Good day, ladies and gentlemen. Thank you for holding, and welcome to Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. At this time, I would like to turn the call over to Patrick Gourous, Vice President of Investor Relations.
Mr. Gourous, please go ahead.
Good morning and thank you for joining us for Rockwell Automation's Q3 fiscal 2015 earnings release conference call. With me today are Keith Nosbusch, our Chairman and CEO and Ted Crandall, our CFO. Randy Rodrati is here as well as Randy and I transition today. Our agenda includes opening remarks by Keith that include highlights on the company's performance in the 3rd quarter and some context around our updated outlook for fiscal 'fifteen. Then Ted will provide more details on the results as well as our sales and adjusted earnings per share guidance.
As always, we'll take questions at the end of Ted's remarks. We expect the call to take about 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. Hope that all of you in New York will find a cool spot given the heat forecast coming. Before I get started, I would like to take a moment to formally introduce Patrick Gorris, who as I mentioned on last call has taken over IR responsibilities with Brandy's upcoming retirement.
Patrick joined Rockwell Automation over 9 years ago and he has been the finance leader of our Architecture and Software segment for about 4 years now. So Patrick, welcome to your first official earnings call. I'll start with some highlights for the quarter. So please turn to page 3 in the slide deck. I am pleased with our performance in the quarter as we delivered another quarter of solid earnings growth despite a year over year decline in sales due to a large currency headwind.
Organic sales growth was 2.2% with higher growth in architecture and software. EMEA with 4% organic growth was our highest growth region this quarter, driven by emerging countries. Safety continues to do well and was up double digits. As you remember, we are the market leader in industrial safety control, and this growth reinforces its importance to our OEM and process initiatives. Logix grew slightly above the architecture and software growth rate Process, reflecting underlying market conditions, was down 3% in the quarter.
Margin expanded 200 basis points in the quarter and free cash flow continues to be very strong. Ted will elaborate more on Q3 financial performance in his remarks, but I'll add a few comments about our performance through 3 quarters this year. Our revenue diversification efforts, whether from a geographic or vertical perspective, are yielding results. We have shown that we can continue to grow even if an important vertical like oil and gas is contracting significantly. Excellent execution and strong productivity drove a 2 10 basis points improvement in segment margins, resulting in double digit EPS growth in spite of lower sales.
And our ability to generate cash remains excellent, with strong free cash flow conversion through 3 quarters. These are very good results in a slow growth environment. Let's move on to market conditions and economic indicators and what we expect to see in our business for the remainder of the fiscal year. Global GDP and industrial production growth forecast have softened since April. For the U.
S, we experienced 3% growth in Q3 and expect about the same in Q4. But our full year growth rate will be lower than we thought 1 quarter ago. Automotive and consumer remain the strongest verticals in the U. S, oil and gas the weakest. As expected, we saw improved growth rates in EMEA during the 3rd quarter.
We expect continued modest improvement in this region, led by consumer, particularly life sciences. In Asia, India is doing well and we're seeing good growth there. China, however, continues to slow and 3rd quarter sales were flat year over year. We're not seeing improvement in the China market as capital spending remains very constrained. While oil and gas and tire are down year over year in China, we continue to grow in consumer and auto.
We now expect China sales to be about flat for the year. China does remain a very important longer term growth opportunity for us. We just do not see a short term catalyst for growth. Market conditions in Latin America remain. Mexico continues to be the bright spot, while other countries including Brazil, Argentina and Venezuela are in a recession.
Auto and consumer are growing above the region average and oil and gas is growing in Mexico. Other heavy industries, including mining, are weaker. With all of that said, let's move on to our updated guidance for fiscal 2015. We told you a quarter ago that we expected higher growth rates in the second half of this year. Since then, the outlook for industrial production has weakened and our 3rd quarter organic sales performance came in somewhat below our expectation.
While sequential growth will continue in Q4, we no longer expect higher year over year growth in the second half, and we're lowering the midpoint of our full year organic sales growth guidance by 1 point. Assuming a smaller headwind from currency, we continue to expect fiscal to $6.55 to $6.70 At the midpoint, this would represent a 7% increase in adjusted EPS on about a 3.5 percent year over year decline in reported sales. Ted will provide more detail around sales and earnings guidance in his remarks. I just have a few closing comments. While the market conditions may not be ideal, I like our competitive position.
We have a differentiated portfolio of products and services and dedicated employees, distributors and partners that are committed to provide the best service to our customers globally. We remain focused on innovation and I am confident in our ability to deliver attractive shareowner return, while we continue to invest in profitable growth opportunity. Before I turn it over to Ted, let me take a moment to mention Rockwell Automation's TechEd 2015, an important annual training event we hosted in June in San Diego. During the event, customers, distributors and partners learned from industry leaders on how to achieve operational excellence with expert led sessions, hands on labs and innovative presentation. Our June event was a resounding success with about 18 100 attendees from 45 countries and all 50 states.
This event is a good example of how we together with of course, is Automation Fair, which will be held in Chicago this year on November 18th 19th. The investor meeting is scheduled for the 19. So please mark your calendars as we hope to see you all there. With that, I'll turn it over to Ted.
Thanks, Keith. Good morning to everyone on the call. I'll start on Page 4, 3rd quarter key financial information. Sales in the quarter were $1,575,000,000 4.5 percent lower than Q3 last year. Organic growth was 2.2%, but currency translation reduced in the quarter by 6.8%.
Reported sales were up about 1.5% sequentially. Organic growth was 2% sequentially. Segment operating margin was 21.8% in the 3rd quarter, up 200 basis points from Q3 last year despite the reported sales decline. The year over year margin increase was primarily due to the higher organic sales and strong productivity, partially offset by modestly increased General corporate net was approximately $22,000,000 in Q3, up about $4,000,000 compared to a year ago. Adjusted earnings per share were $1.59 up $0.10 or 7% compared to the Q3 of last year.
The adjusted effective tax rate in the quarter was 27.9% compared to 27 0.6% in Q3 last year. We now expect our full year adjusted effective tax rate to be about 27%. That's about 0.5 point higher than our previous guidance, primarily due to a different distribution of pre tax income across geographies. The adjusted effective tax rate in Q3 spiked a bit due to the year to date adjustment to the new higher full year tax rate. Free cash flow for Q3 was $267,000,000 another very strong result.
Free cash flow conversion on adjusted income was 123% in the quarter. Our trailing 4th quarter return on invested capital was 33.1%. A couple of items not shown. Average diluted shares outstanding in the quarter were 135,500,000, down about 3% compared to last year. Also during the Q3, we repurchased 950 6,000 shares at a cost of $115,000,000 Year to date, we've repurchased 3,650,000 shares at a cost of $410,000,000 In November, we talked about a full year repurchase target of $470,000,000 We're running about 16% ahead of that pace through June.
At the end of the quarter, there was $642,000,000 remaining under our share repurchase authorization. Moving on to the next two slides, which present the sales and operating margin performance of each segment, both for the Q3 and year to date. I'll start with the Architecture and Software segment on Page 5, and I'll focus my comments on the Q3 results. On the left side of the chart, Architecture and Software segment sales were $684,000,000 in Q3, down 4.4% compared to Q3 last year. Organic growth was 3.1%.
Currency translation reduced sales in the quarter by 7.5% compared to prior year. Sequential organic growth was 1.8%. Moving to the right side of the chart on the 3.1% organic growth, A and S margins were 29.2%, up 60 basis points compared to Q3 last year with the volume leverage on organic sales growth and productivity partly offset by higher spending. Turning to Page 6, this is the Control Products and Solutions segment. In the 3rd quarter, Control Products and Solutions segment sales were $892,000,000 down 4.6% year over year on a reported basis with organic growth of 1.6%.
Currency translation reduced sales by 6.3%. Organic growth for the product businesses in this segment was 5.3%. Organic sales for the solutions and services portion of the segment declined by about 1%. The book to bill in Q3 for Solutions and Services was 1.1, better than last quarter and a little better than Q3 last year. Sequential organic growth for the Control Products and Solutions segment was 2.2 percent.
CP and S delivered very strong operating margins at 16.1% in Q3, up 10 basis points compared to last year. In addition to the contribution from organic growth, year over year productivity was particularly strong in this segment. Moving to the next slide. Page 7 provides a geographic breakdown of our sales and shows organic growth results for the 9 months through June. Keith covered a good deal of the 3rd quarter results in his comments, so I'll maybe just add a couple of additional notes.
As you can see on the slide, the organic sales growth in the quarter was driven largely by the U. S. And EMEA, offsetting a continued decline in Canada and with Asia Pacific and Latin America up only slightly compared to the same quarter last year. Canada was down almost 8% compared to Q3 last year. This region has the largest oil and gas exposure.
As Keith mentioned, the EMEA organic growth in Q3 was largely driven by the emerging countries. Emerging countries were up mid teens with modest growth in mature Europe. In Asia, India grew double digits, while China was flat, as Keith said, and mature Asia declined in the quarter. In Latin America, growth was 1.1% in the 3rd quarter. Mexico experienced organic growth in the mid teens, but that was largely offset by declines in the balance of the region.
As a final note on this slide, overall emerging market organic growth in Q3 was 5.8% despite the flat China. Please turn to the next page, which is our updated fiscal 2015 guidance. So as Keith mentioned, we're revising the full year guidance. At the midpoint, we're reducing our organic growth expectations for the full year by one point. Keith talked through those changes, which are primarily related to the U.
S. And China. We now expect a little less headwind from currency. Previous guidance called for the combination of currency translation and acquisitions to reduce sales by 5.8%. We now expect that to be about 5.5%.
We expect reported sales of approximately $6,400,000,000 at the midpoint. The previous guidance called for organic growth of 1.5 percent to 4.5 percent. The new guidance is for organic growth of 1.5% to 2.5%, a more narrow range with only 1 quarter to go in the fiscal year. Our operating margin performance has continued to be very strong through the 1st 9 months and we expect that to carry forward into the Q4. For the full year, we now expect operating margin to be about 22%.
That's a little above the prior guidance. As I mentioned previously, we now expect an adjusted effective tax rate for the full year of 27%, that's up 50 basis points from prior guidance. Given the lower organic sales, somewhat higher margins and a headwind from a higher tax rate, Our new EPS range is $6.55 to $6.70 Higher margin is offsetting the lower sales. We've remained within a couple of cents of the previous guidance midpoint despite losing about $0.05 to the higher tax rate. Given our strong cash generation through the 1st 9 months, we now expect conversion on adjusted income to be about 110% for the full fiscal year.
With better cash flow conversion and given that our year to date spending on repurchases was at a rate above our original full year repurchase target of $470,000,000 we now expect to spend at least $525,000,000 on repurchases for fiscal 2015. There are a few other items not shown here that I think are generally of interest. We expect general corporate net expense to be approximately $85,000,000 for the full year. That's up about $5,000,000 from previous guidance. We continue to expect average diluted shares outstanding to be about 136,000,000 for the full year, and we expect process sales to be about flat on an organic basis for the full year.
With that, I'll turn it back over to Patrick.
Before we start the Q and A, I just want to say that we have quite a few callers in the queue today and would like to get to as many of you as possible. So please limit yourself to one question and a quick follow-up.
The first question comes from the line of Scott Davis at Barclays. Please go ahead.
Good morning, guys. Good morning, Scott.
Can you give us a sense, Keith and Ted, on if you can separate out oil and gas as best as you can, I mean, I know you said Canada is down 8%? Can you give us a sense of how much oil and gas you think was down and a little bit of a forward look in that regard, if
there's a book to bill or anything else that
you could share to help us understand
how close we are to a bottom there?
Well, we oil and gas in Q3 was down about 10%. And we would expect for the fiscal year, it would also be down 10%, maybe a little bit better, which gets us through Q3 down 7% on a year to date basis. So I think it's a little too early for us to say that we know it's a bottom. Certainly, the next quarter will give us a good picture of that. If we're able to be steady state again in the Q3, I think we have our answer.
It's become very mixed, however, as to spending. Obviously, you picked up Canada. The U. S. Is definitely down as well.
But Mexico is up. The Middle East remains reasonably solid. So the what we are seeing is a transition into more OpEx spending than specifically upstream exploration spending. So we're hoping that we can convert some of the production dollars into and CapEx into OpEx as we go forward.
Okay. And then curious on your views in China. I mean, you've sequentially gotten more bearish than the other companies have as well. But what's your sense on the region? And what I'm asking, I think, really is that there was all this hope that there would be a secular shift from kind of labor to capital that you'd see more automation spend.
But it sounds like folks are so nervous about
demand dynamics, just not one to spend.
I mean, do you see this more as a short term issue? Or is there I mean, how do you guys feel how do your local guys feel about the 1, 2, 3 year outlook?
Well, we definitely feel that there is a short term issue at this point. A lot of that driven by what's the liquidity. It's still difficult for small and midsized customers. The rates are still reasonably high. We had expected to see in China growth in the second half of the year, which is not the case, particularly I think the currency is hurting a little bit.
Their exporting OEMs are suffering because of that. I think we have seen a pickup in some of the infrastructure investments, but that's typical China behavior. We believe the transportation industry, automotive is mixed with some of the leading companies still investing, but the slowdown in consumption is or I should say in auto purchases is hurting the majority of the market. Tire is slowing because of over capacity now. So and but yet we continue to see growth in the consumer industries, middle class, which quite frankly is why we continue to be stay positive on China in the long term.
But certainly, in the short term, there are spending concerns both from a company standpoint as well as individual standpoint. And I think we have to see how the current phenomenon, the stock market transition in the last couple of weeks, what will be the long term impact of that as well.
Patrick. Thank you.
The next question is from John Inch at Deutsche Bank.
Yes. Thank you. Good morning, everyone.
Good morning, John.
Good
morning. So obviously, all eyes are on 16. For most of the companies, it's calendar. In your case, it's fiscal. What I'd like to ask you, Keith and Ted, are as you literally add up all of these trends around the world, you're currently putting up very slow organic like kind of low single digit organic growth.
It's actually better than lots of companies, but still it's still pretty slow. Do you see anything in your frontlog, mix, your initiatives that prospectively should call for 2016 to be an improvement from that trend or perhaps even a deceleration in some manner? Because obviously China is decelerating and it's a pretty important region for you. But then you called out EMEA improving. I mean, it just sounds like everything I don't want to put words in your mouth, but it just sounds like there's really nothing on a net basis, but you guys are insiders.
So what are you thinking here?
Well, what we're thinking is we're going to reserve commentary on 2016 until November. So that's our first thought. But to just give you a little flavor for what currently is going on. And that is our front log and quotation is stable. So I wouldn't say we're seeing a meaningful change in the activity.
Obviously, the concern that we've talked about is the declining industrial production and that's been a pretty consistent drumbeat starting in the spring timeframe now. But when you look at the forecast for industrial production, it shows improvement as we go through 2016. So there is I would say there is mixed messages at this point and that's one of the reasons we want to get a couple more months here and get a better feel before we give our 2016 guidance.
Keith, I mean some companies not that again the quarter is backward looking, but they have called out trends in the June quarter with very weak May and then kind of an improving June, July. Did you see any of that? And if so, is there any kind of commentary you could just give overall about sort of the way the quarter progressed?
Well, the quarter did get stronger as we went April through June. And June would have been the strongest month in the quarter. So that, I guess, you could say would be the trend for the quarter. Although, I would say that's pretty typical
for us.
Yes. That's not unusual in our business. And I would say that July with the holiday and everything started out slow.
Just last, the commentary, Keith, I think is apparent for China. But you guys have a lot of I mean you had over the last couple of years put in through a lot of initiatives with lower end product. As part of the almost sort of bifurcation in the market right there between consumer and heavy industry, are you seeing and are you satisfied with the adoption rate of those lower end microcontroller products? Obviously, you're very strong, right, in large controller. What's happening in smaller controller?
And could that be kind of a Rockwell specific source of improvement in 16 in China even if the overall market doesn't improve?
Well, certainly, we believe that is one of the areas that we should be able to grow in that's heavily influenced by our success in the OEM market. And that's what a lot of it is targeted for. So I did mention OEMs were weaker, particularly exporting OEMs because of the exchange rate, particularly in the Europe. So I think our product portfolio continues get better to serve that market. We call that the mid range market and that's our controllers, our drives, which is a very strong portfolio as well.
So that will continue to be an area that we expect better than market performance in China and certainly has been an area of focus for us this past year in particular. And we still got to get a little better traction.
Got it. Thank you.
John, at the risk of cutting that answer a little too fine, since I do want to draw is I think we probably think we have a better opportunity in mid range and a larger opportunity in mid range than in microcontrollers.
Yes. Okay. Got it. Thanks, guys.
Thank you, Josh. The next question comes from the line of Shannon O'Callaghan at UBS. Please proceed.
Good morning, guys. Good morning, Shannon.
Hey, maybe just a quick margin question. Obviously, CP and S really strong margins. You mentioned the productivity. It also looks like product mix was favorable, but maybe just some more thoughts on why that came in so strong and if that kind of productivity is sustainable?
Yes. So I talked about actions we took at the end of last year, some
restructuring actions. That structural productivity
contribution in PP and S is probably about
half of the productivity that
we're seeing in that segment. A and ANS. And then the other half is kind of what I would call normal sourcing actions and lean and 6 Sigma productivity projects that we always have in the pipeline. I think we have probably tended to underestimate a little bit as we've gone through this year The level of productivity we were driving in CP and S, I would say, has been stronger on the solutions and services side of that business than on the product side. But I do think it will be sustained.
I think, as we go into Q4, the margin comparisons get a little bit tougher, but I think we'll sustain that level of productivity.
Yes. I think the only comment I'd make in addition is, I think we're also benefiting by the mix. And as solutions grow at a faster rate going forward, that will have some downward pressure on margin.
And then just in terms of when you look at the verticals that are actually growing, what kind of investments do you seeing customers make? I mean, are customers actually willing to make a larger, whether it might not even be capacity, but a major redo of a plant or whatever. Are they willing to sort of stick their necks out and make a real investment? Or are these kind of smaller necessity kind of upgrades that you're seeing?
Well, I think it depends on the geography. And for example, the 2 verticals that are growing the best for us are automotive and then consumer. And in automotive, there's a lot of greenfield investment, particularly in Mexico and a couple of the other emerging markets. In the mature markets, including China in that comment, In the mature markets, as you know, the in the U. S, the U.
S. Automotive companies are continuing to invest in new platforms. So it's not necessarily capacity as much as new models and refurbishing their lines. And in particular, we see longer term investment in the powertrain side of the business because of the fuel standard improvements that are mandated. So new engines, new transmission, which you're now seeing.
So I think that would be the area that we see there. With respect to the food, it's pretty much the same story. Emerging markets with the growing middle class and a greater need for automation and for protecting the safety of the product. We see more investments in automation. And when we see it in the mature markets, it's really driving modernization of some of the new lines to update the existing installed base and also to deal with new more flexible packaging to drive productivity.
So I think that's where we're seeing the greatest growth in those two verticals and it varies between mature and emerging market.
Okay, great. Thanks a lot guys.
Thank you, Shannon.
Thanks. The next question is from the line of Rich Kwas at Wells Fargo Securities. Go ahead please.
Hi, good morning everyone.
Good morning Rich. Keith, could you just comment on
the competitive framework in China right now? There's been one of your larger competitors out there saying that
In China, pricing is always competitive. It tends to be a nature of the culture as well to some degree. I would say, we're not seeing significant different activities, but there's fewer large projects. And so I think on the few there are, what you traditionally see is a more competitive environment. So I think that's that remains the case on the few large projects that are out there.
I think the investments that are taking place, they tend to now require a more competitive bid. I would say the area that is probably the greatest impact and it's not necessarily a pricing phenomenon, it's just a situation of currency, which is the exporting Chinese OEMs are less competitive now because the RMB is pegged more to the dollar and therefore with the euro weakness against the dollar, the European OEMs are more competitive. So that hurts the exporting OEMs in China, particularly into the European market. And I would say that's not necessarily a pricing issue. It's more of a currency issue there.
So you've seen the impact from that in the last couple of quarters at the part of the slowdown?
Yes. Yes, we have. I think that is part of it.
All right. And then just when you I guess this is a question for Ted, but on the margins, if you back out FX, you had a very high incremental again. In the past, you've talked about organic growth having to be in that mid single digit range to get to that 35 ish type incremental on an organic basis. When how should we think about it as we move out the next several quarters in terms of the momentum on productivity? And how much that can help sustain the margin versus what you need under in terms of underlying demand improvement?
I mean, I think I'd still give the same guidance we have always talked about, which is if we get organic growth falling into the low single digits, it will be harder for us to drive conversion margins in the 30% to 35% range. And I think what you're seeing this year is really a combination of 2 things. One is, our productivity is above average this year and we've talked about that in previous quarters. And the other thing is, we're getting about 1% of price this year on low organic growth, but not also tends to kind of help with the conversion margin.
Okay. And then just a quick one, Ted, on you had a very strong CP and S margin quarter here. Typically, you see a nice sequential ramp in the Q4 just given the base level higher here. How do we think about that just shorter term?
I think we're certainly going to see an acceleration in volume in CP and S just because Q4 is always our highest solutions and services shipment quarter. Normally, we would see some expansion of margin consequent to that, even though we're going to have a significant negative mix impact.
Okay. Thank you.
The next question is from Steve Tusa at JPMorgan. Go ahead. Hi, good morning.
Hi, Steve. Good morning.
On the margin side, I guess just to ask the question a little bit differently. So if you are, as John was talking about in this kind of low growth environment and the trends from the such an amazing performance this year. I'm just wondering if your conversion is below the 30%, I mean, can you still improve margins in that environment?
So without talking specifically about 2016, because as Keith said, we're not going to give guidance on 16 yet. I would say generally, our expectation is even at low levels of organic growth, 2%, maybe even 3%, is in a 2% to 3% range. Even at those levels, we think we should be able to drive some level of margin improvement generally, but not the 30% to 35 percent conversion that we would expect at higher rates organic growth.
Okay. And then just in Mexico, how strong was Mexico? And then within Mexico on the oil and gas front, should we think about Pemex there obviously? Or what's of the flavor of the Mexico oil and gas strength that you're seeing?
Yes. Mexico for the quarter was up it was up I think mid teens. So that was once again a strong quarter of growth for us. And when you're talking oil and gas in Mexico, you're talking Pemex. And of course, they have a supply chain there, but Pemex drives it.
It's 100% of the business and they are continuing to invest and modernize. They're modernizing their platforms and also their transportation areas. And so that has been the area of growth as opposed to significant new drilling that's going on. So we do see an opportunity with some of our installed base to be able to participate in the upgrades and the modernization that's going on.
Okay. And one last quick one. Process for the 4th quarter, what do you expect that growth rate to be
for the Q4 for total process?
Process for the Q4, we expect it to be right around flat, maybe a little negative. But overall for the fiscal year, flat.
Great. Thanks.
Okay. Thank you, Steve.
The next question is from Robert sorry, Richard Eastman at Robert W. Baird. Go ahead please.
Yes. Keith, could you maybe speak just a little bit to in the EMEA commentary, you mentioned the emerging countries in EMEA were plus mid teens. And I'm curious what is the industry exposure there, end market exposure as well as which countries are you speaking to in there?
Sure. Well, we're speaking to Turkey. I would say the Middle East, when you think of the Middle East in my commentary, think of it as the oil industry in the Middle East, which is now broader than just oil, but think of it as Saudi Arabia, the Emirates, Abu Dhabi. And then Sub Saharan Africa would be the other one and Central and Eastern Europe. So it's pretty much the rest of Europe, Middle East and Africa.
And we saw good growth in other than subset other than Turkey in the quarter, we saw strong year over year growth. And actually, we also saw growth in Russia, but that was the delivery of a project and we're certainly seeing less opportunity with respect to orders. But once again, that's the lumpiness of our solutions business, which is prevalent throughout that entire region.
And is the end markets again, so it sounds like spend Mideast spend on oil and gas is still holding its own. And then the other market slant towards kind of consumer, food, beverage that type of thing?
Yes. Just to clarify in the Middle East. The Middle East is expanding into other areas. Some of our growth there was in metals because of the low cost of energy. They do attract energy intensive industries.
And the other was in a water wastewater project as they continue to build continue to build infrastructure for their population. So I would say oil and gas is the primary, but we had 2 very significant projects in metals and water wastewater in the Middle East. In the emerging in Eastern Europe, a lot of it does tend to be the consumer related mining than anything else at this moment. The resource industries typically lead. We also see some consumer as the population growth is starting to attract some of the multinational food companies to invest.
Okay. And then just a last follow-up here. Ted, when I look at the low end of the fiscal year 2015 organic growth guide, so the 1.5 percent core growth. As the 4th quarter plays out and the trends seem to play out, I suspect that the A and S business would still trend line out at kind of low single digits through the 4th quarter simply because it's got the consumer facing exposure and processor in auto. So the CP and S business where you pick up the oil and gas exposure of the process that could likely be a negative number in the Q4 year over year despite the fact that it should be up sequentially?
I mean that would that be the trend?
Well, I do think our solutions and services business will be down slightly in the Q4 year over year. And I think our products business will be up.
Okay. Okay. All right. Very good. Thank you.
Thank you, Rick.
The next question is from Jeremy Capron at CLSA. Please go ahead.
Thanks. Good morning.
Good morning, Jeremy.
I wanted to follow-up on Scott's question around oil and gas. I get a sense from your commentary that you think we may be approaching a bottom at least in terms of the year on year contraction. I think your guidance implies double digit contraction in Q4 and then we'll have to see what happens. But wouldn't that be a rather a quick down cycle here, particularly if you compare to what happened in mining? I think it took a good 2 years for your business to find a flow there.
So do you think it's fair to assume that starting next year oil and gas would not be a major drag on your business anymore?
No, I don't think that's what I was trying to say. What I was trying to say is we aren't ready to call it stabilizing, that we'll need at least another quarter to see if the declines that we saw in Q3 start flattening out or if we're going to see a continued reduction in Q4. Right now, we are calling on a double to your point, exactly right, we are expecting a double digit decline in oil and gas in Q4. And depending on at what level that comes in, we'll have a better feel for going forward. I do think to the point of your question, I don't think we will see a significant increase in spending until we see an increase in the price of oil.
And I think those 2 will be very connected. And at this point, I think we're still at too low of a level to see meaningful incremental investment. No matter where the bottom is, I think we still need to see higher oil prices to drive new investment as opposed to just OpEx spending to improve productivity and their cost structure.
Okay. And shifting gears a little bit here. The free cash flow looks very strong conversion rate well above 100%. I mean, we've seen that for a few quarters now. Can you help us understand what is driving this?
And as a consequence,
do you see upside to your
share buyback target that we said earlier in the year? And I think you explained that you're trending ahead. How should we think about buybacks going forward?
Yes. So, I would say the biggest factor influencing the higher conversion on adjusted income is better working capital management and working capital has not increased at the rate we expected despite the fact that I'm talking about a constant currency basis, despite the fact that we've had about 2% organic growth. So that's the biggest factor. As it relates to share repurchase, we originally set a target in November of about $470,000,000 And as I mentioned in my comments, we now think we will spend at least $525,000,000 this year. So we ran ahead of pace through 9 months and I think we will run at pace or higher in Q4.
Now obviously that will depend on whether there's any acquisition spending in Q4 and also to an extent on the stock price.
Okay. Thanks very much.
Thank you, Jeremy.
Next question is from Nigel Coe at Morgan Stanley. Please proceed.
Thanks. Good morning. Obviously, another quarter of just outstanding margin strength, so congratulations with that. I just want to understand, maybe it's a dumb question, but when you say productivity, Keith and Ted, what do you actually mean by that? Are we talking here about running the factories more productively, discretionary cost control?
What does that actually mean?
All of the things you have talked about. I mean, you can think about this in part as volume leverage that we're getting on organic growth. You can think of it as Lean and 6 Sigma projects, which are there to reduce costs. The efforts of our strategic sourcing organization to influence material costs. Margins in our solutions businesses, which relates a lot to basically selection of projects and then the execution on those projects.
And in addition to all of that, savings we got from restructuring actions that we took late last year.
Okay. And then just digging down to the next layer, we've got SG and A down 5%, just up 5% year over year, which is slightly more than sales growth. Normally, we expect SG and A to be a bit stickier than sales. So I'm just wondering, how does all of those actions you just referred to, how is that impacting the SG and A line?
Yes. So I don't think the actions we have taken had a big effect on SG and A. I think what you're looking at in that 5% decline is more the effect of currency translation year over year. Now that said, we have not had large spending increases either in SG and A.
Okay. All right. And then just a final one. Maybe I'm wrong, but mining, I think last quarter you mentioned expectation of maybe some growth in mining in the second half of the year and it sounds like that's gotten a little bit weaker. Is that fair?
And maybe just add some color in terms of what you're seeing on mining?
I think if we look at the year to date results, mining is actually slightly up for us year over year. The performance in any quarter is going to bounce around a little bit. But I suspect for the full year, mining is going to be either flat or maybe slightly up for us
this year.
Okay, great. Thanks, Doug.
The next question comes from Steven Winoker at Bernstein. Please go ahead.
Thanks and good morning guys.
Good morning, Steve.
Hey, last quarter you had talked about as part of the margin discussion that spending was a little bit slower in the first half than originally expected, especially R and D effort. I think they were up 2% compared to 4% you might expect in the second half on the R and D. So you've talked a lot about this. So could you maybe hit the R and D side a little bit? What on all of the spending side, are you no longer anticipating bringing that up and what's going on with the projects?
Yes. So last quarter, we talked about spending up about 2% in the first half and an expectation it would be up about 4% in the second half. We did not accelerate a lot of spending in the 3rd quarter and we now think that our spending for the second half will be up about 3% instead of 4%. That's part of the margin improvement that's reflected in the guidance.
Okay. All right. And all of that's really coming in the Q4 now?
I would say back, not all of it, but back weighted.
Okay. All right. And then just quickly on the solutions versus services down 1%, what was the I mean, obviously, I assume the solutions was down
decline was all due to solutions.
Okay. Any number around that?
I don't know that offhand.
Okay. And then Keith, just a bigger picture question. Given the unique position you guys are in, when and what I'm seeing across the sector now, what's your view of I know it's a big question here, but what's your view of world manufacturing excess capacity and excess inventory? You've talked about automotive. You've talked about consumer a little bit, but are there particular spots where you think the world is in a significant excess capacity situation other than the oil and gas commentary in mining?
Well, I think the one that we've been talking the most about historically is metals. And I would say metals is still definitely in an overcapacity situation, particularly metals in China, which has not reduced their capacity. You've seen capacity taken out of the U. S. And that's happened over a number of years, but I still think we have overcapacity there.
I think we're beginning to see at tire industry. And they still have overcapacity in their overall automotive industry, but it tends to be in the domestic suppliers, the 2nd and third tier automotive companies that are losing market share. And many of those are state owned, so they're very difficult to close and to reduce. But I would say that's where we've seen the overcapacity. And I would think in most of the other industries, it's not in an overcapacity situation in the emerging markets.
It's about creating capacity, particularly for the growing middle class and consumers. And in the mature markets, it's about modernization and reducing costs and improving business performance and investments are going into that. And an output of that would be some capacity expansion, but they are not making the investments due to capacity expansion. And I would say, if you take China in particular, independent of overcapacity, there is a need to deal with the escalating labor costs and that's just a natural tailwind for automation investment as well. So we do see some benefit there independent of some of the other comments I made.
All right. Great. Thanks, Keith. Thanks, Ted.
You're welcome, Steve.
The next question is from Julian Mitchell of Credit Suisse. Please go ahead.
Thanks a lot. The first question, I just wanted to circle back to the gross margin expansion you've seen and the extent to which you think that mix has been a help there this year or if you think the mix you've seen in 2015 is fairly typical assuming no big changes in the overall demand environment?
I would say if you looked on a year to date basis, the mix is slightly favorable this year and it's had a small positive effect on margin. And I think for the full year, I'd expect that to be about the same.
Understood. And then secondly, I guess if you think about the appetite, the customer appetite around large project spend changed? Is it very different versus 3 months ago? Because your comments sound a little bit more cautious, but you had a decent book to bill.
I don't think large project activity has changed a lot in the last 3 months. I mean, I think one of the things we've seen is with industrial production rates slowing, and that's been true pretty much globally, maybe with the exception of EMEA. With industrial production rates slowing, what we're seeing is kind of somewhat less MRO and small project activity.
Understood. Thank you.
Operator, we will take one more question.
Thank you. This comes from Robert McCarthy at Stifel. Go ahead.
Good morning. Thanks for taking my questions. First, I mean, I apologize if you've already talked about it on the call. Did you cite what the book to bill for services solutions was in the quarter and what the Logix growth rate was?
Yes. The book to bill for solutions and services was 1.1 and the Logix growth rate in the quarter was 3.5% organically.
And do you have any kind of outlook for what you expected kind of the Q4 for LOGICS?
We expect LOGICS in the 4th quarter to grow less than the 3.5%, but still positive.
Okay. And then the final question is and this is in terms of Canada in terms of I mean you have a pretty globally balanced mix in terms of I think your productive capacity, but clearly the Canadian dollars moved against you. Have you called out what kind of the headwind has been just on a transactional basis there?
No, I don't think we have. I don't think we have ever talked about specific currency transactional headwind.
Okay. So was it material or not? I guess it wasn't.
I'm stopping to think about we manufacture in Canada and export to the U. S. And we also manufacture in the U. S. And export to Canada.
I'm trying to think about what that balance would be. Okay. So it sounds like
it's relatively balanced. For some other industrials, they got kind of nipped by that. So don't worry about it. I will leave it there.
Okay. Thank you, Rob.
Okay. That concludes today's call. Thank you very much for joining us.
That concludes today's conference call. At this time, you may disconnect. Thank you.