洛克威爾自動化 (ROK) 2009 Q4 法說會逐字稿

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference is being recorded. Later in the call we will open the line for questions. (Operator Instructions) At this time I would now like to turn the call over to Rondi Rohr-Dralle, Vice President of Investor Relations. Please go ahead.

Great. Thanks. Good morning. Thank you for joining us for Rockwell Automation's fourth 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 both the press release and charts include reconciliations to non-GAAP measures. A webcast of the audio portion of this call and all the charts we referenced 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 Chief Financial Officer. Our agenda includes opening remarks by Keith that will include overviews of 2009 and our 2010 outlook along with a preview of what you'll hear during our investor conference on Thursday. Then Ted will provide more details around the fourth quarter and full year 2009 performance and 2010 guidance. There will of course be time at the end of the call to take your questions. We'll try to get to as many of you as possible. So please limit yourself to one question and a follow up.

We expect the call today to take about 45 minutes and 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. So with that I'll turn the call over to Keith.

Thanks, Rondi, and good morning to everyone who joined us on the call today. 2009 was clearly a very difficult year. More than a year ago, we saw a slowdown coming and took early cost actions in Q4 2008. We were one of the first industrial companies to provide an outlook for declining revenue in 2009, but business conditions deteriorated even more rapidly than we had expected and for most of the year, we were mired in the deepest and broadest global recession of my career. In the turmoil in the financial markets exacerbated the economic decline and was a contributing factor in most industrial companies decisions to slowdown production, slash spending and conserve cash. In this economic environment, we experienced a full year organic revenue decline of 19% but we did see demand levels in our product business start to flatten out in the latter part of the year and although our solution order rates declined throughout the year, those declines slowed considerably in the fourth quarter, so at this point, we would characterize business conditions as relatively stable but at demand levels well below the peak of the cycle.

In spite of the challenges in 2009, I want to highlight several key accomplishments. We acted decisively throughout the year to right size the cost structure, achieving $300 million of savings in 2009 with incremental savings expected in 2010. We carefully balanced these actions with preserving investments in our core technologies and global domain expertise. We also generated great cash flow this year by quickly aligning inventory levels to lower demand, effectively managing receivables in a difficult credit environment, and appropriately constraining capital spending. I want to thank our employees, partners and customers for their unwavering support during this difficult year.

Before I turn to 2010, I'd like to reflect on our transformation and why the future is bright for Rockwell Automation. Roughly six years ago, we developed a core strategy of diversifying our revenue base and expanding our served market. This strategy guided our investment since then and we have seen real results. We diversified geographically and now earn about half our revenues outside the US and the percentage of our revenues from emerging markets has more than doubled since 2000. We diversified in end markets and now serve a broader range of consumer and heavy industry and applications. We continued enhancing logics and as a result dramatically expanded our served market and are the market leader in plant wide control. We made extraordinary progress in process and are now recognized by process customers as a DCS provider.

We gained the number one position in the global machine and process safety market. We expanded our capabilities in service and solutions to capitalize on domain expertise with existing and new customers. And lastly, we recognized a growing importance of OEMs and automation decisions and have expanded our product and solutions portfolio to meet their needs and align commercial efforts to further penetrate this market. While diversification did not save us from the ravages of the latest down cycle, it did make the cycles impact on us less severe.

Ted will provide more detail about our guidance in his comments but let me set the stage. While macroeconomic indicators such as GDP, industrial production, and PMI are improving, it is still an uncertain environment for manufacturing. Unemployment remains high and consumer demand is less than robust. We expect a recovery but no one knows what the shape of the recovery will be. Our order rates seem to have stabilized but it is too soon to call it a trend. Our quoting activity is up but we are still seeing some project delays and a cautious approach to spending by most of our customers. With this backdrop, we are providing an outlook for revenue excluding currency to decline 9 to 2% from 2009. Remember, in Q1 of '09, we were just starting to see the sharp drop in business. Consistent with this outlook, we expect to show sequential and year-over-year revenue growth in the second half. These volume declines will put a downward pressure on EPS but with a significant benefit of our cost actions, we are providing EPS guidance of $1.25 to $1.75.

Before I turn this over to Ted, let me leave you with a few key thoughts. At our investor conference on Thursday, I will go into more depth on why we believe Rockwell Automation will outperform the market in the next cycle. Here is a preview. Manufacturers will need to invest in automation to remain globally competitive. Automation markets will grow in excess of GDP. We invested in and expanded our capabilities over the last cycle. We continue to make in roads in process applications and are expanding our capabilities in both batch hybrid and continuous. We have improved our number one global safety position. We are winning OEM conversions and will see increased orders when end market demand picks up. We have expanded pilot activities for our information software solutions and we are well positioned to benefit from growth in the emerging markets, so I remain very confident in the future of Rockwell Automation.

Our technology remains a differentiator. We have great employees and partners who remain dedicated to solving our customers business needs. We have demonstrated our agility in responding to rapidly changing market conditions. We have improved our cost structure and we continue to have a strong balance sheet and liquidity position. We have executed well in this downturn and are well positioned for when the economy does recover. Please join us on Thursday to hear more and now I'll turn it over to Ted.

Thanks, Keith and good morning. As Rondi, noted we posted charts to our website and my comments will reference those charts. I'll start with the full year results on chart one. Sales for the full year-ended at $4.332 billion, a 24% decline compared to fiscal year '08. Currency contributed 5 points to the decline. Excluding currency, sales declined 19%. Segment operating margin for the year was approximately 10%. Diluted EPS from continuing operations was $1.53. Excluding Q4 restructuring charges and special items from Q2, EPS for the full year fiscal '09 was $1.68. That puts us at the top end of our July guidance range.

Free cash flow for the year was $431 million. That's conversion of almost 200%. We're very pleased with that result. ROIC for the year was 11% below our long term target levels due to the significant decline in earnings in fiscal '09.

Moving on to chart two, Q4 results summary, sales in Q4 were $1.074 billion, down 28% from Q4 last year. Currency contributed three points to the decline. Segment operating earnings were $80 million down from $269 million last year. The decline in operating earnings is primarily due to the significant year-over-year revenue loss. Segment operating earnings in Q4 included pre-tax restructuring charges of $33 million related to our ongoing efforts to appropriately align our cost structure to current demand levels. After-tax, the EPS impact of the Q4 restructuring charge was $0.17.

The $33 million charge was higher than we projected for Q4 at the time of our last earnings release in July. We went deeper on restructuring actions to achieve a total of 80 million of incremental savings for fiscal '10. The $80 million of savings includes actions taken in Q4 as well as actions taken previously in fiscal '09 and that compares to the 50 million to $100 million of savings for fiscal '10 that we targeted earlier in fiscal '09. The charges were also higher because we took broader actions in Europe than originally expected. As you know, Europe tends to be the most expensive region for such actions. We took broader actions in Europe in part to reallocate commercial resources to emerging markets where we anticipate better growth opportunities. There were also charges incurred in the quarter to exit non-core lines of business in the architecture and software segment.

Given the very difficult market conditions in fiscal '09 we took early and aggressive action to address the cost structure. As Keith mentioned we achieved our target to take out $300 million of cost for the full year fiscal '09.

Moving further down on the chart, purchase accounting expense and interest expense reach lower year-over-year by about $1 million. General corporate net was $31 million in Q4, up from $24 million last year and higher compared to run rates earlier in fiscal '09. The increase was primarily due to a decision in Q4 to fund $8 million to the Rockwell Automation Charitable Corporation. Taxes were a minor benefit in the quarter and our full year rate finished at 20.4%, better than we had expected. The lower rate in Q4 is primarily due to discrete tax items which were resolved in the quarter. Diluted EPS for Q4 was $0.20. Excluding restructuring charges, diluted EPS for Q4 was $0.37. Last year in Q4, we incurred restructuring charges that were shown on the P&L as special charges. Consequently those charges did not run through segment operating earnings. Diluted EPS in Q4 last year excluding those special charges was $1.08. This is a comparable EPS number to the $0.37 in Q4 of fiscal '09. Average diluted shares in the quarter was 143.3 million, about 1% below last year. There were no shares repurchased in Q4 of fiscal '09.

Moving to chart three, Q4 results Rockwell Automation. On the left side of the chart, you'll see sales performance. As I mentioned on the prior chart, sales for Q4 declined 28% year-over-year with currency accounting for three points of the decline. Sales increased 6% sequentially about the same sequential increase in both segments. We've seen some significant weakening of the dollar over the course of fiscal '09. That continued through the fourth quarter and adjusting for currency, the sequential sales increase was about 4%. The right side of the chart displays segment operating earnings. Segment operating margin, excluding restructuring charges, was 10.5%. That's much lower than last year due to the substantial decline in revenue but up sequentially about 1.3 points and that's excluding restructuring charges from both Q3 and Q4. Also excluding restructuring charges, earnings conversion for Q4 was 38% and that's similar to last quarter.

Please turn to Chart four which summarizes the Q4 results of our architecture and Software segment. Sales declined year-over-year by 31% in the quarter, 2 points of that declined due to currency. Architecture and software sales were up 6% sequentially. Segment earnings were $37 million. Architecture and software incurred the larger portion of restructuring costs in the quarter, approximately $22 million. Excluding restructuring costs, operating margin was 13.8%, that's down from 23% last year but up about 2 points sequentially.

Turning to the next page, chart five covers control products and solutions. Sales were $650 million, down 25% year-over-year but with the same 6% sequential increase. On a year-over-year basis, currency contributed 3 points to the decline. Sequential growth was 6% and products and solutions each improved sequentially with slightly stronger sequential growth in solutions. In solutions this was a typical quarterly pattern. Segment operating margin was 6.6% or 8.3% excluding restructuring charges. In either case, down from 14.7% last year.

Moving to the next chart, chart six provides a geographic breakdown of our sales in Q4. I'll focus my comments on the far right column which shows the regional growth rates excluding currency effects, though I will note that the currency impact in Q4 was the smallest impact of any quarter this year. Similar to previous quarters, the mature economies lead the year-over-year declines. The US was down 30%, Canada down 28%, and EMEA down 22%. Asia Pacific sales were down 16% year-over-year but up 7% sequentially, exporting countries in Asia Pacific remained weak. In China sales were down about 10% compared to last year but up 11% sequentially. Latin America sales were down this quarter 15% year-over-year but up 19% sequentially. I'll move to chart seven, free cash flow.

Q4 was another very strong cash generation quarter and a strong ending to the full year. Free cash flow for the quarter was $88 million and free cash flow for the full year was $431 million. The full year conversion was almost 200%. As I said we're very pleased with the results we achieved this year in working capital management and in reducing capital spending. We ended the year with working capital down about $255 million. After a difficult start in Q1 over the balance of the year, inventories were appropriately managed down to current demand levels and we carefully manage receivables in a tough global credit environment. We also took steps early in the year to constrain capital spending and ended fiscal year '09 with capital expenditures of $98 million, 35% below last year.

Just a couple of comments on our balance sheet. It remains an important strength for us. Our liquidity position remains very healthy. At year-end cash and equivalents totaled $644 million. That's up from $582 million last year. We had no short-term debt outstanding at year-end and we have no maturities on long term debt until 2017. Debt-to-capital at the end of Q4 was 41%, up from Q3 due to the year-end adjustment to equity related to the pension valuation, but net debt-to-capital remains at 17% equal to last quarter.

Now on chart eight, we'll move on to fiscal '10 and I'll start with some anticipated headwinds and tailwinds. The most important sales headwind is related to the timing and magnitude of the sales declines that we experienced in fiscal '09. The steepest declines occurred from the latter part of Q1 into Q2. Consequently we will face difficult year-over-year comparisons in the first half of fiscal '10 particularly in Q1. In our solutions businesses, order levels remained below sales over the latter half of fiscal '09 and backlog continued to drop. We ended fiscal year '09 with solutions business backlog down about 11% year-over-year. Consequently we expect to see lower solutions sales in the first half of fiscal '10 compared to Q4 and year-over-year, until order rates pick up and backlog is rebuilt.

Regarding sales tailwinds, based on recent encouraging signs and economic indicators and projections of economic activity for next year from a number of sources, and also based on input from our sales organization and customers, we do expect improved market conditions and related year-over-year sales growth in the second half. We should begin to benefit in fiscal '10 from the end of destocking in our channel. We believe that bottomed in Q4 of fiscal '09 and based on recent currency rates and an expectation that rates will stay at recent levels on average for fiscal 10, we expect translation to create some positive impact.

For earnings, we anticipate three important headwinds. The first headwind is lower full year sales in fiscal '10. Although we expect improved market conditions and year-over-year growth in the second half, because of the difficult first half comparisons, for the full year excluding currency, we expect a year-over-year sales decline across our sales guidance range. Pension expense will be a headwind in fiscal '10 due to the lower discount rate and declines this past year in asset values. Pension expense in fiscal '10 will be about $40 million higher than in fiscal '09.

Also, in fiscal '09 some of our cost savings came from what we have described as temporary actions. Those included no merit increase, lower incentive compensation payments, mandatory time off or pay cuts, and the suspension of the 401 (k) match. There will be a natural reset of incentive compensation in fiscal '10 and given the expectation of some year-over-year growth in the second half, we expect to restore some of the other compensation related items as the year progresses. There are also some expected tailwinds for earnings. The cost actions taken throughout fiscal '09 will create tailwind for us in '10. Including the $80 million of savings I mentioned earlier, and adding in carryover savings from '09, we expect a full year of fiscal '10 impact of about $120 million. These incremental savings do not include volume related savings or temporary actions. We also expect significant lower restructuring charges next year. There was a total of $60 million of restructuring charges incurred in fiscal '09. We expect a better product versus solutions mix in '10 and of course, some earnings benefit from currency assuming that we see the topline currency contribution.

So now moving to chart nine, our 2010 guidance. I'll start with sales. We're expecting sales next year of approximately 4.1 billion to $4.4 billion. In percentage terms that range represents a decline of 6% to an increase of 2%. We expect currency to add about 3 points to the top line year-over-year in '10, so excluding currency, the range would be a full year decline in sales of between 9% and 2%. We expect fiscal '10 to be a tail of two halves. In the first half we expect sales to be down year-over-year as a consequence of the difficult comparison I referred to earlier and the level of our solutions business backlog at the end of September. In the second half we expect to see improving market conditions with year-over-year growth but we don't expect a sharp upturn so not enough second half growth to get sales for the full year '10 above fiscal year '09 sales.

We expect segment operating margin for the full year to be in the range of 9 to 11%. We expect diluted EPS in the range of $1.25 to $1.75. At the mid point of the EPS range, despite lower full year sales, headwinds from pension expense and the restoration of some of our temporary cost actions, EPS is about equal to fiscal year '09 and that's primarily due to savings associated with the restructuring actions taken in '09 and lower restructuring charges in fiscal '10. Our longer term objective is to average above 100% conversion on free cash flow through the cycle and we expect to be above 100% in fiscal '10. With that I'll turn it over to Rondi to begin Q&A.

Great. Operator? We're ready to open the line for questions.

Thank you. (Operator Instructions) Your first question comings from the line of Steve Tusa with JPMorgan. Please proceed.

Hi, good morning.

Good morning, Steve.

So, Ted, you said earlier in the call an $80 million number on restructuring, so is that just basically the $120 million incremental restructuring benefit you're going to get minus the $40 million in partial restoration? Is that the right number or is there something, or is that, is there something different going on?

No, Steve. Think of the $120 million as two pieces. $40 million of the $120 million is carryover from savings that started in fiscal '09 and are not related to volume related or temporary reactions. The other $80 million of savings is restructuring actions taken in '09 for which there was no savings in '09 so it's $80 million against that $50 million to $100 million of incremental savings we talked about in '10.

Oh, got you, okay. And how quickly would you expect the restoration of temporary cost actions to come through?

Well, there will be some natural reset of incentive compensation as we progress into '10 and you'll see that basically come in about equally over the course of the year. On some of the other compensation related actions we would not expect to begin restoring until some time later in fiscal '10, probably closer to mid year when we start to see hopefully some pick up in sales levels.

So if you're down kind of at the high end of your range I know you have thrown out kind of a $50 million number for temporary stuff that may have to come back in, I mean is there a gating factor around whether you're down two or down nine or if you're at the mid point of the range is that $50 million all coming back or how do we think about that?

Think about it this way. At the mid point of a range there's about a $30 million headwind in fiscal '10 as a consequence of restoration of temporary reactions.

That's very helpful and then just lastly, when we look at the seasonality from Q4 to Q1, in the good times you continue to grow from 4Q to 1Q and in the last few years you've been down anywhere from I guess 25% last year to down 3% from 4Q to 1Q '08. Given that this is neither '08 or '07, how do we think about kind of the inherent seasonality of the business now in this kind of more depressed level?

Well, I think a couple of things. One, obviously we're not providing quarterly guidance but the way to think about this year is and how we're thinking about it goes back to a little bit about Ted's comments but it's based upon we saw some sequential gain in the quarter with our product businesses. We would expect that to hold in the first quarter and what would be a de traction would be the solutions business that will be down on a sequential basis, so the net will probably be slightly down on a sequential look at the business and then obviously the year-over-year will be significant decline because of just the timing of the declines in our last fiscal year and it was only a 5% decline in Q1 last year, so sequential slightly down Q1.

And then just one last quick question. When you think about the way the companies have spent their capital this year, obviously CapEx budgets are down but in the first half people pretty much froze their spending. We're hearing some of the packaging companies talk a lot about a significant budget flush in the fourth quarter. Maybe you don't want to use that strong of a term but is there anything with regards to the seasonality of this year that makes you feel a little bit better about the flow business and the Products businesses in the fourth quarter?

Well, I wouldn't say that we in the fourth quarter, our -- you mean our--?

For calendar fourth quarter.

No, we just believe that the continuation of what happened in our fourth quarter is the return of some spending in particular in our product businesses around the growth in industrial production that we've been seeing starting in the late Summer time frame, so I don't think that we're going to see a spending spree in the quarter that runs up to the end of the year.

Okay, thanks a lot.

Your next question comes from the line of John Inch with Merrill Lynch. Please proceed.

Thank you, good morning, everyone.

Good morning, John.

Good morning guys. So I just want to firstly as a point of clarification, the EPS guidance Ted and Keith does or does not include further restructuring costs?

John, you know restructuring cost in '09 was about $60 million.

Yes.

We have built in some modest restructuring costs for '10, ballpark $10 million.

And it is in the guidance.

And that is in the guidance.

Okay, so I'm just sort of looking at the puts and takes here. You've got about $0.20 to $0.25 of pension headwinds. It looks like the restoration of some temporary actions what I would call fixed labor issues are about $0.16, maybe I don't know like if you annualize the fourth quarter, ex-restructuring of $0.37 that gets you to the mid point. You look at the sort of $0.35 to $0.40 of headwinds but then you've got currency, you've got what appears to be a substantial contribution over $0.65 from restructuring cost savings based on the 120. How are you getting 150 kind of as a mid point. Am I missing something or is there some obvious large--?

Actually I think you walked through a pretty good bridge and the only thing you did not talk about is the significant or relatively significant ex-currency volume decline year-over-year at the mid point.

That's fair, now is it also fair, Ted, to say because you talked about sort of the restoration of some variable contribution. That as you restore some of this contribution later with volume that will still create for positive EPS contribution; correct? Because you're matching associated volume improvement. Is that not the way to think about it?

Well, I think that's fair, although the bridge we just walked through we kind of broke those pieces up, right? We talked about the loss from volume and then there was an offset in part as a consequence of the restoration of the temporary reactions.

Okay, that's fair. Keith, what are you seeing in your MRO business and does that provide any kind of a prospective clue as to what may be going on maybe in some of your more shorter cycle businesses?

Yes, I think the fact that we have seen sequential growth in our product businesses tells us that -- and just the macroeconomic indicators of improving industrial production tells us that we are seeing stronger MRO I would say operating business, and I think also the other thing that you see is that the amount of destocking dropped again in Q4 and we believe it's over now and so that provided a little bit of benefit as well and basically what we're seeing is manufacturing is running slightly stronger than what it was in our second and third quarters and certainly the pick up in our product businesses I believe is an indication that we're starting to see some spending in MRO plus people are understanding the cash situation that they're in, the credit markets while not great have certainly stabilized and people understand where they stand and what they can and can't do with respect to providing the grease to run their operations, so I think all of that is what we saw starting to play out as we went through our fourth quarter.

Is there any way to size what you think the destock had in terms of the earnings per share impact or just earnings impact in fiscal '09?

I'll be honest, I haven't thought about it in terms of an EPS impact. We think for the full year of fiscal '09 we took about a 2.5 point top line hit as a consequence of destocking.

Okay, so couldn't you just multiply that?

I could. I just haven't done it in my head.

Okay, but in theory that provides a tailwind as well from the absence of destocking, right?

I think that's fair and in most of that was over, we think we had about a 1% impact in Q4, so as we enter the year, off a Q4 run rate, that 1% is not a big number in terms of what we're hoping we'll start to see is real economic improvement.

Great. Thank you very much.

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

Thanks, good morning.

Good morning, Nigel.

Just wanted to clarify a modeling question first. Ted, you said first quarter sequentially down from 4Q but was that just 1Q for was that the first half of the year?

First let me characterize first half, I guess if that will help you. Basically in the first half what we would expect to see is sales run rates in our product business about equal to Q4 and we would expect solutions to be down in the first half compared to Q4.

Okay, that's helpful. And then the net would be in the first half, slightly lower on a run rate basis in 4Q?

Yes.

Okay, great. And then just looking at the segment margin guidance of 9 to 11% and if you reference that to the 10.5 you did in Q4, I just want to understand given some of the cost savings running through here and the beneficial mix impact of progress solutions, what would drive down the margins towards the lower end of that guidance?

I think at the lower end of that guidance it's basically sales levels, right? And as John had asked about the bridge and he was doing it in EPS you're asking basically the same question as it relates to operating margin. Even at mid point we're going to face a year-over-year ex-currency volume decline and at the low end of the range it's a reasonably significant ex-currency volume decline. Right, but on the full year basis I agree but from a 4Q run rate, it looks like the full year is going to be maybe flat volume wise versus Q4. Well even against a 4Q run rate the low end of the sales guidance range is substantially lower than the 4Q run rate.

Okay, that's fair. And then finally if you could just maybe make some comments on how the process business performed this quarter?

Process performed better than the Company average for the quarter and actually is another one of the indicators as to why we believe our diversification strategy is working. Certainly, the acceptance of plant PAX as a process automation system continues to gain traction in our served Markets and that in conjunction with ICS Triplex puts together a very powerful bundled package for both the control and the safety systems for Rockwell Automation and certainly is one of the reasons we continue to be very optimistic in our ability to grow share in process and on a year-over-year basis, we were down 8% in process which is substantially better than the Company in general, so once again, an indicator of the success of the diversification strategy.

So down 8%, so that means Q4 is probably what, high teens?

Yes.

Great. Thanks a lot guys.

Great catch.

Your next question comes from the line of John Baliotti with FTN Equity Capital Markets. Please proceed.

Good morning. Just Ted, a housekeeping question to start. The tax rate for 2010? Ballpark?

Yes, we're expecting something between 21 and 25%.

And given the trend you're seeing more MRO pick up here which may be the beginning of things getting better, what gets you to considering you've got about $0.45 or so of restructuring benefits in 2010 offset by some of the other things like pension, what has to happen for $1.25 to show up? How did you get to that other side of the range?

I think basically, that is a flat run rate from Q4 and certainly, as you have, many of you have always told us, our visibility is limited so if we do not see that pick up in the second half of our year, that would be what we bracketed for the bottom of our guidance range is basically Q4 flat lined for the entire year.

Okay, I've got that. And Keith, if you look at the last month of durables it seems like if you break down the different categories they provide and the different end markets, it seems like you're getting a positive month, a negative month, a positive month, but what you're starting to see is it looks like the demand if you dig into the numbers looks like it's more immediate demand. Is that consistent, in other words the customer sees demand and he does something about it but he doesn't appear necessarily to be thinking longer term. Is that consistent with what you're seeing from your customers?

Well I think really what we're starting, it's mixed I would say, not in general are we seeing only short-term immediate needs. It's certainly if you look in the more mature markets, that would be a very true statement. It's much more short-term oriented and what can I do given that I backed off so strong in the first half of the year or the first two-thirds of the year, I have to do some minimal work at this point in time and I think that's what we're seeing at this point. If you move to some of the emerging markets, certainly there we are seeing some interest in our activity in longer term projects and in particular, in some of the commodities businesses, we're seeing more engineering work going on at the present time. It's not translated to orders yet but we are seeing some activity in what I would call more longer term investments based upon the belief that those commodity and resource prices will stay reasonably well behaved at the current level, so I think that it's a mixture at this point, John.

I remember it toward the end of when things started to tail down you saw nice growth in the emerging markets. I think you guys were talking about the fact there's not a third party integrator network like there is in the mature markets like North America so you guys are doing more of the work out of CP&S. Have those customers yet -- is it still too early for them to transition to ANS, is that business still coming out of CP&S segment?

It's mainly still from CP&S mainly because it's infrastructure and resource based industries which has a higher content of CP&S product and then to your point, the emerging markets will have a mix simply because we provide more Solutions there for just the reasons you mentioned that we would expect that to continue whether it be our growth in our process base or just the fact that there's a limited SI channel capability for companies to do that be it third parties.

Okay, great. Thank you.

You're welcome.

Your next question comes from the line of Mark Douglas with Longbow Research. Please proceed.

Good morning, everyone.

Good morning, Mark.

Thanks for taking my call. Ted, can you talk about what kind of sales and volumes would be necessary for the two segments to kind of return maybe closer to the peak margins that they saw, considering the restructuring charges and restructuring you've incurred what would it take to get A&S to say the mid 20s and control products to say the midteens? Do you have any feel for that at this point?

Mark, that's a difficult question to answer and one I'm very reluctant to answer as we are just starting to come out of the worst recession we've ever experienced, and then if you look back on '09 we lost basically a $1 billion of sales ex-currency, so I guess an easy answer would be something in that ballpark, maybe a little bit less because of things we've done to hopefully improve leverage as we move up.

Okay, fair enough, I thought I'd try. And then, Keith, can you talk about Logix, how it's doing at this point and has the mix still been more towards a growing share from micro and compact Logix and is that kind of negatively impacting the margins of this point and what do you see for Logix in 2010? Thanks.

Sure. Well, Logix for 2010, we would expect to continue to grow. Logix was down this year but certainly performed better than the Company in total and Logix performed better than A&S in total and in Q4, Logix was up sequentially, so we're beginning to see the pick up in that portion of our business and yes, compact Logix is the fastest growing segment of the Logix family. If we talk about going into 2010, we would expect Logix growth in the high single digits and certainly, we would expect to see continued deterioration of our legacy business and we think it will get back to the more normal declines of roughly 8 to 10% on a year-over-year basis, so that's in general how we have baked the plans for that into our guidance for the year.

And then just related to that, so with compact the fastest growing does that also play into your focus on OEM sales?

Yes, great comment. Certainly, the reason we're pushing harder and harder into OEM is because we have continued to improve the scalability of the Logix platform over the last couple of years and now we can address a growing portion of the OEM machine builders portfolio and certainly, we believe the highest growth in our OEM segment will come with the compact Logix platform in addition to certainly our motion and visualization packages as well. In addition to safety.

We think safety will be a big part of the OEM total package and our total capabilities as well, so we've had a lot of good interaction with OEMs the last six months given that their business is down, this is a good opportunity for them to look at new machine designs or cost reduce existing designs and our technical collaboration resources design resources have been very heavily utilized in helping these OEMs work on the Next Generation machines and certainly as demand picks up, we're viewing that as one of the areas that we would expect to see improvements on a year-over-year basis once their order books start getting filled up again.

Okay, thanks. See you all Thursday.

Thank you, we're looking forward to it.

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

Thank you, good morning everyone. Just a couple things to clean up for my end. Pension contribution, Ted? In cash in 2010, anything on the boards?

I would expect it to be similar to our contribution in '09 which was roughly $30 million, $30 million to $40 million.

Okay, and your tax rate is going to vary based on your income level? That's a pretty wide range.

I would say principally based on income level.

Keith, just given how much things have moved around in the last year with this downdraft, can you roughly reorient us on your vertical market and exposures, even if it's by kind of big buckets, consumer, auto, resources, et cetera?

Sure. With our markets today, we're probably around 35% consumer. We're around 10% auto and transportation which would be auto and tire which means auto was less than 10% today, probably 5 to 7, 5 to 8%. We have about 5% that would be in the other category which is marine, water, wastewater types of applications, but then we also have the process industries which now probably has grown to about 50% of our revenue and out of that the biggest one would be oil and gas, given our recent acquisitions, plus the strength of that vertical, that has been a positive market for us over the last couple of quarters, so that's how I would break it down for you, Jeff.

And so then in process, you're including kind of the mining and materials business?

Yes, in process, the heavy industries we would include oil and gas. We would include mining, we would include metals, we would include chemical, we would include pulp and paper, and utility power generation so water wastewater would also be in there.

And the pharma business is in there too or is that something--?

No, pharma business, life sciences business would be in our consumer products area. It would be part of that 35%.

And Keith, to your point about kind of the short visibility, you addressed it a little bit in some of the earlier questions but just using the compass that you have, how should we expect kind of business trends just to kind of evolve across your portfolio? I mean, as you're looking for the path out of this thing what are the sorts of milestones, consumer behavior, end market orders, what have you that you're looking for for validation that we're coming out?

Well, I think a couple of things, Jeff. One, it would be the continuation in growth in our product businesses and that would be an indication that manufacturing is picking up for two reasons. One, MRO would be, that should be an indication that MRO is happening as well as smaller projects that people are running mainly to be more -- drive productivity, improve their cost competitiveness or smaller projects just replacing an aging system or an aging line, so that's why we believe product flow would be the first indicator. As it evolves further down, we would expect to see a pick up in our solutions businesses and the precursor to that will be an order pick up which with the front end of that would be quotation activity and then that quotation activity converting into orders and then the orders will be a little longer and we would expect that consumer industries would be first here in those areas and obviously the key there will be consumer spending and consumer confidence, and so we need to see the continued steady increase there in the current levels and that will tell these industries to continue to invest and certainly that would be what we believe will be the first and the most powerful engine to come out will be an increase in consumer spending, so that's how I would characterize it Jeff and then obviously the differentiation from all of that is in emerging markets, it's still going to be just the investment to continue to support their growth and if they're an exporting country then it comes back to the earlier things I mentioned because most of those exports go to the mature economies, but we would expect to see some growth simply because of the high GDP growth in some of the key Asian and Latin American emerging markets.

Great, and just one brief follow-up on that. So as it relates to that list of things really we're just seeing perhaps the very beginning the growth or modest growth in product business and MRO. What percent of your business is MRO now do you believe? I know it's going to wax and wane as the cycle goes up and down.

Well, it's probably around a quarter to our business, maybe up to a third but it does move around quite a bit and we don't have an ability to track it real succinctly

Great. Thank you very much.

You're welcome, Jeff.

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

Hi, good morning.

Good morning, Scott.

I just want to talk a little bit about China. We've seen some pretty big numbers, government numbers so it's hard to know exactly what they are but numbers coming out of the region and then auto sales today were very very high, up 60% or so. Your business down 10%. You can talk a little bit about is there increasing competition and some market share shifts going on there? The businesses that you're selling into growing maybe a little less robustly or is CapEx really trailing the recovery?

Well, certainly with respect to China, we had negative organic growth in Q4 but sequentially we grew 11% and China had very very tough comparables for the quarter and in total for the year, we were down only 5% in China and some of, we have a lot of solutions business there so some of that is lumpy but we have seen the investments in infrastructure paying off in the second half of the year, that's one of the reasons why we had the sequential growth and we've also grown to your point automotive has continued to be strong for us in China and looking forward, we expect China for us next year to grow in the low teens and certainly, we continue to do well in a lot of the infrastructure investments but also with OEMs and the expansion in some of their more consumer facing industries that they're trying to drive more local consumption on, so we view China as a continued great opportunity for us and certainly, do not feel that we are losing any share in China.

Okay. It's been talked a little bit about and I know you alluded to this in past questions but pricing on your longer term contracts? When you think about some of the big bids that have been out there, we've heard of price weakness anywhere between kind of 5% and 30%, even some a little bit higher. Can you talk, I know there's not a lot of contracts that have been out there on big big projects but can you talk to the pricing that you're seeing and maybe compare that to last cycle and give us a sense of kind of what's normal and what's not normal?

Well, as we've been saying all year, we ended fiscal year '09 with pricing about at neutral and there was a recent Morgan Stanley control engineering survey that concluded what we've been saying and that is I think there was a quote in there that there was really no evidence of a price war in automation equipment, so that's the environment that we see. Now obviously individual, there are certainly projects that depending upon some of the background or the way some companies view that project is it can be a very competitive situation and certainly that's one of the reasons we need to make sure that our cost structure is aligned so that if necessary we can be very competitive but we haven't seen much of a change compared to previous cycles and we don't expect that to become a head wind for us in next year.

Okay, and then the last question, can you talk about what kind of -- you're always looking for bolt on acquisitions but what kind of assets, do you feel like you have product gaps or geographic gaps? Can you help us understand what kind of assets you would be looking at, obviously you can't name names but most of the stuff is much smaller, private companies so it's not much of a conflict for us.

We're looking for areas that continue to fill the gap, those gaps could be a small core chunk of technology. It could be something that allows us to grow our share in non-US -- in a non-US market, and it's also areas that allow us to expand our domain expertise, so our solutions and services areas and then specific vertical applications in information software would be a potential area as well, so they tend to continue to be small bolt on types that really at the end of the day just let us do more for the customer and allows us to leverage the other pieces of our total portfolio.

Okay. Thanks guys.

Thank you.

Okay, I think we've run out of time, so time to wrap up the call. I want to thank you all for joining us and of course for those of you who have questions, we do look forward to seeing many you at Automation Fair later this week and for those that can't come out to Anaheim please join us for the webcast on Thursday morning so Operator, back to you.

That concludes today's conference call. At this time you may disconnect. Thank you.