洛克威爾自動化 (ROK) 2017 Q1 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 would like to turn the call over to Patrick Goris, Vice President of Investor Relations. Mr. Goris, please go ahead.

Good morning and thank you for joining us for Rockwell Automation's first quarter FY17 earnings release conference call. With me today are Blake Moret, our President and CEO, and Ted Crandall, CFO.

Our results were released earlier this morning and the press release and charts have been posted to our website. Both the press release and charts include reconciliations to non-GAAP measures. A webcast of this call will be available at that website 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 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 Blake.

Thanks, Patrick, and good morning, everyone. Thank you for joining us on the call today.

I'll start with some key points for the quarter, so please turn to page 3 in the slide deck. We had a good start to FY17. Organic growth was 4%, better than we expected. Our largest market, the US, returned to growth and we saw double-digit growth in emerging markets. Globally, consumer and transportation were our strongest verticals. Oil and gas and mining remained our weakest verticals, but have now been stable sequentially for several quarters.

While the quarter was better than we expected, we believe we may have seen somewhat higher than normal budget flush at the end of the quarter, primarily in the US. And we did see some larger projects hitting Q1 that we expected later in the year. From a regional perspective, as I mentioned the US returned to organic growth earlier than we expected. Strong growth in consumer and automotive was partially offset by weakness in heavy industries including oil and gas and mining.

As expected, EMEA started the year slowly and was down about 2% year-over-year. However, orders were up year-over-year and we expect sales growth for the balance of the year in this region. Our performance in Asia was better than we expected, with strong growth in the consumer and transportation verticals. We saw growth across all countries in this region including China, where we saw double-digit growth. And in Latin America, growth was driven by Mexico and Brazil.

A couple of additional comments about the quarter. Our recent acquisitions performed well, and contributed almost 2% of sales growth. Our process business improved and was about flat year-over-year organically. Including our recent Maverick acquisition, process was up high single digits. Architecture and software had a very strong quarter with almost 8% organic growth. Within the segment, Logix was also up 8%, compared to last year. I'm also pleased with over 21% segment margin in the quarter. Ted will elaborate more on Q1 financial performance in his remarks.

Let's move on to our outlook for the balance of FY17. The macro outlook remains consistent with our assumptions earlier in the fiscal year. We expect continued growth in the consumer and transportation verticals. Oil and commodity prices have been stable or have inched up, and our business in these markets has been relatively flat now for a few quarters. We expect heavy industry to be about flat year-over-year. Recent projections continue to call for improving GDP and industrial production growth rates, as well as higher levels of global capital expenditures.

Taking the macro outlook and our strong first quarter into consideration, we now expect FY17 organic sales to be up about 3% year-over-year. Including the impact of acquisitions and a larger headwind from currency, we continue to project FY17 sales of a little over $6 billion, and are revising the adjusted EPS guidance range to $5.95 to $6.35. Ted will provide more detail around sales and earnings guidance in his remarks.

Before I turn it over to Ted, let me add a few comments. A couple of months ago, we hosted many of you at our annual Automation Fair in Atlanta. Once again it was a resounding success, as thousands of customers and partners attended and learned about our latest technology innovations and capabilities. We've heard that our customer testimonials resonated with many of you and provided powerful examples of how we partner with our customers and help them become more globally competitive.

Strong underlying demand for our products enables us to accelerate investments this year in core technologies and domain expertise, and to expand the new value we are providing in information solutions and connected services. Together, these will further enhance our ability to bring the connected enterprise to life, and profitably grow share at customers globally. And a powerful indicator that our innovation is creating value for customers is the recognition we are receiving. Control Magazine, a leading process industry publication, recently released its 2017 Readers Choice awards. Our results were great, as we again won more first place awards than any other company.

Now, as we get ready to hear from Ted, I want to say a few words about him. As you probably all know by now, this is Ted's last earnings call in the CFO role, but I'm very happy to be able to continue to leverage his well-recognized experience and understanding of our connected enterprise strategy in the CP&S segment leadership role. I'm also very pleased to welcome Patrick to my senior leadership team. With his proven leadership and extensive experience, I am confident he will move seamlessly into his new role as CFO.

The leadership changes are the result of a thoughtful and long-term leadership succession plan that maximizes the contribution of our experienced leaders, while ensuring the continuous addition of new talent and perspectives for our company, customers, partners, and investors. On a personal note, Ted has helped immensely with my own transition. I believe we have a great management team in place. And with that, Ted.

Thank you, Blake, and good morning, everyone. I'll start my comments on page 4 which is the first quarter key financial information. Sales in the quarter were $1.490 billion, an increase of 4.5% compared to Q1 last year. Sales increased 3.8% on an organic basis. Acquisitions contributed 1.8% to growth, and currency translation reduced sales in the quarter by 1.1%.

Segment operating margin was 21.2%, 50 basis points higher than Q1 last year, and primarily due to higher sales and lower spending, and despite the restoration of incentive compensation that we talked about in the November guidance. Spending was a bit light in the first quarter, and you should expect spending to increase as we proceed into the balance of the year.

The margin result also reflected a good productivity result in Q1, including savings from our restructuring actions in Q4 last year. General corporate net expense was $15 million, compared to $18 million a year ago. Adjusted earnings per share were $1.75, an increase of $0.26 or 17% compared to the first quarter of last year. The increase is due to a combination of higher sales, improved margins, and a lower tax rate.

The adjusted effective tax rate in the quarter was 18.1%, compared to 22.8% in Q1 last year. As expected, the adjusted effective rate in Q1 included a significant benefit from discrete tax items. We talked about this benefit when we provided guidance in November. A relatively small part of the discrete tax benefit in Q1 was due to our adoption of a new accounting standard regarding equity-based compensation.

Free cash flow for Q1 was $271 million. Free cash flow conversion on adjusted income was 119%. Our trailing four-quarter return on invested capital was 34.6%. And a couple of other items, average diluted shares outstanding in the quarter were 129.7 million, down about 2% compared to last year. And during the first quarter, we repurchased almost 650,000 shares at a cost of about $81 million. At the end of the quarter, we had $864 million remaining under our share repurchase authorization.

The next two slides present the sales and operating margin performance of each segment. Page 5 is the Architecture & Software segment. Beginning of the left side of this page, Architecture & Software segment sales were $696 million in Q1, up 8.3% compared to Q1 last year. The organic sales increase was 7.6%, currency translation reduced sales by 1%, and acquisitions contributed 1.7% to sales growth. Moving to the right side of the chart, A&S margins were 30%, up 2.6 points compared to prior year, and primarily due to the operating leverage associated with higher sales, coupled with lower spending.

Moving to page 6, the Control Products & Solutions segment, In the first quarter, Control Products & Solutions sales were $794 million, up 1.3% year-over-year. Organic sales increased 0.7%, currency translation reduced sales by 1.3%, and acquisitions contributed 1.9% to growth. In the CP&S product businesses, the organic sales increase was about 3%, solutions and services sales were down about 1% organically. The book to bill in Q1 for solutions and services was 1.11. CP&S operating margin was 13.6% in Q1, down 1.7 points year-over-year, the biggest factor being higher incentive compensation costs.

Moving to page 7, this provides a breakdown of our sales and shows the year-over-year organic growth results for the quarter. Blake covered much of this in his remarks. I'll add just a couple of comments. The organic sales growth in Q1 was driven primarily by Asia Pacific and North America. Asia Pacific was up 20% year-over-year, with China and India each up mid-teens. We experienced strong growth in both product and solutions and services businesses in the region. The strong growth in Asia Pacific was admittedly off relatively easy comparisons, and as Blake mentioned sales performance benefited from some favorable timing on larger projects that we thought would hit later in the year. Overall for the company, organic growth for emerging markets was 11% this quarter.

And that takes us to the guidance slide. As Blake mentioned, we're making some changes primarily based on the better than expected sales performance in Q1. We're increasing our expectations for organic growth by 1 point across the range, so a midpoint for organic growth of 3% for the full year, compared to the previous 2%, and a new range of 1% to 5% organic growth. The better-than-expected organic growth in Q1 accounts for most of the increase in the organic growth guidance of the full year. So our outlook for sales for the balance of the year remains reasonably constant with our November guidance.

Based on recent currency rates, we now expect a larger headwind from currency translation, the headwind increasing from about one 0.5 point to a little less than 2 points. We still expect total sales to be a little over $6 billion, with the additional currency headwind offsetting the higher organic growth. Our previous margin guidance was about 20%, in November I said maybe that would be a little lower than 20%. Now we think maybe it's a little higher than 20%. Previously we expected a full-year adjusted tax rate of 24%. We now expect that to be closer to 23.5%, and basically that reflects a somewhat higher discrete tax benefit in Q1 than we previously thought.

We're revising adjusted EPS guidance from the previous range of $5.85 to $6.25, to a new range of $5.95 to $6.35, and the midpoint increases from $6.05 to $6.15. For the full year, we expect free cash flow conversion to be above 100% of adjusted income.

A couple of items not shown here, we now expect general corporate net expense to be approximately $70 million for the full year. Also, we now expect average diluted shares outstanding to be about 129.5 million. That's about 1.5 million shares higher than the November guidance. We continue to expect to spend about $400 million on repurchases this year, but the share price has increased.

Before I turn it over to Patrick to begin our Q&A session, as Blake noted this will be my final earnings call as CFO. I'd just like to say that it has been an honor to be the Chief Financial Officer at Rockwell Automation. As you can imagine, it's a lot easier job when you're representing a great company with such a great culture and such great people. I'm really pleased to have Patrick Goris succeed me as CFO. Most of you have gotten to know him over the past few years in his Investor Relations role. He has a great breadth of financial management experience across our different businesses and functions. He is very well prepared for this, and I know he's going to do a great job.

I have really enjoyed the CFO role these past 10 years. Part of that was the opportunity to interact with all of you, the analysts and the investors. I learned a lot from your questions, the challenges, and sometimes your differing views on the industry and the company. I'm excited to be moving back to an operating role where I think I can make a different contribution to the company's continued success. I won't be interacting with this group as often going forward, but if not before then, I'll look forward to seeing many of you at the next Automation Fair. And since this is my last earnings call, I expect you all to take it easy on me in Q&A.

So thank you, and over to you, Patrick.

Before we start the Q&A, I just want to say that we would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up. As usual, Blake and Ted will handle the Q&A today. Thank you. Operator, let's take our first question.

(Operator Instructions)

Scott Davis, Barclays.

Good morning, guys. And, Ted, we're going to miss you but I must say on behalf of shareholders we're happy you're not retiring and at least Rockwell's not losing you altogether, so thankfully you're staying on board so best of luck to you. It's been a pleasure.

Thank you.

I know Patrick will do a great job. But anyways I'm intrigued by your comment about capital spending. When I think about the world, it's where people struggle with the concept of new capacity just given how limited growth is out there, but what are people spending money on, if you could generalize? Or are we going back into the existing factory stock and upgrading? Is it the supply chain? Is it distribution? What's your sense of, if capital spending is coming back, what people are actually are spending money on?

You know, I think it's primarily around increased productivity, and as we've seen, a lot of people implement the first waves of productivity in terms of just basic automation and replacing hardwired control. The next wave in many cases involves the integration of that basic control and information, so taking advantage of the basic data that's a part of their production processes and integrating the information software and the analytics so that operators can make better decisions about their manufacturing processes.

Scott, I think too in this quarter from a vertical perspective, the acceleration we saw was largely in consumer and transportation.

Okay. And just, Ted, you commented on spending will go up at Rockwell going forward, I certainly understand compensation and (inaudible) and stuff like that. But what explicitly do you feel like you need to spend money on? Is it new capacity on your own? Have you been under-investing at all? Just give us a little color on that.

I think the spending is more -- it's not so much about capacity and supply chain. The spending is going to more about R&D and commercial expenses, and very much targeted at some of the new opportunities we have related at connected enterprise.

(Multiple speakers) I'll pass it on. You guys have done a great job and it's been a pleasure, so good luck to you, Ted.

Thank you.

John Inch, Deutsche Bank.

Thanks. Good morning, everyone. Ted, Patrick, congratulations. So first question. China up mid-teens, it had been running down. China has sort of been this tale for Rockwell of kind of two halves, right? Like the consumer piece up very strongly, and then the heavy industry piece down a lot. What happened in China in the quarter? Did the consumer get even stronger, or did heavy industry revert? You talked about some orders, could you just provide a little more color please? And is it sustainable, really?

Yes. So the first thing I would say is we mentioned that there were some pull-ins. We think there were some pull-ins of jobs we expected to hit later in the year. That was true in Asia generally but particularly in China. I would say the vertical profile that we experienced most of last year, which was strength particularly in consumer, to a lesser extent in transportation, and weakness in heavy industry, that continued. But we had a particularly strong quarter entire in China. Heavy industry was better although still weaker. And I don't think -- we do not expect China to be 15% growth for the full year. We still think for the full year an expectation of something in mid-single digits is appropriate.

So it sounds like, Ted, based on your commentary, this is maybe more a Rockwell-specific rebound versus a China-market rebound? I mean 3M talked up China, some other companies have talked up -- [Parker] has sort of talked about a China rebound a little bit in some of the heavier stuff. But are you suggesting that this is a pull-forward of initiatives you were working on? How much is Rockwell versus how much you think is market in the fourth quarter for China?

I'm not sure I know exactly how to quantify that, but my guess would be that maybe half of the growth in the quarter was kind of pull-ins and some unique-to-Rockwell projects, and the other half was kind of underlying market.

Strong parts of the China market are playing to our strengths.

Yes, absolutely, makes sense. Can we then, just as my follow-up, can you please talk about your export versus import position? We know at a very high level what your situation is in Mexico. Obviously we're going to wait to see what Trump does, but could you just talk about, again, your export versus import position in the United States? And then your own thoughts toward repurposing perhaps some of the production, say in Monterey or whatever, back to the US or alternate sourcing? Anything you could add at this point would be helpful. Thank you.

So maybe just to start with a little context. We're a US-based company, but we serve a global customer set, and our global supply chain has been constructed to serve those customers all around the world. Today we are a net importer into the US, but I think it's very important to note that we've got flexibility in our global supply chain, and we believe we could make adjustments if there were changes in the tax law that made that appropriate.

Ted?

Yes.

Thank you.

Steve Tusa, JPMorgan.

Hello, guys, this is Dan on for Steve. Just wondering if you can give us some color on how the quarter looks from a monthly perspective? Did it get better as you moved along? And then, how has January started off? Are you seeing a similar environment or a step up or down in activity?

Dan, I would say the quarter played out in a pretty typical fashion, which is it started a little bit slower and then picked up as we moved through the quarter. I would say maybe the only unusual thing in the quarter was the last couple weeks in December were stronger than normal, and it's the reason that we think there might have been a little bit of budget flush, particularly in North America. January has started off slowly as a typical January, but things have picked up a little bit as the month has gone on.

Great. And then just as a quick follow-up, what was auto up for you guys in the quarter? I guess both globally and then you have any color on strength by region?

So auto is up over 10% in the quarter.

Got it. Thanks, guys.

Nigel Coe, Morgan Stanley.

Yes, thanks, good morning, guys. A nice strong quarter. You mentioned some budget flush, particularly in North America. What do you think caused that? Why would we have seen that budget flush in December? And on top of that, what do you see in your China inventories, specifically within North America?

Yes, Nigel, I'm not sure I know -- I don't know that we know what caused the budget flush. We heard that comment from several of our distributors, and we also observed that there was a little bit higher-than-normal order rate in those last couple weeks in December. That's why we're speculating that there may have been some higher-than-normal budget flush. In terms of distributor inventories, particularly in North America, you know we have very good visibility on that, and distributor inventories were up slightly from September.

Okay. That's helpful. And then, on the segment margin guidance for FY17, it didn't change, obviously there's a squiggle in front of the number, but given the higher organic growth and given the stronger incremental margins in A&S, would have expected to see a slightly better or slightly higher segment margin guidance. Is there any change in the way you're planning the year between CPS and A&S? Or are there some offsets in FX and/or comps that we should consider?

I think it's more about the latter. Basically we're got more currency headwind now, top line and bottom line, as a consequence of what's happened with exchange rates. There will also be higher spending in the latter half of the year. Some of that is just a catch-up from under-spending in Q1, but we also believe we're going to spend a little bit more in total for the year now, consistent with higher organic growth. And then incentive comp will also be higher as a consequence of higher organic growth and higher EPS.

Okay, that's perfect clear. Thanks, guys.

Shannon O'Callaghan, UBS.

Good morning, guys. Congratulations, Ted and Patrick. Ted, glad you'll be around, we'll see you at Automation Fair. Hey, relative to that, the last few Automation Fairs, or at least the last couple, it seemed like, Blake, you've had a lot of these productivity solutions that you're talking about you've offered customers but maybe the adoption wasn't great because there wasn't a lot of business confidence out there. Have you heard in the last couple months a change in tone from your customers? Has there been sort of better follow-on to Automation Fair than we've seen the last couple years in terms of people's willingness to adopt these productivity-related solutions that you're offering?

Progress is still relatively slow, and of course customers are at different stages in their journey as they begin to adopt some of our new solutions. But it starts with having the foundation in place with smart products, and so we do think that customers are getting that message as they know they have to have the data at the foundation of their manufacturing process to be able to do something with it. The pilot process -- the pilot projects that we've been running I think have become a little more formalized over the last few months. We're getting better at it. Our customers are understanding the process, and so we have a large number of engagements that are just moving through the pipeline, and we're happy with that progress. And some of the increased spending is going to acceleration of those activities.

Shannon, I also think when we debriefed our sales organization this quarter, we did hear kind of a more positive sentiment, both from our own sales people and from the channel, than would have been the case six months ago.

Okay, great. Thanks. And then on the oil and gas piece, given the upstream weighting of your business and things, I'd almost think you'd be starting to see a little bit more improvement there than you seem to be indicating. Any change in activity that you're seeing there, or when would you expect? I know you're still assuming it's flattish, but anything on the margin that you're seeing improving there, or any reason that you wouldn't expect your business to kind of turn with an improvement in some of the US upstream activity?

So after the last two years, what we experienced the last couple quarters is getting close to flat year over year, and that feels pretty good, actually. You know, we do think there's the potential for some improvement as we move through this year, but for the full year we still think it's going to be close to flat.

Yes, the sentiment in heavy industries in general is a little bit more positive, but when that's actually going to turn into orders and shipments, these are longer-term projects. Oil and gas continued strong in Latin America, but for the rest of the world we're still not seeing that manifest itself in sharply increased orders.

Okay. Great. Thanks a lot, guys, congratulations.

Jeffrey Sprague, Vertical Research Partners.

Thank you, good morning, gentlemen, and congratulations, Ted and Patrick. Just to the A&S business, wondering if you can comment on A&S US performance in the quarter specifically, and whether it was different than the modest increase in total US that we saw on a Rockwell basis?

You know the A&S business in Q1 was pretty similar to the balance of the Company in Q1. It was strong growth.

And the A&S margins, Ted, did they not have the incentive comp pressure that CP&S did, or it was just overwhelmed by the volume leverage in the mix and therefore it wasn't apparent?

You're exactly right. The year-over-year margin impact of incentive comp was pretty similar in the two segments, but with almost 8% organic growth in A&S, it just kind of swamped that impact.

Great. And, just wonder if you could step back perhaps, Blake, just big picture on automotive automation. Obviously there's a lot going on in Washington, DC. Any auto plant I believe is pretty highly automated these days, but is the, for lack of a better term, is the Rockwell calorie count likely to be higher in a US automotive plant than it is say in a Mexican automotive plant? And how would you think about that? How would you frame that for us?

So I think that's a fair assumption that, as US manufacturers increase -- or as manufacturers increase their US footprint, it's going to be done with a higher relative content of advanced manufacturing. And that's great for us. We have of course very large market share particularly in that industry, and so anything that encourages increased manufacturing in the US is a good thing for Rockwell Automation given our footprint. And that impact on sales is something that has us very optimistic and talking to customers about what additionally we can do to help them as they make those decisions to increase their footprint here in the country.

I know rule of thumbs are dangerous, but if we thought about a typical auto plant that maybe is a 200,000- or 300,000-unit plant, can you give us some idea of what you think the revenue upside in the US versus some other market might be, in percentage terms or indexed or whatever kind of framework you might want to give us?

I think it depends. A lot of factors of course and in terms of when that plays out for us, timing is a big issue. But if you look at some of the numbers that were published for instance with the recent Ford plan and you can look at the labor differences between what they were going to employ outside of the US versus their expectations for new jobs in the US, you can't apply that linearly to the increased dollar count for Rockwell, but it gives you some idea of an order of magnitude.

Great, thank you very much.

Richard Eastman, Robert W. Baird.

Yes, good morning and congrats on a nice quarter and good luck, Ted, and Patrick, for that matter. Just very quickly, on the CP&S segment margin, Ted, could you maybe run through that a little bit? I think what's kind of noticeable here is on the sales growth. On the sales growth our incremental -- or decremental margin here is almost 100% and I'm curious, I realize Maverick comes in at a lower margin, but is that business losing money? And then also, if not, is the margin on the core CP&S business, is that lower than historic norms?

So a couple things. First, Maverick will not lose money, but we're not expecting in the first year, both with purchase accounting and integration costs, that we'll get a significant profit contribution from those sales.

On the CP&S core, I don't think I would say this performance is significantly worse than historic results, but I would say that we're going to have some margin pressure in this business compared to last year. We had a particularly good margin performance last year. That included some higher-margin project business that just isn't going to repeat this year. And as we progress through the year with downturns in heavy industry and the pressure, we've some lower-margin projects in the backlog that are going to work their way out this year as a consequence of some more aggressive pricing.

So we're going to have some margin pressure in that business this year. I think for the full-year margins we'll be a little bit lower than last year, but I don't expect them to get worse as we proceed through the year compared to the first quarter.

Thank you. And then, just a follow-up question. Blake, you had noted in the press release just this issue of investing a bit more in the business given the fast start on the [cord world]. Could you just maybe define that in terms of dollars, Ted? You know, pretax? Are we talking about $0.05 or $0.10 per share and hence again the outlook, full-year adjusted EPS outlook maybe only going up a dime. We've got currency -- negative currency there. And then, is there another 5% to 10% -- $0.05 to $0.10 of incremental investments?

Yes, maybe think about it this way. There's probably about $10 million that we under-spent in Q1 that we're going to catch up on now in the balance of the year. And compared to our previous guidance, there's another incremental $10 million that we now expect to spend.

I get it, okay. Okay, very good and good luck again. Thank you.

Andrew Obin, Bank of America Merrill Lynch.

Yes, good morning. Congratulations, Ted and Patrick. Just a question, as we look at software sales at Rockwell and specifically software excluding embedded software, could you share what kind of growth you are seeing in the channel and what are the trends, what are the customers asking for?

So if we look at the information solutions, then we're seeing double-digit growth in that area, so this is the MES solutions, this is the modular software. This is where our new analytic offerings would be. And so that's part of the information solutions and connected services which we're expecting double-digit growth in.

And when you say double digit, is it low teens, high teens, just sort of ballpark?

I think if you can think of that for this year is kind of low- to mid-teens.

Thank you. And just to follow up on Jeff's question on -- can you give us some color just generally post the election, what kind of conversations are you having with customers? What industries are the most interested in talking to you in putting capacity in North America? Because you guys probably are the cutting edge of what's happening in the kind of conversations people are having.

Yes, I think a lot of the early conversations are around discrete manufacturing or batch, so again it's right in our wheelhouse in consumer and transportation. And there's some obvious things that we can do to help those manufacturers ensure that they have the labor that's ready to address the advanced manufacturing technology. That's a big issue for manufacturers, particularly if they deferred those investments in automation for some time. So we're very well positioned to be able to offer to enable that workforce. And then when they need additional sources of labor to augment their own existing workforce, then we have a lot of solutions there. And so we're actively engaged with those manufacturers to be able to (inaudible) specific new proposals in place on top of what we already offer them.

Thank you.

Steven Winoker, Bernstein.

Thanks, good morning, and congrats. I'll echo everybody's comments. We covered a lot of ground but going back to your comment that larger projects were pulled forward -- larger projects from the end of the year were pulled forward in terms of your expectations. Can you maybe expand on that little bit? I know there's only a certain level of visibility given the nature of the business. What makes you believe that there's not something behind that as well? And what kind of projects are we talking about?

Well, the larger project pull-forward primarily occurred in Asia Pacific. It was a combination of a cross vertical, as it affected both transportation and heavy industry. Semiconductor was one of those. Look, Steve, if I had to estimate, I would estimate that, of our organic growth in the first quarter, between project pull-forwards and potential budget flush, maybe 1 point of the organic growth was related to that. Even if you take that out, this was still a better quarter than we expected.

Okay. And then, as we think about the $20 million or so of spending and how things are going to layer in through the year as well as kind of growth, normally in terms of seasonality I might start to look at Q2 being maybe a little more challenging, but you have this acceleration and then you have a very strong back half now. Can you maybe comment on how you think we should -- or how we should think about layering in the seasonality given the commentary you've had?

I think there are two things you ought to think about. One is our normal merit increases occur basically effective January 1 across the Company, and so sequentially there will be a step-up in spending, probably about $10 million on a sequential quarterly basis, that's just a consequence of that merit increase. And then in addition to that, you'll start to see us ramp what I would call more underlying spending. And I think that will ramp as we proceed through the year, so probably a little lower in Q2 and a little bit higher in Q3 and Q4.

And then, from a growth perspective as well, you were thinking about that step-up in organic growth, is this something you think about kind of natural year-on-year acceleration each quarter from here?

I think on sales, you'll see some increase from Q1 but not a lot of sequential growth in Q2, Q3. Then you ought to expect a step-up in Q4 which is typical for us on a seasonal basis.

Great, helpful. And I guess one more thing, Ted. In your response to John's comments about being a net importer, I think it's probably important, we know that you're a net importer. The question's more about size -- we're talking low hundreds of millions, not something more than that. Or is it possibly larger?

That's correct. We think we're probably about a $250 million net importer.

Okay, thanks so much. Good luck. Look forward to next conversation. Bye.

Rich Kwas, Wells Fargo.

Hi, good morning, congrats, Patrick, Ted. Look forward to working with you in your new capacities. Two questions, quick ones. So on the change to the organic growth outlook, the hundred basis points improvement, how would you segment that between heavy industry maybe a little bit better versus automotive and consumer coming in better than expected? Because I know you put some guidelines out there for underpinning the growth back in November, and it looks like in at least this quarter both of those areas came in better. So how should we think about that?

Rich, I think it's fair to think about that increase as primarily transportation and consumer.

Okay. And then, based on what you're seeing right now on heavy industry, flattish which is a little bit better than flat to down, but need to see more evidence of order improvement to get constructive?

I think that's fair. I think Blake mentioned earlier, we're hearing some better things about potential investment in heavy industry, but we're not seeing it translate into orders yet.

Okay. And then just a quick one, Ted, on free cash flow there's a plus sign in that 100% now, seasonably speaking you did pretty well this quarter on conversion. Anything puts and takes-wise we should think about for the balance of the year as we try to model this out?

No. The only thing I would remind you of is because there was no incentive compensation earned last year, there was no payout this year, either in the first quarter or in the balance of the year. And so that's going to contribute somewhat to a better conversion on the year. That's probably the most important thing.

Okay, great. And then just a quick follow-up on auto and consumer, are you still thinking mid-singles for the year? Growth.

Yes, I would say maybe now it's mid-to-high single.

Okay. Thank you.

Robert McCarthy, Stifel.

Yes, I'll echo all the comments, Ted and Patrick, and I'd also remind you the importance of compares, and remember, Patrick, you have a very tough compare, and, Ted, I think you had a very interesting compare. So in any event, congratulations. (Laughter). All right, moving from the ridiculous to the sublime, clearly you talked about the budget flush and the reacceleration in underlying growth, the pace of business. This has been talked about with several other analysts on this call, but could you just comment across the board how you're feeling about the front log, and are you seeing a change in the pace of business? You talked about the budget flush but could you talk about anything about January trends? Anything about the current state of what you're seeing? And are you seeing a change in the underlying psychology in association with business with the change in administrations?

I think it's fair to say that there's a general optimism, but front log is flat, and it's still early in the year. Our backlog overall is up a little bit, and so these are positive signs. Importantly we're releasing new products and that has an impact as well, but it's still early to call this a different trajectory in terms of the outlying months.

Okay. And obviously John asked a series of intricate questions and he may have covered this, but what I would ask is maybe just talk about the prospect for cash repatriation, the uses of cash, the M&A environment, how you're looking at that, that kind of old chestnut.

Yes. So I think we are encouraged by some of the things that are being talked about around US corporate tax reform, and the house proposal that's been put out there we think addresses a number of important issues that currently create a disadvantage for US-based companies: a lower corporate rate, a territorial tax system, the potential to repatriate foreign earnings. We view all of those as positive for Rockwell, for US manufacturers, and for US economic growth generally.

Specifically as it relates to repatriation, what we would repatriate ultimately would depend on the rates, the tax rates that would apply to that, and any conditions that might apply to the repatriation. But we probably currently have about $2 billion that could be repatriated at some point. Those funds, if repatriated, could be used for investments in organic growth. They could be used for acquisitions, especially US-based companies. It could be used for retirement of debt, for better funding of our pension plans, or to return to shareowners through dividend or repurchases. And once we get a clearer view on what the conditions might be, we'll be prepared to talk in a little more detail about specifically how we would use it.

Just one follow-up on the M&A question. Do you think it's a better environment now for M&A, just given the standpoint of perhaps optimism of reacceleration in the underlying cycle, and maybe the ability to stomach some valuations in that context? Do you think there's been a change in the psychology around M&A for you at all?

You know, we haven't passed on attractive acquisitions in the past for lack of US cash. We continue to look at acquisitions as opportunities to accelerate what we're doing in terms of technology, domain expertise, or market access, and we're pleased with the results of our recent acquisitions. We've talked more about the need to be present in M&A to accelerate our strategy. So I don't really see it as a significant accelerator to the amount of M&A that we would otherwise do.

Thanks for your time.

Julian Mitchell, Credit Suisse.

Hi, this is Lee Sandquist on for Julian Mitchell. As a follow-up for the M&A question, can you just talk about the M&A pipeline right now and touch on any specific end markets or geographic regions that look particularly attractive right now?

I think if you were to look at where the concentration of our activity is, it's really in that new value that comes from information solutions and connected services. So in the network space, in the software space that sits up above the real-time control, those are the areas where we're probably relatively active. And it's spread across the world. It's not constrained to any one geography.

Understood. And could you just quantify the impact of incentive comp on the CP&S margins for the quarter, please?

It was approximately 1 point.

Great, thank you very much for your time.

Joe Ritchie, Goldman Sachs.

Thanks, good morning, everyone, and congratulations, Ted and Patrick. My first question is really on pricing. You guys have done a great job of continuing to get price through this malaise that we've been in the last couple years. Just wondering if we do see this CapEx acceleration, is there an opportunity for you to get greater than a point in price, or how do you guys foresee that?

Joe, I think what's reflected in our current guidance is what we talked about in November, which we think for the full year, price will be a little less than a point, and similar to what it was last year. If the economy heats up, who knows. Maybe pricing could be a little better.

Okay. And I guess along those lines, if things were to heat up and just along the lines of your guidance in the higher end of that range of getting to 5% growth, what would have to happen for us to get to the higher end of the range? And then if we do get towards the higher end of the range, what kind of incrementals would you expect to see across the business? Because historically they've been a lot higher than your gross margins.

So in answer to the first question which is about the top line, maybe the way to think about the higher end of the range is, clearly, we had a better organic growth result in Q2 than we were expecting coming into the year. But basically we have not changed our balance-of-the-year guidance. So if Q2 is truly kind of a new baseline, and we should expect the same sequential growth we were originally expecting in the November guidance, that's a way to think about how we could get to the higher end of the range on the top line.

Our conversion now in the new guidance is about 20%, which is almost double what was in our November guidance, and that's despite the headwinds we talked about in November around incentive compensation and pension in particular. So there will be some better conversion at the higher end than we would see at the low end or midpoint.

Okay, fair enough. And maybe if I could sneak one more in there. Going back to the question we had on the repatriation. Ted, when you think about bringing cash back, I feel like today companies are facing a little bit of a conundrum in that valuations are really high from an M&A perspective, stocks are hitting all-time highs. How do you think about the allocation to capital if you are able to bring back overseas cash? And then, specifically, do you need to invest internally if we do accelerate from a CapEx standpoint?

One of the things we have always talked about is we're not all that capital intensive as it relates to growth. So with immediate deductibility of CapEx, is it possible we might spend more than we originally planned? I think that's possible but I don't think that's a very big number, particularly compared to the amount of earnings we've got sitting overseas.

Yes, the bigger impact would be to increase sales for our more capital-intensive customers.

Sure, that makes sense. Thanks, guys.

Andrew Kaplowitz, Citi.

Good morning, guys. Ted and Patrick, congratulations. Solution and services, they were down 14% last quarter. I think you said down 1% this quarter, and you had mentioned previously that the business [should stay] negative in the first half of 2017. But based on what you're seeing, you mentioned the strong bookings in the quarter. Any improvement there, timing, and can it be up now sequentially going forward in that business?

I mean, I would love to think that we're going to start to see some improvement in heavy industry as we proceed through the year, but we haven't seen that yet and it's not reflected in the guidance. I think our solutions and services business right now we believe will be about flat year over year, and any improvement that does start to occur in heavy industry, for a significant part of that business we really need to see it in Q2 or maybe early Q3 in order for that to have an impact on shipments in the year.

Okay. Thanks for that. And then, Blake or Ted, you mentioned that you had a slow start in EMEA this year as expected. But last quarter you had talked about strong orders in the region, I think it was up mid-single digits. It didn't seem like last quarter's orders translated, but you did talk about improving from here. So did you see any actual weakening in any part of EMEA? And specifically the Middle East, how is that region doing?

So for EMEA overall, the orders were actually up. They were up year over year and sequentially, and we do expect the results for the full year to be growth in EMEA.

I think the Q1 performance in EMEA was just more about timing of when projects hit, principally in the solutions and services businesses.

Okay. Thanks, guys.

Operator, we will take one more question.

Eli Lustgarten, Longbow Securities.

Thank you, good morning, and thanks for taking the questions and my congratulations to both of you. Just a clarification, the orders that were -- or the shipments that were brought forth in the first quarter, want to clarify, was it all A&S and was it added the second quarter, or was it spread out over the year?

So I would say it was primarily advancements from the second quarter, and it was not all A&S, it was kind of a combination of A&S and CP&S.

Okay. And so we understand the weakness in margins that we saw in the control solutions business, but A&S had a very strong margin, I suspect that with some [brought forward] that those margins are not expected to be sustained at that the level and expected to come off a little bit?

That's correct. We do not expect A&S margins at 30% for the balance of the year. You would expect lower margins for A&S in the balance of the year.

And one final quick one, of the things we heard from [a lot of] companies, you saw the Trump Bump I guess is what it's more referred to than flushing these days. But we're hearing from a lot of companies, particularly in the heavy industries of a -- almost a wait-and-see for spending. They talk a lot, but a wait-and-see for spending to see what policies really come, because not much can change in the first half of the year. Are you hearing any of that from your customers? There's a lot of talk but really more excited about 2018 spending than 2017 spending at this point?

Yes, I have not heard specifically that people are waiting to 2018 but I do believe that, as we are, before we make specific changes in [any plans], we want to see what actual changes to various elements of the tax code or other incentives might be. So I think that is a fair characterization.

Eli, maybe a little bit different approach to the answer, and this is not intended in any way to be a political commentary, but I don't think we're hearing anything from investors that would cause us to believe that what we saw as the acceleration in the first quarter is related to upcoming potential tax changes.

Thank you very much and congratulations, both of you.

Thank you, Eli. That concludes today's call. Thank you for joining us.

This does conclude today's conference call. You may now disconnect. Thank you for attending.