洛克威爾自動化 (ROK) 2005 Q3 法說會逐字稿

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. [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, sir.

Thank you, Denise Good morning and thank you all for joining us for Rockwell Automation's third quarter earnings release conference call. Our results are released this morning and have been posted to our website at www.rockwellautomation.com. A webcast of the audio portion of this call and the charts will be used in reference during this call are available on our website. These postings will remain there for about 30 days.

With me today are Keith Nosbusch, our Chairman and CEO, and James Gelly, our CFO. Our agenda for today includes summary remarks by Keith. and then review of both the quarter and the year, as well as the outlook, by James. There will be plenty of time at the end of the call to take your questions. and ask that you self-limit yourself to two questions to allow broader participation. We expect the call to take a little bit less than an hour.

Please note that our comments today, as always, will include statements relating to the expected future results of our Company and, therefore, forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from our forecast and ,due to a wide range of risks and uncertainties that are described in our earnings release and detailed in our SEC filings.

And with that, I'll turn the call to Keith.

Thanks, Tim. Good morning, everyone. Pleased to be with you all of you today. Our business is again produced solid results in a gradually expanding global industrial economy. These results validate the sustained investment we are making in our product portfolio and solutions delivery capabilities. Diversifying our customer base, expanding our served market, and broadening our geographic footprint allow us to continue to outperform our underlying markets. We continue to generate above-market organic growth by delivering quantified business value for our customers. I'm pleased to see the strength across our business units.

With the anticipated composition of our growth transition, we continue to deliver good incremental margins, driven by our relentless focus on productivity. Our business units continue to execute well. Our quarter three results were net of some important growth investments. Investments we initiated earlier this year that are now ramping up. We are excited about what they can mean for potential growth beyond 2006. We continue to drive our business transformation to a more intellectual asset, knowledge-based business model, and the corresponding higher returns on invested capital.

Now let me turn it over to James to walk you through the presentation materials. James?

Thanks, Keith. Good morning everybody. My comments are going to be referencing the slides that were posted on our website earlier this morning, and I'm going to turn to the chart entitled 'Q3 Results Summary,' which is the first chart, which summarizes the key items from the income statement. As you can see, revenue of a 1.264 billion, or an increase of 11% over 2004. That's 9% excluding the effects of currency translation. Segment earnings were up 32% to $221 million. That's year-over-year conversion on incremental sales of about 41%.

Walking down the page, you'll notice that purchase accounting amortization was $2.4 million in the quarter. As you know, this year marks the 10th and 20th anniversaries, respectively, of the Alan Bradley and Reliance acquisitions. So, the current level you see is about the run-rate you should assume going forward. General corporate net was about 4. -- was down about $4.5 million versus a year ago, basically reflecting lower environmental expenses. When you get to income taxes, you'll that this quarter's expense calculates to about 33.5%, which is higher than our guidance for this year of 32. That's because, for the year, we're raising the effective tax rate by 50 basis points to 32.5, and that means this quarter's provision is a catch-up for the first three quarters of 2005. So, in summary, going forward, that is for the fourth quarter and, therefore, for the full year, you should expect 32.5% ETR.

Diluted EPS from continuing ops was up 20 million -- I'm sorry, $0.20 or 42%, excluding the $.018 of tax benefit that we had in the year-ago quarter. Average shares outstanding in the quarter were wonder -- 186.4 million, down about 2% from a year ago. During the quarter, we purchased -- repurchased 2.5 million shares, and for the year-to-date we're at 7.7 million shares.

Let me direct your attention to the next slide, which is results for all of Rockwell in the quarter. As you can see on the left, sales were up 4% sequentially, which is in line with our April guidance. On the right-hand side, operating margin expanded by 2.8 percentage points to 17.5%, which is about a 32% growth of operating earnings year-over-year. You can't see it on the chart, but our return on invested capital in the quarter was about 18%, up from the low-teens a year ago.

I'm going to cover the segments in more detail, so why don't we go to the next chart, which is control systems in the quarter. Sales in control systems were up 11% year-over-year, 8%, excluding the impact of currency. And as I indicated, for the Company, sequential growth was up -- was about 4%. International sales were also up. International revenues were up about 8%. As you can see in a subsequent slide, Latin America, Asia Pacific continue to pace our growth, and Europe remains soft.

Sales of our Logix integrated architecture were up 20%, kind of at the low end of our experience, but right on plan for the quarter. Logix is up 10% sequentially, and remember that the year-ago growth rate was 42%, so kind of a tough comparison. We are on track to be up 25% for the year. Margins expanded in control systems 2.8 points year-over-year, and about 60 basis points sequentially. So that's a margin of about 18.2%. As you'll recall from Keith's comments and from what we said in the last couple of quarters, we're ramping up investment in some high return growth opportunities, and we spent about $11 million in the quarter, about one percentage point. Despite that, our incremental conversion was 43%, in-line with the guidance we've given you before.

Let me turn now to power systems, which is the next slide. Power systems sales were up 14% year-over-year and 4%, sequentially. Remember that our second half comparisons are tougher than the first half , given the way the business transpired in 2004. The Reliance Electric Motors business had a good, strong quarter, and both Dodge and Reliance continue to see favorable end markets. Margins expanded 2.6 points year-over-year to 14.2%. Now, they were down slightly sequentially, basically related to some higher cost inventory coming through the income statement. Both Dodge and Reliance continue to benefit from a combination of volume leverage and aggressive productivity initiatives over the last couple years. We turn now to some detail on our regional breakdown.

We turn now to some detail on our regional breakdown. Very strong growth in all regions, expect Europe. Latin America demand remained robust , with particular strength in Mexico and Brazil. Asia Pacific growth was strong, but somewhat slower than prior periods, due to harder comparisons and the timing of some large projects. China and India grew 16% and 20%, respectively. But we expect a stronger fourth quarter in the entire Asia region, with some solid sequential growth. As you can see, Europe remains weak, down 2% versus prior year, with particular weakness in Germany.

The next chart covers our cash-flow for the quarter and the year-to-date. The bottom line on the lower left is that we generated 157 million of free cash-flow in the quarter and, as you can see from the details, this was helped by some better working capital performance. Despite solid revenue growth, we held working capital flat in the quarter , and we're working to make sustained improvement in working capital going forward, which will hopefully improve on this quarter's results. Year-to-date, capital spending was $85 million. We expect full-year capital spending to come in at around 135 million. That's a little higher than our prior guidance of around 125. The increase versus our earlier guidance is primarily due to some spending on ERP systems. Cash-flow conversion for the year-to-date is close to 100% of net income, and we're standing by our target of 100% plus conversion for this year.

The next slide gives you some guidance for the balance of the year. Of course, we only have one quarter to go, so we're really just tightening up our prior guidance slightly. Revenues should finish the year up 10% to 11%, so we expect another good sequential growth quarter in the fourth quarter. Full year EPS from continuing operations, not including the benefit of tax items or the insurance settlement that we had in the second quarter results, not including those things, EPS from continuing ops is projected at $2.60 to $2.65, and just talk about free-cash flow.

The last slide, which is a preview of 2006, is offered in the spirit of full service investor relations. So we've broken our normal rhythm of disclosure, and that included some thoughts on our next fiscal year. Now, I have to point out that we're just starting the planning process for fiscal 2006, so the purpose of this chart is to tell you what we know, as early as possible. We will give guidance, of course, for the year at a later date. So today, we're not really going to get too specific or really help a lot with modelling questions, but we do want to give you some thoughts about '06. On the left side of the chart, you'll see the headwinds that we think we're facing as we enter 2006. Our tax rate, which was up two and a half points this year will probably up -- be up another point or two next year. This is due to the growth of income in higher tax jurisdictions. The biggest thing on the page is the substantial increase in pension and retiree medical costs of $50 million plus that we project for 2006. In so many words, we've set our discount rate as of June 30th, and we appear to have bottom-ticked the rate. So that's the bulk of the increase in expense you see here.

And fo -- just for information purposes, our projected benefit obligation has likewise expanded, and now stands at about $2.5 billion of liability. The total plan assets are about 1.65 billion. Taken together, these are obviously some pretty stiff headwinds. On the tailwind side, however, we currently see our organic revenue growth in 2006 at 7% to 9%, which, as you know, is about in-line with the growth rate for the second half of this year. This is higher than our normal long-term guidance of 6%, and basically reflects the good momentum we see in order trends. We also believe that we can sustain incremental conversion margins in the 30% to 40% range that you saw in a quarter like the one we're just reporting. This is made possible by solid productivity that we are working on for the -- during the course of 2006. So people across Rockwell are currently at work on our 2006 and, frankly, 2007 cost structure with broad-based productivity initiatives across the Company. And as you can see on the lower right, we have an under-levered balance sheet, which can be used to contribute to next year's results and offset some of the headwinds that I've just talked about.

In summary, we're working hard to execute on our long-term earnings growth targets of 15%, compound growth. We've got a lot of work to do, but that's where we stand as of late July of this year. We'll get back to you with real guidance in the calendar fourth quarter.

And now, we'd be happy to answer any questions you might have.

And, Denise, before we take questions, I just had one correction. We referenced the wrong row in a table here. China growth was 23% in the quarter and India growth was 37%. And with that, then we'll take your questions.

Very good. [OPERATOR INSTRUCTIONS]

And gentlemen, the first question is coming from Bob Cornell of Lehman Brothers.

Yes, thanks. Good morning. A good quarter. I must say say, like that conversion rate. You know, how about more visibility in the -- you know, the pace of business looking forward? You mentioned in the press release, '06 shaping up. You talked about sequential gains. How does the big project pipeline look, bidding activity, you know -- you know, the evolution of the -- from MRO to big projects? What do you see there, guys?

Sure, Bob. I think, right now, what we're experiencing is a continuation of the on-going steady rate of MRO business and the small projects being more productivity and cost-reduction driven at this point in time, and a lot of investment in incremental capacity as we've had the past couple of quarters. With respect to looking forward, what we -- what we are beginning to see is that -- is that there's no question that behavior has changed in our customers, and they continue to not want to invest in anticipation of future business. And so they are very cautious with investments at this time, in spite of the fact that there is tremendous cash in our businesses. And really, if we look at what's happening now with activity levels and dialogue in -- in around brownfield or capacity expansion, we think that activity has picked up and, in particular, it has picked up in the heavy or extraction-based natural resource industries. And we believe that that project spending will go forward, as long as commodity prices remain high.

And, so while we're seeing a shift and, in fact, this quarter we saw a significant shift in project-related business to a more power-centric, power-control segment of our served market portfolio, we believe that customers are still trying to avoid, I guess I'd call it, the binge and purge behavior of the past. They're still trying to be profitable across the entire business cycle, but we believe that with the extended period of the relative dollar weakness, that we've seen a significant long-term reduction and wear-out in the industrial base in these heavier -- in the industrial equipment base of these heavy industries that we're believing this project-type work can extend throughout 2000 -- 2006, and that's why we're seeing continued potential for above-average organic growth.

Yes, one follow-up question. I mean, back in the analyst's meeting in winter, you mentioned that this year, the Logix was going to be extended to bigger process jobs. I mean, how has that evolved in terms of orders or business or anything else?

We continue to extend the applications and the capabilities of Logix. I would say that, in the process business, we have not -- there has not been a substantial change in the evolution of that -- of that product portfolio mix at this point in time. But we're demonstrating to our customers the ability for that to address more and more of the applications and, in fact, part of the reasons that Logix will continue to grow at a 25% level is that we are moving upstream, upstream in our installed base to be able to do the wet end of their manufacturing process. And we're now starting to have more activity, more quotes. It's opening up more of the OEMs that address that space, so that we continue to evolve, as I said, upstream at our customers. Fut it's a process, as we have said, with a strong installed base of competitive products.

It's a slow journey that we're on, but we believe we're making good progress in being able to convert, win additional business and change -- change the OEM outlook going forward. So that is part of the strength of the Logix growth portfoli -- the growth perspective going forward and why we've targeted between 20% and 30% growth for the next year in Logix.

Thanks, Keith.

The next question is coming from John Baliotti at the of Fulcrum Global Partners .

Good morning.

Good morning, John.

Hey, Keith. Just, will you talk about Europe a little bit, maybe in a different way? I don't think anyone was expecting Europe to be strong, given all the other reports that we've heard coming out of there, But I guess if -- while you wouldn't want a geography down, could you, given that your -- probably I guess your chief competitor is actually in probably the worst region performance-wise in Europe, I would imagine that's got to help, somewhat, as you compete globally.

Well, you know, these are always mixed -- mixed questions because of the fact that, if you look at where our greatest strength is, it is not in western Europe. So, we do not feel the pain as much as others with a weak Europe economy, and so you are absolutely right. But, given our business in Europe, our business is heavily -- heavily weighted towards Logix and the integrated architecture and our control platforms. And, therefore, as that slows down, you know, that's a good segment of our business, so, you know, we would not want that portfolio to be impacted. But if we had to pick a region, you're slightly right, Europe is where we have the lowest market share and so we view that as less pain.

But, quite candidly, we talk to our sales and commercial organizations that it's also candidly, we talk to our sales and commercial organizations that it's also a great opportunity for us to grow our market share and, in fact, we believe that Europe is a growth opportunity for our business, because of the technoLogical differentiation that we have in, certainly, our architecture, but also in some of our differentiated component portfolios. So, we'd love to have all four regions moving together positively at the same time, but Europe is probably the weakest one with our market portfolio.

Okay. May I please ask a second question on that, on something unrelated. James, on CapEx, you're talking about some IT spending that you're having in the year. How should we look at that, maybe in '06, on a Capex? Is that something that we should start to see flat or start to ramp down a little bit?

You know what, I'm going to take a pass on --

Okay.

on Capex for '06. The answer is the spending, you're quite correct, will continue probably, you know, probably into '06 and for a few years beyond that. But , you know, before I give a -- before I throw out a number for '06, there's a lot of, you know, what I'll call physical capital. You know, we need less of it over-time, and -- so if I can say so, acknowledge that the IT spending will continue, but I don't know that I have to -- if I can give guidance at this point, knowing that we've got a lot of work to do on what physical reinvestment is required, which is hopefully not a lot.

Okay, thanks.

But thanks.

Your next question is going to be from Jeffrey Sprague of Smith Barney.

Thanks, good morning. First one maybe for James. James, I know you probably don't want to drill deep into this '06 preview, but just one important point of distinction. I think a lot of this pension and retiree is kind of embedded in this segment, so to speak, so my question is, is that included or excluded from the comment on the 30% to 40% incremental margins?

You're quite right, Jeff, the 30% to 40% would be as though there were no, you know, pension hits, and we will have to net together.

Okay, thanks.

And that is how -- look at it this way, most of the people are going to be in the segments. There is, of course, an overhead layer, but that isn't a lot of people. So you're right, when you start pushing it down into the operating units, that's where it'll show up, but so will the productivity and other things.

Okay, that's fair. Just wanted to make sure I was squared away on that.

You are.

And, just then maybe tossing it back to Keith. Keith, could you maybe expand a little bit on, you know, your pace of growth relative to the market? You know, your reference -- kind of reference kind of the gradually-expanding market , and I just wanted to kind of clarify on that long answer to Bob's question, which was very informative, but you kind of mentioned a behavior change. But then, a lot of things you talked about seemed to be what we were hearing previously, that it's incremental and it's MRO and no one wants to do really big projects. Is there some kind of further change in, kind, of people's behavior out there?

No, I -- Jeff, I meant to just say it is specifically the change we talked about earlier is sticking. They're not reverting back to the previous spending in anticipation, and that's one of the reasons we're not seeing large capacity greenfield and, in some cases, even brownfield expansion. People are willing to -- are willing to forego some of the upside. They're willing to allow backlogs to push out a little, and not willing to invest in anticipation. And so, it was more of a confirmation of what we've talked about the last couple of quarters and a continuation of that. And I meant that, maybe not as a new behavior change, but as a continuation of what we've seen in the larger project business, almost to the point of , in particular, in the U.S., you know, no one believes it's going to be a growth market and so, therefore, they're holding back. So, really no change in behavior, a continuation of what we've talked about previously.

And your growth relative to the market, you think?

Yes, I think that there's no question that -- that we are, depending on the different markets, we are probably growing anywhere between 25% and 50% higher than the underlying markets themselves, and that's why we're exhibiting such strong organic growth.

Thank you very much.

The next question is coming from John Inch of Merrill Lynch.

Thanks, good morning. Hey, it looks like we spent about $0.04 on the expansion and growth initiatives, Keith. I thought we were going to spend about five. Without splitting hairs, do we have a catch-up in the fourth quarter versus the $0.07 you talked about, or is it going to be less than 15 when the year closes out, do you think?

Well, I think you kind of answered it from the standpoint of, it is a little bit of splitting hairs. We aren't the best at being able to predict exactly the ramp-up. We're hiring people. That is not exactly a -- a completely predictable process, particularly when we're looking for domain expertise as the differentiation. So we're willing to delay that spending until we find the right people. And you are also correct, that will get accelerated in the fourth quarter , and that's one of the offsets to the sequential growth that we talked about, the fact that our growth initiative spending will ramp up. And for the year, we'll probably, quite candidly, be at the lower end of the range that we gave back in January of $0.15 to $0.20.

But you still think you do $0.15? Because that would imply -- that would imply about $0.08 of spending in the fourth quarter.

Yes, I think we have a good -- I think we have a good -- a good shot at getting there, and it's really dependent upon finding the right people and we've been working that hard. And if you look at our business forecasts, they're telling us that they're going to -- they're going to get to that -- they're going to get to that number during the fourth quarter.

Yes, and then just as a follow-up, I mean, the profit conversion was I impressive given, I guess, Logix is slower growth. How did PLC fair this quarter, in terms of its -- in terms of its contribution versus last quarter? Did the rate of cannibalization or decline increase, or wha -- just a little more color there?

Sure. Basically, it was flat sequentially over --over -- over quarter two, and we continue to have the -- we continue to be running about a 10% degradation on a year-over-year basis. So, you know, what we -- what we had expected, obviously very different than in Q1 and the end of last year where -- where that degradation really didn't exist. It was at zero, and now we're running at the planned rate of about minus ten.

That's a number you think holds, Keith, in terms of thinking about both this coming quarter and next year, the trend line?

Well, that's -- that's a good comment. Absolutely right. Next year we anti -- the remainder of this year, next year we anticipate 10% reduction. But I want to remind everyone it is cyclical, so there are some quarters where it's, maybe, a little more and there are some quarters where it can be less because it's very project driven and those are not predictable. But, if you look at it over a long period of time, you know, 25% growth for Logix and 10% decline in the control platforms is where we're at today with our outlook for 2006.

Great, thank you.

The next question is coming from Richard Eastman of Robert Baird

Yes, Keith, just a couple of thoughts, if you will, on the operating profit within the power segment. The last six months or so, we've jumped to, you know, a new level here and probably one that you would not have expected to to see a year ago. But we're also running at a -- you know, a maybe a historic high rate of revenue. Just trying to get a sense of, are we kind of capping out on the margin percentage there, given the competition, or how do you view your -- your effort and ability to improve on the operating margin percentage within the power business?

Rick, James Gelly here. First of all, the main reason for the sequential dip, as I said, was, you know, they -- we've been facing a lot of cost -- raw material cost inflation and raising price and trying to offset, and I think what you've got in the quarter was, in effect, pulling through some -- you know, we'll call it some capitalized variances through the P&L this quarter. I think to -- the answer to your question is there's still unutilized capacity power at systems. There's still strong end-markets they sell into. They've got productivity they're working on. I don't know where they are on, you know, their thinking about price, but mostly we've been trying to offset raw material cost inflation and, you know, if you -- there's nothing inherent in this business.

If you unraveled it, you'd find that they have segments that are much, much higher than the margins that we show on average. And some are obviously lower and we're working on productivity and the cost structure of those. So I wouldn't like you to think that somehow we've hit a natural maximum for power systems. I think, with continued volume growth and productivity and keeping ahead of the raw material costs or keeping even, they should be able to expand margins if the conditions that I've set out are met.

Okay. And is there -- is there much of a distribution around the growth rate for Reliance and Dodge, if one looks at 14% for the power business in total?

If you look at the -- for the year, it's been very consistent. If you look at the last quarter, the Reliance product family had stronger growth than the Dodge family. But on a year-to-date basis, it's -- they've been pretty -- pretty consistent at the average of the business

So Reliance in the quarter grew faster than 14% for the quarter?

Yes.

Okay. And then, just lastly, on the corporate overhead side, the number looked a little bit low for Q3. Was that just seasonal fluctuation or was there any offsets there.

No I was going to say, what you had in that line was a couple of things. As you know from past history, one is the environmental -- the environmental accrual that we've made and those are because of the nature of the thing, which is you discovered an exposure and now need to accrue for it, lumpy. We've had charitable trust contributions and with all the what I'll call million-plus dollar noise that can go on in that line, we've talked sort of about an 18 million -- you're talking about general corporate net run-rate. I don't think we've ever really hit it, but that's what we're trying to hold out as an average over time. The was no special favorable in there, it was just with timing of some of the things that I mentioned.

Okay. Thank you.

Thank you.

The next question is coming from in Nicole Parent of Credit Suisse First Boston.

Good morning.

Hey, Nicole.

Good morning.

I guess, Keith, you mentioned the extrusion business. You gave us a great chart down in EPG, talking about the vertical markets and kind of expected growth rates for '05. Could you just put Q3 end-markets in the context of. kind of. what you've talked about previously and where you saw some strengths?

Yes. I think that's -- that chart would play out in Q3, as well. We saw -- we saw strengths in the -- in the extraction, natural resource, raw material industries, mining aggregates, cement, metals, paper, and oil and gas. Those were -- those were probably the strongest segments and that -- that reinforces the transition to a more project, power-centric growth portfolio that we've seen now in the -- in the business. Water and wastewater also grew very aggressively, but it's a -- but it's a smaller base than -- than some of these other ones. The food, beverage, brewing, automotive, that's where we're seeing growth just slightly below the Company average, about 7%. But these are the areas where we also continue to invest in our ability to serve our customer and do more for them with a lot of our solutions portfolio targeted with that. And then semiconductors had -- had a better performance than it did the first half of the year for us.

And the one that continues to be weak is life sciences. The concentration of -- of revenue in big farm continues to go on. You know, that's going to be slightly down on a year -over-year basis, up probably by the end of the year. But it's a market that we're also continually very interested in, in particular because we feel the emphasis in that business will change from one being heavily regulatory and compliance based, to now where -- where they're going to need to deal with productivity, efficiency and asset management, and certainly that plays to our strength in the integrated control and information architecture. So, while that's not an exciting market to date for us from a growth standpoint, we think the needs of the industry suits us very well and we continue to invest in that vertical as one of our -- one of our growth engines for -- for the future. So that's a quick overview of quarter three.

Super, thanks. And I guess just one follow-up on M&A , kind of strategic outlook. In the press, I know you don't normally comment on, you know, press reports, but you guys were rumored to be looking at a larger German manufacturer. And, I guess in the context of size, it seemed much larger than what I would have expected so I guess, could you just kind of put in perspective what the M&A strategy is at the Company, and the types of businesses you would look at?

Absolutely. Our position has not changed in that. We continue to look mainly for, I'll call it, bolt-on, easy-to-digest acquisitions, things that help us from a geographic expansion. They allow us to accelerate our growth but more importantly, they allow us to do more for our customer. That's what we're really looking for, is to areas that allow us to offer more capabilities and, therefore, build bigger and greater customer value and deeper customer intimacy going forward. And we continue to outline software services and geography-based activities in our deployment resources and skill needs to -- to look for the primary areas.

Now, having said that, there is a number of properties that -- that I would say could be not construed to fit into that specific criteria, and if they would come available at some point in time, we'd look at them. As we would have to, but that's not what we're out driving. We're trying to improve the intellectual domain expertise, the knowledge, the capabilities of this business, and that's -- that's where we're focused.

I think it's fair to say we look at virtually everything and we have a pretty disciplined process. I would say that the synergies that exist in some of these, you know, product base with their own distribution businesses are heavy enough you at least have to look. Now, a discipline process is what it's all about. Looking is -- looking is not free, but pretty inexpensive. And given the potential synergies, I think you have to look.

Absolutely. Appreciate the '06 early color.

You bet.

The next question is coming from Scott Davis of Morgan Stanley.

Good morning everyone.

Good morning.

And, again, I appreciate the '06 color, as well. Not sure if you're going to be willing to answer this question, but -- or if you've talked about this in the past. But as far as the growth initiatives the spend as you looked out to '06, is this something that -- that just becomes more of an ongoing process, because obviously growth is important, or is there kind of trailing off at some point, as we get into '06?

No, we're very willing to get into that question. It is not trailing off. We are -- we expect that the growth spending that we put in place has become a part and a fabric of our cost structure going forward. And, quite candidly, we want to drive productivity so that we can initiate more growth investments in the future. So we don't view it as tra -- tailing off. We view it as integral to our go-forward model and, quite candidly, I'd like to do more.

Okay, fair enough then. A question I don't think we've talked about in the past, power systems and your raw material costs. How do you think about -- I mean, how do you purchase raw materials for power systems? Are there hedges in place that are going off, for example, at the end of the year? Is it all in spot market? I guess what I'm really getting at, is this something that becomes a tailwind in '06, or does it continue to be a headwind?

Well, I mean -- I think there's a little hedging go on, but the way I would look at it is, they are -- first of all, you know controlled systems is in a different category in terms of the cost of goods sold, so where we are exposed to raw materials is dollar-for-dollar heaviest in the power systems business. I think what has happened here, Scott, is they've been able to offset raw material through price increases that has, as an industry, stuck, and that's the primary, you know, effect.

As we head in -- you just had a little bit of a wrinkle in this quarter, as some of the inventory that was a little more expensive came through the income statement. But, if we do our job and they've done a great job, they pass through to customers. They get the price and it's, you know, kind of a wash going forward. I don't think there is a material effect due to hedges on or off, as you head into the '06 time frame.

No, but they do have contract buying and those contracts come on and come off at different times during the year and you just need to manage that process, which is what they've been doing, I think, extremely well over the last -- over the last twelve months.

Okay. And just quickly, the tax rate, is this just a change in mix because Europe's so weak? The higher tax rate guidance?

No, it's -- you know, it's basically the way the business model constructed. We are -- if you take the U.S. plus Wisconsin, I don't know if it's the highest in the world, but it's getting close.

Okay, fair enough. Thanks, guys.

Thank you.

The next question is coming from Quint Nufer of Susquehanna

Good morning.

Good morning. [multiple speakers]

A quick question on Logix. You mentioned that you're migrating Logix upstream and expanding the applications. Yet the growth rate has decelerated needs in the last two quarters from 30% to 25% to 20%. Is that -- is that primarily due to lumpiness? I guess, in other words, what gives you confidence in the 25% long-term growth rate, especially as comps were getting tougher?

Well, you know, just to characterize the third quarter, while you're right, it was 20%, that was based upon 42% growth the previous year and, even at 20%, was a 10% sequential growth from quarter two, so -- so, it is lumpy. There's no question about that. It gets driven by -- by projects. But as we've talked, the strength and -- of -- and why we are confident in the ability to maintain a high-growth business here, is the fact that we're expanding to serve market. And the fact that we can do more applications in more industries going forward is what is really behind -- behind the business, and behind the business growth opportunity and, you know, quite candidly, it does get harder. I'm not going to kid you. Growing a big number that keeps growing at that rate is hard. It's very hard.

But we have a team that's committed to -- to finding new applications. We are, you know, expanding the portfolio. We're simplifying the product. It's part of the area that we invested. The com -- the comments earlier about the growth initiatives that we're investing in. A piece of that investment was done to accelerate a functionality in the Logix portfolio that would allow us to address, not just more markets, but be able to address multiple price points and to accelerate that growth so that we could maintain a 25%figure over the next couple of years. So a combination.

Right.

I mean there's no one answer to that question, but we think we're approaching it in a very broad way that will allow us to generate high growth with a technologically differentiated product. And our goal is to maintain that technical leadership, and to be able to drive broader and broader market acceptance.

And does Europe have to recover from the negative growth we've seen this quarter for the 25% to happen?

I think that's a -- not for this year, but for us to be able to grow 25% on a ongoing, extended period, the answer would be yes.

Okay.

We must -- we must generate growth for the architecture in Europe to be able to hit our long-term guidance. And that's why we think, with our share position, we're in a good position to be able to do that because it still is technologically differentiated. So we have a lot of emphasis and focus to do just that in Europe over the next 12 to 18 months.

Okay. Thanks.

. Operator: The next question is going to be from Chris (ph) of A. G. Edwards.

Good morning.

Good morning, Chris.

I have another question on the expanding the serve market. I guess what I'm wondering is, is part of that the -- you know, with lean implementation, a lot of companies are following that process, are you seeing processes that were formally batch or hybrid starting to fall, almost because of this move to one-piece flow, for instance, starting to look more like discrete manufacturing processes where you guys have been very strong?

No, no, I think when we talk about the batch hybrid base we talk about, it is more from the process side, the fact that you're dealing with pressure, temperature, fluids, flow, you know, things that you're cooking, as opposed to the manual movement of piece-by-piece products. So what we're seeing is -- but to your point, what we are seeing that the batches there get shorter, as well. So instead of maybe, you know, they change it every couple of days, they may want to do it every shift or in between shifts. And so the strength and the power of the integrated architecture is that it's much more flexible than a DCS process control system , and it has a better price point. So we think the functionality lends itself to the evolution of what's happening in the batch base, as well, with what the capabilities are and obviously that's why we've targeted it.

So they are different segments, but the same phenomenons are occurring, and we think that's what drives the upstream customers to look more at Logix. And the lean aspect is it allows them to reduce the variability inside their plant. That's where the benefit comes. They can invest in less spares, less training, and they have less asset, whether it be physical or intellectual assets, invested because they can do more with one -- one scalable platform. So, you know, it's -- from a capital standpoint, it's less expensive.

Okay. It just seems like there might be a cycular trend here that would be pretty favorable to you in the long run. As you noted, you know, production runs get shorter and flexibility is a bigger deal, and communication and coordination is a bigger issue and Logix addresses that.

We think -- well, that's exactly right. I mean, you just said it. It -- that is what's happening and it's -- it's the integrated control and information aspect of that and that's how you tighten the supply chain. That's how you get down to what you talked about earlier, which is a lot size of one. It's just that in the batch hybrid space, it may be quicker change out as opposed to just doing one. You want to do more batches a day perhaps and so you've got more flow of information, more need to be able to drive it. And then obviously the other trend that I think is in our favor, and in our favor big time, is the ongoing evolution of regulatory and tracking and traceability that started in the pharmaceutical and life sciences businesses that will now move into most, if not all, industries. And the ability to now move information and to be able to validate and be able to trace and trace the genealogy of what's taken place is going to be a trend that actually moves from the batch hybrid side into the discreet markets going forward, and that is certainly a trend that we think is powerful for us and fits the -- fits the value of the integrated architecture forever.

And I guess I'm kind of on a roll here, but let me close with the dimension that we haven't talked with respect to the integrated architecture is integrated safety and how that becomes an integral part to the entire control environment , in both discrete and -- and batch hybrid spaces. That is just starting for us to be able to -- to be able to generate growth from that. We're very early in the evolution of that part of the portfolio, that that's another dimension that allows us to look at the long-term sustained higher growth rate of the technology and of the platform. So I think -- I think that's -- those are all the pieces of the equation.

Okay. I guess as a if I can follow-up on a separate issue, in the absence of major M&A a activity, should we continue to think of, you know, a hundred million dollars a quarter in share repurchases as kind of a reasonable number?

Yes, I mean we did -- depending on the share price, of course, we had authorization nine this year, which we will execute. And, yes, that would be, you know, close to two, 2.2 per quarter, as with this quarter. And I think that's -- in the absence of any other use for the balance sheet leverage, that would be a good assumption.

Okay, thanks guys.

Thank you. Denise, we have time for one more question.

Very good, sir. The last question is actually coming from Robert McCarthy of CIBC World Markets

Good morning, gentlemen. A solid quarter. I wanted to just ask briefly on Logix, what do you se -- do you see in the near-term some acceleration in the fourth quarter in terms of the underlying organic growth rate? I know it's lumpy, but is that what you foresee in the fourth quarter?

Yes, we do see growth -- growth in the fourth quarter to about 25% again, and that will be what we go out the year with is 25%.

Thank you for your time.

Thank you.

Thank you.

Thank you all for joining us, and we look forward to your calls later today.

As this concludes today's teleconference, you may now disconnect.