Rockwell Automation, Inc.

Thank you for holding, and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference is being recorded. Later in the call, we will open up the lines for questions. If you have a question at that time, please press star 1. At this time, I'd like to turn the call over to Jessica Korokas, Head of Investor Relations. Please go ahead.

Good morning. And thank you for joining us for Rockwell Automation's fourth quarter fiscal 2019 earnings release conference call. With me today is Blake Moret, our chairman and CEO, and Patrick Gores, 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 details 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. I'll start with some key points for the quarter, so please turn to page three in the slide deck. Organic growth of 1.4% was better than expected, with growth seen across a broad range of industries and across all of our core platforms, despite a challenging macro environment. Going a little deeper into our vertical sales performance, oil and gas and mining each had another strong double-digit growth quarter. Life sciences continued to show solid momentum with sales growing mid-single digits and very strong bookings. Our offerings in cybersecurity, modular control, and pharma suite MES, coupled with factory talk innovation suite, are extremely well positioned and aligned with industry trends. Food and beverage was slightly up, led by strength in EMEA that was partially offset by other regions. Automotive grew mid-single digits with growth in all regions except Latin America and with some important competitive conversions. In the quarter, we also saw increasing activity within electric vehicles, including a strategic win in North America that we look forward to talking more about at our Investor Day on November 20th. Semiconductor, which is about 5% of our sales, was down over 10%, but flat sequentially. Our logics business grew 3%, even against a tough comparison last year where it grew 7%. Logics growth was broad-based across most regions and end markets. Adjusted EPS was $2.01, including a $0.14 impact from a restructuring charge and a $0.04 impact from Centsia set-up costs in the quarter that were not included in our July guidance. Finally, free cash flow was very strong. Turning to slide four and our regional sales performance in the quarter, North America declined 1%. Continued strength in oil and gas and mining was offset primarily by softness in semiconductor and power generation. Auto improved sequentially and was up year over year. EMEA sales were up 4% versus prior year, with strong growth in life sciences, food and beverage, and mining. Asia was flat, and China sales were down 4% versus last year. China weakness in semiconductor, metals, and automotive was partially offset by continued strength in infrastructure spend. Latin America was up 17% in the quarter. a great finish to a strong year. Most countries in this region, including Mexico, contributed to growth. Very strong oil and gas and life sciences sales performance more than offset weakness in automotive in this region. Now, moving to the full year, let's turn back to slide three. While fiscal 2019 was marked by uncertainty related to trade, Here's a year of progress for Rockwell, with strong operating performance and strategic investments setting the stage for our continued success. Here are some highlights of our financial performance. Our diverse industry exposure enabled us to deliver 2.8% organic growth, even with automotive and semiconductor down over 10%. Segment operating margins of 22%. expanded 40 basis points, and adjusted EPS was up 7% year over year. We had another good year of 100% free cash flow conversion, and we deployed $1.5 billion to dividends and share repurchases. We also continued to make solid progress in our long-term growth initiatives. These include share gains in our core platforms, faster growth in process, double-digit growth in information solutions and connected services, and growth in EMEA and Asia. For example, we saw core platform growth with strong contribution from products like PowerFlex drives and Stratix network switches. This makes sense when you consider that industrial companies can't transform their operations without data from smart, secure devices. This is also Rockwell's home field advantage. We saw double-digit growth in process industries like oil and gas, mining, and pulp and paper. Recurring revenue streams grew double digits with increases in project size and enterprise rollouts of our information solutions and connected services contributing approximately one percentage point to organic growth for the year. We capped off the first year of our alliance with PTC by delivering a very strong sequential increase in new deals in Q4. And for the full year, our alliance enabled strategic wins around the world across a broad range of vertical markets. Importantly, many of these wins were on top of competitive control platforms. Finally, we grew faster outside the U.S. Patrick will elaborate further on our fourth quarter and full year financial performance in his remarks. Let's move on now to the macro environment and our outlook for full year fiscal 2020. Our outlook balances geopolitical uncertainty with confidence in our differentiated portfolio and ability to gain share. Global trade tensions continue to create uncertainty and industrial production is decelerating, heading into fiscal 20, which we expect will have some negative impact on customer capex. However, we are excited about new product introductions across our portfolio. Also, given our pipeline of projects for our customers' digital transformation plans, which are often funded out of OPEX budgets and not capex, We believe we will have another good year in information solutions and connected services. Taking all this into account, we are expecting flat organic sales at the midpoint of our fiscal 20 guidance. We expect our reported sales to be up approximately 3.5% year over year at the midpoint of guidance. This includes approximately four points of inorganic growth coming from our investments in Sensia, and MES tech partially offset by currency. Turning now to earnings, as you have seen in our fourth quarter results, we took restructuring actions to help drive $40 million allow us to both reinvest in our highest growth initiatives and help deliver earnings growth in this environment. Including the impact of acquisitions in currency, Our guidance for sales is about $7 billion. Our adjusted EPS guidance range is $8.70 to $9.10, with a midpoint of $8.90. Now, I'll turn it over to Patrick to provide more detail around our Q4 and full-year results and our fiscal 2020 sales and earnings guidance.

Thank you, Blake, and good morning, everyone. I'll start on slide five, which provides our key financial information for the fourth quarter. As Blake mentioned, fourth quarter reported sales were flat. Organic growth of 1.4% was better than expected, largely benefiting from better performance in automotive and food and beverage. Currency translation reduced sales by one and a half points. Our fourth quarter results include a $20 million restructuring charge as well as $6 million of SAMHSA setup costs, neither of which were included in our July guidance. The restructuring charge is split about evenly between both segments with about 25% in cost of goods sold and the remainder in SG&A. We are reinvesting the majority of the $40 million savings associated with the restructuring charges towards our highest priorities, including commercial resources, and increased software development. We continuously look for ways to streamline processes and drive internal simplification and productivity, enabling us to increase investments to fund profitable growth. Segment operating margin was 20.2%, down 60 basis points compared to last year, primarily due to the restructuring incentive set-up costs that I referred to. General corporate net expense of $36 million was up $18 million compared to last year. As you may recall, we had a large favorable interest settlement in the fourth quarter of fiscal 18. Adjusted EPS of $2.01 was down about 4% compared to the fourth quarter of last year. Excluding the restructuring charge and Stencia setup cost, adjusted EPS was up about 4% compared to last year. As Blake mentioned, we had very good free cash flow performance in the quarter, 451 million or over 190% of adjusted income. The reduced working capital contributed $150 million in the quarter. A few additional items that are not shown on the slide. Average diluted shares outstanding in the quarter were 117 million, down 6.5 million from last year. We repurchased 1.4 million shares in the quarter. at a cost of $224.9 million. The full year fiscal 19 repurchases totaled $1 billion. At September 30, we had about 1.1 billion remaining under existing share repurchase authorizations. Slide six provides key financial information for full year 2019. After a good start to the fiscal year, Our rates of organic growth slowed in the second half as a result of the weakening macro environment, particularly for industrial companies. Organic growth for the year was 2.8%. Blake covered most of what is on this slide, so I will just provide a few additional comments. Growth in segment margin and adjusted EPS was mainly due to higher organic sales. The full year adjusted effective tax rate of 17.9%. reflects the full year benefits of U.S. tax reform passed during our fiscal 2018. We had another year of 100% or more free cash flow conversion, and return on invested capital remained above our target of 20%. The year-over-year reduction in return on invested capital reflects the mark-to-market adjustment of our investments in PTC. Turning to tariffs, I'd like to recognize the great work done by many of our colleagues. We neutralized the impact through supply chain actions, including negotiations with vendors and targeted price increases on affected products. Slide seven provides a sales and margin performance overview of our two operating segments. Architecture and software organic sales were up 2.3% in the quarter. Segment margin of 26.2% was down 190 basis points compared to the same period last year, mainly due to restructuring charges and lower volume leverage affecting this segment. Controlled products and solutions, organic growth was 0.7%. Our product businesses in this segment were about flat year over year, and our solutions and services businesses were up about 1%. Segment operating margin expanded 40 basis points, mainly as a result of good margins in our solutions businesses. The restructuring charge was about a one-point headwind to segment margins. The book-to-bill performance in our solutions and services businesses in the quarter was 0.93, and our backlog for solutions and services was up about 1% compared to last year. This takes us to slide eight, guidance. As Blake mentioned, we're expecting sales of about $7 billion in fiscal 20. We expect organic sales growth to be in the range of minus 1.5 to plus 1.5% and flat at the midpoint of our range. The Essentia and MES spec inorganic investments, both of which closed in early October, are expected to contribute approximately four points of revenue growth. And we expect a headwind from currency of about 50 basis points, consistent with currency rate forecasts for the next 12 months. We expect segment operating margins to be approximately 21.5%, excluding the impact of Essentia, We expect segment margins to be about flat year over year. We believe the full year adjusted effective tax rate will be about 16%, which includes a 200 basis points discrete tax benefit from CENCIA. Our underlying adjusted effective tax rate is expected to be about 18%, the same as fiscal 19. Our adjusted EPS guidance range is 870 to 910. At the midpoint, this represents about 3% of adjusted EPS growth on about 3.5% higher reported sales. A few additional items about fiscal 20. General corporate net is expected to be about $100 million. Net interest expense is also expected to be about $100 million. We're dialing in about $400 million of share repurchases and assume average diluted shares outstanding of about 116 million shares. We will share more details with you on our capital deployment and capital structure plans at our investor day next week. And finally, we expect full year 2020 free cash flow conversion of about 100% of adjusted income. This includes $160 million of capital expenditures. From a calendarization point of view, We expect first half revenue to be down low single digits compared to fiscal 19, followed by a stronger second half, mainly due to easing costs. The next slide, nine, provides an adjusted EPS walk from fiscal 19 to fiscal 20 guidance midpoint. Going from left to right, core performance contributes about 20 cents. We benefit from the savings generated from the fiscal 19 restructuring charge. About 15 million of the 40 million savings is dropping through the bottom line. Fiscal 20 also benefits from the absence of the fiscal 19 restructuring charge and incentive compensation at the midpoint of our fiscal 20 guidance is a bit lower than the prior year. We expect Centsia to contribute about five cents of adjusted EPS. Within that, the benefit of the discrete tax item I referred to earlier and incremental earnings are partially offset by non-recurring setup costs and transaction fees, as well as intangibles and non-controlling interest adjustments. Centsia is expected to have an EBITDA margin profile of about 20%. It will be closer to low teens in fiscal 20, given non-recurring setup costs. Net interest expense, operating pension expense, and currency are all expected to be headwinds. Net interest expense is expected to be higher as a result of the capital deployment activities in fiscal 19 and those planned for fiscal 20. The lower interest rate environment is increasing our operating pension expense, and currency forecasts project a stronger US dollar. Finally, a lower share count is expected to contribute about 25 cents to adjusted EPS. In summary, The net impact of Stencia is about neutral year over year, and we are offsetting pension and currency headwinds with productivity and the benefits of a lower share count to deliver adjusted EPS growth. So with that, I'll turn it back over to you, Blake.

Thanks, Patrick. Before we move to Q&A, I want to make some additional remarks. In fiscal 2019, we executed well and made good progress in our long-term initiatives. Looking to fiscal 20, we have another exciting year ahead of us. We will continue to provide new value with the connected enterprise, which gives us more ways to win. As a pure play, our entire focus is on helping industrial companies and their people be more productive and sustainable. We have no competing priorities, and our relentless focus allows us to grow revenue and efficiently deploy our resources to deliver high margins and increased earnings. Our strategy also generates strong, sustainable cash flow that we will continue to direct to value creating opportunities. An example is Sensia, our joint venture with Schlumberger. Sensia officially opened for business on October 1st and is off to a great start. This joint venture is positioned to be the most innovative provider of process automation, measurement and IoT solutions to the oil and gas industry, and we are very excited by initial customer reception. In its first month of operation, we have already secured several large project wins from around the world as oil and gas customers look to drive additional operating efficiency. In addition, we announced the acquisition of MES Tech last month, which augments our delivery capabilities for information solutions and connected services implementations, particularly in the automotive and life sciences industries. As we look ahead, our acquisition pipeline continues to be very robust. Our key areas of focus for inorganic investments remain information solutions and connected services, process expertise, and market access in EMEA and Asia. While the size, amount, and timing of deals can never be predicted with certainty, we continue to target a point or more of annual growth from acquisitions. In fiscal 2020, we will exceed that goal. Turning now to slides 10 and 11, we are making some changes to the way we segment our served industries. Going forward, we will be focusing our commentary on our performance in discrete, hybrid, and process industries and will continue to provide color on individual end markets like food and beverage and automotive. Slide 12 provides the end market growth assumptions that align to the midpoint of our fiscal 20 organic revenue guidance. This industry segmentation more effectively reflects our performance and progress we are making in executing our strategy. For those of you coming to our Investor Day next week, I look forward to seeing you there. As usual, we will hold Investor Day at Automation Fair, our main customer event, which is in Chicago this year. Customers from around the world will see how we are bringing the connected enterprise to life. We will showcase our innovation and that of our partners at what will be an especially important event. We are on track for this to be our biggest and most exciting automation fair yet. Finally, I'd like to thank each of our employees and partners for their efforts to bring the connected enterprise to life within Rockwell and at our customers. I'm especially grateful for the way our employees are embracing change and demonstrating our company's values every day. We are truly converging IT and OT and have added new talent at all levels of the organization who are contributing to the innovation will be featuring at Automation Fair. With that, let's turn the call over to Jessica to begin Q&A. Jessica?

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

Marcella, let's take our first question. Your first question comes from the line of Scott Davies from Mellis Research. Your line is open.

Hi. Good morning, Blake, Patrick, and Jessica. Morning. Morning. Morning.

Thanks for the update.

The new segmentation seems to make a lot of sense, too. But I just want to talk a little bit about China. I mean, China has been a pretty volatile market. I think some of your competitors have seen results meaningfully worse than yours, and so you're doing reasonably well. But What's the visibility that you think you have into 2020? I mean, do some of these infrastructure projects fall off and then they need to be replaced by other things, more substantive, or are there other infrastructure projects that come in right after them? I mean, just give us a little bit of color on China.

Yeah, so, Scott, from a broad sense, I mean, China is obviously the world's largest manufacturing economy, and we have low share in China. we are relatively less impacted by the ups and downs of, you know, their volatility on the surface because there's so much more that we can pick up. We serve a broad range of the industries, and there's a lot of infrastructure to be built in China. So we expect that to continue. But also importantly, a lot of the spend in China is on the – information solutions and connected services, you know, drawing insights from the basic automation, and that's relatively less impacted by CapEx spending. That's more operational spending, and we expect to continue to grow there. So, you know, the long-term trends are still positive in China. Okay, and

You guys didn't mention anything about the GM strike in your comments. Was there any negative impact this quarter or should we build in for the first quarter of 2020?

Scott, there was a little bit of a delay in MRO spend from GM, but not a lot, and we expect that to recover.

Okay. Very good. Thank you. See you guys next week. Thanks, Scott. See you then.

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

Good morning, everybody. Hey, John.

Good morning.

Hi, guys. Hey, Blake and Patrick, in the guide process, you're expecting to sort of soften to flat. How would that translate into sequential trends? And maybe you could sort of give us a sense of what's happening kind of regionally in process. And I make the comments in the context that, Honeywell and Emerson, they had pretty good results actually in process, pretty good project activity in AsiaPAC and so forth. What are you guys seeing?

I'll make a couple of comments and then Patrick will add to that. In North America, we continue to see strength in oil and gas, mining, and pulp and paper. We do see some moderation in the coming year. I should point out that when we talk about oil and gas, that's excluding Sensia, which we expect, as we've talked about before, to grow double digits, which is, you know, a smaller part of the overall oil and gas market focused primarily at the digital oil field, which we think will continue to grow double digits, and we obviously expect to grow faster than the markets. In terms of the sequential performance, ask Patrick to make some comments there.

Yeah, we don't expect big swings by quarter, John, from a process point of view. And within process... Say again?

I say relatively stable then, Patrick? Is that how you're thinking about it?

That's what we believe, yes. Okay. I'm sorry, you were saying something? Nope.

Oh, okay. And then just out of that, in that sort of part of this discussion, oil and gas, how are you guys actually putting up such strong results, do you think, in oil and gas, especially on the land side? I mean, peers, depending on sort of their activity interactions with oil and gas, are seeing not insignificant pressures there, but you guys are not seeing that. Is it a program share wins? What do you think is going on here?

Yeah, we do think, and particularly with Sensia, we think that there's big opportunity to continue to gain share. Remember, a lot of our participation is with more exposure to OPEX. So our exposure is not as much in drilling new wells as in getting efficiency from the wells once they've started producing. And so they're not going to be as affected by volatile capex spend. And then, again, with Stanfield, we think we have an opportunity to meaningfully accelerate our gains in oil and gas, particularly onshore upstream.

Just last, Blake, how would you characterize your level of conservatism in this guide? I think it caught a number of us, I mean, to your credit, off guard based on how sort of strong it is. If you go back a year ago, right, you were guiding for a midpoint of 905 and you did So maybe you could, you know, people sort of view Rockwell as a conservative company, particularly your guidance. You missed your guidance last year. How do you sort of put in a context the conservatism and what makes you sort of comfortable that this range isn't, you know, also going to potentially be a repeat of fiscal 19?

Yeah, I mean, John, I think fundamentally Rockwell Automation remains a conservative company. But there's a lot of uncertainty out there, and we're balancing that with what we know within our own four walls we're producing and what we're hearing from customers around the world in terms of their plans and the ability that we have to participate there. So we think that the flat organic growth is an appropriate balance between those two broad opposing forces.

Got it. Thanks very much. We'll see you in a week.

See you soon, John.

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

Thank you. Good morning, everyone. Hey, Jeff. Good morning.

Good morning. Hey, just a couple for me, please. First, just kind of level set on kind of the exit rate here on 2019. Did the dial back in investment spend and compensation in the fourth quarter occur, you know, as you suggested, and kind of what is the exit rate on those items?

Yes, so just from a spend point of view, we ended the year where we expected to be, a little less than 2% year over year. The fourth quarter was down a little compared to last year, again, as expected. From an incentive comp point of view, compared to what we shared with you in July, incentive comp expense was higher than fiscal given that we outperformed our expectations. And so the expense in fiscal 19 was closer to 75 million compared to the 60 million that I shared with you in July. Okay. And then you're suggesting from that 75, you are stepping down modestly in 2020, correct?

Yeah.

At the midpoint, about $10 million.

Yeah.

Okay.

And just looking at Latin America a little bit more closely, obviously an extraordinarily strong quarter. How do you see that playing out over the balance of the year?

Was there anything in particular unusual in the quarter there? Actually, Latin America was strong in some of the consumer verticals, but particularly oil and gas was very strong, mining. Both on paper, water waste water all up double digits in the quarter. We do expect some of that to moderate in fiscal 20. You may recall, Jeff, we also had a large Codelco mining project in Latin America. So we'll have some tough comes next year. And so for next year, we expect that growth in Latin America to moderate a bit.

I would also say that, you know, earlier in the year we saw continued growth from Brazil, and that continued to have positive growth through the year. But Mexico picked up partway through the year, and we saw strong contribution as we exited from Mexico, which has good exposure to a broad range of the industries that we serve. It's obviously oil and gas, but it's food and beverage, automotive, really across the board.

And just one last one to clarify, the first half down low single digit, that's an organic number or a reported number? There's organic, Jeff. All right. Thank you. Thank you. Thanks. See you soon. See you next week.

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

Hi. Good morning. Morning. Morning. Good morning. I just wanted to circle back on this notion of perhaps conservatism in the revenue guide and how you're thinking about that sales guide. Because I guess three months ago, you guided organic sales to be down low to mid-single digit in Q4. You just printed slight growth. Now you're guiding for the first fiscal half to be down low single digit. So just trying to think versus three months ago, do you genuinely feel worse about the macro environment? Do you view the Q4 performance as just a bit of a blip because of some movements in the automotive sector? Maybe just try and characterize why you're guiding for a decline now if it's just because of low visibility or there's genuinely something you've seen that deteriorated in the last month or two.

I think there's, as we've talked about before, there's a balance between what is undeniably continued uncertainty. We continue to see decelerating macro indicators, industrial production, and so on. But then on the other side, we're very optimistic about our ability to gain share regardless of what those numbers are. But we're informed by, to some extent, what we saw in the fourth quarter, but also what we're expecting the year ahead to show. Backlog, a little bit up, but not a tremendous amount. And we think it's a balanced outlook on fiscal 20.

Julian, I would just add that we've had one quarter of better than expected sales performance in Q4. That's the two quarters where we had weaker performance than we expected. And the macro indicators that we tracked PMI and IP are still weakening. And so we think that we're balancing all of these things out.

I'd also say that we're happy with the ability to have inorganic growth contributing to the year. It fits very well with our strategy, and it's a meaningful contribution to our reported growth in the coming year.

That's helpful, and thanks also for the color in the slides. My second question would be, on the segment margin guidance. So I think it's guided to be flat, extensia in 2020 for the year as a whole on the segment margin line. You know, that's despite flattish sales not down, lower restructuring costs, and net restructuring savings of $15 million coming in. So maybe just beyond incentive comp, talk about any other moving parts in that margin bridge. For example, it looks as if you're dialing in a mixed headwind perhaps because discrete is losing as a share of the total pie. Is that a fair summary or is there something else moving around in the margins in 2020?

I think the way you can think about it is on the margin side is there is no organic growth, but there is some pricing that's being realized. So there is some uptake there. As you mentioned, mix is somewhat of a headwind next year. Then the restructuring and then bonus expense clearly is a little bit of a tailwind. But our spend next year, our overall spend increase is not flat. Actually, we're investing some next year. And so our spend is up low single digits, a couple of points next year, a little bit less than that. And so the net of that is flat margins. So tailwind from price,

headwinds from, as I mentioned, some of the reinvestments that we're doing in this. Your next question comes from the line of Steve Tusa from J.P.

Morgan. Your line is open.

Hey, guys. Good morning.

Good morning. So given the kind of better-than-expected performance in the quarter, I totally acknowledge that your business is is, you know, the majority of it, vast majority is short cycle in nature. How much kind of came towards the end of the quarter and then, you know, to the extent you have a backlog or a front log, how much was like, you know, more of the kind of the quickest turn short cycle, if you will?

Yes, Steve, Patrick here. Actually, the sales improved through the quarter. September was our strongest month, but that is not unusual for September. So I'd say improvement through the month and as always, particularly September tends to be the strongest month of the quarter.

So you were already kind of, you know, you saw the trends through August and you were already kind of at the high end or above kind of the range at that stage of the game?

No. September was the strong month.

Okay. Were there any targeted pricing measures with regards to any of the business projects, et cetera, where, you know, you push a little harder to get the install on a price basis in the quarter?

No, I wouldn't say that, Steve, at all. Our annual price increase went into effect in August, so if we ever see a little bump in volume due to price like pre-buy, that's nothing unusual there at all. And we don't –

drop price to get volume. Got it. What is your price expectation for 20 now? What kind of – what's in bed?

About a point, Steve. Last year, we did a little bit less than two points, including the impact of pricing associated with the tariffs. And so for fiscal 20, we're targeting a little less than a point. About a point. Got it.

Great. All right. Thanks, guys. I appreciate the call, as always. Thank you. Thank you. See you soon.

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

Yes, good morning. Patrick, could you just speak to the four points of inorganic growth that you forecast for 2020? Could you split that between Sensia and Mass Tech? A little bit is about $275 million in revenue. And is there any seasonality to think about with Sensia?

The way you can think about it is the vast majority of that four points, meaning well more than three points comes from CEMCIA, closer to three and a half points. Most of that comes all from CEMCIA. And then in seasonality, I would probably say a little bit more second-half weighted than first-half weighted, also because we're expecting to deliver revenue synergies as a result of the joint venture. So, obviously, starting October 1st, we're recording all the sales, but we expect sales to accelerate in Centsia, given the synergies that we expect of the combined offering.

And that's captured in the three, call it three and a half points. That's captured in there, the synergies.

Absolutely. Yeah. I think on a go-forward basis, I don't expect meaningful calendarization to of the results of either of those investments.

Okay. And then, Blake, could you just spend a second just around the dynamics? I think you mentioned the PTC kind of wins, the dynamic there that I don't know if you said a majority or many coming on competitor platforms. Just kind of mention, you know, the sales strategy around that and if that, you know, is going to provide some leverage here down the road onto the hardware side of your business.

Well, yes, I'm happy to. So for many years, our fundamental play was providing an integrated control architecture to our customers. So typically, our logics control was at the heart of that, and we would have operator interface, smart products like drives and servos and so on that would connect easier than anybody else in that architecture. On top of that, we now have greater capacity than we ever had to add information processing software that allows you to take the data from that control and to turn it into insights to drive additional productivity. And it works great when it's sitting on top of a Rockwell control architecture, But it doesn't have to. It takes data very well from our competitors as well. And what we're finding really to our delight is that almost half of the sales are putting that software on top of someone else's control system. And so it allows us to go into a brownfield. They're not ready to change out their controllers yet. but it gives us a reason for being there and to add value into their operation. So it gives us more ways to win, more customers to have a reason for being in their facility talking about their business problems.

Gotcha. Great. Thank you.

Thanks, Rick. Thanks, Rick.

Your next question comes from the line of Josh Korwinski from Morgan Stanley. Your line is open. Hi.

Good morning, everyone.

Hey, Josh.

Just want to kind of step back a little bit, Blake, if you don't mind. I think, you know, looking back over the last couple of years, there are points in time when I think people would have said, gosh, you know, old Rockwell, if you want to call it that, you know, might have grown a little faster. And now with this quarter, you know, I think people would have assumed probably a little bit more cyclicality than what you guys put up. So is the case that, you know, because of some of these, you know, information, you know, services pushes and maybe some less cyclical end markets like food and beverage, you know, which is obviously your largest end market. Is it that the cyclicality is coming down, or do you think that kind of cycle-to-cycle growth accelerates? Because I guess they are two different, you know, elements. I guess what's the objective there?

We're going after both, Josh. And, you know, as we've talked before, and we'll talk more next week in detail, the ways that we're – Increasing our resilience to volatility involves the things that you've mentioned. It's more recurring revenue in the form of subscriptions and as-a-service business models from information solutions and connected services. So we get a double benefit there. It's growing double digits, but there's also a very high component of that that's recurring in nature. We're also decreasing our volatility by greater exposure to process industries. which is typically later cycles in our traditional discrete areas. And then life cycle services, being able to provide, you know, ongoing services after commissioning the initial projects. And we're doing that with more urgency than I'd say ever before. And then finally, some of the inorganic investments. As we've talked about, in a period of low or no organic growth, it's nice to have four points or more from the inorganic growth. So it's going to address both. It's early. We've got a lot of work yet to do, but I'm very happy with the results so far.

Understood. And then just a follow-up question around Sensia. You know, obviously that five cents in guidance has a lot of moving pieces. If you wouldn't mind just kind of snapping the line, if, you know, we were one year forward and all the noise comes out, whether it's tax or, you know, some of the kind of one-time costs, you know, what would that five cents look like?

Okay, Josh Patrick here. The $0.05, if I look at what's in there, there are about $0.05 of fees and set-up costs that are in there, and so we would expect that to go away. And the way we're thinking about it internally is Ascensia is expected to be in a 20% EBITDA business. This year, overall, the adjusted EPS impact is about neutral. We expect that to start contributing to adjusted EPS Next year, from a free cash flow point of view, it's contributing to us in fiscal 20. Got it.

But there's also, you know, call it 20 cents of tax in there as well, right? So five cents higher for the fees.

Well, you can think about the tax. The 20 cents is the overall tax impact. The tax impact to Rockwell Automation share owners is only 53% of that. So within the $0.05, there's only $0.11 of tax. You have to adjust out the part that does not go to Rockwell Automation Shareowners. And maybe this is an opportunity to provide a little bit more color on the $0.05 of Centsia on the bridge. Within that are obviously incremental earnings associated with Centsia. Adjust it for the part of the earnings that's no longer go to Rockwell Automation share owners. So the incremental earnings are a little bit over $0.05, say between $0.05 and $0.10. We just talked about the tax benefit. That's about an $0.11 benefit in fiscal 20, but offsetting that are intangibles is about $0.10, and then the fees and setup costs that are about $0.05, as I mentioned. So those are the different moving pieces there. In essence, the tax benefit is offset by intangibles. They're basically the same.

Got it. That's a helpful caller. Thanks for that. See you all next week. Thank you, Jordan.

Your next question comes from the line of Andrew Obin from Bank of America. Your line is open.

Good morning. This is David Ridley laying on for Andrew. What gives you confidence that automotive will be slattish in 2020, and how important are electric vehicles within your automotive trend?

Yeah, so we saw, starting with Q4, we saw some recovery in MRO. We also saw continued spend from some of the projects that we've been talking about in internal combustion vehicles where we had line of sight to those projects, and that was a meaningful part of our performance in Q4. But a really bright part of the picture is the continuing importance of electric vehicle drivetrains. And for instance, in Asia, we had some good project activity at OEMs in electric vehicle powertrain. And we expect that to be a larger and larger part of our overall powertrain business going forward, as a lot of manufacturers are going straight from internal combustion engines to full EV. It doesn't look like there's going to be as much demand as maybe was first thought for hybrid. People are going to total EV and we're very well positioned to play in that because it's less subtractive manufacturing processes, read CNC and metal cutting. It's a really good fit for our current portfolio and we're winning some important competitive business there and it's growing fast. It grew strongly in the fourth quarter and we expect it to continue to grow next year.

And then just following up on a comment that you had around digital transformation projects, I know that a lot of your clients have set up offices and dedicated staff to those. Roughly what portion would you say of your sales are driven by OpEx budgets today versus CapEx? Thank you.

Yes, we've estimated it. We think about 65% of our sales are mostly driven by CapEx, the balanced OpEx. And... You can think about some of the information solutions and connected services. Some of these sales we think will come more out of OPEX budgets than CAPEX budgets.

That's right. A lot of times the digital transformation that our customers are going through are on top of existing, you know, capital-intensive assets in the field. So the lines are out there. They've already got the basic automation in place that came with the original equipment, but now they're looking to drive additional productivity out of those existing assets. And it can be meaningful double-digit increases in OEE and other metrics of productivity by adding this software to be able to analyze what's going on on the line, but often those expenditures can be made out of OpEx and not CapEx.

Thank you very much. Thank you. Thanks, David.

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

Can you hear me? Can you hear me? We can, Rob. Good morning.

Good morning. Two questions.

One that is a little different is can you talk about geography, where you're gaining share?

Because it's clear from the growth rates we're seeing abroad that you're getting share, and talk about the key verticals where you're doing that.

You know, we think, Rob, for a long time, hybrid has been a great place for us. It's where a lot of manufacturers are going, and so when you think about the trend towards smaller but continuous process lines and life sciences where the control is tightly integrated with the software, that's an area that we continue to have double-digit performance in because it's just such a great fit for what we're doing. In powertrain for electric vehicles, that is another area that I just mentioned that we have a very high readiness to serve And I'll tell you that there's some opportunities around the world where we think that we're gaining share in some of the installed base that might be a little bit older from competitive systems. So GE, for instance, is an area where we've had some nice wins in converting out some of that installed base.

And could you just comment on the –

share repurchase in the quarter and the average share price, if you already have it. And just any hints about 2020, aside from the $400 million in share repurchase, kind of the state of play in the balance sheet?

Yes. Robert Patrick here. The share repurchases were pretty much the same each quarter of fiscal 2020. I don't have the average price we paid in 2020. in the fourth quarter here handy. I think it's going to come out later today. You'll see that in the K. In terms of repurchases for next year, again, the $400 million, we expect that to be pretty stable across the fourth quarter. Congrats on a great quarter.

Thanks.

Thanks, Rob.

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

Thanks. Good morning, everyone. Morning, Joe. Can you maybe just touch on food and beverage a little bit more? It switched from being slightly negative last quarter to slightly positive this quarter, and obviously you're expecting it to stay positive for next year. So any other color around what's happening in that end market?

Sure. You know, food and beverage – We continue to see some subdued capital spending across food and beverage. On the other hand, it's one of the verticals that we're seeing particularly high investment across worldwide fleets in IoT. So they're going in and they're looking at benchmarking, you know, lines across their worldwide operations and finding ways to bring the lower efficient lines up to higher levels of efficiency, and the software being added on top of existing iron is a good way to do it. Also, interestingly, packaging OEMs in Europe picked up a bit for us in the quarter. And while, again, we need to watch how that plays out, that contributed to some of the good performance in Europe and some of the better than expected performance in food and beverage in general.

Interesting. That's helpful color, Blake. And maybe just a quick follow-on on Sensia. I know when you guys press released it last month, you referenced roughly $400 million in annual revenue, and now the expectation for 2020 is closer to $230 million to $240 million. What's the disconnect between those two numbers? Is the $400 million a longer-term number or – What's the difference between the two?

Very good question. The way you can think about it is Sensia's overall revenues are expected to be over $400 million in fiscal 20. The 4% that we refer to is the part that is contributed by Schlumberger to the joint venture. The part that is contributed by Rockwell Automation is already part of our sales. So that 4%

that we call inorganic growth, only represents the contribution of slumers A. Yeah, so for the one year, for fiscal 20 only, it'll be the total contribution to the revenue will be split between organic and inorganic.

Got it. That makes sense. Thanks, guys. Thanks, Joe.

Operator, we'll take one more question. Your last question comes from the line of Andrew from Citi. Your line is open.

Good morning, guys. Hey, Andrew. Good morning, Andy.

Thanks for fitting me in. So, Blake, last quarter you had said that you didn't expect a downturn you were seeing to last that long. And while several of your peers are talking about a more prolonged downturn, your results were relatively strong with your own expectations. So how, at this point, are you measuring the weakness you're seeing out there versus previous downturns? You mentioned you were concerned about push-outs and cap-backs. Are you seeing any push-outs on projects versus what you expected? or are you generally seeing projects move forward, albeit slowly?

Yeah, we did not see the same degree of project pushouts in Q4 as we did in Q3. That being said, you know, the macro indicators show deceleration in fiscal 20, and we need to see more than one quarter of – performance to draw a line between those points. So we remain cautious, but obviously we're pleased with the better performance in Q4. And, again, our ability to compete and win for the business that is out there.

That's helpful. And, Blake, I wanted to ask the auto question maybe a different way. You were thinking that auto could be down about 10% for FY19, but obviously up mid-single bid and auto was down. a strong result in Q4. We know you're projecting flat for FY20, but are you seeing the core auto markets stabilizing faster than you expected? And then could these EV projects that you talked about actually lead to some upside for that flat auto forecast that you have for FY20?

I think over a, you know, over a longer period of time, there's absolutely upside with EV as you have, you know, all of these companies, the traditional brand owners as well as new companies. And they have to bring vehicles to market to get a revenue stream. So we're working with them. And all the ones that started a couple of years ago won't make it to the finish line, but there's a lot of exciting innovation out there that we're participating in. We're not expecting the industry as a whole to turn around. We're not expecting SAR accounts to jump back up, but, you know, stabilization may be an appropriate word there. Thanks, Blake. See you next week.

Yeah, see you soon. Hey, let me quickly answer the question that Rob had. Rob, in Q4, the average price we paid for our shares was $158, and for full-year fiscal 19, The average share price we paid was $165. So with that, Jessica.

Thanks, Patrick. I'll turn it now over to Blake for a few final comments.

Thanks, Jessica. So just to summarize, fiscal 2019 was a good year. We grew adjusted EPS 7%. We grew our core platforms and information solutions and connected services continued to grow double digits. We also made some important investments. With this foundation, We're well positioned for the future, and we look forward to seeing you all in Chicago next week.

Okay, that concludes today's call. Thank you for joining us. This concludes today's conference call. You may now disconnect.