洛克威爾自動化 (ROK) 2006 Q2 法說會逐字稿

Thank you for holding, and welcome to Rockwell Automation's Quarterly Conference Call. I'd like to remind everyone that today's conference is being recorded. Later in the call, we will open the lines for questions.

[OPERATOR INSTRUCTIONS]

At this time I would like to turn the conference over to Mr. Tim Oliver, Rockwell Automation's Vice President and Treasurer. Mr. Oliver, you may proceed.

Thanks, Candice. Good morning, and thank you all for joining us for our second quarter 2006 earnings release conference call. We apologize for the slight delay we were letting you all dial in. 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 both now available on that website. These will also remain there for the next 30-days for your reference. With me today are Keith Nosbusch, our Chairman and CEO and James Gelly our CFO. Our agenda today includes some opening remarks by Keith, and then James will walk us through 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 yourself to two questions to allow broader participation. We expect the call to last about 50 minutes. As is always the case in these calls, I need to remind that our comments today will include statements related to the expected future results of our company, and are therefore forward looking statements as defined by the Private Securities Litigations Reform Act of 1995. Our actual results may differ materially from our forecast and projections, due to a wide range of risks and uncertainties that are described in our earnings release and are detailed in our other SEC filings.

With that, I'll turn the call to Keith.

Thanks, Tim. Good morning everyone and thank you for joining our conference call today. This was another quarter of solid execution throughout Rockwell Automation that generated exceptional results and again demonstrated the power of this business model. There were several very positive aspects to the quarter. First, the impact of our ongoing and even accelerating reinvestment in technology and domain expertise is beginning to pay dividends. I can confidently state that we are taking share in all of our major product groups.

We are increasing share of wallet at existing customers, and we are expanding our served market. Second, we capitalized on the continued strong demand from our North American install base and our global power centric and markets. It was a great quarter at Power Systems in both revenue growth and margin expansion. And third, we generated nearly 4% cost per activity in the quarter that can then be used to fuel further investment in growth.

Despite the fact the numbers reported today are well above those that we anticipated when we spoke to you in January, the quarter played out very much the way we thought that it would. Consistent with our first quarter performance all of the overdrive above our original guidance can be attributed to very robust growth in our power centric businesses and in our resource based end market. The recent rapid appreciation of stocks in the industrial sector would suggest that some expect this length and strength to continue for some time.

And while it does, we will continue to outperform these end markets and deliver above trend results. But our sense of urgency and healthy paranoia about any eventual deceleration in these long cycle businesses has not changed. We remain heads down and intensely focused on sustainability. Sustainability that requires us to continue taking share, enhancing our market access, broadening our geographic footprint, extending our technology leadership and generating productivity.

To this end, there are also a few things this quarter that we need work harder on. Logix only grew at 20%. Growth is somewhat lumpy in this business as we have said in the past. But it does need to grow faster. Asia Pacific is an opportunity rich region for us and our growth rate needs to be higher. Our consumer base verticals can contribute more. These verticals are nearly fully staffed and should have stronger growth in the second half. Sustainability will require getting all of these things right and getting them right with both speed and consistency. We will improve and achieve this.

All that being said, we are able to again raise guidance. With the year now half over, we are on pace to deliver another year of very strong results with double digit revenue growth and EPS growth of nearly 25%. With that I will let James walk you through the results and the new guidance. James?

Thanks, Keith and good morning again to all who called in. My comments are going to reference the slides that were posted to our website earlier this morning and I will take as read the two first Safe Harbor charts. So, let me turn to the slide entitled Second Quarter Results Summary and this slide of course, summarizes key items from the income statement. I will have one or two explanations to go into for both this quarter and the year ago quarter. First, revenue was a $1.377.9 million an increase of 13% over 2005, and that's 14% excluding the affect of currency translation.

Moving down a row, segment earnings were up 18% to $258.4 million. I should remind you that last year's results included an $11.4 million one time benefit related to a favorable insurance settlement. So, excluding that from last year's segment operating earnings makes income growth look a little better. Looking at our year-over-year conversion on incremental sales, this quarter's results look like about 25%. However, once you adjust for the insurance settlement I just mentioned and maybe the expensing of options and higher pension expense. Conversion would be comfortably in our long-standing guidance of 30% to 40%.

Walking down the page, you'll note that the next three line items, purchase accounting amortization, general corporate net and interest expense represented an aggregate - - an unfavorable increase of about $5.4 million in expense. Purchase accounting was up slightly due to some minor acquisitions. General corporate net basically reflects options expense. And interest expense is up due to higher short-term debt balances and higher overall interest rates. Probably one of the busiest topics on the page is going to be taxes. You'll note that last year's rate calculates out to about 21%. That's 11 percentage points below last year's affective tax rate of 32%. So, you may recall that last year we had a favorable $19.7 million tax event, which drove the rate down.

Looking at this quarter's rate you'll calculate something close to 30.4%, which is again lower than our guidance for the full-year of 33% to 34%. So you're going to note that in our first half we've been seeing some lumpiness in the quarterly tax rate. And I know this is somewhat confusing, but basically instead of smoothing the tax rate across the year, we are now reflecting some of the larger tax items that we encounter in lower quarterly tax rates. We anticipate these items when we put together our full-year guidance with the affective tax rate. So, if you'll bear with us and keep using an affective tax rate for 2006 fiscal year of 33% to 34%. If you do the math, this means that you should be coming up with 35.5% or something like that for the second half of the year and we agree with that.

As I will discuss in a few slides the net affect of all this is that our lower tax rate in the first half versus a higher tax rate in the second half affectively borrows forward about a dime of earnings that is pulling into the first half and forward out of the second half. Having said all that, if you look at reported income from continuing operations, the chart says we're up about 5%. I think in apples-to-apples comparison excluding the insurance settlement and using normal tax rates would be about 23% growth in income from continuing operations.

Moving to the discontinued operations line, you'll see that this quarter's results include a $3 million after tax charge for some legacy environmental issues. That's a $10.5 million unfavorable swing from last year when disc ops was a positive $7.5 million due to the favorable resolution of some legacy tax issues. Diluted EPS from continuing ops was up $0.08 or 11%, but I'm going to cover this comparison on the next slide. And down at the bottom you can see average shares outstanding were 180.7 million down from 4% from a year ago. During the quarter we repurchased about 1.6 million shares.

Let me go to the slide entitled EPS Walk, now that I have that long explanation out of the way, let me just turn to how you would compare last year's reported EPS of $0.75 to this year's $0.83. The first two rows which are shown in blue are items that we called out of last years results as non-recurring. Excluding those two items would get you to the $0.61 we talked about a year ago. Skipping over options and pension you can see that a lower tax rate helped the quarter by about $0.02 versus last year. Though, you could conclude that an apples-to-apples comparison of this quarter versus a year ago might be $0.81 this year versus $0.61 last year. And I hope that's helpful in getting you on an apples-to-apples basis.

Let me move now to the third chart which shows total Rockwell results over the past five quarters. As was said before, sales were up 14% excluding currency and that's 6% sequential growth versus our fiscal first quarter. Operating margin expanded by 0.8 of a point to 18.8%. And while you can't see it on the chart, our trailing four quarter return on invested capital increased 4 points to 20%.

Let me go now to the fourth chart which summarizes our control systems segment results. Sales were up 13% year-over-year, once again 14% excluding the impact of currency. That would be sequential growth in this segment of 5%. Now, I feel I would be remised if I didn't use the word air pocket at least once on this call. Many of our listeners will recall that we had a strong note of caution back in January, when we went out of our way to alert people to the normal seasonality that we think we face every January/February. And this quarter we did see a pretty big drop in the first two months of the calendar year after a strong finish in November and December.

In retrospect we now believe that the famous air pocket of a year ago was normal seasonality, but exacerbated by some tax driven behavior by some customers. As you'll see in a minute, international sales and controls systems were up 9% with above average growth in Latin America. We are seeing some encouraging signs in Europe, and as Keith mentioned sales in our Logix platform are up 20% in the quarter. This is slightly slower than we had planned and I should point out that our first quarter - - our fiscal second quarter is seasonally our lightest quarter in terms of the mix of Logix and PLCs as a percentage of sales. Control systems operating margin was 19.3% in the quarter, which is an expansion of about 60 basis points versus a year ago. And as we anticipated margins were down slightly sequentially due to the seasonally less rich mix, versus the first quarter.

Let me turn now to our power systems business on the next slide. As you can see sales were $253.6 million in quarter up about 15% year-over-year and that is an 11% sequential growth rate. You may recall that we had to revise our guidance last quarter to reflect the robust end market conditions for our power systems segment. And we continue to see strength, particularly in energy and resource based markets and markets like mining aggregates, cement, oil and gas. Over on the right hand side of the slide, you'll see that margins expanded 1.9 points year-over-year to 16.4%. Both Dodge and Reliance continue to benefit from a combination of volume leverage, better pricing environment, aggressive productivity and initiatives that were launched over the last couple of years.

Let me leave our segment results and turn to the next slide and spend a minute on geographic breakdown. This slide provides regional growth rates and on the far right column shows organic growth excluding the impact of currency translation. As you can see we had very strong organic revenue growth in the Americas, led by a 15% growth rate in our U.S. and Canadian base, with Latin America demand growing 22%, with particular strength in the Andean region and the southern cone. Moving down a row, our European sales were up nearly 7% as our long-term listeners will know, this is a bit better than the past several years when results have been flat at best.

Our European management team has been doing yeoman service over the past year, to improve our competitiveness and go after our rightful share of that market. We've got the best product and technology in the market and we are optimistic that the team there will continue to execute as well as they did this quarter. Looking at Asia Pacific we saw 11% growth with solid results in Australia, Korea and Southeast Asia. China and India grew about 15% and looking at the whole region we believe we will see some acceleration in growth as we move into the seasonally strong second half. Overall our respectable 13.6% organic growth rate, as Keith said reflecting our keen focus on market share, addressable market expansion and geographic and vertical expansion.

Let me leave the income statement and move to the next slide which talks about cash flow. On this slide you can see our second quarter and year-to-date cash flow detail. Starting at the bottom, we had $150 million of free cash flow in the quarter and that's within a few hundred thousand dollars of 100% conversion of net income. Year-to-date you can see the impact over on the right of our voluntary $450 million contribution to our U.S. Pension Trust. Moving down the page, you'll see that working capital used up about $69 million of cash in the quarter, basically reflecting the impact of revenue growth on the balance sheet. But we've got multiple continuous improvement initiatives aimed at offsetting the working capital detriment to cash flow which is caused by strong organic growth. Close to the bottom you can see capital spending was $32 million in the quarter and $59 million year-to-date.

Let's go to the last slide in this deck which relates to guidance for the remainder of the year. As you can see in the far right column, we've increased guidance in sales, income and cash flow, basically reflecting our out performance in the first half. Our revenue guidance is now 10% to 11% for the full-year, which is up from our prior guidance of approximately 9%. Looking at the center column, which shows our second half guidance, we think we will somewhat slower year-over-year growth in the second half, simply due to harder comparisons. And we think this will be particularly visible in the fourth quarter.

As Keith said, most of the upside is coming from resource based end markets, which for us translates into higher sales of power centric products and solutions. This means a bit more project business, which has less of an architecture or computing power content that our average dollar of revenue. That would mean conversion margins on incremental revenues that are inside our 30% to 40% guidance for the second half of the year.

As you can see, we're raising full year EPS from continuing operations guidance to approximately $3.25 a share. This is up from the prior range of $3.10 to $3.20. Now, if you resort to first call, you'll note that our second half guidance is now right on top of consensus estimates for the third and fourth quarters. Basically, we had better than expected Q2 results. Call it normal seasonality, but no air pocket. And we've added that upside to our full year guidance. So, when you take into account a higher tax rate in the second half, I think the current estimates are pretty close to what we see.

And finally, on the bottom row, we've raised free cash flow guidance by $0.10 -- $10 million to $310 million, to reflect the increase in earnings we reported in the second quarter. And I hope this explanation will prove helpful, and we'd be happy now to answer any questions you might have.

Candice, we are ready to take questions.

Sure.

[OPERATOR INSTRUCTIONS]

Our first question comes from the line of Bob Cornell of Lehman Brothers. Please proceed.

Hey, good morning, guys.

Good morning, Bob.

Good morning, Bob.

Yes, it looks like a good quarter. One thing you didn't mention is how much in the way of investment spending you made in the quarter, if that's so quantifiable. I mean, we were going to - did 40 last year. I think we're running at an 80 run rate this year. I mean, Keith, you mentioned some of the successes, but not exactly how much you spent in the quarter and what the expectation will be for the balance of the year.

Well, Bob, as we've mentioned previously, we aren't breaking out the growth spending each quarter going forward. It's become just part of our cost structure and business model. Having said that, though, we did approve incremental spending this year. We focused on a couple of areas, in particular the emerging economies. And we have some initiatives going on there. And for additional productivity resources. And just like last year, I would say we do expect to see a significant increase in the second half of the year based upon those additional investments that we are able to do because of the strong cost productivity.

Increase in revenues or increase in expense, Keith?

Increase in expense in the second half of the year. Obviously, the goal of these growth initiatives is to prolong the growth of our business -- and to continue to accelerate the organic growth of our business. And so, these investments are looking out to 2008, 2009. And we are starting to see the benefits of what we did two years ago this year and that's part of it. It's not the lion's share, by any means. But part of the performance that you're seeing -- that you're seeing this quarter. So, our goal is to continue to sustain that organic growth. You don't get that for nothing and we are going to keep driving more spending in certain key areas for us to be able to do that.

Yes, thanks, Keith. One other question. You mentioned Logix. How about the whole processor group, including the legacy business? How did that perform in the quarter?

Yes, James made a little reference to that, but that's one of the reasons why we're not concerned with the 20% growth rate. Because if you look at the total growth, the old legacy systems did not decline at the rate that we had thought. So, the combination of the two gives us all - very, very close to what we planned for our processor growth, actually for the year. So, we're just seeing once again the lumpiness that you get between the two different pieces of the portfolio, the seasonality that James mentioned to, but we were down to mid single digit decline in the legacy systems. And certainly, that's one of the reasons that Logix was not quite as strong. There was less cannibalization.

Now, I had heard that you guys were thinking, perhaps, that the legacy business might have a slower decay rate going forward than you might have previously thought. Would you give us one more update there, please?

Well, this quarter it was lower.

Right.

For the plan for the year, we still plan it to be 9% to 10%, roughly 10%. We were really half of that this quarter, Bob. So--

Yes.

from a planning purpose, we plan about 10 in the legacy and, as we've said, we target 25 in Logix. So, when you look at the combination, that's what's important for us to feel that we're - that we're in line with and I would say this quarter we're almost right on that combined number. And that's a positive for us, even though this is, from a seasonality standpoint, our lowest and therefore poorest mixed quarter.

Okay. Thanks, guys.

Sure, Bob.

Our next question comes from the line of John Baliotti of Cathay Financial. Please proceed.

Good morning.

Good morning, John.

Good morning, John.

Keith, with respect to the investment spending, while you can't necessarily break it out, the -- and you talked about it on a sort of a rolling basis, your ROIC was about 20%. If I've got it right, it was almost 24% just in -- if you look at the balance sheet just for the second quarter. And so, the investment spending must be being absorbed pretty well as you go along. And I'm just wondering, is there any particular area that's paying off more than others at this point? Where others may take a little bit longer? But -- because it seems like the absorption there is pretty quick.

Yes. Well, I mean, I think to be honest with you, John, I think the bigger story is the cost productivity number that gives us the -- a little better upside there than what we had thought because of our growth investment. But the areas that we think are paying off certainly are where the visibility is that we have today. We do know that we're making great progress in our verticals, particularly where we've targeted the tier zero, which is our code for what we used to call corporate accounts. We have about 50 of them now and that growth rate is, as we expected, a multiple -- basically one-and-a-half times our overall growth.

So, we're absolutely getting traction there. And then the other area that we're seeing the results of the investments -- and James mentioned this -- and that's the great work that our European team has done in the last six, nine months. We took some tough actions there at the end of the last year and while one quarter we can't claim a trend yet, we're very pleased with the results of our reinvestments there. And those reinvestments were in really reallocating the back office cost structure that we removed to customer facing resources and mainly in our verticals and in our integrated architecture areas and OEMs.

So, the -- what we're doing currently and what our initial -- what our additional investments have been are in the emerging markets area. And that will take a little while because we've got to get people up to speed, get them on board, get them up to speed. And that's what we're very focused and driving at the current time.

And with respect to the markets that are a little more established, the durable goods continue to be pretty strong. The [unfilled orders] are very strong, better than the orders and the shipments. And I'm wondering, with utilization rates going up, are you seeing any change in customer behavior? Are you seeing any faster bid activity or is it pretty steady over the, let's say, the last couple quarters?

Yes, I don't think it's any less pronounced than it has been, but I would say we are benefiting in the power centric industries. In fact, before we talked about the deeper cyclicals, spending based upon the need to spend because it had been so - it had been, basically, nonexistent or some would say 10 years, but certainly probably five years at a minimum. And so, it was out of necessity as opposed to a choice. I think we're starting to see more spending in the natural resource commodity part, natural resource part of the markets, to actually generate some capacity expansion. And that's happening because most people are now believing that these prices are going to stay for an extended period of time.

And so, what we are seeing and what's driving some of our upside performance, is a shift in our power centric markets to bringing a little more capacity online or de-bottlenecking may be another way of thinking of it. I wouldn't say we're seeing greenfield plans, at least in North America. But we are seeing spending to generate more output. And - as opposed to just repair what's been used, if you will and needs to be replaced. So, I think that's - we're starting to see that in some of the power centric markets and that's really what is driving the strong performance in that area.

Okay. Thanks, Keith.

Sure.

Our next question comes from the line of Mark Koznarek of FTn Midwest Securities. Please proceed.

Hi. Good morning.

Good morning, Mark.

One thing that I'm wondering if you could elaborate on. You mentioned the approval of additional investment in the second half and any quantifications of magnitude of that. Is that a similar pickup to what you began last year, another traunch of a similar size or less than that, more than that?

Mark, it's probably a little smaller than last year. We took a pretty big bite of the apple last year, particularly, if you remember the ramp-up in the second half. So, we are not at that -- we are not at that level with the incremental, but we will see that really accelerate in the second half. Similar to last year, but the magnitude will not be the same.

Okay. And then, kind of a timely question here with China just having announced an interest rate hike to presumably slow the economy a bit. And I'm wondering if you guys could reflect for us your experiences back in '04 when we had the macro controls put on in the spring and then there was a rate hike in the fall. What actually happened to Rockwell sales or the overall potential for control equipment over there over that period of time?

Well, I'll speak back to the previous time that you mentioned. Really, it became a non-event. We thought it was going to be a concern. And really, what -- and really, it didn't slow anything down from our perspective, from what we saw. And the reason for that was, what they did, they made credit tougher for the second and, certainly, the third tier suppliers that were coming into very hot markets. The steel industries, the cement industries, where really they -- because they don't have really good capital allocation models, if you will, in the country, they were not able to -- they were not having efficient deployment of capital. So, they wanted to slow that down.

What -- and why we didn't see it was because it switched then to where the multinational corporations continued to increase their spending as they moved more of their - I'll call it manufacturing capacity -- into the country. So, we never saw a -- we never saw a blip and that was something that we were concerned about. And I think the other dimension going forward is that we're going to see -- they have a real tough time with all the energy, whether it be getting more energy so a lot of investments going on there in coal and other energy areas, plus energy conservation is very important to us.

And so, our goal is to continue to focus on theirs. And where we have expanded some of our investment, our growth initiatives, quite candidly have been in China now, to be able to go after more verticals and more customer-facing industries, consumer-based industries, where we believe the spending is going to move towards.

The other thing you'll notice is that China is trying to increase consumption as opposed to increase investment in their local economy. And so, we believe that the additional investment that we're making in verticals, particularly the consumer-facing verticals, that we will hopefully be able to ride through and continue to see an acceleration in China or even accelerate our growth in China. And that's one of the areas, as I mentioned earlier, that we believe we want to get a higher growth rate in Asia Pacific and we'd like to be able to demonstrate that in China as well.

That's great, Keith. I appreciate the insights.

Thank you, Mark.

Our next question comes from the line of Steve Tusa of JP Morgan. Please proceed.

Yes, just a quick question on -- I hate to beat the investment side, but did you say you increased that for the year? I'm sorry, you took it up incrementally? Or it's increasing incrementally, second half versus the first half?

Both. It's certainly -- we raised it for the year and certainly the lion's share of that will be in the second half of the year.

Okay. Can you just -- any frame, I'm not talking about quarterly. Just any frame of magnitude that we're talking about here?

It's probably around half of what we were talking about last time. And once again, the way to think about this is, our goal is to cover this with productivity. And that's why we really have stopped calling it out because it's a natural part of what we're trying to do. But I think the message is that we are expecting to increase our spending in the second half of the year and it's going to be focused on growth initiatives.

Let me just say, for people who have maybe not got all the history of a year ago, a year ago we said we wanted, on the basis of a quite strong upturn in volume and success in productivity, we really, if not now, when? So, we said we were going to invest. And we said a year ago -- more than a year ago -- it would be sort of a one cent, three cents, five cents, seven cents, as you work your way through fiscal '05.

So, when we allude to, for those of you who are trying to figure out sort of what we're talking about, it was sort of like very little in the first part of the year and then a dime or more in the second half of the year. And what we're saying is it is not of that order of magnitude as you look at what Keith's talking about in terms of reinvestment.

However, it is significant for us to be reinvesting and trying to sustain and accelerate growth. And that is in our guidance. And -- but it is order of magnitude, let's say, half or less the size of what we said and announced was incremental a year ago. So, it's in our guidance. It's in the 30% to 40% conversion that we've held out as the way to think about our profitability on the incremental dollar of sales. But I hope that helps for people trying to figure out kind of like what are we talking about here.

How do you decide what to put money towards? Are you looking out and saying these are things that we'd like to do in 2007? And since we've got a better than expected performance, we can start them early, which is a very positive thing. How do we think about the timing of these investments?

Well, I think you've hit it pretty well right there. And that is this is about sustainability. And that's the other thing we talked about a couple of years ago. How do we keep this accelerated organic growth going? And when times are good, we need to invest. And this is what I would say you could think of as pull-in, investing faster, investing sooner because we're driving productivity. And, the goal is to continue to expand our served market, continue to enhance our market access. And those are words that really are about what are we doing to drive batch hybrid in process? What are we doing to drive information? And what are we doing to drive our verticals and the emerging economy?

That's what we look at. We look at those areas and then we just make the best choice, the highest returns and where do we want to be strategically in three to five years? And this just gives us an opportunity to seed that maybe a little earlier than we would have been able to do otherwise. And as we continue to drive productivity, we have a list. We have a -- and quite candidly, a long list of things that we would like to invest in. And the more we can pull up, the better we feel about our opportunity to continue to find ways to grow the business.

Okay. And then, lastly, James, maybe for you, there's quite a bit of moving parts here. We're getting closer and closer to June. Any read on where the -- where pension expense might stand for next year?

Yes. I'd say we're spending a lot of time on that here and in order to fix the pension expense for fiscal 2007 there are obviously a couple of things that need to go into it, and I think people are rightly focused on discount rate. They should be focused on how the fund has performed and then the part that we don't talk a lot about is what's the asset mix and therefore the assumed rate of return and I will say that one of the things we are looking is changing the - now that we're in effect getting close to fully funded you might say changing the asset mix. That would involve a larger component of long term fixed income if you will be risking the pension scheme itself and that would led to a lower assumed rate of return.

So I would counsel people to hold your fire. Don't try to second guess us on what we're doing on the pension expense for '07 albeit there will be a lower discount rate which always help. There will be some other moving parts that you really need to hang out and wait for us to - well first of all decide and do and then provide in the form of guidance.

Great. Thanks a lot.

Thanks a bunch.

Our next question comes from the line of Scott Davis of Morgan Stanley. Please proceed.

Okay good morning. Thank you operator.

Good morning, Scott.

I just wanted to get a little bit of a feel. I think I asked the same question last quarter as far as cash flow reinvestment. And I guess my question is since your stock has performed so well that buying back stock is probably a little bit less attractive than it would have been a year ago or so. Maybe you can talk to your acquisition pipeline or other potential uses of these big cash flow numbers you're generating.

Well I take the first part of that which really relates to your comment about repurchase and it's always been our sort of philosophy here that we will maintain a disciplined acquisition and alliance process, and I'll let Keith cover what's in his mind about acquisitions, but only to say that as a default mode we still feel very comfortable returning cash to share owners in the form of repurchase that's accretive and from our standpoint attractive to be doing that and it still remains our default mode along with the dividend in terms of what we do with our free cash flow but I know there's a second part to your question about acquisitions.

Yes. Well in the last six months we've made a couple although admittedly small acquisitions but our goal is to continue to look for acquisitions. We are certainly looking and focused on businesses that would add domain expertise. That would add our ability to have broader market access particularly geographically and added functionality to our existing product and service portfolio and so really what we're trying to do is to identify acquisitions that would let us do more for our customers, therefore being able to broaden our portfolio with the customers.

We are looking for acquisitions that we can continue to use to catalyze organic growth and certainly we're looking at -- we continue to look at I'll call this ball both on easy to digest acquisitions that will not distract us from these other growth initiatives that we've been talking about because we still believe we still have some very strong internal investment opportunities and we don't want to do anything too big to take our eye off of that ball, and I think that's one of the real pluses of what you're seeing now is the focus on driving that organic growth and I think that's what is helping us deliver the results and as James said we do have a pretty disciplined approach to acquisitions.

We have a great pipeline process that we run. However, I would equally say the financial community are not bashful in their bidding so there's some very, very expensive acquisitions that are currently going on and while we're not opposed to do that and we have done they tend to be smaller ones that really tend to fit into that criteria that I talked earlier. So we'll continue the disciplined approach but we are interested in continuing to pursue acquisitions with the criteria that I outlined.

Just a follow-up in that case. If you've been successful since you've more towards a vertical focus. You've been successful in several key verticals. Are there some verticals out there that you can identify that you think you're particularly in that you might have a chance of making acquisitions or even building from within?

Well I wouldn't say we can't. We've identified a course set of verticals. Our strategy is to continue to find ways to strengthen those verticals and add to them and add to them whether it be geographically, whether it's with the OEM's that support those verticals, and whether it's getting more of what we call the cure zero accounts in those verticals to really put more customer basing resources to drive the intimacy and the loyalty that we have from customers. So, I wouldn't say there's any weak ones at the moment but what we want to do is to continue to grow, and to continue to get more domain expertise in the core ones anyway that we've identified.

Okay fair enough. Thanks guys.

Our next question comes from the line of Richard Eastman of Robert Baird. Please proceed.

Hi Keith. I just want to touch base on a second. You're North American growth was obviously strong. But I'm curious, were there any weak spots in the consumers markets that are kind of concealed in those numbers? I'm thinking in particular auto or--?

That was the one I was going to mention. If you look at all of the consumer verticals auto was the weakest. It experienced very modest absolute gains and in fact it's been flat for the first half of the year as a total market, but I would say the encouraging part is even though there's a difficult U.S. industry, we did have single digit growth in our tier zero which is our focused accounts in that vertical.

So I mean, I think one of the positives out of a weak automotive market if we could say that would be - I think it again the performance this quarter reinforces the benefits of the diversification strategy that we've been working because we've been able to get this growth without the automotive participation and certainly compared to where we were 10 years ago there's a lot less of emphasis in our total performance based on automotive so I think it's a plus from our diversification.

I think we're seeing benefits from our focus on some very specific tier zero accounts and as the U.S. automotive continues to resize we'll see that transition and be part of that transition but right now we're very strong with the transplant and we continue to view the global automotive market as a positive place to put our investments in but you did identify the one vertical that really did not contribute to our growth this quarter.

And then a little bit. I just want to clarify some comments on Logix. I understand 20% growth is still pretty good. A little bit off from maybe where it's run but I didn't quite understand did you pinpoint that slight bit of weakness either geographically or by end market or do you just consider it to be difficult to analyze given the seasonality?

Well certainly we do understand a couple of the dimensions of what you've asked and first Logix is somewhat driven by project related businesses so those are -- that's why we talk about it being lumpy, because it's hard to predict timing on that. So in general you do get some oscillation simply because of projects. But I would say looking forward, where we're expecting better performance in Logix would be outside the U.S. we can get some better growth as we focus stronger on some of the consumer basing industries that are more -- that have a heavier logic content as opposed to some of the power centric industries.

Certainly we had a strong quarter actually on Logix on year over year basis in process and that's hybrid so we're very excited about the continued expansion of that segment for us. As a matter of fact on a year over year basis process was up 40% for us so a very substantial and continued increase for us and then we continue to push with the introduction of compact Logix with integrated motion and therefore one of these more functionalities, more performance. We believe that will drive higher growth in the second half of the year in Logix.

In particular the ability to attack more aggressively a broader subset of the OEM market. So that's how I would give a little more color to the Logix story in addition to what we said earlier and the fact that the processor business performed very nice when you look at the combination of the legacy and Logix.

It seems to me 12 to maybe 18 months ago we had a full quarter price on domestically with the distribution base in terms of training and Logix and marketing of Logix. Does the international emphasis on the benefits of Logix and training does that just naturally flow behind our expenses?

Well great memory for one. That's exactly what we did and I think we saw the benefits of that in the U.S. and the international does follow and we are in the process and pretty well completed the training certainly on the base training around Logix. We continue to enhance that as we move process, as we move safety so it's pretty much become an ongoing activity. But we do tend to lead in the U.S. with that.

And then take the programs around the world and that has been occurring and will continue to occur and in fact we did a very strong -- we had a very strong focus of that in Europe as we transitioned the strategy to be more of a focus on technology that we could differentiate and therefore obviously the integrated architecture was at the top of that and over the past year we did extensive training in Europe both for our sales people as well as our partners whether it be the distributors or system integrators.

So that is a core part and quite candidly we get taken as kind of like incremental growth initiative spending. We have an ongoing lets make sure that the entire channel sales organizations are up to speed on all the dimensions of the architecture and that's kind of just baked into the normal process.

Okay, thank you and just last question. James the equity based compensation expense in the quarter was 7.6 million. Could you just bust that down into the two segments in corporate overhead?

Rick, this is Tim. We posted a chart to the web last quarter. I can get you that. I've got it by quarter and by--

Okay that's all I want. Thank you.

Sure.

Our next question comes from the line of Nicole Parent of Credit Suisse. Please proceed.

Good morning.

Good morning, Nicole.

Just to quick follow-ups on vertical strengths. What's behind the strengths from a vertical perspective in Latin America and then could you also just touch on what you're seeing in Europe?

Sure. The Latin America for sure is the natural resources. That's what's driving it whether it be mining or oil and gas so we're really talking about it's driven a lot by Venezuela, by Peru, by Chile. That's where the significant growth has been and then in general Mexico. Mexico is a much more diverse marketplace and we do a good job there across a number of industries. With respect to Europe there are strength is more in the consumer basing industries. A lot of strengths with multinationals that want to have a common architecture. A common control strategy and then also OEM's. OEM's the heart of the European market is OEM.

Exporting OEM's and that is where we've been very successful with logic and in particular with Motion and one of the reasons why we do good with the addition of Motion in the Compact Logic that we can address a broader subset of the market when that comes out so that in particular the machine builders in the packaging machinery market, packaging line, modeling lines, filling lines. Those areas are very rich in control and certainly an area that we've been heavily focused on in Europe and one of the areas that continues to grow for us.

Great. That's helpful and then just one last one. As we think about guidance with many companies moving toward the broader range I'm a little surprised that you went through a rough EPS estimate for the full year given where we are. Could you just comment on how we should think about that?

Yes. I think part of it Nicole is that for us the year is half over. Other guys are still done with their first quarter. We're half way through the year and we continue to see pretty good results and as Keith mentioned, while there are things we think we have a pretty good grasp on so volume and price and so forth we're also reinvesting. We have some ability to balance, that is when we have good volume price productivity. We also have reinvestments that we make.

So when times are good we're going to reinvest and try and keep the organic kind of growth trend that we're ongoing in now -- I think we're thinking about things that affect basically 2008 to 2010. But I would attribute it to the fact that we think we're half way through the year, and rather than fool around with the $0.10 range is what we started with, we just decided to give a point estimate. We assumed you guys would give us a couple of cents on either side of it.

Absolutely. Thank you.

Thanks, Nicole.

Candice, we have time for one more question.

Our final question comes from the line of Nigel Coe of Deutsche Bank. Please proceed.

Yes, thanks for that. This thing about the margin slide you give some guidance overall margins. Just noting that the power margins in the second half of last year were a bit weaker so would you expect incremental margins to be slightly better in power than control?

Yes. I think that where you see power earning from a -- I mean they've had some variability. The thing about Power Systems is when they buy -- when resources that is raw material, copper, steel go up and they did go up a year ago and we have to regain pass-through so to speak that through price increases, those are out of phase. And then the other thing is as they basically mark their inventory to market as we get to the end of the year, we always have a little bit of excitement about some inventory evaluation that runs through the income statement.

So we've had some ups and downs in terms of margins, but that being said if we can keep the price matching the raw material costs, we should be able to motor along in this mid teens range, and to your point that would be a somewhat easier comparison in the second half of this year versus last year.

Okay. And just picking up on Nicole's point on the guidance. Just to clarify. Should we think about 325 [both] the low end guidance or should we think about any incremental upside from now on will be -- you know you'll just raise investment spend to offset that?

I think it's rather the later but I certainly -- I wouldn't have you take away that somehow that's the bottom and watch out it's going up from here. What we're saying is it's a pretty good point estimate based on what we see, and we do have balancing actions that we can take reinvestment and so forth. And to the best of our ability that's seems to be a pretty good place to put a peg in the ground. And by no means is it suppose to be the bottom end of some new range.

Okay and just quickly on the tax. Can you just explain quickly why the tax rate will rise up to 35% in the second half of the year?

Yes and first of all let me apologize to everyone. I know that this is starting to be kind of a convoluted part of these phone calls and I do apologize. In the past, you would have some large tax items that were used when you calculated the rate for the full year, and then in effect you smooth the rate throughout the year. Currently, some of them are large enough for example this quarter, where they have an effect on the rate in a quarter, and therefore you're going to have some choppiness as you work your way through the year.

So what we had in the first quarter and the second quarter, were a couple of items that we had anticipated, but that drove the tax rate down in the first part of the year. They won't be present in our thinking in the second half of the year and the rate will still hit 33 to 34 for the year. So that means that the average for the first half and the second half will be 33 to 34, and therefore you'll be looking at something closer to 35, 35.5 for the second half. So it's the absence of the items that were in effect visible in the first half which drive up the rates in the second half. And again, I do apologize for not having a normal monotonously flat effective tax rate, but this is sort of the world we live in. I guess that helped?

Nigel?

I'll take that as a yes.

That's all right. My mute button was on, sorry. Thanks for that guys.

Okay. Hope that was helpful.

Candice, I guess that concludes the phone call.

Okay great. Ladies and gentlemen this concludes today's conference call at this time. You may disconnect.