Thank you for holding and welcome to the Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's call is being recorded. Later in the call, we will open up the line for questions. [Operator Instructions] At this time, I would like to turn the call over to Jessica Kourakos, Head of Investor Relations and Treasurer. Ms. Kourakos please go ahead.

Good morning and thank you for joining us for Rockwell Automation's third quarter fiscal 2019 earnings release conference call. With me today is Blake Moret, our Chairman and CEO; and Patrick Goris, our CFO. Our results were released earlier this morning and the press release and charts have been posted to our website. Both the press release and charts include reconciliations to non-GAAP measures. A webcast of this call will be available at that website for replay for the next 30 days. Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. So with that, I'll hand the call over to Blake.

Thanks Jessica and good morning everyone. Thank you for joining us on the call today. Before I start, I first want to thank Steve Etzel, who has transitioned from Investor Relations back to his Treasury duties full time. He served as well in the IR role for the last few years. I also want to welcome Jessica Kourakos as our new Head of Investor Relations. Jessica brings a wealth of experience from both the sell side and buy side and we’re excited to have her onboard. With that let me start with some key points for the quarter, so please turn to page 3 in the slide deck. Globally organic sales were up 0.5% lower than we expected. In general, we saw a strong growth in our longer cycle end markets, while shorter cycle end markets weakened. Organic sales growth was led by heavy industries including oil and gas, pulp and paper, and mining as well as Life Sciences, each of which grew double-digits. In oil and gas we saw a strong growth in all regions as our customers are focusing on productivity, improvements and digitization initiatives. Pulp and paper continued to do well for us with most of the growth this quarter coming from North America. Strong growth in mining was driven by CapEx investments in iron ore and copper, electric vehicle related commodities and investments around digitization. Life Sciences was another stand down vertical for us this quarter. Our offerings align well the industry trends including personalized medicine and cyber security. Offsetting the longer cycle growth in the quarter was weakness in shorter cycle end markets including automotive, semiconductor and food and beverage. Automotive was down about 10% year-over-year and slightly up sequentially versus Q2 in-line with our expectations. Semiconductor in the quarter was weaker than expected impacted…

Thank you, Blake and good morning everyone. I’ll start on slide 4 which provides our key financial information for the third quarter. As Blake mentioned, sales slowed down in Q3 with reported sales down 2%. Organic growth of 0.5% was weaker than expected and currency translation reduced sales by 2.5%. Segment operating margin was 23.8% expanding a 130 basis points compared to the last year. The increase in segment margin was mainly due to lower incentive compensation expense partially offset by higher investment spending. Our incentive compensation plan reflects our strong paper performance culture and track record. We have a companywide incentive plan that covers most of our employees globally with bonus earned being very aligned with financial performance of the company. To reflect the revised outlook for full year fiscal 2019 financial performance, we lowered our estimates for bonus expense. The total adjustment booked in the third quarter was about $30 million which represents about a 170 basis point to segment margin. About two-thirds of the $30 million is booked in the Control Product and Solutions segment, the balance in the architecture and software segment and general corporate net. Looking at our performance through the first three quarters of the fiscal year, segment operating margin is 22.7% at 80 basis points year-over-year. Earnings conversion ex-currency is 35% and adjusted EPS is up 11%. General corporate net expense in the quarter of $24 million was down $9 million compared to last year mainly as a result of lower functional expenses including lower incentive compensation expense. Adjusted EPS of $2.40 was up 11% compared to the third quarter of last year. The year-over-year increase in adjusted EPS is mainly the result of lower incentive compensation expense, higher organic sales and the lower share count partially offset by higher net interest expense.…

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

Your first question comes from the line of John Inch from Gordon Haskett. Your line is open.

Good morning everybody.

Good morning.

The down 3% core growth for the fourth quarter, are you guys assuming that this is just a function of projects being further pushed out or are you actually assuming there's embedded deterioration, say in both distribution and projects in terms of the cadence?

So looking at the different industries John, we're expecting that for the full year that automotive overall is going to be down about 10%. We see some sequential improvement as we had seen some purchases beginning in some of the projects that we've been tracking, but we're still looking at about 10% for the full year. I think the stories in Q3 that inform our outlook for Q4 are that in the quarter while automotive performed about as expected, we did see weaker than expected performance in the areas like semiconductor, food and beverage weekend a little bit and then chemicals, power; some of those areas. So those weaker than expected performances in Q3 inform the outlook implied with Q4.

I think like you had talked about, you'd thought -- there going to be some automotive turnaround projects or model changes coming through in the second half, is that still part of the calendar year, is that still part of the expectation or does that look like in deferred as well?

No, actually purchasing has started on a lot of those projects that we were tracking. The ones that we've been talking about that included some line-of-sight we've seen early purchases there. So we won the ones that we expected to plus a little bit more. It's just not clear whether the majority of the volume from those purchases is going to happen in Q4 around into 2020.

Just lastly China stepped down a little bit. It's still pretty decent given the overall sort of macro, but is there any color you could give us viz-a-viz end markets in China say heavy industry, infrastructure, auto, consumers and stuff like that?

Sure. We've talked previously about the impact of some of the stimulus in China and we saw it again in Q3. So mass transit, wastewater which would be most impacted by government stimulus, those were strong performers for us in China in the quarter.

And was anything incrementally weaker that you would call out?

Auto was a little bit weaker in China in the quarter. We had some wins in different areas and we'll talk about that when we talk about our information solutions and connected services, but overall auto in China weakened.

Got it, thanks for the color.

Thanks John.

Your next question comes from the line of Julian Mitchell from Barclays. Your line is open.

Hi good morning.

Good morning.

Maybe just give us a little bit of color as to your guiding for organic sales to dip into the September quarter. How does this environment feel today compared with when you've gone into other sales downturns in the past? And you taking much mitigating action on the assumption that this sales decline could last several quarters if it's consistent with history?

Yes Julian, we haven't assumed that this is the beginning of something that's going to last multiple quarters. What we've also seen historically is even during continued periods of expansion, we have seen times where that growth has leveled off for a quarter or two. However, we have taken cost reduction measures and you saw the impact of that in Q3 and we're actively looking at other ways both to match our spend with market conditions as well as take the opportunity to more rapidly reinvest and look at ways to direct resources to the areas that are going to be most important in the future. So we have taken cost reductions. We're looking at areas that would be opportunities going forward and we're watching the development of this quarter Q4 very closely.

Thank you very much. And then my quick follow-up would just be around the process business. I think your revenue growth in that slowed to about 3%, you've been running at 10% growth in the March quarter. Should we assume that also dips into negative year-on-year territory in the September quarter? And any color associated with that on the backlog in solutions and services?

Yes. So solutions and services backlog remains slightly up year-over-year and we do continue to see growth in some of the key areas driving process such as oil and gas and mining. Some of the project delays that we saw in Q3 impact process, I would say the project delays that we saw were split between the longer cycle that typically makes up most of those projects, but it was also colored by a fairly significant portion of delays in shorter cycle businesses as well.

Fantastic, thank you very much.

Thanks Julian.

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

Thank you, good morning everyone.

Good morning Joe.

Blake, could you maybe just talk about any discernible trends that you saw as the quarter progressed, for example, we've been hearing from a lot of companies that June had turned out to be worse than expected and so anything on the trends that you can tell us about?

Yes. But not that actually for us April and May were weak and June got a little better sequentially. So in the quarter we saw it finish a little bit stronger.

Were there any specific end markets that were driving that?

I can't pick any in particular except perhaps chemical may have followed that a bit where it started the quarter out to a weaker and obviously since chemical is kind of sits a bit in the middle in terms of the applications that we play in, we watch that fairly closely and that started to improve a bit as the quarter went on. I would make the other comment that for our quarter it doesn't progress in a linear fashion. So the last month the quarter is always the strongest and so we can't extrapolate the way that a quarter has started out and just run it out and make predictions about the full quarter.

And then maybe my follow-on question there is on just looking at the CP&S margins, clearly really strong and you guys called out incentive comp as a big driver. Was there anything else that impacted the margins favorably this quarter and then how should we be thinking, I know that you're stepping down incentive comp as well in 4Q. But what should we be thinking about it like a normalized number I guess from an incentive comp standpoint on the go forward?

Joe, Patrick here. So with respect to CP&S segment margin, the largest part of the year-over-year increase is related to incentive compensation. The segment of course had some organic growth in the quarter, which helped as well and then currency was just a slight tailwind less than 0.5 point of margin for that segment. In terms of incentive compensation, the way that you can think about it is a fully funded incentive compensation plan for Rockwell Automation is about a $100 million and the current guidance for fiscal 2019 is about 60% of that.

Got it, thank you both.

Thanks Joe.

Your next question comes from a line of Steve Tusa from JPMorgan. Your line is open.

Hi guys good morning.

Good morning Steve.

I just wanted to talk about the food and beverage is kind of a broad way to characterize that end market kind of vertical. Does that include some of the packaging machinery types of guys that are out there? Is it like a lot of the machine tool like the bottling guys and that kind of stuff or is it more enterprise business with the crafts set of worlds and things like that. Can you maybe just kind of like break out the food and beverage dynamics a little more?

Sure. So food and beverage includes both. So it certainly includes the global end users. So the crafts and the Mondelez, Nestle that would be an example of a few of those AVI. It also includes the packaging, the machine rebuilder. So, you're looking at the packaging OEMs around the world, that's a fair part of our business in Europe for instance as well as in the U.S. and it includes that part of the business as well. They both worked together and we have a strong focus at both ends of it; what kind of performance we can provide to the machine rebuilders as well as how it works together in an integrated system at the user.

But I guess, when you talk about the performance this quarter kind of exiting the year. I guess just simply, how is the how the OEM business do, I know you guys kind of characterize the OEM business and within that this kind of packaging food and beverage the vertical where I think you served a lot of these small and medium size machine builder so well. How did that business do?

Yes. So Steve, the way you can think about it, our global OEM business was down about mid-single digits and within that packaging was down high-single digits in the quarter.

And how fast did that grow in '18?

Probably in mid-single digits because consumer was adopting it this last year.

Yes, okay, that's great.

That's from me.

Thanks as always for the color, I appreciate it.

Thanks, Steve.

Your next question comes from the line of Jeff Sprague from Vertical Research. Your line is open.

Thank you. Good morning, everyone. Just two from me, actually. Just thinking about food and beverage also being kind of broadly consumer oriented. I'm wondering if you could speak to anything else that you're seeing in consumer related markets whether those happen to kind of track in line with the segment averages?

Sure. I'll make a couple of comments and then Patrick here might have some more. When we talk about consumer broadly, we think of three areas underneath that typically. So, food and beverage, its home and personal care so I think of tissue and so on and then Life Sciences. Food and beverage and home and personal care performed roughly similarly and I think our outlook is similar. But Life Sciences is really the stand down in terms of strong double-digit growth.

Yes, so within consumer, Jeff, as Blake mentioned Life Science is good double-digit growth, home and personal care up mid-single digits in the quarter and so it's really food and beverage which represents about 20 points out of the 30 of consumer which is dragging down our performance in consumer.

Right, thank you for that. And just on the comp expense, so it sounds like Q3 you have a year-to-date true up, there's another $10 million in Q4. My question would just be then on kind of the investment spend. Those investment spend on a year-over-year basis actually increase or decrease, could you give us a little bit of color on that?

The way you can think about our investment spending and we exclude incentive compensation for that metric. In our current guidance, our investment spending grows about 2% year-over-year; a little less than that so a little bit more than our revised organic growth rate for the full-year. In Q4, we expect it to be down year-over-year.

Thank you.

And at the same time, I would say that where we are making adjustments in spending is more on discretionary items, not on the R&D side. For example, in Q3, R&D was full-up 8% year-over-year.

Okay, thank you very much.

Thank you.

Thanks, Jeff.

Your next question comes from the line of Richard Eastman from Baird. Your line is open.

Yes, good morning. Blake, could you just speak for a minute or two to the book-to-bill at .98 that's significantly less than the seasonal book-to-bill would suggest it should be. I presume a lot of that is in heavy industries and I'm curious you referenced project delays impacting the book-to-bill but you line a sight on those projects in other words they weren’t booked in the quarter but you have a healthier view of the line of sight and projects that are out there. Is that how we kind of interpret your comments?

I'd say, we continue to have good visibility to those projects that didn’t close in the quarter. And as we look at the reasons why, the obvious question is this just a precursor to the them getting pushed out further or cancelled or with their unique plausible reasons why they didn’t go in the quarter but they could come back in the near future including some in Q4. And the latter was our based on our review, that was the sense of the majority of those that they were delays but they were unique plausible reasons in each case that cause them to push out in the quarter and not necessarily being gone. I mentioned before that there's a little higher component in those project delays of the shorter cycle businesses. So, think of it this way the percentage of delays of shorter cycle business in that book-to-bill was higher than the total bookings of the solutions in services business.

So, again you're feeling as we track into the first half of fiscal '20 is that some of this could drop in higher percent short cycle. It doesn't necessarily mean that again your caution, you're cautious but it doesn't necessarily mean that you're planning on a first half of '20, fiscal '20 that is down.

That's right.

And just -- yes, okay.

And why would it?

Okay.

And while we don’t wait for November to give the guidance, we're watching Q4, but our front log our quoting activity remains healthy.

Okay, that's what I was getting in, okay. And just one last one, could you just define or Patrick could you give us kind of a pricing number here, is it just gross priced capture in the quarter?

We're at about 1.5% price realization, good three quarters and for Q3 about the same. It's about 1.5% which includes, Ric, the price we get associated with the tariffs. And so, you may recall that we implement a targeted price increases on products impacted or effected by the tariffs.

Yes.

And so, the price realization this year 1.5% is a little bit larger than prior years but includes the price associated with the tariffs actions.

And that's not a surcharge, correct, or is it? In other words, will that come off part of it?

Yes. The intention whether the price increase was to neutralize the impact of tariffs, so not to make money out of that. And so, the expectation is that if tariffs would be eliminated that at some point those price increases would also be adjusted. And the object being to neutralize the impact of tariffs.

Got you. Okay great, thanks again for the questions.

Thanks, Ric.

Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is open.

Thanks, good morning. Put a little color as always. I got to say I'm starting to get to the to your 4Q EPS guidance at the low-end the range and the only way I could get that would be is at A&S significantly weaker than the 3% to 4% organic year-over-year you point to for 4Q. Is that how you're thinking that A&S could be down mid-to-high single digits, organic with CP&S probably flat? So, is that sort of how you're building up 4Q?

Nigel, to get to the low end of our current guidance, that's not an unreasonable way to look at it.

Okay. So, there actually that'd be accurate. And I think Blake you mentioned so down quarter is not unusual within the context of the upcycle and you said you saw that in FY'16. Are we in that sort of situation where we have several quarter of negative growth cycle through before we get back to growth. So, or do you think that that's something here like snap us back to growth quicker. I appreciate your thoughts there.

Well, as we talked about, the continued uncertainty that we've been mentioning for quite a while, we think it is impacting investment decisions at this point. And so, a reduction of that uncertainty some stability in the outlook would certainly help. In terms of the fourth quarter, it would have to be in short cycle business, right. So, some improvement in longer cycle outlook might impact orders but it would take a while for that to flush on as revenue and profits. In terms of the duration of what we're seeing currently, again we're going to be looking very closely at the development of the quarter, we're going to be looking at the macro progress on trade, would certainly help but we're not counting on that at all.

And just touching that your that last points. Channel clearance would be a factor that might snap things back quicker. Can you just maybe comment on within A&S how you're selling this all through sales and tracking right now?

State, say again, Nigel, please?

I'm just curious if you're seeing any I guess make a question a little bit clearer, are you seeing inventory headwinds in your A&S channels?

No. we as you may know we have really good visibility into what our distributors carry of our product, that's particularly the case in North America. Inventory changes have not been a material impact to our results including whether it's A&S or the other segments on the product side.

Okay.

Yes. We are closely aligned, we're closely involved with our distributors as they replenish inventory and there's nothing different that's being done there.

Okay gents, thank you very much.

Thank you.

Your next question comes from the line of Robert McCarthy from Stephens. Your line is open.

Good morning. Can you hear me?

We can.

We can.

Hi, Rob. How are you doing, is there any --.

Yes. I guess the first question is just expanding on some of the questions around fiscal '20 and I know you don’t want to give guidance for fiscal '20 as much as we're going to try. Could you just talk about maybe the compares across auto and some of your other businesses where you might think that you kind of you could get closer to bottom here and how do we think about -- how do we just think about some of as we step into '20, some of the comparisons where you feel better versus more limited visibility: better versus worse?

So, let's start with auto. I mentioned we saw a little bit of sequential growth and importantly the results were stable with our expectations, which what would give us more concerns is if projects that we've been talking about through the year went away. That's not what happened and in fact we're starting to see a little bit of purchases associated with those the EV companies while we continue to see that as a relatively small of our overall business, they're going to bring vehicles to market and they're going to need automation to do it competitively and we continue to be highly engaged there as well as we're traditional vehicles as I look at new models and maybe places to build them. So, we see that continuing and as I mentioned before, the front log is fairly healthy. For other longer cycle businesses where we would have visibility that might go on across multiple quarters; things like oil and gas and mining, there continues to be good activity there and you saw that reflected in our current results. And so, through the fiscal year, we don’t see changes there. The shorter cycle business, of course it's more difficult to look at the outlook and we'll have more details on what our view is informed by the quarter in November.

Okay, that's helpful. And I rather light a candle than curse the darkness. So, why don’t we talk about the continued strong double digit growth that information and solution for the connected services. And it looks like PTC last night while having a challenging quarter in the relationship with you actually have a pretty decent quarter. Maybe we could talk about the metrics and key wins there and how you're feeling about that collaboration?

Happy to and glad to see you're lighting a candle, Rob. It's been good and we are probably a little more excited even about the relationship then we started a year ago on this journey. So, we continue to see good wins come in across industries and across geographies. There was a wind and PTC talked about it last night with Euphoria [indiscernible] a big tire company in Korea. We like Euphoria because it's a differentiator. Very few of our competitors have any sort of augmented reality offering and we're selling it in somewhere around a third of our FactoryTalk InnovationSuite wins currently. We continue to see wins in Life Sciences. I talked about the double-digit growth there and the combination of our basic control in Life Sciences. The software that we have had for sometime specifically MES plus the new FactoryTalk analytics that were brought to market, the PTC offerings really puts us in an open field in an industry that continues to grow very strong. So I'm happy with it. We're going to talk, and one last comment, we're going to talk a lot more in November about the comprehensive things that we're doing as an organization to accelerate our move to more recurring revenue streams and more proficiency in managing a growing software component of our overall business. It's certainly not just sales it's about our business model. It's about our IT infrastructure and we're going to talk a lot about that in November.

Well, I'll leave it with this, you think you won something would [indiscernible] I don't think they believe in this, the IT of the PLC so I think that's a very notable win for you.

Yes. Thanks Rob.

Your next question comes from the line of Deepa Raghavan from Wells Fargo. Your line is open.

Hi good morning.

Good morning.

Two questions for me. First, can you please update us on your regional growth outlook and just talk about how your views have changed into quarter based on what you're seeing across region?

So, we continue to see Latin America as providing growth in the year. We also see EMEA for the full year of seeing growth in the low single digits. In Q3, North America and Asia were the regions that were a little weaker than we expected.

Yes the way you can think about it Deepa is, for our current guidance for the full year all regions are a little bit lower than the prior guidance. North America went from mid single digits, a little bit below the company average to low single digits. So did EMEA and Asia and Latin America is still teens, it's still about 10% rather than the mid teens that we were expecting before. So our outlook in every other region has come down a bit.

Got it, thanks for the color. Follow-up from me, Blake you talked about short cycle weakness a few times now. What are some of the conversations you're having with your client in those markets with regards to what the trepidation is or what their recover expectations are and curious if you are surprised based on your discussions, if you're surprised by the duration or magnitude of the current weakness? Thank you.

Sure. I think in some part we're seeing the continued certainty over trade and tariffs that is starting to weigh on investment decisions particularly around capital. We see these customers even short cycle businesses that are continuing to look the ways to improve productivity on top of their basic production and I think that's part of what's contributing to the continued strong growth of information solutions and connected services. But in terms of capital, as these customers weigh the prospects for near-term demand on those shorter cycle products that's what we're seeing and again as we went through and looked project-by-project at the delays, the reasons that are being given are specific and plausible as opposed to some general precursor to further push outs and cancellations.

Your next question comes from the line of Andrew [indiscernible] from Citi. Your line is open.

Hi, good morning. It's Vladimir Bystricky again for Andrew.

Good morning Vlad.

So, just following up on that last question on delays and your comment that they're specific and plausible drivers of the delays versus not necessarily precursor to more push up to cancellations. I guess what are you hearing from your customers in the context of tariffs and uncertainty that gives you confidence that these are sort of transitory delays versus something that could linger and be more widespread?

I think these companies are doing things similar to what we did and continue to look at coming into the year. They are looking at restacking their supply chains to deal with the information we have in terms of tariffs. And so, there is a movement of where products are being built, who are the sub-suppliers of those various products as people are trying to get to where we are and that is to neutralize the impact of those tariffs on their cost inputs. And so that's a lot of work. These things, the decisions aren't made overnight and so being able to react to the current environment by doing in a way that won't have to be undone in some short-term off time horizon that's the kind of uncertainty that we're talking about that we've dealt with and that our customers are dealing with.

That's helpful. And then, just if I could shift to CP&S for a minute. You talked, I think you said solutions and services within the business was up 6% organic in the quarter. Obviously you guys have had some very good momentum there. So can you remind us one help big that business is within CP&S and also just your visibility to continued mid-single digit growth there?

The way you can think about Vlad is, within control products and solutions, the solutions and services business is about two-thirds of that segment.

And I think, just to peel it back a little bit further so that includes the longer cycle projects for us, the average duration of some of the oil and gas projects for instance might be five or six months from the time we get the order to the time that we ship it. It also includes the services which would include that say shorter cycle repair operations things that track product businesses, but also importantly the growing connected services portion of that as well that often attends those projects things like remote monitoring, network consultation and things like that. So it's a mix of those defined scope projects as well as high-value services and then also the engineer to order business, so motor control centers and things like that. All of that contributes to that two-thirds number that Patrick gave of the overall CP&S segment.

Okay. That's helpful. Thank you. I will hop back in queue.

Operator, we will take one more question.

Your last question comes from the line of Nicole DeBlase from Deutsche Bank. Your line is open.

Yes. Thanks. Good morning.

Good morning.

So I just want to dig into 4Q organic a little bit more. So you said that things actually got a little bit better in June sequentially. I guess does July corroborate that 3% to 3.5% organic decline? Could there be some conservatives baked into that? I'm just having a hard time understanding why things get so much worse in the fourth quarter given the 3Q organic trend and the comment that you made about the quarterly progression?

Yes. Nicole I will make a comment and then Patrick might want to add as well. As much as we would like to be able to extrapolate out performance through the quarter that we're reporting on and then take a peek at the first days of the next quarter. We can't apply a linear correlation to that. As I mentioned before, June is the strongest quarter. Typically we were encouraged as we looked at the development of Q3, but we can't draw conclusions that inform our outlook based on that and looking at the early July performance that helps inform the outlook. It's one of the factors that we take into account as we look at Q4, but we just can't draw a straight line with it.

Got it, Blake that's helpful, thanks. And then, just a clarification question on the investment spending. So Patrick, I know you said up a little bit less than 2% for the full year. Just in dollar terms can you clarify I think previously you were saying up 50 million to 55 million for the full year. What does that mean in dollar terms versus the prior guidance that it's on a clear apples-to-apples basis?

About 35 to 40 now.

Got it, thank you.

Thanks Nicole.

There are no further questions. I’ll turn the call back over to the presenters.

So just to summarize, the quarter saw a sharp difference in performance between shorter cycle business and longer cycle project-oriented business. I'm happy with how the market is embracing the Rockwell offerings that add innovation and new expertise to help our customers be more productive. This is important regardless of the macro environment. We also continue to look for ways to be more productive in our own operations by using all of our strengths and directing resources to the initiatives that best accelerate our strategy. That begins with our highly engaged employees and partners who have committed to their roles in this journey. They bring the connected enterprise to life every day at our customers and in our own operations and I thank them all.

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