洛克威爾自動化 (ROK) 2004 Q3 法說會逐字稿

Welcome to Rockwell Automation's quarterly conference call. I'd like 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 Tim Oliver, Rockwell Automation's Vice President and Treasurer. Mr. Oliver, please go ahead.

Good morning and thank you all for joining us for Rockwell Automation's third-quarter earnings release conference call. We're sorry to get started a little bit late; we were waiting for some folks to dial in.

Our results were released this morning and have been posted to our website at www.RockwellAutomation.com. This call is being webcast. A replay of the audio portion of this call and the charts that will be referenced during the call will be available on our website for the next 30 days.

With me today are Keith Nosbusch, our President and CEO; James Gelly, our CFO. Our agenda for the day includes summary remarks by Keith, followed by a review of both the quarter and our outlook by James. We will leave plenty of time at the end of the call to take your questions. The call is scheduled to go about an hour.

Please note that some of our comments today will include statements relating to the expected future results of the Company, and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those in these forecasts or projections, due to a range of risks and uncertainties including those, but not limited to those, noted in our earnings release and those detailed in our SEC filings. With that I will turn the call over to Keith.

Thanks, Tim. Good morning, everyone, and thanks for participating in today's call. Let me start by saying that our third-quarter results were very excellent. Year-over-year revenue growth was 13 percent, and it is 11 percent excluding currency, with double-digit growth at both Control Systems and Power Systems. Clearly, we are on track to exceed our projected 2004 goal of 4 to 6 percent, which we now believe will be in the 6 to 7 percent range excluding currency.

For several quarters now, we have been talking about the positive sales trend emerging in our end markets, about gradually accelerated revenue growth. This quarter was continued confirmation of that trend. While some of this quarter's strong growth was due to easier comparisons, the second half of last year was a little weaker than the first half. However, we did see solid sequential growth in the quarter. It was up 4 percent versus last quarter, considerably better than the 1 percent growth of the past few quarters.

Adoption of our Logix integrated architecture accelerated in the quarter and is now running at $350 million annualized rate, which is about 10 percent of Control Systems sales. Demand for MRO or flow goods continues to be strong, with broad-based sales growth in terms of our end markets.

Pent-up demand appears to be the story of the quarter. We attribute the acceleration in sales to customers catching up after several years of severe underinvestment in the installed base. And candidly, it's a little hard to say exactly how long this pent-up demand will go on until it is satisfied. Looking ahead, we continue to see indications from our customers that their capacity expansion project plans are getting more attention. But quite frankly, we're still waiting for this type of productivity-driven investment to come through, especially in the U.S. and Western Europe.

With industrial production investment in industrial equipment and capacity utilization all showing signs of steady improvement, we're optimistic about the upward trend in our served markets, that it will have legs. Some of what you are seeing is a result of sustained investments we have made in our product portfolio and also in the continued development of services and solution delivery capability, all of which strengthen our competitive position and allow us to take advantage of stronger demand in our end markets.

Looking at conversion, we saw higher operating margins in nearly all of our businesses, reflecting our focus on operational efficiencies. We continue to realize strong operating leverage, through the execution of our Lean Enterprise initiatives and implementation of cost-reduction actions over the past several years.

I would be remiss if I did not mention our Power Systems team, which has taken some tough actions to improve their cost position and delivered a strong combination of growth and productivity. In fact, Dodge could be one of the best industrial businesses around.

As James will clearly describe shortly, we have raised our guidance for EPS, revenue growth, and free cash flow for the year. All in all, this quarter's results were very gratifying. They represent the investment and hard work of many people going back a number of years. We believe we have set the table to take advantage of the improving environment for automation for some time to come, and I believe our momentum is sustainable.

I will conclude with the three key reasons for my excitement about the third quarter and my optimism for the future. First, this quarter was a broad-based strength. We received 3 points of margin expansion in all of our businesses, not just Control Systems. The breadth of the revenue growth from a geography and industry standpoint was broadbased. Second, strong cash flow performance continues, and the powerful cash generation engine is continuing to function.

Third, while it is way too soon to declare victory, we are starting to demonstrate the execution of our growth, strategy, and the traction of our growth initiatives. We are changing the customer perception of Rockwell Automation, and we are expanding our served market. With that, let me turn it over to James.

Thanks, Keith. I'm going to turn out to the first slide on the website after the Safe Harbor slides. The first one is titled third-quarter results, comparing this year's third quarter with the prior year. Revenues in the quarter were $1,163.5 million, up 13 percent over last year's third order. As Keith said, excluding the effect of currency, sales were up 11 percent over last year. Third-quarter segment operating earnings were 168.5 million or 14.5 percent of sales. This compares with the 118.8 million in the year-ago period and its 11.5 percent margin.

Looking down at the major variances, the general corporate net this quarter was 20.4 million, and this compares with 16.5 million last year. The increase is due primarily to higher estimated cost for environmental remediation at two legacy sites.

You'll notice that included in this quarter's results is $34.5 million in onetime tax benefits, in part related to former businesses and primarily related to non U.S. matters. For the record, in the third quarter of last year, we recognized a net tax benefit of 69.4 million related to the settlement of a research and experimentation credit refund claim.

As you can see, the term onetime doesn't seem to apply here. Due to the multiple spinoff transactions of the past, Rockwell is still basically a $12 billion company from a tax standpoint. Our tax staff continues to do a great job of managing these legacy items. You will see if you make the adjustments that excluding tax benefits the effective rate for both this year and the prior year third quarter was 30 percent. Net income excluding tax benefits was 91.9 million or 48 cents a share, up about 55 percent from last year. Last year's third-quarter income excluding tax benefits was 58.7 million or 31 cents per share.

Let me go now to the next chart. The next chart looks at the results for Rockwell as a whole, giving 5 quarters of history. You can see some of the year-over-year revenue and margin detail I just discussed. The chart gives you some sequential information. Sales were up nearly 5 percent versus the second quarter. As Keith said, MRO or flow goods continues to be a source of strength due to pent-up demand in the installed base after years of underinvestment. Segment operating margins were up 9/10 of a point sequentially. Looking at conversion, we saw strong operating leverage driven by higher volume, favorable mix, and lean initiatives and cost reduction actions over the last several years.

Let me turn now to the next chart, which relates to Control Systems where revenue was 933.3 million, up 13 percent over last year's third quarter. Excluding currency translation sales were up 11 percent. As Keith mentioned this was the result of an easy comparison; the second half of last year weakened versus the first half; but also the result of 4 percent sequential growth. We saw very strong growth in sales of our integrated architecture, which were up 44 percent, and strength in our industrial components business.

Control Systems third-quarter operating earnings were 143.8 million, up 40 percent from last year, driven by higher volume, productivity improvements, and favorable product mix. Return on sales was 15.4 in the quarter compared to 12.5 in last year's third quarter, nearly 3 points of margin expansion.

The next chart covers Power Systems, where revenues were 201.7 million, up 12 percent from last year. Sales were up 10 percent sequentially. Growth drivers included the mining, aggregates, baggage handling, and other segments; and these continue to have the appearance of good momentum. Dodge mechanical sales were up 17 percent. Reliance electrical up 6 year-over-year. Margins expanded nicely by 3 percentage points to 11.6. The profitability improvement was driven by volume, higher volume, cost actions, and price increases; and these offset higher raw materials cost and additional restructuring costs in the quarter.

Power Systems had operating earnings of $23.3 million in the quarter compared to 15.6 million last year. Earnings this quarter included $2.5 million of continued pay-as-you-go restructuring costs.

Let me spend just a minute on FirstPoint Contact, which is the next slide, where revenues were $28.5 million, flat from the year-ago quarter. Operating earnings were $1.4 million, up from last year's $0.5 million result.

The next chart gives you some detail on the regional breakdown of sales. As you can see, we had strong 13 percent growth in the U.S. Canadian sales were down about 2 percent in local currency terms, primarily due to the lingering effects of a stronger Canadian dollar. Latin America is displaying some very strong momentum with 26 percent local currency growth nearly across the region.

Europe is now showing some improvement in momentum with sales up 5 percent in local currency. Our backlog has grown during the first 9 months of this year, and this is a welcome change in direction for the European market compared to earlier this year.

Turning to Asia-Pacific, the story is still one of strong growth with sales up 18 percent. India, China, Taiwan, and Southeast Asia were all up strongly. In China, however, we do see some signs of the government's efforts to decelerate the economy; and that means project delays in metals, aggregates, and mass transit sectors, and at least suggests the possibility of slower growth ahead.

The next chart is a cash flow walk. You will see that free cash flow for the quarter was $71.6 million, compared to 47.8 million a year ago. Third-quarter cash flow this year included a voluntary $75 million pension contribution; and you may recall that we contributed 50 million in the third quarter last year.

Free cash flow for the first 9 months was 314.7 million, and that is net of the 125 million of voluntary pension contributions we have made this year. This compares with free cash flow of 206.8 million for the first 9 months of last year, which included 50 million of pension contributions. We continue to monitor the funded status of our pension plans, and that status as of course subject to multiple market-driven variables.

The strong cash flow performance we're been delivering is the result of lower cash taxes, and this is due to all the pension contributions we have made as well as the favorable impact from option exercises. In addition, many of our businesses continue to exert strong capital spending discipline, and I would attribute this in part to the transition of the company to intellectual assets and away from what I will call traditional bricks and mortar.

Looking at cash generating ability, our free cash flow year-to-date has been 118 percent of reported net income. While our cash taxes will not always be so favorable, we do believe we can achieve cash conversion of 100 percent of net income or better over the planning horizon.

Turn to the balance sheet, cash balances were 329.7 million as of June 30. Total debt was 752.6. That leaves net debt of 422.9. We bought back some stock in the quarter. We repurchased 2.2 million shares at a gross cost of $74.1 million, and during the first 9 months we repurchased 5.3 million shares at a cost of $174 million.

Let me go to the last chart, which is our updated 2004 guidance. Keith mentioned we are taking up guidance for the year for EPS, revenue growth, and cash flow, based upon our third-quarter performance. Based upon our read of conditions in our end markets we are encouraged by signs that the uptrend in sales of the past 3 quarters will be sustained. We have been seeing continued sequential growth with the third quarter the best yet. We are optimistic that the momentum we are seeing may continue, although there is some seasonal slowdown in Europe in the summer months, the quarter ahead, and we suspect there will be some deceleration in Asia in the near term.

As Keith said, revenue growth is expected to be about 6 to 7 percent this year, excluding currency, and that is above our original guidance of 4 to 6 percent. Since growth in the quarter was led by MRO or flow goods, in addition to that we are still seeing solid levels of quotation activity nearly across the board.

We believe the much awaited upturn in customers' capital projects is still ahead. So we think we have good visibility to improving conditions almost literally across our served markets. If you take the sales and mix expectations together, we are comfortable raising our full-year guidance to $1.65 per share and that excludes the 20 cents of tax benefit we have had year-to-date. That would mean about 48 cents in the fourth quarter. In terms of free cash flow, we are raising the full-year guidance to about $400 million this year. The fourth quarter is somewhat heavier capital spending than any of the other three.

So all in all we're feeling optimistic about the continued upward trend that we have been on, which is a combination of better end market demand, a stronger competitive position at Rockwell, and the sustained investments we have made in product portfolio and solution delivery capabilities. We remain confident that the combination of solid organic growth and sustained productivity initiatives can produce a highly satisfying outcome. This concludes my remarks, and if the operator would commence the question-and-answer session I would be grateful.

(OPERATOR INSTRUCTIONS) Richard Eastman, Robert W. Baird.

A couple questions. Very nice quarter. Regarding the Power Systems business, could you give us a flavor for margins at Dodge and Reliance? And basically was the majority of the positive surprise out of Dodge, or did Reliance also contribute nicely?

Actually there was expansion in margins at both. If I can say so, both businesses -- they have different characteristics, but the electrical business, if I can say, sequentially nearly doubled its margins from admittedly a low base. And the mechanical business, which as you know is comfortably in the double-digits, went from what I will call the low teens to the mid teens, maybe a little better. But it was both.

Also, in terms of GMS, overall, how much growth did that show in the quarter?

Overall, GMS growth was up a little over 5 percent, but I think there is a number of stories within there that are important. In particular, our process business was up 16 percent in the quarter, and software sales were up almost 8 percent. Almost 10 percent I should say.

And the reality is what dragged the overall performance down was the continued slow development of the project business, which is a large portion of the GMS activities. So pockets of excellence and really based around some of the success in the growth initiatives that I mentioned in my opening comments.

When the project business starts to contribute in a larger way, hopefully over the next 12 months, we should see really the service side of that business uptick as well?

Yes, that is a correct characterization.

Lastly, and I will let someone else get on. In the guidance, James, you had mentioned that the guidance accounts for some seasonal slowness in Europe, and then also your expectation for a deceleration in Asia short-term? That is in the guidance?

It is, yes.

Very good. Thank you.

Bob Cornell, Lehman Brothers.

A strong quarter. Going to a couple of comments, one you talked, James, about the solid level of quotation activity. I would like to get more insight as to what you see; what lead-times you're talking about; what size of projects?

And behind that, what is going on with the whole selling effort? The feet on the street that are Rockwell specific, as well as the ability the Company has to work with its distributors, and the selling effort for Logix? Maybe just expand on those two points? The quotation effort and then the selling effort more broadly?

Bob, I will start out and then I'm sure Keith will jump in. First of all, in terms of quotation, the activity that we have seen in what I will call the previous quarter was good almost across the board. As you know in the couple of quarters past, automotive and maybe pulp and paper were a little on the weaker end of the spectrum. Actually, looking forward auto, both U.S. and worldwide has, improved the level of activity, the number of programs that are out there. As you know, those type of programs can have some very long lead-times in terms of from quotation to actually selling.

The shorter cycle businesses -- and again we were seeing strength almost across the board -- might include food and beverage, life sciences, metals, mining, semiconductor, water, wastewater, oil and gas. So in terms of lead time we continue to say these are, let's say, on the average in the 6 to 9 months time frame.

One thing that we were looking at is they're still as much in evidence as it has been in past quarters. So we're hopeful that we will se those Q4, Q1, Q2, something like that. What was the second question Bob?

Actually I am going to change the second question. You mentioned a number of the contract wins in the quarter, and I wonder how many of the contract wins you're getting have multiple control disciplines of the sort that Logix is trying to go? With discrete, motion process; are any of the project wins you have gotten multiple control disciplines?

That is one of the reasons why I feel optimistic about the future and the fact that our initiatives are getting some traction. Because in fact we are seeing that both at the OEM level and at the end-user level, that the ability to integrate both motion and process continues to gain traction and continues to be a differentiator in the marketplace. So, that is the encouragement we have looking forward.

I would say what we are beginning to see, but it is still very early, is the fact that the information integration as part of that architecture is starting to take notice; it's starting to take hold. We are seeing it in our ability to quote projects, particularly in the consumer products industry, where those projects are now larger projects. Because it is not just about integration of control, but it's about the integration of control and information. So that's another dimension.

Then finally, we're starting to attract some new customers, and the message of the integrated control and information architecture is getting us in front of new customers. Which is why I said we are beginning to demonstrate traction around the expansion of our markets. And it's really in those dimensions that I would reference the expansion, Bob, to your question.

Sounds good, Keith, thanks. And James too. Bye.

Tony Boase, A.G. Edwards.

In looking at the power business, specifically Dodge, I am wondering whether there was much of a prebuy effect? And how much the impact of raw materials there was on that business?

I would say the answer is really no prebuy effect. And the raw materials, basically we are seeing raw materials increases. But we have had a price increase in particular during the quarter that in reality is close to offsetting the commodity price increases and probably will as the year progresses become neutral.

So it is really driven, as James mentioned -- this is a productivity story. A productivity story and a top-line revenue growth story in Power Systems. As I mentioned, that team has done just a great job over the last couple of quarters, and I think you are seeing the evidence of that this quarter.

Kind of a housekeeping question, first, I guess when do you decide on the pension parameters? If you looked at those parameters today, what would that mean as far as pension expense in 2005?

We look at them -- our fund year ended June 30, so we would look at discount rate and the other things right about now. The short answer is, discount rates are up a little bit versus the assumed rate for this fiscal year. Just as a benchmark, I guess every 25 basis points of rate drives about 6 or $7 million worth of annual pension expense. So for example if rates were to go up by quarter of a point, which is probably the outlook, you would see 6 or $7 million worth of reduced pension expenses fiscal year '05. I think that is what you are after.

Great. Thank you.

Scott Davis, Morgan Stanley.

I just wanted to follow-up just on that question, the housekeeping, where does is that leave your funding status, the 75 million contribution this quarter?

If you recall at the beginning of this fiscal year we had about a $670 million underfunded plan in the aggregate of all of our plans. If you look at the way the market's returned, discount rate contribution, I'm going to say order of magnitude that has taken that down by about around $200 million of underfundedness.

So you can continue to make contributions through the rest of the year then?

Let me say one of the things we have talked about is making contributions about equal to our annual expense, just as an example. By, at this point we're having done 175 this year, we're still studying the appropriate strategy from here. But order of magnitude, I would say about equal to the 60 or $70 million of annual expense would be a good rule of thumb for us in terms of contribution.

Given the strong free cash flow that you're clearly generating and your strong balance sheet at this point, is there any change your priorities for cash reinvestment?

No, let me defer to Keith, but I would say we have, as you know, in February nearly doubled the rate of share repurchased. The dividend payout is still probably in the 40 plus percent range. So as we grow earnings we will grow into what I will call historical payout ratio, which has been around 30, 35. But I will deferred to Keith in terms of the big picture of acquisitions and so forth.

I believe the priorities that we have had continue to be the same, which is first and foremost maintaining the appropriate dividend payout. Quite frankly, second would be acquisitions. We have a very disciplined approach that we're taking to acquisitions. We're taking a hard look at opportunities.

But the reality is we are an organic growth company, and we're trying to build secular growth. So we're not just looking for any old acquisition to expand our mass. So, while we are doing that, we're also making sure that we are utilizing the funds appropriately to do an effective share buyback program, which at a minimum will make sure we offset dilution.

But our first priority of the use of cash would be expansion of growth of our growth initiatives, looking for particular acquisitions that make sense, that it into the mosaic and the broader strategy that we are doing. So, I think we have a consistent list of priorities, and we make the call based upon what looks near-term. With the stock buyback that is something we can turn off at any time if we need to augment the firepower that we have to make an appropriate acquisition.

Makes sense. Keith, my last question relates to Logix. We saw real acceleration in the quarter, up 44 percent. I think last quarter it was just up maybe 20 percent or so; and then prior couple quarters the same. Has there been a change here? Is this a timing issue and it is likely to not persist in 4Q? Or has this been a change here and we're seeing a whole new set of demand coming from maybe new projects as opposed to just the replacement cycle, which seems to be where the last several quarters you were filling in?

Well, it is a bit of all of what you have said. Really, what we believe is there is a consistent level that we think this is at, and a quarter may go up or down based upon really more of the specific projects and/or geographies that are more positive than others, and industries.

Our goal, and what we believe is still the opportunity here is, is that we're going to have long-term growth of 25 to 30 percent. We were a little lower than that the first part of the year. We believe we will be a little higher than that the second half of the year. And the average we still feel confident is in that range, and we think that growth will be sustainable for the near term.

Sounds great. Thanks. Congrats on the quarter, guys.

Nicole Parent, Credit Suisse First Boston.

I just wanted to follow-up on the price increases. You talked about, Keith, that you would probably get neutral to offsetting the higher raw material cost. At what cycle do you guys actually start to think about raising prices, just based on better kind of CapEx demand from your customers?

My comment on the commodities, to be real clear there, that was with respect to the Power Systems business, where we did have a commodity-driven price increase. Traditionally, we look at price increases in the fall time frame and the early part of the calendar year. Fall in Control Systems; early calendar year in Power Systems. That is what I would say is the more traditional time.

Price increase in our company and our business is very heterogeneous, if you will. We have price decreases, we have no price increases, and we have some substantial price increases based upon the product portfolio, the life of the product, where it is in its evolution. But what we did notice this past year is from the previous increases that we probably realized a half a point, maybe a little more, of price -- that we finally got realization on the increase across the portfolio.

So flat to plus a half a percent, and that is the first time that we have been able to realize any positive part of a price increase in the last couple of years across the portfolio. So, we think going forward that it will probably be somewhat consistent in there, but it really is driven more by the evolution of technology and product mix than specifically capital spending.

Great. When you look at the nice margin expansion you had at Control Systems, could you I guess attribute the margin expansion by kind of mix versus cost reduction versus productivity?

Yes, on Control Systems, it is almost exactly what I will call 50 percent volume, better absorption, fixed cost, etc.; and 50 percent what I will call just productivity -- doing it across the organization.

In Power Systems, it is kind of a different mix. I want to say it is 70/30. Call it 70/30 volume. 70/30 cost reduction and 30 percent volume.

Okay. Lastly, could you just give us a little bit of color on the environmental remediation charge that you booked in the quarter? How should we think about that? It's for the legacy businesses. Are there any outstanding issues that we need to be worried about with the continuing ops? And should we expect more of those now as we move into 2005?

Good question. In effect, it is like the tax story I told. There are environmental issues that date back for a very long period of time. I would say the outflows are not a material amount this year, last year. The last couple of years you were talking about in the $5 million range for outflows. The reserves, which we show once a year in our 10-K, shows up aggregate of about $30 million of environmental liability.

But you have things that come up. We don't expect any substantial changes from what we have seen; but you're constantly doing remediation studies. But I thought I would give you that as in order of magnitude.

Great. What were the specific issues in the quarter?

I think you have 2 legacy sites. We did some additional studies that indicated that the estimate for future remediation costs -- and this can go out I will call it several to many years -- was raised. In terms of what plant it was and so forth, can get into details, but it's 2 out of 2 dozen at -- you have under the surface here that we're constantly monitoring.

Super. Thank you.

Mark Koznarek, Midwest Research.

Just to follow-up on this price issue. Last year, you sort of moved, pulled forward your price increase across a lot of the Control Systems products to late summer, if I remember correctly. So therefore we are coming against an annualization or an anniversary of that. Are you expecting to increase price again across the board in late summer? And if so, have you announced it? And roughly what magnitude?

Mark, you have a good memory from last year. That is exactly what happened. We are in the middle of it right now, and it will probably be a little later this time in year. We have not locked in on the magnitude of it at this point in time. But it does vary as I said. That is what I want to keep remembering.

So sometimes you will hear a high number; sometimes you will hear a reduction; and sometimes you will hear no increase. So it is hard for us to really come to say here is the average; that is what takes us time to work through all the dimensions. But we are looking at it and it will happen this fall in the Control Systems business.

Okay. Something we have not heard about in a while, and you know I do not want to pick on a little detail, but I think it is significant. Or potentially. I thought was going to be significant at the time, is the power automation relationship that you got involved in a couple years ago. Because it seemed like this was a vehicle for you to try and recapture the healthy position you use to have in the machining area in automotive that I don't think you have got much traction in recently. That is sort of a big market opportunity. I'm wondering whether there has been any progress in that and any traction in addressing that market?

Good comment again. I would say a couple of things. One, we have made progress in the powertrain side of the automotive segment. In particular in some of the applications with the Logix architecture in particular some of the assembly side of engine and transmission, and also in testant (ph) . These were areas that we had not participated in before. To your point, we haven't talked much about them.

With respect to the specific question on power automation, we are continuing to integrate that and other capabilities into our integrated architecture. And we are quoting. We are involved with multiple automotive customers and OEMs with a powertrain solution. These tend to be projects that are a little more longer term. We have just been in the game and able to have a credible capability and portfolio.

We have not seen a large powertrain win yet, but we are quoting, we are bidding, and we're optimistic on being able to deliver over the next 12 to 24 months as these programs evolve. So, we are in the hunt. We have a strategy. We have a portfolio of capabilities. We have the right partners to be able to address the part of the business.

But we really went from -- I would say even worse than standstill, in that we had not participated in that industry in a long time; and you just don't earn business there overnight. So it's a long hill, but one that we are well up, and quite candidly we remain -- we're still very encouraged and optimistic. But no huge successes.

But I do want to reiterate, we are demonstrating capabilities with the existing Logix architecture in some of the peripheral and some of the other applications, as opposed to just the heavy CSC machining in both engine and transmission lines.

Keith, just one thing about the timing of these. I know they are real long lead time kind of things, and it's encouraging that it sounds like you are at least considered now a credible supplier, rather than just outright off the bid list. But are any of these of a timing such that they could provide revenue in 2005 if you should capture the win? Or are these real long lead time things we're talking about?

The tend to be longer lead-times between win and delivery. So I would say it would be minimal in 2005, but I do not have the projects right in front of me, Mark. But given that they aren't here yet, it would be the latter half if any part of '05 where we would see it for the programs.

Got it. Thank you.

Jeff Sprague, Smith Barney.

We covered a lot of ground, so let me kind of just pick at a couple things around the margin if we could. How tangible or visible is the slowing in China that you referred to? Maybe could you characterize for example how the quarter ended in China, as opposed to how it began? Or what you are looking at on the order front that gives you visibility into the next couple quarters?

Let's say that it would not have been evident if you looked at shipments or sales. It would not have in particular been evident if you just said, has there been a massive slowdown in orders. I think what our intelligence is picking up in China is that if you're close to it you see that projects, which have been approved and maybe even started, have been delayed.

That is what I will call a rate of change that is happening in the market, but is not so much affecting our revenue. I don't even think it is affecting our orders. It is just something you can observe in mass transit, mining, aggregates, and other projects that are there. So I will call it subtle but clearly a bellwether, we think, about what is coming.

I would just further characterize it as -- it is just an indication that the comments you are hearing about the central government being tougher on lending is in fact something they are able to manage. That just means the projects go a little slower than they did before, not that they are not going to proceed or not. We also see this at I will call it the second-tier type of suppliers and customers. So it is not evident at this point yet in our performance that there is really anything that is taking place.

Okay. Great. Maybe to switch to the more mature markets, where it's easier to get a pulse some things, can you give us any color on July, the first few weeks of July in North America? The project business? Maybe it's tough to tell, lumpiness, but kind of the MRO trends?

I would think, basically July is consistent with our new guidance. We feel comfortable with our expectations.

Is July looking similar to June? I guess also just trying to get a shape of -- ?

Yes, in other words, it was a good-looking third quarter and there was -- what I will say, no tailoff if that is what you are looking for, in terms of momentum as we go into July, which is basically over now.

Okay. Just a couple other items. So, corporate expense, we shouldn't repeat this item in Q4, but often there is compensation and other things that happen in Q4. Can you give us any guidance to that line item in particular in the fourth quarter? Is there anything we should be thinking about there?

Only to say the obvious, that the sort of 16 to $18 million run rate, which we have held out as the guidance and have very seldom hit -- is where I would still put you. As you know there is a bunch of stuff goes through there, but I do not have anything in mind that would take me outside that 16 to 18 right now.

I guess maybe just finally, on tax, James. Just looking out into '05 and '06, I mean you are accruing at a 30 percent tax rate. But what are you kind of targeting towards on a cash tax rate, assuming you don't have the additional settlements looking out the next year or two?

Your question is really about cash taxes. What I would say is that we think the benefit that we have had from pension contributions and option exercises will throttle down. Therefore we would approach over time the estimated tax rate -- as you know higher in the U.S. than it is outside the U.S. -- probably it will take us a year or so to get to that level, but that is an approximation.

Great. Thanks a lot.

Operator, we have time for one more question.

John Baliotti, Fulcrum Global partners.

Keith, I have a question about -- it sounds like from your comments earlier in the conference call that you're seeing still more MRO aftermarket type of demand than projects.

That is a fair characterization and I would agree with that.

Despite capacity utilization levels still being below 80 percent, it sounds like your guidance is still hedging the chance of you switching more to project related than the type of demand you're seeing right now? Is that fair?

We do expect that the project work will pick up going forward. We have grown our backlog a little bit in the project systems related businesses, and so we see a subtle shift in the mix over the next couple of quarters.

That was it. Thanks.

Thank you all for joining us today. That concludes our call.

That concludes the conference call. At this time you may disconnect. Thank you.