洛克威爾自動化 (ROK) 2011 Q4 法說會逐字稿

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference 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 proceed.

Thanks, Stacy. Good morning, everyone. Thank you for joining us for Rockwell Automation's fourth-quarter fiscal 2011 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.

As always, 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 on the Company's performance in the fourth quarter and the full year, plus his reflections on fiscal '11 and the year ahead. Then Ted will provide more details around the fourth quarter and full-year results and our guidance for fiscal 2012.

We'll take questions at the end of Ted's remarks. 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 will hand the call over to Keith.

Thanks, Rondi. Good morning, everyone, and thank you for joining us on the call today. I appreciate your time and interest in Rockwell Automation.

The first portion of my remarks will cover the highlights for the quarter and the full year, so please turn to page 4 in the slide deck. The fourth quarter capped a year of outstanding sales and earnings performance. All regions performed extremely well.

In the emerging markets, year-over-year growth rates moderated, as we anticipated and discussed on the last earnings call, but sequential growth was solid at 14%. Great execution in our Solutions businesses resulted in a very strong quarter for the Control Products & Solutions segment.

On total Company sales growth of 22%, earnings per share grew more than 50% to $1.39. So in every dimension, another excellent quarter.

We have a lot to be proud of in 2011. In the midst of pockets of economic turmoil, social unrest, and natural disasters, we hit on all cylinders.

For the full year, we had record sales of $6 billion and now have exceeded peak sales from the previous cycle. Logix sales grew 29% reflecting the success of our plantwide optimization strategy and continued penetration both in process applications and with OEM customers.

Emerging markets grew over 30%, reaching 22% of total sales despite strong sales growth in the US and Europe. Sales growth for the year of 24% is noteworthy; but earnings per share growth of 57%, more than double our sales growth rate, is even more impressive.

Continued strong cash flow and a healthy balance sheet enabled us to fund organic growth, make two acquisitions, significantly increase the dividend for the second consecutive year, repurchase 4 million shares, and make $450 million in discretionary US pension contributions in September and October.

The performance this past year is evidence that not only is the strategy right but our team is executing extremely well. I want to thank our employees for their dedication in making this year possible, and our customers and partners for their continued support.

Let me shift gears and talk about the future. Although it is hard to know exactly how this business cycle will play out in the near term, the long-term outlook is bright for the automation market and for Rockwell Automation in particular. There is an ongoing need for automation investment in developed markets to drive productivity and manufacturing flexibility, to address safety and sustainability needs of customers, and to replace an aging installed base.

In emerging markets, the case for automation is even more compelling. There still is a need for infrastructure investment such as metro systems, port facilities, and water/wastewater treatment plants. Oil and gas and mining investment remains healthy and is critical to the economic development of emerging markets.

Rising standards of living, including a rapidly growing middle class, will increase the need for consumer products manufacturing. And wage inflation is a natural tailwind for automation investment.

The time I spend with customers reinforces my confidence that we are extremely well positioned to capitalize on these trends. Our relentless focus on developing innovative solutions to our customers' business needs enables us to constantly expand the opportunities available to us.

Let me give you a flavor of the broad range of applications for our technology. A PlantPAx system used to standardize process control for resin reactors used in paint manufacturing for a customer with 12 plants around the world. A turnkey solution for control and remotely monitoring various bitumen extraction sites spread across northern Canada. A complete solution including design, engineering, commissioning, validation, and product trials for a manufacturer of baby milk in China. An integrated process and power control system for high-altitude mining in the Andes. And converting a European tire machine builder to a common platform for motion, safety, and control.

Our customers look to us for our innovative designs, deep domain expertise, and thought leadership. We are committed to supporting our customers from the idea stage through the total life cycle of their automation investment.

I have never seen better alignment across our global organization around our strategic priorities. We care about how customers judge our performance, just as we care about how investors judge our performance. We are confident that when we satisfy our customers, our shareowners benefit.

So let me give you our thoughts about fiscal 2012. The global economic picture is pretty cloudy these days.

In mature markets the outlook is for low and uneven growth. Some are even predicting a mild recession in Europe. In emerging markets growth rates are expected to moderate.

Customers are spending now; but we are hearing a more cautious tone about their spending outlook. It's possible that customers may adopt a wait-and-see attitude on CapEx in early calendar 2012.

Despite this uncertainty, we expect the recovery to continue in 2012. We feel great about our market position and our opportunities. We have demonstrated success in our key growth accelerators, and our new product pipeline is as robust as it has ever been.

With all of that in mind, for fiscal 2012 we are projecting sales of $6.2 billion to $6.5 billion, growth of 5% to 9% excluding currency. Based on this sales outlook, we are providing fiscal 2012 earnings per share guidance of $5.00 to -- $5.05 to $5.45.

We enter fiscal '12 from a position of strength, technology leadership, talented and dedicated employees, expanding opportunities, and a strong financial position. We will remain flexible and adjust to the underlying economic environment as appropriate.

We proved during the downturn in 2009 and the recovery in 2010 that our management team is nimble and knows how to take actions that balance the long-term health of the Company with short-term economic realities. Our strategic priorities remain the same and we will continue to invest in our best growth opportunities.

Before I wrap up, I hear that we are expecting a full house at the investor meeting during Automation Fair in Chicago next week. For those of you who haven't been to an Automation Fair, we expect to host over 10,000 customers and partners from all over the world.

It is a great opportunity for us to showcase our capabilities, provide technical training, and facilitate best-practice sharing among customers. We will take you on a hosted tour of the show floor and then hold a webcast where you will learn more about our strategy and how we help our customers from me; Frank Kulaszewicz, the head of our Architecture & Software segment; Blake Moret, the head of our Control Products & Solutions segment; and John McDermott, the leader of our Global Sales and Marketing team. We are really pleased that so many of you are taking advantage of this opportunity to learn more about us, and we look forward to seeing you there.

So with that I will turn it over to Ted to provide more details on the financial results for the quarter and our outlook for 2012. Ted?

Thanks, Keith. Good morning, everybody. As usual, I'll start with the Q4 results summary that is on page 5.

Sales in the quarter were $1.654 billion, an increase of 22% compared to Q4 last year. The year-over-year impact of currency translation increased sales in the quarter by approximately 4 points and acquisitions added about another point.

Segment operating earnings were $298 million, an increase of 45% compared to last year. General corporate net was $22.2 million; that is down from $27.4 million a year ago. The effective tax rate in the quarter was 21.2%.

Diluted earnings per share was $1.39, an increase of 53% compared to $0.91 in Q4 last year. Average diluted shares outstanding in the quarter was 144.4 million; and in Q4 we repurchased 1.3 million shares at a cost of approximately $78 million. For the full year we repurchased a total of 4 million shares at a cost of $299 million.

Turning to page 6 now, Q4 results, Rockwell Automation total. On the left side of this slide you can see the sales results for the past several quarters.

It's been a steady upward trend with a particularly strong sequential increase in Q4. As I noted on the previous slide, in Q4 sales were up 22% year-over-year and they were also up 9% sequentially.

Moving to earnings on the right side of the chart, consistent and significant improvement in earnings as well. Segment operating margin has continued to expand and increased by 2.9 points year-over-year to 18%.

Sequentially, operating margin improved by 0.6 point. The year-over-year improvement in operating margin reflects volume leverage partially offset by mix and increased spending to support growth. I'll cover this in more detail later, but our Solutions businesses had a great quarter; and that sales mix created a bit of headwind to operating margin in Q4.

The year-over-year incremental margin was about 31%. That is an improvement from Q3 as we reflected in our guidance last quarter. We experienced higher conversion margin in both segments.

Although it is not displayed on the chart, our trailing four-quarter return on invested capital was 31.6%, another record result.

Moving on to page 7, this slide summarizes the fourth-quarter results of the Architecture & Software segment. Architecture & Software sales were $683 million in the quarter, a year-over-year sales increase of 19%. That included about 5 points of growth due to currency translation.

Sequentially, sales increased by 2%. Operating margin in this segment for the quarter was 26%. That is up 3.7 points compared to Q4 last year. So a very good quarter in all respects for Architecture & Software.

The next slide, page 8, covers our Control Products & Solutions segment. CP&S sales in Q4 were $971 million, a very strong year-over-year increase of 24%. About 4.5 points of the increase was due to currency translation and about 1.5 points from acquisitions.

I mentioned earlier the strong sales results in our Solutions businesses. We had extraordinary execution in these businesses for the quarter.

Sales in our Solutions and services businesses increased by 27% year-over-year, while sales for the product portion of Control Products & Solutions increased 21%. We normally experience significant growth in the Control Products & Solutions segment from Q3 to Q4, but this year was particularly strong with 15% sequential growth.

Moving to the right side of the slide, segment operating earnings increased 57% year-over-year, and we saw significant operating margin expansion year-over-year and sequentially.

Page 9 provides a geographic breakdown of our sales in the quarter. I'll focus my comments on the far right column, which displays the year-over-year growth excluding currency effects. Just a great growth across all regions.

The strongest growth was in the Americas. The US and Canada had a really strong end to the year. Latin America grew 23% year-over-year, and we were pleased to see another very solid quarter from EMEA and Asia-Pacific, with growth in the mid-teens.

As Keith mentioned emerging market growth rates decelerated a bit this quarter on a year-over-year basis, but still healthy, in the high teens excluding currency. And that result is consistent with the expectation we discussed on the third-quarter earnings call.

I'll turn now to page 10, free cash flow. Free cash flow for the quarter was $137 million. That represents conversion on net income of 68%.

The free cash flow result includes the impact of a $150 million pretax contribution in September to our US pension trust. Excluding the after-tax effect of that contribution, conversion on net income would have been 130%.

Year to date, free cash flow is $562 million. That represents conversion on net income of 81%. If you exclude the discretionary pension contribution, conversion for the full year would have been 96%, pretty close to our 100% target.

We also made an additional discretionary pension contribution of $300 million in October. The contributions in September and October were in response to continued declines in the pension discount rate and a consequent increase in the underfunded status of our pension plans.

With these contributions we feel the plans are appropriately funded. Obviously, future require contributions will depend on future discount rates and asset performance, along with some other factors. But we expect these contributions to cover any otherwise mandatory US contributions for about the next few years.

So that is the fourth quarter. Let's move to page 11 for a summary of the full-year fiscal '11 results. Keith touched on much of this, so I will be brief.

Sales reached $6 billion for the full year, up 24%, with organic growth of 20%. So fiscal '11 was the second year of a pretty robust recovery on the industrial side of the economy and very good execution across the Company. This result puts us above the prior cycle peak sales.

Segment operating margin for the full year was a little over 17%. We view that as a very good result at this point in the recovery.

Diluted EPS from continuing operations was $4.79. So on a 24% increase in sales, EPS from continuing operations increased 57%. And we have already covered cash flow, so let's move to page 12 and discuss the outlook for fiscal '12.

I'll start with some anticipated headwinds and tailwinds. Related to sales performance in fiscal '12, we believe that macroeconomic conditions will be a headwind.

Global economic growth is clearly moderating. We expect to see flat to low single digit GDP growth in the mature markets and somewhat slower growth than in fiscal year '11 in the emerging markets. Overall, a significantly less favorable growth environment than we experienced last year.

In addition to the moderating growth, as Keith discussed, there is considerable uncertainty in the global economic picture, and we think that may cause customers to be cautious in regard to their capital spending plans in fiscal '12. We also expect currency to be a modest headwind to sales in fiscal '12.

On the tailwind side for sales we have the benefit of a solid baseline as reflected in our run rates from the second half of fiscal year '11. For earnings, currency will be a headwind. We also have a headwind to earnings in the carryover impact of fiscal year '11 spending increases; and we plan some continued investment in fiscal '12 as we continue to see top-line improvement.

We also expect a significant earnings headwind due to a higher effective tax rate. For the full-year fiscal year '11, our effective tax rate was 19.7%. For fiscal '12 we expect an effective rate of about 24%.

We benefited from some significant discrete items in fiscal year '11. Our underlying effective rate in fiscal '11 was more like 22% to 23%.

Earnings tailwinds include higher sales volume and a reset of incentive compensation. Given our financial performance in fiscal '11, last year was an above-average year for incentive compensation.

We expect to be back to more typical levels in fiscal '12. As I have mentioned previously, our incentive compensation is very broad-based and covers virtually all of our employees.

Finally, we're expecting an earnings per share tailwind from lower share count.

So turning now to page 13, this slide summarizes our fiscal '12 guidance. Our sales outlook is a range of $6.2 billion to $6.5 billion. Excluding currency effects, that represents a year-over-year increase of between 5% and 9%.

We expect currency to reduce sales by about 1 point in fiscal '12. We're assuming that currency rates for the year will be about equal to the rates we experienced in October. As one benchmark in that regard, the guidance assumes a euro of $1.37.

We expect segment operating margin to be about 18%. Based on these planning assumptions, we are projecting diluted EPS of between $5.05 and $5.45.

I have addressed the effective tax rate expectation; and although it is not displayed here, we expect general corporate net spending of about $86 million. That is about $5 million higher than in fiscal year '11. The increase is primarily because we had a $4 million gain on the sale of an asset in fiscal year '11.

Finally, we expect free cash flow conversion of about 75% on net income. That includes the effect of the $300 million discretionary pension contribution that we made in October. Excluding the after-tax effect of that contribution, we expect free cash flow conversion of approximately 100%.

With that, I will turn this back to Rondi and we can begin the Q&A session.

Great. Thanks, Ted. Before we start the Q&A I just would like to remind you that we do want to get to as many of you as possible, so if you could limit your question to just one question and a follow-up, and then get back in the queue if you have a question on another topic. So, Stacy, let's open the lines and take the first question.

(Operator Instructions) Steve Tusa, JPMorgan.

Hey, good morning. Can you just maybe go into a little bit more of what happened in Control Products & Solutions in the quarter? You mentioned that it was a pretty strong sequential increase. Was there a region or an end-market that you saw particular strength in?

No, I think the strength was broad-based. But the uniqueness of Q4 in our Solutions business was -- generally speaking at the end of a month, the end of a quarter, there is not necessarily total certainty on which projects will clear, and which ones will clear based upon witness testing, based upon customer requirements, based upon shipping and the ability to recognize revenue.

So we normally expect, I will just say some discount from what would be in the plan. And this quarter was one of those that is just unique about the fact that everything cleared. So not only didn't we have the discount, but we had the over-performance that went away.

I think it is just an example of the variability that happens, certainly in our Solutions business. And I think there is good and bad news here.

The good news here is it was a great quarter, and certainly we also had a very strong quarter of orders. So, you know, the book-to-bill was just under 1 and normally in our fourth quarter it's a lower number because we always outperform shipments versus orders. But we had a very strong orders month, so we are pleased with that, in addition to the great sales.

The bad news part of it is we probably created a gap in Q1 because of that strong shipment that normally would have flowed into Q1. We now have that as a gap; but we don't see any problem in the full year because of the strong orders. But we aren't going to probably be able to fill that gap completely in Q1.

So a lot of positives there, but certainly it will create a short-term gap. But no specific industry, no specific geography. Just very, very good execution by our entire team on a projects business that is inherently lumpy and uneven.

Right, and so that explains why you just can't take the fourth-quarter revenue rate and multiply it by 4, which gets to beyond the high end of your revenue range. So that is basically what you are saying? That there is actually a little bit of, for lack of a better term, seasonality here from fourth quarter to first quarter that usually doesn't occur.

Or is that just conservatism? Because typically in an upturn you guys don't really have too much seasonality in these businesses.

Well, we normally have seasonality in the Solutions business in Q4. So that's typical, quite frankly. I would say this amount of it was untypical.

Okay, okay.

And I would also say we are not conservative in our outlook.

Okay. Thanks a lot. See you next week.

Okay. Looking forward to it, Steve.

Jeffrey Sprague, Vertical Research.

Good morning, everyone. Hey, just following up on a similar tone, so it does seem extraordinarily strong. You addressed it head on, on Control Products & Solutions. But can you also just put some context around A&S and how it finished September and what the October performance was like?

And if you are actually seeing yet some of this caution that you mentioned about customers' CapEx plans, or is that just more your expectation? Are you actually seeing that in some of the early bid and proposal work?

Well, with respect to A&S in general, our Products business including A&S had performed better than our expectations in Q4. So we had year-over-year growth as well as sequential growth in our Products businesses. So certainly not as strong as the Solutions, but continued positive momentum there.

With respect to how is it performing now and what are we seeing with respect to our customers, cautious, through October we have not seen a change in our customers' buying behaviors. I think most of the -- so at this point in time, we are not seeing that.

What we are getting a question about is, as they are planning for 2012 and how are they going to set their capital spending for the new year, they are becoming a little more cautious in what they are seeing in the environment. And therefore, as you know, uncertainty is not the friend of investment.

Certainly one can say at a minimum we have had some uncertainty; and at a maximum, it has been quite chaotic in the evolution of the macroeconomic environment. So I think it is more of an expectation that we are feeling as we go into the new year and budgets get reset, as opposed to anything we are seeing at this point in time reflected in our order patterns.

Just as a follow-up, the pricing that you put in place a couple months back that you hoped to be near forward realized at this point in time, is that in place? And is there more in 2012?

Well, Jeff, I would say that the pricing we said we would implement we did implement. I would say it is going pretty much as we expected.

The thing I would remind you is a lot of our customers are under annual contracts so the effect of that price increase we put in -- either in August or September depending on the region of the world -- the effect of that will roll out over the course of the next 12 months.

Great, thank you.

John Inch, Bank of America.

Thanks, good morning. I guess we know 3M's weak factory automation markets aren't the same as discrete automation PLC architecture. That is my comment.

Okay. Keith, could you talk about Europe? First maybe you could remind us, because I know you give EMEA, what is your Continental Europe exposure?

And just maybe a little bit more color on, say, your cost position, how you are thinking about the prospects of a mild recession in Europe. You did show a little bit of deceleration in your EMEA results, so I am just trying to understand -- are you preparing for possibly some cost actions? Do you feel good about your cost structure?

Just how are you thinking about things at this juncture heading into next year against the backdrop of your guidance?

Well, I mean you hit the one area where we have probably the greatest concern and I would say the greatest uncertainty. Europe, it is hard to speak in Europe as one. Certainly at a minimum there is a divide between North and South Europe.

South Europe for the last half of the year was performing weaker than the North. When I say the North, I mean Germany, the Scandinavian countries in particular. So, we are seeing a difference within, I will just say Western Europe.

The outlook there is certainly a slowing. In particular, we know that European OEM machine makers will have a slower growth than they did in 2011. Some of the industry organizations have forecasts that indicate there will be a slowing from very high levels to, I will say, a lower growth rate; but still growth.

We certainly know talking to our OEMs that while they are running at very high levels and they are certainly stretching us coming up to their capacity heads, they feel good about the next quarter; but I think as we roll into calendar 2012, they have less visibility. And as I said, those industry statistics indicate that it will be slowing.

Some people say Europe is going to be in a recession. That's -- I think we are certainly on the edge if you look at some of the recent PMI information. Some of the industrial production is certainly slowing.

And how they work their way through the debt crisis I think will tell us which side of zero do they fall on. At this point I think it is just a tough call.

We like our position in Europe. We think we have growing share there this past year, as evidenced by the very strong growth we had year-over-year.

Obviously, it is not our most -- it is not where we are the best positioned given our most -- our strongest global competitors that is their home country.

But we like our position. We like our differentiation with our integrated architecture and our intelligent motor control. And as we are growing our solutions and services capabilities, these are all opportunities for us to grow share in an area where we are definitely not the leader.

So we like our position, we like our differentiation, and as I mentioned earlier that team there is functioning really well, executing the priorities and winning in the areas that we have targeted for growth.

Then, Keith, what are you seeing in China? Is some of that economy's attempts to slow to combat inflation, is that showing up in your results this quarter or the way you are thinking about your outlook? I realize you called slowing emerging markets, but could you -- China is very important to you. Could you talk about China specifically?

Yes, certainly, John. Well, we had talked about that China would be a tough comp in Q4 given I think we had 40% growth Q4 last year. So actually we are very pleased with the 10% growth in China that we had this quarter.

But we do see the moderation. I think there is the second and third tier companies and some of the credit capabilities that are going on there create a natural slowing and braking effect. Obviously as you well know they have some inflation issues that they are trying to manage as well.

But next year, we expect China to grow in the mid to high teens, which we think is continued very good growth given the growth we have had in the last couple of years. And that is a continued outlook of good opportunities in both the OEM sector as well as the consumer industries continue to grow in China; that will be helpful.

I would say that we had good orders growth in Q4. Once again from our perspective, I would say it appears at this point in time anyways that China will have managed with the soft landing through another one of the bubbles that seem to always -- not always, but have come about over the last couple of years. So we have a positive outlook for China at this point in time and we expect to continue to not just grow, but to take share -- particularly as some of our newer products are introduced over the next fiscal year.

Great. Thanks, Keith.

Julian Mitchell, Credit Suisse.

Thanks. Yes, my first question was around -- I guess if I look at the mix of your revenues, if I look at CP&S as a share of your sales year on year, it was around a similar proportion to what you had in fiscal Q2. Also your Solutions growth year on year in fiscal Q4 was similar to the year-on-year growth rate in fiscal Q2.

But there is a markedly different performance in Q2 and in Q4 in terms of segment incrementals and in terms of your year-on-year gross margins. So I guess part of that difference comes from the sort of anniversary effect from cost growth investments. But a decent chunk of it should also come, I guess, from areas like the price cost or the mix of the types of solutions that you're recognizing as revenues.

Could you talk a little bit about those last two points please, the price cost and the mix within solutions? How that mix is? Thanks.

Yes, I mean I'll touch on it, although I think you just went through a pretty good explanation of most of the difference, Julian. I mean I think the two things I would point out in a comparison of Q4 versus Q2 margin performance would be -- one is just the absolute volume and the leverage that that brought along with it. And two is, we did have a little bit better price performance Q4 versus Q2, and a little less inflation impact Q4 versus Q2.

Okay. On the inflation impact, there are stories like magnet costs for some automation companies are up 10, 15 times year on year, this kind of thing. Could you just give an update on how the major materials are moving around for you?

Yes. I mean I think we have talked before about commodity price inflation. The things that affected us in larger ways last year were copper prices, silver prices, and particularly rare earth materials in one very unique slice of our business. Obviously, some of those prices have moderated since Q2, although I think year-over-year we will still see a headwind from inflation related to all of those.

In part, that is why we put through the price increase that we put through was to help get back closer to parity, given the increases we were seeing in those areas.

Okay, thanks. And just lastly, obviously automotive is an important segment for you guys. But the trends look very different region by region. Brazil OE production is slowing. China maybe it has sort of troughed and is picking up.

I realize guys are more tied to new model introductions and what that means for production lines. But could you talk a little bit about what your auto OE customers are thinking about CapEx when they're looking at next year? Thanks.

Sure. Well, we think next year is going to be a good year from what we know today with respect to capital spending. We think Toyota in particular will grow their capital spending. Obviously they had some challenges this past year that they had to address just from a recovery from a very significant disaster and the strong yen. They certainly managed this capital spending this next year -- or last year. So we expect that to be increased.

Also, GM as they continue to come back strong, we expect that they will continue to invest in new platforms. Certainly Ford and Chrysler -- I should say Ford was spending throughout the cycle, so we would expect Ford to be consistent. And Chrysler Fiat is also looking at increasing their cap spending on a year-over-year basis.

So right now we believe that we will see slightly more automotive spending in our next fiscal year. Certainly we think that we will be able to achieve growth in that area given our historical strength and our continued working of that, in particular in the emerging countries; and you have mentioned a couple of them. Brazil and China are very important in the automotive manufacturing vertical.

Okay, thanks.

Mark Douglass, Longbow Research.

Good morning, everyone. Keith, looking at the mix of sales this last year, do you have a sense of how much was for capacity expansion versus replacements and upgrades of the installed base?

I think -- I mean the answer is -- not precisely. But I would say I think a very good way to think about it is basically all developed countries -- so that would be Western Europe, the US, Canada in general, although Canada with some of the strength and mining and oil is not totally true -- but basically all of that spending is for either modernization, productivity, or cost reduction. And certainly the vast majority of spending in emerging markets is for capacity expansion.

I think at a first-order look I think that is a fair characterization of how we think about it and how we believe the spending occurred. So just look at our sales in Latin America; in the majority of -- probably about 70% to 75% of Asia-Pacific; and probably about 20% in EMEA, and view that as emerging countries and therefore capacity expansion.

Okay. Then related to that on the replacement cycle, I assume you are still thinking there is going to be room for that in 2012. But then how much of that, especially in process markets, are you baking in as far as share gains? Do you know what share gains had been? What do you think they were in '11?

Well, certainly in the process space, once again in particular in the mature developed economies, the majority of the investments -- if you are not talking about maybe some of the new oil shale or mining that is going on -- the majority of it is replacement and modernization. And we do know that there is a large percentage -- not a large -- a large dollar amount, tens of billions that is basically legacy and old process systems that are at end-of-life.

That is one of the areas that we have targeted for our process growth, simply because a lot of those systems are no longer replaceable, if you will. There is not a migration because they are old systems that are no longer supported.

We see that as the opportunity for us to be able to demonstrate the value of plantwide optimization. And in particular after 20 to 30 years where DCS systems were the only way to solve and to support that customer, today a Logix Control architecture is very compatible with the application and the functionality requirement. So once again it demonstrates the value of plantwide optimization, and customers are making those choices.

Process in the fourth quarter for us was the highest growth for the year. It grew at 25%. And we believe that process in fiscal '12 will grow above the Company average and in the teens. So we see process as a continued opportunity for us to grow share.

We aren't the market share leader there, so I don't want people to get the wrong impression. We are probably fifth -- fourth, fifth, depending on how you define the market.

But I would say we are continuing to be able to grow share, and we would expect that to continue as the evolution of PlantPAx and we get a little more traction with the recent release of 2.0; and then certainly as we continue to grow our expertise in the different applications. So we see process as an ongoing growth opportunity for Rockwell.

Okay, thank you. See you in Chicago.

Yes, looking forward to it, Mark. Thank you.

Rich Kwas, Wells Fargo.

Hi, good morning. Keith or Ted, any signs accelerated depreciation benefit has boosted results recently, or based on what you are seeing on orders right now here in the US?

I would say there is nothing we can discern that would cause us to believe there is any significant impact as a consequence of that, although I would also say if there is going to be an impact we would expect to see it this quarter.

Okay. Then when -- back to auto and the comment on auto. With the Detroit guys, particularly Chrysler and GM really ramping up redesigns and new model launches, I assume you've gotten some benefit here in fiscal '11 from those plans. And you talked about good growth for next year.

What is the cycle here as we move forward into thinking longer-term beyond '12 into '13? How long do you think this lasts here, when you look at the US discrete business for auto?

Well, I mean that is a hard one to answer, because it is all depend upon the fickle consumer. But if you read -- most of the studies and statistics now say that the age of the fleet is at its highest level -- I am not sure if ever, but certainly recently it's at the highest level.

Which means basically that the automotive companies are expecting a tailwind from the replacement cycle, and I think that bodes well if we can see the amount of units being sold continue to grow a little bit year after year. I think that will give them the confidence and the dollars to continue to reinvest.

So I think it really boils down to the success in the market and the ability to bring the consumer back into the game. Obviously, what we have been talking about now for at least the last year is that, while this has been a manufacturing-led recovery, the consumer is still struggling. Whether it's high unemployment, consumer confidence, the continued reducing their debt burden, de-leveraging -- all of that is somewhat of a phenomenon.

But we do believe the opportunities for continued growth in automotive investment bodes well certainly for the short term. And as I said, longer term it really boils down to success in the marketplace that each one of the companies have.

Okay, and then last quick one for me, just on the other parts of consumer, consumer verticals. Any signs of things starting to break out at all? Or is it pretty lackluster still in terms of business trends for you?

Well, for us, as we have said many times, consumer isn't one that grows dramatically or, quite frankly, contracts dramatically. So I would say we have continued to see reasonable growth in the food and beverage sector.

We do see some of the shifting in spending in consumer to some of the growth markets. Certainly the emerging markets is where that is I think best seen in our business at this point in time, as they follow where consumer spending and the growth of disposable income is growing most rapidly.

We also see that home and personal care products also continue to see for us anyways and for the industry solid growth.

Life sciences I think continues to struggle a little as the companies continue to deal with some of the change in the industry and the impact that has on their P&Ls and balance sheets. But we have seen expansion in some of the emerging markets and the life sciences sector, and we would expect that to continue as well.

So our outlook next year is that it will be growth, but it will probably be growth below the Company average.

Okay, thank you.

Shannon O'Callaghan, Nomura.

Good morning, guys. So in the US, the sequential increase you guys had was really unusually strong in the fourth quarter. You talked a little bit about Solutions; I am not sure if that was weighted in the US. But could you maybe talk about some of the verticals specifically in the US that were strong in the quarter?

Sure. We just touched base a little bit with the conversation we had on auto. Certainly strength in auto and tire, so therefore the broader transportation industries, was good.

Also, heavy industries, which goes back to your comment about Solutions. We believe that we had good growth in our process business, which is more concentrated in the heavy industries.

Then and also food and beverage and home and personal care was good growth in the US for us this past quarter. So I think that is a little bit of a flavor there.

I mean, other than the Solutions dynamics with the completions in the quarter, any of the rest of it that felt unusually strong in the quarter in terms of sustainability?

I don't think there was anything unusual. I mean, the verticals that have been performing continued to. Mining strong; oil and gas picking back up. So I don't think we saw anything unusual.

Really, we had good growth as I said earlier. Process growth was good for us. It really was more about, I would say, the execution of the projects in-house more than any unique industry or order phenomenon that was going on.

So I would just say it is a lumpy business, and this one was on the positive side of the trend line.

Okay, thanks. Do we have to worry at all about Thailand with you guys? Some other people have commented on some potential issues from Thailand.

Yes, that is a good question, because in our second quarter we talked a lot about Japan and what the impact was there. We certainly are monitoring the situation in Thailand very, very carefully.

We do source a limited number of electrical or electronic components from the area. The good news is we understand the drill, and our sourcing team was on it immediately. We have begun implementing appropriate risk mitigation and securing safety stocks and finding alternate suppliers.

Really at this point we do not expect any major impact to our supply chain, certainly not in the short term. Once again, depending on how dramatic the impact is, it is something that could impact us later in our fiscal year, in particular start of the new calendar year.

But in the short term we think we are adequately protected, and our team is really, really working hard to help us mitigate any impact that may come from that.

Okay, great. Thanks a lot.

Stacy, I think we've got time for one more caller.

Terry Darling, Goldman Sachs.

Thanks, good morning. Couldn't let you guys off the hook without an incremental margin question here this morning.

Well, Ted was waiting for it, so --

I think we are reverting to the mean relative to the past quarters in terms of the percentage of the call spent on that, though, which I am sure you find refreshing.

Yes, we do.

So if we look at the implied incremental margins at the segment level within the 2012 framework, and we assume we are working with the high end of the organic revenue growth range, the 18% segment margin you called out would imply -- if we got the math right -- about 27%, 28%, which is right in line with what you did in 2011.

I am just wondering if you can provide some color on your thinking behind that number in terms of the various puts and takes. So it sounds like you think price cost is a little bit more benign this year.

Presumably you're not assuming Japan is going to continue to be a problem. You mentioned that the growth rate for process you think is going to be similar for the Company overall, so that doesn't really -- mix doesn't seem to be an impact issue from process.

But maybe you could talk about Products versus Solutions and any other items that went into your thinking in terms of that upper 20%s incrementals, assuming I got that right.

Yes, I guess the first thing I would say is our expectation for conversion margin next year -- and it varies a little bit across the range -- but generally it is kind of low 30%s. So we think that would be a very good performance given the range of growth we are talking about for next year.

I think you hit on a lot of what the puts and takes are in the conversion margin for next year. Obviously, it is volume leverage. When you take the net of price inflation and productivity, we are hoping that that is neutral or maybe a little bit positive.

And we have got the benefit of the reset on the incentive compensation; but offsetting that is some of the carryover effect a fiscal '11 increased spending and then also our expectation that we will continue to invest next year if indeed we are seeing the sales growth that we expect.

So, Ted, could you maybe just quantify some of those? How much do you think the investment spend -- is there any delta there year over year in your expectations?

Yes, absolutely. I don't want to put a number on it. What we are planning for investment spending now is just appropriate ramping of spending as we see the volume increases.

Okay, so percent of revenues doesn't change much there, I guess. Then the assumption on the incentive comp, can you help with a number there?

Yes, I mean the reset on incentive comp is about equal to the same reset we had last year, which is approximately $50 million.

Okay. Then any chance you want to maybe quantify -- Keith, I think you used the word gap in the first quarter related to the stronger 4Q that I guess the framework assumes you normalize in 1Q. Is that a $40 million or $50 million type of range? Are we way off the reservation with that guesstimate?

Well, I would have said we exceeded our expectation in Q4, if you think about the guidance we provided in the last earnings call, by about $60 million to $70 million. I would think whatever shortfall has been created now in our Solutions business in Q1 as a consequence of the outstanding execution is somewhat less than that.

Okay. So a lower Solutions mix should have a positive margin impact in 1Q; is that a fair translation?

All other things being equal, a lower Solutions mix generally translates to somewhat better margin.

Okay. Then just lastly do you think the price increases that you had out there resulted in some of that revenue pull-forward?

We don't. We don't think there was any impact on the quarter as a whole as a consequence of the price increases.

Okay. Thanks so much.

Okay, so we are going to wrap up then. So thank you to everyone who joined us today. We all look forward to seeing you next week.

Keith in the beginning mentioned that we have a full house, but we will accommodate all. So if anyone else wants to come to Chicago next week and join us for the investor conference, just give us a call or let me know or call Nancy and we will add you to the list.

We will be webcasting that event as well, and so you will have an opportunity to obviously dial in. And it will be a video webcast.

So thanks again and, operator, I think you can disconnect the call.

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