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

Jeffrey Todd Sprague - Vertical Research Partners LLC John G. Inch - Deutsche Bank Securities, Inc. Rich M. Kwas - Wells Fargo Securities LLC Scott Davis - Melius Research LLC Andrew Kaplowitz - Citi Research Joseph Giordano - Cowen & Co. LLC Justin Laurence Bergner - Gabelli & Company Noah Kaye - Oppenheimer & Co., Inc. (Broker).

Thank you for holding, and welcome to Rockwell Automation Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open the lines up for questions. At this time, I would like to turn the call over to Mr. 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 fourth 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 good quarter for us. Organic growth was about 6%, which was slightly above our expectations.

I'm pleased to see that, once again, this growth was broad-based across both industries and regions. Transportation had another good quarter, led again by automotive, which was up about 10%. In consumer, food and beverage continued to do well. Heavy industries were also up in the quarter, including good growth in semiconductor, chemicals and metals.

Importantly, we saw oil and gas return to meaningful growth in the quarter. We had a strong finish to the year in orders, which were up high-single digits in the fourth quarter for the overall company. From a regional perspective, the U.S., our largest market, grew almost 6% organically.

We saw growth in almost all verticals, including strong performance in semiconductor, automotive and metals. EMEA was up 5% in the quarter, a nice finish to the year. We continue to make progress with OEM machine builders. Asia grew 5%, led by growth in semiconductor. China was up 6%. Latin America grew 2%, led by heavy industries.

I'll make a few additional comments about the quarter. Acquisitions added 1.3 points of profitable sales growth. Logix was up 8% compared to last year. Our process business improved, and was up 9% year-over-year organically. Including our MAVERICK acquisition, process was up almost 20%.

We also had two specific items in the quarter that were not in our previous guidance. First, we sold a small product distribution business that was part of our Control Products & Solutions segment.

Second, we initiated restructuring plans related to manufacturing re-footprinting, as well as general cost reductions to redirect spend to our highest Connected Enterprise priorities.

These actions accelerate our ongoing efforts to sharpen our focus on the Connected Enterprise strategy and further enhance the competitiveness of our products, services and solutions. We will continue to balance investments with our commitment to delivering profitable growth.

Patrick will elaborate on our fourth quarter and full-year financial performance in his remarks. Moving to the full year, overall, fiscal 2017 was a very good year for us. Here are some key points.

Continuing several years of good growth, automotive had another strong year, including the contribution from our powertrain initiative and electrical vehicle activity. Consumer verticals were up mid-single digits led by food and beverage. After a few down years in heavy industries, fiscal 2017 was a year of low-single-digit growth.

We saw very strong performance in semiconductor and oil and gas improved over the course of the year. Logix grew 10% in 2017 and process also returned to growth. We saw good growth in revenue streams related to new value from the Connected Enterprise. Our pilots are progressing well and expanding in all industries.

We'll talk more about this next Thursday at our Investor Day. Our customers and our management team will provide specific examples of how the Connected Enterprise is helping companies successfully compete by becoming more productive.

With respect to financial performance this year, we continue to make investments in the Connected Enterprise, including core offerings, information solutions and connected services. We had another good year of free cash flow conversion. We continued to return cash to share owners, over $725 million during fiscal 2017.

Just last week, we announced a 10% increase in the annual dividend. This reflects our confidence in sustained free cash flow through the cycle. Our recent acquisitions contributed 1.5 points of profitable growth and increased our technology, domain expertise and market access.

We have a strong pipeline of both large and small acquisition opportunities and we have recently increased engagement with the start-up community. During the year, we added more resources to focus on acquisition and investment opportunities. We continue to expect acquisitions to generate a point or more of growth each year.

We also continue to leverage strategic partnerships, make targeted technology investments and gain access to emerging technologies to complement our own research and development activities. Our employees, partners and suppliers continue to differentiate us, and I would like to thank them for their efforts every day.

Let's move on now to the fiscal 2018 outlook. I'll start with market conditions and economic indicators. Global macroeconomic conditions are solid. Current forecasts call for improved global GDP and industrial production growth rates and PMI measures are at high levels.

Our strong orders performance in the fourth quarter positions us well as we enter fiscal 2018. Taking all this into account, we expect another year of good growth in fiscal 2018 with continued growth in consumer and transportation and a meaningfully higher contribution from heavy industries, including oil and gas.

We expect our fiscal 2018 organic sales to be up 5% year-over-year at midpoint of guidance. The absence of the business we sold in Q4 will reduce growth by a little more than 1 percentage point, while currency is expected to add 2.5 percentage points to growth.

Including the impact of currency, our fiscal 2018 sales guidance did sales of about $6.7 billion and adjusted EPS of $7.20 to $7.50. Patrick will provide more detail around sales and earnings guidance in his remarks. Before I turn it over to Patrick, let me add a few comments. I look forward to seeing many of you next week at our annual Investor Day.

As usual, we will hold Investor Day at Automation Fair, our main customer event, which will be in Houston, Texas this year. This is a great opportunity to see how we are bringing the Connected Enterprise to life for our customers.

We will showcase our latest innovations, acquisitions and information solutions for thousands of worldwide customers, highlighting how the powerful combination of Rockwell Automation and our partners brings the Connected Enterprise to life.

The opportunities for integrating control and information are greater than ever, and the value of the Connected Enterprise is being demonstrated across all of our verticals and around the world.

I believe we are best positioned to deliver this value to our customers, because we are already on the plant floor, with a large installed base we have differentiated technology and domain expertise, and we have a long history of successful partnerships.

The value we provide is in high demand as every day customers are pulling us into their plans to connect their enterprise to become more competitive. We'll continue to invest in technology and domain expertise to expand this value and profitably grow share, more next Thursday during Investor Day.

Finally, I want to briefly address our announcement from last week regarding Emerson Electric's unsolicited proposals. As you saw, we issued a press release on October 31 confirming that Rockwell Automation had previously rejected two unsolicited proposals from Emerson.

As we noted in the release, the Rockwell Automation board of directors carefully reviewed and evaluated each of the proposals in consultation with its financial and legal advisors, and unanimously determined that the proposals were not in the best interest of the company and its shareowners.

Rockwell is uniquely positioned as the world's largest company dedicated to industrial automation and information. We deliver applications across all industries and process hybrid and discrete on a single platform and one software environment, which is very attractive to both our customers and our distribution channel.

We believe the company is well-positioned to create substantial additional value for our shareowners by continuing to execute on our strategic plan. Over the past week, we have talked with many shareowners and analysts who are equally confident in the company, this team, and our ability to deliver additional upside and execute on our plan.

Our fiscal 2017 results and guidance for fiscal 2018 demonstrate the strength of our business and reinforce confidence in our strategy and that is where our attention is focused. The purpose of the call today is to discuss our results and next year's guidance. Now, let me turn the call to Patrick for a deeper dive on our results.

Patrick?.

Thank you, Blake, and good morning, everyone. I'll start on slide 4, key financial information fourth quarter. As Blake mentioned, we had good sales performance in the quarter with reported sales up 8.4%. Organic growth was 5.6%, a few million dollars better than we expected.

Currency translation contributed 1.5 points to sales growth, also a bit better than expected. Our two acquisitions from last September contributed 1.3 points of growth.

Before I cover the other elements on this page, let me provide more detail on the restructuring charges in the quarter, as well as on the sale of the business Blake referred to in his comments, neither of which were included in our July guidance. We booked $43 million of charges in the quarter, all of which impacted segment earnings and margin.

About half of these charges relates to a re-footprinting of our manufacturing operations. This includes the announced closure of our manufacturing facility in Aarau, Switzerland. This large re-footprinting will take several years to execute and is expected to yield attractive incremental earnings once finalized.

We have successfully executed similar projects in the past. The other half of the $43 million in pre-tax charges relates to general SG&A cost reductions in order to redirect spending through our highest priority areas, particularly Connected Enterprise-related investments.

We expect fiscal 2018 gross savings associated with the $43 million charges to be about $20 million. After taking into account further implementation costs for our re-footprinting, the net benefit to fiscal 2018 should be about $10 million.

The net annualized run rate benefit is expected to be over $50 million once the manufacturing re-footprinting is finalized. With respect to the sale, the business we sold was a product distribution business in the Control Products & Solutions segment.

The business has no Rockwell intellectual property and includes products sold outside of our core channel and under different brands. We sold the business for $94 million with a potential earn-out on top of that. In the quarter, we booked a pre-tax gain of approximately $61 million associated with the sale.

Let me cover one other item that was not reflected in our July guidance and relates to the voluntary pension contribution we made during our fourth quarter. We decided to make a $200 million pre-tax contribution to the U.S. pension plan. A reduction in PBGC premiums made this financially attractive. With potential U.S.

tax reform in the works, we decided to make the contribution now. Based on our most current projections, we do not expect mandatory contributions to the U.S. pension plan for at least five years. With that, let's move on to the other elements on this page. Segment operating margin of 17% was down 280 basis points compared to last year.

A margin tailwind from strong organic growth was more than offset by higher restructuring charges, increased incentive compensation and higher investment spending. Adjusting for the restructuring charges, which as I mentioned were not part of our prior guidance, segment margin was a bit lower than expected due to currency.

Currency translation was a slight tailwind to sales, but represented the headwinds to both margin and EPS in the quarter compared to our expectations. General corporate-net expense of $24 million was a little higher than expected and about flat year-over-year.

Adjusted EPS of $1.69 was up $0.17 compared to the fourth quarter of last year, an increase of 11%. The gain on sale and the restructuring charges combined yielded a $0.04 net adjusted EPS benefit. The remaining year-over-year increase in adjusted EPS is primarily due to higher sales, offset by higher incentive compensation and investment spending.

The adjusted effective tax rate of 25.9% was up 3 points compared to last year and includes U.S. taxes related to the gain on the divestiture. Excluding the $200 million pre-tax pension contribution, free cash flow in the quarter was in line with our expectations. 12-months trailing return on invested capital was 39%.

Let me add a few additional items not shown on the slide. Average diluted shares outstanding in the quarter were $129.8 million, flat to last year. We repurchased about 200,000 shares in the quarter at a cost of $34.6 million. For the year, we repurchased 2.3 million shares at a cost of $336.6 million. This is a bit short of our $400 million target.

At September 30, we have $608 million remaining under our existing share repurchase authorization. Moving on to slide 5, key financial information for full year of fiscal 2017. In short, we had a good year with 14% adjusted EPS growth on 7% higher sales. We talked all year about higher incentive compensation being a headwind to margin and adjusted EPS.

For the full year, incentive compensation was about $115 million year-over-year headwind. The higher incentive compensation and restructuring charges represented more than a 2-point year-over-year headwind to segment margin and had a significant impact on earnings conversion. Adjusted EPS was $6.76.

Excluding the Q4 gain on sale and restructuring charges, adjusted EPS of $6.72 ended up slightly better than we expected. The full-year adjusted effective tax rate of 21.5% is a bit higher than the 21% rate we provided you last quarter, primarily due to the gain on the business sale. Free cash flow was 102% of adjusted net income.

Excluding the Q4 items and the pension contribution, free cash flow conversion was 120%, which compares to the 115%-plus guidance we shared with you in July. Moving on to slide 6, sales and margin performance of the Architecture & Software segment. This segment had another good quarter with 8% sales growth. Organic sales were up 6.2% year-over-year.

Currency translation increased sales by 1.6%, and acquisitions contributed 0.2%. For the quarter, segment margin decreased 210 basis points year-over-year. Operating leverage associated with the sales growth was offset by higher incentive compensation and restructuring charges.

And as expected, spending was up year-over-year, mostly driven by increased R&D. Slide 7 provides the sales and margin performance overview for the Control Products & Solutions segment. We saw another good pickup in growth in this segment with reported sales up 8.7%.

Organic sales were up 5.1%, currency translation contributed 1.4%, and acquisitions contributed 2.2%. We had a second consecutive quarter of solutions and services organic sales growth up over 3%. The product businesses in this segment were up about 7% on an organic basis.

Operating margin for this segment contracted 330 basis points compared to Q4 last year, primarily due to higher incentive compensation and restructuring charges, more than offsetting leverage associated with sales growth. The majority of the restructuring charges and higher incentive compensation affected this segment.

Book-to-bill performance for our solutions and services businesses in this segment was 0.98 in Q4 compared to 0.92 a year ago. This is a bit stronger than usual performance in Q4. As Blake mentioned, overall company orders were up high-single digits in Q4. The next slide 8 provides an overview of our sales performance by region.

Blake covered most of these details in his remarks. So I will just point out that growth was broad-based across geographies for both the quarter and full year fiscal 2017. This takes us to slide 9, guidance. We project sales of about $6.7 billion, an increase of about $400 million compared to fiscal 2017.

Organic sales growth is expected to be within a range of 3.5% to 6.5%. Consistent with currency rate projections for the next 12 months, we expect a tailwind from currency translation of about 2.5 points, and the sale of the business in Q4 is expected to be a little more than a 1-point headwind.

We expect segment operating margin to be a bit below 21.5%. Excluding the impact of the sale of the business and the fiscal 2017 restructuring charges, this implies earnings conversion of about 35%.

We believe the full-year adjusted effective tax rate will be about 24.5%, a 3-point increase, mainly resulting from the discrete tax items we benefited from in fiscal 2017. Included in our 24.5% tax rate is an estimated impact of excess income tax benefits from equity-based compensation.

Note that the 24.5% tax rate does not include any potential impact from potential U.S. corporate tax reform. The adjusted EPS guidance range is $7.20 to $7.50. At the midpoint, this reflects a 9% increase compared to fiscal 2017 on 6% higher sales despite the significant headwinds from a higher tax rate.

Free cash flow conversion is expected to be about 100%. I'll add a couple of other items. General corporate-net is expected to be about $75 million for the full-year and we are targeting about $500 million in share repurchases and expect average fully-diluted shares outstanding to be about $129.3 million. Page 10 shows an adjusted EPS bridge.

My comments will be from the left to the right. As I mentioned earlier, reported fiscal 2017 adjusted EPS of $6.76 includes a $0.04 net benefit from the Q4 gain on sale and restructuring. Excluding that, we came in at $6.72 compared to our guidance midpoint of $6.70. On 5% organic sales growth in 2018, we expect EPS contribution of about $0.70.

And as we mentioned on prior calls, incentive compensation is not a headwind at the midpoint of fiscal 2018 guidance and instead represents a tailwind of about $0.10. Currency is expected to yield a benefit of about $0.20.

The sale of the product distribution business in the CP&S segment represents a loss of earnings of $0.05, and as expected, we see a significant headwind from a higher adjusted effective tax rate. Finally, there is a modest benefit from lower pension expense, a couple of pennies, and lower share count.

We project a smaller-than-typical EPS benefit from share repurchases, given the significant increase in our share price, which impacts the number of shares we repurchase. Let me add that while we expect another good year of sales and EPS growth in fiscal 2018, we do not expect year-over-year EPS growth in the first quarter.

We had an unusual low tax rate and lower spending in the first quarter of fiscal 2017, and while for overall fiscal 2018 incentive compensation is a year-over-year tailwind, for Q1, it will be a modest headwind. With that, I'll turn it over to Steve..

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

Certainly. Our first question comes from Jeff Sprague from Vertical Research. Please go ahead..

Thank you. Good morning. Boy, a bunch of things. I guess I'll try to keep it tight. First, just to better understand the quarter, it would be helpful to get some color on how the restructuring's set in the segments and how the FX played through the segments. Patrick you gave us a directional comment there, but to quantify that would be helpful.

And then maybe more importantly, I'll avoid the Emerson question, but not showing growth in the first half of 2018 even with the high tax rate sounds peculiar to me.

Is there something other than investment spending that we should be thinking about in that regard?.

Okay.

Jeff, with respect to the restructuring charges, you can think of the charges being a 60/40 split, so 60% of the charges going to the CP&S segment, 40% of the charges impacting Architecture & Software, and so that's about a 3-point headwind to the CP&S segment margin in the quarter and a little over a 2-point headwind for the Architecture & Software segment in the quarter.

With respect to the question you had about fiscal 2018, my comments about no year-over-year EPS growth was with respect to Q1, not the first half of the year. So it's only for Q1 that we expect adjusted EPS to be down year-over-year for the items – because of the items I mentioned, but that is not for the first half.

For the first half, we do expect EPS growth. With respect to currency compared to the prior year, currency was about a 0.5 point hit to segment margin for the company and it was a little bit more than that for A&S and a little bit below that for CP&S..

Great.

And then just as a follow-on, Blake, just to hit really kind of the strategic direction of the company and your push-back on Emerson and more importantly your view of the company going forward, do you, in fact, expect a much higher level of investment spending to execute on that? Is there anything unusual and what you plan to spend in 2018? And maybe just a little more – I'm sure we're going to hear a lot next week.

But, just a little more about maybe what your customers are saying about your position and your business proposition..

Sure. Let me start with the last. Customers are voting with their wallets and that's why we're gaining share broad-based across regions and in industries.

The Connected Enterprise and bringing it to life remains our strategy and that means that we integrate control and information across the enterprise to help industrial customers and their people be more productive, and that is what we do. We're a single integrated business, exclusively focused on that.

We're the biggest company in the world that's devoted to industrial automation and information. And customers are telling us it's the right strategy. I would add that it's very compelling to them to have such a tightly integrated business because it brings efficiencies to them as well as to us.

Having a single platform within their enterprise to solve different types of applications is a huge productivity benefit to them. They can get lots of different products from different companies. But having a single platform with a common software environment is something that customers tell us, over and over, brings them a lot of benefit..

Thank you..

Your next question comes from John Inch from Deutsche Bank. Please go ahead..

Thank you. Good morning, everyone. Let me start by asking, so we had this $0.28 gain and the $0.24 of charges.

Patrick, what amongst these charges would have been normally run through anyway? Like in other words, I'm trying to understand, did you pull forward intended spending, or would you have spent this if you haven't had the gain? Like what – I'm trying to sort of – just kind of what's ultimately sort of a normalized versus unusual to kind of decipher how ultimately your business has fared?.

Yeah. You can think of normalized restructuring charges for our company being in about $10 million per year, and we have, every quarter we have some charges. The charges that we just called out now would be on top of the normal $10-ish million we do. And so, obviously, a couple items played a role here.

Obviously, we had the sale and the large gain who we've been looking for a while now at our supply chain and potential re-footprinting there. So we decided to pull that trigger.

And as we mentioned in our comments, the other item is we're constantly looking at where we can redirect spending through our higher-priority areas related to the Connected Enterprise, and these restructuring charges enable us to do both. One is a long term re-footprinting; the other one is shorter term, redirecting some of our spend..

Yeah. Let me also add and this goes back to the question that Jeff asked as well. Do we expect dramatically higher, unusually higher development spending going forward? And the answer to that is no. We continue to increase, as modestly as a percentage of total revenue, our development spend by working with the best partners in the business.

By making acquisitions as well to complement our organic strategy, we're able to continue to keep spending at managed levels..

Okay. So, is it fair to say for the Swiss facility, et cetera, does the $43 million ring-fence this? Because I had sort of thought like you had intimidated that there was still going to be more of these initiatives that bleed into 2018.

So, just to be clear and maybe you said it, but is 2018 back to the normal $10 million spending or is there a still incremental spending that's occurring without offsetting gain?.

The normal $10 million, John..

Okay. So 2018 is the normal $10 million. Okay..

Yes..

Why did China slow to mid-single digit? It actually seems that was probably the primary driver of your overall organic growth which you described as broad-based. It wasn't a bit better because, obviously, this was a strong industrial quarter, right, for – I mean Parker-Hannifin put up 7% core growth, et cetera.

So, strong industrial quarter comes around the world. But in your situation, China was slower.

What's going on there and what do you expect it to be doing in fiscal 2018?.

Yeah. I would say that we always see some quarterly variability in our growth rates, especially in some of the emerging markets where there's some (33:18) more of the larger projects. We're pleased with our growth in China this year. China did about 12% of growth in fiscal 2017. And for next year, we expect China to be close to 10%, a little bit below.

So I wouldn't just look at one particular quarter. I would expect some continued variability in those growth rates going forward as well..

Yeah. I would also add. As some of the projects that get lumped into heavy industries come back, you're going to see some of that natural variability. So for some additional color, in Q4 in China, semiconductor remains at very high levels. Transportation continues strong, metals and mining.

So a lot of that is project-based business and you're going to have some variability there..

The good news, John, is that as Blake mentioned, it's many different industries in China that are supporting growth. And so it's not only consumer, but some of the heavy industries are now contributing growth as well..

Okay. So basically, lumpiness. This is not some sort of a trend or some sort of share loss event or something like that. No. That's fine..

We think we've taken – John, we think – John, we think we've taken share in China..

Yeah. Well, especially in consumer, I think that makes a lot of sense. Let me ask one last one here. Yesterday afternoon (34:43), Emerson laid out, I would say a strategic rationale for why they would really like to buy you. Basically, if you kind of read between the way they presented it, it was to plug their lack of discrete and hybrid offering.

And they commented more than once that customers want this full automation solution across discrete, hybrid and process. I mean, I guess I'm wondering like you sort of answered Jeff's question by talking about how customers want sort of a singular provider.

But the differences between true process and true discrete in terms of customer subset and skill sets are obviously pretty different.

I'm just curious if you concur with Emerson's statement that increasingly the market is looking for a singular solution provider across all of these three disciplines, and if that were so, I mean your process business really isn't that big in the big picture.

So I'm wondering if this strategically prompts you to in turn try and drive higher process penetration. Blake, I think you're on record as even saying you'd be interested in doing deals up to $1 billion or at least stepping up M&A kind of over time versus Rockwell's historical trend..

Yeah. So, John, again starting with the appetite for acquisitions. We've talked about information solutions and connected services being priorities for acquisitions. And we've got a pipeline with some smaller ones and some big ones that get up to that $1 billion plus level. So we're looking at that.

We start first with the strategic fit and then we look at the financial return for making those acquisitions.

In terms of what the market is looking for, customers are looking for a single platform that they can deploy across their enterprise and a lot of customers have a mix of discrete and batch/hybrid and continuous process applications and the attraction of being able to build on our Logix platform to be able to solve all that different type of logic so that they only have to train on one platform their operations people.

And from a parts standpoint and from a learning and an integration standpoint, that's very attractive to them. So while we sometimes get caught up in looking at what pieces of the overall automation market can be used, what matters is the outcomes that you bring to a specific customer and that specific customer is looking for a single platform.

That's why a lot of our investments are based on continuing to add functionality to Logix, to a common software environment and that's what customers, even continuous process customers are telling us that we're on the right path looking at..

Okay. So you don't feel the need to step up the penetration incrementally based on kind of either the Emerson events or other events in the market to gain kind of more of a balance in process versus your discrete offering? I think that's what you're saying..

We continue to see process as a great growth opportunity. We combine what we have in terms of process control with our domain expertise because that's an important part of the equation, that was part of the rationale behind what has been a very successful MAVERICK acquisition.

And something that we talked about a lot in the past is intelligent motor control. When you're talking about handling fluids, then the variable speed drives and the power control is an important part of that and we have as good a portfolio as any in the business and we're taking significant share there as well.

So combining that with our improved process control capabilities is something that's allowing us to see the kind of growth we reported in Q4 in process..

Got it. Thanks. See you next week..

Thanks, John..

Thanks, John..

Your next question comes from Rich Kwas from Wells Fargo Securities. Please go ahead..

Hi. Good morning. Blake, so another good year expected for auto.

Just curious with the re-footprinting that's going on in the powertrain side across global OEs, shifting away from internal combustion, particularly diesel to hybrid and electric applications over the coming years, how do you see that playing out in terms of enhanced growth opportunity for Rockwell, and should we think of that as a potential more structural step-up to company's growth rate within that vertical?.

Rich, we see it as very positive.

When you combine the powertrain business that we've been talking about for the last few years as $20 million of additional revenue each year and you add the activity going on at many of those same-tier suppliers with electric vehicles, in 2018, we expect the contribution from powertrain and EV to be $100 million worth of business in our automotive segment.

So it's big enough to be meaningful and we continue to see those high growth rates. We're competing and winning around the world at those customers. And that's definitely providing a boost to the traditional internal combustion assembly business that we've enjoyed for a long time in automotive..

And that's incremental on top of what you would normally get, say nothing was really going on from a powertrain....

Absolutely. I mean, three or four years ago, that was a zero..

Yeah. Okay. All right. Thank you..

Rich, our guidance for automotive – so continued strong growth in powertrain and EVs as Blake mentioned. Our overall auto business, we expect to grow below the company average in fiscal 2018..

Okay..

Low single-digits..

Does that apply to consumer as well?.

No. Consumer will be at about the company average and heavy industry would be a little above..

Okay. And then, as we think about the mix of sales just on an organic basis, as we think about heavy industry coming back and growing faster and that would imply more solutions-oriented revenues.

As we think about that mix and the impact on incrementals as we go through the year, is there something we should be thinking about where maybe the early part of the year, stronger incrementals and the second half of the year moderates a bit? Any guidance there?.

Yeah. So Rich, our guidance assumes that our solutions and services will grow just a little faster than our product businesses. And when I say faster, it's like within a point or so of our product businesses.

In terms of conversion, I would expect year-over-year earnings conversion to be stronger in the second half than in the first half, with some of the reasons I mentioned earlier impacting or related to the comparisons for Q1. So stronger earnings conversion in second half than first half year-over-year..

So mix is not a big issue and it's really a comp issue in the first half?.

Correct and yes..

Okay. Got you. Thank you. I'll pass it on..

Thanks, Rich..

Your next question comes from Scott Davis from Melius. Please go ahead..

Hi. Good morning, guys..

Good morning..

Give us a sense of why you felt like you had to take investment spending up in Q4 and was it the strong order book that you saw and you just said you got to get ahead of this and add sales marketing or other kind of investments.

Or was this – I'm just trying to get a sense of what was planned and what wasn't planned, because clearly it wasn't in most of our models?.

Actually, Scott, the overall spending came in basically where we expected it to be. If we adjust our – first of all, our sales came in within a few million dollars.

Our segment margin – adjusted for the restructuring charge of $43 million which was not in our guidance, segment margin came in where we expected, currency was a little headwind but basically was in line with where we thought we would end up being. And the net of it is that EPS was about $0.02 better than our midpoint of guidance.

So there was no – let's put it this way, there was no decision during the quarter to just ramp up spending above and beyond what we assumed for Q4..

Okay. Yeah. was a little light (43:21) versus our models, maybe we just had it wrong. And then just getting back – and I don't want to beat the dead horse on Emerson, just trying to get some closure here.

I mean is this kind of done at any price with – I mean if Emerson came back at a different price or a different structure, would there be a new process of – or is this just you guys have decided this is not the right partner and you just want to move forward? Just to be a little clearer on that..

Yeah, Scott, as I mentioned in my prepared remarks, we're here today to discuss our results and fiscal 2018 guidance.

We're very confident in the company's strategic direction and in our ability to continue delivering superior levels of growth and value creation, and that's demonstrated today in the strength of our results and our confidence in our strategy and that's where our attention is being focused..

Okay. Yeah. I was just trying to figure if this is something we're going to be talking about through 2018 or if this is something that's kind of a dead horse and just move on. That's all..

Yeah, Scott, we're not going to speculate on what Emerson Electric or anybody else might do..

Okay. Fair enough. Okay. I'll pass it on. We'll see you next week, guys. Thank you..

Thank you..

Thank you. See you then..

Your next question comes from Andrew Kaplowitz from Citi. Please go ahead..

Hey. Good morning, guys..

Good morning, Andy..

Good morning..

Blake, so you mentioned oil and gas markets improved pretty materially in the quarter. What do you think changed? Was it larger projects started to come back, and you mentioned that heavy industries can now grow clearly higher than the company average in 2018.

Is that across the board including mining, chemical? I know you mentioned semicon and oil and gas..

Yeah. In general, we do see broad-based recovery in heavy industries, and we already saw pieces of that this year. We talked about the strong performance in semiconductor. We saw metals. Pulp and paper, while it's a small vertical, saw a significant growth. And now we're seeing oil and gas returning and it's a mix of MRO, as well as some larger projects.

Obviously, natural gas continues to be an interesting part of that segment. And we see mining – we're seeing some renewed activity in Latin America, for instance, in the mines in Chile and so on as copper prices get up above $3.

So we really do see that as a broad-based recovery across heavy industries, and we think we're very well positioned to take advantage of that..

Okay. That's helpful, Blake. And then, Patrick, I think you mentioned that solutions was going to grow faster than products in 2018. When I look at your two segments though, you have tough compares in both, but obviously strong order momentum going into the year.

The CP&S actually grow faster than A&S as you go throughout the year given that solutions is pretty late cycle. And I think you mentioned 0.98 in book-to-bill and that might have been a little lower in solutions than you thought. But, obviously, there does seem to be a momentum there, so maybe you talk about that..

Yeah. So, actually, we would expect – we expect both segments to grow at about similar rates in fiscal 2018. Solutions and services within Control Products & Solutions will grow a little bit faster than the products part within that segment.

And then, what was the other part of your question, Andy?.

Did you say book-to-bill was 0.98 and a little bit....

Yeah..

...weaker than normal seasonality..

No. Actually....

Any color there?.

Yeah. It was 0.98. That is actually a little bit stronger than typical for Q4..

Felt stronger than typical. Okay..

Yeah. It is..

Led by oil and gas and the heavy businesses?.

Yeah. And as Blake mentioned, generally speaking, we had a good Q4 order intake. Our orders were up high-single digits for the overall company in the fourth quarter..

Great. Thanks, guys..

Thanks, Andy..

Thanks, Andy..

Your next question comes from Joe Giordano from Cowen. Please go ahead..

Hey, guys. Good morning. Thanks for taking my questions..

Good morning..

Just wanted to start, if we could – I think you might have said this in the last question there, Patrick. But look, when I look at A&S growth trajectory into next year, kind of framing it with your guide, we're going to start getting into some pretty tough, like, I think in the first quarter you guys grew 8% and then 14% in the second quarter.

So how does A&S kind of look through kind of as we pace out the year relative to your total guidance?.

Yeah. So as I mentioned to Andy, we expect A&S to be about in line with the overall company in terms of organic growth. So that's about 5%. And you're right, the comps will get more difficult, but that's what we project for A&S. We expect continued growth as we said in consumer. Don't forget A&S also has exposure to heavy industries.

Our Logix platform is sold in process industries and other heavy industries. And so we expect continued good growth associated with that..

Okay. And then you mentioned the $100 million – Blake, you mentioned a $100 million contribution from powertrain and EV next year.

Is that an incremental $100 million or what is that off of? Like, what was it in 2017?.

The way you can think about it is that number about three years ago was probably close to zero.

And so it is not an incremental 2018 versus 2017, but it is the growth that we have seen over the last two, three years and expect in fiscal 2018 that by the end of fiscal 2018, we think that EV and powertrain combined will be a $100 million business and basically, that's business that we didn't have three plus years ago..

And maybe with a little bit more detail on that. So when we started talking about powertrain explicitly as we reentered that market, we talked about around $20 million of incremental business a year from powertrain.

As EV has grown very fast and it's many of the same customers, that's an additional boost to, again, a business that we didn't participate in that is basically growing market and our share over the last few years. And now, it's at that $100 million figure..

Okay. Thank you. And Patrick just one quick clarification.

On your tax rate guidance for next year, does that include or exclude, I couldn't hear before like the impact of or some estimate for stock option exercise?.

It's inclusive..

Okay. Great. Thanks guys..

Thank you..

Your next question comes from Justin Bergner from Gabelli & Company. Please go ahead..

Good morning, and thank you for taking my questions. My first question just relates to the effective currency.

Could you explain why currency was a headwind to margins in the fourth quarter and how it will affect your guidance in 2018?.

Yes. So every time we are in a quarter where we see significant currency swings, we get into balance sheet remeasurements, which may impact the performance of the OE impact of currency compared to what the top line of currency is doing. And that's why in Q4, whereas from a sales point of view, currency was a small tailwind.

The margin and earnings impact was actually a modest headwind. For fiscal 2018, we're projecting a 2.5% sales contribution for currency and based on the currency rate as we see – and we used projections 12 months out, based on those currency projections, we expect about a 20% earnings conversion on the sales contribution from currency.

And so that's why you get to the tailwind and EPS associated with currency that we show on the EPS bridge..

Great. Thank you. And my second question was just relating to Emerson if I may.

I mean, are there assets within Emerson's automation portfolio that are attractive to Rockwell? And could an alternative transaction structure be of interest, versus the one proposed?.

Yeah. Justin, we're not going to comment on that. We're going to continue to focus on the Q4 results and the outlook for 2018..

Okay. Thank you for taking my questions..

Yeah. Thank you..

Operator, we're going to take one more question..

Okay. Your next question comes from Noah Kaye from Oppenheimer. Please go ahead..

Thank you so much for taking my question. It's not an Emerson question, I promise. Connected Enterprise investments, I understand you're going to give a lot of detail on this next week at Automation Fair.

But can you help us just understand a little bit those investments, how much investment we're talking about, really kind of thinking about this split between, say, R&D and growing the sales footprint? In other words, just kind of what do you need to accomplish to get Connected Enterprise growth on your target structuring (53:03)? Thanks..

Sure. Well, Noah, let me start by saying the Connected Enterprise and bringing it to life for our customers is focused on producing outcomes for them that make them more productive.

And so that's a combination of the technology and the domain expertise, and an overall approach to working with them as they go on their journey to add that additional level of productivity.

It starts by putting the foundation in place where the data is born, so that's the smart products, that's Logix, which are fundamental parts of the Connected Enterprise.

And so the investments that continue are to add more performance to Logix, to add more predictive analytics to PowerFlex drives, to more tightly integrate visualization with our logic-solving platform. All those things are fundamental parts of the Connected Enterprise, and that's where a lot of our spending has and will continue to go.

But it's also about the new value that we deliver from the Connected Enterprise. And so as we integrate control and information across the enterprise, we've got home field advantage. The data is born on our smart products that can be turned into useful information that helps these customers become more productive.

So it's investments in information software, our own as well as the ability to integrate with other applications, because nobody has all the software under their own roof that's necessary, and because the technology moves too fast. And that's where our partner strategy is so valuable. It's also a focus area for acquisitions for us.

And as I mentioned, it's not just about the technology, it's also about the domain expertise and the support. All of the Connected Enterprise pilots that we're engaged in, that you'll hear about next week, and there's over four dozen of those that we're tracking, all of those involve engineering to complement the technology.

And so investments in consulting services, in project management, all the things that are so important to make sure that the project goes right and that the value for the customer is maximized, those are parts of our investments as well.

So all of that together, that overall approach is what customers are responding so favorably to as we bring the Connected Enterprise to life..

Great. Thank you very much for the color..

Yeah. Thank you..

And at this time, we'll now turn the call back to Mr. Etzel for closing remarks..

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

At this time, you may now disconnect. Thank you very much..