洛克威爾自動化 (ROK) 2006 Q3 法說會逐字稿

Thank you for holding, ladies and gentlemen. Welcome to the Rockwell Automation quarterly conference call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the line for question and answer session. If you have a question at that time, you may press star followed by 1 on your telephone. At this time, I would like to turn the call over to Mr. Tim Oliver, Rockwell Automation's Vice President and Treasurer. Mr. Oliver, you may go ahead.

Jackie, thanks. Good morning, everyone, and we apologize for the short delay. There was a lot of you trying to dial in late, and we wanted to make sure you all got on. Thanks for joining us for Rockwell Automation's third 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 all the charts that we reference during the call are both available at that same website. These will both remain there for the next 30 days.

With me today are Keith Nosbusch, our Chairman and CEO, and James Gelly, our CFO. Our agenda today includes opening remarks by Keith, and then James will walk you through a review of the quarter and our outlook. We'll leave plenty of time at the end of the call to take your questions and again ask that you self-limit your questions to two per person to allow broader participation. The call is expected to last about 50 minutes.

As is always my role in these calls, I need to remind you that our comments today will include statements related to the expected future results of the Company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from our forecast and projections due to a wide range of risks and uncertainties that are described both at the end of our earnings release and are detailed in our 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. We had another solid quarter of execution throughout Rockwell Automation. James will take you through some of the details but, in a quick summary of the uniformally strong financial performance, revenue was up 13% , segment income up 17%, EPS up 22%, free cash flow was greater than net income, and a rolling fourth quarter after tax ROIC of more than 21%. These results again validate the strength and durability of our business model and keep us on track to deliver another year of very strong results with double digit revenue growth and EPS growth of nearly 25%.

Similar to the last several quarters, the power centric resource based end markets continue to pace our growth. Our Power Systems segment and Intelligent Motor Control businesses saw considerably higher global demand from their mining aggregate, cement, and oil and gas customers. During the quarter, we also saw increasing evidence that previous growth investment targeted at expanding our served market and enhancing market access are delivering results. Our businesses again captured share and outperformed our underlying global market.

Last quarter, I told you that we needed and I expected more from three of our growth engines, more from the opportunity rich Asia Pacific region, more from our Logix integrated architecture platform, and more from our consumer facing industry verticals. While we still have a lot of work to do, I am pleased to report that all three did in fact deliver more.

In Asia Pacific, the contribution of our growth investments is easier to see if you bifurcate the results into developing and developed Asia. Developing countries, including China and India, delivered better than 30% growth in the quarter, which was somewhat offset by lower revenues in Korea, Japan, and New Zealand. Better performance in Asia Pacific and Europe plus continued strong performance in Latin America helped make this quarter the most globally balanced quarter we have produced in some time. It is this kind of global balance that we have been striving for.

Our Logix business delivered more than 21% year-over-year growth this quarter, an increase over Quarter 2, and importantly grew 11% sequentially. Sales of the compact Logix product platform and sales into process or batch hybrid applications both continued to exceed our expectations. We remain committed to our often quoted targets of 25% compounded growth or a $1 billion business in annual sales in 2009. This target is at the center of our strategic thinking and is stretching us as a Company.

The consumer facing verticals also had a more balanced quarter with solid contributions from food, beverage, home health and beauty, and particularly strong performance in life sciences. There is no better proof point for the appropriateness of our efforts to diversify our revenue base than the results we generated this quarter. We are currently in the teeth of a major correction in demand from our Detroit automotive market. Sales from the Detroit region were down almost 50% this quarter, which in turn reduced total Company growth by more than 1 point, Logix growth by about 2 points, and Control Systems convergent margin by about 5 points. In the past, a correction of this magnitude would have had significant consequences for Rockwell Automation. Our ability to deliver double digit growth during such a correction would have been unimaginable 10 years ago. Quarter 4, we'll see a similar 50% year-over-year sales decline in Detroit, and we expect to again deliver double digit revenue growth.

While pleased with the results we've generated over the last several quarters, we are not complacent. Rockwell Automation's high return business model makes maximizing organic revenue growth our most potent value creation strategy and sustaining a high rate of growth requires that we supplement the current extraordinary growth in our power centric end market with more diverse and less cyclical sources of revenue. While our ROIC is now above 20%, trading current period operating margin expansion for longer term top line growth is the right choice. To that end, during the quarter, we further increased the level of reinvestment in order to accelerate and extend organic growth. In fact, spending in this third quarter was almost three times that in the third quarter of 2005.

Beyond strategy and deployment of resources, it is all about execution. Our success requires executing our growth plans to realize the returns on our investments, executing against our productivity targets to generate significant savings to pay for those growth plans, and doing both with speed and consistency.

With that, I will let James walk you through the financial results. James?

Thanks, Keith, and once again, good morning to everyone 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 first two slides which are the safe harbor charts.

So if I could turn to the slide entitled Third Quarter Results Summary, this slide summarizes the key items from our income statement. Starting at the top, revenue in the quarter was $1428.4 million, an increase of 13% over 2005's third quarter. Segment earnings were $258.7 million, up 17% year-over-year. Year-over-year conversion margin on the incremental dollar of sales was 23%. Apples to apples, adjusted for an increase year-over-year in pension and option expense, puts conversion at about 30%. That's a little on the low side compared to what we've seen recently. As Keith said, the biggest headwind depressing conversion in the quarter was the very precipitous decline in our Detroit automotive centric business. As Keith said, about a 50% drop year-over-year, and that cost us about 1 point of growth and 5 points of conversion in the quarter. This is a testament to the industry and geographic diversification that we've quietly pursued over the past decade, and this downdraft in Detroit is something we think will really only be noticeable this quarter and next. After those two quarters which bear the brunt of the tough comparisons, we expect to see moderate year-over-year declines in Q1 and Q2 of next fiscal year, but those will be too small really to show up at the Rockwell level.

So for the full year, thinking about conversion and for next year, the margins should be well within the range of 30 to 40%, particularly when you exclude the pension and option impact that I just referenced.

Walking down the page, you'll notice that general corporate net was $21.2 million in the quarter, up about 5 million versus last year, and the increase is primarily due to the inclusion of stock compensation expense in this line item. Interest expense is up due to higher interest rates and higher short-term debt balances. Our 10-Q will how that we had about $152 million in outstanding commercial paper at the end of the quarter.

Down on the income tax line, when you do the math, you'll calculate a third quarter effective tax rate of about 32%. This brings the year-to-date effective tax rate to about 31%, a bit lower than the guidance for the year which we now expect to be about 33%. This would suggest a higher tax rate in the fourth quarter which will have some modest dampening effect on EPS.

To repeat the message of the past couple of quarters, our annual tax rate guidance presumes the occurrence of a number of relatively minor tax events throughout the year. As you've noticed, the actual rate in any one quarter can jump around a bit.

Going down to the EPS from continuing operations line, we delivered $0.83 in the quarter, up 22% versus last year. You can see at the very bottom row that average shares outstanding in the quarter were 179.8 million, down over 4 percentage points from a year ago. During the quarter, we repurchased 2 million shares.

Let me go to the next slide which shows total Rockwell results over the past five quarters. As I said before, sales were up 13% year-over-year and about 4% sequentially. As you'll see shortly, this is the result of significant growth in all our regions. Over on the right-hand side of the chart, operating margins expanded by 6/10ths of a point to 18.1%. As Keith mentioned, you can't see it on the chart, but our trailing fourth quarter Return on Invested Capital was more than 21%, up nearly 4 points versus the year ago period.

Let me go to the chart entitled Control Systems Q3 Results. Again, sales were up 13% year-over-year and again, sequential growth was 4%. Logix sales grew 21% in the quarter with process applications and compact Logix being the big drivers. Legacy PLC sales were down about 8% in the quarter. But remember that Logix is now about twice the size of the legacy PLC business. Once again, both these numbers were affected by the 50% downdraft in Detroit. Last year in 2005, both the third quarter and the fourth quarter were quite strong in terms of automotive vertical sales and across the Logix and PLC business and as I said just now, we'll have to live through these tough comparisons in Detroit, but our much more diverse market presence is really being demonstrated. Over on the right-hand side, operating margins in this reporting segment expanded 3/10ths of a point to 18.5%.

Let me turn to the next chart which covers our Power Systems reporting segment. Sales were up 14% and 3% sequentially. As you know, the end markets served by Power Systems continued to enjoy strong demand driven by several years of a weak U.S. dollar, high energy prices, high resource prices, and some degree of under-investment in past cycles. Over on the right-hand side of the chart, margins expanded nearly 2 full points year-over-year to 16.2%. Both Dodge and Reliance continue to benefit from a combination of volume leverage, ongoing productivity initiatives, and an improving price cost dynamic.

I'm going to leave our segment results and go to the next slide which is the geographic breakdown of our sales in the quarter. The far right-hand column shows organic growth rates excluding any impact of currency translation. As you can see in that column, we had a pretty good geographic balance of sales growth in the quarter. Latin America, sales were up 19% on a currency neutral basis and the management team down there continued to deliver strong results. Asia Pacific sales were up 16%. That compares with 11% in the second quarter. Growth in China was 40%. Currency neutral in India was up 29%. As Keith mentioned, our Asia results are the average of emerging Asia and the slower growth developed Asia. We continue to drive organic growth across the region through share gains and addressable market expansion. Our Europe sales were up about 7% in the quarter, continuing the progress we saw last quarter. We're hopeful that we'll continue to see momentum in Europe with help from both short-term economic factors as well as the benefits of growth investments that we've been making in the region. So all in all, pretty good geographic balance when it comes to growth.

We go to the next slide which addresses cash flow both in the third quarter and year-to-date. Looking at the lower left total, we had $154.1 million of free cash flow in the quarter. Working way back up the column, working capital was an $18.7 million use of cash in the quarter and about 103 million year-to-date, reflecting the impact of strong organic growth on the balance sheet. We're intensely focused on process improvement and are driving much more discipline across our global operations. In addition, we're focused on executing our typically strong fourth quarter working capital performance. Capital spending in the quarter was 34.4 million. And as you can see, pension contributions were only 5.6 million in the quarter versus 467 million year-to-date. This compares with pension expense of about 30 million in the quarter and 88 million so far this year.

On the topic of pension expense, let me take a minute and talk about a topic that gets a little bit of attention, and that is the fiscal year 2007 discount rate which was set as of June 30th. The rate for next year will be 6.5%. That's up 125 basis points from last year's 5.25%. I should also mention that we're lowering the assumed rate of return that we use on plan assets by 50 basis points, going from 8.5% assumed rate of return to 8. This lower assumed rate of return is related to a somewhat more conservative asset mix and an overall de-risking strategy. The net impact on 2007 from these changes, and this takes into account both pension and post-retirement benefits, will be a favorable $50 million versus our 2006 expense. Normally we don't break out a single element of our cost structure months in advance of a new fiscal year, but this topic has somehow received a lot of attention in the past six months. I should point out it's just one input from among many in our 2007 plan alongside, for example, the anticipated divestiture of our Power Systems business. But in almost exactly 90 days, we will be presenting in much more detail our 2007 plans, including the full list of tailwinds and headwinds.

I'm going to go now to the last slide which relates to guidance for the balance of the fiscal year. We're increasing revenue and EPS guidance very modestly from last quarter's conference call. We now look for full year revenue growth of 11%. That's at the top end of our previous guidance of 10 to 11%. And as I said earlier in the call, the fourth quarter of last year is definitely our toughest comparison of the year, and we will work through the downdraft in Detroit and still deliver solid double digit organic revenue growth. Likewise, we're modestly increasing our guidance for full year EPS. We expect another quarter of about $0.83 a share, driven a little bit of a headwind due to the higher tax rate. But that puts full year EPS a few cents better than the 3.25 guidance we provided last quarter. And cash flow we expect to be about 310 million, in line with previous guidance. All in all, as Keith said, solid quarter and pointing to strong full year results. Thanks for your patience, and we'd be happy now to answer any questions you might have.

Jackie, we're ready for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Mark Posenick from Cleveland Research. You may proceed, Mark.

Hi. Good morning, everyone. I'm wondering if we could dissect the control systems margin performance a little bit more, especially on a sequential basis, when you compare it to the second quarter where we had 19.5% or 19.3% margin. Sorry. You know, what are the changes in there, 'cause you mentioned both the investment mix with -- and Detroit. So looking for some help there and then what to expect going forward?

Well, first of all, as Keith said, the reinvestment in the quarter was at a level about three times what it was a year ago. So clearly, as Keith said, when you have a business model like this one, you're rewarded for organic growth, and certainly you couldn't find anybody in Rockwell that isn't focused on driving organic growth, so the investment was pretty heavy in terms of year-over-year increase in growth investment.

James, what about versus last quarter, prior quarter? How much would the investment have been up then?

It certainly was an increase, although from every 90 day period to the next, it can't be a dramatic increase, but it certainly was a steady increase Q1 to 2 to 3, and slightly but not much higher in Q4.

Okay.

Mix, I would link mix to the Detroit downdraft. What we're trying to point out here about the historically very important concentration in the automotive industry having been lessened, it still was a hurt of, I'm going to say sequentially a fair amount of top line and a fair amount of conversions. So if you look at, you look at the difference from conversion in the last quarter to this quarter you really could identify probably five percentage points of conversion just related to the Detroit issue that we talked about. And then finally, so that's very heavy in terms of its effect on mix because you've got a lot of PLC and Logix going through there. It's really the absence of some projects which we did see in the third and fourth quarter of last year. Gives you some idea of the climate, I think. As Keith mentioned and I think we've made clear for some time now, in general, the power centric businesses that we have are pacing our growth, and those are, as I think we've made clear in the past , those are very good business for us, but they're not the heaviest processor, PLC and Logix types of projects that we have.

Okay. That actually leads right into my follow-up. In the past, on occasion, you've broken out with a little more detail the growth of the power centric side of the business versus the consumer side, and I'm wondering if you could do that again, and similar, and maybe this is equivalent to the same thing. If you could talk about the relative growth of the Intelligent Motor Control side versus the processor side?

First of all, Intelligent Motor Control for other people on the call relates to all of the differentiated products that we sell, and our power centric business is primarily the Intelligent Motor Control. If you think about it, we have a drives business, a drives systems business, motor control center, medium voltage. We have spent, I would say as a Company, years and significant investment in differentiating what it is that we sell in the power centric side of the house. So they're kind of the same thing. Most of the growth in power centric, I would say, is Intelligent Motor Control, and frankly that's in the mid to high teens as a growth rate year-over-year in the quarter. And then the consumer centric, if I can say so, have always been kind of mid to high single digits, and that's why we like them. They're mid to high single digits in bad times and in good times, and our job here is to drive share gain and addressable market and geographic expansion within those very low variability consumer facing industries. So once again, to answer your question directly, kind of mid to high single digit in the consumer centric and teens of growth on the power centric side and the predominance of that power centric is the term we use, Intelligent Motor Control.

Great. Thanks a lot, James.

Thanks.

And your next question comes from Steve Tusa from J.P. Morgan. You may proceed, Steve.

Yes, I just have a question on the general macroenvironment. I'm just wondering what your take is on the state of the current cycle with regards to capital spending, U.S. and globally.

Sure, Steve. Happy to take that one. Currently we still believe we're in the 11th quarter of the expansion. If you look at the historical definition of those expansions, it would last anywhere between 25 and 35 quarters. And I think what we're continuing to see is disciplined spending by our customers. Certainly you're seeing a buildup in cash at many, many businesses today which says that they are not just freely throwing money at the current situation and they're picking their investments, and they're being very -- much more disciplined. Once again, they're trying to stay profitable throughout the cycle.

Having said that, what we're currently seeing is the continued spending, just to James' point, of the power centric deeper cyclicals. They are spending after that long hiatus, and that's across a broad continuum. Pulp and paper, glass, metals, the oil and gas sector, so we continue to see that spending. The U.S. industrial output is very important to us, but really our revenue now, as we talked about with the balanced portfolio geography that we're covering, is really more driven by the global industrial spending. And here we see spending trends that remain very strong across our end markets and really that it's expected that most of our end markets will play and spend a higher amount in '07, and that's what we're seeing at the moment. That's what the forecasts are indicating. And our interaction with our customers today would indicate that we still see that as the short and intermediate term around the world. And as I said, the spending in the power centric end markets continues to barrel along at very strong rates. James just talked about the consumer facing manufacturers. It's steady, and we've seen no signs yet of any consumer slowdown spilling over into investment in this industry. And while the U.S. or Detroit-based automotives are going through a major correction that we expect to last another couple of quarters, the global automotive market we expect to be a net positive this year for us. So you can see that, in total, it's making up for the shortfall in Detroit. So that's a long-winded answer, which I guess I would summarize quickly as we're not seeing much of a change at all, if any, in the rate of spending in the industrial market on a global basis.

So you feel just as good about the industrial outlook as you did maybe January 1 of this year, if not better?

That would be a fair statement. We feel just as good, and we do not see any short-term decline or are sensing one from the interactions that we're having with our customers on a day to day basis.

Great. Last one, one really quick one. Has the level of investment relative to what you were expecting for the rest of the year at the end of last quarter -- you mentioned it was 3X what you did last year in the same quarter. Are you guys continuing to kind of pull forward some of this planned investment?

Absolutely. I mean --

So that number is higher now, this year?

The third quarter was higher. The fourth quarter will be higher. We are accelerating it, which is quite frankly what we stated a couple quarters ago, that we're trading off expanding margin with accelerating, pulling in investment spending that allows us to prolong the growth and or accelerate future growth into an earlier period. And quite candidly, that's one of the reasons we grew at the rate this quarter was because a little over almost two years ago, we started seating investments. Obviously we were very slow then, as we said. Our over-performance was because it took us a while to ramp up spending. I think we've gotten better around the world at being able to spend, quite frankly, because it is about acquiring talent, people, which is very difficult to do. And so we have seen an acceleration in that, and it's based upon a continued outlook of growth in our businesses. And that's why we want to grow it, grow that spending at a faster rate, because we're seeing continued spending by our customers, continued revenue growth, and therefore the opportunities for us to make bigger investments and drive that organic growth, which we feel is very, very valuable from a long-term value creation.

Great. Thanks a lot.

You're welcome.

Your next question comes from the line of Richard Eastman from Robert Baird. You may proceed, Richard.

Keith, could you just maybe add some color on Asia? I'm curious, we define that now kind of in the growth markets. Can you give a sense of what percentage of your revenue in the quarter was China and India? And are those markets -- is the growth coming from consumer driven markets or still the power centric markets and products?

Let me answer the last one first. Asia, and in particular China and India, is interesting markets because still today a lot of our growth there is in the more infrastructure businesses. And I don't have the split precisely as to what that percentage would be, but we do get a lot of business in the metals, in the power generation, utility markets, the infrastructure of subways, light rail investments, ports, and we continue to see that growth. What is accelerating and growing at a faster rate, although smaller, is the consumer industries, and really we saw no difference from what was going on there the last six to nine months. And that is that we're continuing to see the investment in infrastructure, and we're seeing an acceleration of spending as consumer and as disposable income grows. China is growing more in automotive, more in food, more in beverage, more in the consumer facing areas.

With respect to your earlier question of the growth accounted for by China and India, it's about 50% of sales and 80% of the growth dollars so a substantial contributor to the overall performance.

Should we think over the course of the next 18 months or so that the higher growth in Asia would be coming in at a lower incremental profit just given that that -- your growth investments would be skewed towards that marketplace? Is that a fair way to view it?

No. I don't think that is it at all. I mean, our business model talks about the investments that we make in the platforms and in the application of those and that's where the dollars are being spent. And I don't see that. That in itself will not impact our conversion margin. That's assumed in -- that's assumed in the outlook that we've given when we've said our margins are going to be 30 to 40% going forward. That takes into account what we have to invest, and really the pricing, our margins, our cost structures. Asia does not put us at a disadvantage in that regard. So just the fact that we're growing faster there does not pull our average margin down across the Company. These are global industries, global customers. We don't get to really differentiate significantly the pricing structure around the world. So I don't sense and we're not anticipating that growth in Asia will be dilutive to our margins.

Okay. Thank you.

And your next question comes from the line of John Inch from Merrill Lynch. You may proceed, John.

Thanks. Good morning.

Good morning, John.

Just as a clarification, Keith, when you guys reference Detroit, do you mean exclusively the big three and their suppliers or do you mean all automotive operating in the U.S.?

No. That's a good question. We did try to make the distinction by using the word "Detroit", and I would say it is in general the Detroit based OEMs or the brands, if you will, and the tier ones that support those. It is not the global automotive market. We feel very good about the global automotive market. Our non-Detroit automotive business will be up in 2006. So this is strictly mainly GM and Ford, and it's around project business that is most impacted at this point in time. There's a lull in their investments. James mentioned at the last year third and fourth quarter, they're coming out with a lot of new models. They're just not investing at this point in time, and I think there's a little tinge of the current environment. It's not just the current platforms, if you will. And we'll see a little longer tail, but not an impact -- as great of impact later as the MRO business slows a little because of the some of the plant closings that they've announced. But the big deal right now is the Detroit based automotive, their suppliers and the environment that they're currently going through which we expect to last another two plus quarters and not be an impact -- not be a meaningful impact after our fourth quarter.

So to give us a little bit of help in terms of how to think about that outlook, could you tell us roughly speaking what was the revenue contribution from these OEMs and the tier ones in '05 and what, based on the trajectory, you expect it to be this year?

Yes, John. Think of it as $40 million a quarter a year ago in the third and fourth, looking more like 20 in this third and fourth, and obviously the mix is with a lot of MRO and projects, a lot of PLC and Logix in there. It's a pretty good mix.

Right. And then just kind of to switch gears to the divestiture of Power Systems. So just in terms of the timing, a couple questions. Are we thinking that the timing happened prior to the year-end analyst meeting? And I think James, just based on the math, if Power Systems were dilutive, I think the number is sort of $0.20 to $0.25. This suggests, if you match it against pension, there's sort of a mild dilutionary impact between the two. Is that the way to think about it?

Well, let me take the second question first. The answer is yes. They're about the same size, but there's a lot of imponderables, including how much it sells for, how much I buy back. It's approximately, but they're pretty close. Give me a little standard deviation just in terms of the transaction proceeds and timing of repurchase. The way I would put it in terms of overall timing is we are probably looking at end of calendar year and again you throw out a date with a little trepidation here, because you can always look back and say that was, you missed something. But we're, if all goes normally and all goes according to what we think will happen and the time line, we're thinking more end of calendar year, therefore not done by the time we see you at our late October meeting. That would be more brisk in terms of a closing time than we ever thought.

And then just finally, Keith, I guess to interpret your comments, it sounds like you're feeling pretty good about the portfolio. You don't think there's any other sort of pockets of customer verticals that could be subject to a significant deterioration the way these Detroit OEMs and their suppliers have occurred recently? Is that the way to think about it?

I think that's a fair way to think about it. We're not sensing that in any other area at this point in time.

Great. Thank you.

Your next question comes from the line of Nigel Coe from Deutsche Bank. You may proceed, Nigel.

Thanks. Just wanted to talk about some of the margin mixes between markets. I know you addressed the question on Asia. I always assumed that Europe was structurally a lower margin business than North America. Is that the right way to think about it?

Let me first shoot off and then I'll let Keith go. He made a point about Asia which is directly the point you could make about Europe. And by that I mean the Company has invested in multiple technology platforms which are applied globally. As Keith pointed out, we don't get to differ -- price it differently in one region versus another. So all the money goes into having a differentiated technology platform. That's what our customers are willing to pay for. And then we work to sell, market, apply, kind of engineer solutions wherever those customers are in the world. So structurally I would say, if anything, Europe would get the same value across the plate to customers in Europe as we get to them in Asia, as we get to them in North America. Now, you might think -- perhaps your comment suggests that I'm trying to compete on price given my relatively small share in Europe compared to some of the other guys. We really, surprising as though it may sound, we don't compete on price. We compete on features, differentiation, the value we're able to deliver. In many cases, we might actually be modestly higher in price. So as long as we keep a lean cost structure, which is something we've been addressing in the last year or so in Europe, trying to make sure that the G&A level is not too heavy, we shouldn't have any lower profitability in Europe than we do in Asia or Latin America.

Okay, okay. And secondly you called out the impact of Detroit on your drop through margins in the third quarter. Can you quantify the impact of the higher investment spend, a three fold increase on the margin? And what would the impact be in the fourth quarter roughly?

We didn't break out the growth investment. What I would say, Nigel, is that growth investment is something that we're going to do and we're always going to be doing and hopefully your good management teams that you talk to at other companies are doing it to. After the effects of that growth investment, we'd like to say that we can be in that 30 to 40% drop-through margin or conversion margin. It was the Detroit piece that twanged us down in the third quarter. The fourth quarter should be, I would say for a variety of reasons, a little bit better than the third in terms of conversion. That has a lot to do with what was going on a year ago. But when you look at our fourth quarter numbers, it will be better than the third.

Okay, and just finally, just a clarification point. You gave some guidance on the pension impact next year. Does that include or exclude power?

Oh, yes. It's on an as-if Rockwell is still constituted next year the way it is this year. Otherwise it's kind of hard to do. But it would be -- there would be a effect, there'd be a slightly smaller benefit at minus power.

Okay. Thanks a lot.

Thank you.

And your next question comes from the line of Chris Kotowicz from A.G. Edwards.

Good morning. I had a question on the mix, maybe a couple of questions. On the project work versus more flow business, you talked a little bit in the press release about mix being a little less favorable. Can you give us a little more flavor on project? Are you seeing more of that activity?

Well, I think by definition the fact that the power centric areas are growing faster indicates that we have a higher project -- a richer project mix and, to the point we made earlier, particularly in our Intelligent Motor Control area. So our drive systems business, our motor control center business, our medium voltage business, those are all growing at the mid-teen rates in total, as James mentioned. And so that's where our greatest growth is, which means the greater percentage of incremental growth is in the project power centric part of our portfolio, and certainly the conversions there are 30 to 40% and keeps us -- allows us to stay in that 30 to 40% range. But we're not seeing the rich conversions that we saw earlier in the recovery a couple years ago where it was really much driven by flow goods business because MRO is what picked up first, and that was a richer mix, followed by spending in some of the consumers, which was more processor rich, and as we talked, when the pick up of our project business started, we had a lot of capacity that allowed us to grow our margins at an accelerated rate, and now we have to add people because the project businesses are growing at such a dramatic rate. We have a more typical margin expansion around a 30 to 40% based upon the need to add resources in the more people intensive parts of our businesses, and we no longer have the domain expertise capacity that we could utilize when the recovery we started. So the combination of all of those really is what is pushing it down. And to some degree now, in the power centric portions of our business, that is where the expansions are occurring. That is where more of the North American as well as global greenfields are starting to occur because of the high energy and raw material costs that allow expansion as well, as James mentioned, the fact that there's been under-investment for over a decade in some of those markets, some of those industries. That's a long way of saying there's a natural progression that's occurring here that continues to balance in a more typical way the total portfolio and therefore the 30 to 40% conversion strategy, or I should say outlook, going forward.

Okay. On the mix, a follow-up to that, you talked earlier about the pricing levels being comparable inside and outside of the United States. Can you give us maybe a little bit more of a sense of why the pre-tax margins would be seemingly so much lower outside of the U.S. then? Is it just content? Lower content? Or is there something else going on there? It seems like, if you increase your international sales, that's going to present some headwind if those are lower margin sales to your overall margin mix.

Well, first of all, let me say I don't know that I've ever showed my pre-tax margins outside the United States, but I think if you saw them, you would be impressed. Think about it this way. I bear the cost of developing these multiple technology platforms in the United States. If you looked at my cost structure, you would say, wow, this is a guy who's got a -- maybe we'd like it to be a little less U.S. centric, but it certainly is where the bulk of the engineering, marketing, call it development and technology costs are, and we are moving those to be more global and to be closer to where our customers are. But if you saw my pre-tax margins around the world, you would say they're better outside the United States than they are inside the United States. What's interesting about the model here is these technology platforms, because they're so highly differentiated, they need application and sales locally, but there's not much of a layer that needs to go beyond selling an application outside the United States. So what I thought you were talking about was my relative share outside the United States is lower because it's so high in the U.S., but that was the point I was making earlier about not competing on price but rather going head to head with the other industry players based upon differentiated technology and really having an aversion to anything that I would have to use price to compete with. And that means small, call it commoditized products are not really what's in my mix outside the United States. So if you look at my mix outside the United States, it's the richest mix I have because of the fact that I don't really try and compete on component level stuff where I don't have the market share and pricing power that I have in the United States. So the mix is better, and it's really all application and sales off of a global technology platform if you try to bifurcate it by geography.

Okay. I'll circle back off-line and dig into that in a little more detail.

Excellent. Thank you.

Jackie, we have time for one more question.

At this time, gentlemen, you have no further questions.

Terrific. Thanks for your help, Jackie, and thanks you all for joining us.

No problem. Ladies and gentlemen, you may now disconnect, and have a wonderful day.