Thank you for holding, and welcome to the Rockwell Automation's Quarterly Conference Call. I need to remind everybody that today's conference call is being recorded. Later in the call, we will open up the lines for questions. Of Investor Relations. Mr.
Gorris, please go ahead.
Good morning, and thank you for joining us for Rockwell Automation's 4th quarter fiscal '15 earnings release conference call. With me today are Keith Nosbusch, our Chairman and CEO and Ted Crandall, our CFO. Our agenda includes opening remarks by Keith on the company's performance in the Q4 and full year. Keith will also provide context around our outlook for fiscal 2016. Then Ted will provide more details on the results as well as our fiscal 2016 sales and adjusted earnings per share guidance.
As always, we'll take questions at the end of Ted's remarks. We expect the call to take about 1 hour today. Our results were released this morning, and the press release and charts have been posted to our website at www.rockwellautomation.com. Please note that both the press release and charts include reconciliations to non GAAP measures. A webcast of this call is accessible at that website and will be available for replay for the next 30 days.
Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are, therefore, forward looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. So with that, I'll hand the call over to Keith.
Thanks, Patrick, 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. Both sales and earnings came in below our expectations in the quarter. Organic sales declined a little over 2%.
As we progress through the quarter, conditions softened and September was especially weak, particularly in the U. S. Product businesses. We expected the U. S.
To be up low single digits, and organic sales instead declined almost 3%. Remember that we have limited visibility in our product businesses and September typically is the strongest month of the year. The shortfall in the U. S. Was broad based across verticals, but particularly in oil and gas.
China was the other weak spot. Sales in China were flat compared to the Q3, but came in a bit lower than expected. For the company, currency was an even larger headwind than we expected, reducing sales by 8% year over year. Overall, lower operating margin and lower sales led to the decline in adjusted EPS. Ted will elaborate more on Q4 financial performance, including restructuring charges in his remarks.
Obviously, the 4th quarter was a challenging end to the year, but I believe we executed well during 2015 in difficult market conditions. Here are some full year highlights. We delivered modest organic growth despite significant headwinds from heavy industry end markets, including oil and gas. Process was down a bit in the quarter and flat for the year. We feel pretty good about those results given what other process players are reporting.
Logix was up 4% for the year. That is about 1 point above architecture and software growth. For the quarter, Logix was flat. Segment margin improved 120 basis points due to excellent execution, including particularly strong productivity in the Control Products and Solutions segment. EPS grew 4 5% lower sales.
And free cash flow conversion was excellent, resulting in record free cash flow of about $1,100,000,000 Return on invested capital of almost 33% was also a fiscal year record. We continue to return cash to share owners over $950,000,000 during fiscal 2015. This was a 19% increase compared to fiscal 2014. And today, we announced a 12% dividend increase, the 7th consecutive double digit increase since the beginning of 2010. These were good results in a difficult environment.
I would like to thank our employees, partners and suppliers for their continued commitment to serve our customers. Their dedication is key to our success. Let's move on to the market conditions and economic indicators what we expect to see in our business in fiscal 2016. We are experiencing weak market conditions as we enter the fiscal year. Heavy industry end markets, including oil and gas, have not stabilized, and we see continued softness in key emerging markets.
Growth in automotive and consumer verticals globally will be insufficient to offset these headwinds. In the U. S, the strong dollar is also affecting producers and equipment builders, and the broad based slowing we experienced in September has persisted in October. We therefore expect a particularly weak start to the fiscal year. Current forecast, however, call for continued global GDP and industrial production growth in 2016.
And for the U. S, industrial production is expected to pick up after an anemic first half. That is why we are projecting gradual improvement, including year over year growth later in the year. Taking all these factors into consideration, we are expecting fiscal 2016 organic sales to be flat to down 4% year over year. Including the impact of currency, we are initiating fiscal 2016 sales guidance of about $6,000,000,000 and adjusted EPS guidance of $5.90 to $6.40 Ted will provide more detail around sales and earnings guidance in his remarks.
Before I turn it over, I would like to remind you that we will be holding our main customer event automation fair next week in Chicago. As in prior years, we expect to welcome thousands of customers and partners from all over the world. We will showcase our latest technology and that of our partners. Attendees will take part in forums, technical sessions and hands on labs and network with peers to learn how to bring the connected enterprise to life, optimizing their business performance and driving their competitive advantage. I am particularly excited about this year's event.
We are on track to have record attendance. And in fiscal 2015 2016, we will have launched an unprecedented number of new products, including our next generation high performance integrated control information architecture. With this new offering, we will help our customers realize a step function change in productivity and global competitiveness. In short, we are enabling our customers to achieve their connected enterprise. Our innovation engine is really humming.
In closing, the prospects for Rockwell Automation continue to be very attractive. Even in the challenging market conditions we currently have, producers and equipment builders still need to have our technology and expertise as we help them achieve their business objectives. The long term secular drivers for industrial automation and information remain intact, and we will continue to enhance our competitive differentiation in order to expand the value we provide our customers and gain market share. With that, here's Ted.
Thanks, Keith. Good morning, everyone. I'm going to start on Page 4, the 4th quarter key financial information. Sales in the quarter were $1,608,000,000 that's down 9.8% compared to Q4 last year. This was the Q1 of fiscal year On an organic basis, sales declined 2.3%.
We were expecting organic sales growth of about 1%. As Keith mentioned, that shortfall was driven primarily by lower sales in our product businesses and especially in the U. S. Market. Currency translation reduced sales in the quarter by 7.6%.
That was a full point more than we expected at the beginning of the quarter. Segment operating margin was 20.9%, down 1.3 points from Q4 last year. The lower margin year over year is primarily due to lower organic sales, unfavorable currency conversion and $12,000,000 of restructuring charges that we took in the quarter. We took the restructuring charges to get our cost structure more aligned to the outlook for fiscal year 'sixteen and to create some headroom to reallocate spending to our most important priorities in what we expect to be a difficult market environment. General corporate net expense was $20,000,000 in Q4 compared to $22,000,000 a year ago.
Adjusted earnings per share was $1.57 We missed the midpoint of our guidance by $0.23 unfavorable currency effects and higher restructuring charges accounted for half of that miss. Of course, lower organic sales also contributed to the miss. Adjusted EPS was down from $1.86 last year, primarily due to lower sales and margin, partly offset by lower share count. Average diluted shares outstanding in the quarter were 134,300,000, down 3% from Q4 last year. The adjusted effective tax rate in the quarter was 28.2 percent that compares to 27% in the Q4 last year.
Free cash flow for Q4 was very strong at $309,000,000 During the Q4, we repurchased 1,800,000 shares at a cost of $196,000,000 For the full year, we repurchased a total of 5,400,000 shares at a cost of $606,000,000 That's almost 30% more than the $470,000,000 in repurchases that we projected at the beginning of the year and related to our strong cash flow performance. The rolling 4 quarter return on invested capital was 32.6%. Turning to Page 5. This is the full year version of the key financial information. Sales were $6,308,000,000 for the full year, down 4.8%.
Organic growth was 1.1%. Currency translation reduced sales by 6%. Segment operating margin for the full year was 21.6%. That's up 120 basis points from last year. The primary positive factors were the contribution from organic growth and strong productivity, which were partly offset by higher spending and unfavorable currency effects.
Adjusted EPS was 6.40 dollars That's up 3.7% compared to last year despite the decline in reported sales. Free cash flow for the full year was $1,077,000,000 which was 124 percent of adjusted income. The strong conversion was driven by very good working capital management through the year. The next two slides present a graphical view of the sales operating margin performance of each segment. I'll start with the Architecture and Software segment on Page 6.
On the left side of the chart, you'll see that Architecture and Software segment sales were $684,000,000 in Q4. That's down 8.5% from the same quarter last year. The organic sales decline was 0.4% and currency translation reduced sales by 8.1%. Moving to the right side of the chart. In the Q4, on the 8.5% decline in reported sales, architecture and software margins dropped by 3.8 points to 27.3%.
A little less than half of the drop in operating margin is due to a higher than normal unfavorable currency conversion in the quarter. The balance is due to increased spending and the segment's share of the restructuring charges that I mentioned previously. As we expected, spending was up significantly in the quarter in this segment, both sequentially and year over year, and largely related to the timing of R and D project costs. The Q4 spending level in A and S is not indicative of an ongoing run rate. For the full year, A and S sales were down 3.4% as reported, with 3.1% organic growth.
Segment operating margin for the full year was 29.4%, essentially flat compared to fiscal year 2014 with about 1 point headwind due to unfavorable currency effects. On Page 7, a similar view for the Control Products and Solutions segment. In the 4th quarter, Control Products and Solutions segment sales declined by 10.7% year over year with an organic sales decline of 3.6%. Currency translation reduced sales in this segment by 7.2%. The organic sales decline for product businesses in this segment was about 3% and for solutions and services about 4%.
The book to bill in Q4 for solutions and services was 0.83. That's about the same book to bill as Q4 last year. CP and S has delivered very good operating margin performance this year and that continued in the 4th quarter. Operating margin was 16.2%, up 40 basis points compared to last year. For the full year, CP and S sales were $3,558,000,000 down 5.8% year over year and down 0.4% on an organic basis.
On an organic basis, product sales in the segment were up about 3% for the full year and solutions and services sales declined by about 2%. CP and S segment operating margin for the full year was 15.5%, an increase of 190 basis points compared to 2014. This was a great result despite an almost 6% drop in reported sales and largely attributable to very strong productivity performance in the year. Page 8 provides a geographic breakdown of our sales and shows organic growth results for the quarter and the full year. My comments will all refer to organic growth rates.
As Keith mentioned, the U. S. Was the biggest negative surprise in the quarter. Sales in the U. S.
Declined almost 3% compared to Q4 last year. Product sales declined about 4% year over year. Sales in the U. S. Were flat sequentially.
We expected sequential growth of 7%, which would have been more in line with historical norms. Customers in oil and gas in the U. S. Were down year over year almost 30% in the 4th quarter and sequentially about 15%. We expected a sequential decline, but not quite this large.
In the balance of the world, oil and gas sales were pretty much as we expected in the quarter. There appears to be a general slowdown in U. S. Industrial customer spending, both capital and operating spending, and what we experienced in the U. S.
Market in Q4 seems to be consistent with what we have seen reported by other automation related and electrical suppliers, including some of the major distribution companies. Demand slowed through the quarter, as Keith mentioned, and September was especially weak, down about 10% compared to September last year. Demand levels in October early November were down about the same amount, and consequently we expect a very weak Q1 for sales in the U. S. For the full year, U.
S. Sales were up about 1% with automotive as the best performing vertical. Canada sales in Q4 were down just under 10%, but pretty much in line with our expectations for the quarter. For the full year, Canada was down 5%. Resource based industries continue to be a drag on our Canadian business.
EMEA was up almost 4% organically in the quarter and up a little over 2% for the full year with consumer related industries as the best performing. The emerging countries of EMEA generated the higher growth rates in 2015, but mature Europe was up 1% for the full year. At the beginning of last year, we didn't expect that EMEA would exceed the U. S. Growth result.
In Asia Pacific, sales were down 10% year over year in Q4. India experienced modest growth in the quarter, but China was down high teens percent year over year. China was flat sequentially, but we expected to see some growth. For the full year, Asia Pacific was down about 1% with China down mid single digit and low double digit growth in India. Latin America had another solid quarter at 5% growth with strong growth in Mexico more than offsetting a decline in the balance of the region.
For the full year, Latin America was up 9% with Mexico growing in the high teens and Brazil about flat year over year. Organic growth in emerging markets for the full year was 4%, led by Latin America and despite the decline in China, which is our largest emerging country. And that takes us to the fiscal 2016 guidance slide. Based on demand levels as we exited September and that have continued through October early November, as well as our current backlogs in solutions and services businesses, we expect a very weak start to the year. We expect organic sales in Q1 to be down mid single digit year over year, driven by the U.
S. Being down high single digit. With that starting point, even with projected IP growth next year, we don't expect sufficient sequential growth in the balance of 2016 to get us to a positive organic growth result for the year. At current exchange rates, we expect a headwind from currency in Q1 similar to Q4. So on a reported basis, Q1 sales could be down over 10% year over year.
For the full year, we expect currency to reduce sales by 300 basis points. Our projections for translation impact assumes recent exchange rates. For example, we're assuming an average euro rate of $1.09 We expect fiscal 2016 sales to be approximately $6,000,000,000 Organically, we expect sales to be down next year about 2% at the midpoint with a range of minus 4% to flat to fiscal year 2015. By region, on an organic basis, we expect U. S.
And Asia Pacific to decline a couple of points more than the company average, and we expect to see growth in EMEA and Latin America. We think results will be relatively balanced across our products and solutions and services businesses with product businesses declining at a little greater rate than solutions and services businesses in 2016. We expect segment operating margin to be a little above 21%. That would be less than 0.5 point decrease compared to 2015 with conversion margin of about 30% on the sales decline. We expect the full year tax rate to be about 27% equal to fiscal year 2015.
Our guidance for adjusted EPS is $5.90 to 6.40 in adjusted EPS on 5% lower sales. Q1 will be our most difficult year over year earnings comparison. We expect free cash flow conversion on adjusted income of about 100%. A couple of other items not shown here, General corporate net expense should be approximately $80,000,000 in 2016. We expect average diluted shares outstanding be about 132,000,000 for the full year.
We intend to continue to return excess free cash flow to investors. Keith already talked about today's dividend increase. The amount we spend on share repurchases in 2016 will depend on free cash flow and acquisition spending, but at this point, we expect to spend about $500,000,000 on repurchases for the full fiscal year. The next page includes an EPS walk from fiscal year 2015 to fiscal year 2016. As you can see, currency is expected to be a significant headwind in 2016.
As the benefit of currency hedges becomes smaller, currency conversion is more unfavorable year over year. Core performance is down about $0.10 That represents about 15% earnings conversion on lower organic sales, which we think is pretty good result. Modestly higher spending and a somewhat unfavorable mix is offset by strong productivity and a tailwind from lower incentive compensation. As I mentioned on the previous slide, no significant from tax year over year. And finally, continued share repurchases are expected to provide a $0.20 or roughly 3% tailwind to EPS.
And with that, I'll turn it back over to Patrick to begin the Q and A session.
Before we start the Q and A, I just want to say that we have quite a few callers in the queue today, and we would like to get to as many of you as possible. So please limit yourself to one question and a quick follow-up. We appreciate your cooperation. Operator, let's take our first question.
Your first question comes from the line of Shannon O'Callaghan, UBS. Please proceed.
Good morning, guys.
Good morning, Shannon.
Hey, Keith. How do you sort of reconcile or make sense of the record attendance at automation fairs. So it certainly seems like there's a lot of interest and you talked about all the innovative new products coming out, but yet contrasting that with the extremely weak trends here and seemingly a lack of willingness to invest. So there's a lot of interest in the automation fair, but we're not seeing the spending. Explain a little bit what you're seeing in that contrast and then just your confidence in sort of coming out of this?
Well, two things. The first would be automation there. We believe with the theme of it being the connected enterprise and then to your point, the dramatic increase in new products that are going to be introduced during the fair that we have a lot of excited customers about the opportunities to learn what is coming and how it can help them be more competitive. And there's no better time for our customers to focus on new technology than when their business is slowing and they have an opportunity to look at the new technologies and integrate it into their strategies or their new machine lines as they come up. So we think this is a great opportunity.
The fact that it's in Chicago, it's always a well attended fair. We think this year, it will be even greater than the last time we were in Chicago. And that's because the Midwest is still the heart of manufacturing in the U. S. So we're excited to be there.
We're excited with the messages that we will be providing our customers. And quite frankly, the confidence in the future, I think we have never been better positioned than we are today, and it's only going to get stronger. As I mentioned, this release of the new architecture, the next generation of that architecture and the ability to provide a broader portfolio of Rockwell Automation products and services and solutions is going to be unmatched in both the industry and in the global environment. So we're going to have customers there from around the world, Europe, Latin America, Asia Pacific, that will also be a very strong showing. So you can see the interest that our customers have in basically continuing to drive their productivity and improve their competitiveness.
And I think that's the message that has been out. We did a lot of pre work to make sure that our customers knew all of the new products as well as something this year that we're going to have, the innovation demonstrations where we talk about how the technology is going to evolve in the future and give them a snapshot of how that future is going to look 3 to 5 years down the road. So from a combination of new products, the innovations that are coming and how technology is evolving to enable the connected enterprise, we think that's what's behind the attendance. And quite frankly, we're happy many of you will
be there. Shannon, your question about high attendance and low spending right now and that disconnect, what we're hoping it is indicative of is customers' expectations that despite low spending right now that they will be spending more sometime next year or sometime this year.
Okay. Great. And then in terms of cash flow, I particularly strong year. I know you guys have been just working on sort of productivity and working capital. Anything one time in nature this year that you would call out or is this just sort of good cash execution?
Well, I mean, I think we really did have good working capital management this year, but in the interest of full disclosure, we also had some favorable timing items that we benefited from in 2015. I think we had some favorable cutoffs at the end of the year on receivables and we also had some benefits in the timing of things like tax payments this year. So this was an exceptional year for cash flow generation. Some of that's going to reverse next year, I expect, but we're still expecting another good year in 2016.
Okay, great. Thanks guys.
Thanks, Shannon.
Thank you. Your next question comes from the line of John Inch, Deutsche Bank. Please proceed.
Thank you. Good morning, everyone.
Good morning, John.
Good morning. Can we start with restructuring? You called it out, which you normally don't do. Could you parse it between CP and S and A and S? And then could you give us the total restructuring spend that would compare to the $12,000,000 this quarter for fiscal 2015 and what would be embedded in your guidance for fiscal 2016?
There's a lot there. So let me see if I
can get
all of that.
That's my long one question, first question.
So 12,000,000 dollars 1,000,000 for the full year. We called it out because this was an unusually large amount for 1 quarter. We're expecting to generate about $25,000,000 of savings in 2016 on that $12,000,000 restructuring spend Q4 and that's reflected in our productivity expectations for next year. For next year, in terms of restructuring charges, what we'll build into the plan is an amount that is similar to this year or to 2015, I should say.
So about $20,000,000 year over year the same spend?
Yes. And then
And I'm sorry, in A and S and CP and S, it was roughly equal. The restructuring charges in Q4 were roughly equal between the two segments.
Given how quickly things have deteriorated, right? And you guys called out sort of tough U. S. Products business in September that spilled into October. We've got a tough Q1 coming.
I mean, I guess without being too specific, it sounds almost though that you're anticipating some sort of sequential pickup, but not enough to kind of get your EPS up year over year. But why would that be the case? Meaning, if this is sort of the first period of serious U. S. Decline, why do you think that next year, whatever reason that things are actually picking up because it really does look like that certainly on the heavier industry side, the global economy is worse, not better.
So I just want to make sure I'm we all know how old Rockwell was very, very cyclical. Now you're more of a CPG company. But we're still trying to understand what's kind of the expectation set and that for a company that obviously doesn't have a lot of visibility, you're not sort of baking in some kind of false to the guide framework?
Right. First, I would say, I was going to you just mentioned it, I was going to start the answer by saying, you know, we don't have great visibility. And I think your question is a legitimate question because there are concerns right now. I mean, there's been overall continued very slow global growth. We've got the slowdown in the U.
S. In Q4 in industrial business. And if you look in the emerging markets, Brazil and China are still we're not really seeing anything that is a near term catalyst for improvement there. But as Keith mentioned, the forecasts for GDP and IP for 2016 are still 16 are still indicating growth. Generally, our sales tend to track well with IP growth.
In the media and what we're hearing from people and customers, people are not talking about the recent conditions in the U. S. As a general recession, although there's been some noise about maybe an industrial recession. In the U. S, the consumer side of the economy still seems to be in pretty good shape, including the most recent jobs report that was very positive.
And we've generally thought that this should be a longer upcycle given the sluggish global growth. So it was all of those things that we took into account and looking at the outlook for 2016. And based on that, we're thinking this is more of a pause that will be followed by some sequential growth, not the beginning of a deeper downturn.
I mean, that's fair. But on the other hand, we're going to get through the December quarter and roll into a new year. I mean, it sounds like I guess what I'm trying to understand is, are you assuming things kind of hold Ted at these levels and then start to pick up maybe beyond the March quarter? Or do you assume that things are going to actually start to begin to sequentially improve post the December quarter, I guess, is kind of the question?
No, I would say generally, we're not expecting to see sequential growth until the second half of the year. Okay.
So first half tougher and sequential growth second half. Got it. Okay. Thank you.
You're welcome. Thank you, John.
Thank you. And your next question comes from the line of Steve Tusa, JPMorgan. Please proceed.
Hey, guys. Good morning.
Good morning, Steve.
Can you just tell us, I guess, the software business outside of embedded and kind of the stuff that goes along with the product, but just your kind of more like the MES type of stuff, what that did in the quarter and then ultimately what that did for the year as well?
Yes, absolutely. It was we had a very good quarter in our IS Solutions business, which is in information software in the quarter. We had a high for the year of sales. It was up above the average for the company. We also had very strong margin and OE performance in the business as well.
We continue to expand the pilot programs with rollouts at multiple customers now. We currently have over 100 customers running FactoryTalk Production Center, and we have the suites installed in over 200 plants. And so this continues to be an area that now we are looking at growing it more aggressively. It's at the forefront of the connected enterprise and what we can do for customers in the IT, OT convergence that is currently going on. And quite frankly, after a number of years, this is the best that, that business has been positioned with the suites that they have as well as the ability to deliver both revenue growth and profit growth at the same time.
So that team has done a very good job there. And we think as we continue to build upon the Connected Enterprise story and vision that our software business will play a more important role going forward.
So sorry, so it did grow, just to be clear. And then just lastly, as a follow-up, because I mean your sales were down, so I would assume that it grew above when you say above the company average. And then lastly, just in Mexico, what's growing so strongly there? Is that still oil and gas that's holding up? Or is that auto?
And then maybe at a higher level, what are your comments on global auto and that's
it? Okay. Yes, it did grow and it has grown for the year, our software business. Mexico. Mexico is a very broad based story from the standpoint of what's growing.
And obviously, the strongest growth there has been oil and gas, and it has been for us. And we continue to win more midstream projects in oil and gas. The areas automotive continues to grow, and we expect that to continue into next year. The ability of the powertrain capabilities that we have will open new opportunities for us there. We also have great channel capabilities in Mexico, and we're starting to see the power of our distribution model as it continues to mature.
And in the emerging markets, Mexico is probably the most mature distribution capabilities that we have. And so it's broad across verticals. Consumer was very good. OEMs grew tremendously this past year, mainly because of the mid range capabilities that we have. And so we see the oil and gas, consumer industries, automotive and the channel work that is going on and OEMs being the areas that is driving growth for us.
And we do expect that to continue as we go into 'sixteen, not as high a level as it grew in 'fifteen, but still the best emerging market performance of the larger countries for us next year.
Great. Thanks for the color, Keith. Appreciate it.
No problem, Steve. Thank you.
Thank you. And your next question comes from the line of Jeff Sprague, Vertical Research. Please proceed.
Thank you. Good morning, everyone.
Hi, Johnny, Jeff.
Good morning. Just a couple other subtopics here. Keith or Ted, could you elaborate a little bit more on just kind of how this abrupt deceleration unfolded? And by that, I mean, did it does it look like it's inventory liquidation? You mentioned MRO.
Is there kind of a more abrupt pullback in MRO? Just is there any kind of common theme to what you saw happen? I'm kind of asking the question in the context of trying to understand how we do consider a stabilization at some point.
Yes. So Jeff, my comments are going to this is Ted. My comments will reference the U. S. July was a little bit below where we thought it would be.
Things picked up a little bit in August and then deteriorated significantly in September and September kind of got worse as the month progressed. You know as it relates to inventory that generally our end users and OEMs don't keep a lot of inventory of our stuff. And we have very good visibility in North America of the channel inventories. There's been no significant change in channel inventories. So we don't think this is about destocking.
I think what we believe is what we have seen, it has been in the U. S. This year, it's been kind of generally a lower number of larger projects. But what we saw in the Q4 and particularly September looks like a turn down in both MRO and small project spending. And that's why in my comments I suggested we think this is both capital spending and operating spending.
And that's why I think the product business is more because that is what drives the obviously the MRO, but also small projects tend to be much more product centric.
And what's going on with price? Have you seen degradation in price and anything from your foreign domiciled competitors that are disruptive on price?
So in terms of our price realization in Q4 and the full year, it was right at about one point, even a little bit better than that. I'd say this has been this year has been a little bit better than average. So pretty much as we expected. I don't I think it would be fair to say we haven't seen any significant change in competitive pricing dynamics. But the U.
S. Dollar being as strong as it is, is not helpful and does put increased pricing pressure on us. And are you seeing
kind of a reciprocal positive effect on your European OEM machine builders? Obviously, your share and exposure in the U. S. Would be higher, so I wouldn't expect a like for like offset. But can you kind of tangibly see and feel U.
S. OEM machine builders losing share globally and being picked up in Europe and other places? Not
with every quick change in not with every quick change in currency, but this has been relatively long now. And you are seeing the competitiveness of Europeans increasing. I think we see their attention being turned more to the U. S. Because of that.
And also, we're seeing because Asia is weaker, China is weaker, there is less European exports to China and Russia. So I think they're looking at the U. S. As the opportunity to make up for that other decline. And to Ted's point, the currency is giving them a competitive advantage in that regard.
Thank you for the color.
You're welcome, Jeff. Thank you.
Thank you. Your next question comes from the line of Nigel Coe, Morgan Stanley.
Just Ted, I guess, I just want to run through the bridge. I mean, the top line feels reasonable. I mean, who knows, but it looks reasonable. But the decrementals on core sales feel a bit light. And I understand there's some restructuring payback, but 15% given what you've done in the past and given the expectation that products is going to be worse than the average.
I mean, how do you control decrementals in this kind of environment?
Well, I mean, I think it's a couple of things. There is some spending increase, but it's pretty modest year over year. And then probably the most important thing is we're expecting another strong year for productivity similar to what we generated in 2015 and that should be helped by the restructuring charges that we took. And then equally important is there's going to be some tailwind from incentive compensation with lower sales and lower EPS year over year.
Okay. Okay. And then, Keith, you mentioned short cycle is tough to get a handle on your 'sixteen trends. But have you seen a lot of down cycles? And I think we tend to agree with you this is more of a pause and saying more sinister.
But during your experience prior downturns, what gives you confidence, be it from what you've seen in the channel or be it from customer conversations, what gives you the confidence that this isn't a bit more of a severe downturn?
Well, I think it goes back to some of the comments that Ted made. While we're going to see very difficult first half to the year, we're still looking at the key indicators for us, which is industrial production. And that's still forecast to grow in 2016 and to grow at a faster rate later in the year. So that historically has been a very good indicator of our performance. And I also think some of our new products, we do expect next year to be able to take market share.
So that is always a piece of our equation. I think that's how we look at our ability to demonstrate differentiation. And certainly, with our new technology and our new products, we expect that the year unfolds to be able to take share even in a difficult market environment.
Okay. Thanks a lot guys.
Thank you, Nigel.
Thank you. And your next question comes from the line of Rich Kwas, Wells Fargo. Please proceed.
Hi, good morning everyone.
Good morning.
Keith, on your last comment there around market share, where do you I assume that's a global comment in terms of taking share, but is it kind of the usual suspects in terms of taking share in process? Or are there other areas that you expect to drive share
gain? Yes. I mean, that is the main one. But I would say, in addition to that, we think we can continue to grow our share in safety. We think we can continue to grow our share in our power control businesses, both in what I would call our drives business and our intelligent motor control center business with some of the new capabilities that they are building out.
And then, capabilities that they are building out. And then as we've talked previously, we are starting to quote and be involved in more activity in powertrain, and we see that as an opportunity that's going to expand for us this next year, and we expect to be able to create some more wins there. And that scenario, as all of you know, we historically did not participate greatly in. So that would be the other one that I would add to the pile in addition to process.
Okay. And then just as
a follow-up, what's the could you give us some framework for how you're thinking about the various verticals that you're tied to oil and gas, auto, consumer, food and bev, etcetera, in terms of what's embedded in the outlook? And then second, what's your assumption for the China auto business in 2016? What's embedded in the outlook?
Okay. Let me start with the last one. We think China in automotive will probably be down on a year over year basis. That has been a growing piece for us previously, but we have seen some slowdown in the automotive market there with the decline in sales of autos, the front end of autos. Of autos, the front end of autos.
With respect to the outlook
in the different industries for us, auto, we expect that to grow above the company average. And as I mentioned, increased opportunities in powertrain. Tire is expected to grow above the company average. We've been talking recently about the weakness in the China OEMs. That is going to continue to be true, but there have been 8 greenfield plant announcements in the U.
S. And Mexico, primarily with Asian manufacturers, and we're very well situated in those expansions. So we see that as a growth. Food and beverage, we think that will be flat next year. With North America, the focus is on modernization and productivity.
And in Europe, Latin America and Asia Pacific, we expect to get the traditional different variety and packaging changes that will drive growth there for us. In Home and Personal Care, we expect that to grow about the company average. And there, new product introductions and innovation is driving a lot of that. Life Sciences, we expect to be above average growth for us, and that will be driven by the new requirements, including serialization. If we look at some of the heavy industries, we expect there we expect that oil and gas will be weaker in the U.
S. For sure and especially in the first half of the year. But we do expect Latin America to be a little bit. Overall, oil and gas will be down about 10% next year. And then some of the small excuse me, first, mining will continue to be weak across all regions with the commodity prices continuing to be down.
And also you're seeing a lot of restructuring in the larger global customers and that tends to slow CapEx spending while that's going on. In some of the smaller verticals, pulp and paper, we think it will be in line with the company average. There is spending going on in the U. S. And Canada for modernization.
Metals continuing to be weak and soft and just a couple of large projects that we'll be participating in, in EMEA and Asia Pacific, but overall weak. Chemicals, about the company average and obviously everyone knows what's going on there with the lower feedstock prices driving additional expansion and modernization in that industry, particularly along the Gulf Coast. So that's quick, but overview of all the key verticals and how we're thinking about them next year.
I appreciate it. Thanks Keith with that.
You're welcome. Thank you.
Your next question comes from the line of Jeremy Capron, CLSA. Please proceed.
Thanks. Good morning. Good morning. I wanted to following up on oil and gas markets, it sounds like came in below your expectations in the quarter. Can you talk about what you're seeing there and maybe dig a little deeper into your comment about that market being down another 10% next year.
How do you see that unfolding? And where do you see a bottom there?
Well, I think at this point, we haven't seen the stabilization or the bottom. We were a little surprised with the drop in the U. S. This last quarter. The rest of the world operated pretty much as we expected, but the U.
S. Was stronger decline, which is why we're believing we haven't gotten the stabilization yet. We're learning a lot more in the 1st calendar quarter as all of the key companies release their capital spending. But as you've seen with some of the recent releases, they're expecting that to continue to be reduced in the next year, in some cases, as high as 20% to 30% reduction. So we're not expecting capital spending to be strong.
We do believe that they will continue to spend on driving down their operating costs. We believe we have some new technology that we'll also be talking about at automation fair that enables us to create a much more productive oilfield as well as the ability to create more of helping them maintain their assets, their rotating equipment, which is very important in that industry with some capabilities in remote monitoring and in asset management capabilities of those of that equipment. So we think in some of the smaller countries, they will continue to create opportunities for us to help them become more productive, so they can compete better against some of the majors. So the Latin America countries, in particular, Southeast Asia, we'll see some benefits there. But overall, it's going to be another declining year of capital spending in that industry in 2016.
So that's why we're cautious about how we're approaching this because we don't believe we've seen the bottom.
Jeremy, I think the other thing coloring our view of oil and gas in 2016 is, particularly in our solutions businesses, we're going into the year with a weaker backlog and our front logs would indicate that we're going to see continued declines.
Okay, that's helpful. And maybe quickly on EMEA, obviously pretty robust performance there. I wonder how much of that is due to your machine OEM clients where I think you've made good progress over the recent years? And just a quick one for you, Ted, on pension. You haven't made any comments on that, just a view on expenses around this and funding.
Thanks.
Yes. Certainly, Europe, the best part of our success story there is the continued expansion into the OEM space. We continue to expand the number of customers that we have, and we continue to expand the breadth of our portfolio to where it's more than just the motion on the machines. We've grown our safety business there and we've grown our network sensor business there in addition to our standard drives. So we do see the OEM business in Europe as one of the areas that has been responsible for our continued growth even in a very difficult environment.
Jeremy, this is Ted. I didn't mention pension because it's a pretty modest change, 15% to 16%. On an operating cost basis, it's less than $5,000,000 and the full in GAAP pension expense increase year over year is about 15.
Operator, we will take one more question.
Thank you. And your last question comes from the line of Steven Winoker, Bernstein. Please proceed.
Thanks very much guys for fitting me in. Just first on the cost side, in terms of the $20,000,000 of restructuring for next year and given the lack of visibility, the increased technology spending and the productivity that's no doubt freeing up capacity, why stop Is that just a placeholder? Do you have the project pipeline? How quickly might you increase that if conditions,
I guess, worsen? How are you thinking about sort of the relative size?
We're just Well, so Steve, I think, we're just seeing maybe larger programs than many of the other companies.
Well, so Steve, I think we believe that the restructuring charges that we took in at the end across 15 and particularly in the Q4 should be reasonably sufficient to kind of get our cost structure adjusted to what the current outlook is. There in any year, we've always got some normal level of restructuring charges, which I would say typically is about $10,000,000 a year. We left an extra $10,000,000 in 2016 because of the uncertainty around the outlook right now. And so if things play out the way our current guidance indicates, we think our cost structure is in pretty good shape. If things get a little bit worse, we will probably be looking at taking more restructuring actions.
But as we have often said, the areas that we're very careful and cautious about is, as an intellectual capital business, we have to continue to invest in the new technology I mentioned. A lot of new products coming out, we want to finish those. And we also need to make sure that our customer facing resources stay as strong as possible because that's how we're going to get the interest level at our customers with our capabilities. So it does require expense spending to do that. It's all about people And that's those are the areas that we want to maintain as high of a capacity as possible for the reasons that we do see this as short term in nature and we are building our capabilities and our product and service portfolio for the long term for our customers.
Okay. Fair comment. And then just on process growth, obviously very, very difficult end markets, but still 2nd year of, I guess, 4% or below growth in the area, better than apparently what appears to be some of the competitor moves. But maybe just comment on the rate of deceleration in process? And as you look forward, given all the new product introductions and all the efforts and are some of the competitors closing the gap as you see them or getting more aggressive in that area?
Or do you attribute the process growth or slower growth, all of it to the markets?
Well, we are the simple answer is we are putting it all on the market at this point in time. We believe, to your earlier part of the question, though, that some of the new capabilities that we're going to come out in the batch hybrid space will create additional opportunities for us. And as I mentioned, we have some strong capabilities now in the oil and gas space that we believe will also help drive productivity as opposed to just looking at increased production levels and new wells. We think we have an opportunity to help customers reduce their operating costs, improve their competitiveness with the lower oil prices. That's very important, and it's something that they're very interested in as opposed to just expanding the production rates themselves.
And so we think there's a couple of things in here that allow us to still be focused. We've improved some of our go to market strategies in the industry with our with some project pursuit capabilities. And so we continue to add capabilities to our platforms. So I wouldn't say people are catching up with the multi disciplined control. And I would say we're continuing to remove any of the shortcomings against some of the pure DCS players with our modern DCS approach.
So we're we have a lot of expectations for our ability to continue to grow in process.
Okay, guys. Thanks. See you next week.
Yes. Thanks. Thanks. Thanks. Okay.
That concludes our call today.