洛克威爾自動化 (ROK) 2007 Q3 法說會逐字稿

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 lines for questions. (OPERATOR INSTRUCTIONS)

At this time, I would like to turn the call over to Kirk Larsen, Rockwell Automation's Director of Investor Relations. Mr. Larsen, please go ahead.

Thank you. Good morning and thank you all for joining us for Rockwell Automation's third quarter 2007 earnings release conference call. Our results were released earlier 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 referenced during the call are available at that website. These will remain there for the next 30 days.

With me today are Keith Nosbusch, our Chairman and CEO; and Ted Crandall, our CFO. Our agenda includes opening remarks by Keith, and then Ted will review both the quarter and our outlook. We will, as always, leave time at the end of the call to answer questions and ask that you self-limit to two questions to allow broader participation. We expect the call today to take about 50 minutes. As is always the case on these calls, I need to remind you that our comments will include statements related to the expected future results of our 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 forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. With that, I will turn the call over to Keith.

Thanks Kirk, and good morning to everyone who joined us on this morning's call. My comments will be brief today. At this same time one quarter ago, we laid out the rationale for considerably better performance in the second half of our 2007 than we delivered in the first half. We projected somewhat higher growth rates and better execution against our productivity objective. I'm extremely pleased today to report that our Q3 results were very much as we expected.

U.S. revenue growth did accelerate modestly to 2% year-over-year, or 6% sequentially. We did sustain the rapid growth outside the U.S. with particular strength in Latin America and Europe and improvement in Asia. Architecture and software did for the first time in about two years grow more quickly than control products and solutions. Consumer industries did, for the first time in over two years, outpace resource based industries. Productivity did improve substantially to 5%. And, therefore, our conversion margin did recover to our targeted range of 30 to 40%. In fact, somewhat above that range.

The results we posted in Q3 and the momentum that we are carrying into Q4 have allowed us to raise our guidance for the full year. With only one quarter to go, we are raising our guidance for revenue growth to the high end of our previous range of 8 to 9% and then tacking on an additional percentage point for the recent acquisition of ICS Triplex. So we now expect revenue growth to be about 10%. We are also raising our estimate for EPS from continuing operations from $3.55 to $3.65, to $3.65 to $3.70. As should be evident from this guidance, 2007 will be another great year for Rockwell Automation. But I can assure you we're not resting. We remain intensely focused on sustaining above market organic revenue growth, on diversifying our revenue base, and on driving the adoption of our Integrated Architecture while further developing our continuous improvement culture. I am confident that we will close out a successful 2007 and carry that momentum into 2008. I will now turn it over to Ted to provide more details on the quarter. Ted.

Thanks, Keith. And good morning to all who called in. We've posted charts to our website and I will reference those charts along with my following comments. Turning to chart 1 entitled "third quarter results summary" this slide summarizes key items from the income statement. Starting at the top, revenue in the quarter was $1.281 billion, an increase of 9% over 2006. Segment earnings were $262 million, up 21% year over year, resulting in a 2.1 percentage point improvement in margin. Walking down the page, you will note the general corporate net was $18 million, down about $4 million from last year. The primary driver of the year-over-year decrease is interest income of about $5 million on proceeds from the Power Systems sale.

Going forward, you should think of general corporate net expense of about $20 million to $25 million as a normal quarterly run rate. Interest income from the Power Systems proceeds will no longer be a factor as we have used those proceeds to buy back stock and fund the purchase of ICS Triplex in early July.

Moving down the page, interest expense was flat with last year. The third quarter effective tax rate is about 26%, down about 4 points from last year. The rate was lower due to our global earnings mix and the resolution of certain state tax matters. We estimate the rate will be 28 to 29% for the full year 2007. Average shares outstanding in the quarter were 156.5 million, down 13% from a year ago. During the quarter, we repurchased 6.2 million shares. At the end of June, we had $284 million available under our $1 billion repurchase authorization.

Let's move to the next chart. Q3 results, Rockwell Automation continuing operations. As always, we're showing total Rockwell results over the past five quarters, excluding Power Systems. As I said before, growth was 9% year-over-year, or 7% excluding the effects of currency translation. Sales were up 6% sequentially. From a regional perspective growth was led by continued strong performance in Europe and Latin America with improvement in Asia, Canada, and the United States.

Operating margin in the quarter was 20.5%, up 2.1 points from the third quarter of last year. You can't see it it on the chart, but our trailing four-quarter return on invested capital was 23.7%, up 2.6 percentage points versus the year-ago period.

I'd like to go to the next chart, which summarizes our architecture and software results. Sales were up 11% year-over-year, on a sequential basis sales were up 8%. Logix seals grew 15% in the quarter with nearly two-thirds of the growth coming from process applications and the CompactLogix product offering. Legacy PLC sales were down about 7% in the quarter. Operating margin was 28.3%, up 2.9 points from the third quarter of last year. Profitability benefited from volume, productivity efforts, and price, partially offset by inflation.

I'll turn now to slide 4 which covers our control products and solutions business. Sales were up 8% year-over-year and up 5% sequentially. Operating margin improved by 1.2 points year-over-year to 14%. Profitability in this segment benefited from volume, productivity efforts and price partially offset by inflation and less favorable revenue mix.

Let me turn now to a geographic break down of our sales in the quarter. This chart provides regional growth rates and the far right column shows growth rates excluding the impact of currency translation. As you can see on the chart, we had a strong global mix of sales in the quarter. Our Europe sales were up about 15% in the quarter, a very good result, continuing the progress we've seen in the last few quarters. We're optimistic that we'll see continued momentum in Europe with help from short-term economic factors as well as the benefits of growth investments we've made in the region.

Latin-American sales were up 22% with continuing strong performance. Asia Pacific sales were up 9%. Once again, our Asia results are the average of emerging Asia and the slower growth developed Asia. This quarter clearly reflects an improvement over the last two quarters. Canada sales were up 7%, also an improvement from the last couple of quarters. Looking at the United States, sales were up 2% year-over-year. The U.S. accounts for 54% of our sales, a decreasing percentage but still large. Consequently U.S. results have a significant impact on our average growth rate.

Turning to chart 6, you will see cash flow detail for Q3 and year to date. In the third quarter, free cash flow from continuing operations was $184 million. That excluded tax payments related to the gain on the sale of Power Systems. This is higher than net income and much improved compared to the first two quarters of the year. Capital spending was about equal to depreciation and amortization.

I'll close with chart 7 which summarizes our full-year guidance. As Keith said earlier, we are raising our revenue growth guidance to 10% which is the high end of our prior 8 to 9% range, and it includes an additional 1 percentage point due to the ICS Triplex acquisition which we closed in early July. We are also raising our diluted EPS guidance from continuing operations before special charges to $3.65 to $3.70 per share from our prior range of $3.55 to $3.65 per share. We are holding our guidance for free cash flow at $500 million. And with that, we'd be happy to answer any questions you might have.

Thank you, sir. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Bob Cornell of Lehman Brothers.

Big sigh of relief going on out there. Remarkable quarter, I have to say. A lot of questions. The first, I guess, would be why, Keith, did you see the consumer facing industries do so much better than the resource-based industries, and is that a function of some of the investments you made in those verticals? What's really going on? Is it end market or Rockwell related?

Well, I believe there's two things, Bob. One, the resource-based industries just have very tough comps, because of the strong growth that they had previously. So it's very hard to continue at that accelerated rate of growth. Having said that I believe a lot of our investments have been made to improve our capabilities in the consumer industries. And certainly what we're doing in the verticals, what we're doing with information, what we're doing with the expansion of Logix, all of those are more appropriate and more attuned to the consumer industries. So it's a combination of those two facts.

Yes, I mean, Logix, at 15% I guess is good, but maybe less than we might have expected, especially given the overall good quarter, 18% last quarter. What's -- how does 15% shape up in your mind?

Well, actually, we're very happy with the 15%. As we have said, our goal and our aspiration is to keep that at 20%, which gets to be a pretty tough number as we keep growing it at the pace that we're growing it. And as we also have said, 20% requires that we are hitting really all cylinders, and in this case, we had very good across the board growth other than in Asia. And if we're growing at high single digits, 9% in Asia, that's not a high enough number to pull Logix at the 20% level. So we still have some work there, but overall we're very happy with the Logix performance, and that combined -- the performance in Logix plus the return to a more normal degradation of the legacy platforms is what was a strong driver for our performance this quarter.

A follow-up question there is, you talked about the improvement in Asia but you didn't break down the specifics and reference China. Maybe you could just tack on that observation.

Sure, sure. If you look at our growth in China, we had excellent growth in India. Once again India was up 30%, China was up 21%. So a real good turnaround in China with continued strength in India. That leaves Southeast Asia had a difficult quarter but mainly that was because of project-related work, Southeast Asia is a very project driven market, and most of that is just timing year-over-year.

Got it. Thanks, Keith.

You're welcome, Bob. Thank you.

Our next question comes from the line of John Baliotti of FTN Midwest Securities.

Maybe we could focus on comps. Logix, as you guys reported was 15%, the comp, I think, was a little bit harder this quarter than last. If I'm right, the next quarter actually drops to a comp of 12%. Is that right?

I believe that's right, John.

Okay. And similarly, on geography, I think the -- as you mentioned, Asia was going to pick up, it looks like the comp was actually, ex currency, was tougher this quarter for Asia than prior quarter, and you had a nice pick up there. Along those lines it looks like the comp actually, for both Asia and the U.S. gets easier in the current quarter that you're in. Is that right?

That is true, although I wouldn't say easy.

Well, right, right. Relatively. I know it's easy for us to say that from our perspective. So with that, what kind of absolute momentum are you feeling right now relative to last quarter going into the rest of the year?

Well, we talked last quarter that we felt very good momentum heading into the second half, which obviously is the big reason we increased our outlook for the second half. Going into the fourth quarter, right now we basically see no different from what we saw earlier. We've done our normal pulse around the world, and we believe it's very similar to what the outlook was a quarter ago, and in particular, we have strength in our solutions businesses, where we have built that backlog throughout the year, and we believe that will be a key driver of our performance in the fourth quarter.

Okay. Maybe just big picture. The capacity utilization seems like it's still sticking around around 81, 82%. I think in the past we had talked about that being above 80, being very healthy for you guys. Are you feeling like even though it bumps around 10 basis points here or there, do you feel like things are still pretty solid from a foundation standpoint there?

Yes, I think if you look at all of the economic numbers that have come out over the last three to four months, really support the increased momentum that we were talking about at the start of the third quarter -- of the second quarter, I'm sorry, start of the third quarter, second quarter in the calendar year, but that that momentum is continuing. Housing and historically what was going on in automotive were the only sectors that we did not see -- that we did not see growth in. And we continue to see a broad-based investment that is going on through the other industries.

Great. Thanks very much, Keith.

Sure, John.

And our next question comes from the line of Steven Tusa of JPMorgan.

The ICS deal, I know that added a point of growth, but I think it was going to be dilutive in '08. Is it going to be -- since it closed a little earlier than we were expecting, dilutive in the fourth quarter?

It will be slightly dilutive as we have said it will be dilutive for the first year. It probably closed perhaps a little quicker so it's not going to be a significant impact, but it is dilutive in its first year of transition and certainly that is the reason we added one additional point on to our revenue growth because we will own that business for the entire quarter.

So the revenue contribution there for this quarter, it's [$50] million for the fourth quarter? Something like that?

No, no, it's about 35.

Right, right. Okay. And then just thinking about the longer term here and talking about automotive, are you getting any kind of sense that if these guys do get favorable deals with their Unions that they will begin to look at maybe investing a little bit more in their products and flexible manufacturing? I know that that's not on the radar screen for the next couple of quarters, and we're certainly not counting on it, but is that something that is a potential to happen maybe in 18 months to 2 years' time?

Well, I think they are going to invest. We're -- compared to where we got down to, we're seeing now some project activity, and we expect to see some order help from the automotives over the next couple of quarters. So projects appear to be -- some projects will be flowing. The magnitude of those, I think that some of it is dependent on the performance or the opportunities that they're able to generate from the negotiations that are currently on. I think if they feel that they've put themselves in a more competitive position they will be more willing to invest. So we're very optimistic that we'll see that happen after negotiations are successfully completed. The other dimension, there's still the supply chain sorting out that has to take place, so the tier ones are still going through change, and then also each one of those -- each one of the Detroit based automotives, particularly GM and Ford, are still going through their plant rationalization which does impact our installed base, MRO business, but not the project-related activities.

Right. So you're pretty confident that auto has indeed bottomed here.

Yes, we're not even talking about that as the head wind any more.

Right. One last question. The incremental in architecture and software, I understand that you had a pretty good productivity quarter and we certainly won't be assuming a 50% plus incremental there going forward, but is that just a little bit of sneak peek as to how profitable this business could be if it continues to grow the way that you guys would hope would it grow over the next few years?

Well, the answer -- there's two parts to that. If it grows at the rate we're hoping it will grow, it will have decent margin. What is more important this quarter is the mix in A&S was much more processor software centric. If you remember the last quarter we talked about a weak mix and also a software action that was required. And really both of those changed, and so we had what I would call probably a more favorable mix in this quarter. That, plus the growth rate, is what created the margin improvement this past quarter.

Right. Thanks a lot.

Sure.

And our next question comes from the line of Mark Koznarek of Cleveland Research.

Really great quarter on the margin line. A question about those. We had recently spoken to some channel contacts who were experiencing some delays associated with some of the manufacturing plants that you folks were installing your SAP upgrades, and I think you even mentioned this in the prior quarter, and it gave me the sense that there still could be some challenges associated with that, but these margins suggest that you've overcome those challenges, or you've found some other way to offset them. So could you address those issues, whether that's a temporary phenomenon that you've overcome, or is their still some shoes to drop coming up with regard to your systems implementation?

Sure, Mark. Be happy to answer that. Certainly from the history in ERP implementations, basically all of them do cause some level of disruption. And quite candidly, our implementation is no different. We have had some disruptions. Those disruptions have impacted customers, and they've done a good job of working with us, our channel partners, to get through these bumps in the road. Certainly we believe, as evidenced by this quarter, that there's been no impact, or I should say, more importantly, a not just negligible impact, based upon the introduction at some different sites. And we believe that the worst of the disruption is behind us. But I've got to tell you, our entire organization is very intensely focused on minimizing these disruptions, and more importantly, we have learned from the previous site installation. This past month we went to our fourth set of sites, and we've had a much smoother introduction, basically because of the learning out of the first three sites. So I believe the worst is behind us and that we are a learning organization, and, yes, we have had some disruptions, and that has impacted our -- the ability of our channel to support the customers the way we believe we should be supporting and servicing our customers, and we take that very seriously and are working very hard to get that 100% behind us. And we believe we're on that path.

Keith, I understand that the plants that you're now rolled on to, this fourth set of sites includes some or all of your Logix facilities and some some of these channel partners said that they were kind of nervous about that and had pre bought some of these products in the quarter. Do you think that had a material impact at all on the Logix growth rate, or do you think that's relatively minor and this is reflecting actual underlying market demand, what you reported today?

We believe that it is -- that whatever that prebuy was was very negligible. We monitored that very closely, and we believe it had no impact on the performance in the quarter, and more importantly, we believe that the Go Live is going extremely well for that set of plants, and we expect to be back to the pre Go Live status much quicker than in any one of the other implementations. We're very encouraged with the -- I'll say the three-weak look, as we have rolled out those other sites, but no impact on quarter three.

Okay. Well, then, I guess the conclusion of all this is that you've -- you're offsetting those internal challenges, they're getting better. Margin improved a lot, and you did mention that mix improved. Was there anything else that helped the year-over-year margin performance or even compared to the prior quarter?

Yes. Two things, Mark. You hit the first one. Absolutely, mix was a big deal. The other one was, they probably had their best quarter in productivity of the entire year. Not probably. They did. And as you know, you know, the right mix, overachieving in productivity is a pretty powerful leverage in the A&S businesses, and they certainly hit on both of those points this past quarter.

That's great. Congratulations. Thank you.

Thanks, Mark.

And our next question comes from the line of Jeff Sprague of Citigroup. Please proceed.

Thanks. Good morning.

Good morning, Jeff.

Good morning. Just to drill a little bit further in kind of the margin and expense dynamics, you didn't really call out some of your cost reduction efforts. Maybe that's all wrapped in that productivity bucket. But I'm just wondering, just kind of looking at what the Q4 guidance implies. It seems to suggest the margins come down a bit. So maybe it's mix normalization. Can you just frame that a little bit better for us, kind of the basic cost-cutting actions versus the mix, and maybe how things shake out in the fourth quarter?

I'll make a couple comments, then Ted can fill in whatever I've missed here. But certainly we had a very strong cost productivity in the quarter, and to your point, that is where the cost actions are captured. And being at 5%, we talk about 3 to 4. So, quite candidly, we're not planning for another 5% in quarter four. We're planning on being in the range of 3 to 4. So there's a little -- there's a slight pull-down because of that. And so productivity is going well.

Our cost actions, we are on target for what we expected to be at with the actions we took in quarter one. We're achieving those benefits. If you remember the actions that we talked about in quarter two are more longer term. And there's minimal, if any impact in this fiscal year. That's teeing up productivity for '08 and, quite candidly, more in '09. So that's the mix -- the productivity aspect of it. The other dimension in Q4 is that we expect a mix shift to be back a little bit to a stronger solutions revenue, which is typical for us in the fourth quarter, because a lot of our systems businesses produce very strongly, and particularly with the backlog we have, we know we're going to have a very strong solutions business, revenue stream, in the fourth quarter and that that, as well, will be -- will cause downward pressure on our margins. So it's those two points. And I'll let Ted fill in any of the missing parts.

Jeff, I would add a couple other things in terms of a Q4 to Q3 comparison. A smaller item is basically we'll have, call it either increased interest expense or reduced interest income related to the ICS Triplex acquisition that was completed in early July. And that's really how you ought to think about the dilution around that acquisition at this point. Secondly, and probably more importantly, our third quarter tax rate was 26%. That was due to kind of a discrete tax event that occurred this quarter. We do not expect that to recur, and we're not projecting a rate that low for the whole second half. So you couple the things Keith talked about with being back in our 3 to 4% productivity range, a little bit less favorable revenue mix, the tax rate difference going from Q3 to Q4, and I think that kind of explains the balance of our outlook for the year.

Right. Next question, final questions, maybe two in one, but just first on pension, you guys are on a June 30 measurement date. I just wonder what that suggests for 2008 on pension? And secondarily, just kind of on financial items in general, now that you've redeployed the Power Systems proceeds, how do we think about capital deployment going forward? Is it more of the same share repurchase and a deal dropped in here or there, or is there some other priority?

No, I'll answer the last one first, Jeff. And that is we have really no change in our philosophy of capital deployment. We look at internal organic growth opportunities, then we consider a continuation of our disciplined acquisition strategy. And then our default mode is to not have excess cash on our balance sheet, and that we'll return it all to the shareholders in the form of dividends or share repurchase. So consistent to what we've been doing is what you can expect. We have worked our way through the 1 billion repurchase -- I should say we're working our way through it. We have worked through the cash aspect of that with the ICS Triplex acquisition now. And we're currently analyzing what the optimal capital structure will be going forward and that will be something that we talk more about in the fall when we talk about our plans for 2008. But our priorities remain the same, Jeff, as they have been, and that's the outlook at this point.

And regarding your question about pension, we're kind of working through the result of rate changes based on our measurement date on January 30, that is not yet completed, and I think we'll be sharing that when we talk about '08 guidance.

Thank you.

And our next question comes from the line of Nigel Coe of Deutsche Bank.

Just wanted to ask a quick question on ICS Triplex. Does this substantially replace your sort of organic push into safety or was it simply (inaudible) and maybe, if you could just wrap into that discussion whether you feel you might need to augment pushes into other areas such as process control?

Could you repeat the last part of that?

Yes, I mean, it sounds like process control is a key initiative of growth. Wondering if you might need to acquire one or two properties there?

Sure. The first point is, this augments our existing safety activity. Most of -- not most, all of our investment in safety previously was in the discrete machine safety element. And we had had machine control, and we had safety component. We were able to address part of process safety at the low CO2 level and below. What Triplex did for us was allow us to move into the process safety and the high availability fault tolerance segment of that market. That is a very different segment than what we were able to address with our current portfolio. So it was new technology, allowing us to broaden our industry application and really did complement, to your second point, really did complement what we were trying to accomplish in the process space, which is an area that we are moving the Logix architecture into for an expanded served market.

So process is our greatest growth initiative inside the Company, and Triplex really augments and adds to and gives us more credibility in the process, in particular the oil and gas space, and it helps us broaden our geographic footprint as well, because most of their sales were outside of the United States. So it hit on a couple of key elements of what we're trying to do to grow to business, and we're actually very excited about having it as part of our portfolio and we do believe that we can also take that technology, the high availability fault tolerant technology and move that into the batch hybrid space and into some discrete applications because of the importance of asset utilization in many different manufacturing environments today and probably more important in the future. So that's -- that's the beliefs and goals of what we're trying to do with that acquisition.

Great. And you mentioned price in a couple of areas during the slides, specifically in terms of the good leverage you had this quarter. Can you quantify the price this quarter and maybe whether you see it improving?

Well, I don't believe we see it improving, but over the last couple of years, we have talked about a more favorable price environment, and while it's not as good as it was a year ago, we're able to probably overall realize under 1% as we look forward and as we have -- and as we have developed this past year.

Okay. Thanks, Keith.

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

Hi, Keith. Good morning.

Good morning.

Just a question -- I just want to circle back for a second to the architecture and software margin. Can you just talk for a second or two, did the geographic mix within that segment help you from a margin standpoint?

No, the geographic has less to do with it than the mix within -- than within the segment. And so the product mix is more important to us than the geographic mix.

When you talk about the consumer facing industries having picked up, I guess I'll assume they grew at a rate greater than the 8% local currency in that architecture and software area. Which particular verticals within consumer grew? You had had mentioned auto -- was auto flat or down in the quarter?

Auto was slightly up.

Okay.

And if we talk about the consumer industries, food and beverage, and home and personal care growth was at about the Company average. The real star performer for us this quarter was life sciences. That was up more than 20%. And automotive was in the low single digits.

All right. Then, Keith, one of the things you had mentioned was your backlog is strong on the solutions side. Some of that will flow out in the fourth quarter, which is somewhat typical. How do you see the growth in the solutions backlog relative to where we may be in the investment cycle overall?

Well, I would say that what we're seeing in the growth in the backlog tells us we're still in the investment cycle, and I think this is probably a little unique investment cycle because of the commodity pricing that's going on. And the worldwide demand for those commodities. So we're seeing continued strength. Certainly if you look at some of the mining sectors, they're talking about years of investment. And I don't think that will be universal across all of the resource industries, but this appears to be a long investment cycle. But mainly driven because of commodity pricing. And if things change dramatically there, that can -- it can turn pretty quickly, as we have evidenced before, but the oil and gas and the commodities very strong demand and very -- and, therefore, capacity expansions are going on.

Okay. Then just a technical question for -- maybe for Ted. In the guidance you talk about the 3.65 to $3.70 including FX and acquisitions. Sounds like acquisitions will maybe be minus a $0.01. Did FX help the bottom line in this quarter?

I would say not significantly.

Great. Thank you.

And our next question comes from the line of John Inch of Merrill Lynch.

I thought there was maybe some capacity additions that were coming on line or had come on line for the architecture and software business. Did that, Ted or Keith, did that have any kind of material impact to the results of Logix or the profitability or growth rates that we saw?

No, I don't believe we had capacity additions. What we had been talking about, John, is that we are globalizing that business and we started up a facility in Singapore, and that was not really capacity expansion. That was a realignment of our manufacturing footprint. That is coming up to speed. That is accelerating, but it's not from a capacity standpoint, and I wouldn't say that that was a help in the quarter. If anything, it probably continued to be the expense item as we ramped that up more so than an ability to generate more top line.

Singapore was what I was sort of referring to. So there was no -- to your knowledge, Keith, there was no channel sale impact or start-up benefit associated with this from a pure demand or a distribution standpoint?

No, nothing in that regard at all.

Okay. Just -- I want to go back to the pension for a second. Ted, if I'm not mistaken, I think around this time when your pension plan closed, you guys at the time had articulated that the discount rate was up 125 bips to 6.5%. I think fiscal '07 is benefiting versus '06 from less of a drag by over $30 million. Do you -- I know you haven't sort of finalized the numbers yet, but can you give us at least a generic sense based on as you see where the plan stands? Are we in line still to get a kind of contribution to the bottom line as we head into '08, or are things possibly neutral or possibly even a little bit of an upwind?

John, I can't answer that at this point. We're still right in the middle of that analysis.

Do you have a sense one way or another of which way it's going to swing?

I don't at this point.

Last question. As we've worked our way through the share repurchase from the proceeds of the Power Systems sale, and then, Keith, you've done the ICS deal. Should we be thinking, in terms of capital allocation, perhaps of a reorientation back towards some fill-in acquisitions or toward more of these kinds of deals as you expand out process? You guys have done a terrific job of buying back your stock. How are you thinking of the trade-off before? I know you're opportunistic but again, is there any kind of shift going on here? How would you like us to think about this heading into next year?

Well, I don't believe there's been -- that there's been any shift. We continue to run the disciplined acquisition process, and as we have said, just because we had the Power Systems cash we weren't going to go out and do anything that was not consistent with that strategy. And we expect to be aggressive in our small bolt-on types of acquisitions that we've been doing the last couple of years. And they do fill in very nicely, to your point, John. And we see more of that going forward, and we commented with the ICS acquisition that it was probably a little bit on the high end for us, but we thought it was a great fit, and something that we wanted as part of the portfolio. So looking forward we're going to continue to look at acquisitions that allow us to do more for our customers, that fill technology gaps, or that allow us to grow share and competencies and expertise in different geographies of the world.

But it sounds like it's still very much a bolt-on emphasis.

Yes, that is the way you should view it.

Thank you.

We'll take one more question.

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

Quick follow-up. Ted, could you elaborate on the Corporate expense line going up, as we think about it going forward?

Nicole, I think if you look back over the last several is quarters, we have kind of been in that $20 million to $23 million range, and general corporate net is also the place where kind of special items that may come up quarter to quarter generally fall. If you went back to previous quarters it would have been things like legal settlements, environmental charges, and that's why we've kind of quoted that range of 20 to 25. The increase from this quarter being about 17 is basically reduced interest income going forward.

Okay.

That was also captured in that category.

Okay. And I guess just one last one on Asia sales. When you think about China, and the growth there, what's really driving it, and can you talk a little bit about the strategy there?

Well, what's driving it is the incredible investment that's going on in China and in India to some degree. That's obviously evidenced by the continuing reports that come out that talk about the incredible growth rate in the output, manufacturing output as well as the balance of payments and the fact that they're exporting an awful lot of those manufactured goods. So we see that continuing. As a matter of fact, we see the -- we see the dynamics changing a little to where, because of the disposable income, particularly in China, that is being developed because of their growth that we see more of a future in the consumer industries, and therefore a lot of the strength that we have and the opportunities that we'll have will be closer to where the sweet spot is for Rockwell Automation, but it's a combination of the infrastructure investment that's going on in those two countries, and the increase in disposable income that allows more specific consumer-driven investments, and actually China is trying to develop a more consumption-based economy as opposed to the investment based economy that has currently been driving it. So in Asia, particularly developing Asia, that's what the core underlying aspects of growth are.

I guess maybe I should have asked it a different way. When I think about the growth rate that you posted in the second quarter versus the growth rate in the third quarter we accelerated, is it just a comp issue or was -- you had said ex-China it was more timing related. Did things get pushed into the third quarter from the second quarter or is it just lumpy?

Well, it is lumpy, absolutely, because there's much more project business in Asia than any one of our other regions. So Asia can be lumpy, but I think the -- I think the change between second quarter and third quarter is the start of some of the things that we've been talking about the last couple of calls as to how we're trying to build more infrastructure and more maturity, more organizational maturity in a very fast growth region. So part of it is the outcome of that hard work that that team over there has been doing the last three-quarters, and our goal is to continue to get back to that range that we've identified for our growth long-term.

Great. Thank you.

You bet.

That concludes the call. Thank you, everybody, for joining us, and have a good day.

Ladies and gentlemen, that concludes today's conference call. At this time, you may disconnect. Thank you. Thank you, gentlemen, have a wonderful day.

Thanks.