洛克威爾自動化 (ROK) 2013 Q1 法說會逐字稿

Welcome to the Rockwell Automation quarterly conference call. I need to remind everyone that today's conference call was being recorded. Later in the call we will open up the lines for questions. (Operator Instructions). At this time I'd like to turn the call over to Rondi Rohr-Dralle, Vice President of Investor Relations. Miss Rohr-Dralle, please go ahead.

Thanks, Francis. Good morning, and thanks to everyone for joining us on our Rockwell Automation's first-quarter fiscal 2013 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 include highlights on the Company's performance in the quarter and outlook for the full year. And then Ted will provide more detail on both of those. We will take questions at the end of Ted's remarks.

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. A webcast of this call is accessible at that website and will be available for replay for the next 30 days.

Before we get started 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. 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 turn the call over to Keith.

Thanks, Rondi. Good morning, everyone, and thank you for joining us on the call today. I know it's been a busy earnings season for all of you, so I appreciate your time today and your interest in Rockwell Automation. The first portion of my remarks will cover the highlights for the quarter, so please turn to page 4 in the slide deck.

Sales in Q1 were in line with our expectations in total with mixed results by region. Latin America grew 7% with Brazil back to positive growth; US growth was strong at 6%; EMEA declined 2% as expected due to flat OEM demand and lower solutions backlog entering the quarter.

The negative surprise in the quarter was 9% sales decline in Asia Pacific. China and India were both down in the quarter more than the region average. In China continued soft economic growth, lack of credit availability and project delays all impacted sales in the quarter.

Orders performance was better than sales performance and we rebuilt backlog in the quarter. I was in China earlier this month and it feels to me like sentiment for industrial investment is turning a bit more positive which should help our second -- our results in the second half. I'm confident that we are well positioned to capitalize on opportunities when growth accelerates.

In India continued economic weakness, tight credit and high interest rates are dampening investment and causing project delays and we don't see any improvement on the horizon.

Process had a small sales decline this quarter reflecting a weaker solutions backlog coming into the quarter and continued project delays. Continue to believe that Process is our best growth opportunity and I will talk more about that later.

Before I and my discussion on the top line let me point out a couple of positives in the quarter. In addition to the strong sales in the US and Latin America, Logix grew 5% and we were encouraged to see Solutions' order rates pick up. The Solutions and Services book to bill was 1.23.

Those of you who have been following us for a while know that a core part of our strategy is diversification of revenue streams from a geography, industry and application perspective. A quarter like this where you have areas of strength that make up for pockets of weakness demonstrates the importance of that strategy.

Operating margin of 18.5% in the quarter was good and in-line with our full year guidance. Adjusted EPS was $1.23 in the quarter. So overall I would call it a good start to the fiscal year.

Let me share some other highlights of the quarter. [CONTROL] magazine, an industry leading publication exclusively dedicated to global process automation market, recently issued the results of its reader's choice survey. We had our best showing ever with 43 wins in control, industry and product categories, the most of any process company.

Of the six CONTROL discipline awards we won three with no other company winning more than one. In the industry vertical awards we wanted 30 out of 53. A second-place supplier won only 12. These results are further validation that we are gaining ground as a leading DCS company for process application.

We're getting good traction with new products such as our family of mid-range controllers that we released throughout 2012. We expect this new product momentum to continue and that, along with the cooperation from the global economy, will help fuel the increased growth in the second half that is baked into our fiscal year guidance.

In early Q1 we closed on an acquisition in China, a medium voltage drives business headquartered in Harbin. This acquisition positions us well in the fastest growing region for medium voltage drives adoption in energy intensive application. I'm really excited about this group of talented employees who bring local manufacturing and design capability that will help us serve customers in China and across Asia.

We were honored to receive the Better Business Bureau's 2012 International Torch Award for marketplace excellence. This award reflects our commitment to quality, our customers, our investors and our communities, all based on a strong foundation of ethics and integrity. Every employee played a role in this recognition and should be extremely proud.

So let me share our thoughts on the remainder of the year. Given first-quarter results and our current assessment of market conditions, we are re-affirming our outlook for fiscal 2013 organic growth of 1% to 5% with corresponding adjusted EPS of $5.35 to $5.75.

We think year-over-year growth in Q2 will be similar to Q1, but stabilization of macroeconomic indicators and forecasts, coupled with our rebuilt backlog, reinforce our expectations of increasing industrial activity resulting in stronger growth in the second half of our fiscal year. We are planning to continue to invest in innovation and customer facing resources, but will monitor business conditions closely and pace our investments accordingly.

While the economy is not as robust as we all would like it to be, and business conditions remain challenging, we are seeing signs of stabilization that are encouraging. We are going to stay focused on providing value to our customers and executing our strategy. If we do that we will continue to outgrow the market.

We have a great franchise with great employees and partners that know how to be flexible, collaborative and responsive to customers' needs, that is what will enable us to grow and deliver superior return to our shareholders. Here is Ted to provide more details on the financial results for the quarter and our outlook for 2013. Ted.

Thanks, Keith. Good morning, everybody. As Rondi mentioned, we posted a set of slides to the website; my comments are going to reference those slides. I will start with page 5, which is the first-quarter results summary.

Revenue in the quarter was $1,489,000,000, up 1% compared to the first quarter of last year. The year-over-year impact of currency fluctuations reduced sales by about 0.5 points and acquisitions contributed less than 0.5 point, organic growth was 1.5%.

As I move to segment operating earnings I will take the opportunity to remind you that, consistent with our get discussions on last quarter's earnings call, beginning with this first quarter of fiscal 2013 we have adopted a new approach to dealing with pension expense and some of our earnings measures.

We have introduced new non-GAAP measures that exclude non-operating pension costs from our income from continuing operations and corresponding EPS and we also changed our definition of segment earnings to exclude the non-operating pension costs.

We define 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 plan curtailments or settlements. We consider service costs related to active employees to be operating pension costs.

So on the new reporting basis segment operating earnings were $276 million, down about 5% from $292 million in Q1 last year. General corporate net was $18.5 million compared to $20.2 million in Q1 last year; $18.5 million is a little lower than our expected run rate for the full year.

The adjusted effective tax rate in the quarter was 26.6%, that compares to an adjusted effective rate in Q1 last year of 24.9%. Adjusted earnings per share were $1.23 and that compares to $1.31 a year ago.

Average diluted shares outstanding in the quarter was 141.2 million. We repurchased approximately 1.2 million shares in the first quarter at a cost of about $88 million and at the end of Q1 there was $849 million remaining under our $1 billion share repurchase authorization.

Moving it to page 6, this is the graphical version of total Company results for Q1. As I noted on the prior slide, the year-over-year increase in sales for Q1 was 1%. Sales declined sequentially by 11%. As we discussed in last quarter's earnings call, we entered the first quarter with an unusually low backlog in our solutions businesses.

On the right side of the chart you will note a modest year-over-year and sequential decline in operating earnings; operating margin in Q1 was 18.5%, down from 19.8% on a comparable basis for Q1 last year. The year-over-year decline is more about an unusually strong margin in Q1 last year than about weakness this year.

In Q1 this year we experienced very modest organic growth, so not enough volume leverage to offset a higher base of spending due to annualization of fiscal 2012 investments, the increase in operating pension costs of about $5 million in the quarter and normal year-on-year compensation increases. Currency effects also had a negative impact on operating margin in the quarter.

These factors I had a similar impact on operating margins in both segments. At 18.5% operating margin is about equal to last year's full-year results, pretty much right on our full-year guidance and we believe a very solid start to the year. Although it's not displayed on the chart, our trailing four quarter return on invested capital was 29%.

Now please turn to page 7, this is the Q1 results of the Architecture & Software segment. Looking at the left side of this chart, sales increased 1% year over year, currency translation reduced sales by 1 point, so 2% organic growth. Sales were down 2% sequentially.

Operating margin for the quarter was 27.9% down from a difficult comp of 29.1% in Q1 last year, but almost a full point above the full-year 2012 operating margin for Architecture & Software. Again, a pretty strong start to the year. You can also note here the sequential earnings improvement and operating margin was up 2.7 points sequentially.

The next page, page 8, covers our Control Products & Solutions segment. Sales in the quarter were up 1% compared to last year, both on a reported and organic basis. There was no significant difference between the year-over-year growth rates and the products portion of this segment and the Solutions and Services portion.

Sales declined 16% sequentially with products down 3% but Solutions and Services down 24%. The decline in Solutions and Services was pretty much as expected and consistent with our comments last quarter regarding a low beginning backlog.

On the right side of this chart you will note the year-over-year and sequential earnings decline. Operating margin in this segment dropped from 12.5% in Q1 last year to 11.2% this year. Particularly in our Solutions and Services businesses the cost structure increased over the course of last year as volume ramped.

We haven't fully adjusted for the substantial sales decline from Q4 to Q1, because when we rebuilt backlog in Q1 and we need to preserve the experienced people in these businesses to fulfill the orders which now will be delivered in the balance of the year.

Switching to the next page, this provides a geographic breakdown of our sales in the quarter. I will focus my comments on the far right column which displays organic growth. As Keith noted, strong growth in the US of 6%; Latin America was up 7%; and Brazil experienced 13% growth in the quarter; EMEA and Canada were each down 2%; and Asia-Pacific was down 9% year over year with China down 13%; India was weaker. That was somewhat offset by growth in the balance of Asia.

Compared to our expectations and looking across the regions, the US outperformed expectations in Q1 and Asia underperformed. Keith talked about some of the reasons for the underperformance in China and India in his comments. We do expect to see improvement in Asia Pacific sales performance in the balance of the year, particularly in China.

Trends in the macro indicators, our backlog at the end of Q1 and input from our sales organization and customers support this view. In the longer term, we continue to believe that the emerging markets in Asia remain among our best growth opportunities.

I will turn now to page 10 which is free cash flow. Free cash flow for the quarter was $156 million. Even though Q1 is typically a weaker cash flow quarter, that represents about 97% conversion on net income. So another very good start to the year.

And that takes us to the final slide, page 11, which addresses our current outlook for fiscal 2013. As Keith mentioned, we are reaffirming guidance. We continue to expect to sales in the range of $6.35 billion to $6.65 billion. That revenue range represents organic growth for the full year between 1% and 5%.

Consistent with our previous guidance we still project stronger growth rates in the second half of the fiscal year. We believe that currency and acquisitions will add about 1 point of additional growth for the full year, that is the same as prior guidance.

We continue to expect segment margin to be about 18.7% for the full year and consistent with an expectation of higher growth rates in the second half, third and fourth quarters are also likely to be the higher margin quarters.

We are reaffirming adjusted EPS in the range of $5.35 to $5.75. We now foresee a full-year adjusted tax rate of between 25% and 26%, that is down slightly from previous guidance of 26%. The reduction is primarily due to the extension of the R&D tax credit for 2012 and 2013 in the recent American Taxpayer Relief Act. We believe that the benefit of a lower tax rate will now likely be offset by somewhat higher share count.

Subject primarily to acquisition opportunities, we still expect to spend about $400 million this year on repurchases. However, we are now projecting that full-year average shares outstanding will be about $141 million. That is up 1 million to 2 million shares from what we expected in November and due to a higher share price and the impact of the higher share price on both repurchases and options.

And finally, we still expect general corporate net expense to be about $83 [million] for the full year. With that I will turn it over to Rondi and we will begin Q&A.

Great, thanks, Ted. We have quite a few callers in the queue today, so -- I know I say this every time, but we would like to get to as many of you as possible. So please try to limit yourself to one question and a follow-up so we can then move on to the next caller. Okay, Frances, we are ready to take our first question.

(Operator Instructions). Steve Tusa, JPMorgan.

Can you just maybe provide some color on Process in China?

Well, specifically Process in China I think was -- the impact there was mainly in project delays both -- and really in the backlog where there was a delay in customers because of liquidity in some cases, delaying shipments. But probably the bigger impact of it was simply the large backlog depletion that we had in the fourth quarter left us with less to be able to ship in the first quarter.

So I think I was probably the bigger portion. We saw some additional delays throughout the quarter. I would say the encouraging thing about Process in China was the orders that we had during the quarter where we have rebuilt some of that backlog. So I think it was a quarter -- at this point we believe it was a quarter phenomenon.

Great. And then just a follow-up to that on the backlog build. This -- the CPS Solutions business kind of seemed like it hit instantaneously here with your backlog. That 1.23 book to bill, I guess you are saying through the balance of the year?

How much of this comes through in the second quarter, because that would imply quite a nice -- just like you had a pretty significant downdraft in the first quarter here would suggest CP&S bounces back pretty strongly in the second quarter, yet you are kind of guiding to moderate year-over-year growth, which looks like it doesn't account for that kind of bounce back in the second quarter on revenues.

Well, Steve, I would say what we believe is that build up in the first quarter doesn't come out immediately the quarter after. So that build up is why we have confidence in the growth rate in the second half of our year and it is why we believe the second quarter will be similar to the first quarter.

And the build up -- while we are positive about the buildup, it does take a while to work its way through the organization and through the engineering and designing process for those projects and it is a second half phenomenon.

And were these orders late in the quarter? That is my last question, sorry. Were they late in the quarter or did they come kind of throughout the quarter?

They weren't disproportionately weighted to December, but our orders did ramp from October through December in the quarter.

Okay, thanks a lot.

Steve, that was pretty much across the board, not unique to Solutions.

Okay, thanks.

And just one more comment on Solutions. I think we do expect better Solution sales in Q2 than Q1, but we think we will see more of the impact of that backlog build beyond Q2.

Scott Davis, Barclays.

I have a few questions, but I think one thing that is pretty notable is your kind of lack of commitment to share buyback here. And I think the question is kind of -- maybe it just shows a lack of confidence in the macro environment. But if you look back at kind of the history of your share repurchases, you bought back a lot of stock in 2006 and 2007 and then a bit in 2008 and it has been kind of a trickle since then.

What is really the cause of that? I mean is it that -- the lack of kind of macro confidence to put a lot of money to work here? Or do you see some substantial deal out there that is kind of keeping you wanting to be more liquid? I mean, help us kind of understand that (technical difficulty) pretty stark.

So Scott, the first thing I'll say is even excluding 2007, over the last three fiscal years we've returned $1.3 billion in cash to shareowners either through dividends or share repurchase. And basically our plan this year is to exhaust our free cash flow, at least as what we are expecting at the moment to be free cash flow, over the course of this year.

And that is the expectation we talked about of spending $400 million this year after acquisition spending and after dividends. We spent almost a quarter of that in the first quarter. So we believe we are on pace for what we were expecting to do in terms of repurchases this year.

Well, I get it, except just to play devil's advocate -- I mean you are holding almost no net debt and you have got almost $1 billion of cash on the balance sheet. I mean that is a pretty big number; if you go back in history and look that is a much larger number than the history. And again, if there's some macro uncertainty I completely understand it. But otherwise I guess I will move on. We can take this afterwards.

I want to go back to Steve's question in China and talk us through what kind of projects in the volatility there. I mean my understanding just in talking to your competitors is that China was more flattish for them in the quarter. Your down 13% is probably going to be an outlier for your broader comp group. What specifically happened to Rockwell that caused that growth rate to modulate down so fast?

Well, let me -- first about the flat comment. Our orders were flat, so we don't see it as a disconnect from what we had expected in that regard with orders continuing to perform. What happened is pretty simple, it's the aspect of a solutions business where it is very lumpy and we have orders and sales that certainly are more volatile than our products businesses and in this case the timing drove a significant shipment in our fourth quarter, that created the hole in our backlog.

We had a weak second half orders rate in fiscal 2012 and that in combination -- weaker I should say a weaker order rate in the second half and that plus the shipments in the fourth quarter created the gap in shippable product and then during the quarter we had some project delays. And those are typical in a solutions business and I think it was just a combination of those multiple aspects that created a more severe outcome this quarter in China.

Okay. Fair enough, thanks, guys. I will pass it on.

Scott, this is Rondi, and I just want to mention that back in that 2006-2007 time frame we sold the Power Systems business and that generated net cash [growth] of over $1 billion. And so, when you look at share repurchase from that period of time, that is really an aberration. I think what you are seeing now is very consistent with our cash deployment philosophy that we have been talking about now for years.

Yes, just one quick comment. I just look at if you are holding a $1 billion in cash and you've got $1 billion in receivables, I mean you essentially have kind of $2 billion of cash to the entity, if you will. I mean that is just a big number. So I will pass it on. But that is just my (multiple speakers).

Scott, that is a fair observation. I think one of the things we have talked about on previous calls is we've got over $1 billion in cash, but 90% of that is sits outside the US and we can't easily access that without absorbing a significant tax penalty which we have been reluctant to do.

Yes. No, I totally get it.

Julian Mitchell, Credit Suisse.

I wondered if you could give any color on different end markets in terms of how customer activity is differing in the automotive versus food and beverage, that sort of color.

Absolutely, Julian. Certainly for us the two strongest end market's verticals for us were automotive and oil and gas, and that would be pretty consistent on a global basis. And if you -- auto, outside of EMEA, has been strong with continued CapEx investment and we also are able to now work in another application and we are being able to participate in more of the powertrain applications in that industry. Oil and gas has been a good for a period of time here now and certainly that was one of the stronger markets for us this past quarter.

Consumer in food and beverage, in there the food is the stronger; beverage is starting to slow down some, particularly in the mature markets. Most of the CPG consumer investments are being made today more in the emerging markets.

Our life sciences business had strength both in EMEA and in Asia Pacific. Tire is getting a little weaker now, they had very strong investments for a couple of years and I think we are starting to move to a lower investment rate in total, but still good levels of investment.

And I would say today the weakest markets in total would be what is happening in metals and mining. And I think the metals has been weak for a while here and I think recently we are now seeing a slowdown in some of the mining activities in specific geographies driven a lot by the reduction in demand from China.

So I think that is impacting the mining business in Australia and in certain segments in Latin America as well. Although mining in Canada continues to be solid and then you also know of the labor unrest in South Africa, and that is creating additional I will say impacts on the mining industry.

Okay, thanks. And then just secondly, your gross margin was down about 130 -- 120 basis points year on year even though revenues were up slightly. Was there anything going on, particular input costs or price or any special mix effect that will normalize?

You know, I think, Julian, the only unusual thing is that gross margin is a full GAAP number, so it's got all of the pension cost increase, both operating and non operating, that we are absorbing year over year.

Okay, thank you.

John Inch, Deutsche Bank.

Can we focus in on automotive? It's one of your strongest verticals legacy; it is one of your most profitable verticals. You have clearly significant model introduction ramps coming in North America, Ford talking about CapEx spend improvement should be very helpful to you, GM and so forth.

Where are we at with respect to the historical contribution of auto as a vertical? And maybe, Keith, you could give us your perspective around the runway and how you actually see that evolving by say geography. Because obviously in prior cycles China wasn't significant in automotive and now you are making inroads there. So maybe a little color there would be helpful.

Okay. Well, you're absolutely right about the legacy strength of automotive in Rockwell Automation. We have talked at the depths of the decline automotive was under -- was in the high-single-digits. I would say today we have -- and over the last two years automotive has probably picked up a little bit to where the combination of auto and tire is probably around 15% of our revenue now, auto is probably a little over 10% -- 10% to 12%.

A lot of that has been because of the growth of the automotive industry outside of the US. I mean the US is back and it is very important to us, but where the incremental has been from a historical perspective has been the investments really in the emerging markets of which China would be number one. And we are continuing to increase our penetration of both the joint venture companies in China, which is the only way a multinational can participate in the automotive market, and in the domestic -- the major domestic suppliers.

So China has been a great opportunity for us, that would be followed by India, Brazil and Eastern Europe. The only other parts that I would link a little bit to the US automotive is Mexico has been a very strong automotive market and it continues to grow both with North American manufacturers as well as international companies as well. So Mexico has been an improvement.

Then what I mentioned earlier about our ability to address more applications, we now are able to address the powertrain side of the business and historically we were mainly in the body and assembly side. And so powertrain -- so we can address -- and paint. So we can address paint, body and light assembly as well as stamping.

And now with powertrain there are no applications that we can't go after in automotive. In addition, we have expanded our information capabilities and NES in the automotive space. And that has been a help for us also in the emerging markets as they try to be a very efficient producer of cars and -- with high quality.

So I would say it is really been the emerging market, the expansion of our portfolio that -- and the resurgence of North American manufacturing that has driven our participation in this space to a higher level of our total sales over the last two to three years.

So thanks for that, I appreciate that, Keith. And then in terms of follow-up, could we -- just curious if we could talk a little bit about this China acquisition that you did. I don't believe you have done a China acquisition in the past.

Caterpillar, which I realize has nothing to do with your Company, just took a massive write-down for a China deal. How have you gotten around -- I mean, you are a pretty cautious guy -- how have you gotten around the risks associated with doing that sort of a thing?

And is this some sort of an inflection toward your own I guess increasing comfort level in China and operating as a player say comparable with some of the other big automation players, Mitsubishi and Siemens? I mean just a little bit -- I just think it is really interesting. What else can you tell us about it?

Sure. Well first, it is our second acquisition in China. We acquired an engineering company there for our Solutions business called Hengsheng and we did that a couple years back. And that was really to get us domain expertise to have a bigger critical mass of engineers to be able to support our growing Solutions business there. So that was more of I will say a people investment and that has been very successful for us.

The second one that we made was basically JZE, which was a medium voltage manufacturer -- a medium voltage drives manufacturer. And what gave us a little more confidence here, John, to your question is the fact that we had worked with them for a number of years previously; they were a contract manufacturer for our medium voltage drive in China.

And they had some technology that was -- that allowed us to address a different market segment -- I shouldn't say different market -- different applications with a different price point because it was different technology and it gave us a broader coverage of the medium voltage market. And that is very important because of the energy savings opportunities that that brings.

So I would say the previous working relationship gave us confidence in the people, gave us confidence in their capabilities and certainly was a part of the reason why we made the acquisition.

I would say in China in general we continue to believe -- well, obviously it's a very important market, and we continue to look for ongoing acquisitions in China. They are difficult, as you outlined in your comments about Caterpillar. And certainly we are cautious, we are cautious because of the intellectual property, we are cautious because of the business practices and --.

But, yet, they are going to continue to grow solid good companies and we believe that we want to keep monitoring what is going on in China and we are willing to make acquisitions there given the right conditions and situation. But obviously due diligence is quite important and we have not proceeded on a number of our acquisition inquiries because of those types of concerns.

Perfect, thank you very much.

Steve Winoker, Sanford Bernstein.

Keith, you have often talked about and described Rockwell as not a margin expansion story. But I would like to just dive into margin a little bit more even on this quarter just to make sure I understand it better in terms of the decrementals. Could you maybe first just talk about the regional mix impact on margin given the very different regional profiles?

I don't think there was any -- there was not a significant mix impact in the quarter either based on regional performance or the mix of product versus solutions.

Okay, second then, discretionary spend and you talked about annualized spending going up, year-over-year comp, I assume R&D. Maybe just -- and then pricing as well. Just give us a flavor for -- I understand last year was exceptionally high and that this is the run rate, but try if you could, just break it down a little bit into some of those components other than pension -- help us get a sense for the profile going forward.

Sure, maybe this will help. One of the reasons Q1 last year was a relatively higher margin quarter within the context of last year was our spending ramped from Q1 across Q2, Q3 and Q4 last year. So if you look at the exit rate of spending, we were probably up about 3%, maybe 3.5% from Q1 to Q4 and that carried into our Q1 this year.

So with a 1.5% organic sales increase we've got more like a 3.5% to 4% expense increase -- spending increase, if you will, and that includes investments we have made in R&D, in domain expertise, in commercial facing resources. And included in that also is just normal compensation increases year over year as well as the $5 million increase in operating pension costs we are absorbing.

Okay, all right. So from your perspective this wasn't a sort of intra-quarter, it was just you held your cost structure sequentially. And while you were satisfied it sounds like with the growth and better than the Street on growth, that wasn't enough to where you wanted to be. And therefore your seasonal plan -- if I am correct, is more -- was always weighted later in the year.

Well, yes. And we guided to 18.7% for the full year and we were 18.5% in the first quarter, so it's not like we are well below.

Right, right, right. Okay, great. Thanks, guys. I will pass it on.

Mark Douglass, Longbow Research.

Keith, can you talk about the strength in the US? We've heard from some others that there may have been -- I mean, some of our channel checks -- may have been some pull forward with companies trying to take advantage of the bonus depreciation, which they weren't sure if it was going to come back or get extended, turned out it was. But was there a little bit of that in the US? And just talk about the strength here in the US going forward as well.

Okay. Well, as Ted had mentioned, we did see a continual uptick in business throughout the quarter. And every year there is probably some, whatever you want to call it, budget flushing or pull ahead that occurs. I think we saw a normal case of that this year and we did not see anything that I would say was meaningful with respect to taxes or fiscal cliff.

Some of our distributors did see a little more sales towards the end of the year. Some of that could be attributed to how you characterized it. But overall we do not believe there was any meaningful change in what I will say typical order patterns that we would see in towards the -- throughout December and towards the end of December.

The strength in the US really comes from automotive and oil and gas. I think those have been the two major areas that we have seen. And then in addition to that, we had pretty good growth in -- our Solutions business grew in the US year over year, so that was a positive.

And we had good Logix sales in the US. And I think that was a combination of the Solutions growth and in particular some of the oil and gas and automotive expenditures that were taking place. I think that gives a little bit of flavor to it.

Okay, thanks. And then finally, what are the machine builders in Europe saying about expectations going forward? Not just in Europe, but obviously they do a lot of exporting and they expect -- with a China ramp are they expecting a better second half in 2013 as well, exporting to China?

Well, I am not sure if they are expecting a better exporting to China; their exporting has been -- the strength of European exports the last couple of quarters has been the US and Latin America as opposed to China. I think what we are hearing from our European OEMs are they are expecting -- they're expecting 2013 to be flat compared to 2012.

And I think Italy is still struggling a little. And I think Germany will be the better performer as the year progresses. Their backlogs are probably back to normal. I think they bled off some of their backlogs over the last couple of quarters and there is a more typical pattern in that at this point in time.

And I would say at this point the only thing we are hearing with respect to weaknesses would be some of the beverage OEMs and to a smaller degree some packaging. But in general still a positive outlook for fiscal year 2013.

I guess I understood China was already weak. But are they expecting it to get better as well like in your forecasts?

I think the OEMs would say that they do expect to see some pickup as the year progresses and that would be more towards the end of the calendar year and late our fiscal year.

Okay, thank you.

Rich Kwas, Wells Fargo Securities.

On the Process growth a negative this quarter, if I recall from the guidance last quarter, Keith, you talked about Process growth moderating closer to the Company average in 2013. Is that still intact? So that would imply kind of better growth through the rest of the year?

Absolutely right on both comments. We do an expect it to be about the Company average and that would require a pick up for us. We expect that based upon some of the backlog build in our Solutions business and also some of the continued growth of our products, both the Logix platform as well as our Process Safety portfolio. So better second half in Process, Company average in total for the year.

And I assume that incorporates a lift in China as well from what we saw in December?

Yes, absolutely. As a matter of fact, both China and Asia in general we expect to see that increase.

Okay, and then my follow-up is on US. So on Mark's question talking about the growth here in the December quarter, it was pretty solid against a comparison that I wouldn't call easy. US comparisons get a bit easier, I think the guidance had assumed low-single-digit type growth for the US market for 2013; you did 6% this quarter. Should we think of this as that being potentially a conservative outlook now or what are kind of the potholes that you could see in the US right now?

Well, I think one of the things we said last time was that we expect the US to moderate as the year progresses. I think we still feel that will be the case. And so, overall it will be basically at the Company average for the full year. So we do see less than 6% growth going forward over the next three quarters.

Okay, that's all I had. Thank you.

Shannon O'Callaghan, Nomura.

Can you talk about what Process orders actually did in the quarter -- overall?

Process orders overall were flat on a year-over-year basis.

And so, I guess in terms of the pick-up from here is there I guess activity beyond that you are expecting in order pickup in 2Q or how do you see it playing out?

Yes, we do see order pick up throughout the year in our Process/Solutions businesses.

I guess I just mean if it is flat in the quarter you have visibility into I guess activity levels that are not necessarily yet showing up in order levels, right?

That is correct. We believe the activity supports the growth; both the commentary from customers as well as the commentary from our sales and channel organizations led us to expect a pick up during the year and it is part of the reason we talk about the second half being stronger than the first half. We expect second-quarter orders to be better in our Solutions business, and so the combination of first and second quarter should enable us to see that sales pick up in the second half of our year.

And, Shannon, just to put it in context, it was flat in Q1 and we're talking about Company average 3% organic growth for the full year.

Okay, and then just in terms of incremental margins going forward across the remaining quarters of the year, I mean I know you talked about second half margins being higher. But any thoughts about where we kind of shake out in terms of ranges on incrementals for the remaining quarters of the year, any timing things or other?

I will be honest; I'm try to think quickly about a sequential incremental margin expectation. I mean I think year over year we still have the same incremental margin expectation we talked about in November which was kind of low 20%. Obviously we didn't get a great start on that in Q1, but on the other hand it was a very minor top-line change. So we do expect higher absolute margins in Q3/Q4.

And just --.

That's primarily based on better volume.

And I mean last year kind of took a big -- kind of an usual big sequential step down. I know you had just some timing things last year. I mean do you have any view on sequential margins coming off 1Q this year?

Well, I think the two things that -- we don't do quarterly guidance, but the two things I'm comfortable talking about because they're pretty normal each year. One is in January we do our merit increases for employees pretty much globally, so there is probably about a $16 million increase in spending related to merit increase from Q1 to Q2. And then secondly, we expect better Solutions growth, so we are going to have a little bit less favorable mix in Q2 than Q1.

Okay, great. Thanks.

Hopefully we are going to have some better volume too.

All right, thanks, guys.

Richard Eastman, Robert W. Baird.

Just a couple things. Keith, could you just address given how we started in APAC and in particular in China, how does the growth for the year out of that region or country match up against your 2013 guidance for core growth?

China -- we would expect -- well, Asia Pacific we would expect to be at the Company -- flat to at the Company average, somewhere in between there in that range over our range and for all of Asia Pacific. For China in particular, if that was part of your question, we expect that to be about equal to what last year's growth was in China which was around 5%.

And, Rick, I would say compared to our expectations in November, we now expect Asia to be a little bit lower than we were thinking in November and we expect probably Latin America, EMEA, US to be a little bit better.

Okay. So pretty much all the geographies kind of fall within that 1% to 5% consolidated number? There is nothing above it?

No, I would say our expectation is Latin America will be above that.

Okay, all right. And then just as a follow up, we did talk about booking sequentially being better on the Solutions side. Is the margin in that backlog and on those bookings -- is it consistent with a 25% incremental margin year over year?

Yes, I would say the margin on those bookings is normal Solutions margins and generally consistent with our expectation of kind of low 20s conversion incremental margin year over year.

Okay, very good. Thank you.

Frances, we have time I think for one more call.

Nigel Coe, Morgan Stanley.

I know we have covered a lot of ground with these orders and backlog, but if we go back to last year, I think the book to bill is about 1.3. So the question is, were the orders year over year down? And therefore is there a risk that as we go into 2Q we could see a flatten out of sales or maybe even an exit number within CP&S?

Well, Nigel, I think to your point, you are right; last Q1 was a 1.3 book to bill. I think the real difference for us this year was in Q4 of 2011 we had a pretty good book to bill despite having very high Solutions shipments and that was -- we had the opposite effect in Q4 of 2012. So the hole we created was really in Q4, it's not so much about the book to bill in Q1 this year versus Q1 last year.

Okay, I know you don't give quarter guidance, but do you think there is a risk that we could go down from 2% a little bit lower from here before we start to see that flexing upwards?

You're saying in terms of organic growth?

Yes.

I mean, look, you know we don't have great visibility; I would say we are pretty confident in our expectations of Solutions and Services sales for Q2. And we don't think we are going to see any significant change in our product business trends right now, but there is always a potential range of performance in any one quarter.

Like now we are expecting the second-quarter to have similar year-over-year growth. But at the moment the test point, higher dollars -- higher sales for the quarter.

I mean we have to get pretty reasonable sequential growth to get to a similar year-over-year growth.

Absolutely, absolutely. No, that is helpful. And then, Ted, you called out the impact of the higher share price on the share count. Is there any impact in the P&L? We have seen some swings with exec comp accruals last year, for example, as the share price fell. So given that I think you planned the year back in October, has the higher share price had an impact on some of the margin assumptions for the second half of the year?

I don't believe there will be any significant impact because our equity grants all occurred in the first quarter and were valued at the prevailing price at that time, which wasn't that far off our expectations when we did the plan.

Okay, great. Thanks a lot.

I will now turn the call back over to Rondi Rohr-Dralle for your closing remarks.

Okay, great, thanks. I think all we want to say is thanks for joining us for today's call. I'm obviously available for all the follow up calls and have a great day.

And, ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect.