洛克威爾自動化 (ROK) 2004 Q2 法說會逐字稿

Please stand by. We are about to begin. Thank you for holding and welcome to the Rockwell Automation quarterly conference call. I need to remind everyone that today's conference is being recorded. Later in the call, we will open the lines for questions. [Caller Instructions] At this time I would like to the call over to Mr. Tom Mullany, Rockwell Automation's Vice President and Treasurer. Mr. Mullany, please go ahead.

Thank you, operator. Good morning, everyone and welcome to Rockwell Automation's second quarter conference call. I'm Tom Mullany, Vice President and Treasurer, and on the line with me today is Keith Nosbusch, our President and CEO; and James Gelly, our Chief Financial Officer. Please note that our comments today will include statements related 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 second 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.

Second quarter net income was $78.3 million, or 41 cents per share. This compares to last year's second quarter net income of $49 million or 26 cents per share. Revenues in the quarter were $1 billion 112.9 million, up 8% over last year's second quarter revenues of $1 billion 29.4 million. Excluding the effect of currency translation, sales were up about 4% over last year. Now looking at the second quarter results for each of our business segments. Control Systems revenues were $897 million, up 8% over last year's second quarter sales of $830.4 million. Excluding currency translation, Control Systems sales were up 3% over last year, driven primarily by sales of our integrated Logix architecture; which are up about 25% from last year. Control Systems U.S. sales in the second quarter were up 4% from last year. Excluding translation, Control Systems international shipments were up 1% versus last year.

The breakdown by region is as follows: shipments were down 5% in Canada, down 4% in Europe, up 8% in Asia Pacific and up 20% in Latin America. Control Systems second quarter operating earnings were $132 million, up 41% from the $93.4 million reported last year; due to favorable product mix, productivity improvements and higher volume. Control Systems return on sales was 14.7% for the quarter compared to the return of 11.2% in last year's second quarter.

Now turning to Power Systems. Power Systems revenues were $182.6 million, up 5% from last year's second quarter sales of $174.6 million. Electrical, or motor sales, were up 5%, while mechanical sales were up 4%. Power systems had operating earnings of $13.8 million in the quarter compared to $15.5 million last year. Earnings this quarter include $3.7 million of charges related to a plant closure and discontinuation of some product lines. Return on sales was 7.6% in the quarter versus 8.9% last year.

Now looking at FirstPoint Contact. FirstPoint Contact had second quarter revenues of $33.3 million, up from the $24.4 million reported last year, primarily due to two large projects that were shipped this quarter. Operating earnings were $5.7 million, compared to last year's break-even results.

Some other items to note for the quarter, general corporate net expense was $22.5 million compared to $13.9 million last year. The increase is due to higher estimated future costs for environmental remediation at three legacy sites, a contribution to the company's charitable corporation, and costs associated with corporate staff changes. Interest expense for the quarter was $10.2 million, compared to $14.7 million last year, primarily due to the retirement of the $150 million ,6.8% notes in April of last year. The effective tax rate for the quarter was 30%. And diluted average shares were 192.1 million for the quarter and outstanding shares at March 31, were 185.9 million. Revenues for the six months were $2 billion 128.6 million, compared to $2 billion 13 million last year, an increase of 6% over the first six months last year. Segment operating earnings were $261.9 million, compared to $202.5 million last year, an increase of 29% over the last year's first six months.

Net income for the first six months was $140.5 million or 73 cents per share. This includes two cents from discontinued operations and two cents from the favorable tax benefit that were both reported in the first quarter. Last year's net income was $90.7 million or 48 cents per share.

Now, looking at the preliminary balance sheet information. Cash was $353.8 million, up $38.2 million from last quarter. Debt, both long and short-term, is reported at $766.3 million, down $1.8 million from last quarter. Our debt-to-total cap ratio is 31.5%. Shareowners equity was $1 billion 666.1 million at the end of March, which is up $11.1 million from last quarter. Book value per share was $8.96 at the end of March, up from $8.85 at the end of December. During the quarter, we repurchased 1.8 million shares at a cost of $59.2 million. For the first six months, we repurchased 3.1 million shares, at a cost of $99.9 million. And finally, free cash flow was $115 million for the quarter, and $243.1 million for the first six months; compared to $159 million for the first six months last year. That concludes the summary for the quarterly results. Now I will turn the call over to Keith Nosbusch for his comments. Keith?

Thanks, Tom and good morning, everyone and thank you for joining us today on the call. As you have seen and heard from Tom's presentation, the second quarter results were really terrific; and I feel really good with where we are at. I am extremely pleased on two fronts: revenues are accelerating at both Control and Power Systems, and the earnings power of the business were clearly evident. I would like to make some additional comments on both of these topics.

With respect to revenues, in January we talked about the improving outlook for our base business. The Power and Control components and product sets that serve our $25 billion installed base in the industrial automation market. In the second quarter, we saw the continuation of a trend that started last fall. In fact, the trend is clearly showing an acceleration in the daily run rate. Sales were up 4%, excluding currency. The revenue pickup is, again, mainly attributable to the MRO segments of our markets. Almost all of our served markets, with the exception of automotive, which was down and paper, which was flat, showed good improvements in customer demand. The U.S. automation market growth is consistent and steady. Latin America was an area of strength. Canadian sales were weaker due to the impact of the Canadian dollar. Europe continues to struggle with weaker sales in the quarter. In Asia, growth is robust with China sales up more than 50% in the quarter.

We are also very encouraged that we are seeing more indications from our customers that their capital project plans are getting more attention. We announced a number of significant orders this quarter, and we will see the trend toward more capital projects gaining momentum over the balance of the year. Things are getting better, and right now, our revenue expectations remain on track for full-year growth of 4 to 6%. With respect to profitability and our operating leverage, the real story here is the profit that we generated this quarter on the 4% organic sales growth. Control Systems clearly benefited from a very favorable mix of higher margin, control platform products, such as PLCs, and Logix; as well as our industrial control components business and software products. As we said, our projects and system businesses have not really kicked in yet. Since the larger projects generally require more engineering and integration effort, their margins tend to be somewhat lower than our product portfolio. As a result, while revenues should continue to accelerate, the mix shift will have somewhat lower incremental margin pull-through going forward.

Both Control and Power are doing a great job of improving their operational efficiency, and maintaining an appropriate cost structure as the recovery gains momentum. Joe and his team at Power Systems are focused on improving the cost structure of the motors business, while increasing volume across both segments. At motors, we took several cost actions during the quarter related to employee costs and asset impairments, associated with plant closure, and the discontinuation of product lines. There is clear evidence that productivity improvements are occurring throughout both enterprises and this will enable us to continue to make investments in these businesses going forward. Investments that will allow us to maintain our technology leadership position, in the integrated control and information architecture, and drive our vertical solutions focus with high value sales and marketing resources. Accordingly, we are raising our full-year EPS expectation to $1.55 to $1.60.

Before I turn the call over to James, I need to make an additional announcement. This will be Tom Mullany's last conference call. Tom has decided to retire in May, after almost three decades in key management roles in finance. Tom will help ensure a smooth transition with his successor and we will continue to benefit from Tom's many contributions over the years in the areas of investor relations and treasury. We will miss his insight and judgment. I, in particular, appreciate the fine job that Tom has done. He has helped me tremendously in my transition into the new role, and I want to wish Tom all the best as he begins the next phase in his life. With that, let me turn it over to James for a little more detail on the numbers.

Thanks, Keith. A nice quarter, which you heard Keith and Tom describe well. Let me touch quickly on a few additional highlights. First, the outlook for our end markets, the signs are encouraging because of the solid level of quotation activity going on and the visibility that our distributors have to customers' capital projects. In terms of profitability, as mentioned, control systems sales showed some exceptionally good mix this quarter, as well as better volumes and solid productivity improvement. Our Power Systems team is working to improve operating margins, particularly at motors, where we took several cost actions during the quarter. Excluding these actions, Power Systems margins were up in the quarter. FirstPoint's sales were exceptionally strong, primarily due to two large shipments in the quarter. These are effectively upgrades to customers' existing call center platforms. The sales cycle is pretty long, and the volume in this business can be pretty lumpy.

Margins were up solidly from break even levels a year ago, primarily due to the higher volume. And just as a caveat, you probably shouldn't extrapolate these results going forward since we expect volume in the balance of the year to be more like the first quarter level. Let me reiterate the points that Keith made on the outlook and the guidance for the year.

We're raising full-year EPS expectation to $1.55 to $1.60, excluding the two-cent tax item we recorded in the first quarter. Revenue growth expectations for the year remain at 4 to 6%. In the second half, our outlook is for continued modest sequential revenue growth at both Control Systems and Power Systems. Likewise, second half margins are expected to be flat as compared to second quarter levels, which were very good. As Keith mentioned, a recovery in Control Systems projects and systems businesses would drive our incremental conversion rates toward the low of our 30 to 40% guidance in the past. So taking both revenue and margin expectations together would result in EPS of about $1.55 to $1.60.

Let me turn to cash flow. Our full year 2004 guidance is for $300 to $350 million of free cash flow, including the latest pension contribution of $75 million, which actually took place last week and after the second quarter ended. The drivers of cash flow so far this year have been income growth, lower capital spending, and tax payments. Let me say a word about the last two.

First, Rockwell has become much more efficient in terms of capital spending and we plan to continue this discipline. First half spending was about in line with prior year's seasonality, and we think second half spending should also be about in line with last year. So full year 2004 capital spending should be similar to 2003 levels. On the subject of cash taxes, you can see from our cash flow statement that we've been in an unusual period. This is due primarily to the deductions resulting from pension contributions and the tax benefit from stock option exercises. So taxes have not been an outflow during calendar year -- fiscal year '04, primarily due to these drivers, as well as to some strong work generating refunds related to prior tax years. As you know this set of circumstances is temporary and we expect to see more normal tax outflows after year-end.

Pensions. Total pension contributions this year will be $125 million. Let me put pensions into perspective if I can. At the end of our last fiscal year, our plans were underfunded by $670 million, the product of a $1.9 billion projected benefit obligation against $1.2 billion in assets. We think we're making steady improvement in this area. With the contributions of the past 12 months, our funds performance to date, and assuming a slightly higher discount rate we estimate that our underfunding could be cut in half. As a reminder we don't have any required contributions prior to 2007, and we're optimistic that we have done what we need to do in terms of significant catchup. There may be some normal annual contributions about equal to our annual expense, but we're optimistic that we've made the significant catchup.

Let me spend a minute on some other uses for our cash flow. First, after the ongoing dividend of 66 cents per share comes share repurchase. As Tom said, during the quarter we bought back 1.8 million shares. We nearly doubled the rate of share repurchase, bringing our first half repurchases to 3.1 million. By comparison, about 3.4 million stock options were exercised in the first half. So we have roughly offset dilution from options and we continue to have the objective of keeping shares outstanding roughly constant. Another priority use of cash is acquisitions. As you know, we're looking for deals that extend our business model into the software, manufacturing and information solutions space, and our preference is for both on scale acquisitions. In general, we believe we have the financial flexibility to support both acquisitions and the current level of share repurchase.

I should comment on the pay-as-you-go actions we took this quarter. Our results included charges related to plant closures and the discontinuation of product lines. We will continue to look for high internal rate of return projects, which we intend to take on a pay-as-you-go basis, to reposition our cost structure and make us more competitive in the future. In addition, as Keith said, we will invest in new product development and launch, and high value marketing and sales resources to maintain our lead over competitors in key products and services and drive our vertical solutions focus. We're investing in infrastructure outside the U.S. to address local markets like China, where we grew 50% in the quarter. Adding investment in high growth geographies is a key part of our growth strategy.

Finally, a word or two about price, costs and productivity. In general, Rockwell is focused broadly on improving operational efficiency and further strengthening operating leverage, as was demonstrated this quarter. Price was a mild positive in the quarter. We are seeing some cost inflation, probably in the range of 2 to 3%, including wage, benefit and raw material costs. With all the lean activities including strategic sourcing, globalization and prior period pay-as-you-go actions, Rockwell's driving productivity at a 4 to 6% annual rate; enough to offset and expand margins. We're executing on initiatives to deliver higher volume and improving productivity and these actions, which we're working to sustain, can be seen in this quarter's terrific results. Well, those are my comments and now we'd be happy to take any questions you might have.

Okay, operator if we could open the lines for questions, please and if I could remind everyone to try to limit their questions to one or two related items and get back in the queue, so we give everybody a chance to ask questions.

Thank you. [Caller Instructions] We'll pause just a moment so everyone can signal. We'll go first to Mark Koznarek of Midwest Research.

Hi. Good morning.

Good morning, Mark.

A question about the inbound, with the project activity apparently picking up, can you quantify at all what the inbound or the bookings might have been in the quarter to give us an idea of what the pipeline looks like for the second half? You know, in other words how -- how much visibility now do you have into the second half of the year?

Mark, it's James Gelly, my answer would be, you know, I think we have made it clear that the company has got a two-week backlog. A lot of the things that are driving growth are in the nature of front log, which by its nature is quotations that are in place, customers that are -- we're bidding for work, we can see our distributors are giving us the feedback that they can see, project level activity in the works; but, you know, we kind of call them the way we see them and much of our comments this quarter relate to that front log type of business. So as you call it, inbound, but as far as a backlog, you know, we -- we, as a company as a front engine do not have, you know, an identifiable backlog in the way you might be familiar with.

Okay, so it's that front log issue that has picked up substantially? So the opportunity is more significant, you just need to kind of rope it and pull it in?

Yeah, as you remember in the January time frame, we were looking at stuff with the 6 to 9 month lead time. What we said in January has begun to be borne out in some of, what I will call, the increased level of bid activity; and, if anything, the tone amongst our distributors and sales people is at least as good, if not a little bit better than what we described in January. It's getting closer in time and I think that's why Keith's comments about margins anticipate the rising proportion of projects and systems business. Because that's what we can see drawing closer in the way that we're describing.

Yeah, I think that's a fair characterization that we see it closer in time now. Once again, it is about plant scale-type projects really around productivity and cost reduction, particularly in the U.S. We do not see significant capacity expansion, investments in the U.S., but it is clear that capital is starting to be spent and quoted in a much broader sense than we had seen in the January and earlier time frame. So I guess people are starting to stick their heads out of the fox hole, and we're beginning to see real activity, real interest in projects and I guess part of it is -- they have to do it. They have to do it. They have heard-- they have turned the spicket off for such an extended period of time that they're getting to the point where there has to be, what I would call, just minimal reinvestment in their existing operating plants and the next step is to get -- get these, you know, stick in the mud CFOs to sign off on the final documents. But we're optimistic that it's a positive outlook.

Okay. And related is GMS, you didn't mention GMS in the prepared remarks. How did that do in the quarter?

Good question, Mark. GMS in the quarter was -- was basically flat. And if you remember we talked last time about the makeup of that business being about 50/50 with legacy-type of break it, fix it. That is definitely in a decline and that we're transitioning that business in a much more contemporary business model. In particular, we saw good growth--double digit growth in process, and high single digit growth in software in the -- in the quarter. So we're pleased with the areas that we're focused on for investment. They are generating traction. And we just have to overcome the legacy business that continues to -- continues to be on a decline.

But we're very -- very happy with GMS, the growth elements remain on track and the outlook is positive for this business; and, quite frankly, to the point that James made earlier, know, GMS is is one of the areas where we are winning some good-sized projects that will come to fruition in the latter part of this year and early '05. So that's part of the reason for the positive outlook in the project side of our business, because of the capabilities and the wins that GMS is having.

Okay. Keith, James, thanks, and Tom we're gonna miss ya.

Thanks, Mark.

We'll go next to Rick Eastman, Robert W Baird.

Hi. Just a couple of questions. I was a little bit curious about Europe. In local currency we saw a decline there. Any visibility or expectation that that starts to improve later the second half of the year?

Rick, this is Keith. The answer is yes we -- until March, Europe was, I would say, struggling as I commented and part of that, I believe, was just that they went into the downturn a little later than the U.S. did, and they're going to come out a little later; but also they had the strong currency and that's starting to mitigate a little going forward. So, you know, it dropped almost 10%, I think 8% in the last 30 days. We're beginning to hear more positive statements out of Europe. That could be a good sign, plus the increased performance at the end of the quarter. We're hopeful that Europe will turn around and be a positive in the second half of the year, but right now I would say it's a little early to call that one, but it -- but it's an area that I believe we have -- we have opportunities and we continue to focus there on the exporting OEMs, who I think took the -- most of the brunt of the rapid, quick acceleration in the exchange rate. And we're beginning to see a little -- a little signs that they've -- they've managed to weather some of that, and -- and we're hopeful that early signs of recovery in Europe will bore out in the second half of the year.

And then just a follow-up, in terms of the auto segment of the business, that was down, I think -- I seem to recall the comparison was -- was strong, but I'm curious what's the visibility there on the auto segment of the business?

We believe that the auto segment will pick up in the second half of the year, in particular we believe right now that there's some good, I will say domestic car programs that appear to be on track. As we've said before, these things tend to turn on and off maybe faster than any other industry. But right now, we believe there's some good activity coming and, in particular, there's a lot of investment that continues to go into China in the automotive segment, and we're working on a number of projects there with, not just U.S., but the global automation companies.

Okay. Very good. Thank you.

We'll go next to Jeff Sprague of Smith Barney.

Hi, this is Ron Admerski. Jeff's traveling today. Rick was just asking about the automotive market being weak and you also talked, as far as vertical end markets are concerned, that the paper market was flat; and I was just wondering if you could give us a little bit more color on some of your other vertical end markets.

Sure. Are you talking about in the quarter or looking forward?

Both.

Both. Okay. In the quarter, you know, we continue to see strength in the food and beverage and brewing and pharmaceutical life science markets. Oil and gas continues to be one that -- that is is good for us. You've noticed that we've announced a couple of wins that are really in that segment of the business and they tend to be large program wins there. And then in addition, where we're starting to see some strength that will carry over into the -- into the future is really in the mining, aggregate and more of the natural resources types of industries where it really is a strength for Power Systems. That's their core market. It's a great market because, actually, their product tends to get consumed as production is ramped up. It does have a wearout factor.

So we're seeing strength in that market and we expect that to continue going forward, based upon -- based upon the strong global raw material price increases that have occurred in the last three months and certainly we see that, at least, going forward for the next quarter. And if we just look in general, on our outlook, one of the reasons we are positive with the 4 to 6% outlook is because of the strength of the -- and I should say the breadth of the increase in almost all end markets going forward. The only one that we think will be a little stagnant is-- is the oil and gas, but all the rest of them we have a positive outlook on. And while we may not like the -- we may not like the rate of acceleration and the magnitude of acceleration, the breadth is both important and impressive to us, as something that has changed over the last -- over the last quarter and another reason why we feel good about the 4 to 6% outlook.

Okay. Thanks for the color. Also as far as these pay-as-you-go projects are concerned, I know it's about $3.7 million in quarter two for Power Systems. I was wondering if you could give us an idea of the run rate for these projects going forward.

I can't give you a run rate in the sense that they are not what I would call a forecast item. The businesses are in the habit of looking at areas where we can drive some efficiency, make some consolidations and so forth and I would say we'll be opportunistic in identifying and executing those.

Okay. Thanks. That's it.

Thank you.

Our next question comes from John Inch of Merrill Lynch.

Thank you. Good morning. Hey, James, last quarter you gave us the daily results on a sequential and year-over-year basis. Could you do that again, specifically for Control Systems. If you look at the daily run rate, what happened in the second quarter versus first and then year-over-year?

Yeah the daily run rate was up 1, 1.5 in the -- sequentially and I want to say -- I will get the exact number for you here, but I think it's 5%.

Is anyone there?

Yes, we're still here. We're trying to get the exact number.

Okay. Thank you.

We don't have it --

And this is Control Systems, James.?

Yes.

In the U.S. or globally? Can you give us the U.S..

Total.

U.S. would be a little higher because Europe -- Europe is down.

Okay, and then the other question while you're looking that up, is maybe you could provide a little bit color in terms of how the months progressed January through March.

January through March were actually very consistent. The pace was steady throughout the quarter in terms of year-over-year growth as we went and there was no -- if you look at some comparisons they were a little tougher as you got to the end of the year ago March and, as I say, pretty consistent and steady across the quarter.

So, no sort of end of quarter burst in terms of March activity in, in terms of volumes.

Not that I could discern, no.

Okay. Well, they were looking up a number.

Yeah, we'll keep looking if we want to go forward, we'll answer that when we find the specifics so we're not holding everyone up.

Okay. Well, thanks very much.

Thanks, John.

Our next question is from Scott Davis of Morgan Stanley.

Good morning. Thank you, operator. I just wanted to touch a little bit on Logix and talk a little bit about how that's progressing. The-- historically, or at least the last few quarters, you've talked about how Logix is mostly being sold into your installed base and yet in this release you identified a couple of new wins. Can you talk a little bit about whether you're starting to now reach beyond your installed base and the traction you are getting there?

Well there's no question, we're reaching beyond the installed base with Logix. That's the -- that's the whole heart of the -- of the strategy, if you will, and we see that we continue to expand the capabilities into motion, and now elevating it into process; and so the ability to do the multiple control disciplines and you can see the breadth of the industries and applications that we're now serving, demonstrates that we're able to expand the market, but you're still correct that part of it is the cannibalization of our installed base, but really with the uptick in the MRO business, we now see a slackening of the decline of our traditional business. And that combined with the acceleration of Logix, which grew at a greater rate this quarter than last quarter, indicates that we are expanding our served market, expanding our applications, and demonstrating quite candidly the capabilities of that architecture.

And with these new project wins that -- that you got this quarter, did they tend to be with customers that were existing customers or brand new customers? You referenced a paper mill, for example, is that a mill that you had sold into before?

Right. We had sold into that--we had sold into that mill before, but this was specifically an upgrade on a competitive -- on a competitive line, if you will. So it was a -- it was a competitive win, but we are installed in that plant in other applications. But in general, we do achieve a balance of new applications, new customers, in addition to helping our customers transition their installed base to the new architecture. And, you know, it -- it ebbs and flows depending on which one is greater in any quarter, but the goal is to broaden our customer base, and be able to do more for our existing customers.

Okay. Fair enough. And just a quick follow-on for you, James. The corporate expenses in the quarter $22.5 million, clearly it seems like this is a fairly high quality quarter, since you had some -- what I would call one-time expenses there. How should we think about that walking into the back half of the year. Are there more of these type of one-time expenses that will -- that will hit that corporate expense line or is that likely to go back down where it was before?

Well, thanks for the question. The -- what I would call the steady-state run rate of that general corporate net line is about $16 million per quarter. And to answer your question going into the back half of the year, that's about the level that I would expect to see in the third and the fourth quarter.

Okay. Great. Thanks, guys.

Thank you.

Just a reminder, that is star one for questions. Our next question comes from John Baliotti of Fulcrum Global Partners.

Good morning. Keith, I've got a question about--you were talking about, obviously, planning for more project versus repair, replacement type of business which is something that is similar to what you said earlier in the year. Is there any evidence that the utilization--the capacity utilization of your customers is starting to pick up more than before, or what -- what is signaling some of that?

Yes. I would say capacity is -- is going up, but not to the levels where -- capacity utilization is going up, but it is not at the levels yet that you would see the traditional capacity expansion investments occurring; and that's why I made the comment that we're -- particularly in the U.S., we're not seeing project spending around capacity utilization. What we are seeing is spending along, how do I get more productive? How do I take costs out of my processes? And one of the dilemmas that we're in now is is that, inherently in upgrading some of their lines, they get more capacity. Because the new technology, higher speeds, better capabilities, more functionality, tends to create, I will call the uncovering of hidden capacity. So we -- we are indirectly helping customers increase their capacity when we do these retrofits and keeping them from having to spend on additional capacity going forward in the traditional ways.

And I think in general, that's the real difference between this recovery and the historical recoveries where we did see a faster rate. We saw capacity utilizations going up faster than they currently are. I think there's a number of factors there, but one of them is the technology allows customers to get -- to get that hidden capacity out of their plans; and what we do in our control and information strategies now are create more productivity and more cost reduction for our customers. So we aren't seeing, you know what you would expect when you get to the high 70s very low -- you know 78, 79, 80% capacity utilization, that's when you see large projects for capacity expansion. We are not to that level yet, but we are seeing accelerated activities with respect to the need to invest on their current existing lines because they've just been under invested in over the last three to four years.

So you think the purchasing behavior that they've gone through is slowing that acceleration of utilization picking up?

Yes. Yes I do.

Is there any particular end market that stands out or are they all kind of doing it together?

Boy, you know the ones that are probably jumping the most tend to be the -- I will call it the natural resource markets in particular we see the biggest jumps in mining, areas that really are driven by -- that are driven by the strong uptick in material prices that are now making these things very -- that is making almost any mine efficient to start extraction from. So we see some acceleration there. Semiconductor has picked up the last year, semiconductor was very strong in flat screen-type of technology, TFT panels; but now the core--the core IC market is starting to pick up, and then we're also seeing some pickup in the -- in the water--wastewater areas with some of the municipal projects and -- and commercial market needs starting to be driven a little stronger and we're optimistic that we're going to start seeing some pickup in the paper industry.

I was just in the south two weeks ago, and we're starting to see the start of interest, at least, in an industry where it's kind of been very dormant for probably three to four years. So in general, those are the ones. We continue to see the slow but steady growth in food, beverage, pharmaceutical, life sciences; but nothing atypical from what we had seen in the previous year there. So it tends to be more natural resource driven, and commodity price driven at the current stage in the cycle.

Okay. Thanks.

Our next question comes from Mark Roberts, Wachovia Capital Markets.

Thank you. Good morning. Most of my questions have been answered, but I was still left a little unclear on the tax rate. Going forward, what should we assume as a -- an effective tax rate for the year and then going into next year?

You should use 30% both for the second half of the year and for next year. If we change our tax rate guidance, going forward -- it will probably be part of a presentation we would make about '05, and there's no reason to use other than 30% for the balance of '04.

Great. Thank you very much.

Thank you.

Our next question comes from Blair Tremblay of American Research.

Good morning, gentlemen.

Good morning.

Just some minutia, if you don't mind. Revenue in Latin American ex-currency up 20%. I know you called that out briefly. Any additional color there? Is that a small number of large pieces of business? Where is that going within that geography? What industries?

A good question. A couple of industries. In particular, we continue to get the growth, as I mentioned, in the mining sector; Chile, Peru, some good -- some good business. And then also a little bit in the -- in the life science, food and beverage areas in the entities of Colombia, Brazil, and a little bit in Argentina; but that's kind of makeup of the markets, as well as a little bit in the -- in the chemical--petrochemical market of Venezuela. You know they've struggled there for an extended period of time, but they have increased -- they have increased production from where they were over a year ago, and that's requiring a little more spending on their part. Still not back to where it was pre the slowdown, though.

Okay. Secondly, I think in the past you guys have called out margins within Power Systems by motors and mechanical. Am I correct in that?

Directionally.

Yeah, I would say what we said is is the mechanical business is -- I will call it double digit and motors is, you know, I will call it low single digits and the average is the one that you see in the reporting segment. But I don't think we've been more specific than what I just did.

Okay. All right. That's fine. FirstPoint Contact, the two large contracts in there, what portion of the increments of revenues and NOI would attribute to those couple of contracts?

You're asking of the two big contracts how much did they represent of the increase in revenue and income?

Correct.

And the answer is is most.

Okay.

Most.

All right. And any expectation that we should have that you're going to change the pace of your repurchase activity going forward.

You know as I said in my earlier remarks we try to offset, keep the number of shares outstanding constant and I would just leave it at that for now.

Very good. Thank you so much.

Thank you.

And our final question comes from Mark Koznarek of Midwest Research.

Yes, thank you. I just had a follow-up on pricing because of several other folks, you know, directionally in your electrical equipment space have announced surcharges and I know it's been a while since you had your formal price increase and I wonder if there is anything announced in the foreseeable future or whether there's an expectation that we ought to look for something in the second half, in terms of pricing.

Good question, Mark. You know, we do -- we did announce the price increase in Control Systems last fall. Power Systems had a price increase in the January time frame. We have announced another price increase in Power Systems, in particular-- that will be effective in mid-May, in particular to deal with the issue you just talked about. The rising costs of steel and copper and, you know, I don't think we're necessarily calling it a surcharge, but it is to cover the material price increases. And right now, that probably all you should expect from us for the remainder of the year. But we are focused on offsetting any -- any cost increases with the productivity improvements and, as I mentioned, the specific one in Power will be effective in May; and the other good news is we believe that the majority of the earlier price increases are sticking. So there is some pricing of Power in the marketplace today.

So nothing formally announced or currently contemplated for Controls?

That's correct. Yes.

Okay. And then the magnitude of the Power System move in May?

Enough to more or less offset the inflation in raw material prices that they are seeing.

Okay. So a lower to mid single digit something like that.

Probably about right.

Yes.

Okay. Great. Thank you.

You're welcome.

That concludes the question-and-answer phase of our call. At this time I would like to turn the call over to Mr. Mullany for any closing comments.

Before we turn it over to Mr. Mullany. It's James Gelly here. I found the answer on sequential and year-over-year sales per day and they are both in the neighborhood of half a point to a point, that is a currency adjusted revenue per day, both first and second, and second versus a year ago. I apologize for not being more crisp. Back over to Tom.

That concludes the call today and I want to thank everybody for joining us on the call. If you have any questions certainly give us a call. Thank you.

Thank you. And that concludes today's call. At this time, you may disconnect.