洛克威爾自動化 (ROK) 2012 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. Mr. Rohr-Dralle, please go ahead.

Thank you, Daloo. Good morning and thanks, everyone, for joining us for Rockwell Automation's fourth-quarter fiscal 2012 earnings release conference call. 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 and some commentary on our outlook. Then Ted will review the results for the quarter and our guidance for fiscal 2013. He will also spend some time today going through the components of pension expense, our new definition of segment operating earnings and our new non-GAAP measure of adjusted earnings per share. We will take questions at the end of Ted's remarks.

Our results today 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. In addition, our supplemental financial data document is available on our website and it includes reconciliations to our new non-GAAP EPS and segment earnings by quarter for 2008 through 2012. A webcast of this call is accessible at that website and will be available for replay for the next 30 days.

We appreciate you starting our week with us today. We have got a lot to cover, so the call may go a little bit longer than an hour. Before we get started, I need to remind you that our comments will include statements related to the expected future results of the Company and are therefore forward-looking statements. 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. Let me start by saying to anyone affected by last week's hurricane and its aftermath that I appreciate your efforts to join our call today. I hope you were able to stay out of harm's way.

I will start with highlights for the quarter and the full year, so please turn to page 4 in the slide deck. I was pleased with 5% organic growth, especially given the tough comparison to last year's very strong fourth quarter. Growth rates continued to moderate due to the difficult economic environment, but, once again, we had organic growth in all regions. Emerging markets grew 11% in the quarter with particular strength in Central and Eastern Europe and Africa. Most of the growth this quarter came from our Solutions businesses as our Product businesses were essentially flat compared to last year.

Process had another great quarter with 18% growth. In the quarter, we initiated restructuring actions with corresponding charges of about $13 million. We are calling this out because the charges are considerably higher than a normal run rate for pay-as-you-go actions. These restructuring actions provide us with some headroom to rebalance investments in 2013.

Earnings per share were $1.38, about $0.01 lower than last year. Restructuring charges reduced EPS by about $0.07. Cash flow in the quarter was strong and we repurchased another 1.4 million shares. So overall, a good end to a very solid year.

I will make a few comments on the full year before I move to our outlook. We entered 2012 in the midst of global economic uncertainty and that is still the prevailing environment. The prospects of a fiscal cliff in the US, the ongoing sovereign debt crisis in Europe and the slowdown in key emerging markets all weighed on economic growth this year. Despite that, we delivered organic growth of 6% for the full year and ended the year with record sales of over $6.2 billion.

Canada had very strong growth of 20%, reflecting continued strength in the resource-based industries. Mexico also grew 20% and industrial activity there remains strong. But our European region was the real standout with 6% organic growth in the face of a recession. I was encouraged that we grew in both developed and emerging EMEA and I want to acknowledge the EMEA leadership team who executed very well within difficult market conditions. It is not on the chart, but Process sales grew 20% for the full year and we continue to win both batch and continuous Process applications.

I was pleased that we were able to expand segment operating margin a full point while continuing to invest for growth. Continued strong cash flow and a healthy balance sheet enabled us to increase the dividend for the third consecutive year and repurchase 3.7 million shares. We are proud of our track record of returning cash to shareowners.

We delivered solid results in a challenging environment this year. I want to thank our employees for their dedication in making this year possible and our customers, suppliers and partners for their continued support throughout the year.

So let me give you our thoughts about fiscal 2013. Growth rates moderated considerably as we moved through fiscal '12 and our current underlying demand trends are pretty flat. We saw an increase in project delays in Q4 and ended the year with a lower solutions backlog than a year ago. So there is not a lot of positive momentum as we enter the new year.

Each region has its own story, but the global economic recovery seems to have run out of steam at the moment. We continue to believe this is a pause in the recovery and not an inflection point, which is consistent with what we are hearing from our sales organization, our channel partners and customers. The forecasts that we monitor for GDP and industrial production call for growth next year, but consistent with those forecasts, and given current conditions in our lower backlog, we don't expect to see much growth until the second half of 2013.

It is possible that the current global economic sluggishness is creating some pent-up demand for manufacturing investment. If that is true, a couple of positive macroeconomic signals could give customers confidence to accelerate their spending. We are counting on market conditions improving early enough to have a positive impact on the second half of our fiscal 2013. We are excited about and counting on new products to help us grow next year even in sluggish market conditions.

From a regional perspective, we expect the US to stay on a low growth track and we don't think Europe gets any worse. Asia-Pacific and Latin America should have higher growth rates next year, driven primarily by improvement in China and Brazil. With all of that said, we expect total sales growth of 2% to 6% next year. Ted will provide more detail around sales and earnings guidance in his remarks.

Although we can't control the economy, we know how to remain flexible and adjust to the underlying economic environment as appropriate. In the end, with our great technology, talented and dedicated employees, loyal partners, robust installed base and share gain opportunities, we are well-positioned to continue to outperform the market.

Before I wrap up, I want to assure you that Automation Fair events this week will continue as planned. Downtown Philadelphia, the convention center and hotels, sustained minimal or no damage. We feel extremely fortunate that Automation Fair, its supporting events and our investor conference will proceed as scheduled, but the people and businesses affected by Hurricane Sandy still remain in our thoughts.

For those of you who haven't been to an Automation Fair, we expect to host thousands of 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 our customers.

At the investor conference on Thursday, you will hear from John McDermott, the leader of our Global Sales and Marketing team and from one of our major global customers. Then we will take you on a hosted tour of the show floor. After lunch, we will hold a webcast where you will learn more about our strategy and progress from me and Ted. Frank Kulaszewicz, the Head of our Architecture & Software segment and Blake Moret, the Head of our Control Products & Solutions segment, will provide a deeper dive into two of our best growth opportunities, Process and OEMs. 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 2013. Ted?

Thanks, Keith and good morning, everybody. I have a lot to cover this morning and I will start with the fourth-quarter results summary on page 5. Sales in the quarter were $1.664 billion. That is an increase of 1% compared to Q4 last year. Organic sales growth was 5% and the year-over-year impact of currency translation reduced sales in the quarter by approximately 4 points.

Segment operating earnings were $295 million, down 1% compared to last year. As Keith mentioned, we incurred restructuring charges of approximately $13 million in the quarter. General corporate net expense was $20.6 million compared to $22.2 million a year ago. The effective tax rate in the quarter was 23.4%. That is 2.2 points higher than fourth quarter last year.

Diluted earnings per share were $1.38, down $0.01 compared to Q4 last year. The restructuring charges reduced earnings per share by about $0.07. Average diluted shares outstanding in the quarter was 141.5 million. In Q4, we repurchased 1.4 million shares at a cost of approximately $96 million. For the full year, we repurchased a total of 3.7 million shares at a cost of $265 million. On the earnings call in July, we projected to repurchase about 3 million shares for the full year so we were more aggressive than that in the quarter.

Turning to page 6, fourth-quarter results, Rockwell Automation total, on the left side of this slide, you can see that sales increased only slightly from last year. That is the currency effect offsetting the 5% organic growth. You might remember that Q4 fiscal '11 was a particularly strong quarter, especially in our Solutions and Services businesses and sales in the fourth quarter this year were up 7% sequentially.

Moving to earnings on the right side of the chart, segment operating margin in Q4 was 17.7%, down a bit from 18% in Q4 last year. Lots of puts and takes on margin in the quarter, but the $13 million in restructuring charges reduced operating margin by about 80 basis points. So margin would have been about 18.5% without those charges and I think that would've been pretty much as expected. Although it is not displayed on the chart, our trailing four-quarter return on invested capital was 30.3%, about the same as last quarter.

Moving on to page 7, this slide displays the Q4 results of the Architecture & Software segment. Architecture & Software sales were $671 million in the quarter, down about 2% year-over-year. Organic growth of 3% was more than offset by a currency translation impact that reduced sales by 5 points. Sequentially, Architecture & Software sales increased 1%. Operating margin for the quarter was 24.8%, down 1.2 points from Q4 last year. About one half of the restructuring charges were incurred in this segment. Excluding those charges, margins were down about 20 basis points compared to last year.

The next slide, page 8, covers our Control Products & Solutions segment. Control Products & Solutions sales in Q4 were $993 million. That is up 2% from a year ago. Currency translation reduced sales by 4 points, so organic growth was 6%. Sales in the product portion of CP&S in Q4 were down a little year-over-year, but sales for the Solutions and Service businesses were up 12%, pretty strong performance and as I mentioned earlier, against a difficult year-ago comparison for the Solutions and Services businesses.

However, orders for Solutions and Services were weak in the quarter. The book-to-bill was only 0.8. It is typical for the Solutions and Services book-to-bill to be below 1 in our fourth quarter, but 0.8 is lower than normal.

As Keith mentioned, we saw an increasing number of projects being delayed in Q4, particularly larger projects and that was pretty much the case in all regions. Our backlog in the Solutions and Services businesses is down approximately 7% compared to this time last year.

Moving to the right side of the slide, segment operating earnings increased 7% year-over-year and operating margin expanded by 6/10 of a point to 13%. Control Products & Solutions also incurred about one half of the restructuring charges, which reduced margins in the quarter by about 6/10 of a point. That offset some of the benefit of higher volume.

Page 9 provides a geographic breakdown of our sales in the quarter. I will focus my comments on the far right column that displays the year-over-year growth, excluding currency effects. As we discussed on the last earnings call, growth rates have clearly moderated from earlier in the year. Despite that, as Keith mentioned, we realized organic growth in every region in Q4. Canada has been consistently strong this year with 18% organic growth this quarter. EMEA organic growth was 7%, better than we expected coming into the quarter. We are continuing to benefit from our success with OEM customers and saw particularly strong growth in the emerging countries in this region.

Asia-Pacific was up only 2% compared to fourth quarter last year. There was very mixed performance across the countries in the region. China was up 11% year-over-year. India was about flat to Q4 last year and Australia was down significantly. Latin America was up 8% compared to Q4 last year and that was with Brazil down about 4%. There was continued strong growth in the balance of the Latin American region and particularly in Mexico.

I will turn now to page 10, free cash flow. Free cash flow for the quarter was $347 million. The conversion on net income was 178%. Year-to-date, free cash flow was $598 million. That represents conversion on net income of 81% and if you exclude the discretionary pension contribution we made in the first quarter, conversion for the full year would have been 105%.

So that is the fourth quarter. I will turn now to page 11 for a summary of the full-year results for fiscal '12. Sales reached $6.259 billion for the full year, up 4%. Organic growth was 6%. Currency translation reduced sales by about 3 points and acquisitions added a little less than 1 point.

Segment operating margin for the full year was 18.1%, up 1 full point from last year. Diluted EPS from continuing operations was $5.13, up 7% compared to last year. And I think Keith already mentioned that this represents another year of record sales and EPS for the Company.

Since we have already covered cash flow, I will move to slide 12, which describes the new approach we are taking to the way we deal with pension expense and some of our earnings measures. Significant declines in interest rates over the past several years have caused an extraordinary increase in our pension expense. We consider a large portion of that pension expense increase to be unrelated to our underlying operating performance. Because of this, beginning in fiscal '13, we have decided to introduce new non-GAAP measures that exclude non-operating pension costs from our income from continuing operations and corresponding EPS. And we are also changing our definition of segment operating earnings to exclude the non-operating pension costs.

As shown on the right side of the slide, we are defining non-operating pension costs to include defined benefit plan interest costs, expected return on plan assets, amortization of actuarial gains and losses and the impacts of any planned curtailments or settlements. We consider service costs related to active employees to be operating pension costs. We believe that the non-operating components of pension costs are more related to financial market factors and that excluding them presents an earnings picture more reflective of our underlying operating performance, and also allows for more relevant historical comparisons.

Let's turn to slide 13. This next slide provides a sense of the extent to which the non-operating pension costs have impacted our results over time and why we think it is important to provide better visibility of that impact. The three columns to the left display the operating and non-operating components of pension expense from fiscal 2008 and 2012, along with our projection of pension expense for fiscal 2013.

The far right column, which is labeled 2013 better than/worse than 2008, shows the difference in the components of pension expense between those two years. In the five-year period, total GAAP pension expense increased by $140 million. You can see that total at the bottom of the column. That total GAAP pension expense increase represents more than a 2 point negative impact on operating margins in 2013 compared to 2008. The non-operating component of that pension expense increase is $104 million, or almost 75% of the increase. We think it is important for investors to understand the impact of the non-operating pension expense.

The second column from the right side of the slide shows the difference between the components of pension expense for 2012 compared to 2013. For 2013, we are projecting a $64 million increase in the total GAAP pension expense. The non-operating portion of that increase is $44 million or about 70% of the increase. It is important to note that even with this change, there is still a $20 million increase in the operating pension costs in 2013. The operating pension costs will continue to be included in our segment operating earnings.

The next slide, slide 14, provides a walk from our fiscal 2012 GAAP results to the new non-GAAP measures so that we can provide investors with a consistent comparison against our fiscal '13 guidance. Focusing on the middle column, which displays the adjustments, I will start with segment operating earnings, which would have been $32.5 million higher in fiscal '12 under the new definition of segment operating earnings. General corporate net expense would have been $2.7 million lower, so total income before taxes would have been $35.2 million higher. After tax, that yields an earnings per share addback of $0.16. So adjusted earnings per share for fiscal '12 would have been $5.29 compared to $5.13 as reported. Segment operating margin increases by half a point under the new definition of segment operating earnings to 18.6% and the effective tax rate also increases by about 40 basis points.

As Rondi mentioned at the beginning of the call, reconciliations of earnings per share and segment operating earnings annually and by quarter back to 2008 are available in the supplemental data book that is posted to our external website.

So now let me turn to slide 15 and we can discuss guidance for fiscal year '13. Regarding the top line, Keith provided a good deal of color on our views of the economic and market environment we are expecting in 2013. I will repeat just a couple of key points. Growth rates moderated throughout fiscal '12. Our current underlying demand trends are pretty flat and there is not much positive momentum as we enter the new year. The global economic recovery seems to have run out of steam, but we still think this is a pause, not an inflection point. We expect to see improved market conditions in 2013, but we don't expect to see any significant improvement until the latter part of the year.

Given that context, we expect fiscal 2013 sales to be in the range of $6.35 billion to $6.65 billion. That is 1% to 5% organic growth. We expect currency and acquisitions to each add about half a point of growth. So that is the makeup of the 2% to 6% growth that Keith highlighted. We expect segment operating margin to be about 18.7%. That compares to the restated fiscal '12 segment operating margin of 18.6%. Think of the 18.7% as the midpoint of guidance, so maybe a little bit higher or lower across the sales range.

Not a significant margin improvement year-over-year, but, at the midpoint, we are at a relatively modest 3% organic growth and even with our new definition of segment operating earnings, we are absorbing a $20 million increase in pension expense. As Keith noted, our guidance for adjusted EPS is $5.35 to $5.75 and that compares to EPS of $5.29 for fiscal '12 on an adjusted basis.

We expect free cash flow conversion on adjusted net income of about 100% in fiscal '13 and then maybe a couple of other items that aren't shown here. We expect general corporate net expense to be approximately $83 million, about equal to fiscal '12. We expect an effective tax rate in fiscal '13 of about 26% and we expect the average share count next year to be between 139 million shares and 140 million shares. And with that, I will turn it over to Rondi and we can begin the Q&A session.

Okay, great. Thanks, Ted. Before we start Q&A, I always say this, but I want to say it again this time, which is please limit yourself to one question and a follow-up. We would like to get to as many of you as possible and obviously, we have a lot of things to talk about. So operator, why don't we go ahead and take our first question?

Scott Davis, Barclays.

Hi, good morning, everybody.

Good morning, Scott.

I know visibility isn't all that great, but when you think about 2013 guidance, I mean what are your customers telling you as far as kind of the mix between CapEx-related, project-related things and the regular daily flow products that are more driven by capacity utilization? Are you thinking in terms of CapEx being flattish next year or actually down?

Well, it is a little early to get a read on the CapEx because most people are calendar year and we really hear that more in our second quarter, but I would say from, anecdotally at least from the commentary we are hearing, we don't expect that it will be an increase from where we are currently seeing it. And the question will be I think how do some of these other factors play out over the next couple of months, particularly the fiscal cliff and elections in the US and the debt and the euro crisis potential that remains in Europe. So I think those are the factors that we need to get some, I will just say, better clarity and certainty around to be able to understand what is going on.

Also some of our customers at this point I think are taking a little bit of a wait-and-see attitude. But I think that is more around, I will just say, the OpEx type of projects than the larger capital investments that typically require a higher level of approvals.

Okay, helpful. And just as a follow-up, just wanted to talk about cash reinvestment. Not really much in -- I mean you bought 3.7 million shares, it's respectable, but you're still sitting on a fair amount of cash and have balance sheet space. Can you just talk us through what the plans are the next 12 months?

Yes, sure, Scott. First, I think we are pretty pleased with our track record of returning cash to shareowners and over the past three years, we have returned over about $1.3 billion in dividend and share repurchase and at the same time made some pretty sizable contributions to the US pension trust. We have increased the dividend by over 60% in the last three years, so we are reasonably pleased with that track record.

We had that large pension contribution this year, which held down our repurchases a bit, but next year we would expect repurchases to be in the range of $400 million, so significantly higher than the $265 million we spent this year and depending on share price, if we are in a range that is close to where we have been recently, that ought to be in the range of 5 million to 5.5 million shares.

Okay, that's helpful. Thanks, guys. Appreciate it. We will see you in a couple days.

Looking forward to it, Scott. Thank you.

Steve Tusa, JPMorgan.

Hey, good morning.

Good morning, Steve.

We are obviously in this kind of a follow-your-nose type of environment. There is not a ton of visibility, and I know you guys don't like to give quarterly guidance, but I guess just kind of looking at the better sales this quarter, the backlog and the weak book-to-bill, in Solutions, there's a lot of things that are moving around, some positive and some negative. Last year, you guys had a pretty tough 4Q to 1Q where you were down I guess around 10% sequentially given some project timing headwinds. I mean is that the same type of sequential decline we should expect heading into the first quarter here? And again, it is kind of an unusual environment because you said it is going to ramp in the back half, so I am just -- I want to make sure that I'm kind of calibrated on the model when it comes to this stuff.

Yes, I think that is a fair characterization. It is a similar situation we found ourselves in last year. We need to rebuild our Solutions backlog. That is going to take some period of time and certainly we typically historically see, even independent of the backlog, a reduction in our Q4, we typically see a softer Q1 in our Solutions business already. So I think that combination of traditional reduction plus the accelerated amount of backlog that we burned off and the weaker orders portend a softer first half of the year in our Solutions business.

Right. And so that down 11% sequentially would be kind of flattish organically year-over-year, Ted. Is that right?

Yes, I would expect if you think about the 3% growth for the full year organically, I would expect the first half to be flat to up a little bit maybe and then better growth in the second half.

Okay. And then one follow-up on that. I guess you are talking about a pause, you are talking about kind of a little bit more confidence that things will maybe come back. Can you maybe talk about the run rate of conversations or I guess you talk about a front log or RFPs to RFQs, things like that? Has that softened dramatically call it relative to six months ago? I mean how has the kind of pool of addressable business outside of the obviously ongoing MRO stuff, but the pool of addressable targets trended over the last six months? And if it has gotten weaker, how much weaker has it gotten?

We have not seen any real change in the front log or the, I will just say, quoting activities over the last six months. It has been pretty flat, so we haven't seen it going up. But we haven't seen much of a change in that dimension of activity. Where the real change has been in the last six months has been -- in Q3, we talked about project delays and the majority of that was in the front log areas and then in Q4, that picked up even a little more. So I would say the activity remains constant or relatively constant, but the decision-making is taking longer to close orders than it had in the first half of our fiscal '12. So I would say that is where the change has occurred as opposed to I will just say engineering feed projects and quotations and I think I would characterize it that way.

Okay, and is that similar to the kind of infamous air pocket comment that you guys made I guess in '04, '05? Remember that point? How different does it feel relative to that or maybe the same and then thanks, that's my last question?

You have a good memory. That goes quite a bit back, but I just think every period is unique in its own way and I think to characterize it back to that point in time I believe over the economic environment is very different today. So I think it is more just the uncertainty is creating less than confidence in their outlook and therefore, they are just delaying decisions and waiting to see how a few things unfold before they make commitments and we are just in a period that that has to play out and ultimately, it will go one way or the other. But, at this point, we are just seeing the uncertainty is the overriding, I will just say, behavior.

Great. Thanks a lot.

You bet, Steve.

Julian Mitchell, Credit Suisse.

Hi, good morning. Thanks, so, yes, the first question was really on the color by end markets, what are you seeing in things like automotive versus broader consumer versus I guess heavy industry. How has that changed in the past couple of months? And which industries are you seeing the biggest shifts in in project in terms of signoff delays and so forth?

Well, I guess a couple of things. Where we see the strongest activities continues to be in automotive and oil and gas and that would be pretty much on a global basis. If you look at heavy industry and you take oil and gas out of there, I would say currently where we are seeing the greatest slowdown in buying at this point would be mining is probably the toughest area at this point in time. Some of that is driven by labor situations such as you have in South Africa. Some of it is demand from China and India impacting Australia and some of it is just the environmental issues associated with some of the large new mines, particularly in Latin America. So it has probably created a slowing of investments and we think that is the area that we see it the most.

With respect to consumer, I think we still see -- consumer isn't one that has high peaks and low valleys. So I think it stayed pretty well flat, but there is no question that the global investments in consumer products is more -- is being slanted more to the emerging markets than it is to I will just say the US and Western Europe.

Okay, thanks. And then the follow-up just on the segment margin guidance of a slight increase in fiscal '13, you talked about what the operating pension cost effect is and there is some volume leverage in that as well. But how about sort of two or three other things, in particular a mix or the delta of savings versus restructuring charges and kind of input costs versus price. How are you assuming those move around inside that margin guidance?

So let me start and hopefully I will hit all the points you just made. We would expect a small favorable impact from mix because across -- if you think about our guidance range, I would say across -- of sales growth -- across that range, we would expect product growth to be maybe a point higher than the Company average in Solutions and Services. They'd be about a point lower, so a little bit of a favorable mix impact.

On price material cost, I would say we expect a small positive contribution. We would expect price to be less than a point similar to what we are seeing in 2012 and I would say we expect some modest material cost increases purely on the commodity side. If anything, neutral to maybe slightly favorable. We talked about obviously the pension headwind. Was there one other item you had there, Julian?

Yes, sure, it was just on kind of the net of savings versus restructuring charges.

Yes, great question. Right now, our intention is not to take those savings from the restructuring actions in Q4 to the bottom line, but rather to use those to kind of rebalance our investments as we go into 2013. Now as we proceed into 2013, if market conditions turn out to be worse than we were expecting, we may not redeploy all of that.

Got it. Thank you.

Steven Winoker, Sanford Bernstein.

Thanks and good morning. First question on Logix, can you just provide some color around what Logix was doing in the quarter and any more pressure competitively in terms of traction there given the fact that customers are, as you mentioned, putting off decision-making at this point?

Sure. Logix's -- organic growth from Logix in the quarter was 6% year-over-year and for the full year, it was 8% growth. So we are happy with the performance of Logix in the year. I think our ability to continue to expand the platform, in particular with a number of -- actually three new midrange platforms, gives us optimism and that is why my comments about we are pleased with our new products, but we are also counting on those new products to drive growth in this next fiscal year.

So I don't believe delays or customer -- lack of customer certainty has impacted disproportionately anything associated with our Logix business and I think we are better positioned going into '13 with these new platforms than we were coming into '12. So I think it is an area that can help us across the board both in Process, as well as our OEM initiatives and whether that be in emerging markets or mature economies, we think a broadening of that portfolio bodes well for us going forward.

Are those the best growth -- you mentioned best growth opportunities in the release and a couple times on this call. Is that what you are talking about?

Yes. And to Ted's point, part of the redeployment of resources with the headroom we have created from our restructuring actions are to do just that, to focus on our core platforms and to support the commercial initiatives, particularly in emerging markets. So we do see that as one of the better opportunities and Process and OEMs remain right up there as far as where we think we have the greatest long-term growth potential.

And second question, you mentioned EMEA. EMEA was up 7% in the quarter organically. Where was that? What did Western Europe do and are you assuming you can keep that up for 2013 and how?

Well, I think it was interesting, Europe, because it was a combination of good growth in a lot of the emerging Europe, which would be for us Central and Eastern Europe, including Russia and then the Middle East and South Africa. So that was significant growth, double-digit growth in the quarter.

I think Western Europe was more mixed. We had some very good success in a couple of countries and in particular, good success in the UK, good success in some of the northern countries and really the greatest weakness for us was in Italy and mainly because of the financial issues there that is impacting both the end-users in Italy, as well as the machine builders. So I would say in Western Europe, Italy was the weakest performer for us.

As far as being able to keep it up next year, we believe that Europe will be at below the Company average and I think it really depends upon how does the financial and the debt crisis there and the euro crisis unfold. As we said, we are not expecting it to deteriorate from here, but we are not counting on a lot of growth from the mature economies. And we think we will see above average growth in the emerging.

Okay, thank you.

John Inch, Deutsche Bank.

Thank you. Good morning, everyone.

Good morning, John.

I just would like to understand the organic growth guide a little bit more, Ted and Keith. So if you look at volumes and the normal seasonal pattern today, and based on all the puts and takes that you have described, does the midpoint of your guide assume that in fiscal '13 business conditions, all else equal, are relatively static? Or are you assuming, as I think, Keith, you mentioned, some second-half improvement, or is the second half improvement really a function of getting to the 5% within the range?

No, John, I would say even at midpoint, we would expect first half to be relatively flat to current conditions, maybe slightly better, but then most of the growth has to come in the second half.

So some companies have gotten into trouble, though, by forecasting macroeconomic improvement. I am just curious is this -- I realize you have some visibility with respect to backlogs. Obviously, you're discussing a lot with your customers. Is this a little bit of an inventory build or is it Process, or what would give you the confidence at this juncture to assume that in your June quarter you are going to start to see a pickup or is it sort of aspirational? Just a little more color would be helpful.

I would not call it aspirational, but I think we have been pretty consistent saying we don't believe we have visibility that goes out more than six months, especially from an order and backlog point of view. I think what we are looking at is conversations we are having with our sales organization, our channel, our customers. We are looking at the macroeconomic projections that were put out there by people like Global Insight. I would say generally what we are seeing in those macroeconomic projections, and I think this is also true of IMF, is that there is expected growth next year, but generally weighted towards the latter half.

We are also hopeful that once we get past the elections and the fiscal cliff that hopefully that will reduce some of the uncertainty we have in North America right now. So we think that is consistent with the notion of whatever is going to happen in our fiscal 2013, it is more likely to be positive in the second half.

The only thing that I would add to that, John, is quite frankly that is why we have a range and if you go at the low end of that range, we are not assuming anything in the second half and if you go to the high end of the range, it kind of fits what Ted just talked about. So I think that range allows all of you to make your best estimate of how you see it playing out from your window, but certainly we see the potential to operate across that range and I think the dynamic that Ted talked about is what moves it from the low end to the high end.

Okay, that clarifies it. That's quite helpful. Let me ask you then, Ted, at the midpoint, right, of your EPS assumption, you are assuming $5.55 versus $5.29 ex the pension non-operating costs. Now I realize you have got this extra -- you've got the service cost increasing by about $0.10 -- $0.10, $0.11, but that is still giving you a -- it is sort of still kind of an anemic, if you will, variable contribution. I think I am just going back to the 18.7%, right, versus 18.6%. I realize that if you ex the $20 million, it is about 30 basis points, but what kind of variable profit conversion are you assuming and shouldn't the lower solutions, shouldn't that actually be helping your mix a little bit more? Like why is there not a little bit more volume leverage?

So, at the midpoint, conversion is a little bit over 20% and if you add it back, the pension expense increase, conversion would be close to 30% and we think with 3% organic growth being at the low end of kind of what we normally talk about of that normal range in the upcycle of 30% to 40%, we think that is pretty good performance.

Okay. So your midpoint is assuming the low end of your historical range of a 30% to 40%, that is the way to think about it?

Without the pension expense increase.

Right. No, I understand. And the reason for that is just because overall uncertainty you are just being conservative or what?

Well, I don't think so. I mean I think it is simply that the lower that organic growth number is, we just don't get as much volume leverage.

That's fair. Lastly, China. I think China was up 5% last quarter, up 11% this quarter. Keith, what are you seeing in China? Like what are you sort of seeing on a sequential basis? What are your on-ground field people telling you because companies are, for all intents and purposes, saying it is flat but some have actually called out perhaps a degree of improvement? Thanks.

I think we are seeing mixed at this point, John. China, we have not seen any impact or I should say meaningful impact yet of the stimulus, particularly in some of the infrastructure projects. We do expect a little bit of help with that in fiscal '13. But they still have challenges with respect to liquidity, particularly for the small and mid-sized customers and their exports, particularly given the impact of the euro to their export industries, continues to be a challenge.

So we see China as having another tough year, but a tough year for them means it is still meaningful growth. GDP has dropped down into the 7%s with the last one continuing to bring it down. They are going through a leadership change. I think this first quarter here it will be a little bit uncertain and I think we will get a little more clarity as to what that does, positive or negative, as we get past the Chinese New Year. So we see China as mixed at this point in time and we are still very optimistic and bullish on China in the long term, but we have to get through the current environment.

But your guidance doesn't assume China deterioration; it's just assuming (multiple speakers) ?

No, no. We think China overall will perform slightly higher than it did for us this year. That is our plan for next year and as you know, we had a very, very weak start in China last year. We ended much stronger and we think we will be slightly ahead of the fiscal year performance.

Got it. Thanks very much.

Jeff Sprague, Vertical Research Partners.

Thank you. Good morning, guys and Rondi.

Good morning, Jeff.

Good morning, Jeff.

Can we talk pension a little bit? What is the funded status of the plan at year-end?

We were underfunded by $930 million at year-end, which is slightly higher underfunding than year-end last year. And so basically the drop in the discount rate pretty much offset the favorable contribution we got both out of asset returns and the pension contribution we made in October.

And then what do you see for pension contributions in 2013, if any?

I think in terms of discretionary contributions, we would not expect a discretionary contribution in 2013. So our normal level of pension contributions primarily related to plans outside the US of about $40 million.

And what percent of the current plan participants are current employees and is the plan still open?

Well, the plan was closed to new participants. This is generally true for our defined benefit plans in the US, Canada and the UK. They were closed to new participants in 2010, but they remain open for active participants. Offhand, I do not know the percent of employees active versus not active. I would guess it is probably about 40% active versus 60% not active. I will check that for you and we will have Rondi get back to you if that is not correct.

And then just going forward, are you going to report kind of full detailed GAAP/non-GAAP so if we want to keep track of what the GAAP numbers actually look like, we will be able to do that?

Yes.

All right. Thank you, guys.

Nigel Coe, Morgan Stanley.

Thanks, good morning.

Good morning, Nigel.

Yes, so I just wanted to dig into A&S margins a little bit. You talked about restructuring and that accounted for the bulk of the year-over-year decline, but then you called out Logix growth of 6%, which is -- that comes at a decent margin. Just wondering were there any negative mixes that offset that Logix growth?

I would say nothing significant in the quarter and I would also say the Logix growth versus the average of A&S wasn't a significant mix boost for us. I think if you look at A&S, we have always said the margins are going to be somewhat variable quarter-to-quarter in part because of the high underlying contribution margin potential. If you look at the full year, A&S margins were 26.5% for the full year, which was up almost a point from last year. I think that is representative of the underlying performance of the business.

Right. And we talked about the 1Q seasonality within CP&S, but A&S margins normally pick up from 4Q fiscal into 1Q fiscal. Would you expect that to recur this year?

Well, I think you are correct in your historical observation. Since we don't provide quarterly guidance, I don't want to comment on what I think A&S is going to be next quarter.

Okay, fair enough. And Ted, you gave us the Solutions book-to-bill. I know you are very short cycle, so the Products book-to-bill is not that meaningful a metric, but do you have the number offhand?

I don't have the number offhand, but I think you're right. Because that is such short cycle, we typically don't have a big difference in book-to-bill in Product.

Okay. And then just switching to the pension change, you had the option to -- I guess you considered switching to mark-to-market. You opted to go for a non-operating metric. Maybe just quickly why did you decide not to go with the mark-to-market route because it seems that most US companies are adopting that change of accounting?

Yes, I think that is a fair question. We felt that the most important thing was trying to provide investors transparency into the non-operating versus operating pension costs. We thought we could accomplish that without changing the underlying GAAP accounting and we thought it was a positive that, in choosing the method we chose, we don't have to make these large fourth-quarter GAAP adjustments that are a consequence of the mark-to-market adjustment.

Right. And by the way, I appreciate all the detail you have provided on the restatements. That is really helpful. And then just quickly on Logix, you set a target of $1 billion this year. Did you get there?

We were just under it this year and we certainly are going to go over it early in our fiscal year, but the difference between organic and with currency caused us to be just slightly under. So we are pleased with where we are at. We almost got to that magic $1 billion and we are going to look forward to blowing through it this fiscal year.

Okay. Good luck, guys. Thanks.

Winnie Clark, UBS.

Good morning.

Good morning.

Ted, could you just talk a little bit about actually back to the quarter, it seems that results were better than what you had expected going into the quarter. Can you kind of talk about how things trended with September better than the prior months, etc. throughout the quarter?

You are breaking up a little bit, so let me see if I can repeat the question and make sure we got it. You are asking (inaudible) the sales numbers came in a little bit better than expected in the quarter and could we talk a little bit about how things trended through Q4?

Yes, that's right. Thank you.

Okay. I would be happy to do that. Well, I think most of you know that our fourth quarter is very heavily weighted to September performance and September, once again, was our strongest month in the quarter, both in orders and sales and nothing unusual there. I would say it was our typical pattern that we have every year given the holidays, particularly in the July, August timeframe both in Europe and more and more in the US, so very consistent.

With respect to October, we believe what we have seen so far is consistent with the guidance we gave and with the commentary that we talked about with first half and second half and our Solutions backlog reduction in Q4.

Okay, thank you. And then on Process, obviously very strong growth this year being that your Solutions backlog is a bit weaker and you expect some weaker mix next year, how do you think about Process next year relative to the Company average growth?

Yes, we think Process will be closer to the Company average growth this next year than the significant above Company performance that we had this year. And you are exactly right. It is mainly driven by the softness in orders the last two quarters. So not the performance difference that we had this year, but still ongoing growth and still the area that we believe has the greatest long-term potential for us.

Okay, great. Thanks so much.

Okay, we are a little over the hour, but we will take one last call and then we are going to wrap up, okay, so one more call.

Shannon O'Callaghan, Nomura.

Good morning, everyone.

Good morning, Shannon.

In terms of the pause amidst the uncertainty out there, I mean is this kind of a amorphous commentary you're getting back from customers in the channel or do you hear one thing more than the other? I mean are people bringing up mainly fiscal cliff, mainly Europe? Do you have any ability to kind of rank order what you tend to hear the most to give us a little feel for when people are going to get over this uncertainty?

Well, no. I mean with -- and the reason I say that is with more than 50% of our sales outside the US, we hear an eclectic set of feedback and I think the US, the predominance is the fiscal cliff and what is going to happen with taxes and what is going to happen with my cost with all the regulation and the healthcare. So I think there is this great uncertainty in the US as to can I make a long-term investment decision without knowing a little more as to what the rules of the game are going to be for some period of time. And I would think there that is the predominant question that is on people's minds.

If you go to Europe, I think it is just they haven't solved the fiscal sovereign debt crisis and everyone is waiting to see will there be some definitive conclusion to that. And the emerging markets are just kind of -- I think you see a little mix there. The emerging markets that have strong exporting are wondering what is happening in the US and Western Europe and I think where the ongoing positive activity is is in their indigenous markets and in particular, in some of the automotive, some of the consumer product areas. That is where we see the least dependence upon what is going on in the rest of the world in those emerging markets. And really what is the form of government stimulus that is being applied there, which traditionally is much more infrastructure types of projects.

So it is varied and I think each region has their unique set of concerns and that is the backdrop that we see this pause and ongoing uncertainty and therefore lack of confidence to make ongoing investments.

And one follow-up on China. You said you haven't seen sort of the evidence of stimulus yet, but you expect some in '13 I think. In terms of the pipeline of things that are on the table over there, I mean any particular verticals or areas of investment that you think have some visibility to benefiting from?

Well, the stimulus is heavily focused into infrastructure, so metro systems, they always -- not always. Last time as well as this time, they are accelerating projects, which would have been done later, but now they move them up and they have more lines going in in parallel than they would have previously. And we still see some strength in oil and gas in China, particularly some of the offshore activities are strong and automotive is not as strong as it used to be, but it is still a healthy sector. And then, as I mentioned earlier, the indigenous food and consumer industries with their growing middle class is an area that we still see good investment by both indigenous, as well as multinational companies.

Okay, great. Thanks a lot.

You bet. Thank you.

Okay, so that concludes today's call. Thank you all for joining us and we look forward to seeing many of you in Automation Fair next week, actually starting this week, actually it is this week. It has been a busy month. So we will see you later this week. Thank you.

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