洛克威爾自動化 (ROK) 2004 Q4 法說會逐字稿

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. (Operator Instructions). At this time, I would like to turn the call over to Mr. Tim Oliver, Rockwell Automation's Vice President and Treasurer. Mr. Oliver, please go ahead, sir.

Thank you. Good morning and thank you all for joining us for Rockwell Automation's fourth quarter earnings was conference call. Our results were released morning and have been posted our web site at www.Rockwellautomation.com.

This call is being webcast. A replay of the audio portion of this call and a copy of the charts that will be referenced during the call will be available on the investor relations portion of our web site for the next 30 days. With me today are Keith Nosbusch, our President and CEO and James Gelly, our CFO. Our agenda today includes summary remarks by Keith; James will then review both the quarter and our initial guidance for 2005. We will leave plenty of time at the end of the call to take questions. The call is scheduled to less about an hour.

Please note that 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 our projections due to a range of risks and uncertainties that are included but not limited to those included in our earnings release and all of our SEC filings. With that, I will turn it over to Keith.

Thanks, Tim, and good morning everyone and thanks for participating in today's call. I should say at the outset that this quarter's results are more complex than usual since they include discontinued operations, tax benefits, charges for facilities rationalization and so forth. Despite the complexity, I think you will see that our fourth-quarter results were strong in every respect. In just a minute, James will take you through the quarter in detail and we will leave time to answer any questions that you might have at the end of the call.

Let me summarize. EPS from continuing operations were 51 cents, but when you make adjustments for some of the special items that were not anticipated in our prior guidance, you could conclude that results were somewhat higher. The key driver of Q4 results was revenue growth and the breadth of it. Year-over-year revenue growth was 18 percent. It was 16 percent excluding currency. We experienced double-digit growth in most of our businesses, in nearly all of our end markets and in every region of the world. And for the first time this year, both our control systems and power systems reported reporting segments had double-digit top line growth during the quarter.

For the full year, our sales were up 10 percent, or about 7 percent excluding the currency effect. Like the third quarter, some of this quarter's strong growth was due to easier comparisons from last year's second half, which was generally weaker. However, we did see strong sequential growth in the quarter, up 7 percent versus last quarter; a great result, but probably above trend in terms of the growth rate. We still believe pent-up demand is a driving force and that customers appear to be catching up after a long period of underinvestment and their installed base. It remains hard to predict how long this pent-up demand will take to be satisfied, but it is probable that we will see deceleration to more moderate levels of sequential growth in the near future.

In our first quarter, this will be due partly to seasonal factors -- vacations, holidays and fewer selling days. Our expectations are that we will revert back to the gradual sustainable trend line we saw in the first three quarters of fiscal year '04. The results you are seeing reflect improving end markets, but also the sustained investment we have made in our portfolio of products and services, and most importantly, the hard work of many people going back a number of years, and we are not done. We continue to invest heavily in new capabilities, targeting the real business problems that customers say are the most challenging.

The very recent feedback we're getting indicates that customers generally get what we're doing for them. I believe the next wave of product and service introductions are among the best, most valuable and most customer-centric of any so far. I am firmly convinced that we're better positioned than we have ever been to both meet our customer's needs and to anticipate the long-term factors driving manufacturing worldwide.

Looking ahead to 2005, we see steadily improving customer demand across our markets, and excluding some kind of external shock or disruption, we expect our growth to continue, although from the trend line established in the first three quarters of fiscal year '04. We remain committed to the relentless pursuit of productivity and again will expand our operating margins and we expect to achieve our objectives of converting all of our net income to free cash flow. With that summary, let me now turn the call over to James.

Thank you, Keith. I'm going to begin with a chart entitled fourth-quarter results summary and take as a red (ph) the prior to Safe Harbor and risks charts.

Looking at that chart, since this quarter's results have the potential to be very confusing in view of the many different puts and takes, let me start with some key facts. Revenue in the quarter was 1.2 billion, up 18 percent, as Keith said, and I'll get into this in more detail in a couple of charts.

Income from continuing operations was 96.6 million, up 54 percent year-over-year. Diluted EPS from continuing operations were 51 cents, up 55 percent year-over-year. You will notice that income taxes of 30 million in the quarter calculate to a rate of only 24 percent on continuing operations, which is below our normal guidance of 30 percentage points. And that is due to a tax benefit of 4 cents per share, which was included in the continuing operations. So using the 30 percent tax rate would have meant EPS from continuing operations of about 47 cents per share.

Turning to discontinued operations, you can see 27 cents for the quarter, which gets us to the reported EPS of 78 cents. We had a gain on the divestiture of First Point contact of 17 cents, or $32 million. There is also about $1 million of fourth quarter of First Point income, which is generated prior to the closing in those discontinued ops and another set of tax benefits of 10 cents per share, or $18 million. And I should plan out with respect to First Point that all of our financials in this release and the 10-K to be issued shortly have been restated to move First Point to discontinued ops. So before I leave this page, I should just confirm that our Q4 results included a total 14 cents in tax benefits and 17 cents related to the First Point contact gain.

Let me turn to the next chart, if I could. At the risk of being repetitive, we have included an additional bit of visual explanation of all of the divestiture gains, tax benefits and large facility charges, which perhaps made it a little hard for you to get out what our current or expected results might be. We are not suggesting how you should do your math, but here are some potentially helpful thoughts on the quarter and the year. Looking at the top half at the quarter, you can see most of the elements we just discussed.

One element I did not mention in the last chart, but which is discussed in our press release this morning, is a fourth-quarter charge we took in control systems related to our ongoing facilities rationalization program. We're shrinking the footprint of control systems worldwide, and this quarter, we took actions in North America and Europe. The 9 cents, or $26 million, includes restructuring, severance and asset write-downs. As you know, we're driving lean initiatives across all businesses, regions and staff. This quarter's action is considerably larger than our historical or expected pay-as-you-go actions. I hope this chart will help answer some of your questions in a potentially busy quarter.

Let me go to the next chart, which gives you revenue and operating income for Rockwell as a whole. As Keith said and as you can see, sales were up 18 percent and 6 percent versus the third quarter of this year. Operating earnings were up 32 percent year-over-year with margins expanding 1.5 points to 14.3 percent.

Let me go to the next chart and give you detail on each of our two reporting segments. This is some detail on control systems. First on the left, revenue growth. Year-over-year revenue was also up 18 percent, out seven percent sequentially. Nearly all of our businesses were up, as Keith said, and we saw strength across both our product and our services businesses. And you'll see in a couple of charts later that we had good momentum around the world. As I said, sequential growth was up 7 percent, and that is pretty clearly an above trend rate of growth for this company.

Looking on the right at margins, year-over-year, we had about a point and a half of expansion in control systems to 15.2 percent. This is the result of obviously great volume leverage and productivity, both of which offset the $26 million of facility charges I just talked about.

Let me turn now to the next chart, which relates to Power Systems. First, the management team at Power Systems is doing a great job at running a very lean operation and taking steps to further lower their cost structure. On the left, you can see that sales increased 15 percent year-over-year and 2 percent sequentially after a very strong third quarter results. Their end markets, like aggregates and mining and material handling, are displaying some favorable conditions. On the right hand side, you can see operating earnings were up 38 percent year-over-year to $21.3 million. That is a 10.3 percent margin, up 1.7 points. The benefits of higher volumes and productivity and price increases offset higher raw material costs.

Looking sequentially, however, in the short term, operating income was down by about $2 million as higher raw material costs more than offset higher volume and price favorability. Power Systems has announced further price increases to offset the pressures of higher raw material costs.

If you would turn to the next chart, I can provide some detail on regional sales. I would direct your attention to the far right column, which excludes the impact of currency and shows growth rates in local currency terms. As you can see, we had strong growth in the U.S., in Latin America and Asia Pacific. In Latin America, we had very strong results and this reflects the considerable time and resources that have been expended on training and skills upgrade and a good mix of new projects and favorable resource-based end market. Mexico and (indiscernible) Argentina were both particularly strong. Looking at Europe, we had better growth than we have had earlier in the year, although somewhat due to easy comparisons in that the second half of last year was particularly weak.

Turning to Asia Pacific, we continue to benefit from strong local demand. You can see the growth of 29 percent in local currency terms. We also benefited from our leading automation technology and a strong effort by local management to build a competitively differentiated market access model. India, Taiwan and Korea were particularly strong and China was up about 16 percent in the quarter year-over-year. So, strong performance worldwide.

Let me turn to the next chart, which relates to cash flow and both for the quarter and for the fiscal year. As you can see in the left column, we generated about $203 million of free cash flow in the fourth quarter. For the year, we came in at a very strong $499 million. The annual result was due to disciplined capital spending and lower tax payments related to the pension contributions that we have been making, as well as the tax benefits from option exercises. This year’s performance was great, better than 140 percent conversion of net income. I should say looking ahead, we expect free cash flow to the something a lot more like net income as cash taxes increase. And for the record during the quarter, we repurchased 2.2 million shares.

The next three charts, beginning with the one entitled Initial 2005 Guidance, provide some views on fiscal 2005. As you can see in this chart, we expect Rockwell Automation top line growth of 6 to 8 percent. And as I will explain in a minute, we think the story of '05 will be easy comparisons in the first half, and then as Keith said, reversion to a gradual uptrend that we established in the first three quarters of 2004. All in all, the guidance translates into $2.15 to $2.25 per share in 2005, and as I said, cash flow not less than net income.

Let me turn now to some additional assumptions provided on the next chart. In the spirit of full-service investor relations, we have included some additional modeling details. They include general corporate net, which as you can see, we believe should be in the range of $70 to $80 million in 2005; 2004 and our fourth quarter were a bit higher than our original guidance due primarily to some higher levels of environmental reserves and charitable trust contributions. You can see the tax rate; we think 31 percent is probably the right number for 2005 as our blended rate creeps upwards slightly.

Capital spending is planned at about $120 million. Thinking about pensions for 2005, we plan to make voluntary contributions to our pension plans, which is approximately equal to our net pension expense, so in the range of $60 to $70 million during 2005.

And my last chart is entitled Initial 2005 Guidance Calendarization. And first, we wanted to provide some thoughts about the first quarter, which we see coming in at about 48 cents, and let me give you some details on that. Revenue will be down we think versus the fourth quarter, which we've characterized as above trend. Additionally, as Keith said, we generally see 3 to 4 points of negative sequential growth from the fourth quarter to the first of the new fiscal year, due to fewer selling days, vacations and holidays. And we think operating margins will be a lot like the third quarter of 2004 on roughly similar volumes.

If you look at the bottom half of the chart, there is a first half/second half rate down for 2005. And it might be helpful to note one more time the year will have easy comparisons in the first half and underlying our view is that we will refer back to the gradual uptrend trend line we were on in the first three-quarters of 2004. So note that first half '05 is very similar to the second half of '04, and the second half of '05 is one of more gradual growth. So hopefully that helps you fill in some of the details.

We will be back in December in New York and we will of course provide any additional guidance we can at that time. And that ends the remarks that I had, and maybe we could turn it over to Q&A.

(Operator Instructions). Mark Koznarek, Midwest Research.

Good morning. A couple of balance sheet things, if I could. There was some pretty significant changes, like in the property, plant and equipment line versus the third quarter, other assets moved around a lot and your retirement benefits moved a lot as well. Is that all because of the discontinued operation, or is there something else going on?

Certainly, the quarter will look different because of discontinued ops. Retirement benefits I think, you're comparing with the third quarter, Mark?

Yes.

My guess is that all of the substantial changes versus the third are going to be related to discontinued ops. And we will -- tell you what, Mark, let me get the process changes that were made to the quarter related to discontinued operations and we will provide those.

That was just looking for clarification there. The key question I had really had to do with the outlook, because I guess a couple issues with it. One is sort of the more gradual second half, because one of the things that struck me recently being down at automation fair (ph) was sort of the ongoing momentum that you guys are capturing, in terms of product line broadening and penetration into new markets. And it doesn't seem like those kind of developments are just a 1 or 2 or even 3-quarter phenomenon, but they hopefully stay with you for awhile.

So that is the first part. And the second part is to get to the midrange of your guidance with this lower revenue line you have, if you have to, it implies an extraordinary incremental margin. And so I'm wondering if you're planning big price increases for next year, something along those lines, to get the earnings up without revenue being that robust?

Let me start with the second question first, which relates to -- in effect, the question is the conversion margins that you should assume to get to the number in 2005. And first of all, I would say we have made it pretty clear that the mix we are enjoying at the moment is quite good and it relates to the, as we said I think on a couple of occasions, the pent-up demand from the installed base, and in effect, the combination of flow goods things, that have high margins and a relatively -- we still see in the large projects, which are characterized by their lower conversion margins, move to the right. And as we headed into 2005, that's something driving the conversion that we're indicating.

Price, you ask about? I would say we've in 2004 got about half a point to a point of price realization on average across control systems. At the moment, we have come through the raw material and other inflationary pressures so far with minimal impact on control systems margins. So the conversion is far more related to the mix of business being one of continued good demand for flow goods from the installed base, with a pick up in the larger projects sometime in the future. And I think that hopefully -- not price -- explains the continued good conversion margins. And I don't think that what is described -- implied in the guidance is greater than we had seen, say, for example in the second half of 2004. Now you had a first question I think which --.

On the momentum currently. Mark, by the way, thanks for coming to Automation Fair. It gave you a great opportunity to see exactly what we are accomplishing across a broad spectrum of our business. And I would concur with your characterization that the momentum now is strong and the second half of next year really boils down to more of a comparison to the second half of this year. And for example, the fourth quarter was a 7 percent sequential growth. And to be able to do that on a continuing basis, we feel is unrealistic and something that we did no want to plan for throughout the entire '05 year.

And the other aspect of it is that our business, it is hard to get great visibility six-plus months out. We still, with the growth of the MRO business and short projects, we still see the planning period and the horizon that we have is somewhat limited because of that. So our enthusiasm and excitement for '05 as evidenced at Automation Fair is absolutely there, but we were concerned about and are concerned about the high growth rate in the fourth quarter and the sustainability of that, as opposed to the gradual sequential growth that we had been seeing throughout the early part of '04, which we believe is more consistent with the economic environment that exists out there in the long-term and the impact of high oil prices and a couple of other things will have, will ultimately have some effect on the spending of our customers.

Great, thank you.

Rob Cornell, Lehman Brothers.

Thanks, everybody. I was intrigued with one thing you said about your customers now generally get it. And you have been in this massive education program internally all this year, getting I think you said in prior calls, getting the sales force internally up to full compliance on the logic sell and getting you're value-added distributors and partners up the learning curve. How much of the current business conditions and the good growth in this quarter is a function of a more well-educated salesforce connecting better with the customer set?

Well, I believe that's certainly one aspect of it, because we have seen an impact across the breadth of the portfolio. And so Logix is only one element of that. But there's no question, Bob, and we're very pleased with the knowledge base that we have been able to instill in our selling organization, into our channel partners and to be able to articulate to our customers the value that the integrated architecture brings them. And that is the real I think highlight at the end of the year, being that we now go into the year with a much more aggressive outlook because of the knowledge base that we are imparting into our customers.

In terms of systems sell, Keith, the more aggressive outlook with regard to getting the value equity across to customers on bigger sales?

Yes. I think -- the answer is, yes, certainly to grow that. But in addition, what I believe, Bob, is that we are better able to communicate and to quantify the value of the architecture. And that is one of the things that will keep us able to maintain the margins as we go forward because it is about the value and we have to be able to demonstrate that to drive the margin growth that was talked about on the earlier questions.

So the other aspect of this is Latin America and Asia have stayed very, very strong and we do the training there. We've started the training there, but we're going to accelerate the training in '05 in those two regions. And then we have the extension of the architecture and we're going to expand the training even in the U.S. to include process, to include safety as that comes out, and to demonstrate the value of ethernet from the information space. So it is the continued building of the value of the integrated architecture, and this training and education really does not stop. It is something -- a mode we're going to be in for the next, well, probably for a long time, but certainly over the next couple of years.

Another question on the systems sell. I think James alluded to the fact that the big systems sell were moving out to the right. Could you give me a little more perspective on that please?

Sure. We've talked a couple of times that our business is really made up of three different segments -- the MRO, the small projects, and then the larger capacity add projects. And James' comment was mainly on North America and a Europe comment. We continue to have project business, larger project business in Asia and Latin America where most of the capacity expansion is now occurring. What is being pushed to the right is the capacity expansion that you normally see in the late cycle of a recovery. And what I believe is occurring is that most companies have decided that they want to be profitable throughout the entire business cycle, and so they are not adding capacity as much as getting more production out of the their current capacity. And that's a great opportunity for us because of our installed base, but also because of the value we talked about earlier. So customers are looking at improving their production capacity and reducing their costs much more in this cycle, particularly in North America than in previous ones. And that is why James is saying the large capacity expansion is being pushed out. But we're seeing a continued robust small project short cycle project businesses that are being utilized, and that is a great opportunity for us and really fits well in the capabilities that we have deployed across the geographies.

Great, thanks, Keith.

Richard Eastman, Robert W. Baird.

A couple of things. James or Keith, could you just define the business and how it performed within the subsegments of controls? I other words, the components, the automation control and GMS segments kind of year-over-year, just a growth rate there?

Let me say first of all that all of the businesses, GMS was up in line with control systems. The automation and information part was a little stronger than the average components business -- was not far off the average. And really what I'm getting and is very broad, everyone participated. Power Systems as you heard was up 15 percent. We talked earlier about regions of the world as well. So I must say, it is hard to say one led or another one lagged. They all came in -- virtually every business in the double-digits and virtually every region.

Could you just review your pricing strategy and your -- the points in time here where you have raised prices on the power side? I think we're kind of picking up maybe a 10 percent price increase in September -- does that sound about right -- on the power side, motor side?

We had a number of price increases over the last 12 months in the Power Systems business. The first one was what I will call the -- let's just call it the annual increase, or the traditional increase timing, if you will. And that was in early calendar year '04. After that, we started to see the price, the material costs driving up and we added another price increase in the May-June time frame, and that was in the 3 to 4 percent level at that point, because it closely followed the January one.

And then as material costs continued to go up over the summer and early fall time frame and we saw that we were not recovering the cost increases, which is what our intention was, we have announced another price increase effective in January of '05, which is in the 5 to 10 percent range, and that varies, depending on the product portfolio and the material content. So that is how we have layered the pricing, and it has really all been in reaction to the input of price increases about have just continued to come our way. So we want to (multiple speakers).

Do you sense that, given where we are today in this pricing cycle, and in particular in January when we move on another price increase, will we be able to generate more incremental margin in that power business than what we saw here in the fourth quarter?

Rick, let me say, I think the price increases during the course of '04 were only about half what we needed to get to recover the raw material cost increases. And certainly, it is intended that the price increases that Keith talked about are designed to get the rest. But as you know in these businesses, you can get ahead or you can get behind, and we're trying to catch up and there could be more coming through the pipeline on the cost side. So you saw the margin contraction sequentially as a result, and my hope is that we will be able to.

Last question, James. When I look at the EPS of reconciliation for the year and discounting or eliminating the discontinued operations, I don't come to the same EPS number from continuing operations that you come to. Were there some tax adjustments that were made in the first three quarters?

Whatever we earned in First Point contact during the first three months of the year, three quarters of the year, will be moved to discontinued ops, and that probably is the difference that you're talking, about 3 cents.

There seems to be a big difference to the tax rate that's applied to the year versus the roll-up of the quarters?

I was going to say, the other thing is, some of the tax treatment of the facilities actions and the gain on the First Point transactions are different than the 30 percent rate that you've probably been modeling with. And so the gain is disconnected. The taxation of the First Point gain is disconnected from the 30 percent that you would expect.

Alright, thank you.

Jeff Sprague, Smith Barney.

On that last one, it would be great if you guys could throw a schedule up on the Web kind of restating '04 for us. Just to the questions. I guess first, could you give us a little bit of color how things played out in October sequentially? I'm assuming the 7 percent increase is a daily sales rate, how that is trending in October?

You know, if you're just talking about year-over-year, we're still getting the easy comparisons that we talked about. It looks a lot like the fourth quarter. Sequentially, it's certainly -- we have learned in this company to stay away from a single month. I remember a year ago October, hit faked us (ph); it turned out November and December did not follow. So let's say that nothing in September, October run rate that leads you to think we've seen an abrupt change or an abrupt deceleration. Put it that way.

The other thing. Rough getting around with the numbers here. It would appear that to hit 48 cents in the first quarter, that margins need to be around 15 percent, i.e., your full year target. And understanding what you said about maybe the project mix, it doesn't sound like the mix between MRO and projects really would change that dramatically over the course of the year. I don't think you'd really argue that project activity is going to really ramp up in North America. So I was wondering if you could elaborate a little bit more, James or Keith, you did talk about variable margins. But it seems like you're off to a very strong start.

Let me try, and if I don't get it all the way there, Keith can push it over the line. What we have been trying to point out here is, clearly, the mix, the pent-up demand for the installed base to replace high-margin, the growth tat we're seeing being relatively overweight, in terms of the flow good MRO piece and underweight in the large project, which is characterized by lower margin. And we are saying something about that mix, and that is that we believe the heavyweight of MRO flow goods will dissipate over the course of '05. It's really what we're trying to say in that the one-third, one-third, one-third of MRO small and large projects will reassert itself by the time you get to the second half of '05. So we do think the guidance, as everyone has pointed out, is that the first half of '05 looks a lot like a good mix that we've seen in the second half of '04. We're trying to make that assumption clear.

So if it's normally split evenly, one-third across those three slices, how did we exit '04 with the mix?

I was going to say, like on the large projects, so instead of a third, it would be half of that. And instead of one-third MRO flow goods, it would be -- make up the difference. So you were really overweight in the MRO flow good. And if you get to that one-third, one-third, one-third mix, you will see closer to the traditional 30 percent conversion margin that we have held out as a rule of thumb.

And Asia looks very strong, China maybe decelerated a little bit. Can you give us a little bit of color on what impact the government or other issues are having on your business there?

Yes. We talked last time and said we were hearing about that the second- and third-tier customers, that capital was a little tougher to come by. I would say that we have not seen anything of significance since we last talked. There has been a slowdown. They have reduced the availability of capital to some of the smaller companies, particularly in the steel and cement industries. But what we are seeing is that has been a little bit offset in some of the infrastructure capabilities and the activities, with respect to with respect of the utility business, it still requires, they still have a great demand for energy there. That spending is continuing to go forward. And energy conservation is very, very important and our power-centric businesses are doing very well in China because we offer a very strong energy savings portfolio and capability. That is a compelling story now for customers in China because of the shortage of utility. And then you also know just recently, they increased the interest rates in China two also try to slow some of the growth. And I don't think that has been reflective yet in behavior, but they are on a path of I will just trying to softly guide their growth to a lower number.

One last thing. As we close out '04 here, what is the size of the Logix platform in revenues?

Probably 360 million annualized -- well, that is, multiply the fourth quarter by 4, and you get 360 million, and it was up as you know 33 percent.

So you're (indiscernible) 360, it must have did about 330 for the year, or something like that?

Probably about right.

Yes.

John Inch, Merrill Lynch.

Good morning. The larger project business, Keith, that you referenced in Asia and Latin America, are the margin contribution from those relative to the MRO business in Asia and Latin America, is there a material difference or maybe how should we think about that?

In general, the project business is lower than our product businesses, and that's pretty much on a worldwide basis. I would say that the project business is consistent around the world, but it's lower than what we achieved in some of the straight core product businesses and software businesses.

But I was just trying to use Asia and Latin America as a test case for thinking about when project business does come back here. Are you already realizing lower margins were you're seeing the project business in other parts of the world pick up? Is that actually happening today?

The answer is, it did not happen terribly much in the quarter, and I think we think you had some unused capacity in some of the systems businesses that, once filled, represented a nice conversion. That is not expected to remain as a pattern in the future, simply because you will add costs in order to grow the systems businesses. So it didn't happen so much in the quarter, but I think we can explain that's just having access capacity, even in the systems business. And once filled, it produces some nice conversion. I don't know if you had anything you wanted to add to to that, Keith? No.

Manufacturing capacity in the U.S. isn't exactly at full run rate.

What we meant, John, was our capacity. We had a very strong Solutions Systems quarter, and that helped in the overall company margins. And really, that was leveraging the capacity that we have internally. You're absolutely right -- we're nowhere close to meeting capacity in North America.

Going back to the end market customers, if you look at demand and capacity utilization in the U.S., the levels are still pretty low. A lot of companies still looking to offshore, if anything, versus build new plants. I know with automation there, we got the example of the Coors (ph) plant, and there are other perhaps auto transplant examples. But what are the chances that we're here in a year and the North America and European project business really has not come back and we're still talking about this move to the right deferral?

I think that is a reality. That's why we're finding more customers today interested in getting more production out of their current capacity and reducing their costs and they are giving up perhaps some future upside potential based upon a strong growth in the market. And so I believe that is the case, and that is one of the reasons we are not planning for big uptick in projects in the U.S. and Europe, Western Europe. And that is one of the reasons with the earlier conversation around the second half of the year. As the MRO business gets to a more traditional growth, the year-over-years get harder because the large project business probably will not accelerate in U.S. and Western Europe to significant levels throughout '05.

Alright, that make sense. So does that imply you that you're going -- I think you're at your official margin and revenue targets already. Does that imply that these targets are going to have to be raised, in terms of the overall company?

You mean our long-term financial targets?

Yes. Including ROIC and the 14 to 16 I think revenue margins.

John, I think the answer is -- we're between productivity and volume, if we choose the margins, can well expand beyond what I understand to be the traditional guidance. However, if we have areas where we can reinvest and sustain the revenue growth that we produce, we will do so. And so there is something of a trade-off. But yes, ROIC and operating margin, absent those reimbursement opportunities, will want to go beyond the original guidance that you may have heard.

I think, and James mentioned the other, the other piece of that leveraging equation, and that is investing in additional growth opportunities and market expansion, market access models going forward. So that is the analysis we're currently doing and we have the annual meeting update and we'll characterize the outlook from the longer-term financials maybe a little more clearer at that meeting.

That's fair. One final one. If you'd I guess include the expected headcount reductions from the couple of facilities you intend to take down, given this charge, where do pro forma a count levels sit at the end of the year? And how would that have compared to last year? And basically, are you guys still comfortable that your manufacturing footprint, your capacity with which kind of alluded to earlier, you just don't have to bulk up your headcount and incur a bunch of costs as demand continues come in very strongly?

Let me say, I agree with the characterization you made about bulking up to support additional volume. There are a couple of moving parts. One is, the company is globalizing and moving a lot more of who does work here to lower cost regions in particular we've added to the infrastructure in China and the rest of Asia pretty rapidly. But I think the answer here is, the Company has the ability to drive continuous improvement in the cost structure and to leverage the volume without adding a lot of infrastructure. And that infrastructure that we do have is shifting on the margin as aggressively as we can to reflect more of where our customers are going and where they're located. And that means more in lower cost regions. So while you might not see a large change in the headcount reported in our financial statements a year from now, you'll certainly see a very different composition of who's in that headcount. We may actually add engineering resources, for example, in low cost regions and the number could even go up. But we need to be clear about what is high cost versus low cost. in terms of regions.

That's fair. Great, thank you.

John Baliotti, Fulcrum Global Partners.

Hi, guys. I have a question about CapEx. I know we'll probably gets some more defined targets later in December. But I was looking at your comments about your customers improving their production capacity and not really adding new lines and watching your CapEx as a percentage of sales come down towards a little over 2 percent of sales level, down probably half from a couple of years ago. How do you look at that from a high-altitude standpoint going forward?

First of all, I think the Company has reached a realization that it can continue to invest somewhere in the 2.5 percentage points of revenue. And I want to say that was 5(ph), if you go back in the past. There are clearly cases where capital could go up slightly if we, for example, invest a little bit more in some systems and other infrastructure. But by and large, I think the high-altitude view is that 2.5 percentage points of revenue is a reasonable planning assumption for Rockwell.

So you come a little bit, but you probably won't even get back to the 3 percent of a couple of years ago?

There may be a time, based upon a special need where we could get back there. But our goal is to run it, as James said, certainly no higher than the high 2 something as we go forward, and 2.5 is a good guideline for us.

I think the culture here is one of realizing that you don't need a lot of fixed capital; it's an engineering intensive growth story and it has a lot of customer facing resources that frankly get expensed every period. And it is not so much a fixed capital story.

So are you getting more also out of what you had initially put in place, given that -- I think your earlier targets were around 120, 130 million. Are you finding that you're just getting more utilization out of what you have?

Absolutely. We're no different than our customers in that regard. We're all becoming more efficient users of capital and we have to be like that internally as well. And that is part of the -- one of the great benefits of the lean program that we're running internally is that we are able to increase production, increase productivity without the traditional linkage to capital spending. So that has been a real positive for us and I think you'll see it in our cash flow and I think you'll see it in our operating margin improvements.

Okay, thank you very much.

(Operator Instructions). Scott Davis, Morgan Stanley.

I was wondering, as it relates to your inventories at the distributor level, have you seen any strange buying patterns ahead of your price increases that could have impacted the quarter a little bit?

No, we monitor our distributor inventories, and they have basically not changed, based upon price increases.

Okay. I think on the call, you have mentioned which end markets, where you've seen the most strength, or the most incremental strength. Can you comment on that?

Let me just comment one more thing on the last question. We're still -- I want to be real clear, because we're still evaluating, I mentioned earlier that we just announced a price increase at Power Systems in the January time frame. We don't know yet if there has been a buildup because of that in anticipation or not. That's something that will play out over the next couple of weeks, so I may have a somewhat shaded comment. Mine was strictly from a Control Systems perspective and we are still determining if there has been any distributor change or delta based upon the anticipation of that January Power Systems price increase.

But your question was on end markets. Let me if talk about those. And I think where we have seen the greatest strength across the business has been in oil and gas, mining and water wastewater. And that has been pretty strong in many different regions of the world. As we said earlier, we're not seeing a lot of large capacity activity in the U.S., but oil and gas has been very strong worldwide, particularly in Asia, Canada and Latin America. And certainly the production and transmission additions, because of the pricing that is now going on, is a very fertile ground for investment. And in fact, one of our businesses, our medium voltage business, we had order increases over 75 percent in the quarter because of that industry. And it's a great industry for us because as I mentioned earlier, energy prices going up, which means conservation is more important. And that is a sweet spot for our capabilities.

Likewise, what's going on in the oil industry has increased interest in coal and other materials. And we see mining in particular having a very strong quarter and a very strong output -- outlook, I should say. And just put that in perspective, if you look at a year ago to now, we have six times the number of active projects in mining, and these are large substantial projects compared to a year ago. And like I said, water and wastewater continue to be strong. There is steady growth there. That is something that has been very positive in the U.S. as well. But also, just in other parts of the world, it continues to be a source of activity for us. And that has been a plus for us in two areas. In particular, our Power Control does a great job there and Logix architecture as part of the SCADA (ph) networks that are used are very important as well.

Automotive was a little weak around the world, even in China. But, we have a very good feel for that latter part of '05 and '06 as some of the '07 and '08 platforms need to start being put in place in startup mode. Not a lot of strength there this last quarter, but certainly we are pleased with what we see as a potential in the new platforms down the road there.

Semiconductors, there, I would say a mixed bag a little bit. Slowdown because of some of the chip inventories, particularly in the U.S. But bucking that trend has been Asia. In particular, Taiwan has been very strong in both chips and flat-panel spending, which is still a high-growth area. And the other interesting thing in semiconductor for us is that, historically, we were very strong in the facilities side. We are moving onto the tools now in the actual production side, if you will, the process side, and there, we have a dual play, which is in the power panels. But now, we are also starting to out the integrated architecture onto the tools, and that is something that is a new area for us. And those manufactures are beginning to see the benefits of a more consistent I will say off-the-shelf solution for that industry.

Metals, we are starting to see an upturn in projects there, but that is an area where the projects have been very small, other than in China and India. Paper, that is the one that has been the toughest the entire year. The only good news there is we are starting to see project quotation activity. We're not seeing business yet, but we are seeing projects that are becoming a little bit stronger. And hopefully, that is an encouraging first sign.

That is a little walk-through of the various industries, various markets. And we think certainly as I said earlier, the strength of those earlier markets really speaks well for both Control Systems and Power Systems. Oil and gas, mining, aggregates, cement -- those are strong markets for the Dodge Mechanical business, the Reliance mill duty motors and also Rockwell Automation drives and Logix architecture. So those are good industries for us and really demonstrate the breadth of our product portfolio and our ability to serve a lot of different applications and take advantage of increased customers spending.

Keith, on the last call, you mentioned that you saw some slowdown of projects in China. Your Asian numbers were pretty strong. Can you give a little bit of color on whether there was just a head fake, or that you're seeing some real slowdown there?

We're not seeing a real slowdown at all. I would say it's just, the projects are closing slower. They are not being postponed or cut. They tend to take longer to get approval and it's a little slower process, I would say, then before. And I made the comments earlier that we have seen the interest rates go up. And I would say that certainly, the Chinese government is trying to, I will say, slow down growth so it isn't at such a superheated rate that it was earlier. But when we talk about slowdown here, we're talking about 10 percent to 7 to 8 percent, which still will be the highest growth anywhere in the world. So I think we need to put it in a proper context there. When we're talking slowdown, we're talking from high 9's to 10, down to something 7 to 8, which they believe is more manageable. So we do expect to have a good growth year-over-year in '05 in China as well.

Okay, thank you guys.

Operator, we have time for one more question.

Mark Roberts, Wachovia Securities.

Thank you, good morning. A lot of my questions have been answered, but one of the questions that occurs to me -- your tax guidance for next year, are you just being conservative at 31 percent, or have the kind of tax benefits and your ability to manage much lower effective tax rate that you've seen over the last three or four years, are you running out of those benefits?

First of all, I don't think it's conservatism, with respect to the tax rate. Secondly, if you look at the mix of our income, it is solely based upon growth in areas of the world that have higher tax rates. And so it's sort of a blended average drifting up as a result of where income is taxed.

So it's more of a mix issue than anything else?

Exactly right.

Thank you.

Thank you.

Thank you all for joining us today. Some of information that you requested on balance sheet and income statement restated for the divestiture, we will get up on the Web site in the next day or two. And we plan to publish our 10-K, which will also have much of that information in the next week or so. Thank you for joining us.

That does conclude today's conference call. At this time, you may now disconnect.