洛克威爾自動化 (ROK) 2006 Q1 法說會逐字稿

Welcome to today's Rockwell Automation quarterly conference call. I need to remind everyone that today's conference 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.

Good morning and thank you all for joining us for Rockwell Automation's first-quarter 2006 earnings release conference call. Our results were 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 that will be referenced during the call are also available on that same website. They will remain there for the next 30 days.

With me today are Keith Nosbusch, our Chairman and CEO, and James Gelly, our CFO. Our agenda for today includes some opening remarks by Keith, and then James will review both the quarter and our outlook. We will leave plenty of time at the end of the call to take your questions and again ask that you limit your questions to two per person. We expect this call to take about 50 minutes.

As is always the case on these calls, I need to remind you that our comments today will include statements relating to the expected future results of our Company and are therefore forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from these forecasts and projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in our other SEC filings.

With that, I will turn the call to Keith.

Good morning. I'm glad all of you could join us today on the call. This was another strong quarter and a great start to fiscal 2006. James will walk you through all the details of both our performance and our revised outlook.

While the results in the quarter are impressive, especially organic growth, I tend not to get too excited about any one quarter. I am however pleased about the pace and cadence of our transformation and about our execution. This quarter is important because it is another data point in a lengthening series of quarters that validate our strategies and demonstrate the power of this business model and the strength of the entire organization and leadership team driving productivity.

Our growth initiatives are undoubtedly paying dividends. We're winning more share of wallet as we broaden our served markets. Our growing domain expertise and expanded applications portfolio are making us a more capable solution provider. Most importantly, we are not resting. We are extremely focused on actions and investments that can be taken today that will catalyze growth in 2007, 8, and 9.

Our focus on productivity is enabling these investments. Both Control Systems and Power Systems achieved their stretched target of 4% cost productivity in the quarter. In fact, despite all of the incremental spending on growth and significant higher pension costs and the inclusion of option expense, our segment margins expanded. Both growth and productivity require investments for future benefits. We will continue to make those investments going forward.

Before I hand the call over to James, I want to add a word of caution. We have been here before. It remains true of this business that extrapolation of any one quarter to perpetuity is likely to generate a wrong conclusion. We are experiencing above-trend growth in a favorable economic environment. As our adjusted guidance suggests, we feel increasingly confident about 2006. But as many of you know, our performance from quarter to quarter will oscillate around this growth trend.

With that, I will let James walk you through the results and the new guidance. James?

Good morning again to everybody on the call. My comments will reference the slides that were posted to our website earlier this morning, and I will start with the first chart entitled "Q1 Results Summary."

Revenue was 1.301 billion, an increase of 10% over 2005, and that was 11% excluding the effects of currency translation. Segment earnings were up 16% to 248 million. Year-over-year conversion on incremental sales was 30%. This included a couple of items worth pointing out -- a $6.5 million increase in retiree benefit expense, $4.5 million of stock option expense, and a $9.2 million facilities charge for a controlled systems site in Europe.

Walking down the page, you'll note purchase accounting amortization was an expense of 2.8 million, roughly similar to the run rate at the end of last year and where it is going to be going forward. Remember we passed the anniversary dates of the Allen-Bradley and Reliance acquisitions last year.

General corporate net was an expense of 22.3 million, up 6.3 million versus last year, and that increase is due to a $5 million contribution to our charitable corporation and the inclusion of stock compensation expense in this line item.

If you use the income tax provision line to calculate this quarter's tax rate, you will find the quarter rate is about 31% versus 32% in the year-ago period. This quarter's lower tax rate was the result of the beneficial resolution of a foreign tax matter. You may recall that in November, we gave full year guidance of 33 to 34% for this fiscal year's EPR and we now expect a full 34% average tax rate that is at the top of the previous range for the fiscal year. In order to get that, you're going to have to model an average rate of 35% for the last 3 quarters of this year.

Going down the line, income from continuing operations was 145.7 million, up 19% year over year. Diluted EPS from continuing ops was up $0.15 or 23% over the year-ago quarter. As you can see, average shares outstanding this quarter were 182.3 million, down almost 4% from a year ago. During the quarter, we repurchased 3.5 million shares.

Let me go to the next chart, which depicts total Rockwell results. Sales were down 3% sequentially. We too had fewer selling days in the quarter, and the sales per day was about flat sequentially versus a very strong fourth quarter. However, as you can see on the right, operating margin expanded year over year by 1.1 points to 19.1%. That drove a 16% increase in segment operating earnings. The drivers for that were volume and price -- higher volume and price; as Keith said, a solid 4% cost productivity, partially offset by cost inflation and the facilities charge in Europe that I referenced.

You can't see it on the chart; but our 4 quarter average return on invested capital was 19%, up about 4 points versus the year-ago average.

Let me go to the next chart, which gives some detail on Control Systems, the reporting segment. Sales were up 9% year over year or 10% excluding the impact of currency. Sequential growth was a negative 3%.

International sales grew 5%. As you'll see in a couple of slides later, Latin America and Canada were the standouts while Europe was flat year over year and Asia had some tough comparisons versus the prior year.

Sales of our Logix platform were up more than 25%. Looking on the right-hand side of this slide, operating margin expanded about 0.4 point year over year to a margin of 19.7%. This result did include the 9.2 million facilities charge in Europe. It also included $4.9 million of incremental retiree benefit costs and $3.5 million of stock option expense. I should just say we provided a chart in the appendix that gives you quarterly detail for these two items.

Go to the next chart and provide some detail on Power Systems, where results were a bit better than we indicated in the guidance we gave you in November. Sales, as you can see on the left, were up 15% year over year with better-than-expected volume and price realization. As you'll see shortly, we are raising our guidance for the year for Power Systems revenue by a few points.

On the right-hand side of the chart, margins expanded 4.3 points year over year and 6.5 points sequentially. Both the Dodge mechanical and Reliance motors units continue to benefit from volume leverage, a favorable pricing environment and aggressive productivity initiatives taken over the last couple of years. Obviously looking sequentially, there has been some variability in terms of margins. And this is largely due to the impact of what were previously very large raw material price increases working their way through inventory into the P&L, and you saw that in the fourth quarter. You should be thinking about margins in the mid teens for Power Systems for this fiscal year.

Go to the next chart, which is a geographic breakdown of our sales this quarter and gives you the regional growth rates with and without adjustment for currency translation. As you can see, we had very strong revenue growth across the Americas. The US business saw strong momentum. Basically, our wheelhouse, where the strengths of our business model are shown off to best advantage, which took the form of solid share gains and continued relentless effort to more than double our addressable market.

Latin America demand remained robust with particular strength in Mexico and Brazil. As I said, Europe was flat versus last year. We are working hard to change the direction of our European revenue growth despite some indifferent market conditions there.

As you may recall, we took a pretty large charge to restructure our European back office in the fourth quarter. Our plan is and was to reinvest the savings back in the front end and grow market share in Europe. So we're reinvesting in targeted growth programs in Europe, and we hope to see some tangible results as we move through the fiscal year.

As I mentioned earlier, Asia got off to a slower start this year in the aggregate, primarily due to some tough comparisons in India which had a string if you remember of 50% quarter growth rates a year ago, which was driven by some large projects. Growth is better in China, Japan and Southeast Asia -- more than 20%. We saw some slower export-driven demand in Korea, where the economy is adjusting to the strong currency.

But in talking to our Asia team, we're getting a pretty upbeat outlook for the year. So we do expect a much better and more balanced result in Asia in the second quarter, which would mean year-over-year acceleration as we move through the year.

Let me turn now to cash flow. Obviously when you look at this chart, the $450 million voluntary pension contribution kind of jumps off the page at you. At the bottom of the chart, you can see that we had negative $213 million in cash flow in the quarter, reflecting that big pension contribution which we made in October.

Working capital was a $15 million use of cash in the quarter. I should say that we continue to devote significant time and resources to continuous improvement in driving working capital turnover upward. Capital spending was $27 million in the quarter. As you'll see shortly, we are raising our guidance slightly for free cash flow for the full year.

We've inserted a new charge. Normally, we don't have that much to say about the balance sheet, so if you go to the next slide. In view of the relatively big changes in the past quarter, we've included a walk to point out the moving parts. So starting at the left, you can see our beginning balance for the fiscal year. Moving one column to the right, we made a voluntary $450 million pension contribution, which added to our prepaid pension asset and that's where it will stay for the balance of the fiscal year. We issued $300 million of commercial paper, as you can see moving one column to the right to finance the bulk of that contribution. As you go right, you can see we sold the effects of selling about 24 owned properties and leasing them back again over 5 to 15-year terms.

The bottom half of the chart shows you the proceeds of this transaction, which were 147.5 million. You can see above, the net reduction of our property plant and equipment asset of 93.5 million. A gain on this transaction will be recognized over the lease terms.

Finally, as I said earlier, we bought back 3.5 million shares of stock in the quarter. So if you add it up, our net debt increased from about $286 million in the end of the fourth quarter to $604 million at the end of the first quarter. This pushed cash-adjusted debt-to-cap capital from an underleveraged 15% to about 28%. I don't think we will see this much activity in a single quarter going forward, but hopefully this chart was useful.

Let's go to the last chart, which is entitled "2006 Guidance." As Keith said, we are going to make some adjustments to the guidance we provided in November. First, looking at revenue, we're going to take our revenue guidance to about 9% for all of Rockwell. Basically, that is the high end of the range we provided earlier. This is driven by the better volume and price we see in Power Systems and also our increasing confidence in Control Systems' end markets has allowed us to nudge Control Systems' growth to the top half of our original range for this year.

As I said earlier, the tax rate is now expected to be 34% for the year, which is the high end of the original range. We raised our EPS range for the full year by $0.10 to 3.10 to 3.20, which reflects the additional point of top-line growth. Finally, we are raising our free cash flow guidance by $20 million to 300 million to reflect the increase in earnings.

In summary, the financial results for this quarter were very good. I know that for some people, the $0.80 of EPS this quarter will be deja vu all over again, reminding them of the strong first quarter of a year ago. Adding to Keith's word of caution about extrapolating a single quarter's results, I just wanted to point out a line in the press release, which says, "We expect to experience typical seasonality in the second quarter. That is typical seasonality and customer capital spending." Remember that the quarter just ended is for many of our customers their fourth quarter when they are animated in some cases by the use it or lose it mindset. Our experience has been that is sometimes followed by a kind of low tide feeling when they get back to work in January.

Last year, we had a fantastic year but it might have been spoiled for some people by the $0.04 sequential decline from Q1 to Q2. I guess some people kind of spill their coffee when we hit the famous air pocket.

Looking at the balance of this year, we do feel pretty good. We did see accelerated growth in the quarter in most businesses with rising backlog and good momentum. However good our outlook is for the year, part of that outlook might include some typical seasonality in the coming quarter.

Okay, with that out of the way, I have only got to point out we included some extra stuff in the appendix, including a Q1 EPS walk showing some headwinds and tailwinds for the quarter as well as a very detailed quarter-by-quarter breakout of the equity-based compensation and retiree benefit expense for the year to help you with your models.

That does it. Thanks for listening in. Now, we would be happy to answer any questions you might have.

Christina, we're ready to take questions.

(OPERATOR INSTRUCTIONS). Robert Cornell, Lehman Brothers.

Great quarter and thanks for the heads up on March. You know, legacy was up -- I mean, Logix was up over 25% in the quarter. Maybe you could help us understand why that is, and you didn't indicate what legacy did in the quarter -- legacy PLC stuff, so maybe you could start there.

Let me take that one here. Well, as we said, Logix grew by more than 25% in the quarter. And that was made up of -- probably 40% of that growth was attributed to new addressable market and applications with Process and CompactLogix, another 40% market share and growth. In this quarter, only about 20% of it was cannibalization, which tells you that PLCs were down only 6% year over year and were flat sequentially. So that is very similar to the pattern we saw last year in the first quarter, and it is one of the reasons and probably the primary reason for the rich Q1 mix that we enjoyed. Certainly going forward, we expect that step function drop in PLCs in Q2 similar to what happened last year. It will be about 7% on the year-over-year drop and then probably a 10% sequential drop. So that is the typical seasonality in the legacy business. Right now, we continue to target Logix for a 25% growth in the second quarter but offset with a stronger reduction in the legacy business.

Keith, would you expand just on the first point you made? I think part of the increased confidence you talked about for the business was the Process and also CompactLogix. Have you seen any sort of big project -- wins looming in Process? Or maybe give us just a little bit more disability into the confidence angle and the Process and CompactLogix.

I think in both of those, we continue to see expansion of the market. With compact sets, you know it allows us to address another price point in the very important OEM machine segment both in Europe and in Asia. So that is very positive.

With respect to Process, we continue to invest in verticals and Process is one of the leading elements of that investment. We believe that in a lot of those verticals, we have strength in the dry end of those businesses and we want to move it into the plant deeper and generate more process, particularly batch hybrid space. We've been doing greenbelt training for a lot of our sales organization around the world. In fact, this last quarter, we pretty much completed it for Process on a worldwide basis. We had pretty much done it over the summer timeframe in the Americas. But Asia and Europe now is pretty well-trained and up-to-speed on the capabilities and the differentiation with respect to Process. That is one of the reasons we continue to have confidence -- is our ability to expand into that market segment.

Mark Koznarek, FTN Midwest Research.

A question on the investment spending we have been -- you just mentioning that with the investment in the verticals and we have been spending at, I believe it was a run rate of around 80 million annually or 20 a quarter. But there had been discussion recently that if things looked better and you saw some open field ahead of you that you might boost some spending to address market opportunities. So can you update us on where things stand relative to that investment? Is it still at that pace, or are you notching it up?

It probably has picked up a little. I would say right now, we're probably spending at about 25 million per quarter. Quite frankly, we have a list of additional areas that we would like to be able to seed going forward throughout the remaining 3 quarters. And that is a process that we run on a continuing basis. Certainly our goal, as I said earlier and previously, the ability to drive sustained growth requires investment. Our goal is to continue to invest and continue to use productivity as a reinvestment tool. The better we do productivity, the more you're going to see us investing in the future and in additional growth initiatives as well as just deepening the investments in the current ones, which we feel real good about at the moment.

So 25 million run rate currently with certainly an expectation that we will add to that as we continue to demonstrate the ability to drive productivity at the 4% target that we have outlined for the year.

If I could follow up -- on the Power Systems side, it looks like margin was at a record level or near if not a record. You know one of the things that I'm sure is helping to drive that is a lot of the retrofit and replacement that is going on down in the Gulf Coast for the motors kind of products and other things out of that. Is this kind of a bubble because of that high MRO activity, or have we moved to a new level of profitability because of the productivity initiatives you just talked about?

I think James addressed that. I would say that the first quarter is not where we expect the full year to be in total. James mentioned we thought you should model around mid teens for margins. The first quarter was just a great combination of a number of areas that you identified, one being the price. But two, we did see some benefit from Katrina and the Gulf situation. The recipients of that was Reliance in the motor side of the business in particular and our Motor Control Center business. In total, we saw about $10 million of revenue for the quarter that we did not anticipate and probably about half and half -- half in Control Systems, half in Power Systems. And that was part of the benefits that Power Systems enjoyed in the first quarter.

In addition to what James mentioned, the price realization offset and finally we are approaching catch-up to the increases we had through 2005. Also they have been driving product very aggressively and then a little bit with respect to improvements over the operating performance of the fourth quarter and some -- I will call it -- specific operational areas that they got better in. The higher volume just allowed them to run their plans more effectively as well. So just a very, very strong quarter but made up of a number of dimensions of which a couple of them will moderate as the remainder of the year unfolds. But still, they are going to have a very, very strong improvement on a year-over-year basis in margins. And that's because of the efforts of that team to improve their cost competitiveness.

Jeffrey Sprague, Citigroup.

Keith, could you expand on your commentary about where you think we are relative to trend? My question is more in the light of dollars spent. Clearly, this rate of growth is above what you think the long-term average rate of growth is. But in terms of dollars spent, dollars needed to be spent in these various industries and vertical markets you play in, where do you think we are in that cyclical progression?

I believe it varies based upon the different -- I will call it -- industries/verticals. Certainly, you know if you look at I guess history, which we're saying is not always a good thing to look at for us and other recoveries because we are a different company. But certainly from an industry standpoint, these trends tend to last 25 plus quarters and we are probably one-third of the way through that. We are in the eight or ninth quarter of that spending.

The one thing that is different now is that the spending is more disciplined and I would say more restrained than it was before, which some people will say well maybe extend some of this but it will attenuate the magnitude of the change and the rate of change. But it might be longer but less dramatic of an impact on a quarter-by-quarter basis.

So what we are seeing now I would say is that some of the deeper cyclical industries are starting to spend and are probably spending early in that cycle based upon historical perspective. They did not spend for an extended period of time. They probably ran a lot of their equipment down, and I think we're seeing some replacement spending there because of a need to spend. And we think that will continue. Certainly, most of them are now in the fray including to some dimension the pulp and paper industry. While the rate of expansion in the industrial economy is slowing, certainly in the US, we think the macroeconomic indicators are still positive and will give us moderate sequential growth and improvement over the next couple of quarters.

The cash position of companies is strong. So they have the wherewithal to spend. It's really once again back to a more disciplined spending process, and I'm hopeful that we will see a prolonged period but adding more modest rate than perhaps historical timing would indicate.

It also sounds from your comments that most of what you are seeing would still be characterized in one way shape or form as MRO as opposed to people adding capacity for future organic growth in your end markets. Is that a--?

Particularly in the US. Let me say that to the US and Western Europe. We believe that the vast majority of spending is for productivity and cost reduction with a tertiary benefit being added capacity because of that spending as opposed to pure capacity expansion.

Now the area that perhaps that is not the case would be in the mining segment where really the backlogs have gotten extended. Now, we're seeing those companies starting to spend a little bit to expand their capacity and not let backlog extend out any further than it currently is.

But in general, you are absolutely right. In the US, we still see no sign of what we will call Greenfield and/or capacity expansion.

Just one really quick numbers one for James. James, if I look at corporate ex-charity and ex-the options and pension, the number is fairly low. Is there a corporate cost-cutting or something? Is that kind of a normalized base line now where general corporate is? Or should it move up over the course of the year?

I think it's fair to say we're talking about 90 million for the year. One thing I've learned is that general corporate net if I told you a number, it would not be that next quarter. If you just say it's lumpy and it should do 90 for the year, I think we will be pretty close to the mark.

Steve Tusa, J.P. Morgan.

Just wanted to ask about the tax rate. You are kind of guiding up the year modestly on the tax rate and it was low this quarter. So can you just explain to me kind of dynamics and why you're giving back that tax benefit over the course of the year?

Yes, first of all, think about it this way, when I prepared the guidance for the year and thought about what the tax would be, I had in mind some items including the one that occurred in the quarter. So when I said it was 34 or 33 to 34, I had some -- some call them resolution of certain items that I used to calculate my tax rate for the year. You have got one in effect broken out in the first quarter. I am still going to do the 34, and I'm just pointing out for the whole year to be 34 and the first quarter being 31, you're probably are looking at something close to 35 for the remainder of the year.

It's just sort of the way the tax rate is determined, not to get into the gory details but you've got your blended statutory rate and then you have things that are raising or lowering the rate around that average for all your global tax rates. And one of those items was big enough to get broken out in the quarter's results.

As far as the sequential progression in earnings, you said it would be similar to last year. Last year, I guess it was a 5 to 6% decline from 1Q to 2Q. Is that on a percentage basis how we should be thinking about it?

Thank you for asking that. But yes, that is basically the gist of my comments, which is there is a little seasonality. And like last year, it could be some -- last year was $0.04 -- could be that same order of magnitude this year.

Sorry, then one more -- Logix is at more than 25%; how much more than 25%?

1 or so or 1 or 2 more.

John Inch, Merrill Lynch.

James, you said there were fewer selling days in the quarter. How many fewer? How much of a revenue impact was that? Does any other quarter have fewer or more selling days versus the year-ago comparison?

I was trying to be fair and balanced. It was about 2 days fewer because of the holidays. For the rest of the year, it's pretty level. So order of magnitude, think of it as 64 going to 62 days and then back up to the 64. But that is our forecast.

What kind of a revenue impact was that then?

I'm sorry. If your sales per day were down, were flat and your number of days was down call it 3%, you would end up with the 3% sequential decline. So sales per day was flat, and the number of days was down 3%. So the revenue was down 3%.

But why don't we get those 2 days back in one of these other quarters?

You do. As you go from Q1 to Q2, you would have let's sequentially 3% more days -- now we're into the days -- and then you have to figure what sales per day would be as we do. But if it was flat, you would be up 3% in the second quarter.

So in terms of the Q2 or the March quarter, I mean I hear you that you're saying sequentially there is sometimes a seasonal drop-off. Yet, you guys have pretty easy comps because of the air pocket. Are you guys talking about what you are seeing in terms of business activity thus far in January creating a similar air pocket? Or are you just trying to exude a little bit of caution to not extrapolate the very strong results we saw from the December quarter?

It's rather more the latter; that is we have not seen even all of January yet. Remember last year, it was not just January, which sometimes is slow. It is slow generally in every year. It was the one-to-two punch of January is slow and then February not making it up. We are just trying to leave some room here so that if that were to occur again, we would not go through the same bumpy ride. People have a little more notion of seasonality. So it is really what you said the latter, which is just to exude a little caution.

But the year over year, James, should actually be -- I mean all things equal if the trajectory holds -- pretty good because you do have easier comps versus last year, correct?

You're right.

Just my other question is on the tax rate. I guess I am not fully appreciative of why if you have this one-time issue this quarter that drove the tax rate to 31% -- but the tax rate are you saying ex the issue would've been 34%?

Yes.

Okay, then why would -- so pretend that issue did not exist, why would then the tax rate in Q2, 3 and 4 actually go up? I don't --

Maybe I should say, John, that --

The two are connected.

The first quarter probably minus the items I talked about probably would have been closer to 35. You plan on when you do your rate for the year, as I said in my earlier answer, you calculate the average statutory rate and then you have items that you plan to occur. And these would be things that could be $500,000, they could be 5 million, they could be 10 million. They get above a certain size, and you have got to break them out. And that is all that happened in the quarter.

Then lastly just Power Systems' strength, was there some sort of exaggerated order benefit at the year end perhaps -- I don't know Keith called out mining as an above trendline capacity expansion vertical. Was there something else that accounted for ex the Katrina commentary that accounted for some of the very strong results we saw in Power that perhaps attributed to one or two customers or something that could be arguably more lumpy?

I don't think so, John. We looked pretty carefully at the big distributors as a subset, and they were not as it turns out one of the big growth drivers. I think it really is the case of some pretty broad-based strength. We did look to see if there was some pull ahead or spike or something. Actually, that would probably be a big distributor, and they were not one of the leaders of growth kind of if you look at the quarter or the year broad based. As Keith said in his remarks, for sure 5 million which is a pretty big number for those guys -- a couple points of growth -- just related to hurricane rebuild. But other than that, I don't think there was a discrete big customer that we would call out.

Again -- I am sorry -- the 10 million, that is the hurricane rebuild? You said half Control, half Power?

Exactly.

So 5 million for Power was hurricane?

That's right.

John Baliotti, [Canday Financial Wizard].

Keith, could you give us some color maybe on auto? I know there is reason to believe there's opportunity there in terms of penetrating some of the accounts, some of the OEMs with more product. But can you kind of talk about how the dynamic of the news we're hearing out of GM and Ford in terms of rationalizing lines and facilities, how they think that is going to play out with you?

Let me make a couple of comments in general about the industry and then specifically take on that last part, which is what is the plant closings portend for Rockwell Automation. Let me just start by characterizing the industry a little. Certainly, this was the first quarter in over 2 years where sales in the automotive vertical were down year over year. And we still expect modest growth over the remainder of 2006.

I think the real positives here is that the ongoing diversification of our end markets allowed us to generate strong growth despite lower automotive sales. So I think this is a good indication of what we're trying to do to diversify and the fact that today automotive is only about 10% of our sales. In particular, a significant percentage of that is non US-based companies. And I think that is the other dimension to remember here is that the global automotive industry is still a growth market, and the industry is not broken globally.

Now having said that, the problem we have is that in particular to US players have excess capacity, I mean particularly Ford and GM. As we said before, even Ford and GM must continue to bring new model introductions and they need to continue to invest in flexible automation and safety that will continue to drive our growth, which is why we feel good about the remainder of 2006 for the industry.

The plant closings will also reinforce the need to have more flexible manufacturing plants because they're going to have fewer lines and fewer assembly plants. So therefore, what they do have will be required to be able to produce multiple models. So in the long run, that will be helpful for continued investment in the breadth of the portfolio that we have for the automotive industry. Plant closures in particular that will change the composition of some of our sales down the road, and it will impact MRO business. There will be less of it. They both identified a number of assembly plants where we are particularly strong that will be closed and that will impact.

However, we believe some of that can be offset with greater investments into flexible manufacturing and the continued need independent of the closures. They have to continue to drive productivity. Certainly, we expect that the integrated safety capabilities will drive part of that productivity and part of that growth.

Then in the US, certainly the transplants continue to be very aggressive and we continue to focus very aggressively on the global automotive market, which is why I made the comment that globally it is a growth business and a lot of continuing investments are being made in the US by the transplants certainly, in Asia by all companies and in Eastern Europe by many companies as well. So tough news though for the plant closings, and it will impact us in a segment of our MRO spend going forward.

Do you think that that changeover in terms of going to -- rationalizing the plants and then also having to go to more flexible, more productive infrastructure. Do you think that happens concurrently, or how do you think the timing works? I can't imagine you shut everything down and then think about productivity?

No, they go in parallel. They retool lines. It will be based upon their belief of which models are going to be the keepers if you will and which plants are going to be sustainable. And you'll see them starting to invest in the different lines. In particular, it gets timed to the model year changeover. That is when the investments occur; that's when the decisions are made. As they prune lines, prune cars or prune plants, the other remaining facilities and lines is where the ongoing investments will be made. So it's a simultaneous game that gets played here. Our goal is to have the project work offset the MRO work -- not the MRO work but the MRO business that would have naturally flowed from those additional assembly plants being open and running even at that reduced capacity.

Richard Eastman, Robert W. Baird.

Just a couple questions. Keith, do you have a sense of is CompactLogix growing at a rate in excess of say 30%? Is it the faster piece -- the faster growth rate piece of the Logix product line?

The answer is yes. But it is north of 30%. But you would expect it because it's a very small base. So the growth rates are very high. It will grow very high double digits for the year, and it is just the nature of that business. As you bring out a new platform, the growth rates are higher than you would expect. Not only the revenue growth rates but the other dimension of it is the unit growth rate is higher as well than ControlLogix would be. So those tend to be natural phenomena when you're bringing out new platforms as part of the family.

Is there any conclusion to draw about your penetration rate into the OEM marketplace? We've heard about it for the last couple years; it seems to be fairly dramatic. It seems to be maybe an entry point into Europe or a competitive strength in Europe? Is there any conclusion there when you look at the growth rate? Or should we just bundle that into the success of Logix in general?

Yes, I think you need to bundle it in. This is a -- I will call it pervasive platform if you will. Certainly OEMs is a very important segment that we targeted with the Logix platform, starting with when we came out with Integrated Motion and now accelerating with CompactLogix, which opens up another set of OEMs and price points that we can reach.

Your comment about Europe I would say is exactly right. If you remember our conversation around Europe and the realignment of our selling strategy there, it was focused around the technology differentiation that we had with the integrated architecture and focused on OEMs in particular in addition to our verticals. But the OEMs are a big part of that. Likewise, OEMs are very important to us in Asia, particularly China and India. If you would go through a number of the original equipment manufacturing shows like we do, we track our penetration based upon the number of machines that would have our equipment on the plant floor. I would say over the last 4 years, 5 years we have seen a consistent, steady increase in our penetration on the machines. Therefore, that reinforces why we are seeing the growth rate in Logix and why we are very optimistic and bullish on the opportunities that CompactLogix would bring as well in that space.

Then just a quick question. Can you just roughly size the run rate of the Process business for you right now just off of first quarter?

Boy, I would hate to be wrong there because it's pretty important. How about if I have Tim get back to you on that one? I just don't want to --

Okay, no problem.

I don't know it off the top of my head, and that is an important segment and I would hate to be wrong. But as I said earlier, it was 40% of the Logix growth. But I don't know the precise number of the Process growth this quarter.

We have time for one more question.

Nicole Parent, Credit Suisse First Boston.

One follow-up you kind of touched on in Jeff's questions with mining and John's with auto. Could you give us some color by vertical what you did in the quarter?

Sure, I would be happy to. The real strong performer that was I guess I would call it exceptionally strong and it kind of goes back to what we talked about earlier with some of the Katrina activities was oil and gas. The real positive here in oil and gas is that the spending is in our sweet spot, which is exploration and production. As we said earlier, Katrina helped there as well. So that was very strong.

Food, mining aggregates and cement and life sciences all grew above the Company average. Water and wastewater and beverage grew slower than the Company average, but we certainly expect those to accelerate going forward with some of the activities that we have been working on. Then as I mentioned in the transportation conversation on automotive, transportation was down in the quarter. So certainly, we believe going forward that continued growth -- low teens growth from our consumer industry verticals will see some deceleration in the energy and mining aggregate and cement simply because it's such a high number. It is not really sustainable at those levels. It will still be a healthy growth, but it will be somewhat less and we continue to invest. We continue to invest in our verticals, and this is one of those investments I think Mark's question maybe earlier -- this is one of the areas that we invest for the future and where we look to spend more money as we go forward.

In a couple of these, we're just getting going, particularly the water wastewater and beverage areas. And that's why we feel good about some of the future potential they have. So that's a little overview, Nicole.

You might have said it and I just missed it. Was the price realization in Power Systems in the quarter?

The price realization, I did not say it. But basically, it would have been in the low-to-mid single digits. But you have to remember that was to offset the earlier price increases we had in the inputs -- I shouldn't say price -- cost increases that we had.

In the quarter, we just basically got caught up to where the price offset the input cost increases that we saw throughout 2005. We continue to monitor that. But we are trying to manage that as an offset more than anything else. It is still a pretty aggressive customer base out there, and it is very difficult to get pricing particularly in those products.

Thank you all for joining us; that concludes the call.

That does conclude today's teleconference. We do thank you for your participation and have a wonderful day.