洛克威爾自動化 (ROK) 2004 Q1 法說會逐字稿

Welcome to the Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. (OPERATOR INSTRUCTIONS) At this time I would like to turn the call over to Mr. Tom Mullany, Rockwell Automation's Vice President and Treasurer. Mr. Mullany, please go ahead, sir.

Good morning everyone and welcome to Rockwell Automation's quarterly conference call. I'm Tom Mullany, Vice President and Treasurer. On the line with me today is Keith Nosbusch, our President and CEO-elect, and James Gelly, our Chief Financial Officer.

Please note that our comments today will include statements relating to future results of the Company and are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of various risks and uncertainties, including but not limited to those noted in our earnings release and those detailed from time to time in our SEC filings.

During this call we will provide you with an overview of our first quarter results for fiscal year 2004. At the end of my review, Keith and James will make a few comments and in the time remaining take your questions.

First quarter net income was $62.2 million or 32 cents per share. This result includes two items -- a tax benefit of 4.3 million or 2 cents a share related to additional state tax benefits associated with the 2003 US Federal Research and Experimentation Tax Credit Settlement; and income of 7.6 million -- 4.6 million after-tax or 2 cents per share -- which is reflected in discontinued operations from a final judgment in a legal proceeding related to the Rocky Flats Facility that was formerly operated by the Company. Excluding these items, income from continuing operations was $53.3 million or 28 cents per share.

Last year's first quarter income from continuing operations was 41.7 million or 22 cents per share. Revenues in the quarter were $1,015,000,000.7 million, up 3 percent over last year's first quarter revenues of $983.6 million.

Now looking at the first quarter results for each of our business segments, Control Systems revenues were $828.8 million, up 5 percent over last year's first quarter sales of 787.1 million. Excluding currency translation, Control Systems sales were up a little more than one percent on a daily run rate basis. Sales of our integrated Logix architecture increased by more than 20 percent over last year, while sales in our process, software and information solutions business units within the Global Manufacturing Solutions business increased by nine percent over last year's first quarter.

Control Systems' US sales in the first quarter were down about two percent from last year, but on a daily sales basis US sales were flat. Excluding translation, Control Systems' international shipments were up one percent versus last year. The breakdown by region is as follows -- shipments were up 11 percent in Canada; down 3 percent in Europe; up 2 percent in Asia-Pacific; and up 1 percent in Latin America.

Control Systems' first quarter operating earnings were $100.5 million, up 17 percent from the 85.9 million reported in last year's first quarter due to continuing benefits of cost reduction actions and lean initiatives. Return on sales was 12.1 percent for the quarter, compared to the return of 10.9 percent last year.

Power Systems had revenues of $161.5 million, down 5 percent from last year's first quarter sales of 170.8 million. Electrical, or the motor sales, were down three percent while mechanical sales were down about nine percent. Power Systems had operating earnings of 9.1 million in the quarter, compared to 8.1 million last year, again due to continuing benefits of cost reduction actions and lean initiatives. Return on sales was 5.6 percent versus 4.7 percent last year.

FirstPoint Contact had first quarter revenues of 25.4 million, down from the 25.7 million reported last year. Operating earnings were 0.8 million compared to last year's first quarter loss of 0.4 million.

Now some other items to note for the quarter -- general corporate net expense was 16.9 million, compared to 12.4 million last year. The increase is partly due to costs associated with changes to the senior leadership team, and general corporation net also includes income from the Company's investment in Rockwell Scientific Company, which was lower by approximately 1.2 million this year.

Interest expense for the quarter was 10.5 million, compared to $15.1 million last year, primarily due to the retirement of the $150 million 6.8 percent notes in April of last year and the benefit of an interest rate swap.

The effective tax rate for the quarter was 24 percent, including the tax benefit announced this quarter.

Diluted average shares were 192.3 million for the quarter and outstanding shares at December 31st were 187 million.

Now looking at the preliminary balance sheet information, cash was $315.6 million, up 89.2 million from last quarter. Debt, both long and short-term, is reported at 768.1 million, down 4.6 million from the prior quarter. Our debt to total capital ratio is 31.7 percent. Shareowners' equity was 1,655,000,000 at the end of December, which is up 68.2 million from last quarter. Book value per share was $8.85 at the end of December, up from $8.55 cents at the end of September. During the quarter we repurchased 1.3 million shares at a cost of $40.7 million.

And finally, free cash flow was 128.1 million for the quarter, compared to $89 million in last year's first quarter.

That concludes the summary for the quarterly results. Now I would like to turn the call over to Keith Nosbusch for his comments. Keith?

Thanks Tom and thanks to all of you for joining us today. I know this is the height of the earnings season, so I will try to keep my remarks fairly brief to allow enough time to answer all the questions you may have.

As Tom mentioned, James Gelly, our new CFO, is also on the call with us today, and he will be providing a little more color on the first quarter results in a few moments.

Before I get to the first quarter highlights, allow me a moment to comment on my transition to the CEO position. It is truly an honor and privilege to lead this great franchise, and I can tell you I'm really excited about the opportunity to follow in the footsteps of a great leader and a mentor to me, Don Davis. I'm also very pleased to take over the reins at a time when we're finally beginning to see a sustained upward trend in our end markets.

Let's get to the highlights. In my mind, we had a pretty solid quarter. Net income was very strong, all of our businesses delivered improved operating margins, and cash flow was outstanding. In addition, revenues were up sequentially for the second consecutive quarter. This may not appear to be that significant, but to us in truly is. When you look at the underlying base business within Control Systems -- the industrial control components and our automation platforms, two of the key areas that have built our 25 billion installed base -- this core business is now starting to gain traction and have some upward momentum.

When we look at all the data points from our customers, our end markets, the appropriate and relevant economic indicators, and most importantly our daily sales run rates, we believe that this trend is becoming sustainable. So our plan for the year is on track and we remain very focused on executing our growth and performance strategy. Our growth initiatives, particularly Logix, process, software and information solutions, are all doing exactly as we had planned, and with continued good growth that will fuel our market expansion opportunities in the future.

Our focus is on execution, and while the recovery is emerging we remain very focused on making sure our costs stay in line. While organic sales were flat, our operating earnings were up about 18 percent. We had excellent margin improvement in Control Systems -- 120 basis points -- while both Power and FirstPoint also reported good profit improvement.

As the recovery gathers steam we will continue to see improved margins in all of our businesses as we continue and even intensify our focus on operational efficiencies. Our objective is to further strengthen the strong operating leverage that we have in this business through our lean enterprise and globalization activities.

Our earnings outlook for the full-year remains the same. Revenues should grow four to six percent, excluding currency impacts. We should see operating margins improve by at least 100 basis points over last year. And the diluted EPS should grow by 20 to 30 percent, which equates to $1.35 to $1.45.

There are three key messages that I really think are the takeaways from the quarter. First, revenue in the base business is trending upward. This is significant. Second, our key growth initiatives -- Logix, process, software and information solutions, are working. And finally, our cost structure is getting leaner and the operating leverage will remain strong as revenues accelerate. The bottom line, I'm feeling very optimistic about the future and very encouraged about our present position.

Now I will turn the call over to James to provide a little more color on the quarter. James?

Let me begin by saying that it's a real pleasure to be here at Rockwell. I'm really enjoy working with Keith and getting to the know the management team here. The people I've met in the last three months have been very high-quality and more it than confirms my going-in impression that this company is very good at what does. I'm particularly happy with the growth potential of the Company and the fact that the management team is executing on a large number of initiatives across the board to expand Rockwell's business universe.

So it's great to be here. I've found a well-ordered environment, including finance, I'm happy to report. And I'm particularly grateful to Mike Bless for his help during the last three months, and really for injuring a smooth transition. I know he's going to be successful in whatever he decides to do next, and I wish him the best of luck.

Let me add a couple of additional comments to Tom's and Keith's about the quarter, which is a solid one. As was said, net income and cash flow were both strong -- sales up three percent. And as Keith said, Control Systems is displaying what looks like a pretty clear-cut up trend in its core market segments.

Just a couple of additional thoughts on revenue -- first of all, our overall reported revenues were boosted by currency about 49 million. Secondly, this is a short quarter; there is about six percent fewer workdays than other quarters -- holidays and so fourth in November and December. Looking at sales on a per day basis tells a little better story. On this basis Control Systems is up about one percent versus a year ago, which we knew would be our toughest comparison this year. You might recall that in 2003, sales cooled off considerably in the fiscal second and third quarters after an initially optimistic start to the year. And on a sequential basis, Control Systems' run rate daily was up three percent.

As Keith said, looking forward the leading indicator is still positive. Orders were up both sequentially and versus the year ago quarter. And based upon our businesses' read of customer activity levels, orders quotes, the daily run rate should continue to improve.

We talked a little bit about Power Systems where sales were down about five percent versus the year ago quarter. As you know, the motors part of this segment has been facing weak markets for some time now, and their sales were down about three percent versus a year ago. Our mechanical business has been holding up pretty well, but they were down about nine percent. This really was a case of particularly tough comparison -- a very large shipment to their largest distributor a year ago. The leadership in mechanical is pretty positive about the balance of the year. Overall, Power Systems orders were flat to down slightly and the outlook is for a gradual improvement in market. Finally, FirstPoint Contact sales are down about 1 percent to 25 million.

Let me spend a minute on profitability. As Keith said, operating earnings were up 18 percent, margins up 1.4 points overall versus last year. I think this demonstrates a pretty widespread cost focus throughout the Company. And I might add that this is a clear plus for someone who came from a productivity-driven company to sign up here and find a continuous improvement culture in place, and one where people on executing on a large number of lean strategies around the Company.

As was said, margins at Control Systems were up about 1.2 points. This is driven by strategic sourcing, procurement and by pay-as-you-go workforce reductions during 2003. Power Systems margins were up nine-tenths of a point. FirstPoint swung from a loss of 0.4 million to income of 0.8 million. Both of these improvements were due to lower cost structures in those units.

In terms of net income, reported net income was 62 million, up 49 percent. But this is obviously boosted by the two discrete items in the quarter that Tom mentioned. Excluding them, EPS were up 27 percent from 22 to 28 cents.

Just a word in passing about the tax line -- we have not changed our tax rate expectation for the balance of the year, and the effective tax rate will remain at 30 percent.

As Keith said, we're feeling pretty good about the $1.35 to $1.45 guidance, which excludes, of course, the 4 cents of discrete items we just talked about. We continue to watch the daily growth -- the rate of daily sales growth and recognize that Rockwell is very well positioned to take advantage of improving volume and revenue.

I'm going to turn now to the balance sheet. As Tom said, total debt was down about 5 million in the quarter, and with the increase in share in our equity our debt to cap fell off a full point to 31.7 percent. Cash balances were up 89 million versus September 30th, so this means net debt -- that is debt net of cash -- fell by $94 million to 453 million, and this drives the ratio of net debt to total capital down by nearly 4 points to 21.5 percent. So this is a nice increase in financial flexibility.

The cash flow stated (ph) indicates the source of this improvement. Free cash flow of 128 million, up 44 percent from last year's first quarter. I believe Rockwell has strong cash generation ability. This quarter, however, benefited from tight capital spending, favorability in tax payments and the timing of some other outflows. So this quarter is considerably better cash conversion than normal. But we should continue to see cash flow well in excess of net income. As I look at it today, we should generate cash flow north of 300 million this year, possibly as much as 350 million.

It's encouraging that Rockwell has good cash flow and an improving balance sheet. And as you know, management has been pretty clear about the priorities for the cash flow. First, we plan to at least maintain the current level of share repurchase. Second, you know we take a strong interest in niche acquisitions, ones that are consistent with the business model transformation under way at Rockwell. Third, we will make a voluntary pension contribution this year, which we have already talked about. And finally, the dividend, which in my view is likely to be maintained at its current level for a while yet.

So that wraps up my comments, and in conclusion, as I said at the outset, I'm delighted to be here. And now we would all here be happy to take some questions.

Operator, we would like to open the lines up for questions now, and I would like to remind everybody that if they have some unrelated questions, if they could re-key and get back in the queue.

(OPERATOR INSTRUCTIONS) Robert Cornell, Lehman Brothers.

First of all, let me welcome both Keith and James -- the new team -- to the firing line here. Looking forward to a good year.

You mentioned the organic growth issue, and maybe that's worth a little more of an explanation. Remember, at the end of the September quarter there was a comment about October being up like six percent organically and we ended up, as you say, about flat, maybe down a little bit. Last year you had the big December; maybe sort of explain what happened December last year. Were there big automotive contracts? Where was it coming from geographically? Give us a little more perspective on the comparisons this year versus last year, maybe we don't (ph) understand the going forward growth rates.

Let me make a couple of comments, and then we have James and Tom if they need to add some more.

Certainly, your characterization is correct. When we last talked with you, quite candidly October was stronger than the typical first month of a quarter for us, and I think that's what we reflected in our comments. November weakened a little and December rebounded. If you look at the comparison to last year, really the difference last year, we uncovered a lot of buy it or lose it spending that occurred at the end of last year and that is something we did not attack detect this year as we went back and evaluated performance of the business. That was encouraging, actually, to us because if you remember what happened last time, January started to weaken. And that was the head fake (ph) that we explained the remainder of the year after, quite candidly, a pretty strong first quarter last year, which is why we thought the comparisons would be tough this year. And in fact they were. But we did end the quarter on a strong note, and I think the other part that just reinforces what we've been saying is that our business is lumpy. And right now, though, January is keeping pace to support our view for the year.

Just a second follow-up question. I think again in the September/October period you mentioned that some of the strength was coming from previously moribund portions of the end market -- metals and mining, some of those things. What would be an update on some of those comments?

If we look at -- give you a couple of comments from the industry perspective, I think is what you're asking. Certainly food and beverage, we think there the outlook for capital spending is positive, mainly driven by some of the changes that have happened in the industry, such as the Bio-terrorism Act that got incorporated in 2002, some of the activities that you're seeing from Wal-Mart with their electronic product code initiatives, and also the overall trend of just more health-conscious foods. We all of this is going to create opportunities for retrofits, packaging and process improvements in that industry. And that's a good industry for us, as you well know.

Pharmaceutical and biotech production in the pharma industry we think will continue to grow. We think it will be up about four percent this year after generally flat activity in '03. Certainly we see that the spending there is aimed at streamlining a lot of the manual processes that are involved in manufacturing and driving the information management solutions to a stronger degree. And that's a real plus for us with the Propack business and the acquisition that we had a little over a year ago now.

And then we also mentioned oil and gas, and that has remained reasonably strong over the Q1, but we don't expect to see that being continued strength throughout the entire year. We see that slowing a bit as it unfolds.

So that's a little overview on a couple of the markets.

One final comment on auto.

Good comment. Thanks for bringing that up, because last year we had a pretty strong first quarter in auto, driven a lot by in particular some forward reinvestments that were coming online in a couple of their core platforms. So that was a real positive a year ago.

This year we didn't see a lot in the automotive industry in the first quarter. However, we are expecting to see additional expenditures in the transplants, that their plants are coming online this year. And also, we've gotten some benefit now with respect to the activities in information space and our work with all of the automotives in that regard. And also we are concluding our first project with IBM and the alliance we formed to address the integrated information enterprise-wide supply chain conductivity strategy that a lot of the automotive are working lives are working on. We see that as an opportunity as the year unfolds as well. So those will be a couple of additional comments with respect to automotive. And once again, thanks for bringing the one up.

Thanks guys.

Richard Eastman, Robert W. Baird.

A couple of things. Is there anything in the December or early January order rate that would suggest more capital project spend as opposed to MRO spend -- average order size or length shipping -- order ship length?

That's a great question, and not yet would be my comment in general. That's probably the one area that we're still seeing a little bit of the continued weakness. Generally, that's driven by capacity utilization, which still is reasonably available, if you will, in the mid-to -- well, I guess mid-70s is where it is still at from a percentage standpoint. But we are seeing more activity with respect to quotations and the interest levels remain high. And in a couple are segments we did book some good business that we expect to ship in the second half of the year. So positive outlook, positive trends, but really with the weak fourth and first quarter -- or I should say the weak fourth quarter of last year -- there really wasn't a lot of shipping backlog that we were able to build and with that being a little longer cycle, we will see the second half of the year stronger from a project standpoint.

Okay. Also, could you just characterize the daily sales rate in January here year-over-year? Are we up in that three to five percent range, kind of consistent with the organic growth expectation?

I would say we're looking at sort of the two to four percent range in the January month to date.

Okay. Lastly, the organic growth rate that you mentioned year-over-year in the US Controls business, I think you said sales were off two percent, but the daily sales rate was flat. Could you just do the quick end market thing? Year-over-year, I guess auto was a little bit softer year-over-year. Were there any other end markets that would pull that sales number down a little bit?

No. I think it was general the key one was probably automotive. And I would say towards the end of the year, certainly on a US basis, the metals were pretty weak as well and paper was generally flat.

Okay. Very good. Thank you.

Mark Koznarek, Midwest Research.

Could you talk a little bit about the Logix and GMS businesses, some of the growth platforms because it looks like sales kind of decelerated a little? Growth rate is still strong in Logix, but last quarter you were seeing up 25 percent, now up 20. And you're recasting the GMS parts that you call out. We haven't seen this combination of businesses put together -- the one that is up nine percent. And if you could just give us some idea of how that same set of businesses was doing earlier in 2003?

Certainly I can get a couple of those. I'm not sure about the last specific question, but I can characterize GMS that I think will answer your question. Let me give it a shot here.

Logix, our business has continued to grow. We're at about a $275 million run rate in that business. Sequential growth was up six percent. You're right, the 20 percent plus growth on a quarter-over-quarter basis was a little weaker, but that's because we had a very strong first quarter last year. And in addition, we've built a little backlog because of the strength of the business at the end of December.

But our outlook continues to remain positive. We think that 25 to 30 percent growth for the year as planned, that we're still on track with it, and in fact encouraged by the continued expansion in the motion and process batch hybrid (ph) space.

Your second question was around GMS and the fact that we spoke about some specific segments there and I think what's important is to characterize our GM business. First off, certainly the growth story is still intact for our GMS business. But really this business, as you remember when we formed it a couple of years ago, was a combination of all of the services businesses that existed throughout Rockwell Automation at the time. And it's really a business that is split probably 50-50 between old and new growth activities. And the part of the business -- the old, the break-it-fix-it, the legacy parts businesses -- are the ones that are in transformation. So what we're really doing now is focusing and taking place is the growth in the longer-term customer support contracts. While this takes a little time, we certainly think that the growth elements are still on track and certainly in process, software and information solutions and the new segments of asset management are very strong. So the outlook for the business and the growth areas will outperform and the legacy business will really be in line with some of the things that are happening in our more product-centric markets, which is really the generation and the legacy of those service businesses that are tied to what's been happening in products. And it's a little different makeup and outlook than we would for the growth initiatives that Tom talked about earlier. So that's how I would characterize it.

How much was GMS up overall?

GMS overall for the quarter was up just a bit, basically flat.

Finally -- this one perhaps is for James -- I'm wondering if there's any material amounts of pay-as-you-go restructuring in the controls margin because a year ago -- I'm looking at my notes -- you guys had talked about something like 7 million that was embedded in the year ago margins that absent that would have pulled the margin up to high 11 percent, meaning that it doesn't appear that there's that much leverage. So is there something I'm overlooking here?

First of all, I think your memory is accurate that in the year ago that number in the seven range is what I think is in that number. So the benefits of the pay-as-you-go are a part of the lean or the margin expansion calculation that I went through. But in general terms, your memory is accurate.

But is there a material amount in this current quarter that is an offset?

No, we're always doing it pay-as-you-go initiatives and looking at it appropriately -- where appropriate around the Company. I wouldn't call out any meaningful amounts that you need to be aware of in this quarter's number.

Okay. Thank you.

Jeffrey Sprague, Smith Barney.

Good morning everybody. Keith, could we maybe just -- I want to kind of drill down to your comfort level because I think when we look at this, it actually looks like the patterns are similar to what we've seen -- we're up a little bit, we're down a little bit -- yet you're feeling more confident that it's real this time. But again, it doesn't look very visible and tangible. We've got to parse it down to daily selling rates and everything to find the growth. So I'm just wondering if there's some other way you can convey your confidence that you're seeing the sign of the turn, either in the form of forward order activity -- you did make some remarks (multiple speakers). But again, from our vantage point looking at the numbers, we really don't see much going on in the topline here.

Let me try to segment the business as to the way that we look at it and tell you why I have the confidence in the outlook going forward here.

Certainly a segment of our business is focused around the MRO, and basically what we term as the flow goods business. This was the first area that we saw pickup a little over -- about a year ago we saw a little bit of life in the flow goods business, which is pretty much based upon manufacturing was starting to come back, and they were running the equipment somewhat stronger than when they were simply cannibalizing existing equipment for whatever they needed, or inventories were being driven down, or whatever else caused you not to have a one-to-one correlation between ordering and the manufacturing cycle. So we saw that business return, and what we're now seeing in that business is we're starting to see our components run rate pickup, in fact, in some of our core businesses. And that's a good sign and one of the reasons we think we're in a sustained uptrend at this point in time.

The second element of our business is what we talk about as the -- let's just call it the plant-driven productivity and cost reduction modernization activities that are pretty much ongoing in the operating environment of a plant structure. And there it's what we're doing to help them take costs out or help them be more productive on the existing asset base in many cases. And there we see continued activity, and we evidenced that by some of the short cycle project work that we get in some of our distributed engineering capabilities, if you will, in various regions of the US and other parts of the world. And that business continues to be a positive.

And then we get to the third case, the third element of our business, which is more project related -- a little more long cycle. Could take a couple of months to up to a year that you're working on these projects; could take another one to two years to basically get the projects up online as they go through the entire process. And that's the area that is most dependent upon capacity utilization. And certainly that has been strong for us outside the United States, in particular in Asia and Latin America, throughout last year and early this year as well. And what we're starting to see, and what I commented about earlier, was that the front logs, if you will, of our business have seen a pickup in a number of areas that would indicate that we're going to see that project business pick up for us and capacity type of spending -- I guess I would call it the more true capital spending -- later in this fiscal year, and that we've seen the start of that in our quotation activity, our unexpired quotes, and the basic front log in our more engineering-driven businesses.

And then on top of that I would put the economic data that we follow, in particular some of the ISM indices. They've been very strong and picked up strength through the first quarter. And certainly that's one of the reasons we saw the pick up at the end of December for us, and we think that portends stronger growth in the short as well as intermediate-term next year.

So when I look at the three segments of our business, the external relevant data -- and I just mentioned one -- the ISM -- there is other data points -- that is what's giving us the confidence that this will be sustained.

Very good answer. Could you give us a little bit of color also -- and maybe this is to James, either one of you -- on how to think about the volume leverage once the revenues do begin to turn here? You know, by my analysis it looks like it could be fairly significant into the 30, 40 percent range, maybe even higher than that. But are there -- I'm sure there's some mix considerations with GMS and other things. Just any perspective you could provide there would be helpful.

First of all, you did a great job of answering your question. In other words, the normal, I'd say, conversion that we have guided recently is in that, I want to say 35 percent range. But you're right, it is a mix. There are segments in this core business that Keith is describing that have, let's say margins -- contribution margins considerably higher than that. I think the balancing act here is to invest in the areas that represent these options on growth -- let's say business model transformation -- but balancing that against an overall lean force that's in motion here. So if I can say so, it boils down to kind of a 30 to 40 percent range, which is the one that you initially started by suggesting. That is how I see it.

Thanks. Just one follow-up -- what is this lumpiness in corporate on change in leadership? Is that a bonus to Don or something on the way out the door?

No, it is not. The answer is you have had some transition in the corporate staff. I am one of them. I'd love to tell you that I'm the explanation, but I'm not. I'm a little tiny piece of it, I guess. And there's some search work going on to replace some other members of the team. And then frankly, one-piece is just a benefit for one of the members of the staff who will, I guess, transition out and be replaced. So it's kind of headhunter and transition fees as you go through the change up at the staff level.

Can you just give us some guidance on the year for that line then? Should that sell back down a little bit or--?

Yes, I was going to say it should settle down. I guess you're used to seeing it go up as the year goes on; it just happened to end the year -- begin the year more or less where it has ended it. So I would say it's going to settle down in the mid-teens, 16-ish range for the quarterly run rate going forward.

Thanks a lot.

John Inch, Merrill Lynch.

James, you said January up two to four as the run rate; just for perspective, what was December on a daily sales basis?

I want to say two to three, sort of thing.

If you look at some of your competitors, they seem to have put up stronger results in the quarter. I guess I am just curious overall if there was perhaps business that you deliberately didn't bid on, or if there are other sort of pieces of the lumpiness that maybe explains why relatively the revenues were not a little bit stronger.

I guess to say that I don't know who has the pure play factory automation that Rockwell has, is the first question. And I just say that looking at the space we're in and trying to deduce other what I will call electrical and automation providers. I don't know if I see a -- you would have to guide me, but I don't see a standout in that segment versus what we're talking about here. I hate to turn around the question and ask you, but yes I see that other companies have topline, but I don't know who is exactly in the space we're in.

I was just looking for do you feel like within the space you compete in specifically that you guys maintained your share in the quarter?

Yes, I guess we didn't take the question quite that way, so that's a good clarification, John. Thank you. We certainly believe that we have maintained our discrete share, which we grew quite substantially last year. And we think we're still there with it. Actually, we know we're still there with it. And we also know that we're growing share in the motion business and the process business with the integrated architecture. So I don't believe this is a question of losing share at all. As a matter-of-fact, we continue to feel positive about our ability to not just maintain but grow our share with the breadth of the portfolio and also the other activities that we've been investing in to expand our served market. So it's a combination of those that are going on now, and we feel pretty good about our market position.

I don't know of any business we declined to quote on, let's put it that way. I certainly don't know any significant orders that we had expected to get that we did not receive. So I don't believe there are any surprises and losses from projects or quotations or activities that we had counted on.

That's fair. Keith, coming out of the recession of '90, '91, would you say the sales pattern that we're seeing today has comparability to that period of time, which ultimately, of course, lead to some pretty high double-digit topline run rates in '93 and '94? Maybe just in a contextual capacity, is what we're seeing today somewhat similar in pattern to that time period 12 years ago?

No, I don't believe it is similar. I think we're seeing a slower growth rate out of it. I think there's been some changes in the industry in general. I think you're still seeing a traditionally low capacity utilization for this time of a recovery, and I think that's impacting it. The excess capacity on a global basis that exists is different than what occurred at that point in time. And I would just say it's a little -- that the rate of growth is slower and the pace is slower than what we saw in the mid-90s coming out of the '90, '91 recession period.

Thanks very much.

Scott Davis, Morgan Stanley.

I have a question on the share count. And excuse me being relatively new to this name, there may be a simple explanation. But share count went up a bit sequentially, and given that your cash balance is up kind of year-over-year $90 million or so, just could you maybe explain a little bit about what your cash use priorities are and maybe what we can expect the next couple of quarters of that share count number?

First of all, you're exactly right; the number of shares outstanding drifted up since we last reported, primarily due to stock option exercises. As you know, we have a purchase in-place intended to soak up the share creep. It's clear that in the quarter we got behind a little bit, so to speak, and that the repurchase, which is sort of what I will call a level load or a steady-state run rate fell behind the number of options that were exercised. So in my comments, I subtly alluded to the fact that a use of cash is to at least maintain the rate of share repurchase, and clearly we have built up some cash and we have some flexibility, and doing a better job of soaking up that.

I don't know if I can tell you that in the next time we report it will be way back down to where it was at the end of September, but yes we're going to take a look at dedicating some more of the cash and the cash generation to repurchasing.

Now, we've got a couple of three years of pent-up demand. People are issued options, they have had a pretty good run in the stock price. We want to keep up with this dilution and we're going to look going to luck at a more appropriate level of repurchase as we go forward to try and balance that a little better.

Makes sense. Maybe James, as an appropriate follow-up, if you had to expense options in 2004, what do you think it would cost you on the bottom line?

Can I get back to you on that one? I know it's in the footnote and I just don't have the 10-K in front of me and I apologize.

Not a problem. Real quick, Keith, I know we've hammered on this with a number of the other guys, but can you talk a little bit about -- when we look at the CapEx budgets at the customer level they are clearly up '04 versus '03 and you would have expected to see a little bit of an improvement, I guess I should say, in first quarter. Are you seeing any risk that the CapEx budgets are being pushed out a little bit, particularly given the level of energy prices and some of the cost pressures that your customers are seeing?

Good question. Let me come at it from -- you're right, and I do believe '04 over '03 will see stronger CapEx. Remember, our first quarter is the end of '03, so I think it's been too soon for us to see the increasing CapEx in '04. I think those budgets basically got approved, and I think that's one of the reasons -- got approved recently -- and that's one of the reasons we're seeing more front log activity in the projects business. But I don't think it's too soon to -- I think it's too soon to see the benefits of that increase yet. So that's one of the reasons we feel optimistic and confident about the remainder of the year because of that increased CapEx expenditure that's going to take place.

And with respect to specifics behind it, it goes all over the map. It's hard to pint in on one area or in one industry. And I certainly won't look at energy today as one of the core drivers in CapEx spending. But it is a piece of it, particularly in some of the process industries where they have some constant speed, heavy energy usage equipment -- pumps, fans, compressors -- that if we can run variable speed with high-efficiency motors and variable speed drives, we can generate pretty fantastic paybacks on that expenditure. And that's been one of the reasons, quite frankly, last year the oil and gas industry was strong for us because companies were making those expenditures; they were cognizant of the increasing energy costs and the ability to get a payback. So that's how we see it currently.

Great answer. Thanks guys.

John Baliotti, Fulcrum Global Partners.

Good morning. James, could we talk a little bit about free cash flow? You pointed out the fact that you're looking at something north of 300, possibly upwards of 350, for the year. I'm assuming we're still talking about CapEx between 125 and 135.

Yes, that's the range we gave.

Okay. And then you pointed out tighter capital spending for the year. I think working capital contributed about 4 million this year in the quarter, about 2 million last year. There seemed to be a bigger swing in the other line, which I think you were talking about earlier when you discussed it -- about a $28 million swing. I was wondering how should we look at for the rest of the year in terms of -- that was a negative, I think, for all of '03. Should we consider that to be continuing to be positive or running at this rate?

First of all, that's the timing of some payments, outflows and so forth. That was a big help in the quarter and you should not count on it being there going forward. You need that, in fact, to get to the cash flow that we're forecasting. In other words, that it is a mild outflow on balance for the year.

Is there anything significant in there that you could point out that we could kind of get a sense of what's moving?

Not really. I was going to say it may be just simply something as simple as the timing of a payroll cut off or something, so I wouldn't freight it with significance.

So then in terms of taxes payable and so on, that's going to continue to start to work in your favor and --?

Yes, that's right. So yes, capital is something where people have really tightened down here in the last couple of years. I think we're in a permanently different environment in terms of this company's attitude towards what is capital that needs to be spent. And I think that's going to be an ongoing lean and significantly below depreciation for the foreseeable future.

Thanks.

Michael Regan, Credit Suisse First Boston.

Keith, can you give us some sense of what you're seeing competitively out of your European primary competitors with the strength of the euro and their disadvantage now for the first time in a while? Do you feel like you're picking up share in the US? What kinds of things are happening?

Good question, Michael, because it certainly has moved over the last year.

I like this new CEO. Don never said I asked a good question.

We will hopefully keep that going, both ways. In the US I think right now it's still too early to tell. The Europeans -- Siemens just committed to being successful in the US, and we have not seen any impact or any change in their business model in the last half year as it strengthens. So I don't sense any ability to be able to compete better because of the currency in the US. They are a global competitor and they're going to be here for a long period of time.

However, when we went around the world over our quarterly review, we are seeing and sensing that in Asia the European manufacturers are having to pass along some price increases and/or use different market access models to absorb the cost differentials that are taking place. So there we think, and in particular in China, we believe that we have grown some share. We had a very strong first quarter in China. We were up 40 percent. And we believe some of that is share growth and some of it is coming because of the advantage we get from the exchange rates that exist today.

So that's how I characterize it -- tough in the US because it's a tough economy and we're going to battle it and advantage somewhat that I would say is a perhaps not permanent. But at the moment we're enjoying some pricing advantage in Asia.

Thank you.

Mike Whitfield (ph), Wachovia Capital Markets.

I wanted to get some clarification on Power Systems and the outlook, particularly expectation of growth there for the year and profitability levels. How does it change? We saw this quarter last year was up relative to the December quarter. Is that the same kind of expectation for the current quarter?

Certainly with Power Systems that's a new area for me. Certainly looking at the performance there as a Control Systems guy, we have some great businesses there and we will stay very focused on what's taking place at Power.

I think it's really a tale of two businesses when you take a look at it. And the motor side of the business, the electrical side -- tough business. But we expect that to pick up in the second half of the year. And I was very pleased, quite frankly, with the performance of the business from an operating margin improvement, in spite of a reduction in sales. That tells me the lean programs are working. And they're focused on the growth areas and they believe that motors will pick up going forward.

With respect to the mechanical business, the mechanical business is a great business. We have double-digit margins, and we were just down there a little over a week ago and the management team there is very encouraged about the outlook for the year for them and have all expectations about achieving the plan, which is a growth in the second half of the year.

So right now, I would say the mechanical side is a little more optimistic, but we expect to see improved performance in the motor side. And we're just going to stay focused on that business. We have to overall improve its performance on an ongoing basis.

Can you clarify whether the expectation is then, just to be clear, that the profitability in that business will be up over last year?

I guess if I had to give you guidance for the year I would say margins mid-single digits, revenue up a point or two type thing. I guess I would not paint a picture of a significant change in any of the elements of the income statement year-over-year for the whole year.

Thank you.

Mark Roberts (ph), Wachovia Capital Markets.

I wanted to follow up a little bit on the questions about China. Are you able to give us a breakdown of your Asia-Pacific Rim business? What percentage of that -- of those revenues are in China?

Our China business is running now over $100 million and that would be -- let me see here -- if we do a quick calculation for you --

I was going to say the total Asia-Pacific is in the 350 range, of which China is in a run rate of 100, so ballpark about -- a little less than the third of the total.

Okay. And you mentioned that you believed you were taking share in China. Is that mainly from European competitors?

Yes, because that's pretty much where the -- China's a pretty open market with respect to automation. There's not a good indigenous supplier in the automation platforms, and so the real competition there is with the Japanese, obviously the US, and then the Europeans. I would say the best opportunities for us, given the currency, which is where the conversation was directed from, the currency change has been most dramatic with the Europeans, and that's where we've gotten a little bit of help, from currency.

Okay. Great. Thank you.

Martin Sanki (ph), Neuberger Berman.

Have you been seeing any pick up in metals costs and is that going to have an effect on your ability to improve margins, particularly in the power side of the business?

That's a good question. The answer is yes, we have seen upward pressures. The good news is we have some contracts that are still have some time to run and our goal is to continue to drive the lean initiatives to be able to absorb any additional pricing that would come through -- any additional costs that would come through later in the year. So tremendous pressure from the metals, both copper and steel, are seeing increases and that's a raw material content for our Power Systems business and one that we're very focused on and coming up with ways to manage any costs that may flow from those contracts.

Are you trying to raise prices to compensate in Power Systems?

That's another great question. We just announced a price increase in January, and a good portion of that was to offset the raw material prices for that business, and we do hope to be able to offset the majority of it with that price increase.

How much was the price increase on average?

On average a couple percent -- two to three percent.

And you said that you have hedging contracts -- that you have -- your input costs under contract, when do those contracts start to roll out and what kind of extent are you seeing in terms of price increase -- or cost increases -- in your metals?

The contracts are sort of staged over time, and I can't quote you an exact increase. But as Keith said, they will roll off. Eventually you have got to put them on a higher level. There is an inflationary pressure. And I guess the message here is that the lean initiatives are designed to offset exactly those type of inflationary margin contracting pressures and so far the lean initiatives across the place have been more than sufficient to do so and continue to drive margin expansion. And I don't think we've changed the -- wouldn't have you take away a different opinion going forward.

Just sitting back for a second and thinking about it philosophically, lean has been a tremendous help over the last couple of years and of course sourcing initiatives have helped your materials cost as well. But it was an era where -- of global overcapacity and a lot of very hungry suppliers. Now we're sort of moving into an era where demand is improving, the pressure seems to be going the other way. Can you continue to get the kinds of material savings that you have achieved in the past?

The answer to that is no. That's not the continued focus of our business. You talked about how we started the process, and that's exactly right. A couple of years ago we started, in particular in our sourcing procurement, and it was a relatively great environment to do that and we've gotten a lot of advantage. But our lean program is much broader and much deeper than just the sourcing side of it. And it's much broader and deeper than just manufacturing.

So we're now evolving, I will call it into the next generation of lean, which is all functions and all business processes. And we think we still have some legs that exist there to get after some of this to keep the leverage going in spite of a slowdown in just the ability to extract raw material input product cost reductions at the rate that we've seen in the last couple of years. But even there we get isolated areas where we still have opportunities, but it will not be the magnitude that we've seen before.

And then finally, in addition to lean, the other cost program that we have is globalization, which is all about making sure that our resources are aligned the way our customers are doing business and our ability to generate opportunities on a global business. And that too is about all functions and all areas of our business. So we think we continue to have an ability to exercise productivity improvements in our business and cost containment activities in our business, and it's just going to take a different and additional twist, if you will, as opposed to the historical approach where we all started.

Thank you.

I think we have time for maybe one more question.

Chris Codowitz (ph), A.G. Edwards.

I wanted to follow up on the discussion about the globalization. You guys were talking about presenting opportunities in different markets. Obviously, with the benefit you guys had from currency in the quarter, I guess I'm wondering associated with that are you guys going to changing operationally; are you guys going to be investing overseas in new facilities or anything? Are you changing your footprint in that respect?

The answer is yes, but it's not because of currency at all. Most of our investments have been in the last couple of years and will be going forward, whether it's our acquisitions and/or our capital investments have been outside the US because that's where our greatest growth opportunities are and that's where the traditional multinational companies are making their investment. Outside of the automotives, which we've talked about, and the transplants investing heavily in North America, and the pharmaceutical and food companies, most of the infrastructure, most of the raw materials processing types of applications are done in other regions of the world. So what we're doing is making sure that our footprint mimics the growth that we see on an ongoing basis. So your specific question is yes, a disproportionate amount of our investments will be outside the US going forward, based upon the revenue potential and the need for us to support our customers, wherever they choose to locate.

Okay. Tying back to the foreign exchange, can you give us a feel for how much of that foreign exchange benefit you guys had on (technical difficulty) revenue side flowed down to your profits?

It's a very small quantity. There's a pretty thoroughgoing hedging of what I would call the major portion of the currency that maybe one million or two flowed through from translation and other things, but not more than that in the quarter.

Okay, that's all I have. Thanks guys.

Thank you, operator. I just want to thank everyone for joining us on the call today, and if you have any further questions, give us a call.

Thank you. That does concluded today's call. At this time you may disconnect.