that. I didn't ask that, by the way. Just kidding..

The macroeconomic indicators are solid. So PMI continued strong in most spots around the world. Industrial production continue, so largely unchanged from the last quarter. So we do feel like we're in a period of expansion..

Okay. Great. Thanks a lot, guys..

Thank you..

Your next question comes from the line of Rich Kwas with Wells Fargo Securities. Your line is now open..

Hi. Good morning..

Good morning..

I wanted to figure out – I just want to follow up on some auto, a little different tact here. With European diesel penetration coming in pretty significantly versus expectation, a lot of the plans focused on EV and gas-powered trains.

The transition in Europe over the next few years, is that net positive content-wise for Rockwell?.

I don't know that we've modeled the mix between the various transitions. There's some puts and takes in terms of the different parts of the assembly in powertrain process. Some require a little more automation, some a little less. I think the biggest single factor is expansion to new customers.

So capitalizing on some of the openings we have within the brand owners, continued coverage in the tier suppliers around the world, release of new products that makes a difference, continuing to add value to our partnership with FANUC and others.

I think those will have a bigger impact on our revenue growth than the pure split of automation content between EV and IC assembly..

Okay. So share of wallet is more important than kind of neutral in terms of powertrain mix..

Both customer share and the acquisition of new customers..

Great. Okay. All right. And then as you look through the quarter, anything noteworthy in terms of trends in the U.S.

market, in terms of the months and how things trended versus expectation?.

No, Rich. I'd say it was a typical quarter. We always start the quarter a little bit slow, and then it picks up during the quarter, and that's what we saw in Q3..

Okay. And just a finer point on the guide for the balance of the year, typically your EPS in FQ4 is fairly similar to FQ3. You have a little bit tougher year-over-year organic growth rate in FQ4 versus FQ3, but seems like the FQ4 organic growth rate is somewhere around 5%.

So just trying to gauge whether it's mix in there, conservatism, what kind of wouldn't keep you from getting close to FQ3 EPS?.

Yeah. So in Q4, we expect a little bit of a benefit compared to Q3 related to volume. Some of that – typically in Q4 is a pickup in our solutions business which tends to have somewhat of a negative mix impact. One of the items that's impacting Q4 is we expect our spending to be up sequentially and year-over-year in the fourth quarter.

And so that is impacting the Q3 to Q4 performance from an earnings perspective. And then of course from an EPS perspective, we expect a somewhat higher tax rate in the fourth quarter which has a negative impact on EPS..

Great. Okay. Thanks. Thanks for the color..

Thanks, Rich..

Your next question comes from the line of Jeffrey Sprague with Vertical Research. Your line is now open..

Thank you. Good morning, everyone..

Good morning..

Maybe first just to pick up on that point, Patrick. So it did sound like when you were talking about the guide raise, you were talking about some offsets and incremental spend. It sounds like it's in the fourth quarter. But, I mean, Blake said earlier, it's in the base.

But relative to what you were expecting, say, a quarter ago, is there now an elevated level of spending in the guide for 2017?.

No, Jeff. There is not. The only, call it, increase we have is really related to incentive compensation. We increased the guide at the midpoint by about $0.10, and so there's a little bit more incentive compensation associated with that. And basically, that is being offset by the tailwind we get from a lower headwind of currency translation.

Those two kind of net out..

And similar to Q2, although there's less year left to catch up on, is there – the Q3 then reflect kind of a catch-up year-to-date then on the higher incentive comp number?.

Yeah. But it's a much smaller number, Jeff. So last quarter, I said that for the full year, the year-over-year increase is about $110 million, $115 million. Now it's about $5 million higher for the full year. And of that, $3 million was reflected in Q3, a little bit over $3 million, and the rest was reflected in – will be booked in Q4..

Okay. Great. Thank you..

So much smaller numbers..

Okay. And then just thinking about A&S specifically, give us a read on how A&S performed in the U.S..

So A&S, we said, was up organically 10.5% year-over-year. In the U.S. it was above that..

Okay.

And in Europe, these projects that you're talking about that have caused some timing influence, a little bit of color on what's going on there and how you see that playing going forward?.

Yeah. I think there's a little bit of movement between the different OEMs, for instance, in Europe. We continue to see very good adoption and good growth in our CompactLogix platform at a broad range of OEMs. The variability was really customer-specific.

Some of our traditional customers may have purchased a little bit less in the quarter while we're building at some of the newer machinery builders. So that's really the majority of the variability..

And then just one last one for me. At the midpoint of your range in your free cash flow conversion, you actually have raised your free cash flow per share $0.80 for the year, roughly.

What is driving that?.

Well, we have – first of all, from a free cash flow performance, what's helping us from a conversion point of view is the fact that we are accruing bonus which won't be get paid out till the first quarter of fiscal 2018. So that's worth about 10 points or so of conversion.

And then the other thing that's helping really from a cash flow generation point of view, not the conversion, is that we're increasing our net income – our earnings performance for the year..

Right. But on incentive comp, you only went up $5 million from Q2 to Q3..

Oh. Yes.

I think you're referring to going from 105% to 115%?.

Yes..

I think, it's having another good quarter of cash flow conversion behind us. That's the main driver, Jeff..

Great. Thank you very much..

Thank you..

Your next question comes from the line of Julian Mitchell with Credit Suisse. Your line is now open..

Hi. Good morning..

Good morning..

Morning. Just a first question on A&S globally. You saw the organic sales growth. It was very good again in Q3, a little bit slower than Q2 off a tougher comp a year ago.

So when you're looking at revenue growth outlook in that segment, should we expect that just to drift off as your comps get a lot tougher into the calendar fourth quarter and just looking out over six months, or is there any actual improvement in real end demand going on, or is end demand all-in pretty stable and it's just a function of comps driving your growth rate now?.

Julian, I think we see continued strength and growth, but the year-over-year growth rates will moderate because, as you say, the comps get tougher..

Yeah. I would also say we do feel confident that we're gaining share in core platforms. So at the growth we're seeing and comparing it against what external measures are available, we think we're taking share in A&S products..

Thank you.

And looking at your sort of fourth quarter, should we expect that CP&S can hold the organic growth rate it saw in Q3 at about 6%?.

It might be a little less than that. Yes. I would say similar, maybe a little..

Understood. And then lastly, a quick one. This is normally an issue for Rockwell, but so many electrical companies have mentioned some challenges around price or price cost in the last 10 days or so.

I wonder if you were seeing any change in pricing dynamics in any particular region or product category right now?.

No. We're in an intensively competitive market. I think we're guiding to a little less than a point of price because we're an asset light business, and mainly trade on intellectual capital, cost headwinds are not a significant new headwind for us..

Understood. Thank you..

Thanks..

Thank you..

Your next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open..

Thank you. Good morning, Blake and Patrick..

Good morning..

Good morning..

Can you guys touch a little bit about what you're seeing in Europe? So in fiscal second quarter, you saw some good acceleration and I fully appreciate that the comps were tougher in fiscal 3Q.

But maybe just a little bit more color on the slightly negative growth that you saw in Europe this quarter?.

Yeah. I think as Blake mentioned earlier, actually, the growth in EMEA came in as we expected. And I would say that what we are seeing in the region is the timing of projects is driving some variability in our quarterly growth rates. We're not seeing an underlying trend that's different than what we expected.

It's more related to timing of some of the projects we have throughout our businesses. We still expect to grow in EMEA for the full year. It's going to be below the company average. So that has not changed. And there are areas in EMEA where we continue to do well, for example, with machine builders and our mid-range controller family..

We also continue to see growth in the emerging parts of Europe..

Got it.

And were there any particular areas within Europe that were weaker than you expected this quarter?.

Well, every quarter, there is some variability. In this case, we saw good growth in emerging Europe, and some of the Western European countries were a little bit less than what we expected. But I wouldn't read too much into that. I think that's normal quarterly variability that we see all the time..

Okay. All right. That's helpful. And then you typically – you mentioned earlier on the call that you typically don't talk about the semiconductor space. I think it's a relatively small piece of your business.

So maybe to the extent that you can quantify what percentage of sales semis is for you guys? And then more specifically, one of the trends we've seen this year is just electronic CapEx has been up a lot. So to the extent that you can just comment on cyclical versus potentially sustainable or structural growth in that industry, that would be helpful..

Yeah. So first of all, semiconductor and electronic manufacturing and assembly are roughly 5% of our sales. And as you pointed out, they are in a period of investment. That's the chip production, that's the glass panel fabs. We have a particular strength in the facility management control system.

So the environmental controls that are so important to those kinds of advanced manufacturing processes are an area that we're quite strong in. Characterized growth centered in Asia, in the U.S. especially, and they are in a period of good spend that's predicted to continue for a while, but there will be a certain cyclical element of that..

Got it. And you mentioned, just maybe follow-on there, you mentioned that China was up about 20%.

What was your semiconductor business up this quarter?.

You mean, specifically within China?.

Yes..

It was a little bit more than that. Actually, it was – yes, it was more than that in China..

One of the things that contributes to the growth as well is for a lot of that business, it involves value add as well. So engineering services, panel fabrication. So it's not just the loose products, but it's also the value add that increases the value of those sales..

Got it. Thank you, guys..

Thanks, Joe..

Your next question comes from the line of Andrew Kaplowitz with Citi. Your line is now open..

Hey, good morning, guys..

Good morning..

Solutions and services, which went down 3% last quarter, I think up 4% you said this quarter. We know solutions is big in heavy industries. You already mentioned that you still expect heavy industries to be up low-single digits for the year.

Is there any evidence though that it is accelerating a little? I mean I know you mentioned nothing really going on in oil and gas.

What about mining or some of the other segments of heavy industries? What contributed to that sort of inflection in the solutions business?.

Yeah. It's still variable around the world. So we mentioned last quarter that we are seeing a bit of a improvement in mining in Asia, for instance, but we're not ready to call it broad-based around the world.

We still see pressure from lower commodity prices like copper still below $3 a pound, and we're still dealing with overcapacity in steel, that's putting pressure on that. That being said, we've got some bright spots. So metals has been relatively strong as customers modernize and, in some cases, consolidate facilities but adding automation.

In North America, the lower cost of feedstock in natural gas is giving us good growth in chemical. So it's spotty around the world. We're not ready to call a general recovery, but there are spots that have contributed to that relatively improved performance in solutions and services..

Andy, obviously, what's helping us is that some of those heavy industries are not as a significant drag now than they were a year ago or several quarters ago..

Okay. That's helpful, guys. And, Blake, maybe somewhat related, process was up 8% in the quarter, which continued to improve from last quarter.

Would you say that pickup in growth is more Rockwell-specific based on things like your hybrid control offerings, or is it just the process markets themselves are improving?.

I think it's both. I mentioned before the chemical market. Certainly, the continued evolution of our PlantPAx control platform has helped. It's going to continue to help. We've got a lot of developments lined up over the next few years that are going to increase our competitiveness there. But at least is important is the domain expertise.

So we're better able to serve, for instance, the chemical market because of the MAVERICK acquisition. And that domain expertise is absolutely critical to foster the trust in those customers that we know how to address their mission critical applications.

So I'd really say it's a mix of our improved ability to serve the market, as well as a recovery in some areas and some diversification in terms of our ability to address additional process control applications..

All right. Thanks, guys..

Thanks, Andy..

Your next question comes from the line of Noah Kaye with Oppenheimer. Your line is now open..

Great. Thank you. This is Kristen on for Noah. Good morning..

Good morning..

Good morning..

So, you mentioned in the release, you have been seeing some significant results on the Connected Enterprise pilot programs.

I'm just wondering if you can give us any sort of specific examples or maybe quantify the tangible results that you're seeing? And how are you seeing those pilot programs as they transition to full-scale deployment?.

Sure. Happy to do that. As we've talked about, we're very pleased with the evolution of these pilots. We have a couple dozen that we're formally tracking across different industries and different parts of the world.

We've made some public announcements about a few of those, Metso, in the mining world as we partner with them, in conjunction with Microsoft, to be able to enhance their ability to add value to end user customers in areas like remote monitoring.

Great Lakes Brewing, craft brewery located in Cleveland, is using some of our device-level analytics and some of our reporting tools to get better production visibility. Again, that's one that we're working with Microsoft to deliver that value for them. It's a great story.

It's giving value to that individual customer, but it's also something that will, no doubt, expand to other similar operations.

It's an easy way to get started and to get the value from the Connected Enterprise, from that integrated control and information without having to send all the data to the cloud in a very expensive and high-risk type of application.

In oil and gas, we've talked about companies like Shell in the past that continue to expand their use of our information solutions and connected services. So really across industries and across geographies, we're happy with the evolution.

In terms of quantifying the specific value, we think it's contributing to our very strong product growth as customers put that foundation in place. That's where the data comes from.

But also we still believe that we're on track to deliver double-digit growth from some of the areas of new value in the Connected Enterprise, the information solutions, and the connected services that customers turn to as they try to integrate that control and information..

No, that's very helpful. And then just sort of as my follow-up, we saw another great quarter of cash generation, continuing to generate just tremendous amount of cash on the balance sheet.

So in light of that, how are you thinking about capital deployment priorities at this stage?.

Yeah. That has not changed. So we'll fund our organic growth, that's priority number one. We continue to look for acquisitions that have a very good strategic fit and that will help us grow faster organically as well. And then after that, we continue to target a dividend with a yield and payout that's at the median of our peers.

And finally after that, we return cash through share repurchases. So that remains very consistent..

Great. Thank you so much..

Thank you..

Your next question comes from the line of Justin Bergner with Gabelli & Company. Your line is now open..

Good morning, everyone. Nice quarter..

Thanks, Justin. Good morning..

First question relates to oil and gas. I guess, I'm not sure if you broke out how oil and gas performed in the quarter.

And then secondly, was that really the only market that maybe didn't do as well as you expected in the June quarter or were there other markets that sort of fell short of your expectations?.

Yeah. Actually, I'd say that oil and gas for us in the quarter, just like mining, they were actually up a little, call it low single-digit. But we think it's more maybe some hovering around the bottom than anything more than that. We're not seeing a big turnaround yet in those verticals..

Yeah. And so the ones we typically talk about and we've talking about together over the last couple of quarters has been oil and gas and then a broad-based mining recovery. And going back a few years, we were used to outsize growth in those areas.

And even though we did see low single-digit growth in mining and oil and gas in the quarter, we're not ready to call a general inflection point across the world..

That's why we continue to believe and our guidance continues to assume no year-over-year growth for the full year for both of these verticals..

Okay. Second would be on the question of currency tailwinds. I mean, you mentioned that you're going to have about $5 million of incentive comp, and that will be more or less offset by the FX tailwinds over the quarter just completed and the September quarter.

I mean, should we think about the FX tailwind sort of picking up as we get into fiscal year 2018 if exchange rates stay at current levels? And sort of what will be the puts and takes to think about how the changing currency environment will affect profitability going forward?.

So we're not necessarily known for being good forecasters of currency. But at the current levels of currency, instead of having a tailwind, it could be a small – instead of having a headwind like we have this year, it could be somewhat of a positive. It's still early.

Currencies move around, and we'll share with you in November what our assumptions are for fiscal 2018..

Okay. Thank you. And then finally, just – Latin American strength has been exceptional. I mean, it continues to be exceptional. I know, it's something a lot of people take for granted, but it's really a strong point of the company in this quarter in particular.

Is there any dynamic there that is worth highlighting given the strong comp? And obviously, Brazil is not particularly rosy now so the strong results stands out even further..

Well, I agree. It is remarkable. It's a source of traditional strength for the company. A lot of that growth has been centered recently in Mexico as Brazil and Venezuela, among others, deal with continuing political uncertainty. And we enjoy in Mexico and in some countries diverse space.

So it's not just the heavy industry, but it's automotive, it's food/beverage, tire manufacturers are locating in Latin America. So those would be a few additional comments about that growth. But it's a source of pride for us. So we have that relatively strong share in Latin America..

Great. Thanks for taking my questions..

Operator, we'll take one more question..

Your final question comes from the line of Robert McCarthy with Stifel. Your line is now open..

Hi. Thanks. Thanks for fitting my questions in, or questions. I guess, the first question is maybe following up on capital allocation. I mean, obviously, we haven't gotten much in the way of policy traction for the Trump administrational on tax and there's the limited visibility there, particularly with respect to repatriation.

But at some point, is there urgency to kind of come up with new framework for your capital allocation given the prevailing environment? I mean, do you think you have to, just to put a finer point on what kind of your priorities are or sizing the priorities in terms of capital allocation or bringing back cash? I mean, could we talk about that for a little bit?.

Yeah. I think, the answer is, Rob, that we – obviously, we look forward to potential tax reform including the lower rates, including an opportunity to repatriate cash, including moving towards a territorial tax system. But absent that, we can continue doing what we have been doing for the last several years.

There is no need for us to repatriate the cash that's overseas. It's permanently reinvested there. And as our cash needs in the U.S. are larger than our cash generation, we continue to gross up the balance sheet. And so there is no need for us to change it at this time.

The one item that could change that is if for some reason our credit rating would come into play, but I think we're still far away from that..

Okay. And then as a follow up, in terms of the acquisition opportunity and landscape, this is kind of two questions tied together.

I guess, Blake, where do you see the most opportunity to structurally improve some of your businesses from a domain expertise standpoint or from distribution or geographic distribution? Where do you see the biggest opportunities for M&A or collaboration?.

Sure. Well, just to reiterate, when we look at acquisitions, we look at their ability to accelerate our technology innovation, our domain expertise and/or our market access. And the best ones bring us benefits in multiple of those dimensions. On the technology side, information solutions is a particularly interesting area for us.

In domain expertise, process continues to be an important opportunity for us. And then market access, as you would expect in some places, Asia, Europe where we have lower relative share, there are opportunities there as well.

We're looking at our acquisition pipeline which is robust, first, in terms of the strategic fit in those dimensions, and we're satisfied and optimistic that what we've talked about before as our ability to grow on top line, have accretive acquisitions, but most importantly have them contribute to the strategy in areas like information management, analytics and so on..

I'll leave it there. Congratulations on a good quarter..

Thanks, Rob..

Thank you..

Okay. That concludes today's call. Thank you all for joining us..

This concludes today's conference call. You may now disconnect..