洛克威爾自動化 (ROK) 2009 Q1 法說會逐字稿

Thank you for holding and welcome to the Rockwell Automation quarterly conference call. I need to remind everyone that today's conference is being recorded. Later in the call we will open up the lines for questions. (Operator Instructions)

At this time I would like to turn the call over to Rondi Rohr-Dralle, Vice President of Investor Relations. Ms. Rohr-Dralle, please go ahead.

Thank you, Operator. Good morning and thank you all for joining us for Rockwell Automation's first quarter fiscal 2009 earnings release conference call. Our results were released this morning and the press release and charts have been posted to our website at www.RockwellAutomation.com. Please note that both the press release and charts include reconciliation to non-GAAP measures. A webcast of the audio portion of this call and all the charts that we reference during the call are available at that website. The webcast will be available for replay and the materials from this call will be accessible 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 followed by Ted's review of the quarter and discussion of 2009 guidance. There will of course be time at the end of the call to take your questions and we'll try to get to as many as possible, so please limit yourself to one question and a follow-up. We expect the call today to take about one hour. 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'll turn the call over to Keith.

Thanks, Rondi, and good morning to everyone who joined us on today's call. Let me start by making a few comments on our results this quarter and then spend more time talking about the balance of the year. At this same time a quarter ago we talked about how challenging 2009 would be for Rockwell Automation, one that anticipated a revenue decline of 1% to 5% from 2008 levels, excluding the effects of currency. As you know, a lot has changed in the market environment since then and business conditions are markedly different. After a very solid October, we experienced a severe decline in customer demand during the second half of the quarter. This was due to deteriorating economic, financial, and credit market conditions in all regions and most industries aggravated by an unusual number of customer plant shut downs resulting in performance for the quarter below our earlier expectation.

Organic sales declined 5% in the quarter plus a 6% decline due to currency. Segment operating margins were down considerably compared to last year primarily due to the rapid decline in sales volume. Free cash flow was weaker than our normal seasonal performance and Ted will talk more about this shortly. And even with these results our return on invested capital was 22.3%.

Now let me shift gears and focus on the future. We expect an extremely difficult market environment in the balance of 2009. The global recession has grown deeper and wider than we originally anticipated. Key economic indicators and projections continue to weaken and we see a significant deceleration in customer demand. Negative GDP is now projected in all mature markets and all emerging market growth projections are substantially lower. Industrial production for all markets have worsened with significant declines expected in the mature markets and growth expectations substantially lower in emerging markets. US manufacturing capacity utilization fell further in December to 70.2% compared to 79.2% in December '07.

The purchasing manager indices are in the 30%s in mature markets and no emerging market is close to 50% except India. December US PMI was at 32.4%, the lowest level since the mid '80s, and capital expenditure budgets have been reset and a survey of our top accounts show a double digit reduction in capital spending. There is no doubt that all the indicators and trends have continued to decline significantly. This was further confirmed when we ran our quarterly business review and forecasting process where we received input from our sales organization, channel partners, and customers in every region. The clear consensus was that we are operating in a rapidly declining environment and that we will confront very challenging business conditions in 2009. We evaluated backlog and frontlog, order trends and plant shut downs. Our backlog was up slightly over Q1 '08, and our front log and pipeline analysis, we are seeing a noticeable increase in project delays and a slight uptick in cancellation. Product front log is down. Project front log varies by region, but in general it is only positive in process, oil and gas, cement, power and energy, and legacy conversion.

The situation is further complicated given the abrupt falloff in sales volume and uncertainty around the depth and duration of this synchronized global recession, making it a very difficult to forecast sales and revenues. What is clear is that we have not seen the bottom yet, and that with this rapid volume decline, we expect a very difficult Q2. Accordingly, we are now planning for a fiscal 2009 organic revenue decline between 12% and 17% excluding the effects of currency. We will also face currency headwinds impacting revenue negatively another 7%. Based on this sales forecast and the savings related to cost reduction actions, we are revising our fiscal 2009 earnings downward to a range of $1.55 to $2.25 per share.

We took cost actions in Q4 in anticipation of a slowing market and our ongoing mix shift. In November, when we provided guidance, we anticipated the need for additional actions based on an expected moderate decline of negative 1% to negative 5% in market conditions and built in about $25 million of implementation costs to permit pay as you go cost reduction action. It is now clear that we need to aggressively continue to reduce our costs and restructure our businesses to reflect a more significant change in customer demand levels.

In addition to the restructuring actions we announced in September, which we are already realizing the planned benefits from, we have frozen all headcount additions and replacements, clamped down further on all discretionary spending, eliminated temporary and contractor positions, suspended the January increase that is normally scheduled for January 1st, eliminated overtime, moved to shortened work weeks in some of our production facilities and implemented additional headcount actions in Q2, and planning for further reductions in the balance of the year consistent with the previously announced pay as you go cost reduction actions that were included in our original guidance. All of these actions are targeted to take a total of $240 million out of our cost structure and is factored into today's guidance.

In addition, we now have also initiated a process to analyze and identify further cost reductions in the range of $50 million to $100 million on an annual basis. This analysis builds on previous actions and will consider the following: Further reduction in or consolidations of manufacturing in business locations, additional organizational consolidation and simplification actions and evaluation of the future for under performing productlines. We intend to protect the investments we have made in emerging markets to support future growth. We also plan to continue our investment in technology leadership including the evolution of our Logix architecture. We are aggressively attacking working capital to improve cash flow conversion.

Before I turn it over to Ted to discuss Q1 and 2009 in more detail, I would like to conclude by saying our balance sheet provides a source of strengthen challenging times like these. We have ample cash and credit facilities at our disposal giving us flexibility to invest in growth, strengthen our portfolio and fund our current dividend. Although our outlook reflects the dramatic declines in most of our global end markets, I want to stress that there is nothing fundamentally wrong with our business or our strategy. Our diversification strategies are working and represent an important source of strength in dealing with the current environment. This was evident in the quarter with growth across multiple dimensions, specifically, our process business grew 11%.

We also introduced plant [PAX], the unifying brand for our entire process portfolio and process Rockwell Automation system. Our oil and gas strategy is gaining traction. We experienced growth in the first quarter anchored by a multimillion dollar win with a leading oil company in Canada. Also, our integrated control and safety system allowed us to win a significant technology differentiated order with another major oil company. We are increasing wins in applications and markets that we previously could not compete in. Our solutions and services businesses grew and we experienced 10% organic growth in Latin America. Our employees are doing on outstanding job navigating through these global market challenges and are committed to improving our customers experience and increasing our share.

We will remain focused on dealing with near term cost and business issues and we'll keep a keen eye on executing our long-term growth and performance strategy. While we must deal with reality, I am confident that we are well positioned to outperform the market in these challenging times and that we will emerge from this downturn more competitive and more successful than ever before. Now let me turn it over to Ted.

Thanks, Keith, and good morning. We've posted charts to our website. My comments will reference those charts. On chart one, Q1 result summary. Starting at the top of the slide, revenue in the quarter was $1.189 billion, down 11% from Q1 last year. The effective currency translation accounted for six points of the decline. Segment operating earnings were $178 million, down from $258 million in Q1 last year. Purchase accounting expense was a bit below last year. General corporate net was up about $4 million from last year, but last year's number included a $6 million gain on the sale of Baldor stock received as part of the power systems sale. Interest expense was $3-million lower than last year and the effective tax rate in the quarter was 17.1% below last years effective rate of 28.5% and below our guidance range. The lower rate included the benefit of a discrete tax item resolved in the quarter and the effect of the retroactive extension of the US federal research tax credit.

EPS from continuing operations was $0.81 and we recognized $2.8 million or $0.02 of income related to discontinued operations. This resulted from a favorable ruling in litigation related to a legacy environmental reserve. Average diluted shares outstanding in the quarter were 142.2 million down from 151 million in Q1 last year. During the quarter we repurchased approximately 1.7 million shares at a cost of $50 million. At the end of Q1, we had $621 million available under our $1 billion share repurchase authorization.

Moving to chart two, Q1 results of Rockwell Automation. As noted previously sales for Q1 declined 11% year-over-year. Sales declined by 20% sequentially, both comparison including currency effects. Q1 sales are typically lower than Q4, but this was a larger than expected decline. I'll discuss regional performance in a few slides. Moving to the earnings side of the chart you can see the significant decline in segment earnings both year-on-year and sequentially. Year-over-year segment operating margin contracted 4.4 points. As we discussed last year and in our guidance, revenue mix and the impact of acquisitions continue to create some headwind. Our higher margin product business is declining more rapidly in the early part of the cycle than the solutions business. But the more important part of the story in Q1 is the impact of volume leverage related to the 5% organic sales decline. It's not displayed on the chart, but our trailing four quarter return on invested capital was 22.3% down from 24.7% last year and primarily due to the earnings decline.

Please turn to chart four which summarizes Q1 results of the architecture and software segment. Sales in Q1 were down 12% year-over-year, down 6% excluding the effects of currency translation. In this segment, acquisitions contributed a bit less than one point of growth year-over-year. On a sequential basis sales were down 18%. Operating margin down 4.1 points year-over-year and 1.3 points sequentially. Volume leverage is the primary driver.

Chart four covers our control products and solutions segment. Sales in Q1 were down 9% compared to last year, down 3% excluding currency translation, and down 21% sequentially. Operating margin declined by 4.5 points year-over-year and 4.7 points sequentially. The drop is due to lower volume, aggravated mix and in the year to year comparison inflation. The next chart, chart five, provides a geographic break down of our sales in the quarter. In the center column you'll see overall growth rate by region. The far right column shows growth rates excluding the effects of currency translation. In comparing the two columns you can see the significant impact the currency had on all non-US regions. I'll focus my following comments on the far right column. In the US, sales were down 4%. Transportation was particularly weak both automotive and tire, and an unusual number of plant shutdowns and production slowdowns across many industries impacted the quarter. Canadian sales declined by 14% compared to prior year, primarily driven by declines in the Eastern part of the country, which from a vertical perspective is largely automotive and general manufacturing.

In EMEA, sales declined 9% compared to Q1 last year. We saw weakness pretty much across all industry categories. EMEA also saw an unusual number of plant shutdowns and slowdowns and particular weakness in the OEM business. In Asia Pacific we experienced a 2% decline, emerging Asia including China saw 6% growth year-over-year, but this was more than offset by declines in mature markets. Latin America was the one bright spot in the quarter with growth of 10% compared to last year. Auto held up well in this market and resource-based industries continued to generate growth particularly mining, cement, and oil and gas.

Please turn to chart six, Q1 results, free cash flow. Free cash flow for the quarter was $22 million and that's 19% conversion. Q1 is typically a low conversion quarter due in part to the timing of prior year incentive compensation payments. However this year cash flow in the quarter was also negatively affected by three other issues. There was a higher than normal amount of US payroll payments in this quarter and a change this year in the timing of interest expense payments. These will naturally correct in the balance of the year. We paid out $15 million of the restructuring costs for our September '08 actions that negatively impacted conversion by about 13 points in the quarter, and this will continue for about the next two quarters. And inventory increased in the quarter, not that unexpected given the speed and magnitude of the Q1 sales decline, as sales continue to decline in fiscal year '09, we do expect this reverse and inventory to be a source of cash for the year.

Before we move to the next slide, I want to remind you, as Keith mentioned that our balance sheet is very solid with net debt to total capital of only 25% at the end of the quarter. And that brings us to the next slide which addresses our fiscal year '09 current outlook. As Keith mentioned, we're revising guidance to reflect a much more rapid and significant decline in market conditions than we expected in November. We now expect full year sales to decline in the range of 12% to 17% excluding currency effects. We expect currency effects to cause a further decline of about 7%, that assumes that rates stay at approximately recent levels. Our previous guidance incorporated a 5% decline. Given this expected sales decline and taking into account the cost actions that Keith discussed, we expect operating margin in '09 to be in the range of 10% to 13% and EPS in the range of $1.55 to $2.25. Implied conversion margins for the remainder of the year require that we continue to take cost out of the business. We expect a full year effective tax rate of between 22% and 26%, and we expect free cash flow conversion of about 100%, that includes the cash outflow associated with our September restructuring actions, excluding that, conversion would be closer to 120%. And now I'll turn it over to Rondi for Q&A.

Thank you, Ted. [Noelia], we are now ready to open the line for questions.

(Operator Instructions) Questions will be taken in the order received. (Operator Instructions) Your first question comes from the line of Bob Cornell with Barclays Capital.

Hi, good morning. Pretty dire forecast, guys. Keith, you mentioned that you hadn't seen the bottom yet. Did that include a comment on January as well? Is January continuing to drop away?

Well, January is continuing along the lines of our guidance for the remainder of the year, so I would say January is similar to what occurred in November and December.

Now you gave the organic growth guidance, the 12% to 17%. I mean how do you expect that to array as you go forward? In other words is the second quarter, none of the balance of your quarter is going to be exactly 12% to 17%. It's going to be a pattern. Are you going to see a greater than -- you'll have to have a greater than that decline because your first quarter is only down 5%, so how do you see the quarter, the other three quarters of the year laying out in terms of this organic growth guidance?

Well, we see the second quarter dropping substantially from a sequential standpoint, but we expect similar declines year-over-year in each of the remaining three quarters.

So the exit rate of organic growth in the fourth quarter will be about what do you think, in your model, in your guidance, because the exit year growing or contracting by what amount do you think?

Well it's the high end of the range.

Okay. Now did you guys build any -- you talk about the adverse margin effect being attributable to volume, but did you guys actually have an inventory build in the quarter that's going to have to come off in subsequent quarters?

Yes, we did, Bob, and that's what we're planning for to have that come down, which will positively impact cash flow and negatively impact the margin line.

Now, I guess final question for me, you saw October was decent and November and December fell off. Obviously the whole fall off was surprising, but when you look at it, was there anything in particular to that in terms of end markets? Control products for example, was off more than I expected relative to architecture software, and that's a bit of backlog business. I'm surprised that business has much of a miss relative to my model in A&S.

Well, Bob, if you'd remember, the split in control products and solutions, about 60% is solutions and that actually did not fall off, and so the magnitude of the fall off was in the products side of that business. The products side of that business is very heavily associated with MRO and I believe what we saw here was companies trying to conserve cash. They stopped, it wasn't just the fact that they were slowing some of their projects, but they stopped buying MRO as a way to conserve cash over the last couple months of the year.

Okay, got it. Thanks.

You're welcome, Bob, thank you.

Bob, this is one other point I would make. You said was there anything surprising. I'd say what was surprising was how broad based the decline was across regions and industries.

Yes, got it.

Your next question comes from the line of John Baliotti with FTN Midwest Research.

Good morning.

Good morning, John.

Keith, could you give us like maybe walk through a little more color on your revenue expectations, like if you look at the different geographies and maybe in each of those if there's any end market that's worth noting in terms of building up into that expectation?

Yes. I can talk about some of the assumptions that we have in the revenue projections by region. Certainly we expect the largest declines in the developed markets, US, EMEA, and Canada we expect to be three to four points lower than our average. Asia Pacific, we expect to be flat to mid-single digit decline, and Latin America, we're expecting growth of low single digits.

Okay, is there any other in terms of end markets within those regions, or anything that's worth pointing out, or are you similar to what you said that was Ted was pointing out that the broad end market decline is -- you're assuming the same for the balance of the year?

Well, I think where we see the best opportunities from end markets, we believe those are mainly in the, I'll call them the process related industries still, so we expect to continue to see strengthen oil and gas. We expect to see strengthen the cement markets and in the energy and power markets for us and those tend to be the longer cycle businesses which have a lower ability to immediately reduce the project activities. So we expect those to remain strong. And then obviously at the other end of the spectrum, the most difficult and challenging markets will be in global automotive and tire, and that is a much broader scenario now than we had been talking about previously which was with the Big Three from Detroit. It's truly now a global automotive decline and that's where we'll see the toughest. Metals will be a very, very difficult market, at least in the short and intermediate term, and that's a little more color around the end market view, John.

So oil and gas, despite oil being about $41 a barrel, that's still supports investment?

It is, if you look at -- and it's not a black and white. I mean if you just look at this past week, Shell increased their CapEx for next year. Most of the majors are holding it reasonably flat. However many of the minor categories, any of the secondary players are starting to lower their's, but these tend to be very long duration projects and those will keep, I mean they have permits, they have other things that are required to continue on, and so we do expect that to happen. Where we hear the break is if you get under $40 and to $35, that will start impacting some of the I'll call it more global players in that market.

Okay, thanks.

You're welcome.

Your next question comes from the line of Nigel Coe with Deutsche Bank.

Yes, thanks, good morning. Could you just be a bit more specific about what the 17% organic declines implies? So at the low end of that range, 17%, would that just basically extrapolate the current trends or can you just along those lines just give us some color on what each side of that range implies?

Yes. I think the 12% really looks at what's been currently happening and so that's I think that's, depending on which way you view it the upper side of our guidance. Going down from there, we just believe that we have not seen the bottom, that there will be continued decline here and really that's based upon a number of factors. Obviously one is the review that we took just two weeks ago across the different regions that identified the continued slowing.

We certainly see the rapid decline in the macroeconomic indicators that point to continued contraction and we have seen now starting in the mid-summer, certainly in the fall and now at the start of the new year, an accelerated decline in the outlook of each one of those key indicators, which is telling us that we still have a ways to go before we achieve the bottom and that's across-the-board, whether it be GDP, industrial production, capacity utilization, or just CapEx expenditures, and I think that some of the changes in what's going on in the OEM Markets, particularly the major OEM Markets in Europe. But at the end of the day, Nigel, what I would say is it's not an exact science. We're trying to take our most realistic and look at each one of the pieces that fit into the puzzle, but I have to tell you, it is not an exact science and which is what we're trying to do is give it our best call, given what we know today and what we're seeing, this range, we believe, creates the most realistic look at the remainder of the year.

Okay, and then you mentioned that some of the long cycle markets remain pretty good. The 17%, does that build in any cracking in those markets at all?

No. We expect those to play out reasonably well the remainder of this year, and I would say it's the longer term outlook for those that would be the next area that we have to look at but that's a longer term and too hard to predict at this point in time.

Okay and then just one more for me. Just on Q2, I know you don't give quarterly guidance but will you expect to make money in Q2?

Yes.

Okay, thanks.

Your next question comes from the line of Mark Koznarek with Cleveland Research. Please proceed.

Hi, good morning.

Good morning, Mark.

I am wondering if you guys could review the restructuring actions in a little more detail. It seems we talked about pretty significant actions in the fourth quarter and you took a charge in that quarter. It sounds like now you're cutting deeper and there's more pay as you go. And so could you refresh us on where you stand and how the benefits are expected to rollout over the course of the year and then into next year?

Sure, Mark. Keith talked about our need to get about $240 million of cost out. That's a combination of direct and indirect cost that has to come out of cost of goods sold as sales declined and then also less G&A. Of the $240 million, think of $75 million of that as coming from the actions we took and announced at the end of September, and we're probably about roughly 80% complete with those actions as of the end of Q1. There is another sizeable chunk of money that's going to have to come out of the direct and indirect cost of goods sold and I would say that is just starting and then the balance comes out of various other areas. In total, I would guess that of the total $240 million, a little more than half is going to come out of SG&A and the balance out of cost of goods sold.

Okay. Then given that we already spent some money in the fourth fiscal quarter to get that first traunch, the $75 million and now you're going to need $165 million more of cost reduction, how much pay as you go expense is that going to hit the income statement by over the course of the year?

Right. I mean, you'll remember that we talked about having built into the original guidance in November about $25 million of additional pay as you go. Some of the cost reduction that's in that $240 million, I would say will come from areas that don't require up front implementation costs. Examples would be sales commissions will be lower with lower sales, bonus will be lower with lower sales, we're eliminating temps and contractors, we're eliminating overtime, we've gone to shortened work weeks in the manufacturing facilities. Those are all ways of driving cost out that don't have implementation cost and then we believe that the $25 million of pay as you go that was in that original guidance will cover the balance of the actions that we need to implement this year. The additional $50 million to $100 million of costs that Keith talked about, the process we have started to analyze and identify that, there is no implementation cost related to that reflected in the '09 guidance.

Okay, but there likely would be once you identify it and decide to take those actions?

Yes. I would expect there will be implementation costs related to that but we're so early in that process both the amount and the timing is uncertain at this point.

Okay. And then could you review what the Logix business did in the overall processors, how legacy PLCs did in the quarter?

Yes Mark, let me do that. The Logix business for the quarter grew. We grew that at 3%. The legacy processor, the legacy sales were down 17%, which is significantly higher than what we had planned for the year which is around 8% to 10% decline. We certainly believe that MRO cutback spending to conserve cash as well as CapEx spending reductions were a big factor in total processor sales were down 5% for the quarter.

Keith, of the overall processor mix, how much is legacy at this point? Is there that much more fall away where it just can't hurt you that much more?

Well there's two dimensions to the legacy, Mark. The PLC family, that will not hurt us much more. The SLC has a significant revenue base yet and that's where we're seeing accelerated decline this quarter, mainly because of some of the as I said some of the capital spending reductions but also it's a good product with the OEM community and that dropped rather dramatically in the quarter and in total, I believe, Mark, legacy would be about a third of the total with SLC being the predominant piece of that total.

Okay, thanks very much, Keith.

You're welcome Mark.

Your next question comes from the line of Nicole Parent with Credit Suisse.

Good morning.

Good morning, Nicole.

Keith, you've been doing this for a long time, I guess. Could we get your perspective on what's going on today versus prior downturns that you've experienced? And what's maybe different and what's similar?

Sure. We have been through a bunch of these, and quite candidly, I think that's one of the advantages that we have with the leadership team here. We know what to do, how to do it and how to make the right trade off decisions but I think what's different? Well let's go to the most recent one and what's different is in 2000 and 2001, it was basically a manufacturing depression and the rest of the economy barely saw anything.

Matter of fact, GDP network declined. So what's different this time is it started in the financial Markets, it moved to the credit markets, it moved to the consumers, and it moved to manufacturers, which is a little different than the previous one, which mainly was never impacted consumers in a big way, and I think that's probably the greatest difference and in that regard, this is probably closer to what was occurring in the early '80s as opposed to either the '90s or early 2000.

And I would also say one of the big differences this time, this is probably the first time since World War II that we have had a synchronized global recession, and that's also something different here where we're seeing for sure all of the mature economies, and the developed economies entering into a recession and in some cases very substantial recessions if you look at some of the recent numbers in Japan, recent number in the US and certainly countries in Europe. So I would say that from a broad characterization is what we see as different and that's why we're very focused now on making sure we take the appropriate actions in making sure we take the appropriate actions in the business.

Your next question comes from the line of Richard Eastman with Robert W. Baird.

Good morning, Keith.

Good morning.

Just a question on inventories here. So with the core growth down 5% overall, presumably it was down more, the sell-through was down more at the distributer level, so basically that's the situation with inventories is that's what we need to work down in the next couple quarters. Is that the right way to think about this?

Yes it is. We have at least for the majority of our inventory in the US, we basically have that on an order process based upon what they're selling, so we're a little behind if you will on what they're seeing simply because of the timing of those algorithms and the flow, but certainly there was some reduction in the quarter of their inventories and we would expect that to continue until we see a stabilization of the revenue.

Okay, and then also how does it affect your pricing outlook? Would you expect to be able to hold price or do you, in your guidance, do you have some price discounting in your guidance factored in?

No. We expect to be able to hold price in our guidance. Certainly, the environment is different from what we were talking about in the summer time frame where we thought we would get more price but then we also have less inflation now, so I think those two will offset and we'll probably end up basically around what we've been doing historically which is minimal if any and that varies depending on the industry and the cur rinse situation at customers.

Okay, and then just two real quick questions. What was the impact of currency on EPS? And then second, what is the pension expense jump this year?

Our currency impact on EPS in the quarter was about $0.05, and pension expense year-over-year is going to be up somewhere between $5 million and $10 million.

Okay, great. Thank you.

You're welcome.

Your next question comes from the line of John Inch with Banc of America.

Oh, thank you, good morning.

Good morning, John.

Good morning Keith and Ted. So question, on the price, just to pick up from what you just said, how and it dovetails a little bit to what you guys have seen historically, what kind of pricing pressures are you seeing say from competitors and I'm just curious, why do you not have to cut price particularly if customers are deferring or holding back so aggress ferly, just help us understand a little bit of that.

Well certainly with respect to competitors, many of the competitors really don't have a lot of options to compete in these Markets, particularly the second and third tier competitors, and they will use price and certainly price is one of the first tools that they will bring to the forefront as a way to attack customers and in general to attack Rockwell Automation. I think from our perspective, basically, we have lots of options to work with our customers on and that is the entire life cycle cost that they see, the ability to move them to different platforms, the ability to help them utilize perhaps newer technology in replacing some of the older products. And so it still boils down to the value that we can provide and that's more involved than just the initial purchase price and so we talk to them about productivity. We talk to them about being able to improve their outputs and yields with less input and those are all factors that go into a final decision and our goal. And certainly the way we approach customers is that it is all of those dimensions and all of those pieces, which many customers will give us credit for, the ability to save cost in multiple areas of their operation and throughout their organization, as opposed to just an initial purchase price. So it's really --

Well Keith are you saying Siemens or the big Asian players are they cutting price? I hear you on the small guys but presumably the big players also have a decent value proposition as well. What's going on competitively there?

I think at this point, we have not seen significant pricing competition. Anything more than usual from any of the major Asian or European competitors.

And then could we get a little bit more color on some of the verticals and how they perform, so life sciences, the [Mac] businesses, that sort of thing?

Yes. Well certainly in the quarter, those that performed above the Rockwell Automation average as I mentioned earlier was oil and gas and food and beverage, particularly food. Beverage was a little weaker but food was very strong. The Rockwell Automation average would have been the home, health, and personal care area, below our average would have been life sciences and metals, and significantly below would have been the global automotive and tire markets.

Lastly, what are your thoughts vis-a-vis share repurchase? You have a very strong balance sheet as you called out. You are going to have to spend some money for restructuring and some other things. How do you think about share repurchase now and using the rest of the authorization?

Well the way we think about it now, we would start out by saying we really have no different thoughts in our cash deployment priorities, which would be, first, funding organic growth and good opportunities there. Second would be strategic acquisitions. Third would be returning any excess to our shareholders in the form of dividend, and then finally any excess from that would be share repurchase. Given the current environment and with the I'll say volatility and uncertainty, I think it's fair to estimate that we will be much less in the share buyback environment at this point in time, and certainly we would not be on a path to conclude that over the next 12 months with the outstanding authorization that we have.

Thank you.

You're welcome, John.

Your next question comes from the line of Jeff Sprague with Citi Investment Research.

Thank you very much. Good morning guys.

Good morning Jeff.

It's tough out there, isn't it? A couple things. Just first to clarify on the restructuring, I think the dialogue you had with Mark earlier, so there's $165 million of costs to get out beyond the $75 million that was covered by the charge. Could you just clarify how much of that $165 million is just again the volume driven changes? I mean it sounds like that includes lower raw [mats] and everything that just comes with lower volumes and lower commissions and things that come with lower volumes. So how much of that $165 million is true structural costs that need to come out?

Well let me try to answer that this way, because when you get into these kind of level of sales declines, I'm not sure I exactly know how to distinguish between normal and structural, but on the cost of goods sold side, something in the range of $60 million to $90 million has to come out of direct and indirect cost and cost of goods sold.

Okay, and that is not included in your pay as you go $25 million target then?

I would say pieces of it are, but I would say we expect to be able to get most of that out without a lot of up front implementation cost.

Okay. If there is addition all restructuring should we expect it to be pay as you go from here or is there the chance of a larger charge again like we saw as you exited '08?

Jeff, it's really too early to make that call, because we've just started that process, and really there it's more of a trade off of what is the payback and how quickly you can get that payback as to whether we want to take it all at one point in time or spread it out over an extended period. And so not knowing exactly what will fall into which bucket, I'll defer on that one until we're a little more knowledgeable about what the makeup of the cost out is going to be.

And then Keith, maybe stepping back from all this and thinking about the bigger picture of your competitive position and what your priorities are. If we think about Logix, it's been in the marketplace for eight or nine years, obviously that's not a static introduction, you've added a lot to it and it's evolved over time. But are you thinking about or working on some significant changes in your offering platform? And how do you think about that relative to kind of the macro environment? Even if you had something new, would you be inclined to sit on it here and let some of these fundamentals play out? Just trying to think given what does look like a fairly good balance sheet what you might try to do to actually take advantage of how tough it is.

Well, I mean, we would not sit on anything in this environment. We believe this is a great opportunity to continue to extend our technology leadership. We believe that it's an opportunity to take advantage of the weaker market participants in this type of an environment. And we certainly believe that if we make the investments now and if we continue to focus on working with customers in a downturn that that is a huge advantage for us as we come out the other side. So our goal is to continue to focus on the technology differentiation, because as you said while the product was introduced, it's a product that continues to evolve and we want to add more pieces to that platform. We want to move it up to do a better job in process, move it down to do a better job at global OEMs. And certainly, we think that we have a advantage here because of our strong balance sheet that we will be able to continue to take the steps and continue to take the actions that will allow us to emerge even stronger as we come out. And I think everyone understands how the upside plays out for us during the leverage that we receive on the recovery side.

A related question or thought. Within control products and solutions, naturally you saw products drop off quickly through distribution, its quick turns and so solutions didn't take the hit. But are you seeing evidence yet, or is there an effort to basically as your customers were under severe duress here, Rockwell providing some avenue for them to take costs off by further engaging from a solution standpoint? Is there any evidence of that really going on in the last couple quarters or any new effort there?

Certainly, I wouldn't say anything of significance, Jeff, but always when we're in these difficult economies, customers look at what are opportunities for them to reduce their cost structures and we believe that falls into two categories for us. We can work on more projects to your point, the solutions businesses are able to support more strongly the in house project work that some of our customers have and then secondly, our services business which also continued to grow in the quarter. It presents opportunities for that organization to also support customers in their operations and in their facilities. And certainly, we have people deployed both in our solutions and in our services businesses globally, so that specifically to be able to be that local touch and that local capability to support customers. So we do expect that to be a positive as this plays out. But I think with the significance of the decline and the speed of the decline, those actions have not been implemented and executed yet that we've seen any difference in that position at this point in time.

And then finally just one more for me. Just back to this question of channel inventories. So at this point, you believe distributer inventories are still on the high side, but it's your inventories at the Rockwell parent level that are most, are the largest issue? Is that a correct statement? And then secondly, does [title] to all that inventory pass to the distributors when you ship it or do they have some recourse back to you or consignment type arrangements or anything where really the inventory is still on your dime until they ship out their end?

Let me address your second question first, which is the inventory of our distributors is owned by our distributors. Secondly, we have very good visibility of our inventories of our distributors in North America, and what we saw in Q1 was that that inventory beginning to decline, but I would say it was declining at a rate that was in line with what we think is going on within customer demand and that there was nothing unusual there. If we extend what we were seeing in North America and try to estimate what we think might be happening kind of across the globe in the distribution channel, we would estimate that maybe the inventory adjustment at our distributors was worth about one point of the five points of organic sales decline in the quarter.

Great. Thank you very much.

You're welcome, Jeff.

Operator, we'll take one last question.

And your final question comes from the line of Steve Tusa with JPMorgan.

Hi, good morning.

Good morning, Steve.

Hey, I appreciate the more realistic than average view of this year. It's kind of refreshing to see. So on that -- on the process business, what were the order rates in the quarter? And you talked about kind of the long lead nature of these projects. Does that mean that the revenue growth holds up in high single double digit range throughout the course of the year, and then we kind of come to a slowing period in 2010, or would you expect that to begin to slow in the second half? And then I just have one quick follow-up on the balance sheet.

Well we would expect the order rate to slow as we go through the year. This is an area where we have a longer larger backlog than in other businesses, and so that's what gives us the short-term perspective. But certainly, given the other dynamics that are going on, we are expecting a decline in orders as we go through the year and we expect that to get a little stronger as we go towards the end of the year. So that business will also soften, but it will be a quarter or two out from where we're up.

Do the worst declines of that business seize this year, in order, approach the Rockwell sales average, kind of a down double digit at some point in the fourth quarter?

That's not what we're currently planning. We expect it to be down only in the midsingle digits as we go through the year, and we do still see a good front login some of the legacy DCS migration to a newer platform. So some of these activities still go on simply because of the aging of the installed base and the need to make that transition. So --

And then that's mostly oil and gas or do you have a lot of chemicals exposure as well?

No, no, we're not -- chemicals is not as strong of a market for us. We do participate, but most of my comments were made around oil and gas, and certainly, the cement and power and energy on more of a global basis than specifically chemicals.

Okay, and then on the balance sheet, the short-term debt went up a little bit. And also, I know you guys have a measurement date on the discount rate in June, but I think your plan gets measured at the end of September. Do you guys expect, given that may not reflect all of the declines in asset values that we seen this year or maybe it is a December year and maybe that's my question. Would you guys expect a lot of companies taking hits to equity because of the decline in asset values, would that be something you'd plan for this fiscal year instead of the previous fiscal year, given the tough markets out there?

Let me try that. There was a lot there. I guess the first one is short-term debt did go up a little bit in the quarter. We used commercial paper to kind of fund normal operations, and I would say nothing unusual there but it was up a little bit in the quarter.

Okay, I guess to rephrase my question, I'm not a pension expert and we've been seeing a lot of big hits to equity at a lot of the companies we cover, given the pension plan, underperformed so dramatically into year-end. And given the difference in your year-end relative to some of these other companies September instead of December, is there more of a lag effect, whereas this fiscal year it will now reflect a little bit later the declines in asset values we've seen out there?

There was an accounting rules change that impact the accounting for pensions that we reflected last year inequity. I'm not expecting any significant additional changes this year.

Okay. Thank you.

Our evaluation date this year will be at the end of our fiscal year.

Okay, thanks a lot.

Steve, your question, how you started it is certainly, we hope that this turns out better than what we've outlined here but quite frankly, we think this is a realistic assessment and we're using this assessment to guide us in how we position the business to best perform in very very difficult market conditions, And we're going to run the business consistent with this outlook. And if it gets better that's great, but I think given where we're at and what's going on in the external markets, we believe that this is the most prudent and appropriate way to manage the business. And certainly the leadership team here is committed to manage through this and quite frankly take advantage of the opportunities as they present themselves during these challenging times.

Thank you.

Okay, that concludes today's call, and thank you to all of you for joining us today.

That concludes today's conference. At this time you may disconnect. Have a great day.