洛克威爾自動化 (ROK) 2015 Q1 法說會逐字稿

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'd like to turn the call over to Rondi Rohr-Dralle, Vice President of Investor Relations. Ms. Rohr-Dralle, pease go ahead.

Thanks, Ian. Good morning. Thank you for joining us for Rockwell Automation's first-quarter FY15 earnings release conference call. With me today as always are Keith Nosbusch, our Chairman and CEO; and Ted Crandall, our Chief Financial Officer.

Our agenda today includes opening remarks by Keith that include highlights on the Company's performance in first quarter and some context around our revised outlook for FY15. Then Ted will provide more details on the results as well as our sales and adjusted earnings per share guidance.

As always, we'll take questions at the end of Ted's remarks. We expect the call to take about an hour today.

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'll hand the call over to Keith.

Thanks, Rondi. Good morning, everyone. We appreciate you joining us today. We hope those of you in the Northeast have weathered the storm okay.

I'll start with the highlights for the quarter so please turn to page 3 in the slide deck. We had a good start to the year with 2% organic sales growth in the quarter. This was better than we expected given the strong sales last year in Q1 and especially given the low backlog in solutions and services at the beginning of the quarter.

I'll start with some color on the top line. Architecture and software delivered its sixth straight quarter of at least 5% organic growth. Our investments there are paying off.

Logic sales were up 7% in the quarter so back to a more normal expected relationship with logic sales exceeding the segment average. And we continue to see traction with our midrange portfolio. It's not on the chart but our process business grew 4% in the quarter.

Latin America was a standout region with 18% growth. Brazil and Mexico continued to grow about 10%, and we saw even higher rates of growth in selected other countries in the region. Our team there is executing very well, and I congratulate them on an outstanding quarter.

We expect Latin America to be our highest growth region this year, and they are off to a great start. Ted will provide additional color on the other regions' performance. Operating margin, EPS growth, and free cash flow were all very strong in the quarter so all in all it was a very good start to the fiscal year.

Let's move on to the macro environment. One of the big changes since I talked to in November is the continued strengthening of the US dollar against a broad basket of currencies. At current rates, we're facing a significantly larger sales headwind than we originally expected. Ted will provide more detail regarding currency impacts in his remarks. As it relates to underlying market conditions, with the exception of oil and gas, things haven't changed much at all.

The US continues to demonstrate strength. We're watching EMEA closely as they deal with geopolitical and economic challenges, but we aren't expecting any significant change in market conditions there.

In Asia, things are looking better in India and a bit softer in China. Despite lower commodity prices, we expect to see continued growth in Latin American markets.

Regarding vertical markets, generally we're seeing continued healthy investments in consumer verticals and transportation. In heavy industries, we're expecting mixed market conditions but relative stability overall. However, there's obviously a good deal of noise related to oil and gas.

Just like other suppliers to the oil and gas industry, we're trying to understand the near-term and longer-term implications of the rapid decline in the price of oil. We did not see any negative impact to our business in Q1 and our front log in oil and gas is stable.

Most of our oil and gas customers have not yet declared their capital spending plans for calendar 2015. A lot of that will become public in the next several weeks, but at this point here's our view.

There will be a negative impact on CapEx investment due to the lower price of oil but the timing of spending cuts is harder to predict. We think oil and gas customers are likely to complete large projects already underway and proceed with those they consider strategic.

Generally, this industry takes a longer-term view of their CapEx investments. Any negative impact on spending will likely be more significant in exploration, especially for unconventional sources. We expect to see some shift in spending from larger projects in exploration to smaller productivity improvement projects in production, similar to what we've experienced in the mining industry over the past couple of years.

Lastly, we think midstream and downstream investments are likely to be sustained. Taking all of this into consideration, we see modest risk to our previous sales outlook for FY15 related to lower oil prices.

With all of that said, let's move on to our updated outlook for FY15. While most GDP and industrial production forecasts continue to call for stable growth in 2015, we are incorporating the more significant headwinds from a stronger dollar and the anticipated impact of lower oil prices into our revised outlook.

For full-year sales, we are increasing the currency headwind by almost 3 points and lowering the top end of our organic growth guidance from 6.5% to 5.5%. While this results in a pretty big change to the top line, the new midpoint for EPS guidance is only $0.10 lower.

We now expect FY15 reported sales of about $6.6 billion with organic growth in the range of 2.5% to 5.5%, and adjusted EPS of $6.50 to $6.80. Ted will provide more detail around sales and earnings guidance in his remarks.

So to wrap up, Q1 was a very good start to the year. Even though I talked a lot about oil and gas here, it is only 12% of sales. In fact, if oil prices remain low, we expect to see some benefit in our other verticals, especially consumer, which is a sweet spot for Rockwell Automation.

We remain excited about the opportunities we see in consumer and automotive, in process with OEMs, and the connected enterprise. We continue to invest in all of these areas.

Our revenue diversification works and we are executing very well across the globe. I want to thank our employees, suppliers, and partners for their dedication and expertise and continually expanding 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 page 4, first quarter key financial information.

Sales in the quarter were $1.574 billion, 1.1% lower than Q1 last year. Organic sales growth, as Keith mentioned, was 2.1%, and currency translation reduced sales in the quarter by 3.4 points. Segment operating margin was very strong at 22%, up 140 basis points from Q1 last year, despite the small sales decline.

The year-over-year margin increase was primarily due to the higher organic sales, favorable mix, and a strong productivity quarter partially offset by a modest increase in spending. General corporate net expense was $23 million in Q1, up about $1 million compared to a year ago. Adjusted earnings per share were a $1.64, up $0.17 or 12% compared to the first quarter of last year.

The adjusted effective tax rate in the quarter was 26% compared to 27.8% in Q1 last year. The 26% adjusted effective rate in Q1 reflects the retroactive extension of US R&D tax credit for calendar year 2014.

Free cash flow for Q1 was $233 million, a very good result for the first quarter and a strong start for the year. Free cash flow conversion on adjusted income was 103% in Q1. Our trailing four quarter return on invested capital was 30.7%.

There were a couple of items not shown here. Average diluted shares outstanding in the quarter were 136.9 million. That's down about 2.5% compared to last year, and during the first quarter, we repurchased 1.55 million shares at a cost of about $167 million. At the end of the quarter, we had $884 million remaining under our share repurchase authorization.

The next two slides present the sales and operating margin performance of each segment. I'll start with the architecture and software segment on page 5.

On the left side of this chart, you can see that architecture and software segment sales were $708 million in Q1, an increase of 1.7% compared to Q1 last year. Organic growth was 5.1%. Moving to the right side of the chart, on the 5.1% organic growth, A&S margins were 31.3%, up 90 basis points compared to Q1 last year with the improved margin primarily due to the higher organic sales and a good productivity quarter.

Now turning to page 6, a similar view for the control products and solutions segment. In the first quarter, control products and solutions segment sales were down 3.3% year over year and essentially flat year over year on an organic basis.

Organic growth for product sales in the segment was a solid 3.3%, solutions and services sales were down 2.8% organically. That was actually a bit better than we expected given the low starting backlog.

The book to billing Q1 for solutions and services was 1.13. That's pretty healthy and starts to rebuild the backlog that we need to drive growth in the balance of this year in this part of our business.

CP&S delivered very good operating margin in Q1 at 14.5%, up 150 basis points compared to last year despite the decline in reported sales. The earnings conversion on the negative currency impact was modest in the segment.

Mix was somewhat favorable. Project margins were better in the solutions and services businesses, and it was a particularly strong productivity quarter.

Page 7 provides a geographic breakdown of our sales and shows organic growth results for the quarter. The organic sales growth in Q1 was driven largely by Latin America with Canada and Asia Pacific also contributing. The US was flat year over year in Q1 with 3% growth in the product businesses and a 4% decline in solutions and services businesses.

The decline in solutions and services was expected and consistent with our comments last quarter regarding a low beginning backlog. The underlying market in the US remains very healthy and that was reflected in orders growth in the US in the mid-single digits.

Canada saw 8% growth and that was partly about project timing and an easy comparison to last year, but with the exception of the oil sands, we're seeing some pickup in most other markets in Canada.

EMEA was down 1% organically. It was a somewhat unusual quarter for the region in that sales in Western Europe were actually up 1.6%. However, that was more than offset by declines in emerging countries, particularly South Africa, and to a lesser extent Turkey and Russia.

Asia-Pacific was up 2.9%. Growth was pretty broad-based across the region with the exception of China, which was down 2%. I would attribute the decline in China more to project timing than any change in underlying market conditions. China orders in the quarter were up mid-single digit.

India organic growth in Q1 was 9% so we continue to see improvement in that market. Keith already talked about Latin America so to close out this slide, I'll just add that overall for emerging markets, organic growth was 4.4% and that obviously led by Latin America.

That takes us to the FY15 guidance slide. As Keith mentioned, we are revising our full year guidance.

We're reducing full-year sales guidance primarily to reflect a much more significant headwind from currency and to a lesser extent, less optimism about the high end of the sales range. We're dropping the high end of the sales range primarily due to the very significant decline in oil prices, but also because we're continuing to see forecasts for IP and GDP be revised downward in most regions although the forecast still called for growth in 2015 that's similar to 2014.

Our previous guidance called for reported sales of approximately $6.8 billion at the midpoint. In the original guidance, we expected currency to reduce sales by 1.8 points, and we expected organic growth of 2.5% to 6.5%.

Now for the full year, because the dollar has continued to appreciate against a broad basket of currencies, we expect currency to reduce sales by 4.5 points. That difference in currency impact from previous to current guidance results in a reduction in reported sales for the full year of about $180 million.

We're also reducing the high end of organic growth from 6.5% to 5.5%. We are maintaining the low-end of organic growth at 2.5%. That will drop organic growth at the midpoint by 0.5 point.

We're revising EPS guidance from the previous $6.55 to $6.95 to a new range of $6.50 to $6.80. From the old to the new midpoint, EPS will be down by $0.10. That's a very modest EPS decline on a roughly $200 million sales decline coupling the currency impact and the organic sales change.

In part based on our performance in Q1, we now expect slightly higher operating margins for the full year, about 20 basis points but still about 21%. We're projecting an adjusted effective tax rate of 26.5%, 0.5 point lower than previous guidance and largely due to the R&D tax credit. We didn't plan on the extension of the R&D credit in the original guidance.

Those factors allow us to absorb a pretty large drop in the sales guidance with a relatively small impact on EPS. We continue to expect to convert about 100% of net income to free cash flow. And a couple of items not shown here, we continue to expect general corporate net expense to be approximately $80 million for the full year, and we continue to expect average diluted shares outstanding to be about 136 million for the full year.

The last slide is a walk for adjusted EPS from the previous to the revised guidance midpoint. Starting on the left side, the previous guidance for adjusted EPS midpoint was $6.75. The big change as you can see here is currency.

Compared to prior guidance with the additional top line translation headwind of $180 million, all when we expect a related earnings impact to reduce adjusted EPS by about $0.25. A little higher operating margin is more than offsetting the impact of 0.5 point lower organic sales growth at the new midpoint and the net effect adds about $0.09 to core.

Lower tax rate and share count add an additional $0.06 compared to prior guidance. That gets us to the new midpoint of $6.65.

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

Great. Thanks, Ted. Before we start the Q&A, I just looked at the list. We have quite a few callers in the queue. I know we are not going to be able to get to everyone, but in the spirit of trying to get to as many as possible, if you can limit yourself to a question and one follow-up, that would be great. We appreciate your cooperation on that and so Ian, let's take our first question.

John Inch, Deutsche Bank.

Thank you. Good morning, everyone.

Morning, John.

Good morning. Could we start with Canada? I know it's a relatively higher proportionate exposure for Rockwell. How much of the $0.25, Ted, is Canadian dollar? Let's start there.

I would say probably about a quarter of it.

Okay.

As large as you would expect, the largest impact we have from currency is from the euro and depending on whether you talk about the full year or the quarter or the balance of the year, the euro accounts generally for more than half of the impact.

You know, [Grainer] called out transaction exposure in Canada. Do have that? In other words, are you selling Canadian customers US-made product that's going to create for perspective margin headwinds? I'm just again trying to be somewhat proactive in the thought process.

It cuts both ways. We do have transaction exposure in Canada because we manufacture around the globe and sell into Canada, but we also manufacture in Canada and export to the rest of the world, so we've got some natural hedge. We do have some transaction exposure and we hedge that.

Okay. The other question I had was just automotive powertrain. I know you guys are making a lot of head roads into that arena. What point do think we might actually -- maybe this question for Keith, start to actually realize some sales from the powertrain stuff or orders you'd be talking about, because right now the popular view is your auto business has peaked, but in theory you've got another 50% of the market that you're just beginning to tap.

Yes, John. I would say we've had limited success only because at this point, only because these are projects that are long in the planning stage and we just started a little over a year ago in the, I'll say in the pursuit. We're seeing the front log in powertrain opportunities increase.

We don't have a lot of booked orders at this point in time. I would say that we should see an increase as we go through this year with a stronger outlook in the next two to three years with respect to strictly the powertrain segment of automotive.

Just last. You guys are sitting on the most overcapitalized balance sheet, maybe next to ITT. I realize you're buying incrementally more shares, but what are your thoughts toward somehow stepping this up in some manner through either financial leverage or some other actions to return more cash to shareholders? Thank you.

Well, John, we've had a lot of conversations about this in the last couple of years, and as part of that, I talked about our cash balances and where they are. I think we've been very consistent in our cash deployment philosophy. Our expectation is that we will continue to exhaust free cash flow each year after organic growth funding and acquisitions and return the balance to share owners.

Last year, we did a little bit more than that because of a strong cash flow year. This year, we've gotten off to a start that is a pace above that. Given that, it's possible we'll end up spending a little bit more than that this year. But I don't think we have fundamentally changed our approach

Got it. Thank you.

You're welcome.

Thank you, John. Scott Davis, Barclays.

Hi. Good morning, guys.

Good morning, Scott.

Can you help us understand, I'm picturing a scenario where as soon as this call is over, people are going to say that you're not being conservative enough in oil and the impact. Can you give us a sense of what you learned in mining and what the parallels are here as far as how fast things can ramp down and how -- you mentioned in your prepared remarks, how projects can gravitate?

But help us understand and maybe a first place to start is give us a sense of where mining went peak to trough for you guys and where you see some parallels in oil.

Well, I think the parallels are more along the lines of that new investments in expansion is the area that gets impacted first, and obviously there were rising commodity prices when there were a lot of projects going on, and the commodities pricing was going up mainly driven by the China growth. I think that we've seen in mining and what we think is in parallel is, the major projects that were going on were not installed.

Those continued to move through to conclusion, and as those were moving through, what we saw was the decline in new investments in new capacity and a switch of that to more improving productivity and taking cost out of their existing operations. They were doing that obviously because the prices were going down as opposed to prices going up, and you can sell everything you can mine.

I would say those were the learnings, and I think the other thing that we feel is similar is that both of these industries take a long-term view of their investments. A mine is planned to run generally for decades and oil, depending upon the magnitude of the field, is also good for decades. So it's not a decision they take arbitrarily or capriciously based upon a short-term swing in the price of oil -- in the price of whatever the commodity is.

In this case, obviously, there's been a dramatic drop in about six months. So I think the important thing in here is I wouldn't say we're not being aggressive in our beliefs here. I don't think the final card has been played to understand what's going on in the market yet.

Very few companies have come out with their Cap Ex guidance. I think we've seen one of the major oil companies so far. I think we've seen some oil services companies respond, but we need to at least wait until we get a little more insight before we're making calls in this industry. And I just think it's still too early to say anything more than we have at this point in time. So we're obviously monitoring it.

But to your final point, in mining, what we saw was a 15% decline over two years. So that gives you a little bit of a scale of what is possibly ahead of us in oil, but we just feel at this point, it's too early to make that call given that CapEx budgets haven't been outlined.

And secondly, it takes time. It takes time for these decisions to ripple through organization. They don't happen the same day, the same week, the same month that the decisions are made. So they have to prioritize. They have to recalibrate. They have to reevaluate, and then come up with the new list and how that impacts us will not be known for a meaningful time down the road.

So we're trying to keep it right down the middle of the fairway here and call it by what we're seeing today and to your point, relating it a little bit to experiences that we've had in perhaps a similar industry of mining.

I think people on this call would probably view down 15% over two years a victory, so I hope that happens. But anyways, I just wanted to ask a quick follow up on currency in competition, and you guys have done really well with the machine builders in Europe for probably 10 years, but this is a different level of yen for the Japanese competitors and clearly a different level for euro.

But have things changed to the point where you have such a fantastic relationship with the OE builders that somebody coming in at 5% or 10% lower price is not enough to get them to switch? Or is it still somewhat of an aggressive bid since it's a more commoditized product?

Well, I don't think it's a more commoditized product. I certainly don't feel that's the core of our business, quite frankly. But the issue is more around machine cycles than it is around price. With OEMs, the important thing, and what we've been working on over the last decade, is how do we get into design cycles and how do we validate our differentiation that enables them to get better machine performance utilizing our technology.

And at the end of the day, it's that combination that is more important than strictly a short-term price based upon currency fluctuations which obviously moving both in directions at some point in time. So I think it's about creating that value and creating that differentiation to enable us to build the loyalty and the confidence that we are the best solution for them and not have it be 5% to 10% price -- an up front cost advantage because it really is all about the total lifecycle cost for the end users, and that's where the bigger emphasis is placed.

Scott, I think your [asking the price] into this and was talked about previously is historically, we have not seen a lot of changes and price dynamics and price behavior associated with currency changes. We've had a lot of discussion about that over the last couple years as it relates to the yen.

Our global supply chain isn't perfectly balanced but it's certainly not like we build everything that we manufacture in the United States, and most of our major competitors have a similarly global supply chain. And so I think that's partly the reason that you don't see big changes in pricing behaviors as a consequence of the currency changes.

Very helpful. Good luck, guys. Best of luck this year.

Thanks, Scott.

Steve Tusa, JPMorgan.

Hello, guys. Good morning.

Good morning, Steve.

So can I just ask you what are you assuming now for oil and gas growth this year?

So I mean maybe the easiest thing is think about it as we're expecting no growth at midpoint.

Okay. No growth in oil and gas at the midpoint. Okay. And within that, what are you guys looking for over the next couple of weeks as far as what should we be watching and looking for when it comes to these CapEx budgets? I mean is there a specific sliver of the market that you guys are more focused on?

You said you're looking for another turn of the cards. Just curious as to maybe a little more detail on maybe where you're most worried or where you think you have the best chance of stability, and what to watch out for over the next month or so.

Sure. First off it's just the magnitude of their CapEx reductions. I think that's the first test period, and then it goes back to, okay, so how does that really play out against the different applications and the different segments of the market. And certainly we're more exposed to upstream and so that would be our greatest concern.

If a lion's share of that reduction was targeted in the upstream, we certainly think there's opportunities to continue to improve the productivity of wells, so we believe that as they move to OpEx in upstream, that that is beneficial for us and would be helpful as an offset to the new well drilling. And then the split between unconventional and conventional spending and how they're seeing the impact of the lower prices on the stock of oil.

Got you. Clearly with your solution of book to bill, you're saying that you're not seeing really any unusual behavior as of yet from your customers?

That would be fair. We have not seen any change at this point

Yes. I think that was the Q1 takeaway. We have seen no change.

And Steve, to your question about the announcements that will come out in the next couple weeks, where Keith started, I think, what we'll get a better picture for is the magnitude of expected cuts. I suspect what will still be a little bit uncertain is the timing of that and our bet, based on past experiences, it's going to take a little longer to implement those cuts than some others might be expecting.

Right, and would this be like the big, big guys or like the Exxons of the world, or is it mostly -- is it really broad based?

Yes, it's very broad based because today, our business is with majors but also with the NOCs and also with the Tier 2s given the magnitude of unconventional. A lot of that has been driven by Tier 2s. So, it really is across all the spectrum of the industry, which as you have known, has grown pretty dramatically, so with the advent of unconventional.

So we would look at it in each one of those segments and then look at our exposure into those segments and our front log against those segments and then have a better feel. And obviously, we're not talking upstream. We're more heavily into production than we are into exploration. So that's the other split, and we think the safest area, quite frankly, is downstream.

Downstream where all of this low cost oil and gas is going to flow into the chemicals and petrochemicals market, and while that at this point is a smaller segment of our total sales, it's an area that we feel will be the most stable for the longest periods of time going forward. So we think that is where the opportunities can remain and can grow even after if there's a reduction in the upstream segment.

It's a complex market that has many different variables, and that's why we're going to -- we need to evaluate each one of those as we get more input.

One last quick one. Any impact on -- your margins were very strong and the growth in emerging markets are strong. I remember several years ago that was a headwind. Any impacts from the movements in foreign exchange on your margins because the margins were just absolutely blow out this quarter, very strong? I wouldn't have expected that with the growth in Latin America and Canada, so any impact from either hedges or anything like that on the margins in the quarter?

I would say if you're saying any significant favorable impact, the answer is no. Actually, currency in the quarter probably converted a little bit more negatively than what we would expect is average conversion

Great execution. Congratulations.

Thanks, Steve.

Thank you, Steve. Jeff Sprague, Vertical Research Partners.

Thank you. Good morning, everyone.

Good morning, Jeff.

Good morning. Keith, just on the comment on oil and gas being 12%, is that all the way through the entire complex down through petrochemicals or is there -- are you kind of stopping at, I don't know, refining when you say that? Can you just put a finer point on the whole chemical complex?

Absolutely. My comment would be it's mainly -- it is -- the 12% is oil and gas. We would put chemical at about 4% of our sales.

Okay. Thank you.

And that would include petrochem.

Right. What do you think, kind of describes the surge that you saw in the quarter on kind of the low starting backlogs? Was there some kind of budget flush or something else going on? It just seems peculiar that that in fact happened.

Well, I don't think there was any budget flush, quite frankly, that drove it. I think some of that was project timing. I think, as always, we get the quarterly what gets in and what gets pushed out, and I think what we did see and what we did talk about at the end of our Q4 was, there were a lot of push outs and delays in the solutions business. And we definitely saw a return to a much more normal end of the year and that's probably more than the budget flush thought process is what turned it a little more positive for us and in that category.

And on the outlook for oil and gas, [is there kind of a weight really] a little bit more clarity on what the customers are actually going to do. Is there kind of the preemptive or predictive draw down in distribution that's starting to happen or that's not even underway either?

No, no. There's been no draw down. Our outgoing flow is, as you know, we basically match our distributors' shipments with our deliveries, and we're not seeing any deviation at this point in time in anticipation of any future activity.

And just one other quick one. I think you said Lat Am was up 18 with Brazil and Mexico up 10. I would imagine those were 75% or 80% of Lat Am so how do you get to up -- I mean what was up 100% or some crazy number in Latin America?

Well, there are two of those are generally about two-thirds, a little less than what you're talking about. But if you remember probably one of the biggest differences was Argentina, which a year ago was pretty much shut down for us anyways, and we're now back to a more I'll say stable environment that could change at any time, but in our entire first quarter that was probably where the biggest delta came.

And then we also had some Central American activities that were stronger and the Andean regions, Chile, was another benefit and that's a little bit back to an earlier commentary around mining. Mining was very weak in Chile last year and we are starting to see some of the operating OpEx spending that's kicking in as opposed to pure CapEx. So I would put it into those two to three countries.

Great. Thank you for that color. Appreciate it.

You're welcome, Jeff.

Thank you for your question, Jeff. Shannon O'Callaghan.

Good morning, guys

Good morning, Shannon.

Keith, maybe can you dig in a little bit more in terms of these -- the pickup in investment you're seeing in the consumer industries? And are these capacity investments? Are they new product related or technology migrations? I mean, seems like you're finally seeing a pickup there this cycle and just maybe a little more color on what types of things you're seeing.

Well, I think with the consumer industries, it's always dependent upon the regions that we're seeing it, and basically you can think of everything in emerging markets is new investment, particularly as far as developing. I'll call it more sophisticated manufacturing processes, in particular with domestic indigenous suppliers.

Take China as a primary example. You all know that they've had a food scarce, so they're going to much more rigor in their internal processes and that requires automation investments. We also know that they're continuing to expand capacity in their food sector as the middle class continues to grow, which is the other driver in emerging markets, and that's not just China, that would be Latin America, Mexico, as well.

I would put a lot of it into that space in emerging. In the mature economies, I think the majority of it is continued drive for cost reduction and productivity, and out of that they also get some capacity expansion, but generally speaking, it's more along the lines to reduce costs and be able to continue to drive higher levels of productivity.

And really, as always, in the mature markets, packaging styles change and whether it's the materials used or how they do printing on them or the size of the package. It's a little bit like the automotive industry where you have model change years even though you don't have capital spend, you don't have a lot of increase in new car sales.

They just have to modernize their portfolio and in consumer industries, it's a lot of times around the packaging that is very similar to the styling of cars, and so they have to buy new packaging lines, take advantage of new technology. So I would say that's what we see more in the mature markets.

Okay. Great. That's really helpful, and then Ted, maybe free cash flow was up around I think 30% year over year and the buyback was up about 50%. Any reason either of those were elevated in the quarter and why they would moderate from what happened in 1Q?

Yes, I mean on the cash flow I'd say quarter to quarter, there's a lot of timing issues just about things like payables and receivable cut off dates and also timing of tax payments, so I think we're off to a good start but we're not really changing our full-year forecast for cash flow at this point.

On the repurchases side, we were facing a significant drop in the price in October from the time previous to that and under a 10b5-1 plan, we bought very aggressively with the drop in the price. As the drop in the price continued into November and December, we continued to buy at what I would call an above average rate and so I think that explains the first quarter of repurchases.

Okay. Great. Thanks a lot, guys.

Thank you.

Andrew Obin, Merrill Lynch.

Good morning.

Good morning, Andrew.

Just a question. You were talking about expanding capacity at Logix, adding salespeople in the Gulf region, what are these capacity expansion plans are right now given the current market dynamic?

Well, we continue to see -- I'm assuming you're talking about oil and gas in the Middle East.

Yes.

Well, we continue to see project activity there. The Middle East is probably got the lowest cost conventional oil, and I think you've also seen most of those countries say they're going to keep pumping because of that. So we are not seeing any change. We also continue to see the activities going on with respect to metals in the Middle East region, so I would say at this point in that region, we are not sensing any change in their current plans.

I think I was also referring to the Gulf of Mexico, as well, because you guys were pretty optimistic about the build out there.

I'm sorry. I misunderstood the Gulf. (laughter)

Hey, I'm Russian. It's not my first language. (laughter)

Fair enough, but it might be my years too. With the Gulf, we have not seen, at this point, any change in the activities there. A lot of the Gulf is -- not a lot, but a significant portion of the Gulf is Mexico production. It's obviously very important to their economy, and I think we'll see a bunch of that continue as the -- as we see some of the majors determine what's going to happen with their CapEx.

I think the question in the Gulf is some of the modernization and some of our comments about the modernization of those wells and the ongoing expansion could be at risk going forward, and really most of our previous comments on the Gulf were what would happen along the Gulf of the US. We were very -- not very, we were more positive about the downstream activities and the impact on the Gulf of Mexico, US region, which was really about the chemical and petrochemical industry and we still feel bullish about that.

We think those investments will continue to go forward. They are building the ethylene crackers. They are building the new ammonia and other chemical plants, and we see that as continuing basically because of the ongoing costs -- their input costs, if anything, have gotten better over the last six months than they were previously.

So I now remembered the questions around the Gulf and it was really the Gulf region of the US, and reinvigoration of the chemical/petrochemical industry in the Texas/Louisiana area. And we still see that as a growth opportunity for Rockwell Automation.

And just a follow up question. I think the big debate among our clients is what happens to North American energy production in 2017. When you talk to your customers, the initial conversation, what do think is the prevailing view? Do you think the low energy price kills the growth in North American production beyond 2016, or do you think the view is that somehow technology and ingenuity prevails in North America continues to grow its production?

I would say in 2017 is a long time out for predictions with respect to the energy market. But I think the one thing that has probably proven out over time is technology works, and the US is probably the most innovative technology country when it comes to oil and gas. I would never count that dimension out, but I just can't forecast two years out.

I also think at least at this point most of our customers, and don't take this as a prediction for Rockwell, but I think most of our customers don't expect oil prices to stay at $50 a gallon, or $50 a barrel.

Certainly for two years.

No, I really appreciate it. Thank you very much.

You're welcome. Thank you, Andrew.

Thank you, Andrew. Nigel Coe, Morgan Stanley.

Thanks, guys. Good morning. Ted and Keith, you've added some pretty good 1Q color. Obviously, I think the 1Q color is more in line because of the softer book to bill in 4Q, but I'm wondering anything stand out for 2Q that we should bear in mind, Ted?

Maybe the only thing I would say about the second quarter is, you know it's very normal for us to see a sequential sales and EPS decline when we move from Q1 to Q2, and this Q1 we have told you we thought was a particularly strong earnings quarter.

Okay. But you expect organic to accelerate from 1Q levels?

Well, we certainly in the balance of the year are expecting higher rates of organic growth in the remaining nine months than in Q1.

Okay. That's helpful. And then it's a long question. I think the analogy with mining is a good one and you mentioned, Keith, that mining was down 15% [in the trough] over two years. And I'm wondering over that period, did pricing hold up and then did your margins in mining hold up as well?

Yes. I think we did not see any meaningful change in margins in the mining industry over those two years. I think the projects become more competitive, but in general that's why we have to continue to drive productivity.

I think, Nigel, the other thing that happens is as you might expect, as we start to see the larger projects going away which the larger projects generally tend to be lower margin, and more smaller proactivity related projects coming in and more MRO activity, in some respects we actually see a little bit of a margin benefit.

Okay, and that's what we're seeing right now in the [engine] where you mentioned in Chile. That's more OpEx driven?

Yes. That is correct.

Okay, and then just a final one. We think of -- sometimes think of Lat Am, Canada as resource driven markets. The strength that you're seeing down there, is that primarily within oil and gas and resource or is it broader than that?

I'd say much broader. In Canada right now, we're seeing significant weakness, as you would expect, in Alberta with the oil sands, but we are seeing some improvement in other markets in Canada, consumer, automotive primarily in the eastern part of the country. And Latin America, our growth in the quarter, and I'd say for the last couple years has been pretty broad based, especially in Mexico and Brazil.

In Mexico, we're seeing great growth in consumer and transportation. In Brazil, transportation not as great but consumer's been pretty good, in addition to the resource based industries.

Okay. Thanks, guys.

Steven Winoker, Bernstein.

Thanks. Good morning. Could you maybe talk a little bit about -- a lot of your peers are attacking their cost structures right now with significant restructuring, and they're currently putting up mid-single-digit organic growth. They see a global environment that's not dissimilar to what you've just described in terms of those international challenges anyway. But maybe just help us think through a little bit about how you're thinking about sensitivities and reaction time right now given the uncertainty at least, if not weakness, outside the US and Argentina and Canada.

Steve, this is Ted. Last year, especially with what we were seeing as a slowdown in our solutions and services businesses, we started to kind of adjust the cost structure in those businesses, and we took some restructuring action in the second half of the year and some charges in the fourth quarter to facilitate that. And it is one of the reasons we're driving the levels of productivity that you saw me first quarter.

So we think we got a little ahead of that. With the outlook that we have for the balance of this year, we don't think we require any additional large restructuring actions, but obviously we'll continue to monitor that and if conditions deteriorate, we'll make the appropriate adjustments to our cost structure.

Ted, on that though, you talked a little bit about GDP and IPI forecasts weakening, as well globally, maybe some sense of the sensitivity around that so when you say much weakening from here, I mean how well do think you're protected? Is it just sort of a mild deceleration from here that you could handle or flat or the absence of growth or it has to be something much more than that?

Well I mean, obviously, we are roughly a 1.5% to 2% decline from our midpoint. That's what's reflected -- you can see the earnings impact of that is reflected in the low end of the guidance range. I would say in part our assumption is that that also reflects some cost actions we would take if we saw sales coming in at that level. If things deteriorate beyond that, we'd be in kind of a new ballgame.

Okay. All right, and then just a second question on process and your progress and traction on that front. In this environment, are you seeing any further reduced opportunities in terms of your ability to penetrate new customers and new project opportunities? Is that -- has your -- is the environment changing and should we be thinking about growth there differently?

No. I think we saw 4% growth in process in Q1. We think that is a good growth in this current environment. It's obviously improved from where we were at the end of last year, and we did lower our process growth for the full year so we were in the mid- to high-single-digits. We're now in the mid-single-digits, so we're a little lower, about 1 to 2 points lower.

So our outlook is a little less bullish than it was at the start of the year. But the majority of that is because of the anticipation of oil and gas as opposed to an inability to be able to continue to find opportunities for Rockwell in process. We still see this as a good growth market for us, an opportunity to expand our share. But given the oil and gas environment, we just thought it would be a little lower than what we started off at the start of the year with our November guidance. Process still important, still a good market, and something that we can continue to grow and expand our footprint in.

Okay, and just one last one on China. How do you see -- I know you talked about the project issues this quarter but, Keith, going forward, what are the sort of puts and takes in China that you think could be better, at least for Rockwell?

Well, as I mentioned a little bit when we were talking about consumer, we certainly think that's a market that's going to continue to take off as they continue to grow and they continue to demand more from their food suppliers. So food, beverage, home and personal care of the consumer related markets are why we're very bullish long term on China. I think the difficulty in China is the metals market and overcapacity, liquidity, the banking structures with the bad loans.

So I think there's some financial concerns but as far as the underlying markets other than overcapacity, mainly in metals, we think consumer, there's probably a little overcapacity in the total automotive market, but the multinationals and the JVs continue to grow their share. That's where we're obviously the strongest. So we have a good outlook in consumer and transportation.

We think oil and gas will continue to be good in China, and so that's an area that we've been investing more in. And also the infrastructure with the one area that the Chinese government has continued stimulus in has been in their metro and rail systems, and that's an area where we have opportunities as well and have participated previously. So we think China, even with these slowing growth rates, will continue to be a market that we can find opportunities in.

Thank you

Thank you.

We have reached the end of our hour. We're a little bit past the half hour so I think we're going to wrap it up here and appreciate everyone's questions. I think we had very great, thoughtful questions today on the call, I'll look forward to talking to most of you afterwards. So thanks for joining us and we'll talk soon.

Thank you, ladies and gentlemen. That concludes today's conference call. At this time, you may disconnect. Thank you.