洛克威爾自動化 (ROK) 2012 Q2 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, Deanna. Good morning. Thank you joining us for Rockwell Automation's second quarter fiscal 2012 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 as always 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 second quarter and the first half of the fiscal year, as well as some full-year outlook commentary. Then Ted will provide more details around the second quarter and our guidance for fiscal 2012. We will take questions at the end of Ted's remarks.

We know it has been a busy earnings week for all of you, so we appreciate you dialing in today. We expect the call to take about an hour, maybe a little bit less. 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 over the call 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 some highlights for the quarter and a summary of our performance in the first half of the year. Please turn to page 4 in the slide deck. We had solid 8% growth excluding currency in Q2 and 7% organic growth. I was really pleased to see solid organic growth in every region.

North American market conditions have remained healthy. Our reported sales growth in the US was 5% this quarter, but because of an unusually large project that's shift in quarter two last year, we believe that understates the strength of market conditions in the US. We carved that large project out. Growth in the US would have been several points higher. Canada was a standout with 25% growth. We are successfully capitalizing on the strength of resource-based industries there. Europe had another strong quarter, despite macroeconomic headwinds. Our team there is executing very well in a difficult environment.

I was encouraged to see Asia return to double-digit growth in the quarter. China improved to high single-digit growth, and we are optimistic that market conditions will continue to improve in the second half of the year. Our outlook for India is more cautious. Sales in India were flat in the quarter, and we have yet to see evidence of improvement in the economy. Lastly, while Latin America organic sales were only up 4% in the quarter, they had a difficult comparison to a great quarter last year. Orders were strong in the quarter, and we continue to expect double-digit growth for the full year.

I hope that regional color was helpful. I have a few other second quarter highlights to share before I move on to the first half. Our process business continued to gain traction and delivered another quarter of over 20% sales growth. We continue to expand our integrator network, which is enabling us to pursue a broader spectrum of applications in all regions. Process remains our greatest growth opportunity, and we are executing well. We introduced two new Logix mid range controller platforms that improve scalability and ethernet connectivity plus enhanced motion for our OEM customers. For the fourth time, we were recognized by the Ethisphere Institute as one of the world's most ethical companies. This award is a real tribute to the efforts of all of our employees and the important of ethics in our culture.

Ted will provide more detail on second quarter financial performance in his remarks, so I would like to provide a few highlights on the first half of the fiscal year. I am pleased with our year-over-year performance through the end of March. Sales grew over 8%, excluding currency. Operating margin expanded 1.7 points, and segment conversion margin was over 40%. Earnings per share in the first half grew 12%, in spite of a pretty significant headwind from taxes, and we continue to generate best-in-class returns on invested capital. So far, the year has played out a little differently than we thought it would. Developed markets have been a bit stronger and emerging markets weaker than we were originally expected. But overall, at the halfway point of the year, we are pretty much where we expected to be, and we're well-positioned as we enter the second half.

So this is how we're thinking about the second half. We expect sequential sales growth in all regions and across our product and solutions and services businesses. We had a good first half in developed markets, and we expect those markets to remain solid for the rest of the year. In emerging markets, we expect stronger growth in the second half of the year. Our outlook for China and Latin America is strong. We expect to return to double-digit growth in the second half. But we are more cautious on India, as we have yet to see signs of economic improvement there.

Despite some mixed signals in the macro environment, we expect the recovery to continue in 2012. We feel great about our market position and our pipeline of opportunities, and we continue to invest in innovation and differentiation. With two quarters behind us and given our current assessment of global economic and market conditions, we are maintaining the midpoint of both our sales and earnings per share guidance for the year and narrowing the ranges. The narrowed range for earnings per share guidance is $5.10 to $5.40. Sales and earnings within our guidance ranges would represent another record year for the Company. Ted will provide more color on the assumptions in our guidance in his remarks.

Let me close by thanking all of the employees and partners of Rockwell Automation. We are executing our growth and performance strategy well, and that will enable us to deliver superior returns to our shareholders. With that, I will now hand it over to Ted.

Thanks, Keith, and good morning to everybody out there. I will be referencing the slides on the website, and I will start with slide number 5, which is titled Second Quarter Results Summary. Revenue in the quarter was $1.561 billion, up 7% compared to the second quarter of last year. The year-over-year impact of currency fluctuations reduced sales by about 1point, and the contribution from acquisitions increased sales by about 1 point. Segment operating earnings were $268 million, an increase of 10% compared to a year ago.

General corporate net was $25.1 million, compared to $20.5 million in Q2 last year. The increase was due to a $7 million legacy environmental charge related to former Rockwell International sites. The effective tax rate in the quarter was 24.9%. Diluted earnings per share was $1.16, up a bit from last year. While we had a reasonable increase in segment operating earnings, the combination of our legacy environmental charge and a higher tax rate reduced EPS by about $0.13. Average diluted shares outstanding in the quarter was 144.7 million, and during the quarter, we repurchased approximately 508,000 shares at a cost of about $41 million.

Moving to slide 6, this is the total Company results for the second quarter. As I noted on the prior slide, the year-over-year increase in sales for Q2 was 7%. Sales increased by 6% sequentially. On the right side of the slide, segment operating earnings were $268 million, up 10% compared to Q2 last year, with segment operating margin at 17.2%, up 0.5 points from last year. The year-over-year margin expansion is due primarily to volume leverage and a favorable contribution from price, partly offset by increased spending. It's a similar year-over-year margin causal in both segments. Sequentially, operating earnings declined by about 5%, and segment operating margin was 2 points lower.

Last quarter, we talked about Q1 being an unusually strong margin quarter, and we said that we expected lower operating margins in the balance of the year. All the factors we said would cause margins to be lower in the balance of the year came into play in the second quarter. That was less favorable mix, the normal January wage and salary increases, other increased spending, and less favorable impact from currency. As Keith pointed out, we're pleased with the first half performance, including margins. Segment operating margin for the first half was 18.2%, up 1.7 points compared to the first half of last year and with a related conversion margin of 42%. Although it is not shown on the slide, our trailing four quarter return on invested capital was 30.5%.

I will turn to slide 7, which summarizes the Q2 results for the Architecture and Software segment. The left side of the chart displays the sales performance. Sales increased 7% year-over-year, reaching $665 million. Currency translation reduced sales by about 1 point. Sales increased 2% sequentially in the segment. Operating margin for the quarter was 25.2%, up 0.8 points from Q2 last year. Year-to-date, operating margin in Architecture and Software is 26.9%, up 2.2 points from last year.

On slide 8, you will see the results for our Control Products and Solutions segment. Sales in the quarter were up 7% compared to Q2 last year. The increase included about 2 points of contribution from acquisitions, offset by about a 1 point reduction due to currency and with particularly strong growth in the solutions and services businesses. Sales increased 9% sequentially in Control Products and Solutions. Segment operating earnings were $101 million, with segment operating margin up 0.2 points from the same quarter last year. Year-to-date, Control Products and Solutions operating margin is 11.5%, up 1.4 points compared to last year.

Switching to the next slide, this is a look at regional sales performance. You can see here the growth rates by region, both as reported and excluding currency effects. Keith covered most of the regional highlights in his comments, so perhaps I will provide just a bit more color for EMEA. EMEA continued to deliver very good results, with 12% currency neutral growth. You can see that in the far right column. EMEA was the only region with a significant impact from acquisitions in the quarter, but excluding the effect of acquisitions, EMEA still had a very healthy 7% increase year-over-year.

I will turn now to slide number 10, the free cash flow. Free cash flow for the quarter was $230 million. That's about 137% conversion on net income. We continue to expect free cash flow conversion of about 75% for the full year, and that includes the impact of the $300 million discretionary pension contribution that we made in the first quarter. We would expect conversion to be about 100%, excluding the pension contribution.

That takes us to the final slide, which addresses our current outlook for fiscal '12. This slide provides a comparison of first half results to the full year guidance. Looking at the first half results, as I mentioned, we're pleased with the growth in sales, the margin performance, and the EPS performance. We are pretty much where we expected to be at the mid year point. As Keith mentioned, with two quarters behind us, we have narrowed the guidance. We now expect sales for the full year in the range of $6.25 billion to $6.45 billion. That compares to the previous guidance of $6.2 billion to $6.5 billion.

We expect currency translation to reduce sales by 2 points for the full year. Our previous guidance assumed a 1 point decrease due to currency. Last quarter, you may remember, we identified currency as a risk to the full-year sales guidance. With another quarter of experience behind us, we are now building that into the guidance. Excluding currency effects, we expect growth for the full year of between 6% and 9%. Previous guidance was 5% to 9%.

The $50 million drop at the top end of the sales range primarily reflects the increased negative impact due to currency. At the bottom end of the sales range, we are absorbing the negative currency impact but increasing our expectation for full-year organic growth by about 1 point. We still expect segment margin to be around 18%, probably a little better. As I mentioned earlier, we are at 18.2% year-to-date, and we expect diluted EPS in the range of $5.10 to $5.40. The $0.05 reduction at the high end of the EPS range includes a more negative impact of currency. We continue to expect a full-year tax rate of about 24%.

Finally, we expect general corporate net expense to be about $90 million for the full year. That's up from the previous guidance of $86 million, and the increase reflects the legacy environmental charges that were incurred in Q2. And with that, I will turn this back over to Rondi.

Great. Thanks, Ted. Before we start the Q&A, I would just like to ask you, as we always do on these calls, to limit yourself to one question and a follow-up. Then if you have another topic that you would like to ask a question on, if you could get back in the queue. That way we could get to as many callers as possible. So, Deanna, let's take our first question.

(Operator Instructions). The first question comes from the line of Rich Kwas, Wells Fargo.

Hi. Good morning, everyone

Good morning, Rich.

Ted, on incrementals, just when you look at on a year-over-year basis, a little bit below our expectations. And just was thinking of, in terms of commodity headwind, that was pretty significant last year at this time, and you put through prices as the year went on. What was the spread on price costs in the quarter, and did that have any positive benefit on margin year-over-year?

I think, on commodity costs, we are running a little bit higher than a year ago but not outside our expectations, and I would say consistent with our original guidance. On price, we said we thought we would realize about a point, maybe a little bit less. And I would say through the first half, we are very much on track with that. So, I think price costs through the first half and in the second quarter was pretty much as we expected.

Okay. And then, just a quick follow-up on the mix with solutions. I think you had raised that last quarter to two to three points incremental versus a point in the original guidance. Where are you now within the guidance for solutions mix?

I think what we have seen through the first half and with what we have got in backlog now, it looks like solutions growth is going to even be a little bit better than we originally thought and product growth just maybe slightly lower than we originally thought. So, that three point difference has now become a several point difference.

Okay. I will get back in the queue. Thanks.

Thank you.

And the next question comes from the line of Shannon O'Callaghan, Nomura Securities.

Good morning, guys.

Good morning, Shannon.

So, interested in the pick-up again in Asia-Pac and in China. Can you talk a little bit about how you saw that progress through the quarter and exiting the quarter?

Absolutely. With respect to the trend in the quarter, it definitely got stronger. I think there's probably two reasons for that. One is, as we talked last time, there was the impact of liquidity, particularly on small and mid-sized customers, and China has been easing their reserve ratio in the period. But then second is just the holiday in Asia, with the Chinese New Year occurring generally a little -- in the early part of the quarter, that as we exited we saw stronger momentum building as we went through March. And March was very solid, which I think drove a lot of the performance that we talked about improvement on a sequential basis from Q1. But I would say those two things, with growing momentum as we exited the quarter.

Okay, great. And then just, maybe, Ted, on the incremental, so I understand the components in 2Q, obviously, I think, hit a little bit more than we thought. We all knew they were coming down from 57, came down a little more. As you think about the back half, to work towards the higher end, it looks like they have to get a little better again. So, can you maybe talk about the dynamics heading into 3Q, 4Q from an incremental standpoint?

Yes, I think if you look at the implied incrementals for the full year now, we are kind of in the mid- to high 30s. And given where we have been in the first half, that would put the second half in that same -- the high 30s range. So, we're pretty comfortable with that, given our expectations for volume growth in the second half, but we are going to have some headwind from mix in the second half.

So, I mean relative to this quarter, what would be the key things that are not as much pressure on the 3Q, 4Q incrementals?

Well, I think there's going to be a contribution from volume compared to this quarter, a little bit of headwind from mix, and then there's just some other noise kind of stuff that affects quarter-to-quarter results. And when you do the conversion, you've also got a complication of what was going on in the quarter in the prior year before.

Okay. So basically, no change to kind of thinking 35-plus or something on incrementals?

I think that's right.

Okay. All right. Thanks a lot, guys.

You're welcome. Thank you.

And the next question comes from the line of Winnie Clark, UBS.

Good morning.

Good morning, Winnie.

First of all, just particularly on end market color, can you give us an update on what you're seeing by end market? I know transportation has been a bright spot. Does that continue to be the case? And you talked about some acceleration expected in process and markets as well.

Sure. Let me comment on a couple of the end markets. You hit the first one, which was auto, and certainly, we felt auto was strong in the quarter. And we continue to believe that that will help us as we go through the year. Associated with that would be tire. Tire has been a very strong market over the last probably 12 to 18 months now. While we're not seeing the growth there, tire is continuing to stay at the high level, with just a little bit of shift of where and who is doing the investing. But the market itself continues to perform well.

Oil and gas is strong, pretty much across the board, and that is pretty much a continuation. Water, wastewater, strong in the US. Mining, strong in Latin America, Canada, and the South Africa-Middle East region for us, with respect to EMEA. The consumer products, consumer is a little bit mixed when you look at it in total. The food and beverage market, a lot of the investment there is primarily in emerging markets as we go forward. Life sciences becoming a little stronger in EMEA. And then the one that is probably a little weaker within consumer is the home and personal care market at this point in time. So, that gives you a little feel for the different end markets.

Okay, great. Thanks for that. And then, just within EMEA, can you talk about within the different areas what you're seeing there specifically? And you talked about the export market's strong last quarter. Is that something you're still seeing?

Yes, yes. Within EMEA, we see a continuation of what you just mentioned, we talked about in Q1, and that is the strength of the exporting sector. I think the strength of the exporting sector is starting to diverge a little, and that is continued strong exports back into the US but a little weakening of exports into Asia, because of some of the slowdowns that were taking place there. So, a little difference as we see that happening at the moment.

Then we also have the phenomenon between North and South, I'll call it Western Europe, if you will, the continuing debt crisis in the South impacting a little bit stronger into Spain and Italy now. And the North being more of the exporting region, goes back to my earlier comments. And then the last point I would make with respect to Europe would be that emerging aspects, which for us would be areas like Russia and Turkey. They continue to perform well in the second quarter, equally strong -- almost equally as strong as they were in our first quarter. So we see continued growth there, and then the Western Europe would be back to the earlier comments I made.

Great. Thank you so much.

You're welcome. Thank you.

And the next question comes from the line of Terry Darling, Goldman Sachs.

Thanks. Good morning, everyone.

Good morning, Terry.

I wonder if you could just elaborate a little bit or clarify -- it sounds like you are looking on organic for a little bit of an acceleration in the second half versus where we have been here. And I am taking from that Ted, your comments in response to Shannon's question but also this idea that the US was impacted by comps here in the March quarter. But if you could just flush that out a little bit more.

Well, I would say on an ex currency basis, on a year-over-year basis, the current guidance would call for growth about equal in the second half to the first half.

So --

And is probably not enough acquisition impact in either half to affect that much, so think of that as organic.

Okay. And so, just the offsets then and the context of a flatter. So, US you are saying, tough comp in first quarter but something else decelerates in that mix? In other words, you talked about EM getting better in the second half, that's pretty clear. So to offset that, you would have to have a slowing in DM, or maybe that's Europe, but --

I think that's exactly the case, Terry. I'm sorry. I didn't understand your question from a regional point of view. We do expect stronger growth rates in the emerging market in the second half, and we do expect lower growth rates in the mature markets. But that's kind of what we've been talking about for a while in terms of a continuing deceleration in the mature markets as the -- just as the cycle continues to play out.

Okay. And then, on your point with regards to margins and certain things happening in given quarters, just on CPS margins, that is really where the weakness was on our luck of things. I guess it was our thought that you had very easy comps because of all the impact from material pressures and Japan supply chain issues last year. So, is it really just mix going on here, or are you seeing some pricing pressure there? I know you talked about one point and that's in line. But you raised some prices in I think August or September that was as likely to drive a better year-over-year comp, at least in the first half of the year. What else is going on at CPNS, given how easy that comp was that you didn't have a little bit stronger incremental than 50 in percent year-over-year?

Well, I would say we got a reasonable contribution from the volume. We got the favorable contribution for price we were expecting, and actually, I talked about being a little under a point. It wasn't much different in either of the segments. You know, there is a negative mix impact in the CPNS year-over-year, and that's basically higher solutions growth. And we've got the spending impact that we have talked about in both segments year-over-year.

And did you call that mix effect a three-point impact? That's a revenue impact, presumably, but can you clarify how much that mix impact was?

Well, it would have been less than 0.5 points of margin year-over-year.

Okay. And then just lastly, continue seeing a very strong balance sheet. Buyback has been slower in the first half of the year than the pace from last year. Are you looking to step up buyback in the second half of the fiscal year?

Yes, I would say yes. Obviously, our repurchases in any period are going to depend on the cash generation and what's going on with acquisition spending. But if you look at our expectations for cash flow generation this year and you back out some reasonable estimate of acquisition spending, we would expect to probably repurchase about three million shares this year. Obviously, we have not been at that pace in the first half. Partly in the first quarter, we stepped back a little bit because of the large pension contribution. I would say in Q2, we got a little bit of a slow start in January under a 10b5-1 plan, but our repurchases did accelerate through February and March. And we would expect to kind of be on pace through the rest of the year to get to that roughly that [$]3 million number.

Is that --

Share number, I'm sorry.

Is that 3 million, Ted, is that net or gross of issuance-related options and so forth?

That's gross.

Thanks very much.

And the next question comes from the line of Julian Mitchell, Credit Suisse.

Thanks a lot. Yes, my first question, I guess, on the -- just the margin outlook. If you're looking at your gross -- let's start with, I guess, CPNS, your incremental margins, your operating margins. The operating margins there have been around 11% last year. They're tracking at about 11.5% this year. Last cycle, the operating margins there got up to -- towards mid-teens. Is there anything this cycle versus previous that you think will cap the operating margins in that business for the next couple of years that would stop you getting back to that prior peak growth rate before, let's say, 2014?

I don't think I would characterize that as something that's going to cap the margins, but we do have some headwind this cycle, particularly in CPNS compared to last cycle. Part of that is an increasing solutions content as a percent of the total, so we've got that mix headwind we have talked about previously. And then the other thing I think we have talked about previously is we've got substantially higher pension expense this cycle than we had last cycle, and because CPNS tends to be our more people-intensive business and has somewhat of a disproportionate impact in that segment.

Okay, thank you. And then, just on your sort of developed market growth assumptions for the second half, year on year, I think you have said a couple of times that that would -- that growth rate would decelerate year on year in the second half compared to what you delivered in the first half. But it sounds like the US may be a little bit better because of easier comps. So, what sort of growth rate are you expecting for EMEA in the second half? Is that a very big step down, year on year?

Yes, I would say we are thinking that it will vary across our sales guidance range, obviously. But at the midpoint of the range, we are thinking the second half on an apples-to-apples basis, excluding acquisition impact, might be maybe three points lower than the first half.

Great. Thank you very much.

Thank you.

The next question comes from the line of Scott Davis, Barclays.

Hi. Good morning, guys.

Good morning, Scott.

I want to get a sense -- your process business continues to be strong, and a couple questions here. I mean, first, how much of that is -- when you think of it being up 20%, how much of that is business that you are going in with partnership in with Endress+Hauser? How big of a help is that? And then I have the follow-on on that as well.

Sure. Well, certainly it's hard for me to say exactly how much of a help that is, but it certainly is part of the broader strategy of our process strategy, which is we can supply a complete integrated solution, including instrumentation, when that's the way the customer wants to purchase it. And to do that from an ability to provide the integration services, the maintenance services, the asset management associated with that equipment, and to provide a more seamless start-up for our customers. So it is part of the process strategy in some customers. E& H has a strong position. In some customers, Rockwell has the stronger position, and we help each other. And then, we target other customers where we just want to break into that market. So, it's -- I just view it as it's a good partnership, and we help each other in growing our mutual business at our common customer.

Okay. Understand. One of the things I think we are trying to figure out, if you, by product, the low natural gas prices, of course we've got a bunch of ethylene crackers that are coming into the US and other pretty large chemical projects as well. Are you guys kind of ready to step into some of these big projects or have credibility in the market to step in to some of these big projects and take a much larger role, as like a master automation contractor, that type of thing or --

Yes.

How do you kind of see that playing out?

Well, I think as far as being able to be a main automation contractor or a MAC, as you referred, we do that in a number of industries and a number of applications. And we've done that now for -- certainly over the last year or two, particularly more outside the US, because obviously, as you well know, that's where most of the greenfield and expansion had been going, particularly in the oil and gas industries. Your comments about -- and specifically to the US and the expansion into large-scale chemical complexes, I would say that is one of the places that is not Rockwell Automation's sweet spot. That is very similar to what we talk about in the oil and gas segment being refining, the bulk chemical projects, the majority of our applications there and where we do have and where we are capable and will participate is in the intelligent motor control aspects of that business with our medium voltage drives and motor control centers and our safety systems from a process standpoint. And there, we will become a significant participant and to work with the companies that are starting that up, that are talking about those new facilities.

But when you look at the main process control, that is an area that, while we have capabilities, that would not be our historical strength and certainly is an area that we will participate in, in the areas that I talked about, as well as our advanced process control, which is an area that we have worked with all of these companies globally on, in particular, outside the US. And advanced process control is a capability that we do have, where we are talking about reduction of process variability and improving the control of those core chemical processes with some very sophisticated modeling technologies and capabilities. So, different pieces, absolutely, and we are aware of those expansions that you've referenced.

Okay. Thank you, guys. Good luck.

Thank you.

And the next question comes from the line of Steven Winoker, Sanford Bernstein.

Good morning.

Good morning, Steven.

Just first question on logics and integrated architecture and the penetration rates that you are achieving. If you think about just sizing that now, I know it's not just a quarterly issue, but can you give us a little more color and flavor for that penetration and the size of the business in terms of how you see that playing out to the rest of the year so that we're not -- I am just not focused only the cycle but trying think about your penetration share gains?

Well, certainly let's take the near in look, and that's for the remainder of the year. We would expect Logix to grow at a growth rate above the Company average, and that certainly is what we're planning on. With respect to penetration, that's a larger -- let me just -- and we expect to see really solid high single low double-digit growth rate for the year in Logix. As far as the penetration, we continue to expand the opportunities for Logix. So, we have not -- and when I say that, I mean we are expanding the served market for Logix. And that is what I talked about, the new two controllers that came out. That's expanding the market that we have had, that we cover going into OEMs, going into process, the addition of safety, the addition of broader ethernet capabilities. All of this is expanding the scalability and therefore the served market for Logix.

So, our penetration -- in one way, you can say it keeps going down because we keep expanding the market. So we believe we still have a runway to grow Logix as we go forward. And certainly, that's one of the reasons we continue to invest in it, to be able to continue to expand the served market and therefore be able to continue to drive that higher growth that I talked about. And this year, for the first time, we expect Logix's sales to be over $1 billion. And we see no reason we can't continue to grow that above the Company average into the -- certainly the short- and mid-term future.

And would you say -- how big a deal is the integrator network overall in terms of as a growth limiter to your ability to drive this? And how much investment -- or how does that relate to your investment, particularly overseas in building that out?

Yes. Well, the fact of the matter is, it is not our investment to build it out, other than the people that we have on staffs to grow the relationships, because these are independent third-party companies that create the integrator network. So ours is creating the relationships and building the interface and the day-to-day interaction with our sales and/or channel management teams. And certainly, we don't see it as a limitation from the standpoint of we continually grow and develop it, and we talk about, in particular, in process. One of the reasons we are growing at the rate we are is that we continue to expand the integrator network, and to your point, very much so in the emerging markets. And I think the challenge is more of finding competent, talented integrators in some of the emerging markets that can support the technology and have the domain expertise to grow into some of these new markets. So I think it's more the availability issue and having the competence to continue to expand. But we are constantly evolving and growing that partner network throughout the world.

So you haven't changed your approach in terms of either funding -- finding promising folks who aren't system integrators yet and putting them in the business so that they can help drive your growth? I'm just trying to get a sense on the emerging market side of how big a limiter or not this is.

We don't see it as a limiter, and we operate in two dimensions here. One is, if you notice, some of the acquisitions we've made have been system integrators in emerging markets so that we can get a critical mass with domain expertise. But at the same time, we are expanding the partner network so that we can work with more customers, because at the end of the day, it's the customer that decides how they want to work here. Do they want to work with a local integrator, or do they want to work with a Rockwell Automation, who can probably provide more commonality, more standardization globally then a local system integrator could. So, we try to look at that as the best of both worlds and how do we balance the growth of local integrators versus continuing to expand our solutions capability and domain expertise in the emerging markets.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Nigel Coe, Morgan Stanley.

Thanks. Good morning.

Good morning, Nigel.

Keith, you talked about the divergence between CPS and A&S growth rates to several points. And I'm just wondering, is this a temporary divergence, or are we now at the phase of the cycle where large projects are going to be the primary driver of your top line growth?

No. We don't -- back to where we are in the cycle, we think we're still in the part of the cycle where we should see growth in both our product businesses and our solutions businesses. I think the gap that we talked about is mainly because of the slow -- excuse me, the slow start we had, particularly in Asia in emerging markets in our first quarter and the hole we dug with the expanded shipments we had in our fourth quarter last year. And as we refill that pipeline with orders, we are just seeing that order flow now come through in the second half of the year. So we're seeing some moderating in product but a normal expansion in our solutions business. And we don't see that as an indication at this point yet of a movement towards end-of-cycle large projects in heavy industries.

But the other part of that is, we are naturally growing our process business, so we are seeing some of that as just the -- as far as just a natural evolution of our strategy as we go forward. So, we would expect more larger projects, more in the heavy industries, particularly in the emerging markets. And some of that is just the natural evolution of following our growth and performance strategy, and yet for the remainder of the year, we still expect above market growth in both products and solutions.

Okay. No, that's helpful. And then, coming back to the US's quote unquote manufacturing renaissance, it's not just chemical and crackers. We are also seeing some tire manufacturing relocations. We're seeing some heavy manufacturing expansions. Are you starting to see that in your numbers right now? Are you starting to see that in your order flow, or is that to come in 2013 and beyond?

Well, I would say we are not seeing that in our business at this point in time. We are starting to have the anecdotal commentary as we do our normal quarterly pulse check. I would say the US organization would tell us that they are having conversations, that people are bringing it up, but we're not seeing a mass change of direction here going forward. But certainly, the topic and the interest in manufacturing in the US has picked up. And I think that's good, not just for Rockwell Automation, but also just for the economy in general. So, a conversation at this point we would expect to -- if there is going to be an impact, that's a little longer term as far as an investment cycle that it would bring with it.

Okay. And then just one more quick one, if I may. You mentioned the prior -- second quarter 2011, you had a particularly large project. So I'm assuming it was within CPS. Would you describe that as a particularly profitable project, because it looked like your margins in the prior quarter were somewhat higher than they might otherwise have been?

No. I would not qualify that one as -- I think it is what we call it to be the average of our solutions business for us, tot one that was particularly strong. So I don't think that had any impact into year-over-year performance.

Okay. Thank you.

You're welcome. Thank you.

And the next question comes from the line of Jeff Sprague, Vertical Research.

Thank you. Good morning, gentlemen and Rondi.

Good morning, Jeff.

Hello. Just a couple things, if I could. Just first, back to China. Keith, if you said it, I missed it. Could you just tell us what China actually did in the quarter on a stand-alone basis? And then, more importantly, I was just interested in your view on what you are seeing change to kind of bolster your outlook in the second half of the year. What end markets, what type of activity is driving that?

Yes. Well, first of all I did not mention it, but China grew at 7% for us this year.

This quarter.

I'm sorry, this quarter. Excuse me. And that was up from negative growth last quarter. What are we seeing that's different? Well, I think a couple of things. First, our team there is doing a very good job at uncovering new customers and new applications. And that does take a little bit of time, and that is why sometimes you get a dwell period, particularly when the economy is slowing. And we have seen that in China, and I think all of the statistics point to that, which is something that you've seen.

As where are we seeing this now, I think we are starting to see some of the liquidity problems working their way through the system. We would hope that that is going to be a continuing theme as we go through the year, which is why we believe the uptake will come up. And we see a split, really between large customers and smaller customers yet. The larger companies are getting stronger and investing more, and we still see some of the pain at those smaller customers at this point. And that's really driven because of the liquidity problems that I talked about.

The other reason we think we are going to see a better second half is our front log activity has picked up, and that really goes back to the earlier comment I made about our sales organization is working very aggressively. We believe OEMs continue to be strong for us. To be able to create new OEMs, it takes time to work with them in the design phase and the design cycle. So we are expecting a pickup with OEMs as we go forward. And just the ongoing maturity of our distributors and our system integrators will help and should always help provide some tailwind as well, but that's also a long-term process for us as well. So, I think those would be the thoughts that we have with respect to China, both current and why we feel we will expect to see an acceleration in the second half.

Just one additional point on that. Clearly, a lot of what you said is about making your own luck. I guess the liquidity stuff is more a macro comment. How much of this do you think is you driving the business versus some genuine improvement in underlying business and market conditions there?

Well, I think if you look at the underlying market conditions, they continue to be mixed. If you look at the PMI, depending upon which one you look at, the third-party one, which tends to be most of the multi-nationals, is still under 50 and has been under 50 for, I think, maybe six or more months now. So, that tells you that manufacturing is slowing. If you look at the data that they communicate, they just recently lowered their growth rates another 0.5 points. And so their exports have been impacted to some degree.

So I would say the majority of our success has been us working it, as opposed to the continued growth at a high level of -- while the growth rates are still strong, they are declining from where they were. So, it isn't like the overall business is pulling us along with it. I think we are having to work harder, and we are having to create more of our opportunities and grow more customers. And that is why I am complimenting our team in China, because it is -- while it might've been stronger market growth previously, we have certainly strong growth, but our performance, I think, indicates that the team is outperforming the underlying market there as well.

Yes, that's impressive. Just one other quick thing for me, and I will jump off. Is there any color or anything you can share on just the state of distribution in the US? Are distributors destocking, restocking? Just kind of where their head is around just kind of the general tone of activity in the US market. Thanks a lot.

Jeff, this is Ted. I think you know we've got pretty good visibility of our North American distributor inventories, and I would say nothing unusual going on in their inventories. They have increased proportionate to kind of what they are seeing as end demand increase. And if you look kind of at the underlying product sales in Q2 in North America, it was another very good quarter for our distributors.

Great. Thank you.

Thank you, Jeff.

Okay, Deanna. We're getting close to the end of the hour, but I think we've got time for one more quick question. So, let's go to our final caller.

And the final question will come from the line of Richard Eastman, Robert W. Baird.

Hi. Good morning.

Good morning, Rich.

Keith, could you just speak for a second to maybe the mix within the A&S business? Can you -- looking at the core growth rate of about 8%, was the process in software piece up more? Is that where the mix impact came, versus the peripheral products business?

I think around -- Logix was slightly higher than the average. And I would say last time we talked a little bit -- last year at this time, we talked about motion being much stronger. And that was the inner segment mix difference at that point, but motion would've grown this year slightly under the segment average. So, really, it was a pretty tight band within A&S this quarter, not a big swing between the different businesses within there. Good, solid safety growth, obviously, solid Logix growth, and the peripheral products, which would be really motion and sensing motions slightly under and basically right at.

Rick, in the year-over-year causal -- margin causal in A&S, there really wasn't much of a -- there wasn't much of a significant mix impact.

Okay. So in the 80 bps improvement, that's not necessarily mix. It's more volume and leverage?

Correct. Yes.

Okay. And then, could I just ask, in terms of the orders on the solutions piece of CPNS, was order growth -- how did that look in the quarter?

Book to bill was 1.1 in the quarter. So, once again, two very good quarters of above one growth in our solutions business, which is why basically Ted commented about the second half and the mix shift favoring more the solutions. It's because of that backlog that we built after digging ourselves the hole in the third and fourth quarter of last year.

I understand. And then just as a related question, I'm going to relate this, just so I can sneak it in. But the growth investment in the second quarter, we had talked in the first quarter that you basically delayed some of the first-quarter growth investment. Did -- if you look at that -- the growth investment that you made in the second quarter, does that kind of true up your year-to-date investments? In other words, was it heavier in the second quarter since we kind of delayed the first quarter investment?

Well, there were two things. When we talk about spending Q1 to Q2, so the sequential change, probably the largest impact was just the merit increases that we normally put through in January. There was additional internal spending increase sequentially beyond that. I don't think I would say we caught up year-to-date from some underspending in Q1. If anything, we're probably still a little bit below where we thought we would be for the first half.

Okay. Great. Very good. Thank you so much.

Thank you, Rick.

Okay. Thanks, everyone, for joining us today. That's going to conclude today's call. I am available for follow-up calls, and so thank you again.

And that concludes today's conference. At this time, you may disconnect. Thank you.