洛克威爾自動化 (ROK) 2010 Q3 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 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. Ms. Rohr-Dralle, please go ahead.

Thanks, Haley. Good morning, and thank you for joining us for Rockwell Automation's third quarter fiscal 2010 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 reconciliations to non-GAAP measures. Additionally, a webcast of this call is accessible at that website and will be available for replay 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 third quarter and thoughts about our outlook for the remainder of fiscal 2010. Then Ted will provide more details around the third quarter financial performance and our revised 2010 guidance. We'll take questions at the end of Ted's remarks, and we want 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 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. So, with that, I'll turn the call over to Keith.

Thanks, Rondi. Good morning, and thank you for joining us on today's call. The economic recovery continued through our third fiscal quarter, even somewhat stronger than we expected, and our results reflect that in a very positive way. Our revenue performance was outstanding with 25% year-over-year growth and 9% sequential growth. I was really pleased to see the broad-based nature of our revenue growth with all regions contributing to the strong year-over-year performance. Product revenue in the quarter was once again better than our expectations. Year-over-year growth was over 35%, more than 10 points higher than the year-over-year growth rate in Q2.

We turned the corner in Q3 in our solutions and services business. As expected, we saw year-over-year growth for the first time since the second quarter of fiscal 2009, and the solutions and services book-to-bill ratio was a healthy 1.1 this quarter. Operating margins improved seven points year over year, primarily on the strength of volume leverage and we increased spending to fuel future growth.

Here are some other highlights of the quarter. We had strong growth in emerging markets, with exceptional 42% growth in China. Latin America had very strong year-over-year growth and solid sequential growth, and we exited the quarter with record backlog in this region.

We continue to make progress globally in our process business. Process revenue grew 16% in the quarter. Our process business in Asia grew over 40%, and we had significant wins in new applications for pharma, chemicals and power. And legacy DCS conversion opportunities continue to grow. Our momentum with OEM machine builders continued in Q3 as our revenues spanned a wider footprint of customers and machines. And we continue to generate considerable free cash flow in Q3. Our balance sheet remains very solid. And based on our confidence in our ability to generate cash throughout a business cycle, in June we raised our dividend by 21%. These great results are a testament to our talented and dedicated employees and partners and their steadfast commitment to our customers' success.

Let me set the stage for our outlook for the remainder of the fiscal year. There has been some noise in the macro-economic indicators. But generally, they remain at relatively healthy levels and we aren't expecting any significant changes in the near term. There is increased concern about sovereign debt issues in Europe, but we have not seen any slowdown in orders or front log activity to date.

In industrial markets, MRO, small project and OEM demand is stable. While quotation activity for larger capital projects is picking up, customers in developed markets are still cautious about committing to large capital spending and we have not yet seen a pickup in larger capital project orders.

So with that as backdrop, let me provide more specific expectations regarding our Q4 outlook. We are confident we will see sequential growth in solutions and services revenue in Q4 given the backlog coming into the quarter. For our product businesses, we believe that Q4 revenue could be about flat compared to Q3 after the effects of normal seasonality in Europe and the end of restocking in our channel. In total, we expect revenue to be up sequentially in the fourth quarter by about 4%. Given these expectations, and with three quarters of solid performance under our belt, we are providing a revised outlook for fiscal 2010 full year earnings per share of $2.95 to $3.05 on revenues of approximately $4.8 billion.

Let me close with few comments. We have performed very well in the early part of the recovery. I am confident in our strategy and our ability to execute. We are well-positioned to take advantage of improving market conditions as we proceed through this cycle. Although the macro-economic outlook is uncertain, we are optimistic that the global recovery will continue and we have begun to make some incremental investments to support our future growth. We remain committed to delivering shareholder value by prudently investing in high return growth opportunities and appropriately returning cash to share owners. Now I'll turn it over to Ted.

Thanks, Keith. And good morning to everybody on the call. As Rondi mentioned, we posted charts to our website and my comments will reference those charts. I'll start the briefing on chart one, which is our Q3 results summary. Revenue in the quarter was $1.268 billion, up 25% from Q3 last year. Only $5 million of the year-over-year revenue growth was due to currency, so results were approximately currency neutral year-over-year. Total segment operating earnings were $198 million, up 129% from $86 million in Q3 last year.

General corporate net expense was $23 million, that's about $3 million higher than our expected quarterly run rate and primarily due to higher performance-based compensation related to the Q3 performance and our revised full year outlook. The effective tax rate in the quarter was approximately 23%. There were no significant discrete items in the quarter, and the year to date effective tax rate was 20%. EPS from continuing operations was $0.83, up from $0.23 in the third quarter of last year. Average diluted shares outstanding in the quarter were 144.3 million, and during the quarter, we repurchased approximately 1.2 million shares at a cost of about $68 million. At the end of June, we had approximately $528 million remaining under our existing $1 billion repurchase authorization.

Please turn to chart two, the Q3 results Rockwell Automation total. On the left side of this slide, you can see the 25% year-over-year revenue increase, as well as the 9% sequential increase, a reasonably steady upward trend across the past four quarters. Channel restocking contributed about three points to the growth, similar to last quarter. Q3 was another strong quarter for our product businesses, with year-over-year growth of 37%. And moving to the earnings chart on the right side of the slide, you will see the 129% year-over-year increase in operating earnings and a 12% sequential increase. Operating margin for the quarter was 15.6%. That's up 7.1 points compared to last year and up about 40 basis points from last quarter.

Similar to last quarter, the year-over-year improvement is largely driven by significantly higher operating margin in the architecture and software segment. However, in total for the Company, the margin improvement continues to reflect strong volume leverage and improved mix, partly offset by higher compensation costs and beginning in Q3, some deliberate increased spending to support future revenue growth. During our April earnings call, Keith mentioned that we intended to increase spending beginning in the second half of the year. In Q3, we increased spending by about $20 million, primarily in technology investments and customer-facing resources with a particular emphasis on emerging markets.

We are pleased with the year-over-year earnings conversion realized year-to-date, and as you'll see reflected in the guidance, we continue to expect a very strong result for the full year. Although not displayed on this chart, our trailing four quarter return on invested capital was 17.7%. That compares to 14.8% last year and 13.2% last quarter. We expect return on investigated capital will further improve as we continue to see favorable year-over-year earnings comparisons.

Now we'll turn to chart three, the Q3 results for the Architecture and Software segment. Looking at the left side of this chart, you'll see another quarter of very strong sales performance in our Architecture and Software segment. This is the fifth consecutive quarter of increased sales. Sales in Q3 were $554 million, up 39% compared to the same quarter last year and basically all organic growth. Sequentially, sales were up 7%. Operating earnings in the quarter nearly tripled to $125 million and operating margin for the quarter was 22.6%, 11.8 points higher than the third quarter of last year with the increase predominantly due to volume leverage and despite higher compensation costs and growth spending.

Operating margin was down 1.2 points sequentially, primarily due to the increased spending. The growth spending included additional development dollars related to our integrated architecture, as well as the segment share of customer facing investments.

Chart four covers our Control Products and Solutions segment. Sales in Q3 were $714 million, a 17% increase compared to Q3 last year. Currency contributed about 60 basis points to the year-over-year growth. Sales increased 10% sequentially in this segment.

In the product businesses of Control Products and Solutions, sales increased both year-over-year and sequentially at rates that were similar to the Architecture and Software segment. Solutions and service business revenues increased 6% year-over-year and 14% sequentially. This is our first quarter to return to year-over-year growth in solutions and services, and the sequential growth played out pretty much as we expected given that we had built backlog over the first half of the fiscal year. Solutions and services orders also continued to improve in Q3. Segment operating earnings increased by 69% in this segment and operating margin was 10.2%, an increase of 3.2 points compared to Q3 last year, and primarily due to higher volume. Operating margin was up 1.8 points sequentially.

Turning to the next chart, chart five provides a geographic breakdown of our sales for the quarter. The far right column shows growth rates excluding the effects of currency translation. I think the most important message here is just the very good year-over-year growth demonstrated across all regions. Latin America was particularly strong with a 40% year-over-year increase. Asia-Pacific sales increased by 23% compared to last year, with growth in emerging Asia at 31%. And as Keith mentioned, we had an exceptional quarter in China with 42% growth year-over-year. And we saw good sequential growth in all regions including EMEA on a local currency basis.

Now, turn to chart six and we'll look at free cash flow. We have continued to generate considerable free cash flow. Free cash flow for the quarter was $117 million. Free cash flow conversion on net income was 98% in the quarter and 127% year-to-date. Our balance sheet remains strong with sizable cash resources and a comfortable debt-to-capital position. Based on the strength of our balance sheet and confidence in our ability to continue to generate significant free cash flow, we increased our dividend by 21%. That increase will be effective with the dividend that we pay in September.

And that brings us to the final chart which addresses our outlook for the full year fiscal 2010. As Keith mentioned, we're increasing our guidance. We now expect sales to be at or a little above $4.8 billion. Basically, the high end of our previous guidance range. Excluding currency effects, the new revenue guidance represents year-over-year growth of 9% to 10%. We expect currency to contribute about two points to year-over-year growth. We expect operating margin for the full year to be at, or maybe a little above, 14.5%. We expect our fiscal 2010 EPS to be in the range of $2.95 to $3.05 compared to the previous range of $2.60 to $2.90. We expect a full year tax rate between 19% and 20%. And finally, we continue to expect free cash flow conversions to be above 100% for the full year.

And with that, I'll turn this back to Rondi to begin the q-and-a.

Thanks, Ted. Okay, Haley, we're ready to open the line for questions.

Thank you, ladies and gentlemen. (Operator Instructions) Your first question comes from the line of Robert Cornell with Barclays Capital. Please proceed.

Hi, guys.

Good morning, Bob.

Hi. So, I guess the news is the turn in the solutions business. Maybe you could go over that in a little more detail. What regions, what products, the backlog build. Just maybe give us some more color there, Keith.

Sure. Well, I'm not so sure if that's the news because we kind of expected that based upon the fact that we had book-to-bill ratios over one for the first two quarters. So, the fact that we turned a corner is significant, given that it's the first time in five that we've been there. But it was totally expected. And it happened pretty much universally around the world. We had continued strength in -- certainly the process space, which is an area that we, as you know, Bob, we've been very focused on, and the fact that we're now generating revenue growth on a year-over-year basis in the process space is very good news for us.

And I would say that may be the bigger news, the fact that not only have orders been positive, but we have turned the corner on revenue in the process space. And obviously our revenue is made up of products and solutions, and certainly this was the quarter that our solutions business turned positive in process. And that's very encouraging because we think that's a precursor to stronger long-term growth as the project business continues to evolve in some of the more late cycle businesses. So, I think it's the area of process and the growth there that we're most pleased about and I think an indicator of a real turn.

Yes, that's what I saw as well. Could you differentiate, though, the comments around the solutions business doing better and still, the reluctance for customers to make commitments to big projects? It seems to be a bit of a contradiction.

The dichotomy here?

Yes.

Well, I think what that says is that we're still not seeing the larger projects in more of the mature markets. And we have been seeing the projects in emerging markets over the last couple of quarters. And in fact, in some of the emerging markets, this business is lumpy as you well know, but we were seeing orders. It's just that we're not seeing the breadth and the build of the pipeline across multiple geographies and multiple industries. So, I think the dichotomy is only in the magnitude of the growth and where it's occurring. And I think the large project business comment was really around mature. If you remember, in the second quarter, we said to hit our high end, we expected to see project growth in our third and in particular, our fourth quarters. And the comment about not seeing that yet is really around that characterization, and that's mainly in the US and western Europe. So, a little bit of a mixed bag there. But, I think more mature as opposed to emerging market commentary.

Final question for me. Could you talk about -- the growth spending was $20 million in the quarter. Is that going to be a run rate going forward? Are you going to ramp it up? Is the number going to be roughly the same in 2011? How do you see the growth spending ramping?

Well, Bob, I think you remember last quarter we talked about spending an incremental $50 million in the second half. So, that was $20 million in Q3. We would expect that to increase by $10 million as we go into Q4, and that'll get us to the $50 million in the second half. So, we'll exit at about a $30 million run rate.

And can you expect that to be the run rate going forward?

Absolutely. And we hope we'll be able to add to that as we move into fiscal 2011. But right now, given what we know, that's our plans and our goal is to increase spending as we move through the cycle and we demonstrate the revenue growth.

Okay. Thank you, guys.

You're welcome, Bob. Thank you.

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

Good morning, everyone.

Good morning, Mark.

We picked up in the channel that there's -- electronic component shortages continue to be an issue. Sometimes they can get around it by offering a maybe a comparable product, maybe an upgrade. So, related to that, do you think that limited your sales? Well, can you confirm that? And then, if so, did it limit your sales growth in the quarter with some sales getting pushed out maybe? And then is it an industry-wide phenomenon that --

I would say that that did not impact our sales at all in the quarter. And in fact, we were able to work down some of the backlog in the quarter that we built in our second quarter because of electronic shortages and allocation. And our operations team and supply chain people have done just a great job bringing in the parts. And I would say right now, we're basically back to the normal flow and normal lead times. And I'm speaking now as of basically the end of July. So, we're not expecting any impact going forward. Obviously, there's always spot, one component issues that can bite you. But our team has really done a good job of working that.

We made substitutions as you mentioned. We did some redesigns in our engineering community. So, right now, we're not expecting any impact or seeing any impact from the allocation of electronic components, which is an industry-wide phenomenon.

Okay. So, you didn't lose any sales to competitors because of it?

No. No. We did not.

Okay. Good. And then final question. Ted, you talked about the restocking. You think it added about three points. Where was that restocking occurring? Because it doesn't seem like distributors are doing much restocking. Is this more end users picking up on their inventory? And would you expect maybe distributors to begin picking up their inventories if they haven't already?

No, Mark. Our comment this quarter, and in all previous quarters, when we talk about restocking is strictly what we see happening in our channel. And so, our distributors' inventories this quarter were up from last quarter. Our distributors' sales to their customers saw sequential increase. So, I would say most of that inventory increase was just a natural increase reflecting the increased business levels they were seeing. But as Keith mentioned, a little bit of that increase was us catching up on some of last quarter's customer service issues when probably the distributor's stock should have been a little higher at the end of last quarter.

Right. Okay. Thank you.

Thank you, Mark.

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

Yes. Good morning.

Good morning, Richard.

Keith, could you just talk a minute or two. You mentioned the Architecture Software business probably generated the upside surprise to the quarter in sales. Could you just talk about perhaps the verticals -- vertical markets that generated the upside to your earlier plan?

Sure. But just to be clear, the upside was across our product businesses, and that obviously A&S, to your point, is all a product business. But also, CP&S had very similar growth in the product businesses of industrial control and our drives businesses. So, it was across the product portfolio where we saw the -- what we determined to be overperformance from our earlier expectations.

Okay.

The verticals that we saw this in, really the continued strength in auto and tire that we believe certainly performed above the company average. Water and wastewater continued to perform very well globally. And the consumer products markets, in particular food and beverage, is where we saw the additional increase.

Okay. And then just as a follow-up question, in Latin America, that 40% growth that you flagged in local currency, is that primarily driven by the OEM business for you?

No. Not in Latin America. We do have a very solid OEM business there. But the majority of that would be in areas such as mining, such as oil and gas and a little bit in automotive and consumer. But, it's more of a resource-based region. And it's probably the smallest region for OEMs.

Got you. Okay. Great. Thank you.

Yes.

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. Just, firstly as clarification, the 3% restock, was that three percentage points of the 9% sequential, or the 25% year-over-year?

The 25% year-over-year.

And -- okay. So, effectively we're talking about a fairly de minimis contribution versus last quarter. Is that correct, Ted? Because last quarter was three and this quarter was three. Is that the way to think about it, the actual magnitude of the total is so small it's almost not nearly the significance?

I think that's a fair way to think about it.

So, on that point, just going back to this, you guys had expected effectively very little in the way of restock. Is that still -- given than point is that still -- did the restock effectively play out the way you saw it in the sense that what you saw restocking was a function of just higher volumes the way you thought would have been the case heading into the third quarter?

Correct. We expected little restock in Q3 because we thought we were going to see relatively flat product demand. Given that product demand increased the way it did, the restocking was a natural result.

Yes. No. That makes sense. I think some people may think the 3% is comparable to the prior quarter's three. Effectively, you're saying it's not. So, my other question is China. This could be for either Keith or Ted. So, last quarter China was up 15. It was okay, but GDP was up almost that much, and now it looks like you guys got a lot more traction in China. Was there a little bit of lumpiness in the China results in the sense that maybe what you had hoped to book in the prior quarter came through this quarter? Or are you just starting to see broader traction based on your new distribution channel? What's really going on? Do you think it can be sustained?

Certainly, I don't believe it can be sustained at 40%. But, you kind of answered it, John, and that is, as all of you know, our business is lumpy. And we always say, don't take the results of one quarter and project it. And certainly, we felt we were low last quarter. And once again, our goal is to grow north of 20% on an annual basis in China. And we fully expect to do that for an extended period of time. As we said a while back, we oscillate around a trend line. That trend line is 20% growth and I would say that last quarter was an aberration and this quarter the 40% happened. One, because of great performance, but secondly, some of those projects did push out a little and they came in in Q3.

So, we're expecting another solid quarter and continued growth. And to your point, we are building a channel distributors and systems integrators. That's a long-term process. But we do expect that to continue to get better and to help us reach a broader segment of the market and support a growing installed base. So they are very important. But I wouldn't say any one quarter, once again, is based upon a build-out of the channel. That is a steady continuous effort that you'll see as a long-term value creator for Rockwell in China.

Just lastly, Keith, what was the -- or Ted, what was the progression of business through the quarter and to what you've seen thus far in July? Was there lumpiness or was it steady or did it accelerate? Maybe even if you can inject a little commentary regionally in what happened.

Well, I'm not sure I can go regionally very well. But certainly we -- this quarter -- the third quarter is probably one of our most steady quarters, if you will. There's really no large deviation traditionally, if you will. And I think this quarter played out exactly like that, where we were able to see continuous progress. The last quarter, the last month tends to be stronger. But not significant like you will see in a September, or in many cases, a March.

So, this tends to be a pretty flat quarter. That's what this generally was. And I think that what we are seeing so far in July would be sales and order rates that are consistent with what our guidance -- the increase in the guidance that we gave. So, I would say a continuation of Q3 performance and what we baked into the increase in guidance.

Great. Thanks very much.

You're welcome.

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

Thanks. Good morning.

Good morning, Nigel.

Just wanted to again pick on the restocking comments. Can you maybe just talk about the data sales in the channel? Has that remained fairly constant?

I would say it has remained relatively constant. Our distributor inventories generally turn about six times a year and that has not changed significantly over the course of the last couple years. It ran up a little bit last year when sales were falling off relatively rapidly and has come down a little bit this year. But I'd say there's nothing unusual in the last few quarters about distributor inventory levels, given the level of sales they're seeing to their customers.

Okay, okay. That's great. And then turn to 4Q, the guidance, you mentioned the pickup in corporates. I think you mentioned incentive comp issue. How does that then look into 4Q? Do we see another pick up in 4Q or would you expect it to be fairly constant?

I would expect general corporate net to probably be about at the same level as Q3 or maybe slightly lower than that.

Okay. Then obviously, if you've gone to a point estimates of revenues in 4Q. But the margin range is still fairly wide. Based on the comment you just made on corporate expenses, it looks like you're forecasting the segment margin about 14 to 15 for 4Q. I understand you've got to pick the investment spend and probably a negative mix on CP&S versus A&S. But, any reason for the wide range on margins versus the point estimate on revenues?

Well, actually, I think -- I guess what I would have said is, I think we've got a relatively narrow range on EPS now, compared to where we have been earlier in the year. I wouldn't argue with your margin analysis and I would say the biggest issue in Q4 is going to be mix, particularly because we expect to see the largest increase in sales sequentially to be in our solutions business.

Okay. Great. Then just finally on pension, we were hearing a lot more chatter on pension. Can you maybe talk about discount rates and how that's shaping up for fiscal 2011 in terms of the expense compared to this year?

I'm not sure there's really a lot to talk about with regard to pension at this point in time. As a reminder, our funded status gets measured once a year at the end of our fiscal year in September. Like most companies, last year our funded status decreased due to the combination of reduced asset values and a lower discount rate. Asset values have improved somewhat so far this year. And it's probably a little too early to call discount rate. I would say based on the trends we have seen so far to date, it probably is slight -- looking slightly lower than it would have looked a year ago. All other things being equal, that would say there might be a small increase in pension expenses, consequence of discount rate.

Okay. When you say small, you mean the step up in pension expense next year will be lower than this year?

Well, I mean assuming we see a change in discount rate that is say, less than 25 basis points, that impact alone would be substantially smaller than the step up in pension expense we saw last year.

Great. Thank you.

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

Hi, good morning.

Good morning, Mark.

I'm just wondering if we could touch on just a couple of the things we normally do, which is some of the A&S categories, Logix increase, processor overall increase?

Absolutely. Obviously with the performance of A&S this quarter, you would expect that Logix had a good quarter, and in fact they did. Our logics business was up 36% year-over-year. And actually, the processor business, the total processor -- the Legacy processors were up even better, 39% year-over-year. And that was really driven by the strength in MRO and the small project business with some additional benefit from restocking.

So, I also just want to remind everyone that across the cycle, we're expecting that Legacy processors will continue their 10% decline. But, certainly, given the dramatic drop last year and the increases this year, we're seeing Legacy being a very solid plus contributor. But we're very pleased with the Logix growth, and in particular, compact Logix. And the fact that that continues to demonstrate the scalability of the architecture and the success that we're having continuing to convert and build our OEM conversion pipeline. So good performance out of both pieces of the processor family.

So, overall processors would have been a high 30s number?

Yes. It would have been about the same, mid- to high 30s.

Okay. And then, we had heard that you guys have recently established a more formal arrangement regarding some of your process control activities with E&H. And I'm having a hard time understanding how significant that could be if it it's really a different veneer on what you've already been doing, because E&H has been an encompassed partner for some time, or is this a pretty significant move that could accelerate process revenues for you guys?

Well, I wouldn't say it's a significant change in the relationship. I think it's a continued evolution of what we've been working on to where we're trying to continue to align the portfolio of instrumentation with the process control and to deliver an integrated solution and to do that seamlessly through our sales and a channel or a collective organization. So I think what you may be detecting is we're continuing to align all the geographies, all the regions, all the players together and that's something that just takes time and continued evolution. But that really was the goal and the strategy from day one. I think we're executing better. I think we're having -- I think we're also integrating the portfolio better together to where it's not just about sales, but also about delivered customer value from the asset management, the integration of the software packages and our ability to collaborate in the selling model, both at end users and OEMs. So, I think it's just a maturing of the relationship, a continued expansion of the interoperatability, the alignment of the networks.

E&H has come out with some very strong product portfolios that are connected on ethernet IP, which is a very significant advancement, to once again to create the integrated architecture and to have a information and asset management capability across the discrete and the process side. I think what you're seeing is more traction, more interoperability, more of our collective portfolios that play well together. And quite candidly, we just see that continuing to improve, and obviously the goal is that it grows both of our process businesses at a faster rate. And certainly that's what each of us are looking forward to.

Okay. And just a quick one for Ted. What will be a reasonable range for tax rate next year?

What we have said we are expecting in this cycle is basically to be a little bit below the kind of rate you saw in the last cycle. Now, if you remember in the last cycle, in the higher growth years we were in the range of 27% to 29%. So, we're expecting probably in this cycle, in the higher growth years to be more like in the range of 24% to 27%.

Okay. Thank you.

You're welcome.

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

Hi. Good morning.

Good morning, Steve.

Actually interested in the Legacy business being up so strong. Can you just maybe talk about what's driving that? Or are customers trading down a bit? Is it a function of the kind of revitalization of the auto industry? And if you can maybe also talk about what your auto growth was in the quarter sequentially and year-over-year?

Well, certainly we believe the strength in Legacy was driven by -- mainly two items. MRO, because it has a huge install base and certainly, as the continued strength in manufacturing occurs, those assets are being used and need to be upgraded and maintained. And the second is, once again, the fact that we have such a large installed base. When they're doing small upgrades locally in an area that had the older systems in, many times they choose to just keep that current vintage of product. So, it really doesn't have anything to do with trading down. The functionality and cost really are not a driver between the two platforms at all. It's more of what the customer wants to try to do. What the customer is trying to do for their long term architecture and control strategy. So, we -- it's strictly, from our perspective, the recovery of manufacturing and the need to support an installed base and support of small modifications and adds to existing lines.

Okay.

With respect to auto, auto was above the Company average year-to-date and in the quarter. It was up a little bit sequentially. But certainly the strength -- and we talk about it as transportation, so we lump tire in there -- and tire has been very strong and in particular, in Asia this past quarter and globally the past year. So, I think that those are the two combinations there.

Okay. And then just on corporate. How do we think about that? I hate to ask about corporate, because it just seems like it's a little bit of a rounding error. But now that you've mentioned two quarters in a row where you're putting some performance-based comp in there, does that go up next year on the back of the performance-based comp and then maybe a little pension? How does corporate turn over the next couple of years? And then just one clarification on tax, I think you said 24% to 27%. How quickly do we get to that 24% to 27%? Is 2011 thought of as more normalized now that you've ramped off the bottom pretty hard?

I think I'm going to try and avoid starting to provide line items of 2011 guidance. But with that said, the general corporate net expense, I think, is probably a little higher run rate this year than I would expect once we get past this year as a consequence of performance-based compensation, which will basically reset at the end of the year. In terms of the tax rate, generally I think in the cycle, as we hit the higher growth years, we're going to be in that 24% to 27% range and my guess is, but this will play out depending on each year, my guess is it will ramp that way across the next couple of years.

Okay. Great. And then one last question. You guys have done a great -- this quarter in China was good and that business has, due to the investment, undergone a pretty positive face lift over the last couple of years. How much more do you need to do there? Is that a big percentage of the ongoing cost you'll have coming back in over the next couple of years?

We believe we still have a lot to do in China. We believe there's a lot of opportunities, and as I mentioned a little bit earlier, we have to continue to build the channel. But in addition to that, we have to build our own capabilities and if we're going to have growth rates above or around 20%, we need to continue to add domain expertise and capabilities, and certainly China is one of the areas where we would expect to continue to be investing at a disproportionately higher rate with respect to our emerging market strategy and customer-facing resources. So, that -- China will continue to see strong investment and we believe, given the growth of China, more to consumption. We think it's even a better opportunity for us in the long term. So we will continue those investments and you can expect that -- a portion of those incremental dollars into the future will be in China.

Great. Thanks a lot.

You're welcome.

Your next question comes from the line of Rich Kwas with Wells Fargo Securities. Please proceed.

Hey. Good morning.

Good morning, Rich.

Ted, quick question on the added costs, how does that split up by segment? I know you mentioned A&S had some this quarter, but where is it landing mostly?

I think it would be fair to say that a little more than half of it is in A&S.

Okay. All right. And then big picture question for Keith. If you think about MRO's been a nice positive here the last couple of quarters. Assuming the comps start to get more challenging and the contribution a little less significant, and given your comments regarding developed markets with project-type business, how should we think about the bridge from increased MRO to project-related stuff? And where is your current thinking there right now given what you are seeing in the market?

Yes. Well, certainly our thinking is that MRO expansion can only carry you so long. So, at least from a incremental growth perspective, and we do need and we do expect the larger project spending to occur. We have seen pickups for the continued growth that we're talking about. We have seen pickups in the front log on these large projects. People are still cautious in pulling the trigger. And I think they're just waiting to determine, or to have, I should say, a little more clarity and a little more certainty in what both economic environment looks like, as well as the regulatory environment to know what are the implications longer term of those investments. But, we certainly believe and we think we are on that path towards increased project spending, particularly in the mature markets into the next year.

Okay. Great. Thanks so much.

You're welcome.

Your next question comes from the line of Jeff Sprague with Vertical Research Partners. Please proceed.

Thanks. Good morning, gentlemen.

Good morning, Jeff.

How's it going?

Doing well.

Couple quick questions. Just on that last point, Keith, are there any particular vertical markets that stand out as where the front log is building when you think about the large project business?

Yes. We've started to see a little more pickup back into the oil and gas area in our third quarter. Also, as we had mentioned with some of the growth in Latin America, we're seeing the mining areas and resource-based areas picking up as well. And so, I guess I would say, in general, we're seeing it now starting in some of the heavy industries, not necessarily in metals and pulp and paper yet, although there's a little more activity. But certainly those other heavy industries is where we're starting to see the pickup, with continued solid spending in infrastructure that we have seen earlier.

And the flip side of another coin, when you talked about your A&S verticals, the strong ones, it sounds like everything was broadly pretty good. But in the quarter, were there any in particular that stood out as lagging?

Lagging, and it wouldn't just be just A&S commentary, it would be a vertical in general. Certainly, we believe Metals continues to be weak and Life Sciences is stable, but not a lot of additional spending going on there yet. So I would say those are the ones that are the weakest at this point in time and probably will continue to be a slow growth model going forward. And certainly, I would say the other area that just can't keep running at the rate it had been would be some of the infrastructure spending that was a key part of the China stimulus. That is just going to -- I'll just say ramp down to a normal run rate which is still solid growth. But when they executed their stimulus, what they did was pull forward projects that were already planned and certainly accelerated those and that'll continue to play out. But their infrastructure investment, I will say, will come down to a normal pre-stimulus spending as time goes on.

And just one last one for me. I wonder a little more granularity on Europe, if you can give us a sense of how much the E, if you will, grew in EMEA? If you think about just western Europe in general and just the Texture of that growth, too, was it OEM, was it export oriented? What's going on in the heart of Europe?

Well, actually there was some good news in the heart of Europe. There was growth in the E, if you will. In particular, we saw very strong growth, year-over-year growth in Germany and Italy, in particular. And I would say the reason for that, Jeff, is OEMs. And a bunch of that export as well. So, I think exporting Europe, OEM Europe is doing well, and certainly some of the other spaces, as probably you know, are little tougher. But we did see it in Europe.

And we have the other growth area probably in the quarter that was stronger than others, would have been what was in the Middle East from an emerging area. So that -- those were the highlights in EMEA. And certainly, we're pleased with the growth there. As you know, for us, Europe turning down later than the US, and we think now it's probably on a recovery, but a couple of quarters behind the US, just like it was a couple quarters behind going in. So we are starting to see life back in European region.

Perfect. Thanks a lot.

You're welcome.

Haley, this is Rondi. I think we can take two more callers, but we've got to make each one pretty quick so we can get it in the next three minutes or so. So, let's try and take the last two.

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

Thanks and good morning.

Good morning, Scott.

I think most of my questions have been answered. But I did want to take a little bit of a step back and just get your view, Keith, on how this cycle is playing out compared to past cycles that you've witnessed on the automation front? The mix shift between capex, the interplay between capex and opex and the pace of recovery and just a little bit of a, maybe big picture view from somebody who's been in this industry a long time.

Well, I maybe have been in it a long time, but all of these tend to become somewhat unique in what you think versus how it plays out. So, this one -- I think what surprised me after how fast it dropped was how fast, at least the initial rebound, came back. In particular, as we have been saying now for the last couple of quarters, the product business exceeded our expectations. Certainly, we knew that it was at an unsustained low level. But I think the speed of the product recovery certainly surprised us given the drop that we saw 12 months ago. I would say the other difference that we're seeing compared to other recoveries, I think there is less -- it's less aggressive of the return of the, I'll say, larger project spending. And we seem to, with -- I think there's just too much uncertainty in the environment and there's lots of dimensions to that.

But there's more cautious in the -- in companies wanting to spend more money at this point in time. And I think they're trying to continue to drive productivity, continue to drive their existing assets and resources even harder. And I would've said that in a normal recovery that comes back at this rate, you would've seen a more aggressive, larger project pulling the trigger on it than we're seeing at this point in time. I think those are the two big picture activities that we've seen and that we're obviously monitoring very closely to once again try to determine what the shape is ultimately going to be. So, it is -- and that larger project commentary is really around the mature markets.

I would say the other thing that is different this time is that the world is much more connected in this cycle than in previous ones. The economies, the supply chains, the international businesses. There's just a much more global picture of the way decisions are made and the way the action, reaction occurs. And so I would say it's a much more integrated economy, businesses and all the other dimensions around it. And I would say that's very different than early in my career. And it's very different than just 2000, 2001, 2002. So, I would say that's another significant difference and we only see that getting tighter and tighter as time goes on. So, I think the synchronization and the connectivity across geographies, across regions, across industry and within industry is a significant difference.

That makes a lot of sense. I guess one thing to -- well, actually, I don't want to waste a question on that. Let's move to just quickly, China. We keep read being wage inflation as a potential driver of automation. But is that real? Or is this just more isolated areas in the trends to automate were in place prior to recent labor unrest?

I believe the salary increases will accelerate the move to automation. But China was investing in automation early on. And there's only so much you can do with -- I'll just say labor. No matter what the cost is. And as you continue to want to move up the value chain, continue to want to build world class products with high quality, you do need to automate a lot of those applications. While the intensity of the automation may be different, that's really the only difference based upon wage rates. And I think that intensity now, given the acceleration, you will see more people looking at additional areas that perhaps before were marginal, they may become a net positive for the need to automate.

China's been automated. Some of the most automated plants in the world. I was just in one a couple weeks ago in China. It's the world's most automated nutritional plant. And they're doing that because of quality. Because of regulatory compliance and because they want to protect the image of their brand against the problems you have in other circumstances. I hope it'll be an accelerant, but China's been continuously investing.

Yes. That's very helpful. Thanks, guys.

Okay, I did say we'd take one more caller. So, let's do it. We are a bit over time, but let's try and make it quick, okay?

The next, or the final question comes from the line of Julian Mitchell with Credit Suisse. Please proceed.

Yes, thanks. Yes. You're running late, so just a very quick one. Was really on your emerging market strategy. Obviously, you're building out costs organically, given a lot of what you sell goes through distributors, and you've got a very financially undergeared balance sheet. I just wonder what your approach was to acquiring in the emerging markets in order to accelerate your footprint there on sales and the distribution network?

Well, two answers there. With respect to the distribution network, that is not something that Rockwell Automation invests in and we are not planning to invest in that in the emerging markets. We work hand in hand with our channel partners, but those are independent businesses so that they can support the full needs of customers. And certainly, that's a model that has worked for us and we expect that it'll continue to work, and it has to date in many of the emerging markets that we've been in for many years, not just the new ones that we have to build in China and India and other areas.

With respect to other acquisitions, absolutely. We are looking for acquisitions in the global marketplace. Emerging markets is where a lot of our focus and interest is. But, also, in some of these markets there's not a lot of mature technology players at this point in time. So, a lot of our activity has been around domain expertise and people that can help us deploy automation systems. And we continue to evaluate the product portfolios of different companies and we would see making acquisitions outside of the mature markets as we can find players that have the quality, the IP protections and the expertise to fill gaps that we have in our portfolio. So, acquisitions very interested in our product services and solutions area in the emerging markets.

Thanks.

You're welcome. Thank you.

Okay. Thanks, everyone for joining us. We're going to wrap up the call and we look forward to talking to you next time. Thanks.

That concludes today's conference call. At this time you may disconnect, and thank you.