洛克威爾自動化 (ROK) 2014 Q1 法說會逐字稿

Thank you for holding and welcome to the Rockwell Automation's quarterly conference call. I need to remind everybody that today's conference call is being recorded.

(Operator Instructions)

At this time I would like to turn call over to CFO, Ted Crandall. Please proceed, sir.

Good morning. And thank you for joining us for Rockwell Automation's first-quarter fiscal 2014 earnings release conference call. I'm filling in for Rondi today who unfortunately is a bit under the weather and unable to join us. Keith Nosbusch, our Chairman and CEO, is here with me this morning.

Our agenda includes opening remarks by Keith that will include highlights of the Company's performance in the first quarter and outlook for the full year. Then I will provide more detail on both of those and we will take questions at the end of my 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 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. And with that I will turn it over to Keith.

Thanks, Ted and good morning, everyone. Thanks for joining us on the call today. I hope everyone is enjoying winter. I know we are all having fun with the snow and bitter cold here in the Midwest.

I will start with the highlights for the quarter so please turn to page 4 in the slide deck. We had a very good start to the year with 7% organic sales growth in the quarter.

I will start with some color on the regions and verticals. The US led the way with 10% growth. Oil and gas and food and beverage were the strongest industries in the US.

Canada sales were basically flat with mixed performance across the verticals. EMEA deserves honorable mention with 5% growth as they continue to find opportunities to go and outperform the market. It was great to see Asia return to growth led by China.

Latin America, our best growth region all of last year, was a little soft due to difficult business climates in Argentina and Venezuela and weakness in mining across the region. However, Brazil and Mexico continued to perform well as both grew double digits.

Overall, the picture for verticals is similar to what we said last quarter. Oil and gas and food and beverage were the strongest. Automotive was pretty flat. And mining and metals were the weakest.

Here are a couple of other sales related metrics that I know you're always interested in. Process grew 8% in the quarter with the US leading the way. We are now including vMonitor in our numbers so our full-year growth expectation is closer to 10%.

Logix grew 6% in the quarter, the same as architecture and software as a whole. The motion control business within A&S experienced very strong growth reflecting continued success with OEM customers.

We closed on two important acquisitions recently, vMonitor, which brings wireless solutions for monitoring and controlling well head and upstream oil and gas applications, and Jacobs Automation, which is a leader in intelligent track motion control technology for OEM machine builders. Both of these acquisitions bring intellectual capital and differentiated technology and we are excited to have them as part of our Company.

So to finish with this slide, profitability was very strong in the quarter with adjusted earnings per share growth of 20%. I will let Ted provide more detail around earnings in his remarks.

I just want to mention one more thing before I leave the quarter, Control Magazine, an industry-leading publication exclusively dedicated to the global process automation market, recently issued the results of this year's readers choice survey. We had another very strong showing with 41 wins in control industry and product categories. The most of any process Company.

Of the six controlled discipline awards, we won three with no other company winning more than one. This again reinforces the power of our differentiated multi disciplined Logix control platform. In the industry awards we won 28 out of 53, the second place supplier won only 14.

These results along with the diversity of applications we continue to win reflect the breadth of our capabilities and domain expertise in process. We continue to gain ground as a leading DCS supplier.

Let me give you our thoughts about fiscal 2014. From a macroeconomic perspective, forecasts for GDP and industrial production are similar to what they were a quarter ago and call for increased growth as we proceed through the fiscal year.

Global PMI has improved somewhat. And while most of our customers have not yet declared their CapEx plans, our front log of opportunities is solid.

Given this macro perspective and our results for the first quarter we are raising the lower end of our guidance. We now expect fiscal 2014 organic sales growth of 3% to 6% and adjusted EPS guidance of $6 to $6.35. Ted will provide more detail around sales and earnings guidance in his remarks.

Before I close, I'd like to thank those of you who came to Houston to attend Automation Fair and our investor conference. We introduced integrated control and information which expands our served market and enables our customers to realize the vision of the connected enterprise. We are confident that integrated control and information deepens our focus on innovation and domain expertise which enables us to provide attractive returns for our shareholders.

So to wrap it up, Q1 was a strong start to the year. We are executing very well across the globe and I want to thank our employees, suppliers and partners for their dedication and expertise in continually expanding the value we provide to our customers. With that, I will turn it over to Ted.

Thanks, Keith. Good morning everybody. My remarks will start with page 5 of the first quarter results summary.

This was a good quarter with very healthy top line growth and strong earnings conversion. Revenue in the quarter was $1.592 billion, that's up 7% compared to the first quarter of last year. The net impact of currency fluctuations and acquisitions was negligible, so organic growth was also 7%.

Segment operating earnings where $328 million, up 19% compared to $276 million in Q1 last year. General corporate net expense was $21.7 million compared to $18.5 million in Q1 last year. That's pretty close to the expected full-year run rate.

The adjusted effective tax rate in the quarter was 27.8%, that compares to an adjusted effective tax rate in Q1 last year of 26.6%. Adjusted earnings per share was $1.47, up 20% compared to $1.23 a year ago.

Average diluted shares outstanding in the quarter were 140.4 million. During the quarter we repurchased approximately 1 million shares at a cost of about $111 million. At the end of Q1 there was $424 million remaining under our $1 billion share repurchase authorization.

Moving to page 6, this is the graphical version of total company results for the first quarter. As I noted on the prior slide the year-over-year increase in sales for Q1 was 7%, sales declined 7% sequentially, a pretty normal result for Q1.

On the right side of the chart you can see the year-over-year increase in operating earnings. Operating margin in Q1 was 20.6%. That's a 2.1 point increase compared to Q1 last year and primarily reflects volume leverage on the 7% organic sales growth and just a modest increase in spending year-over-year. It is not unusual for increases in our spending to start off a bit slower in the beginning of the year, and we expect spending to increase as we proceed through the balance of the year.

Q1 operating earnings included $6 million of income related to a legal settlement in our architecture and software segment. This settlement increased operating margin in the quarter by 0.4 points. This is a follow-on to the legal settlement income we talked about last quarter and we believe this is the final income we will recognize related to this matter. It is not displayed on the chart, but our trailing four quarter return on invested capital was 31.4%.

Now let's turn to page 7 which summarizes the Q1 results of the architecture and software segment. Looking at the left side of this chart, sales increased 6% year-over-year, organic growth was also 6%. Sales decreased 3% sequentially.

Operating margin for the quarter was 30.4%, up 2.5 points compared to Q1 last year. The A&S margin benefited from higher sales as well as the aforementioned legal settlement. For this segment the legal settlement increased operating margin by 0.9 points.

The next page covers our control products and solutions segment. Sales in the quarter were up 8% compared to last year. Currency effects reduced sales in the segment by one point so organic growth was 9%.

The solutions and services portion of this segment grew by 10% and the product portion by 7%. Sales declined 11% sequentially with products down 2% sequentially and solutions and services down 16%. Book-to-bill for solutions and services was 1.1.

We were pleased to see that above one but that's a little lower than normal for a first quarter. We did have a relatively strong growth in solutions and services sales, but even with that, we would have liked to have seen a book-to-bill more in the range of 1.15 to 1.2. Operating margin in control products and solutions was 13% compared to 11.2% in Q1 last year, that's up 1.8 points.

Turning to the next page, this provides a geographic breakdown of our sales in the quarter. Keith covered a lot of this in his comments, I will focus just a few comments on the far right column which displays organic growth. First I would reinforce the very strong performance in the US with 10% growth.

As Keith mentioned it was another strong performance in EMEA with sales up 5%. Growth was stronger in emerging markets in EMEA and it was another good quarter for growth with OEM customers. Asia-Pacific was up 7% year-over-year, also with strong results in emerging markets. China was up 21% and India returned to growth, up 13%. In both cases admittedly off easy comparisons.

In Latin America growth was 3%. As Keith mentioned we continued to see strength in Mexico and Brazil both with double-digit growth in the quarter. But we experienced sales declines in the Andean region, primarily related to mining, we had a large mining project that hit in Q1 last year so a difficult comparison. And sales declined year-over-year in Argentina due to import restrictions.

In Canada sales were down slightly compared to Q1 last year with growth in automotive and consumer more than offset by declines in mining and other heavy industries.

I will turn now to page 10, the free cash flow. Free cash flow for the quarter was $179 million. That represents about 86% conversion on adjusted income, that's also a good start to the year.

Turning to the final slide, page 11 summarizes our current outlook for fiscal 2014. As Keith mentioned we've increased the lower end of our sales and EPS guidance range. We continue to expect sales to be approximately $6.6 billion.

We now expect organic growth to be between 3% and 6% compared to the previous range of 2% to 6%. At the low end and midpoint of sales guidance, we now expect slightly higher organic sales partially offset by increased currency headwinds.

We believe that currency and acquisitions will about offset for the full year but that net amount has gone from slightly positive in our previous guidance to now slightly negative. We continue to expect segment operating margin to be about 20%. The new adjusted EPS guidance range is $6 to $6.35.

We now expect the full year adjusted tax rate to be between 26% and 27%. That's up from our previous guidance of 26%. The new adjusted EPS guidance range reflects the benefit of somewhat higher organic sales offset by unfavorable currency effects, slightly higher incentive compensation expense, and a little higher tax rate.

We don't provide quarterly guidance but as it relates to the second quarter and particularly as it relates to margins, I would remind you that our annual merit increases begin on January 1 and we do expect to ramp investment spending. We also will not have a reoccurrence of the legal settlement income so we don't expect operating margin in Q2 to be as high as it was in Q1.

Last week there were significant currency movements, primarily in some emerging markets. The changes in those rates are not included in our new guidance and of those rates main at current levels through the balance of the year, that would create some additional currency headwind for us. We continue to expect free cash flow conversion to be about 100% of adjusted income.

Subject primarily to acquisition opportunities we still expect to spend about $440 million on repurchases this year. However, we are now projecting that full year average shares outstanding will be about 140 million. That's up less than 1 million shares from what we expected in November and due to a higher share price. And finally, we still expect general corporate net expense to be about $85 million for the full year.

And with that, I think we can move to Q&A. As we do so I'd like to ask you that you limit yourself to one question and a quick follow-up so that we can try to get to as many of you as possible today. Operator, we can move to the first question.

Thank you, sir. Richard Eastman, Robert W. Baird.

Just a question on the book-to-bill, you basically did flag the fact that it was maybe a little bit softer than you expected, still comfortably north of 1, but I'm curious if you can pinpoint any industries or perhaps geographies that maybe led to just slightly less seasonal uptick in the book-to-bill?

Yes, Rick. I think where we saw it a little bit weaker was primarily in our motor control businesses and we think probably more than any other industry a slowdown in mining is responsible for that.

Okay. And then also just a quick follow-up, the tone in the auto or transportation side of the business?

With the automotives, we would say that it is basically flat. But remember, this is at a very high level of investment. And I think we are starting to see mixed results with, obviously, Europe a little lower. As Ted mentioned, automotive was strong in Canada. And auto will remain strong in Latin America. And it will probably flatten in the US and in -- remain flat in the US and Asia is how we see the automotives at this point in time.

Okay, very good. Thank you.

You're welcome, Rick.

Scott Davis, Barclays.

A couple things. First, I just wanted to get little bit more color on China and India. China has been a real roller coaster. Is there any sense of stability there for you and any sense of increased predictability there going forward?

Okay, well let me start with the second part of that. The answer is, no, on predictability. I think China is going through the natural evolution from high growth to a more stable type of growth. And I think they are going to see cyclicality, or I should say oscillations, around that growth trend line. So I would say, we don't believe we will have more predictability and we will continue to see fluctuations.

We certainly believe now that we are in a stable point in the China market and with the China economy. But, as you know, they have a number of potential issues that continue to be concerning, whether it be the credit availability, or the shadow banking, or the excess capacity with SOEs in some of the key heavy industries. They continue to work through those areas.

But I think we are at a stable point and exports appear to be reasonable at this point in time as well as investment in some of their consumer industries, which is one of the areas that we are very focused on. And the OEMs continue to perform well in China.

Scott, maybe what I would add is, both in China and India our sales quarter to quarter tend to be a little more variable because of project content. And in the case of India, the underlying orders were not as strong as the growth and I don't think we would say there we think we have turned the corner yet. And in China, our expectation for the full year is still high single digits, so we are not getting overly excited about 21% quarter.

Yes, makes sense. Guys, can we just talk quickly about oil and gas? And there's a lot of mixed feedback we're getting from companies on -- some notable big companies like Shell, for example, that cut CapEx recently. Are you seeing any slowdown in your front log in that specific vertical?

No, our front log has remained pretty stable. I think what we need to be watching for, with respect to your comment is, are we starting to see projects being slowed or pushed out? And, at this point in time, we haven't seen that -- with the exception of Canada, where they are in the middle of some very large project rollouts and there's just not the ability to work the next phase of projects at this time.

So we see a little bit of a lull in the order rate in China -- I'm sorry, in Canada. And certainly that's related to the previous heavy investments that were going into the oil sands.

Okay. That's very helpful. Thanks, guys, and good luck.

Thank you.

John Inch, Deutsche Bank.

The strength in the US, Keith and Ted, do you have any sense -- maybe you could just give us a sense of how December played out. And, do you think there might've been any kind of a US company say -- I don't want to use the term budget flush, because I think that's a little too sensational, but a pickup in spending maybe based on confidence, just what you're hearing from the channel, what you saw in the United States to help drive the 10%?

Well, quite frankly, December was very strong for us. And, as far as on a year-over-year comparison, it was the strongest month in the entire quarter. And, quite candidly, that's a comment worldwide, not just the US. But that would lend to believe that there was some -- that there was end-of-the-year spending that was going on, and I think that was a piece of it.

Plus, I think it was just the continued belief in an improving economy and a little more confidence in that after, I would say -- during the summer timeframe I think it was a little weaker in that regard. So, the combination of end-of-the-year and greater confidence probably led to a little higher spending as we exited the calendar year.

John, that said, I would also say though that January has been pretty much what we expected.

Right. Okay, that makes a ton of sense. Some of your industrial peers are perhaps making a little bit more of a mountain out of a molehill in terms of this weather issue. Do you guys see -- obviously weather has been pretty austere, right, throughout the Midwest, Northeast -- have you seen any sort of an impact with respect to maybe your flow goods business or anything that you would perspectively call out that maybe could have offset some of this budget spending?

No, at this point, we have not seen order pattern aberrations based upon a very either miserable day in the Midwest or East Coast or wherever it's occurred in different phases. I think that has been a minimal impact for us. I wouldn't call that any different than what we normally see during, let's just say, a milder winter.

Yes, okay. Just maybe lastly, Keith, could you characterize the state of China with respect to competition? Because clearly you have Japanese competitors that could be perhaps taking advantage of the yen. I think it is clear that China's improving, right, for lots of automation players. But you've done exceptionally well, and I just want to sort of pick off a little bit of Scott's question, could you maybe comment towards your confidence or the sustainability of improvement, maybe not a 20% given the backdrop really of what could be some advanced competition from either local players, Japanese players, that sort of thing?

You are absolutely right, there's no question, China is a place that we see the Japanese competition more than any other region in the world. And they continue to be a very strong competitor. We believe that the portfolio that we have and the focus that we have, in particular on OEMs in consumer industries, that we are able to compete very effectively.

I would say the other dimension of our competitiveness -- or I should say competition -- is, given that there's a slowing in particular some of the heavy industries -- metals and cement -- in China, that those projects, when they do come up, are very, very competitive from a project and therefore solutions business.

So I think we are seeing increased competitiveness simply because there's fewer projects in the heavy industries. That's not unusual, and we think we can continue to win our fair share of those. But the fact of the matter is, there's just not as many. That's why I made the comment earlier about some of the over capacity, particularly in the SOE.

The one exception to that would be, China will continue to invest in oil and gas. They are continuing to invest in offshore projects and they are just at the start of determining whether or not they can create a shale industry. There's been recent reports that indicates they have shale reserves greater than the US. And the real question is, how difficult is it to get to? And they don't have the technology, but will Western technology be able to help them untap that?

And I think that's a wild card down the road, but I think that's the other potential play that we see in China going forward. To offset the other heavy industry comments I made.

I'm sorry, Keith, do you think you are positioned to capture that opportunity in oil and gas in China?

I think if we look at what we are able to do in the US in that space, I think we have a good opportunity to compete effectively. Capture, that's -- we will see how it plays out. I think it is a bigger question is, will China be able to tap that energy resource? If they are, I believe we will be able to compete effectively for projects just like we have in some of their offshore business and shale opportunities in the US over the last couple of years.

Got it. Okay, thank you very much.

You're welcome, John.

Rich Kwas, Wells Fargo.

Just a few questions. Keith, on auto, I know we are at a high level of CapEx here and North American production, growth at least is slowing down. But when you look at some of the investments being made by the transplants, European-based, Asian-based transplants, in Mexico and other places, how much benefit do you get from that over the next couple years?

I know your mix with the Detroit guys is pretty strong and very strong position there, but how do you frame the opportunity with the other manufacturers over the next few years?

Yes, well Mexico is the place where we will see continued investment, to your point. There's been a number of plants announced by both Asian and European, as well as continued expansion of US. So, let's take the Asian transplants.

I would say that's probably the most difficult market for us because many times they work with the same partners they have in Japan and those tend to be the Japanese control manufacturers. We can win pieces of that business, but the heavy investment, particularly via what comes in on some of the OEM lines, tend to be more Japanese brand.

With respect to European competitors, our toughest challenge there would be with VW and Audi, quite candidly. That will come in with Siemens equipment on, but we can certainly compete for portions of the business, even there, but also the other European transplants, we have a much better opportunity to win those projects. And certainly we also believe, with some of our expanded capabilities in powertrain now, that we are in a better position to compete in that portion of the projects as well.

Okay, that's helpful. So it sounds like Daimler and BMW are potential -- you already have a good position there, but there's opportunity to grow if they grow.

Yes, we do well with them in their transplants in the US. So Mexico is not -- we think we can be consistent with our support and capabilities in Mexico as we have been -- as we have demonstrated in their US plants already.

Okay, great. And then, just a quick one for Ted on Logix, I think it was 6% growth this quarter. Is the outlook still embed a high single-digit growth rate for Logix in 2014? And then the other piece of it is, with the incrementals being so strong this quarter, it seems like the bias for the year is that the incrementals are going to be closer to 35% rather than 30%, is that a fair statement?

First, on Logix, we would continue to expect for the full year that Logix would be somewhat above the average for Architecture & Software, so I would say higher single digits. In terms of incremental margins, I think you are right on for the balance of the year. We are not expecting -- obviously, the 20.6% is above our full-year guidance for operating margin.

Right, okay. Great. Thank you.

Thank you.

Jeff Sprague, Vertical Research.

My first question goes a little bit just more around that question of incremental margins and kind of investment spending. Can you give us a sense of just order of magnitude there and what it is pointed at and can it play a role on the top line in 2014, or is it more kind of a setting up 2015 and beyond?

Yes, so let me start at the back of that. I think clearly the investment spending that we put in place going forward now on the balance of the year will benefit us beyond 2014. And you should not expect a return in 2014. What we spend on is largely R&D, new product development related.

We have talked about, in the past, a focus on continuing to expand Logix capabilities and also continued investment in our intelligent motor control offering. In terms of ramp, I think what you should expect is, the rate of growth in spending in the balance of the year is going to exceed our rate of growth in sales in the balance of the year.

I would also just add to that, that we also will have an increase in spending due to the acquisitions that we just recently completed. But they would add in the same categories that Ted mentioned, but that's another incremental increase from a year-over-year standpoint.

Great, thank you for that. And then, just back to the tone of business. Is there any change in the nature of demand that you are seeing? So you said there's a little bit of increased confidence to spend money, but are we shifting from MRO or smaller projects to greenfield or bigger expansion projects, is there anything there to kind of spike out?

That would depend on the region, Jeff. In the US, I would say we are not seeing large projects. The majority of the increases and front log that we see at this time is continued small project. And I'll say expansion and productivity investments continue, as opposed to what I would call greenfield.

If you go to Europe, certainly the strength that we had in the emerging markets, that is all greenfield. With respect to, I'll call it mature Europe, there we are seeing some greenfield investment in oil and gas. It may not be -- it may not end up in Europe, but the engineering and procurement occurs in Europe and a lot of that is offshore activities in oil and gas. And then we see the continuing investment at OEMs in Europe and a lot of that gets exported back into the US and Asia and Latin America. So OEM strength in Europe.

And in Latin America, we said that mining is down, but oil and gas continues to be strong. And in Latin America, other than Mexico, the vast majority of that is greenfield investment. And in Mexico, a lot of it is just ongoing efforts to modernize their existing equipment.

Canada, I mentioned we did see the slowing in some of the major projects in oil and gas and mining in Canada. And I think we had a very strong previous year in some of those heavy industry investments. So there's a natural lull before they can go forward.

And in Asia, certainly we're seeing continued greenfield in the Southeast Asia region. And in oil and gas in China, we are not seeing much greenfield in metals, as I mentioned. There's very few projects there. Same for cement. But we are seeing greenfield in consumer industries, particularly food and beverage. Significant growth in there. So that would be a picture for you, Jeff, by region.

Thanks, Keith, that was a good around the world rundown actually. And just finally, Ted, can you just give us a little bit of color, and I will move on, if the EM currencies do stay where they are at all year long, what kind of headwinds are you looking at?

Yes, so probably the three currencies that will make the most difference for us that were moving last week were Brazil, South Africa, and Canada. If all of those stay where they are, it probably creates about a $20 million top-line headwind.

Okay. Thank you very much.

You're welcome.

Julian Mitchell, Credit Suisse.

I just had a question on the December quarter kind of operating margins. Because I guess you and also your main European competitor both had very good margins in that fiscal Q1. They cited kind of software mix as a big boost, I just wondered if that was true for you or if it was more just about fixed-cost leverage because you had good organic growth.

Julian, I think for us it was primarily about the organic growth in volume leverage.

Okay, so there was nothing abnormal around mix in the quarter that you'd call out?

No. I wouldn't say anything significant around mix. Obviously, the margins are benefiting from that legal settlement that we talked about.

We had good growth in Solutions, as we mentioned, so there really was, to Ted's point, no big mix difference here that created the margin expansion.

Great. And then, my second question is just -- sorry if this is a bit tiresome, but just circling back to a US automotive investment outlook. I just wanted to clarify what you'd said earlier. I think you talked about US being kind of flattish going forward, I just wondered if that was the status quo that you'd had recently or if it's been pretty good and you expect it to flatten out from here.

Well, it has been pretty good. As we talked last year, automotive was one of the key drivers of our performance in the US. So we are expecting it to flatten out, slow a little from a very high level. So I think that's just a natural evolution of project spending in that industry, but we are still looking for continued opportunities and projects in automotive in the US.

Great. Thank you.

You're welcome.

Steve Winoker, Sanford Bernstein.

So I just wanted to be clear on the whole end-market growth acceleration and deceleration. You've got 7% for the quarter last year, and you are still guiding 3% to 6% for the year, so we are obviously looking at deceleration through the rest of the year. And can you just, again, clarify a little bit more where you are expecting the most deceleration or headwinds to come from for the rest of the year? That we should be planning in?

Sure. We think at the end of the year the US will definitely be down from 10% growth, quite frankly. And we expect the US, Asia-Pacific, and Latin America to be slightly above the Company average. EMEA will be up for the year, but below the Company average, but still, we believe, outperforming the market. And Canada will be slightly down year over year and that's basically how we come up with the 3% to 6%. And I would say that, basically, my commentary, take it as comments around the midpoint of our guidance range.

Steve, I think also -- look, there is some normal variability in our quarter-to-quarter sales, and as you will remember, I think, first half last year for us is a pretty easy comparison in our Solutions and services businesses because we came into the year with a hole in the backlog. So we expected, coming into this year, that we were going to see better growth in the first half than the second half.

Okay, that's helpful. And then, you guys are up to what looks like an all-time high on cash, I guess $1.25 billion, and you've done a couple of acquisitions, could you maybe talk, Keith, to the strategic value of those? And then, second, Keith and Ted both, maybe some thoughts around capital or deployment as you go forward. It's been very consistent for Rockwell over the years, just wondering how you're thinking about that as that cash builds.

Okay. Let me talk about the acquisitions. We are very pleased with both of them. With vMonitor, we think it is a great opportunity because it expands our technology and solutions, our reach and domain expertise in the oil and gas wellhead.

And, really, that gives us some differentiation with the integrated approach for the design in those systems and gives us additional capabilities in the production side, which is an area that we've been very strong. And we can also continue to develop what's been called in the industry the digital oil field, and this enables us to have a much broader solution for those capabilities -- those requirements. Think of it as in the production side upstream and wellhead applications, and those are quite frankly all over the world, and we see a great opportunity in all geographies with that.

With respect to Jacobs, Jacobs Automation has some really unique technology that we believe will provide faster speed and greater flexibility for machine builders. So it fits right into the OEM initiative that we have and the focus that we have in growing OEM sales on a global basis. And, really, we see this as a way for customers to increase their productivity, help them reduce their energy consumption, and really help them with speed of changeovers and therefore productivity that these OEMs can offer the end customer.

So, really a good fit with our motion capabilities, and we'll continue to integrate that technology with our integrated architecture. And that is a technology that will take some time to be absorbed in the OEM community, but we think we have some good leading-edge capabilities there.

So that's a little commentary around the acquisitions. I will let Ted comment on the other part of your question.

Steve, as it relates to cash deployment, I think I would characterize it as steady as she goes. Our commitment remains to exhaust our free cash flow after acquisition, either in dividend or share repurchase. And we did that pretty much last year, and our plan is to do that this year, and that's reflected in the $440 million of repurchases I talked about earlier.

As it relates to cash on the balance sheet, we have talked about the issue there before of most of that cash being outside the US and not having an easy way to repatriate without incurring significant tax liability. And I would say, as it relates to that, we have no plan to change that at the moment.

Just to reinforce the two comments is that the vMonitor acquisition, the majority of that was made with cash outside the US.

Okay, thanks, guys.

Thank you.

Steve Tusa, JPMorgan.

Ted, great job filling in for Rondi. You're doing a fantastic job (laughter).

I still want Rondi back (laughter).

On the oil and gas side, I remember at OTC last year, I was talking to one of your guys and he talked about offshore being a great growth driver for you guys. And I think he said it was 50% of your -- I don't know whether he said it was 50% of your upstream oil and gas business, can you maybe just provide some color on what the offshore market is as a percentage of your oil and gas sales? I know that you guys do a tremendous amount of high-quality work on the BOPs and stuff like that, so I'm just curious as we parse out Canada and stuff like that, it's just getting a little more interesting, the percentage of business from offshore I guess is my key question.

Yes, Steve, I don't have that number right now. I think instead of just giving out one that I couldn't support long term, we will get back to you with that one. I want to make sure we look at the information and have something there that we have confidence in the number. But certainly, to your point, we are very strong in the offshore, both from a control as well as safety systems, is -- the ICST acquisition is very helpful there and we will have to pull together the makeup of our oil and gas business with respect to offshore. And we will get back to you.

I guess it is mostly upstream and a little bit of midstream, is that how should we think about it?

Yes, Steve, absolutely right. The heavy -- when we talk about our process initiative, what we are counting there will be heavily weighted to upstream and midstream. When we talk about motor control it would be across the board -- upstream, midstream, and downstream. Likewise safety systems would play across that entire continuum. But when we talk about our expansion into oil and gas we are mainly talking about control and what we do with our solutions capability and the majority of that would be the production side.

Okay. And then one last question --

vMonitor fits exactly into that production side.

Right. So then just on the margin, maybe to just cut it a little bit of a different way and try and kind of understand what you guys are saying -- so for the second quarter I guess a 35% incremental year over year or 30% to 40%, kind of gets you to that high 19%s kind of 20% range, if you will? I'm just trying to understand how this investment phases in and impacts that number. Is that kind of a good way to think about the kind of -- the step down from first to -- from the first to the second quarter?

Yes, I think it is.

Okay.

I think you will see -- what you ought to expect is something in that 30% to 35% range in terms of conversion, as compared to the 50% in Q1.

Okay. Great, thanks a lot.

Nigel Coe, Morgan Stanley.

Nigel, you there?

Mr. Coe, please proceed, sir.

Can you hear me?

Yes, we can now.

Okay, good. I guess I will ask the question again. I just wanted to ask Steve's question a different way, because obviously you always see this tick down in margins from Q1 to Q2 due to the ramp up in spend and also because of the normal inflation factors. Did you say, Ted, that operating income or operating margin is down Q over Q?

Margin.

Margin, okay. That's what I thought you said. Then just, I just wanted to pick up on the thread about the book-to-bill for the quarter. You mentioned it came in a bit weaker -- it sounds like mining and Canada are two factors there -- but then, Ted, you mentioned the encouraging front-log activity. So I'm just wondering -- I'm just trying to reconcile the two comments and I'm wondering, are you seeing a pickup in RFP activity through -- do you see a pickup in RFP activity through the quarter? And going forward, does the front-log activity suggest a pickup in book-to-bill activity going through the year?

I think we wanted to characterize the front log as stable at this point -- not growing, but still solid as we look forward. And we would expect that to be starting to convert at normal rates as we go through the remainder of the year.

Okay.

Nigel, maybe what would help is, I think I'd say that our backlog and our front log at this point is consistent with the guidance.

Right, okay. That's helpful. And then, Ted, you mentioned that the EM currencies, and we're -- obviously we're all watching these with interest, you had an $11 million headwind, I believe, this quarter from currencies. And I'm wondering, the impact on operating income, is that fairly linear, so if we put a 15%, if we put a 20% operating margin on that FX movement, would that be -- would that equate to the impact on earnings? Or are there some unusual margin impacts from currency?

I would say, as you would expect, quarter to quarter can be very variable. Over a longer period of time, generally I would say the translation effect comes in -- on earnings, comes in pretty close to kind of our normal operating income percent. But in any quarter what drives variability tends to be remeasurement losses or gains.

Okay. And was there any unusual impact last quarter from that currency move?

No, nothing significant in Q1.

Okay, that's helpful. Thanks very much.

Thank you, Nigel.

Ladies and gentlemen, I would now like to turn the call over to Ted Crandall for closing remarks.

That concludes today's call, so thank you, everybody, for joining us. And we will see you next quarter.

Thank you, sir. Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.