洛克威爾自動化 (ROK) 2010 Q1 法說會逐字稿

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

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

Good morning to everyone on the call and thanks for joining us for Rockwell Automation's first quarter fiscal 2010 earnings release conference call. Our results were released this morning and the press release and charts have been posted to our web site at www.RockwellAutomation.com. Please note that the press release and charts include reconciliations 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 Chief Financial Officer. Our agenda includes opening remarks by Keith that will include highlights of the first quarter and thoughts about our outlook for 2010. Then Ted will provide more details around the first quarter financial performance and our revised 2010 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 of you as possible but please limit yourself to one or two questions and we'll try to get to as many folks. We expect the call today to take about 45 minutes to an 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 everyone and thank you for joining us on today's call. As we exited last fiscal year, we were cautious in our outlook for fiscal 2010. We had just experienced the largest and most rapid yearly revenue decline in my history with Rockwell Automation, and we were just beginning to see stabilization in the macro environment, and in our order rates. Fast forward three months, and we now believe we are seeing the signs of a recovery, reflected by continued improvement in key global economic indicators, like industrial production and PMI, and by our performance in the first quarter.

I'll talk more about our outlook later, but first let me give you some highlights for the first quarter. Revenue in the first quarter was better than our expectations. Particularly in our product businesses in December. Even though we think product revenue in the quarter benefited from some unusual year end budget consumption by our customers, it still exceeded our expectations.

In our solutions businesses, revenue declined sequentially in Q1, as expected. But we did see improvement in order rates for the first time since the first quarter of fiscal 2009. Favorable revenue mix, along with the benefit of previous cost reduction actions, contributed to sequential margin improvement in the quarter, even after adjusting for the restructuring actions in the fourth quarter of last year.

The results in the quarter and an improved outlook for the year caused us to reverse our temporary pay and benefit cuts in January, a quarter earlier than we originally expected. We believe this was the appropriate timing, but it will create some additional sequential headwinds to margins for the remainder of the year. And the first quarter was another very strong quarter for cash generation, over $100 million. I want to thank our customers, employees and partners for a great start to the fiscal year.

Let me set the stage for our outlook for the remainder of the year. While key indicators such as industrial production and PMI are improving, we remain concerned about other factors, such as continued high unemployment, historically low levels of capacity utilization and a very cautious capital spending outlook. It now seems that the recovery has started, but the shape of the recovery remains uncertain. Absent some unexpected shock to the global economy, we believe demand will trend flat to up from here.

With this backdrop, and using our Q1 results as a new baseline, we are providing a revised outlook for fiscal 2010 full year revenue of $4.4 billion to $4.6 billion, compared to our previous range of $4.1 billion to $4.4 billion. As in our previous guidance, to achieve the high end of the range we need to have meaningful second half over first half growth. At these new revenue levels, we do expect to incur some additional expense from restoration of temporary actions and higher incentive compensation in 2010, and we expect to begin to make some incremental investments to support growth.

So with these factors in mind, we are raising our earnings per share guidance. Our new range is $2 to $2.40. This revised guidance reflects the strong earnings leverage that we would expect on incremental volumes, especially with respect to our product businesses.

Before I turn this over to Ted, let me highlight a few key developments in the quarter and then I'll wrap up my comments. We talked at the November investor conference about our growth accelerators in the next cycle, process control, OEMs, safety, information, emerging markets and sustainability. And we continue to see progress in the first quarter.

We had another strong showing in the 2010 Control Magazine Readers' Choice Awards, a survey of process control engineers. We placed first in 26 industry categories, almost three times the number of firsts of any other global automation company, and a net gain of three positions from last year. In all categories, we increased our first place finishes from 11 in 2007, to 36 in 2010. This further validates that Rockwell Automation is a DCS provider in the eyes of our process control customers.

Regarding our OEM business, we received a $10 million order from a European packaging machine builder for machines to be exported to China. We received the first order for our new scalable process safety product advance from a national oil company in Latin America. This product enables us to serve a broader range of process industry applications. Emerging Asia grew over 9% in the quarter. And in our information software business, we received a $1 million order for a production management system at a Chinese automotive company.

So in closing, we believe that we are at the early stage of a recovery. We will continue to effectively manage our cost structure, while appropriately investing in key technologies and growth opportunities. We are well positioned to take advantage of the recovery, and we are ready to serve our customers' needs when their automation spend increases.

Now I'll turn it over to Ted.

Thanks, Keith, and good morning everyone. We posted charts to our website and my comments will reference those charts. So starting with chart one, Q1 results summary, revenue in the quarter was $1.067 billion down 10% from Q1 last year. An organic sales decline of 15.5%, offset in part by favorable currency impact of 4.4 points, and contribution from acquisitions of about 1 point. Sequentially, sales declined by 1%. In all, a very good first quarter, and a stronger than expected start to the year in our product businesses.

Segment operating earnings were $137 million, down from $178 million in Q1 last year. General corporate net was $19.5 million, compared to $18.1 million a year ago. The effective tax rate in the quarter was 20%, a point below the low end of our projected range for the full year. EPS from Continuing Operations was $0.54, down from $0.81 in the first quarter of last year. And we recognized a small environmental charge in Discontinued Operations. Average diluted shares outstanding in the quarter were 143.8 million, and we did not repurchase any shares during the quarter.

Moving to chart two, Q1 results for Rockwell Automation as noted previously, sales for Q1 declined 10% year-over-year and 1% sequentially. Q1 sales are typically lower than quarter four, but 1% was a smaller than expected sequential decline. We had expected a significant sequential drop in Solutions, and we expected product sales about flat to Q4 run rates. Solutions sales actually declined more than expected, but we saw significant sequential growth in products. We believe a portion of that sequential products growth may have been due to some unusual year-end consumption of customers' operating expense budgets. However, even adjusting for that, product sales were stronger than expected.

Moving to the earnings side of the chart, operating earnings climbed 23% year-over-year, primarily due to the volume drop, offset in part by cost reductions. Operating margin for the quarter was 12.8%, down about 2.1 points compared to last year, but up considerably from the trough margins experienced in fiscal 2009. Looking at the earnings chart, there's an obvious large sequential earnings improvement on the 1% lower sequential sales.

Sequentially, operating margin increased by 5.4 points. You may recall, we incurred some significant restructuring charges in Q4, but excluding those charges, operating margin increased sequentially by 2.3 points. That improvement reflects significantly richer Product versus Solutions mix in the quarter.

We're very pleased with the margin results in Q1, but this might be a somewhat overstated base for sequential quarterly comparisons, as we proceed into the balance of the year. As I mentioned, Q1 saw a very favorable mix of Products versus Solutions, probably in part due to some unusual year end customer spending. Additionally, Q1 will be the only quarter this year where we see a year-over-year benefit of some of our temporary actions. We restored pay cuts and the 401-K match beginning in January. And with an improving outlook, we are planning to allow some increased spending and that didn't get started in time to impact Q1.

On the other hand, we believe we're well positioned for good leverage as volume increases, and you'll see that reflected in guidance. Although not displayed on the chart, our trailing four quarter return on invested capital was 9.5%. That's down from 22.3% last year, primarily due to the earnings decline.

Now, please turn to chart three, which summarizes the first quarter results of the Architecture & Software segment. Looking at the left side of this chart, a strong sales result for Architecture & Software in Q1, with a third consecutive quarter of increasing sales. Sales were down 7% compared to the same quarter last year, with about a 5 point benefit from currency. Sequentially, sales were up 11%.

Operating margin for the quarter was 21.1%, one half point below the first quarter of last year, despite lower sales. That reflects the impact of our cost reductions of last year. Excluding restructuring charges from Q4, operating margin improved sequentially by 7.3 points. That sequential margin performance is primarily due to the significant volume leverage we generate in this higher margin segment.

Chart four covers our Control Products & Solutions segment. Sales in Q1 were down 12%, compared to last year, with a 4 point benefit from currency and 2 points of growth from acquisitions. Sales were down 8% sequentially. We experienced sequential growth in the products business of Control Products & Solutions, but that was more than offset by the larger than expected decline in the solutions business. Segment operating earnings were down 44% year-over-year, and operating margin contracted by 3.7 points, consistent with lower volume. Excluding restructuring charges in quarter four, operating margin was lower sequentially by 2 points, also due primarily to lower volume.

The next chart, chart five, provides a geographic breakdown of our sales in the quarter. In the center column, you'll see the overall growth rates by region. The far right column shows growth rates excluding the effects of currency translation. This is the first quarter since the fourth quarter of fiscal year 2008 in which currency made a positive contribution.

I'll focus my comments on the far right column, excluding currency effects. In the US, sales were down 18% year-over-year, but up 3% sequentially. The US was the only region with sequential growth, and really all of that due to strength in the product businesses, particularly Architecture & Software. Canadian sales declined by 8% compared to prior year, but that comparison benefits from an acquisition made last year. Excluding that, the year-over-year decline was about the same as in the US.

In EMEA, sales declined 16% compared to Q1 last year. And Asia-Pacific was the only region that demonstrated year-over-year growth at 5%. Emerging Asia, including China, saw over 9% growth year-over-year. Latin America was down 19% year-over-year, with the largest declines in the solutions businesses. Turn to chart six, free cash flow. For the quarter, free cash flow was $108 million, a very good start for the year, and that's just a little less than 140% conversion.

And that brings us to the next slide which addresses our current outlook for fiscal 2010. As I mentioned, as Keith mentioned, we're revising guidance. We have increased the range of full year sales to $4.4 billion to $4.6 billion, to reflect a higher baseline based on Q1 performance. Excluding currency effects for the full year, that revenue range represents a decline of 2% at the low end, to growth of 3% at the high end. We expect currency to contribute about 4 points to year-over-year growth, 1 point more than in our November guidance. And we've adjusted our estimate of segment operating margin to 12 to 13%.

We've increased our fiscal 2010 EPS guidance to a range of $2 to $2.40. We now expect a full year tax rate of 19% to 23%. And we continue to expect free cash flow conversion above 100%. And with that, I'll turn it over to Rondi to begin the Q&A session.

Okay, thanks Ted. Ann, we are ready to open the lines now for questions.

Okay. (Operator Instructions). And our first question comes from the line of Bob Cornell with Barclays Capital. Please proceed.

Hi, everybody. I'm surprised. Good quarter. A lot of questions. The first one would be the strength in the product business that you saw at the end of the quarter, did that continue into January, despite the year end adjustments you're talking about?

Well, we obviously exited Q1 at a faster rate than we thought and certainly in January what does happen is we do see a falloff and certainly that did occur. And the rates slowed, as expected, and the January to date daily order rate is below the average for Q1 and this is true in both products and solutions, but I would say that's our normal, typical start, and it's one of the reasons sometimes Q2 can actually be lower than Q1.

We really don't know the continued strength until we get into the mid-February, end of the quarter time period, because obviously most of the companies are resetting their budgets for a new year, and it takes a while for that to work through the system. So I would say right now, we are seeing exactly what we would have expected and obviously that's part of the factoring into our guidance that we provided.

The next question is what sort of magnitude of the temporary cost recovery feedback are you going to have in terms of dollars or margin basis points? Can you quantify that for us at all?

Well, let me try that in two different respects. The restoration of the pay cuts and the 401-K match is about a $15 million sequential expense increase from Q1 through the balance of the year.

That's per year or for quarter?

That's per quarter.

Right.

Okay. The other large item we will have this year will be increase in incentive compensation compared to last year's levels, and at the new guidance midpoint we would expect that to be up in the ballpark of $70 million.

For the year or for -- ?

For the year.

Final question for me. You talked about Solutions orders improving. Do you have a book-to-bill in Solutions?

The book-to-bill in Solutions in the first quarter was roughly 1.15.

Okay. Thanks very much.

You're welcome, Bob. Thank you.

Next question comes from the line of John Inch from Merrill Lynch. Please proceed.

Thank you. Good morning.

Good morning, John.

Good morning, Keith. So I just want to just sort of focus a little bit on your commentary around -- I think you used the term unusual to describe some of the year-end customer budgetary spending. Why do you say that? Was there a concentration amongst a group of customers that you talked to that you sort of felt that was the case? Was it broad-based? Or are you just trying to be cautious as the year unfolds?

No, I don't think it's because we're trying to be cautious. I believe -- and this is more of a broad-brush statement than we talk to a handful of customers. But what we normally see as December unfolds is a normal start and then about midway through, it starts tailing off and then certainly as you get between the holidays, it's pretty slow normally.

And so obviously, that's certainly what we were expecting this year, because if you remember last year, basically everybody shut down, and there was really zero going on, which is obviously worse than normal. But it was a very reduced level last year, and so we thought we would get back to a normal seasonality at the end and what we have -- what we saw was a continued acceleration in the product businesses through the month.

As we went through our normal series of reviews in January, getting ready for this call and obviously the remainder of the year outlook, we got significant feedback from the various regions and verticals, that certainly there was an increased spending thrust as they approached the end of the year and certainly a portion of that -- we believe there are a couple of factors behind that.

One, there had been such a reduction in what I would call just normal operating spending in our second and third quarters and into the fourth, that because industrial production picked up, there just was I would say a natural rebound there, as well as supply chains were pretty well down and people had reduced their maintenance, storerooms and other spending to a point where there was probably a little higher than average replacement. But then also, because that spending was decreased for such a long period of time, we do believe there was some end of the year spending bubble that was why we called it unusual. And so that kind of gives you a little -- well, maybe a lot of color around that question.

No, no, that actually is very helpful. I know you guys have very good visibility into your own dealer channel and have historically talked about the end of a restocking or excuse me, destocking. If I could infer from your comments, Keith, are you suggesting that there has been a degree of restocking and do you think that actually continues, based on -- because you're hearing chatter about this outside of Rockwell. Are you seeing that and do you think that has a degree of legs, based on where channel inventories are set and where you sort of see demand picking up associated with macro variables and so forth?

This is Ted. We think we --

Hi, Ted.

One point of improvement in sales in Q1 due to restocking and as demand continues to increase, if demand continues to increase you through the year, we would expect that to continue.

My final question, Ted, you might be the person to ask this. If you look at the Architecture & Software business, right, I think sequentially you're talking sort of a $45 million delta in revenues, yet if you adjust for restructuring in the fourth quarter, you almost had $40 million, $41 million of sequential profit margin pickup. It almost looks like a 90% variable contribution margin. How is that -- Ted, I know you referenced strong product sales but actually how did the A&S business put up such a very robust contribution margin in the first quarter?

I would say the most important factor in there is very strong incremental contribution margins in Architecture & Software. But obviously, that doesn't explain a 90% conversion. There are in any two quarters puts and takes and some unusual adjustments in the quarter and we probably had a couple negative items in Q4 and some positive items in Q1 that also influenced that conversion for Architecture & Software.

I'm assuming Logix had a very good quarter. Is that true?

Logic sales for the quarter year-over-year were down about 7%, but obviously that's better performance than Architecture & Software as a whole and that's on an organic basis.

Sequentially, John, they were up 11%, so yes, they had a strong quarter.

I'm sorry, Keith, Logix was up 11 sequentially?

Sequentially, yes.

You think Logix does what for the year?

As far as percentage growth for the year?

Yes, roughly.

Yes. We think we'll get back close to 10% year-over-year.

Thanks very much.

You're welcome.

And our next question comes from the line of John Baliotti with FTN Equity Capital Market. Please proceed.

Good morning.

Good morning, John.

Keith, I guess a combination of Keith and Ted, obviously taking out the entire prior range in guidance and you guys are historically very conservative, even throughout the last cycle, is it -- are you feeling better because, Keith, you mentioned in your opening remarks that orders had picked up. Are you seeing what's in the orders much more stable, higher profitability than you guys were seeing or not seeing anything before when the guidance was first laid out?

Yes, I mean, I believe we're seeing two things at this point in time that we didn't see when we gave our initial guidance. And that is a sustained pickup of our product revenues, and obviously we thought that we would have a flat Q1 -- closer to flat to Q4 during our Q1 and it grew, and as I said earlier, it grew throughout the quarter, which was unusual. The other aspect is our solutions business, where we definitely expected it to continue to decline in sales, but quite frankly, we were a little surprised that we saw order -- sequential order improvement, and the last time we had talked we were still going down in our solutions business.

And so we believe that we now probably have seen the bottom of the solutions business and we have more certainty that we have seen the bottom in our products businesses, although obviously the shape as we mentioned of the recovery is still very difficult, but we think with respect to the magnitude of the change that we're trying to go right down the middle of the fairway with what we see today, and I think traditionally that's the approach we've taken, tell you what we know, when we know it, and try to make sure we're as credible as possible on both of the sides of the range.

So I think we have a little more confidence in the stability than we did previously and certainly we believe that unlike last year, where products were going down at a much faster rate than solutions, and, therefore, we didn't get -- we saw all the decremental margin impact, we now fully expect products to lead solutions, and, therefore, you're seeing some of these higher incremental margins going the opposite way.

So I think it's that, plus obviously the macroeconomic indicators. We've got another quarter of looking at those. While there not have been significant change, they've all stayed -- certainly the PMIs have stayed above 50 for a -- now for a significant number of months, and industrial production on a global basis continues to show, while not large, certainly some improvement.

And I think it's that total combination including talking to customers and while they may not be increasing their spending dramatically, they're talking about and they're looking for more quotations. They believe they will be releasing projects later in the year, and I mean, that's why we talked about a meaningful second half over first half growth. So a number of those aspects that caused us to have probably a little different perspective than we did three months ago.

John, I think there's one other thing, and similar to our November guidance, we're assuming in this guidance that we don't see any significant retreat on average in the balance of the year from the run rates we're seeing in Q1.

Right.

And so no W shaped recovery. This assumes that at worst, things are flat and at the high end, we see some reasonable improvement over the balance of the year.

You guys were clearly concerned when you laid out the first numbers and try to us caution us in terms of the amount of volatility given a certain percentage of your more profitable business not showing up.

I think that's a fair statement. And certainly the confidence at that point was certainly shaken, given what we saw in the previous three quarters.

That's fair. I was just curious, just lastly, Keith, if you look back at this last cycle and I know we're a lot lower in capacity utilization than before so it may be hard to interpret. If you look at -- if you take out some of the unusual, as you consider them unusual items in the quarter, just the behavior or the patterns of -- and you talk to a lot of customers, obviously, just the behaviors and the patterns that you're hearing from them or seeing in your numbers, how does that compare to when we were in the 73.5, sort of when we bottomed the last time in capacity utilization, are you seeing any similarities or differences?

Well, I think it's a little too early to talk about the differences. The similarity that we see is I think people are cautious. This has been a very, very difficult period for many companies and I think we'll see them trying to drive productivity as long and as hard as they can to try to offset I'll say incremental investments and actually we're hoping that that will drive some project activity that is more focused on cost reduction and productivity as opposed to true incremental CapEx spending. So I just think people are still very sensitive, and unsure.

I think the uncertainty looking forward is probably higher this time than ever, quite frankly. The uncertainty of what new regulations are coming, what new tax environment will they be involved with, and certainly I think those are all things that are going to play out. But right now, I believe people are probably a little more unsure of what does it look like over the next three to six months. And I think we'll see a little more cautiousness on their part.

Okay. Great. Thank you very much.

You're welcome.

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

Good morning, Mark.

Great performance today.

Thank you.

Just a couple quick details on the guidance here. Is there any change to the tax rate and is there any acquired revenue anticipated in the revenue outlook?

Mark, our previous guidance for tax rate was 21% to 25%. The revised guidance is 19% to 23%. And there is no assumption of acquired sales in the sales guidance outlook.

Okay. All right. Then the question that I've got, more substantial, is having to do with the surge here in the December quarter. There's a couple things that seemed like they could potentially drive some of that that are lapsing, hopefully now or soon. One is that your price increase was announced for the end of January and typically those are in August. So, you know, we have sort of a noncomparability of when the price increase comes through and whether there's prebuying ahead of that.

And secondly, we're hearing about the supply chain being somewhat taut for some of the product categories and some of the dealers are telling us they're actually building stock and you guys actually confirmed that with that 1% comment. As you get your SAP issues further resolved as the year unfolds and that we now have even year-over-year price comparisons, do you expect this sort of surge to subside and even reverse? You know, basically have we pulled forward a lot into the first quarter and then we have to pay it back later in the year? Sorry for the lengthy discourse here.

That's okay, Mark. We already talked about what we thought the restocking impact was, which was about 1 point. I think as we move forward, assuming that we see some increase in demand as the year progresses in end demand at the distributor level, would expect to see some continued benefit from restocking in the balance of the year. As it relates to price, we don't believe there was any significant pull-forward as a consequence of the price announcement.

Keith mentioned, we do think there may have been some unusual buying in December, particularly in our Architecture & Software segment, that related to customers consuming year-end budgets. And it's a little bit difficult to quantify that, because we're trying to discern between that and just kind of a normal increase in demand now. But that's really the only thing we would peg as unusual in Q1.

Okay. Just finally, just to clarify, the comment you made earlier about the mix of business between products and solutions. How far off in the quarter was that revenue mix versus what you -- what would either be a normal year or what you would be forecasting for the full year?

I'll be honest. Offhand, I don't know exactly what the percentage was compared to the expectation for the quarter, but basically we saw a strong sequential increase in product sales when we expected it to be flat, and we saw a larger than expected decline in solutions sales in Q1.

A larger than expected decline in solutions?

Yes.

Even though orders picked up, your actual revenues --

Even though orders picked up. We talked about having a hole in the backlog coming into the quarter. So it was a very favorable mix in the quarter and not one I would expect to maintain as the year progresses. Even part of that mix may have been influenced by this kind of year-end budget consumption by customers, which obviously disproportionately, practically all fell into products, and primarily into Architecture & Software, which is our highest margin area.

Great. Okay. Thanks a lot, Ted. That's helpful.

And our next question comes from the line of Steve Tusa with JPMorgan. Please proceed.

Hi, good morning.

Good morning, Steve.

Just wanted to talk about the mix a little bit in A&S. What was Legacy? What was the Legacy in the quarter? Logix was down 7. What was Legacy?

Legacy was down 20 which may sound like a lot but it's a lot better than fiscal year 2009 when it was down 35%. So it was down 20, but up sequentially 9. So it kind of goes into the same category as Logix and Ted's comment earlier that we saw an improvement in our highest margin portfolio, which would be the combination of Logix and Legacy.

Okay. And you mentioned that China, the software deal, any kind of moving parts in software in the quarter that were notable either way?

First of all, software isn't big enough to be notable at the end of the day. But we are encouraged, but we are very encouraged with the continued building of what I'll call the front log and the pilots that we've talked about earlier. We did have some good customer wins, as far as the early stages of proof points, and that part gave us an encouraging quarter in software. But like I said, it's still a relatively small number, but one that we do see very good signs for, for the duration of the cycle.

Is that $1 million -- you called out the $1 million. Is that an unusual deal? I'm just curious as to the -- it sounds like a relatively meaningful deal in the scope of your software business.

It is. We called it out for two reasons. One, that is a large software order, and then secondly, it's in China in the automotive. So the other message is, these emerging markets are looking at investing in technology and tools to help them be world class and productive. And so the fact that you're seeing a plant floor software solution being implemented in China, we feel that's a demonstration of the importance of this type of technology and also the fact that it's not just in mature markets and from mature companies that are willing to invest in the information space. So it was really those two messages that we wanted to communicate.

How many of those types of large deals are out there? I mean, are they few and far between? Are you working on more and more of them? Just give us some sort of context on you talked about the front log and software, maybe just use the $1 million order from China as kind of a baseline and describe --

Certainly that's why we're creating the pipeline is to be able to have more of those size orders, as we go forward. And this was one that was large in a single instance. What tends to be more typical is that we would have a smaller initial order in a plant or on a line and then we would want to see a sustained roll-out of that across the enterprise globally. So while this is a single instance, we believe the other dimension of this that is equally important, if not more important to us, is the ability to put this software in many of our customers' facilities and to generate the performance for them across their enterprise as opposed to one-offs.

And then just on the numbers, very quickly, Ted, is there any kind of change in the moving parts when it comes to the restructuring charges, savings, temporary stuff come back in? I guess you increased those numbers by a little bit so they're now more of a headwind than you would have expected when you gave the previous guidance. You said some these costs were going to come back in if volume returned. Is it in line, or is this more of a headwind? Maybe if you could walk through those moving pieces into the bridge. And have you called off the dogs at all in the restructuring perspective?

I was going to start by saying all of the savings we were expecting to see this year we still expect to see.

Okay.

As we talked about, restoration of temporary actions in our previous guidance at midpoint as being about $30 million of headwind, okay, we now think at the new midpoint that that is more like $70 million of headwind and that difference is comprised of two pieces. One is somewhat earlier restoration of pay cuts, and the 401-K match, but the larger chunk of it is really just higher incentive compensation at these new guidance levels. And you may recall, we have a very broad-based, pretty much across all employees who are not quota carrying incentive plans.

Okay. Great. Thanks a lot. Appreciate it.

And the next question comes from the line of Mark Zepf with Goldman Sachs. Please proceed.

At the high end of the guidance range, what's the implied second half versus first half revenue increase?

In the high end, if you look at it, we would expect that we have a mid-teens growth from first half to second half.

And is that a comparable increase by products and solutions?

No, it's probably weighted more towards solutions.

Okay. And then to follow up on the solutions comment, could you provide any detail in terms of verticals, where you saw the order increase in the quarter and where you're more optimistic for the back half of the year?

I think with our solutions businesses, where we have seen the pickup is in automotive. We've seen it in water, waste water, and in -- a little bit in oil and gas, although that's been a very strong year for us. We do expect it to be slightly better this year. I would say that's where the significant deltas were at this point in time.

Great. Finally, on capital allocation, still expecting to convert the higher earnings range into strong free cash flow. Any change in your thinking priorities, M&A, buyback?

No, our cash deployment priorities remain the same, investing in organic growth, small bolt-on acquisitions, and then any excess operating cash we would return to shareholders and there we have three vehicles, dividends, stock repurchase, a dividend increase or a special dividend if you will, and then I would say the one area that we constantly take a look at would be infusion into our pension plan. While we have no required contributions in the short term, that could be an opportunity for us to utilize excess free cash.

And is there any share repurchase embedded in the guidance?

There is no share repurchase embedded in the guidance. As you know, we curtailed share repurchase last year because we thought it was important to manage the balance sheet and liquidity in that down economy. I would say, given the current guidance and our expectations for excess free cash flow this year, we will consider beginning share repurchase in the latter half of this year, at least partially to offset dilution from stock compensation.

Great. Thank you.

You're welcome.

And our next question comes from the line of Mark Douglass with Longbow Research. Please proceed.

Hi, good morning everyone.

Good morning, Mark.

Just real quickly, Ted, that $70 million headwind from compensation, that's inclusive of incentive compensation, bonuses, and 401-Ks and salaries being made whole?

Yes, I missed the very first part of your question, Mark. Could you repeat that, please?

Yes, that $70 million headwind that you talk about from temporary cost actions coming back --

Yes.

That's inclusive of everything, it's not just bonus and incentive compensation.

That's correct. Inclusive of everything. I want to make sure I'm being clear here. We previously talked about a headwind of $30 million. It's an increase of $70 million so the new headwind would be $100 million.

Oh, okay. Helpful. Thank you.

The new midpoint.

Okay. And then if you could just talk about Europe, Keith. What was the performance sequentially and also what are you seeing there, say, with the OEMs, obviously that packaging order, is that indicative of what's happening?

Yes, I think in Europe, we are continuing to see some softness in a number of areas, and certainly from a macroeconomic perspective, we believe that Europe is somewhat lagging the US with respect to recovery, and it's probably the region that we have the least confidence in with respect to growth.

However, having said that, what we have seen in Europe and it's one of our growth accelerators is working more closely with the OEM industry. We have seen improvement on a quarter basis in the OEM sector and in particular, in packaging OEMs, which is the one that I highlighted during my comments. So Europe is tougher, but we are starting to see some improvement in the OEM sector.

And then does that imply that you're gaining some market share in Europe and if you could also discuss if you're gaining market share in process industries. Thanks.

Europe is a hard one to call in this environment because we don't have real good numbers. So I would say published numbers, if you will. So it takes us a little while to get a feel for what is really going on in Europe and I would say I don't think we're losing share, but I cannot say that we are gaining it in Europe.

With respect to process, there we do have more confidence and we do know that we are gaining share in process and we're gaining it through a number of vehicles. Obviously, the most important reason for process improvement is the fact that our plant-wide control strategy and differentiation that we have as a Company with our technology continues to resonate with our customers and that story is getting stronger, louder, and gaining a lot of traction.

The second reason is because of the activities that we have started, probably a little over a year now, two years, probably since our acquisition of ICST, which is a process safety supplier, that in combination with Logix, we now have an integrated safety and control system that is a very solid platform, in particular for oil and gas and other heavy process industries.

So we are moving. We started to focus on the batch hybrid space, but now in process, we're moving more and more into the heavy industries and continuous process and so that would be the other area that we are able to achieve share growth, and one of the vehicles that we're using there is the ability to replace Legacy DCS systems that are no longer being supported. So we get our credibility by replacing existing in a lot of the mature markets and then in the emerging markets we're able to compete effectively in greenfield applications.

Thank you.

You're welcome.

Ann, we'll take one last caller here before we wrap up today's call. Thanks.

Okay. And that would be from the line of Richard Eastman with Robert W. Baird. Please proceed.

Hi. Keith, could you just talk for a second or two, we talked about the solutions business and where orders strengthened but on the MRO side of the short turns business, it sounds like we had decent growth sequentially in the Legacy and Logix, but what markets there, Keith, did we see the uptick? Some, especially auto, one could make the argument that there was some budget flush and just an acceleration in spend at year-end but I'm curious what markets maybe you could flag for us on the MRO or short turn side of the business.

Well, I think two comments. One, I think some of the MRO was just in general because of the depletion of activity over probably our second, third and into the early fourth quarters. So that means -- that was kind of broad. But you answered half the question, and that is where do we see a unique situation. It was auto.

There is no question that auto bought more in the first quarter than they had previously and in addition to auto, we saw a pickup in the tire industry. So generally speaking, transportation was a good improved -- had very good improvement in our first quarter, and it's an area that we would expect to see growth on a year-over-year basis going forward.

Did it grow year-over-year in the first quarter?

Yes.

It did. Okay. And then just Keith, as just your commentary about as we rolled into January, the daily order rate may be down a little bit from where it was in the first quarter. Would it be your expectations this early in the quarter that we would see a normal seasonal down tick in revenue in the second quarter, or is that still uncertain?

That's uncertain. I think many times we do see -- maybe many times is too strong of a statement. Certainly Q2 is the one that I would say in normal environments can be softer than the previous quarter and the difficulty is, it always starts out slow in January, and then it's a question of what happens later in the quarter and that's why it's a tough one to call, because we don't get to the edge of the building because of the first couple of weeks of January. If that continues into late February and March, it's a different story. So it's just a hard one to distinguish at this early in the quarter, but we have seen nothing that is different than what a normal start to the quarter would be at this point.

Understand. Okay. Thank you. Nice work to your team in the quarter.

Thank you. They've done a great job.

Okay. With that, we're going to wrap up today's call so we want to thank all of you for joining us and I'll turn it back over to Ann.

Thank you. Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a great day.