洛克威爾自動化 (ROK) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen and 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.

(Operator Instructions).

At this time, I would like to turn the call over to Rondi Rohr-Dralle, Vice President of Investor Relations. Miss Rohr-Dralle, please go ahead.

Great, thanks, [Corita]. Good morning. Thank you for joining us for Rockwell Automation's second quarter FY14 earnings releases conference call. With me today are Keith Nosbusch, our Chairman and CEO; Ted Crandall, our Chief Financial Officer.

Our agenda includes opening remarks by Keith that will include highlights on the Company's performance in the second quarter and the first half, plus the outlook for the full year. And then Ted will provide more details on all of that and of course we'll 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 website to our 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 that I'll hand the call to Keith.

Thanks, Rondi, and good morning, everyone. Thanks for joining us on the call today. I'm sure you're all happy to be in the home stretch of earnings seasons.

I'll start with some highlights, so please turn to Page 4 in the slide deck. We had another strong sales quarter with 7% organic growth and growth in all regions for the first time in over a year. Let me provide some more color on organic growth by region.

The US grew 8% in the quarter, oil and gas continues to be the strongest performing vertical. In addition, we're now starting to see increased activity in chemicals.

Auto remains relatively flat at high levels and the consumer goods industries are showing healthy growth. OEM sales were also strong in the quarter. Canada sales were up slightly, but there continued weakness in resource-based industry.

We're hearing some feedback or delay. I don't know, Corita can you do something to make that go away?

Okay, is it okay now?

I don't know, Keith, go ahead.

We'll start up again. Canada sales were up slightly, but there is continued weakness in resource-based industries. EMEA had another good quarter with 4% growth led by emerging markets. Our OEM business remains solid across the region.

China's sales increase of 14% was the strongest driver of Asia-Pacific's 10% growth. Latin America had a better quarter and better growth this quarter at 9%. Double-digit growth in Mexico and Brazil offset a sales decline in the rest of the region. Emerging markets in total grew 11% in the quarter.

I've got a couple of other comments on the top line. Process sales grew 3% in the quarter, but quarters growth was stronger. For the first half, process sales grew 5% and we expect higher than 5% growth in the second half of the fiscal year.

Logix grew 7% in the quarter with the highest growth in Asia-Pacific. In China, we're seeing good OEM adoption of our compact Logix controllers.

Moving onto earnings, you've often heard me talk about the quarterly variability of our earnings performance, and the first two quarters this year clearly demonstrate that. It's more meaningful and more indicative of underlying trends to talk about our performance in the first half, and we had a very good first half performance.

On 7% organic sales growth, we delivered over 1 point of segment operating margin improvement. Adjusted EPS grew 10% in spite of a significant headwind from a higher tax rate. And cash flow was also very good in the first half with 92% free cash flow conversion on adjusted income.

At the halfway point in the year, we are where we expected to be and are well-positioned as we enter the second half. Based on that, along with our expectations for continued stable market conditions, we are reaffirming sales and adjusted EPS guidance with a few tweaks.

Compared to our previous guidance, organic growth will be a bit higher, offset by lower sales due to currency and acquisitions. And we're maintaining the adjusted EPS guidance range of $6 to $6.35, in spite of a higher tax rate. Ted will provide more color on the full-year and second half of the year in his remarks.

I would like to take a moment to mention something that I'm very proud of. We recently received the Ethisphere Award for the sixth time, naming us one of the world's most ethical companies. This recognition reflects our commitment to integrity, responsibility and accountability, all of which drive value for employees, partners, customers and shareholders.

Before I wrap up, I just want to remind you of the integrated control and information opportunity that we talked about at our investor conference last November. Integrated control and information or ICI, is the next wave of innovation in the evolution of the integrated architecture, intelligent motor control, and Logix multi-disciplined controls.

It will provide the next generation of manufacturing and industrial productivity, thus delivering business value to our customers across the entire automation investment lifecycle. ICI solutions enables a connected enterprise and makes manufacturing processes smart, productive and secure. We have the innovative technology, the smart people, and the partners needed to deliver ICI and expand the value we provide to our customers and shareholders.

Now I'll turn it over to Ted. Ted?

Thanks, Keith, and good morning, everyone. I'll start with chart number 5, second quarter results summary.

So another good quarter operationally with continued strong top line growth and pretty good underlying earnings conversion. There are a couple of unusual items impacting the year over year earnings comparison. I'll highlight those as we move through the charts.

Revenue in the quarter was $1.601 billion, up 5% compared to the second quarter of last year. Organic growth was 7% and currency fluctuations reduced sales by approximately 2 points.

Q2 last year is our easiest comparison quarter, but even given that still very good organic growth performance. And as Keith mentioned, pretty broad-based geographically.

Segment operating earnings in the quarter and the current period were $302 million, up 6% compared to Q2 last year. I'll provide some additional color on operating earnings with our next chart.

General corporate net was $18.9 million in Q2, compared to $18.1 million in Q2 last year. The adjusted effective tax rate in the second quarter was 27.9% that compares to an adjusted effective tax rate in the same period last year of 23.6%.

In Q2 last year we benefited from a catch-up adjustment related to the extension of the US R&D tax credit. The benefit last year coupled with the absence of an R&D credit this year, increased the tax rate in Q2 by approximately 4 points accounting for pretty much of all the year over year increase. This is one of the unusual items I referred to.

Adjusted earnings per share were $1.35, that compares to $1.33 in the same quarter last year, so up only about 2%. The higher tax rate reduced adjusted earnings per share by $0.08.

Average diluted shares outstanding in the quarter was 140.2 million. We repurchased approximately 900,000 shares in the second quarter at a cost of about $111 million.

At the end of Q2 there was 314 million remaining under our $1 billion share repurchase authorization. Through the first half of fiscal year we've repurchased 1.9 million shares for approximately $221 million, so on pace to hit the $440 million full year repurchase expectation that we talked about on the previous earnings calls this year.

Moving to chart 6. This is the graphical version of total Company results for the second quarter. On the left side the chart you can see the 5% year over year sales growth, as I mentioned that was 7% organic growth. Sales increased 1% sequentially.

On the right side of the chart you'll note the year over year increase in segment operating earnings. Total segment operating margin in Q2 was 18.9%, up 20 basis points from the second quarter of last year.

Last quarter we said we intended to increase spending. Spending was up about 4% sequentially and about 6% year over year, so pretty much of line with our organic growth. Incremental earnings conversion was about 22%, lower than would be expected with 7% organic growth.

That brings me to the second unusual item. Conversion margin in Q2 was impacted by a significant year over year increase in variable compensation expense. Due to last year benefited from a year to date adjustment that reduced variable compensation expense, that was related to a change to our full-year guidance at this time last year.

The lower than normal variable compensation last year is causing about an $8 million negative comparison to the current quarter. If you adjust for that, conversion margin would be about 32%, within our target range and pretty good given a more aggressive spending increase in Q2. While not on the chart, our trailing four quarter return on invested capital was 30.6% at the end of the second quarter.

If you'll turn to chart number 7, it is summarizes the Q2 results of the Architecture and Software segment. Again looking at the left side of this chart, sales reached $687 million, up 7% year over year as reported, and up 9% organically. Sales were down in the segment 1%, sequentially.

Keith mentioned that Logix growth was 7%, a little below the segment average. Q2 was a very strong quarter for growth in our motion control business and that's consistent with continued success with OEM customers.

Operating margin for the quarter was 27.7%, that's up 1.1 points compared to Q2 last year. 9% organic growth provided considerable volume leverage, which more than offset the effect of increased spending, a little unfavorable mix, and the increased variable compensation expense.

The next page, chart 8 covers our control products and solutions segment. Compared to Q2 last year sales were up 3% as reported and up 5% organically. Organic growth in both the product business and solutions and service businesses was about 5%. Sales for this segment increased 2% sequentially with the product businesses and solutions and service businesses both up sequentially.

Book-to-bill for the solutions and services businesses was 1.1 in Q2. On the right side of the chart you'll note that operating earnings were slightly lower than Q2 last year and operating margin declined by 0.8 points year over year. The benefit of higher sales was more than offset by increased spending, increase variable compensation expense, and larger than normal negative currency [effects] in the quarter.

The next chart is the geographic break down of our sales in the quarter. I think Keith covered this one well in his comments. So I'll turn to chart number 10, which is free cash flow.

Free cash flow for the quarter was $188 million, another strong quarter. Year to date conversion on adjusted income is about 92%,. That's a very good result for the first half of the year and we continue to expect conversion of about 100% for the full year.

Turning to the next chart, this provides an EPS walk from the first half of last year through the first half of this year. It was a very good first half. Keith mentioned the quarterly variability of our results.

That variability is a consequence of many factors including, for example, the two unusual items I talked about that impacted results this quarter. Because of the quarterly variability the first half may be a better representation of our underlying performance than either quarter taken alone.

Looking at the bridge, EPS was up 10% increasing from $2.56 to $2.82. That's on organic sales growth for the first half of 7%. The 10% increase in EPS is despite a pretty significant headwind from tax rate, which you can see here is worth about $0.11.

A small increase in general corporate net expense was offset by lower share count. And segment earnings are up 12% with incremental margin of about 38%.

That takes us to the final slide chart 12, which addresses our current outlook for FY14. As Keith mentioned we continue to expect sales to be about $6.6 billion. However, we now expect organic growth for the full year to be about a half point higher across the range. 3.5% to 6.5% organic growth, compared to the previous guidance of 3% to 6%.

That change will offset about a half a point of negative impact related to our updated estimates of the full-year currency effects, and a little lower sales from acquisitions. We continue to expect segment margin for the full year to be about 20%.

We are reaffirming guidance for adjusted EPS in the range of $6.00 to $6.35. We now expect a tax rate for the full-year of approximately 27%, that's at the high-end of our previous guidance of 26% to 27%.

We still expect to spend about $440 million on share repurchases this year. And finally we continue to expect general corporate net expense to be about $85 million for the full year.

I know you all are aware that we don't provide quarterly guidance, but perhaps the following notes on the second half will be helpful as you start to put together your models. We expect healthy sequential growth in the second half, but solutions and services growth will be heavily weighted to Q4. That's a typical pattern for our solutions and services businesses.

In the year over year comparisons, for the second half, growth rates will moderate compared to the first half because the comparisons get more difficult. That's particularly true in the solutions and services businesses and especially in Q3.

As I said we expect operating margin to be about 20% for the full-year. Consistent with my comments on the pattern of second-half sales growth, we would expect margin performance to also be weighted to Q4.

Finally, we expect a lower tax rate in a second half due to the expected recognition of discrete tax benefits. It's difficult to know for sure how that will fall out by quarter, but we expect the discrete tax benefits will be primarily in Q4.

And with that, I'll turn it over to Rondi and we can begin Q&A.

Okay, Ted, thanks. Before we start the Q&A, I just want to say we do have quite a few callers in the question queue today. And we do want to get to as many of you as possible, so if you could limit yourself to a question and a follow-up and then get back in the queue if you've got another topic that you want to talk about. So we'd appreciate your cooperation and Corita, let's take our first caller.

(Operator Instructions). Scott Davis, Barclays.

Good morning, everybody.

Good morning, Scott.

I wanted to get a sense -- I mean it sounds like your order book is good. If you look at your full-year guidance, it implies the midpoint would be 5% core for the full-year and you did 7% in the first half, so that would mean more like 3% in a second half.

What leads you to that conservatism? Is there something that you're seeing-- I know your comps are tougher, I get it, but shouldn't be to that extent I wouldn't think, but maybe you can dig into that a little deeper?

Well, I think the way you characterize it is exactly right. The percentages and the differences to get to the 5% number.

We don't believe it's conservative. The comps get much more difficult in the second half and certainly while the year-over-year will be lower, we still are going to see a significant sequential growth in both the third and fourth quarters. So we think it's solid operating performance and nothing really happening in the markets themselves at this point in time.

Okay. So okay I guess we'll see where that comes out to.

And then just to clarify in 2Q some of the kind of one-time expenses you had, the true up on variable comp and such like that. Is there things you identify in the back half the year that will meet some of your operating leverage that we should think about?

So, I think some terms of sequential comparisons, improved margin in the back half of the year is going to come primarily from volume leverage.

Okay. But I guess my question is, are you expecting a more normalized operating leverage, volume leverage, in the back half versus 2Q where clearly it was muted due to the higher cost?

Certainly compared to Q2 but if you look at the first half our conversion margin was 38%. I mean that's pretty close to what we would expect in second half.

Okay. That's good color. Okay, I'll pass it on. Thank you, guys.

Thanks, Scott.

Shannon O'Callaghan, Nomura Securities.

Good morning, guys.

Good morning, Shannon.

How are you? So just to clarify a little bit just on this 2Q incrementals in the first place. So I mean I get the point around some of these spending increase and the comp, but the A&S incrementals were really strong. And it was mainly focused in CP&S. So was the comp issue more weighted to CP&S? And you also mentioned an unusually large FX impact there, can you maybe just size the impact specifically between the segments?

Yes, on the $8 million year-over-year increase and the variable comp expense, which I want to remind you is really consequence of lower expense last year. About 60% of that is CP&S and the remainder A&S. So because CP&S is our heavier, more people intensive business, it bares a larger share of that.

CP&S also had an unusually large earnings impact on the currency translation impact in the quarter. And that's a consequence primarily of our exposure in the CP&S, both more to emerging markets. So countries like Brazil, Argentina, South Africa, where we're seeing some larger currency swings. And also higher CPS exposure in Canada, where we've seen continued weakening of the Canadian dollar.

And how big was that, Ted, approximately the FX impact?

The currency year-over-year was ballpark about half a point.

Okay. And then just on the chemical market. You mentioned you're starting to see some activity there. Can you just mention maybe where you're seeing that occur and also how Rockwell is playing into those projects?

Yes. We're seeing that as the downstream effects of the production expansions that have been going on, particularly in North America at this point. And we're seeing that as it flows into the chemical plants. You've heard about the expansion of petrochemical. But now we're also seeing some of that.

And this activity is really at the front end, probing and engineering studies that take place. But it's also in the specialty and fine chemical areas as well. And we think those are very good opportunities for Rockwell given that it's much more batch oriented. And certainly something that the integrated architecture and our safety capabilities have a great footprint to be able to be successful in.

Okay, great. Thanks a lot guys.

Thank you, Shannon.

Jon Inch, Deutsche Bank.

Thank you. Good morning, everyone.

Good morning, John.

Good morning. What was the dollar amount of the spending this quarter? The heightened spending this quarter versus last quarter or year-over-year, and how does that split between A&S and CP&S?

So year-over-year spending increase was about $25 million, sequentially it was about $20 million. About 1/2 of the sequential increase was our normal merit increase of that occurs January 1. And it's split roughly 50/50 between the segments.

Do you expect that cadence of spending, Ted, to continue for each of the next two quarters?

No, I think the sequential ramps will be somewhat less in the next couple quarters. And I think what I would expect to see is about a 5% increase in spending year-over-year in a second half.

Alright. What are you actually spending on? And is it -- I'm assuming this is mostly people, but could you flush that out a little bit in terms of what are some of these investments and what kind of a payback do you expect on some of this spending?

The areas are really in two primary categories. The first one would be development engineering. And that would be around a number of things that we discussed at the investor meeting, particularly the integrated control and information opportunities that we've identified as our ability to expand our [certain] market.

The second would be in customer facing resources, sales resources. We're adding those in different regions and countries of the world where we see the best growth opportunities. And as far as the payback on these investments, as you know these investments take time to be able to generate the new products. So this is not something that we'll see in the remainder of this calendar year.

The sales resources will start helping, although it starts helping next fiscal year although depending on where they are, sometimes the ramp-up and whether they're new or experienced employees can be from 12 to 24 months before they become fully productive.

And our product schedule -- our project schedules tend to be 12 to 30 months depending on the scope and what exactly that project is. And then we would have a ramp-up of sales after that period of time. So it's really investments for the future.

And that's why I did mention the fact that we believe we do have these growth opportunities. And we've been talking about adding the investment for a number of quarters here. And certainly the second quarter we were able to bring a lot of people on board and certainly we look forward to the benefits of that down the road.

No, I understand. Are you doing this in Asia or Europe or North America or -- where's the emphasis?

Well, the development resources would be in our development centers. And the majority of those would be in the US but we also would be adding development people in the Czech Republic and Poland, and then Singapore and China, would be the two major ones in Asia.

When you look at the salespeople, we have been adding salespeople in some of the emerging Europe markets. We've been adding in Latin America and to some degree in the US given some of the strength that we've seen in this country and we believe the longer-term potential.

Yes, okay. And then just as a technical question, Ted, what if the R&D credit later this year is renewed, how does that work? Are you guys going to be able -- are you going to go back and retroactively adjust your tax rates? You've got this tax hit now and people sort of assume it's just part of Ops. And then is there some sort of big fourth quarter number? Because the risk is Wall Street's just going to think that's a one-time adjustment. How does this work in the past and maybe if you could just talk us through the mechanics of that?

Yes, so if the R&D tax credit were renewed before the end of our fiscal year and remember we're on a September fiscal year, not December. If it were renewed before the end of the fiscal year, then we would do a-- and assuming it was renewed with retroactive application, we would do a catch-up adjustment for the full year. So that would be probably about 6/10, 7/10 of a point of lower tax rate for the year if that happened.

Okay. Got it. Thanks very much.

Thank you, John.

Joe Ritchie, Goldman Sachs.

Hello, everyone.

Good morning.

So I understand the cadence on the CP&S organic growth for the remaining part of year as comps get tougher. But I was a little surprised by the growth this quarter of roughly 5%. Because you had easier comps and then the book-to-bill on the solution side seemed to be pretty good both last quarter and this quarter. So just perhaps you can provide a little bit of color on the growth in that business, specifically this quarter?

Well, I think the book-to-bill is not really a good current -- a good current quarter substitute for the CP&S solutions business. It tends to be six months to a longer period before those projects really will enter into a shippable state. And so we do have this lag between the orders and the project completion. The second part of it is project business is lumpy.

And depending upon where you are in the cycle of the project, where the customer is, and if they're doing some acceptance testing. Or if there has to be a delay because their project is delayed, the project business just is one that is very difficult to predict with certainty, as to which ones will make it in a quarter and which ones will either fall out into the next quarter or a longer period of time. So it's just a challenge from a forecasting standpoint. But book-to-bill is not the only indicator particularly you have to look at the aging of that book-to-bill as to when it is shippable in the future.

Okay, that's helpful, Keith. I just had one follow-up question on the-- I just wanted to make sure I heard of this correctly. So earlier you talked about incremental margins for the second half of year. I think you said 38% which was comparable the first half.

If I'm doing the math correctly, to get to the midpoint of your guidance it looks like the implied incrementals are closer to 25%. So are you -- do you effectively feel confident in the higher end of your guidance for the full-year by expecting 38% for the second half of year?

So I think you're doing the math incorrectly. But why don't you get with Rondi after the call. I think what you're going to see is the incrementals in the second half are in the high 30s.

Okay, fair enough.

Joe, we do it on segment operating margins so I don't know if that's a difference between the way you do it, but --

No, I was doing it on the segment level as well. We can catch up after the call though.

Steve Tusa, JPMorgan.

Hey, guys, good morning.

Good morning.

Just a very helpful color on the sequencing in the second half. I guess the seasonality from 2Q to 3Q has been a bit all over the map. I think the 1.1 book-to-bill and to your comments is similar to 1.1 or 1.15 you've done in the last couple of years. So nothing really stand out there.

But I guess last year you were up 5% sequentially, second quarter to third quarter, is that kind of the right range to think about? I mean, the only reason why I'm asking, I know you don't give quarterly guidance, but you're trying to kind of baseline our models here because there are --because it seems like there are some moving parts with the lumpiness.

Without providing quarterly guidance, I think I would say the 5% sequential increase last year was unusually large.

Okay. So I guess then the year-over-year comp will be similar third quarter, fourth quarter I guess is that the right way to look at it? Or a little bit weaker in the third?

Yes, I suspect a little weaker in the third.

Okay and then you mentioned the margin. You guys did 20 [bips] of segment margin improvement this quarter. Is that the right kind of framework for the third quarter?

Steve, I don't want to get that detailed in the quarterly numbers.

Okay. And then one last question on the ForEx. Companies like 3M, which are seeing similar kind of foreign exchange impact are seeing a lot of price go through in kind of a related way.

So the ForEx change was pretty dramatic in Latin America and your organic growth was very strong. Was there an unusual kind of pricing element in the 9% organic there or is it not kind of the same dynamics for you guys?

No, I would say there's no unusual pricing item in the organic.

Okay. All right, thanks for the detail. Appreciate it.

Thank you, Steve.

Steve Winoker, Sanford Bernstein.

First thing, good morning.

Good morning, Steve.

Could you maybe comment on the incremental growth versus your prior expectations. I mean clearly sounds like you're seeing acceleration and some momentum here. But where specifically and which segments and vertical and geographies did you actually see the extra kind of -- are you comfortable with the extra 0.5% or is it just too widespread?

It would be pretty widespread, but certainly we've seen strong organic growth in A&S. That's been the better performing segment with respect to the product sales that we've seen year to date. And then certainly I would say the US has continued to perform probably a little bit stronger. And we don't see any reason for that to change.

And it 's really those two that told us we could offset the currency and acquisition with a little stronger organic growth for the year. That's basically how we came at the what we call, the tweak, of the make up of the sales number, which stayed the same.

Okay. And on the process growth side you mentioned up 5% and I think going higher and it was 8% last quarter. And this has clearly been a two-pronged story in terms of both end markets and penetration.

How are you viewing that opportunity, Keith, particularly you've talked about the downstream opportunities, et cetera. But is that kind of -- where is the biggest opportunity there and do you expect it to stay in that range or sort of consistently go higher?

Well we do expect the second half process to be higher than the first half. And the first half as you said was 5%. So we're expecting it to go up. And we see the best opportunities there continue to be in oil and gas. We'll get a little bit of help with the vMonitor acquisition that we've talked about, which is really focused, at least at this point of its growth, into the oil and gas industry. So it's a nice play into that space.

But we're also, at least in North America, we're beginning to see some investment in the legacy pulp and paper applications. So it is a very aged old installed base and we see that starting to have a little bit more of a pickup. And we have a pretty good footprint there in our motor control. And now with the process capabilities we can do that wet end of the paper plants as well.

But really the strongest play is oil and gas and we got a couple of other opportunities that we believe will get us to that higher growth in the second half.

Okay, great, I'll pass it on. Thanks.

Thank you, Steve.

Mark Douglass, Longbow Research.

Hi, good morning, everybody.

Good morning, Mark.

Keith, can you talk some more about China? It's interesting how your growth has been so strong this half with the PMI and other indicators in China being weaker. Where as last year you had -- you had declines in a, what seemed to be a better macro. Can you talk about squaring that circle? I mean what's going on in China for you?

Sure. Well, the first one you've kind of touched upon and that is we had a very weak first half last year and then obviously a much stronger second half. But, which is why we're talking about the tough comparables and China will be one of those tough comparables.

But really we're seeing continued growth for us into the consumer related industries. So auto continues, Food & Beverage. As they continue to build out and grow the middle class, they're taking -- and the concerns they have over quality and safety of their food supplies. These are all areas that are very important to us.

Oil and gas continues to be a good growth for us. In China -- and the OEM performance was probably the leader there. The OEM was very strong this quarter. And that's just some of the work that our team did there last year as we -- as quite candidly as we struggled in the first half. We've really focused on a couple of areas where we thought the best opportunities were.

And particularly as their infrastructure spending comes down and there's no spending in the metals, minimal spending in the cement industry now compared to historical. We had to shepherd our resources into the areas where we could see the growth. And we added capabilities and put resources into OEMs and into the Consumer Products industries. And I think we're seeing the benefits of some of that activity now.

Okay, thank you. And then can you do a walk around of what you're seeing in automotive around the globe as far as their investment spending?

Sure. The spending in Europe continues to be very weak. And we don't see that changing dramatically as time goes on here. The US spending continues to be relatively high. But we haven't seen it growing, but it's at a high level and we believe that the projects will continue as time goes on. So that's been a very positive part of our US business, but we don't see the US spending increasing.

Latin America, the strength has been Mexico and Brazil. And there's been -- as you know a significant investment from the foreign car manufacturers into Mexico. And we continue to see investment going on there.

If we go to Asia, we don't do much in Japan, but certainly China is where all the action is in automotives. And there we see mainly the spending in the passenger car side and heavy with the joint ventures. That's where we've been able to make most of the inroads.

We do participate in the domestic market, the domestic car manufacturers, but they're not investing the same levels and rates as the joint ventures are. So it is a little more weighted to the JV.

So really we see the automotive industry as one that continues to provide opportunities for Rockwell. In particular it's a very automation intensive industry. And automation intensive for a lot of the A&S product portfolio.

Then I only would finally comment that we also as we have mentioned activities that we work with FANUC on, with powertrain. We see the powertrain as a longer-term growth opportunity in a space that we did not participate fully in all the applications. And that will help us in the future.

Great, thank you.

You're welcome. Thank you, Mark.

Josh Pokrzywinski, MKM Partners.

Can you hear me?

Yes, Josh, go ahead.

Thanks. So maybe just a little more color on the cadence of business through the quarter. Any impact from weather? It seems like you guys aren't really calling that out as much. And then, any dispersion between larger project and more small, small ticket business, maybe outside of the bigger stuff in service and solutions, but maybe more in kind of the core automation?

Sure. With respect to the quarter itself, it was a pretty typical quarter. March is always the strongest month for us and this March was. And I would say that nothing inconsistent in how the quarter flowed.

If we talk about the project activity, we're not seeing any -- I'll say meaningful change in project delays or anything like that. So it seems like that continues to be at the pace that we have seen earlier.

And then secondly, your comment about the size of the projects. That would depend on where we are. I would say that the majority of the projects in North America are the smaller projects. We have not seen large ones at this point in time. So that means most of it is modernization, as opposed to, I'll say greenfield capacity at this point. My comments about pulp and paper fit right into that type of a scenario.

If we go outside in particular emerging markets is where we see more of the greenfield. And certainly there's the major project tend to be less resource driven in China at the moment or I should say less metals and heavy industry, less metals, less cement. And certainly tend to be more in the consumer space at this point in time.

From a weather standpoint, we had a couple of days where our service engineers couldn't get to customers. But given all the other moving parts we had this quarter, that was certainly not one to point out. It cost us a little bit, but certainly not the extent that the other two or three that Ted mentioned earlier in his comments.

Got you. That's helpful. And just a follow-up the comment that you're not seeing a lot of greenfield work in North America.

Do you get the sense that your customers are kind of sitting back on their heels right now and watching? Or is that something that is maybe more of a next year dynamic and for the time being there's really not a lot of, I'll call a pent-up demand, for greenfield spending?

In the US I don't think we've seen a lot of greenfield spending other than when the automotives came back from their downturns. And I would say the automotives came back meaning that when they do new lines and new models you can think of it as greenfield. Because they basically redo it.

I think where we're starting to see some of the indications and why I mentioned chemicals is I think we're starting to see the generation of new chemical plants, and that's a broad spectrum. But I think it's really the downstream from the energy play that's been going on whether it be oil or gas. We're now seeing, we'll see more greenfield or I should say just large projects as they move that down the process and stream.

Got you. Thank you.

You're welcome, Josh.

Nigel Coe, Morgan Stanley.

Thanks, good morning guys.

Good morning, Nigel.

We've covered a lot of ground, so just a couple quick follow-ups. So, Ted, you've given some good color on 3Q already, more color than somebody who doesn't give quarterly guidance normally does. But FX relative to what we saw in 2Q, does it look similar in 3Q? You're down about 2 points?

I think right now I would expect FX earnings impact to be lower in Q3 than in Q2.

Okay. That's helpful. And then the 50 bips impact to CPS margins from FX. Is that because the Brazil et cetera carry higher margins or is there another reason -- is there some sort of revenue cost mismatch closing that pinch?

No. I mean I don't think it's higher margins in those countries, it's just consequence of the impact on the transactions in those countries. And the currency depreciation, as well as some re-measurement losses on the balance sheet.

Okay, great. And then just wanted to dig into the -- I think you mentioned some discrete tax items, which probably hit in 4Q, Ted. Number one, were those in your guidance originally? And since we're now looking at 27% tax rate for the year, does that imply that 3Q is going to be higher than 27%?

The discrete items were largely in our original tax guidance at the beginning of the year. And it's hard to call exactly how those will fall out in the balance of the year.

But I think they will be more weighted to Q2, which would suggest, or I'm sorry, Q4. So if you think about an average in a second half of about 26%, I think we're going to be higher than that in Q3.

Okay, that's really helpful, thanks, Ted.

Thank you.

Rich Kwas, Wells Fargo.

Hi, good morning everyone. Just a quick one for me. On the book-to-bill, the 1.1. Last quarter it was 1.1 as well and my impression was that you'd expected some kind of kick-up here and FQ2 versus Q1.

So could you just give us some color on how that relates to expectations? And then if it was below expectations for the quarter, was there just -- I know, Keith, you just said there wasn't really any project push outs, but it is a lumpy business. But just what are you seeing that would've push that number to be flat, sequentially? Thanks.

Rich, this is Ted. So I'd say the 1.1 in Q1 was lower than what we would normally expect to see in Q1. 1.1 in Q2 is pretty much normal expectation for Q2. So no big surprise here. It came in pretty much the way we expected it to come in.

Okay. So no real change versus what you were thinking going into the quarter?

Correct.

Okay, thank you.

Thank you, Rich.

Okay, I think we've got time for one last caller.

Richard Eastman, Robert W. Baird.

Keith, could you just talk to -- as we look to the end of the fiscal year and you've got your core or Rockwell's got their core revenue growth guidance on the board. When you look at how the two segments will play out relative to that guidance, it appears as though the Architecture and Software business will be towards the high-end from a growth perspective. Maybe core growth will be 6%, 6.5% versus the CPS business will be towards the lower end.

I'm just curious from your perspective is there a message in those growth rates relative to where we are in the cycle or is spend, again targeting this ICI theme? I mean how do you view the growth rates in those two pieces of business relative to the cycle -- global business cycle?

Well, for the full-year, A&S would be at the higher end to your point, probably around 7%. And CP&S would be lower -- probably around 4% to get you to that average that you talked about. We don't believe that that indicates anything from the cycle.

I think what we're seeing is that the industries where we see the best growth is the US. And certainly the US is a heavier A&S content then CP&S. Because two reasons. One, the types of the industries that we support.

And then secondly, there's a very mature system integrator market here and many of our product flow through the system integrators as opposed to through our solutions business in the US. Particularly in the Consumer Products industry. So we get a little heavier product content in that.

When we go outside the US it's more our people have to supply the project work and so it's different in that regard.

Okay, I understand. Then just one last question. On the OEMs side of the business and the OEM sales, has there been any shift in end markets or applications that's noticeable? I tend to think of the OEM business as being kind of packaging, food and bev oriented.

There's been so much talk and investment into the robotics industry, the collaborative side, the smaller payload robots. Is there any shift in that business towards a compact Logix or anything that suggest that that can be a growth driver going forward?

Well we certainly believe the OEMs would be a growth driver. And as I mentioned, our motion business had a strong quarter and we had good OEM growth in China, in the US, and parts of Europe. And part of that is because of compact Logix, to your point. It allows us to have a better price point and sell the architecture across the customers complete portfolio of machines.

But you have to think a little broader of the OEM space, if you will. Certainly the most recognizable one is packaging and quite frankly, when you go to PACK EXPO, that's what it's all about. It's around packaging machines and those are big displays whether it be in Chicago, Las Vegas, or Europe.

But the other segments are very important. Tire is a very important segment. We do very well in that globally.

We have process skid OEMs. That equipment comes into a processing plant and many times our controllers are what are on that equipment, including drives and instrumentation with our partner.

So there are multiple segments. We have the heavy industries activities, the energy. Some of the compressor and turbine OEMs. So it's much broader than just packaging. Material handling is a very important segment.

And then to your point, robotics. And a lot of times we work on that with a lot of the end of the line packaging equipment, as well as the robotics into automotive. So we have like six segments in the OEMs space that we focus on and I would say we haven't seen any dramatic shift in those segments.

Packaging has been very strong for the last couple of years. Tire has been very strong. And we've been improving our ability to compete, particularly in the process skid, with our process initiative. And then also some of our drive technology has opened up more opportunities in converting print and Web. In particular converting into home and personal care side, is a very important segment for us as well.

Okay. Very good. Thank you.

Thank you, Rick.

Okay, with that we're going to wrap up today's call. So we just want to thank all of you for joining us. And of course I'll be available to answer any more questions after the call. Thanks.

That concludes today's conference call at this time. You may disconnect and thank you for joining.