洛克威爾自動化 (ROK) 2015 Q2 法說會逐字稿

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

(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, please go ahead.

Thanks, Mark. Good morning. Thank you for joining us for Rockwell Automation's second quarter -- second FY15 quarter earnings release conference call. With me today, are Keith Nosbusch, our Chairman and CEO and Ted Crandall, our Chief Financial Officer. Our agenda includes opening remarks by Keith that include highlights on the Company's performance in the second quarter and the first half and some context around our updated 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 and 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 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 and good morning, everyone. Thanks for joining us on the call today. Before I get started I just wanted to say a few words about the announcement that we sent out a couple of weeks ago about Rondi's retirement plans. This will be her last earnings call and I want to thank her for the outstanding job she has done over her career. Her leadership and contributions, most recently in the Investor Relations role, has been tremendous. I valued her counsel, insight and positive can-do attitude. She was a pleasure to work with, a true professional and a great person. She helped us become a better Company but she will be around for a while yet and I can assure you that you will all be in good hands as Patrick Gorus assumes responsibility for Investor Relations starting in July.

Let me start with some highlights for the quarter and first half so please turn to page 3 in the slide deck. Earnings growth in the quarter was robust despite a decline in sales due to a large currency headwind. Organic sales growth was a solid 2.7% led by architecture and software. Logix sales were up 6% in the quarter driven by our midrange portfolio. Our process business grew 2% in the quarter which is good results given underlying market conditions. [Arjen] expanded 270 basis points in the quarter which contributed to a strong adjusted EPS growth of 18%. And free cash flow was also very good in the quarter. Ted will elaborate more on Q2 performance in his remarks.

For the first half, organic growth was about 2.5%, very close to our expectations coming into the year. The standout region was Latin America with double-digit organic growth. Although Mexico led the growth, it was broad-based across the region. Segment operating margin expanded more than two points in the first half with particularly strong performance in control products and solutions and adjusted EPS was up 15%. So excellent earnings performance in this market environment.

Let's move on to what we're seeing in economic indicators and market conditions. Global GDP and industrial production growth forecasts have softened since January. For the US, industrial production growth has moderated for the past several months with oil and gas weighing on overall economic growth and incremental consumer spending has not yet filled the gap. But automotive remains strong and consumer industries are still solid.

For the second half, we expect market conditions to be similar to the first half but with further declines in oil and gas and improvement in other verticals including auto, chemicals and some other heavy industries. EMEA's economic indicators have improved slightly and we expect growth to be a little better in the second half with improvement in home and personal care, life sciences and increased project activity in metals and water wastewater.

In Asia, India continues to recover and we're seeing good growth there. China remains slow which is consistent with the PMI continuing to hover around 50. For both China and the region, we expect low single digit growth for the second half and full-year. Market conditions in Latin America are mixed. Mexico remains healthy but Brazil and Argentina are in a recession and Venezuela remains very challenging.

With all of that said, let's move on to our updated guidance for FY15. Overall, while not a lot has changed from a quarter ago, we're somewhat more cautious about the rest of the year. Some industrial economic indicators have weakened. Oil and gas customers have cut CapEx more quickly than we anticipated and we would have liked a stronger book to bill in Q2. But based on our current assessment of backlog and front log, we continue to expect higher growth rates in the second half primarily in our solutions and services businesses. They just won't be quite as strong as we thought a quarter ago.

So, for our full-year guidance we are lowering our organic sales growth by 1 point and taking off an additional 1.5 points due to a larger currency headwind. We now expect FY15 reported sales of about $6.4 billion. In spite of the top line reduction, our expectation for a higher full-year margin enables us to maintain an adjusted EPS guidance range of $6.50 to $6.80. Ted will provide more detail around sales and earnings guidance in his remarks.

I just have a few closing comments. While I wish we were seeing stronger market growth, I like our competitive position. Revenue diversification and agility are helping us pursue the best growth opportunities. Our strong productivity culture enables us to invest in innovation and organic growth. And we have demonstrated that even in a lower growth environment we can still grow earnings and deliver great value to shareholders.

Before I turn it over to Ted, let me take a moment to mention something that I'm very proud of. We recently received the Ethisphere award for the seventh time naming us one of the world's most ethical companies. This recognition reflects our employees and partners' commitment to integrity, responsibility and accountability. All essential qualities of the successful and sustainable company. So Ted, I will turn it over to you.

Thanks, Keith. Good morning, everybody. I will start on page 4, second quarter key financial information. Sales in the quarter were $1.551 billion, 3.1% lower than Q2 last year. Organic sales growth was 2.7% but currency translation reduced sales in the quarter by 6 points. Sales were down about 1.5% sequentially. Sequential organic growth was about 2%, pretty typical in terms of the historic pattern but currency translation reduced sales by over 3 points sequentially.

Segment operating margin continued to be very strong at 21.6%, up 270 basis points from Q2 last year despite the sales decline. The year-over-year margin increase was primarily due to the higher organic sales, strong productivity and favorable mix partly offset by some increased spending. I will note that Q2 last year is our easiest quarterly margin comparison. General corporate net was $21 million in Q2, up about $2 million compared to one year ago. Still in line with our expectations for the full-year.

Adjusted earnings per share were $1.59, up $0.24 or 18% compared to the second quarter of last year. The adjusted effective tax rate in the quarter was 26% compared to 27.9% in Q2 last year. Last year's rate included some unfavorable prior period adjustments. Free cash flow for Q2 was $269 million, another strong result. Free cash flow conversion on adjusted income was 125% in Q2. Our trailing four quarter return on invested capital was 32%.

A couple of items not shown here, average diluted shares outstanding in the quarter were 136 million down about 3% compared to last year. Also during the second quarter, we repurchased 1.14 million shares at a cost of $127 million. Year-to-date we have repurchased 2.69 million shares at a cost of $294 million. In November, we talked about full-year repurchase target of $470 million. We're running about 25% ahead of that pace through March. Similar to last year, it's likely that we'll spend above the target for the full-year. At the end of the quarter, there were $757 million remaining under our share repurchase authorization.

The next two slides present the sales and operating margin performance of each segment, both for the second quarter and year-to-date. I'll start with the architecture and software segment on page 5 and I'll focus my comments on the second quarter results. On the left side of the chart, architecture and software segment sales were $674 million in Q2, down 1.8% compared to Q2 last year. Organic growth was 4.8%. We continued to see very attractive growth rates in this segment driven primarily by our Logix platform. Currency translation reduced sales in the quarter by almost 7 points on a year-over-year basis.

Moving to the right side of the chart, on 4.8% organic growth, A&S margins were 29.8%, up 210 basis points compared to Q2 last year with the improved margin primarily due to higher organic sales and another good productivity quarter. Spending in this segment was up modestly year-to-date through March. We expect spending to increase in the second half.

Turning to page 6, this is the control products and solutions segment. In the second quarter, control products and solutions segment sales were down 4.1% year-over-year with organic growth of about 1.2%. Currency translation reduced sales by about 5.5 points. Organic growth for product businesses in this segment was 5%, equally strong to the growth rate seen in architecture and software. However, we continued to experience weakness in the solutions and services businesses with organic sales down about 2%.

The book-to-bill in Q2 for solutions and services was 1.06. This was lower than we expected and consequently, we will be reducing our growth expectation for solutions and services in the second half compared to the prior guidance. The order shortfall in solutions and services was primarily in heavy industry with about half of that coming in oil and gas. CP&S continued to deliver strong operating margins, 15.2% in Q2, up 300 basis points compared to last year. The year-over-year margin improvement was due to the organic sales growth, continued favorable mix as our products business is our outgrowing solutions and services and particularly strong productivity performance in this segment.

Moving to the next slide, page 7, provides a geographic breakdown of our sales and shows organic growth results for the quarter and the first half. Again, I'll focus my comments on the second quarter. The organic sales growth was driven largely by the Americas with Latin America continuing to experience the highest percentage growth rate. The US was up 3.5%. Growth in automotive and consumer industries more than offset declines in oil and gas.

Canada was down 11% compared to Q2 last year. As we discussed last quarter, that was not unexpected. Canada is down 1.7% year-to-date and we're expecting to be down about mid-single digits for the full-year. Canada has a disproportionate exposure to oil and gas and declines there are more than offsetting attractive growth rates in transportation and consumer industries.

In Q2 in Latin America, Brazil was about flat year-over-year but otherwise growth was pretty broad based across the balance of the region with Mexico up 18%. Latin America was the only region to experience year-over-year growth in oil and gas in Q2. EMEA was up 1.2% organically. We saw growth in both mature and emerging EMEA with a little higher growth and emerging EMEA this quarter. Asia-Pacific was up 3.2%, driven primarily by India and China. India was up 16% off of the relatively easy comparison and China was up 6%. As a final note on this slide, overall, emerging market organic growth in Q2 was up over 8%.

Please turn to the next page which is our updated FY15 guidance. As Keith mentioned, we're reducing our full-year sales guidance but holding the prior EPS range. Across the guidance range we're reducing sales by about 2.5%. Approximately 1.5 points of that decline is due to currency translation. In our prior guidance, we expected currency translation to reduce full-year sales by 4.5%. We now expect currency translation to reduce full-year sales by 6% and to reduce full-year EPS by about $0.40.

We're also reducing sales guidance by 1 point to reflect lower organic growth. The lower organic growth is due in part to lower than expected orders in Q2 primarily in our solutions and services businesses. Also, we are now seeing an earlier drop in oil and gas spending than we previously expected. These first two factors are related to some extent. And the last factor, we're continued to see declines in the forecasts for industrial production growth rates.

Our previous guidance called for reported sales of approximately $6.6 billion at the midpoint. We now think the midpoint will be a little over $6.4 billion. The previous guidance called for organic growth of 2.5% to 5.5%. The new guidance is for organic growth of 1.5% to 4.5%. At the midpoint of sales guidance, we expect year-over-year organic growth rates in our product businesses to be about the same in the second half as the first half. We expect higher second half growth rates in the solutions and services businesses. That is consistent with our backlog and our front log at the end of March.

We also expect to see a typically large fourth quarter for sales in our solutions and services businesses. Despite the lower sales, we're maintaining the previous EPS guidance range of $6.50 to $6.80. We now expect higher margin to offset the earnings impact of reduced sales. The margin improvement compared to prior guidance is based on stronger Q2 margins, a continuation of the strong productivity into the second half and a more favorable earnings conversion on currency translation than we previously expected.

We now expect operating margins for the full-year to be a little over 21.5%. This margin guidance incorporates an increase in spending in the second half compared to the first half. We continue to expect adjusted effective tax rate for the full-year of 26.5%. Given our strong cash generation through the first six months, we now expect conversion on adjusted income to be above 100% for the full-year.

There are a few other items not shown here that I think generally are of interest. We continue to expect general corporate net expense to be approximately $80 million for the full-year. We continue to expect average diluted shares outstanding to be about 136 million for the full-year. And finally, we expect process sales growth for the full-year to be at about the Company average. With that, I will turn it back over to Rondi.

Thanks, Ted. Before we start the Q&A, I just ask that you limit yourself to one question and a follow-up so we can get to as many callers as possible. And Mark, we'll go ahead and take our first question.

Shannon O'Callaghan, UBS.

Hello, everyone. Congratulations, Rondi. Thanks for all help I appreciate it. I hope you enjoy.

Thanks, Shannon. I appreciate it.

Keith, on the consumer industries, could you maybe walk us through a little bit food and beverage, home and personal, life sciences, what you're seeing in those different markets? And then also, maybe the nature of the investment you're seeing? You mentioned that Logix was strong and midrange. I'm wondering the types of activity you're seeing?

Yes. If we look at the consumer verticals, certainly food and beverage, we see that growing in line with the Company average in the quarter. We continued to see investment, particularly in Asia-Pacific and Latin America, where there is ongoing strength with both multinationals and indigenous food companies. We're also seeing, in particular in Asia and China in particular, the continued need for safety and the risk management of having quality food and quality production processes. That is driving some of the investment there.

In the home and personal care, we are seeing continued investment in innovation in their products and many of the companies are expanding their SKUs and therefore need new and more flexible machinery to do that. We expect that to continue as we go forward in the second half of the year. And as I mentioned, we think home and personal care will be an area that is above the Company average growth.

And then life sciences, we did see growth in all geographies including EMEA. This is a pick up from what has been the previous couple of quarters. That is a quick picture of what we're seeing in some of the major areas. But a good quarter and basically a good outlook for the remainder of our fiscal year.

Thanks. And then on process, the up to, like you said, pretty good in this environment. Could you maybe frame for us a little bit how you're approaching the process business right now and thinking about how to grow it in a tougher oil and gas environment? Are there other verticals you are approaching or different approach in terms of product set, et cetera?

The product set is pretty much the same. We've had some new functionality releases in some of our process and both continuous and the batch hybrid space. But in general, our product portfolio has been pretty consistent over the last couple of quarters after a major release in our plant PAX previously. We are looking forward to some new introductions later this year. That'll particularly be in the batch hybrid space which is an area that we believe we can continue to grow in.

But as far as the markets themselves, while oil and gas is certainly going to see a decline, we believe that chemical will be stronger for us in the second half and going forward. That's an area that we continue to believe we have some opportunities to grow in. Even in oil and gas, if you look at Ted mentioned, that Latin America grew for us in the second quarter.

We think there are pockets of investment that are going on, both in emerging markets where either they are trying to become more energy independent or they just have a government industry that they want to continue to invest in whether it be the oil side or the gas side. We see isolated opportunities even in oil and gas. And in particular, some of the midstream activities that will continue to be invested in. And investments, as we talked about in mining, OpEx spending will become more critical in some of these areas and that spending should continue.

We're seeing very isolated but some pockets of spending in metals. It is very project specific. It is not broad based and we've been successful in a couple of those. We also see once again, isolated but pockets of spending in pulp and paper which is an industry that has really been reduced over a number of -- probably over the last decade. And so they do look at modernization and energy efficiency investments. And in North America, we do see modernization going on in some of those locations. That gives you a little feel for where we see the opportunities to have a little bit above average growth to offset some of the oil and gas decline.

That's great. Thanks a lot.

Jeremie Capron, CLSA

Thanks, good morning and congratulations, Rondi on your retirement. I wanted to ask about Latin America. Very impressive growth coming from Mexico. I'm wondering how much of that is driven by the automotive industry and how long do think this is going to last?

Certainly, there's parts of it has been driven by automotive. And there has been investment in automotive from both the US car manufacturers as well as European and Asian. We see that automotive investment continuing over the next couple of years. It's one of the reasons we've identified automotive as one of the areas that is going to grow a little faster for us in the second half. Mexico is where some of these investments are going in. And so, we see Mexico and automotive continuing and when we talk about this, there'll be two dimensions to that.

One will be the car manufacturers themselves but secondly, it will be the tier 1 suppliers to the automotives. And certainly, that's an opportunity for us as well. The investment and the automation intensity is different than an automotive plan but we also see that as an area. The other area that we see as opportunity for us is the fact that some of the opportunities that we'll see in powertrain now with FANA and we do know there are some powertrain investments that will be going in to Mexico.

Independent of what I just talked about with automotive, that is probably not where the greatest growth has been for us. There is still a significant investment going on in oil and gas. PEMEX, as you know has opened up the energy sector for external investments. So we see that as a continued opportunity. Oil and gas is very important to the Mexican economy and they are also modernizing some of their existing facilities. We see that as a potential.

And then mining in Mexico is one of the few areas where investment is taking place. And also then the growing middle class is pushing for the consumer industries and we see food and beverage, and brewing, all of the consumer related industries, home and personal care, as also opportunities for growth. It's really a broad based set of industries that is driving our growth in Mexico. And we have a very good partner network there. Very strong distributor organization that is able to support that growth. We see a continued ability to grow in Mexico in a diverse set of verticals.

Thanks, Keith. And Ted, I wanted to ask about the margins. Again, strong margin performance this quarter despite the decline in reported revenue. And you talked about increasing spending in the second half. I'm wondering if you could give us a little more color around that and if you expect the incremental margins to remain at this elevated level for the remainder of the year.

First, I think spending is probably started off a little slower for us in the first half of this year than we expected in terms of a ramp up. We're up about 2% year-over-year in spending in the first half. We expect to be up more like 4% year-over-year in spending in the second half. As it relates to incremental margins, I do not expect incremental margins in the second half to be as strong as what you saw in the first half. But I expect absolute margins in the second half to be about equal to the first half.

Thanks very much.

Steve Tusa, JPMorgan

Good morning. Rondi, congratulations as well. It's been a pleasure working with you. Just on the 4 times, I think you guys had guided to 40 -- something in a low $0.40 range of 4 times impact year-over-year on the last call?

Last call was $0.38.

So it's basically another couple of pennies on the 1.5%? Has anything changed with regards to the conversion rate of that 4 times that you're assuming?

I think I mentioned that. We think we're now going to have a somewhat more favorable conversion rate for the full-year than what we anticipated in the previous guidance.

On the foreign exchange?

On the foreign exchange, correct.

What is driving that?

The conversion rate on the foreign exchange is probably one of the more difficult things for us to forecast. Over time it tends to run at about our normal operating earnings margin but it varies a lot quarter-to-quarter. Now that we're six months through the year and we have got the first half behind us and it was slightly favorable to what we were thinking, our best estimates now for the second half say the likely continues.

Right. Okay. And as far as the core incremental margin, clearly you guys are putting up some very good numbers. How do we think about that 30 to 40 going forward? Is that something you're managing to? I know it's all these numbers are kind of an output obviously. You're just on the ground doing business. How do we think about what's going on structurally?

We have made some structural changes that have boosted our productivity this year and I think we're going to run at a somewhat higher level of productivity this year than has been the case the last couple. And that is providing a nice boost to our margins. On a year-over-year basis, I think you're going to see the largest impact of that in the first half because the margin comparisons get a little tougher in the second half.

If you looked at our second half expectations and you pulled out the effective currency, I think what you'd see is a conversion margin that is pretty normal, kind of around 30%. That is a FY15 answer. In the longer term, we still believe that if we are driving reasonable levels of organic growth and I use that to mean 4%, 5%, 6% organic growth, that we should be able to drive 30% to 35% conversion margin. It's always going to depend on mix of growth between our solutions and service business and product business and the rate of which we ramp in spendings so it won't be that in any particular period. But over the longer-term, we think that's a reasonable expectation.

Okay. And one last quick one just in [rodam] you said oil and gas grew. Was that mostly offshore down there or was there a flavor of that growth?

No, it's a combination. Matter of fact, the majority of it was probably onshore in the Andean region, countries like Peru, Colombia, in addition to Mexico. And in Mexico it's a mix with a lot of it offshore there. But the rest of South America is pretty much onshore.

Okay, great. Thanks a lot.

Richard Eastman, Robert W. Baird

Good morning and Rondi, congrats. Keith, could you maybe speak for a minute or two? When we look at the modest downtick in core growth that is forecast now for the year, when I look at that regionally, it would appear as though maybe expectations for APAC and also perhaps for Canada may be have come in a little bit so thinking about it regionally. And is that again, I would expect Canada to be oil and gas but APAC, what would be the reason for that? Is that just China global PMI or --?

I think just to characterize it for the year, we believe each region will be down other than Latin America. That would be the wave we would characterize it in total.

Versus previous guidance.

Yes, I'm talking about versus our guidance last quarter. That's why we took the overall guidance down organically 1 point.

And then, just one follow-up question here. On exports, with the stronger dollar are you seeing anything on pricing, also competitive pricing there? And also again, is the US dollar just making us less competitive from an export standpoint?

As always, quite frankly, a stronger dollar makes us less competitive export wise. When you see the dramatic change against the euro, that is helping the European, particularly OEMs, compete. And then there's also another dynamic going on and that is China. And you look at China now versus the dollar and the China currency is pretty much pegged to the dollar. With what happened with the euro, we are now seeing that the Chinese OEMs are not -- do not have the same advantage against the European euro.

And so we're seeing some different dynamics going on from a competitiveness standpoint that haven't been seen in a while. In particular, because of the magnitude of the euro dollar change and then the impact on other currencies particularly where there is strong exporting economies. I think that is part of the reason why you're seeing a little bit of a decline in the China numbers and China for us OEMs have slowed a little. We are seeing some of the impact there. But just to be clear in the US, in the US, most of our OEM business is domestic business, not export business. We have not seen a significant impact to our business at this point in time.

Your business, what's good for the European OEMs competitively versus the Chinese, your component sales into those European OEMs, is that business held up? That's where our cost disadvantage would be, correct?

Yes, so far it has. And part of the reason is a lot of the European strength is with exporting OEMs. So that is for machinery and a lot of the strength of exporting OEMs is to the US now and that is into where our strength is and where our capability of supporting those machines and the customer base is the strongest. I think you'll see our ability to continue to grow. It's why compact Logix is growing at a faster rate than the A&S and Logix average, quite frankly. It's because we continue to be able to work the European exporting OEMs and that's because it is not a domestic sale and it's a benefit to Rockwell to have a strong position with the exporting OEMs in Europe.

Okay, thank you.

Nigel Coe, Morgan Stanley.

Thanks, good morning and Rondi, I hate to sound so repetitive but congratulations and thanks for the help. It's been a pleasure. I want to come back to the FX conversion. Is it because the mix of currencies has changed, i.e, weaker euro region performance, weaker Canadian performance or has there been a change to your hedging policy?

I would say there has been a change in the mix of currency from our prior guidance to this guidance and that is some of that. We've made no changes in our hedging policy although the mix in currency, it does have impact on the hedging results related to that. But I would say a lot of this is just about what got better visibility now about what to expect in the second half and we've got two quarters under our belt.

Okay, that is clear. And then on the revision to the full-year core growth outlook, obviously, the second half range is pretty wide as it normally is. I was a bit surprised you'd lower the, took the low end down to 1.5 which implies some deteriation from the first half run-rates. And given that we're seven months into the year now, I'm wondering what drove that incremental course at the low end? And perhaps if you could maybe add some color on the sense of what you saw in March going into April?

Yes. I don't think we were trying to send any message with the low end. We focused primarily on the midpoint. We always think of the midpoint as the most likely result. We maintain as symmetric range around that midpoint and so I wouldn't read a lot more into it than that. As it relates to the month of April, I would say early in the month it started a little bit slow. It is accelerated through the month and right now, I think it would be fair to characterize that it's -- what we've seen is consistent with our guidance.

Okay, great. And then just finally, you had the 1.06 book-to-bill on solutions. It's in the zone of where it was last year, 1.1. What sort of book-to-bill were you expecting in your previous plan?

I would say we were hoping we were going to see something about 5 points higher than that. So maybe like 1.11 or 1.12. We miss orders in solutions and services on the order of $40 million.

Okay, great. That's very hopeful. Thanks, Ted.

Richard Kwas Wells Fargo

Hi, good morning. On the solutions and service -- or CP&S versus A&S, what is the split on oil and gas exposure between the two businesses? I assume that CP&S with a solutions exposure there, there's a fair amount there. But what is the split out when we think about the segments?

When we think about the two segments, we don't have -- not precise, but we believe A&S is about 30% of it and CP&S is about 70% of it. And within CP&S, about 85% of it is solutions and services. In total, it's about 40% products and about 60% solutions and services.

And Rich, what Keith was giving you is kind of the breakdown of our total sales in the oil and gas. I think where you were going is and I would agree, we have a lower percentage of sales in Oil and Gas and architecture and software than we have in control products and solutions.

I think if I do some high level quick math here, as a percentage of A&S sales, it's less than 10%, as a percentage of CP&S sales it's going to be 15% plus and 12% for the total company.

That is helpful. And then with the debt raise and the free cash flow generation, any change in the priority for use of cash?

I don't think any significant changes in the priority. As I mentioned, cash flow's running a little stronger this year than we originally projected. We're running ahead of pace on repurchases. I suspect that's going to continue.

Okay, great. Rondi, thanks for everything. Enjoy San Diego.

Steven Winoker, Bernstein

Thanks and Rondi, I'll echo everybody's congrats and thanks as well. Let me ask for a finer point on the margin questions and the margin detail and sustainability. That FX conversion, could you quantify a little bit more how much that contributed? Were there any transaction benefits as opposed to translation in there?

Every period we have got a combination of translation, transaction and remeasurement gains and losses running through that currency number.

And hedging.

And hedging as part of the transaction. But in Q2, we saw a very modest margin benefit from currency. We were up, margins were up year-over-year 270 basis points. The favorable currency effect related to that we think was about 20 basis points.

Okay.

It was not zero but it wasn't large

Okay. So then, that brings me back to pricing mix productivity the other items and you already mentioned the incremental investments came in -- or the year-on-year investments came in lower than you expected. Maybe give us a better sense for what you think was productivity versus pricing mix leverage? Just to help us understand that sustainability question going forward.

I would say productivity was probably the single largest item in the quarter. Although we did get a favorable kiss from both organic sales growth. It was favorable mix year-over-year. That was probably about half a point. On the productivity, we've talked about this a little bit in the past. We've a very well established and ongoing productivity program in the Company. It includes our strategic sourcing efforts, a continuous focus on improving manufacture and labor utilization, product and process cost reductions and all of that consistent with implementing lean and six sigma business processes.

In the second half of last year, we stepped up our productivity goals thinking that we might face more difficult macro conditions this year. And we've had success across both segments driving higher productivity but with particularly strong productivity improvement in control products and solutions. We talked last quarter about restructuring actions in CP&S in the second half of last year. Those are showing up now as higher margins particularly in our solutions and services businesses. Like I said, we expect this to be an above average year for productivity improvement.

Where'd you take R&D?

R&D is up year-over-year but I would say the increase right now is relatively modest.

Okay. And then just last question --

It's a timing issue. I think you're going to see that. That will pick up for us in the second half.

That's what I was just going to say. That is one of the areas that we've been slower with the ramp up simply because of availability. It's going to be part of that 4% growth in the second half that Ted mentioned earlier.

And just lastly, Keith, maybe talk a little bit more about the competitive dynamics and process. You talked about the currency impact. But further to that, it sounds like your commentary you think you're gaining share still relative to even if we just compare it to the Europeans or others. How are we thinking about your share moves progressing?

We believe we continue to gain share in the process space. Obviously, it's an area that we did not compete with the breadth of our portfolio historically. It is a new area for us. It has been the biggest growth in our served market over the last couple of years. And we still see process as one of the better opportunities and areas for us to drive revenue growth.

The majority of that, quite frankly, is going to be -- we have to take share. The market, we have to be growing above the market growth rates here and that means we're going to have to take share. We think the best opportunities for us to take share are in the batch hybrid space. And then, in certain applications in the heavy industries that we're focused on in oil and gas, in pulp and paper, in metals and now, chemicals is a better area.

We've identified specific applications, specific geographies that we can continue to make inroads with the modern DCS approach that we take with our portfolio. We think we have some competitive differentiation. We think our plant-wide optimization message is critical for helping customers drive costs and global competitiveness and cost efficiencies and productivity.

We have a very targeted approach for where we're looking at it and there's a large legacy install base that we also have focused on to be able to update and upgrade because of the fact that those legacy systems are no longer supported or available from the original manufacturer. We have a very broad but yet focused initiative here to drive that growth. And we still believe it's an area that while the timetable has stretched out, our goal continues to be to double that business that we had as of 2012.

Great, thanks.

Julian Mitchell, Credit Suisse

Hi, thanks and thanks again, Rondi for all the help. In terms of European demand, I think one of your competitors had sounded pretty good about Europe improving in general in the industry business a few days ago. I think you mentioned some of the OEMs obviously getting a boost from the currency. I just wondered underlying fundamentals beyond just some of those export OEMs, are you seeing a genuine increase in the pace of order intake in Europe?

Yes. We have seen some improvement in the outlook in Europe in our front logs. We see that the major areas that we see the improvements would be in the home and personal care markets, the life sciences markets have been growing there for us as well. And then also, if you take very isolated countries or locations, we've seen some growth in metals and some growth in the water wastewater area as well as part of it.

That continues to be an area that we see growth opportunities and consumer is a space that continues to develop and continues to create opportunities for modernization in, I'll say, mature Europe. And then in emerging Europe, that's where we have seen some of the higher growth opportunities. And in fact, emerging Europe grew at a faster rate for us this last quarter than Western Europe. A couple of good industries, a couple of good countries and yet a more positive view of the economy there than certainly six or 12 months ago.

Thanks. And then one last one on the margin outlook. Ted, I think you called out mix was around the 50 BPs help to margins in Q2. I think in Q1, it was also a decent driver, particularly in CP&S, of the margin. Just wondering your second half outlook on margins? Are you assuming mix is flat-ish or still should be pretty favorable?

I think mix is going -- it will certainly be less favorable than the first half because we'll get that traditional significant jump up in solutions and services sales particularly in Q4. And as we said, we're expecting better growth in solutions and services in the second half. I think we're going to have a little bit of a mix headwind but my expectation is the volume leverage should make up for that.

That's great. Thank you.

Before we go to our last caller, this is Rondi, I just want to make a couple of comments. I'm not sure that we got this out but I want to make sure that we're clear about our revised expectations for oil and gas for the full-year. We think it could be up to 10% down as implied at the midpoint of our guidance. And then, if you back engineer second half, that's probably down something like mid-teens and so I just want to make sure we get that out.

The other thing I just wanted to say a few words quickly before we go to the last caller. Since this is the last call that I will be participating in, I'll take a little bit of license here. I just want to say that it's certainly been a privilege to represent such a great company to the investment community. I feel really lucky that Ted asked me to do this job seven years ago. I've often said I think I've the best job in finance. Now I'm going to cry. I've learned at time and I've really enjoyed working with all of you and I appreciate all of the best wishes. With that, I think we'll just take the last call.

Jeff Sprague, Vertical Research.

Thank you very much. We don't want to make you cry Rondi, but hopefully we're making you blush a little bit. You've done a great job and you deserve it. Thank you for taking the last call.

Ted, I wanted to come back, obviously, -- well, perhaps not obviously but I think the big surprise for everyone is the margins this quarter. And it is very difficult from the outside looking in to get our head around productivity and how to model that. And that is always going to be the case for sure. I guess really my question is as you said you are pretty comfortable at 30% to 40% incrementals on 4% to 6% organic growth. But how do we think about what you have left in productivity tank if we really are kind of stuck at, pick a number, two or three. Where do the incrementals want to go in that type of environment?

Sure. I think that's a fair -- I think Jeff, I think your question is beyond FY15.

Yes, beyond FY15. Correct.

I think you're absolutely right. Look, if we start to operate in organic growth mode of 2% to 3%, it will be difficult for us to drive incrementals that are in the 30% to 35% range. And part of the reason it will be difficult is it will be more difficult to drive higher levels of productivity.

That makes sense. Could you also just -- it's interesting. We didn't get many oil and gas questions. So Rondi, thanks for jumping on with that. (Laughter). Wow, this whole debate is over. Let's move to the next thing. I was interested in what you were actually seeing in OpEx versus CapEx? We've heard from a lot companies that OpEx is getting slashed very dramatically because it's what people can cut quickly. Are you seeing that type of behavior? A little bit of color on what you can see in the forward CapEx budgets versus the near-term behavior of your customers?

Jeff, I think the first thing I would say is our actual visibility into what exactly is CapEx and OpEx is not great. But the larger declines and the earlier declines we've seen have come more on the solutions and services part of our business than in the product part of our business. Which I think would cause us to conclude that so far, it has been more about CapEx and not as much about OpEx.

That's very interesting. And just finally, on this FX question. So, really your guide now at $0.40 put your FX conversion margin at your average margin roughly speaking right? You were anticipating --

That's correct

You thought it was going to be worse than typical and we've ended up with a typical result.

That is correct. And frankly, our guidance last quarter was somewhat colored by a less favorable result in Q1.

Okay, thanks for squeezing me in. I appreciate it. Thanks a lot. Take care

Okay, Mark. I think you can go ahead and conclude the call.

That concludes today's conference. At this time you may disconnect. Thank you.