Rockwell Automation, Inc. (ROK) Q3 2008 Earnings Report, Transcript and Summary

Thank you for holding and welcome to the Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. [Operator Instructions]. At this time, I would like to turn the call over to Ms. Rondi Rohr-Dralle. Ms. Rohr-Dralle, Please go ahead.

With me today are Keith Nosbusch, our Chairman and CEO and Ted Crandall, our CFO. Our agenda includes opening remarks by Keith followed by Ted's review of the quarter. We will as always leave time at the end of the call to take your questions and ask that you self limit to two questions to allow broader participation. We expect the call today to take about one hour. As is always the case on these calls, 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 as defined by the Private Securities Litigation Reform Act of 1995. 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. With that I will turn the call over to Keith.

Thanks Rondi, and good morning to everyone who joined us on today's call. Let me start by commenting on our results this quarter and then provide an assessment of our current situation and conclude with a few comments about the balance of the year. For the quarter we delivered solid topline growth despite slower growth in the U.S. and in Europe. Revenues grew 15% to nearly $1.5 billion. Growth was particularly strong in Asia. Emerging Asia grew 30%, 26% organic, Latin America grew 19%, all organic. We continue to benefit from our increasing global presence, particularly in emerging markets. We also continued solid growth in our key process initiative, as well as the oil and gas vertical, which grew an excess of 30%. Logix returned to double-digit growth, in line with our expectations. We achieved the performance targets of our acquisitions, ICS Triplex and Pavilion. CEDES and Incuity are coming online and we expect positive results. We continue the ongoing globalization of our business illustrated by the fact that half of our sales came from outside the U.S. again. Earnings per share from continuing operations were $1.03, somewhat above the Q3 guidance we provided last month. We experienced a strong finish, particularly in product shipments during the last week of June. Although EPS and operating margins grew sequentially, they were lower than last year largely driven by mix, that is continued slower growth in our higher margin product businesses and increased investment spending to support globalization and growth. In addition to mix and investment spending, margins were also impacted by acquisitions and foreign currency. Although I am pleased with organic growth in excess of 6%, I was not completely satisfied with our margin performance in this quarter. This is an area that we need to improve, as the success of our business model requires that we drive growth and performance simultaneously. Now let me shift gears and provide an overview of our current situation assessment and make some closing comments about the balance of the year. We are operating in a bifurcated world economy, where buoyant growth in emerging markets coincides with sluggish growth in developed countries. Our business is still growing, due to investments we have made to diversify our revenue base, including growing our business outside of the U.S., expanding our footprint beyond discrete control, evolving in the plant-wide control, safety and information and developing new vertical and OEM markets to serve a broader set of customer applications. We continue to experience strong growth in Asia Pacific and Latin America. Unfortunately, the macroeconomic conditions are weakening in our two largest markets, the U.S. and Europe. The situation is also mixed as it relates to vertical markets. We have begun to see a change in buying behavior by some of our customers in consumer-related industries, including project delays and curtailed capital spending. We continue to see strong customer demand for our products, services and solutions in the resource-based industry globally, particularly oil and gas. This contrasts with the recent weakness we have experienced in the Life Sciences industry and the increased turmoil we are now seeing in the U.S. automotive industry. We are operating in a tougher and more challenging economic environment. Our outlook for the remainder of the year calls for continued strength in Asia and Latin America, continued strength in resource-based end markets, flat-to-low single digit organic growth rates in the U.S. and mid single-digit organic growth in EMEA, primarily due to a very strong growth from our ICS Triplex acquisition. Based on the above outlook, we expect to achieve the following full year results. Revenue growth of 9% to 10%, excluding the impact of currency. EPS of $4.00 to $4.10. Looking forward, we will continue to monitor market conditions and the potential impact on global customer demand. Our existing cost structure and level of spending assume the different mix than we are currently experiencing. As a result, we are taking steps to control costs and to align spending with our growth, while funding continued investment in areas that support growth such as emerging Asia, Latin America, process and information software, and enhancing our technology leadership. Finally, we are evaluating additional actions to bring our costs down in the current business environment with a view towards rebalancing spending, as well as positioning ourselves to address potential contraction, should it materialize. We remain committed to executing our growth and performance strategy while continuing to invest in our core technologies and the globalization of our business. We continue to believe these investments in technology leadership, expanded serve markets and a stronger global presence are creating more worldwide opportunities for growth than ever before. We have healthy businesses with solid market position. We have a team that knows how to execute productivity and equally important, how to invest during tough times so that we are better positioned to accelerate out the other side. We look forward to showing you firsthand, how well-positioned we are to take advantage of the power of the evolving technology convergence trend and what it can do for our customers at our Automation Fair on Wednesday, November 19th, in Nashville, including our approach to sustainable production to make customers operations cleaner, safer and more energy-efficient. In short, how we are building a more valuable company. I remain confident in our ability to deliver superior results and create long-term value for our shareholders. Now let me turn it over to Ted to give you more details on our performance. Ted?

Thanks Keith, and good morning to all on the call. We posted charts to our website, my comments will reference those charts. On chart 1, Q3 results summary. Starting at the top of the slide, revenues in the quarter was $1,475 million, an increase of 15% over 2007. That includes 6% organic growth, 4% growth attributable to acquisitions and 5% due to the effects of currency translation. Segment operating earnings were $258 million, up sequentially, but a decrease of 2% year-over-year, reflecting continued business mix and spending headwinds. Purchase accounting expense increased $2.5 million year-over-year, due to acquisitions made over the past 12 months, including ICS Triplex and Pavilion Technologies, and in this quarter, Incuity and CEDES. General corporate net was $21.9 million, up about $4.5 million from last year. The difference primarily relates to $5 million of interest income in Q3 of last year, earned on the proceeds from the sale of power systems. For Q4, we expect general corporate net to be slightly higher than Q3. Interest expense was $16.6 million, up $2.8 million from last year. The second quarter effective tax rate was 28.5%, in the middle of the range of our 28% to 29% guidance for fiscal year '08. In Q2 last year, the comparable tax rate was 26.2%. EPS was $1.03, as Keith noted, somewhat above our outlook in the June 25th announcement due to a strong finish, particularly in product shipments in the last week of the quarter. Average diluted shares outstanding in the quarter were $148.1 million. During the quarter, we repurchased approximately 1.2 million shares at a cost of $57.4 million and as of June 30th still had $775 million available under our current $1 billion share repurchase authorization. We have been active in the market since the end of June under a 10B-5-1 plan purchasing an additional 1.4 million shares at a cost of about $60 million. That leaves $715 million remaining under the authorization. Moving to chart 2, Q3 results Rockwell Automation. As noted previously, growth in the quarter was 15% year-over-year, excluding the effects of currency translation, growth in the quarter was 10%. Sales increased 5% sequentially with roughly the same sequential growth in both segments. Strong growth in Asia and Latin America helped offset slower-than-expected growth in Europe and the U.S. Moving to the earnings side of the chart, you'll see that segment earnings were down 2% year-over-year, but grew sequentially over Q2. Operating margin in the quarter was 17.5%, up 40 basis points from last quarter, but down three basis points from the third quarter of last year. We did have particularly strong margin performance in Q3 of 2007. The largest factor in the decline was increased investment spending to support globalization and growth. This was closely followed by revenue mix. That is, continued higher rates of growth in our solutions versus product businesses. The impact of acquisitions and foreign currency also contributed to the year-over-year decline. Although not displayed on the chart, our trailing four-quarter return on investment capital was 24.5%, up 8% -- 0.8 percentage points versus the prior year. Please turn to Chart 3 now which summarizes Q3 results from the architecture and software segment. Sales in Q3 were up 7% year-over-year, 2%, excluding the effects of currency translation. On a sequential basis, sales were up 4%. Operating margin was 24.7%, up 130 basis points from Q2, but down 360 basis points from the third quarter of last year. Lower-than-anticipated organic growth and increased investment spending were the main contributors to the reduction. This segment is the primary focus area for the technology and growth investments that we have previously discussed. Q3 last year was the highest margin quarter for architecture and software segment and the year-over-year impact of acquisitions also reduced margins by above [ph] 50 basis points. Chart four covers our Control Products and Solutions segment. Sales in Q3 were up 22% year-over-year. That included 11% organic growth, 6% attributable to acquisitions and 5% due to the effects of currency translation. Sales were up 5% sequentially. This is another very good quarter for growth in this segment, again with particularly strong growth in the Solutions businesses. Operating margin declined slightly on a sequential basis, but declined by 180 basis points, year-over-year to 12.2%. The year-over-year decline is due primarily to the mix impact of higher solutions business growth, as well as impacts from currency and investment spending. The next chart, chart five shows a geographic breakdown of our sales in the quarter. In the center column you'll see overall growth rates by region and the far right column shows growth rates excluding the effects of currency translation. We saw growth of 6% in the U.S. this quarter, excluding currency and acquisitions U.S. organic growth was 4%. This compares to organic growth of 7%, last quarter and 5%, year-to-date. As we mentioned in the pre-announcement, we did experience lower-than-expected growth in May and June in our U.S. business. We are attributing this to project delays and consumer-related industries and both lower MRO spending and project delays in U.S. automotive. We now expect flat sales in our product businesses in the U.S. for the balance of the year roughly stable with Q3. Canada grew 9% in the quarter, about 8% organically. This is the strongest growth quarter of the year in Canada, primarily due to a large project in the Oil Sands region. We are expecting to finish the year with mid single-digit organic growth. For the quarter, Latin America sales were up 19%. Our business continues to benefit from the strength of resource-based industries as well as great execution in this region. We expect the full-year organic growth in this region to be in the mid-to-high teens. In EMEA, sales were up 13% in the quarter, excluding currency impact. Excluding acquisitions, EMEA organic growth was only 2% and year-to-date organic growth was about 4%. This is well below our expectations coming into the year and we are now expecting to end the year in Europe with about 4% organic growth for the full year. Asia-Pacific had a strong growth quarter, with sales up 20%, excluding currency effects and 17% organic growth. China had great results this quarter with over 30% organic growth. Organic growth in Asia has accelerated every quarter this year and we expect a strong finish in Q4. Again this quarter, we realized a good balance in global revenue mix. For the year-to-date we have about half of our sales coming from outside the U.S. Now please turn to chart six, which is free cash flow walk. Free cash flow for the quarter was $151 million and $261 million, year-to-date. That's about 100% conversion in Q3, but only 58% conversion, year-to-date. We are targeting higher conversion in Q4 than Q3, but expect to reach only 70% to 75% conversion for the full year. The shortfall is primarily in two areas, working capital, which accounts for about half the shortfall and tax-related items, which account for about one-third of the shortfall. In working capital, the largest factor is inventory. As we discussed in previous quarters, we deliberately built some inventory this year in order to preserve customer service during our SAP implementations. When you couple that with the organization needing to learn new inventory planning processes, it has proven challenging for us to bring inventories down from the higher levels. We continued to see inventory grow in Q3, although at a lower rate than Q1 and Q2. We expect to turn that around in Q4 and begin to reduce inventory, but with only one quarter to go we no longer expect to get back to our original inventory targets by year-end. With regard to taxes, earlier this year we expected a normal tax benefit from the exercise of stock options which given current share prices has not materialized. This represents the majority of the tax impact. The balance's other income tax payment is somewhat higher this year than we originally projected, primarily a timing issue. Capital expenditures were $43 million in Q3, and we expect CapEx in Q4 to be at about the same level. I'll close my comments with chart seven, which summarizes our full-year guidance for revenue, EPS and free cash flow. My comments about full-year guidance now reflect the impact of CEDES and Incuity acquisitions that we closed in Q3. We expect these to be mildly dilutive due to purchase accounting and integration costs. With the revenue growth assumptions, we're expecting about 9% to 10% growth, excluding currency for the full year. We expect currency to add about five points to the full-year growth rate. Year-to-date segment operating margin is just under 18% and we expect full year results to be at about that same level. We continue to expect the full-year tax rate in the range of 28% to 29%. And we are providing EPS guidance of between $4.00 and $4.10 for the full year of fiscal 2008. With that I'll turn it over to Rondi to begin Q&A.

Okay. Kedy, we are ready to open the line for questions now. Question and Answer

[Operator Instructions]. Your first question comes from the line of Bob Cornell from Lehman Brothers. Please proceed.

Hi, everybody.

Good morning Bob.

Hi, I guess... the first question is after the prior... the March quarter you guys talked about having it done by a pretty in-depth role through a look in the second half and then we got the pre-announcement, maybe you could calibrate us on what really changes, I mean, what happened relative to the walk and how might you change that view of business in the future to prevent so it might just happen again?

I guess two... a couple of areas changed from what we had anticipated in the previous quarter. First and most significant was Europe. And in Europe, the major changes were the customers that had been indicating higher second-half orders basically those did not materialize. And in fact, in some cases they've reduced their order intake based upon, I would say the changing... either the changing economic environment in Europe, or their concern about the economic environment and therefore delays in, I'll just say in approvals of previously expected projects. I think that's probably the largest issue in Europe, we also saw in Europe, some project delays particularly in the consumer industries, and we saw some distributor push-outs in a couple of countries where we have distributor representation... a distribution representation model. So, I think, those were the key areas in Europe. With respect to the U.S, there we did not see the anticipated increase in the ANF [ph] sales that we expected, and I believe there is really two major areas for that. One the Life Sciences industry in particularly Big Pharma is going through a tougher period and they are pulling back some of their spending. And secondly, the U.S. Automotive, I think they got hit with the continual rapid increase in gas prices and really changed their outlook and their strategy going forward with respect to the large vehicle and truck markets and announced more plant closings. They also, in some cases, had a strike that impacted some of their supply chain and so I believe their spending was halted in both projects and in MRO replacement markets, given their financial situations. And... so I would say those are the major areas that impacted what we had expected to happen in the second half of the year. And Bob, your final element of the question was what are we doing to improve upon that?

Yes.

It's tough. I mean, we had been doing a much more thorough analysis than we historically had been doing. And yes, I think when you get these economic impacts and changes, some industries are able to react and do react very quickly, independent of what the commentary was to us, say 30 days to 60 days earlier. So, I think, it's going to be a continual challenge, we've learned a couple of things, we've learned how to... how to anticipate some of the project related activities, but at the end of the day, I guess, I would say, there is still an element of our business that is... that given the short cycle nature of it is at risk for quick changes in buyer behavior from our customer base and there's probably really not much we can do to that to mention even as we continue to get better in our ability to analyze the data and interpret the... and interpret the buying philosophy of our customers.

I got it. One final thought though Keith, you mentioned that the final week or two of June was a positive, did that extend into July or was that just a one or two week spurt?

No. Basically that we have seen July be at the same level as I'll say all of June. I don't want to... the high level that we saw at the end of the month, no, that did not continue. But we have seen no additional deterioration from the June... total June run rate and when we pre-announced, it was a lot weaker in that first half of the month. So, I would say, we believe the second... the last week stabilized at a run rate that basically is what we're seeing in July to date and certainly why, Ted identified the fact that we expect the fourth quarter to be at the third quarter run rate, so getting where we are at [inaudible]... in products, I'm sorry.

Okay, thank you guys.

Your next question comes from the line of John Baliotti from FTN Midwest Securities. Please proceed.

Good morning.

Good morning, John.

Keith, just a follow on Bob's question. Is there any... you mentioned that April is good, May was not and then you didn't see the pickup in June till the end. Is there any dynamic that you can take-away... any kind of conclusions to why late June picked up from the beginning of June and May?

Unfortunately John, the reason... that was a pretty short timeframe and to be candid we were surprised that we saw a vast dramatic of an up tick in such a short period of time, which I think speaks to the volatility of the nature of our products businesses because of all the different market access mechanisms and routes to the customer that these products go. So, we've not been able to identify any specific or any number of reasons for that type of a turn in a short period of time. So --.

Yes because I guess sometimes people would thing like in technology companies that there is a surge at the end because they get a lot of discounts to get the product out to make the quarter, but it doesn't seem like your margins would reflect that?

Yes. We... our margin performance this quarter was strictly mix. We did not have any incentives, inducements or pricing specials or mechanism that created that demand at the end of the quarter and of the month. It was strictly... it was strictly the momentum, previously that was the buildup. But, nothing that we did to accelerate or to influence buying behavior in the second half of the month.

John just to clarify though... really what happened in this last six days was a combination of surprisingly strong product orders, particularly in the U.S., but also somewhat better backlog reduction in both products and solutions than we originally expected. So it wasn't just demand.

Ted, on a quarterly basis you mentioned that you are spending for future growth and I... I'm not sure that you are ready to give a number as to what that was quarterly or someway to put that in perspective, but maybe even later in the year, I think it might be helpful to give us a sense because you're talking about how you can adjust that really discretionary... discretionary basis to affect to take July taken into account changing dynamics, but is there any way, maybe down the road that you could give us a sense of the level of impact that has at least for the year or maybe on a quarterly basis?

Well, I believe we can down the road, but I would say not all of this spending would be classified as discretionary. We have slowed and controlled the discretionary spending, the past... probably the past two months now we've been controlling discretionary spending. The increase that we've been talking about and we've been talking about it for the majority of the year now is, is really around that the globalization of our business, and particularly we are refoot [ph] printing our supply chain, that is adding cost as you know and as we've been doing for a number of years. We are implementing a new business system. This year will be the peak year in that spending and then we need to spend just to support the growth in the new area. In particular, you've heard now three very solid quarters of growth in Asia and in emerging Asia, China and really three years of growth in Latin America. And so some of our spending is required there to continue to build infrastructure and continue to build capabilities as we grow at the fast rate. So, that we're growing in those regions. And then, yes, there is an element of our spending that is... so more of the customer facing sales expenditures for the growing markets. The fact that we're growing in process, which is new for us. The fact that we're growing in information solutions, which is new for us and then a couple of new verticals and OEMs are focus that we have. So, spending is going up to support those new expanded served markets, new geographies and new customer segments that we're going after. And then finally, the increase in spending that we have put in place to continue to grow our core technologies. So it's a combination of those to mention John and obviously when we started doing that we expected a little different business mix and while we are guided at the start of the year that we would not see any margin growth this year, but in fact now we're seeing a degradation of the margins simply because of the overall mix.

Right. And I guess that's consistently what you're talking, when Ted was mentioning that higher solutions contribution in CP&S is consistent with the fact that you're growing as strong as you are in the emerging markets. And I guess the fact that they don't have the infrastructure or the network that you have in areas... more mature like North America?

And probably more importantly the average contribution margin in solutions is just not what it is in the product business.

Right.

There's nothing wrong with growth in solutions, we love it.

Right.

But it can't make-up for not getting the growth on the product side.

Okay John, I just want to do follow up on something around [inaudible] we are on what we're doing. You know with plant, what we have done to kind of manage this pressure on expenses immediately is we have flat on headcount performing highly selective higher end now in key growth areas examples would be Asia-Pacific and Latin America were obviously continue to see good growth opportunities.

Well significantly we do [inaudible] questionnaire spending. These are somewhat temporary measures to contain spending in Q4, beyond that we have started very careful analysis of our spending levels in all businesses and function with an [inaudible] rebalancing our spending to ensure both the decline with kind and what we believe of perspective business levels but also [inaudible] were we see the growth opportunities now in a changing environment.

Understood. Okay, thank you.

Hey John, I just wanted to follow-up on something around cost control, we're clear on what we're doing. We've clamped... what we've done to kind of manage discretionary expenses immediately is, we've clamped down on headcount with only highly selective higher-end now in key growth areas. Examples would, be Asia-Pacific and Latin America, where obviously we continue to see good growth opportunity. We significantly reduced travel and other discretionary spending. Now, these are somewhat temporary measures to contain spending in Q4. Beyond that, we started a very careful analysis of our spending levels in all businesses and functions with an eye toward rebalancing our spending to ensure, both of it's aligned with current and what we believe our perspective business levels, but also that it's aligned with where we see the growth opportunities now in a changing environment.

Okay. Thanks Ted.

Your next question comes from the line of Mark Koznarek from Cleveland Research. Please proceed.

Hi, good morning.

Good morning Mark.

I am... just actually one thought about this hiccup in late June. I am wondering if there is any merit to some pull forward of demand, given that you announced a price increase right at the end of the quarter which seemed to be a little bit larger for '09 and what you folks typically do with rationale of course being the commodity cost inflation that everyone is experiencing, do you think there was any element of that?

No Mark, there was none, because that was not announced at the end of the quarter. That was... and in fact that has not been announced to our customers as of yet. That is now just being two... little over a week ago, that was communicated to our channel, and now our channel and our sales organization needs to put in place the mechanisms to make sure that that is properly communicated to our customers and that will occur in the August time frame. So, any pickup that will come from the price increase will not occur until probably the September timeframe, if any.

Maybe August.

Yes. Late August or September, if any.

Okay. The real question I wanted to ask you is just to review the processor business with regard to the overall Logix sales as a component of the total, and then the growth initiatives which are certainly processes in there and then safety and information of course are not necessarily process, I mean, processor, but you could touch on those as well.

Okay. Let me talk to large extent the total processor business. As I said in my comments, Logix got back to double-digit, 10% growth for the quarter, and we're very pleased with that in particular given the lack of performance... I should say the lack of growth in EMEA and the U.S., we still managed to grow Logix quite dramatically, and in fact in Asia-Pacific, it was up over 30% and in Latin America, up over 40%. So, we are feeling better about Logix at this point in time. You made a good point Mark, and that is what about total processors, we saw in the quarter a higher than expected decline in our legacy PLC business. As you know, we plan that around 8% to 10%, for the quarter it was 14% [ph]. And so that was another drag on the overall ANS performance and one of the reasons we had such a small organic growth. So, we're continuing to see the degradation of the legacy systems, a little stronger this quarter. I think part of that quite frankly is an indication of the continued turmoil in the automotive industry that's occurring presently and so therefore higher cannibalization of that install base. With respect to the growth initiatives and in particular process, process was a... we had a very successful quarter, as you know, that's our [inaudible] largest growth opportunity and we continue to see an increase in our project size in that space that tells us that we're able to address more and more of the continuous process applications and more and more of the DCS, traditional DCS applications with our portfolio and our capabilities of the platform. Our growth in Q3 was 20% year-over-year and if you would include our acquisitions it was basically over 50% in the quarter. So, a very strong process performance and certainly, continues to be an area that we're focused on growing and building our install base.

And then the safety and information any comments on that, Keith?

Safety, safety was a good quarter other than the fact that, because the U.S. is down and automotive is down, that's a large safety market and it did impact some of our Logix sales in the quarter, but our safety components business grew and overall was another positive quarter for safety. And in particular, where the strength in safety was... in process safety with ICS Triplex. ICS Triplex grew, we continue to see the ability to generate new opportunities, a lot of quotation, particularly as we expand our capabilities outside of the traditional ICS Triplex market, which was heavy Europe, heavy Middle East. We are seeing the opportunities now to grow that in Asia, the U.S. and Latin America, and we're putting in place and we'll continue to put in place people to be able to grow that business. So, process safety obviously oil and gas is a very strong vertical and it's an area that we have targeted for continued investment and growth. As you know, we closed CEDES in the quarter, we're very excited about that because it builds a... the largest component segment that being the light curtain segment in the component space for discrete machine safety and that is just coming up the speed though Mark. So, you know they had a solid quarter, but we have not been able to leverage that across the other portions of Rockwell Automation as of yet. So, a very, very strong performance there. With respect to information, as you know, we have closed the Incuity, acquisition in the quarter, that's a small acquisition but gives us a very positive footprint in the ability that link the plant floor with the enterprise systems and certainly that plus Pavilion is giving us... and the continued investment in the... in our portfolio of factory talk, really now we're talking to many customers and the continued expansion of what we've been doing that we mentioned earlier with [inaudible] talked up in the automotive industry, also in some of the food vertical, we are able to now generate a lot more interest and opportunities that are now being accorded at this point in time. So, continued growth and continued interest in our growing stock to our portfolio.

Thanks Keith. Thanks for the review.

You bet.

Your next question comes from the line of Steve Tusa from JP Morgan. Please proceed. Stephen Tusa, Jr. - JPMorgan Chase & Co.: Hi, Good morning.

Good morning. Stephen Tusa, Jr. - JPMorgan Chase & Co.: Hey, can you just, I know you've done this before, but maybe just at a high level talk about your portfolio and how much you think is you know, you talk about service and solutions being a pretty steady business. And I think, you did this last call, but I'm not sure how detailed it was. What you consider, kind of the more steady revenue, what you consider, the project related stuff it's deferrable, and then, what's kind of MRO related or higher level?

Sure, sure. Let me give a shot at that, and I've got a lot to help here too. Let's start at the highest level, if you will, and that being what we would talk about as our solutions and services business and this would be the business that Rockwell Automation delivers to its... our customers. The first piece of that is our solutions business. And today, our solutions business is about 25% of our business and that is what's growing as rapidly as we had talked about before. So, that's the... that's our solutions business. Stephen Tusa, Jr. - JPMorgan Chase & Co.: Is that something, that will continue to grow rapidly or is that steady when things get tough?

Well, I think there is the, there is two pieces to that one is, it will continue to grow as we expand our capabilities in that from the applications and the geographies. And certainly, as we grow outside the U.S. more people are expecting the automation supplier to provide a solution. And so, as we grow in Asia and Latin America there is a natural tendency that more of our businesses delivered these solution and so we would expect that to be a opportunity, somewhat independent of, I'll just call it, the economy itself. Certainly, one of the reasons we have seen the rapid growth for an extended period of time in this solutions business is because of what's going on in the resource and commodities... natural resource and commodities markets, where the emerging markets are becoming large consumers and therefore there is great global demand in that area. So, that's the... that dimension as long as the demand is there, we'll continue to see very solid growth and certainly oil and gas, people are now talking about a couple of years because we've shopped [ph] way past the barrel price that people were saying almost any investment has a return, we're $40 above of that number now. Likewise, you're seeing the investments in mining and those are being talked about once again a couple of years that you see that opportunity, particularly in the coal area and in the steel, iron ore area. So a lot of new mines are being planned and projected. So we believe that will continue for an extended period of time as well. And as one of the reasons we have focused some of our growth on that part of the business. Services, that addresses everything, but that's part of our solutions and services business that is growing rapidly and that's about 10% of our business and then we talk about products that ends up about 65% of our business. Now that products has a number of... a number of split. Part of it is, what we would call... well if all of the products tend to be low business, which means it comes in very quick. It's booked and billed basically one to two weeks, which is why part of the phenomenon occurred at the end of June. So we have for MRO and OEM repetitive purchases, probably about 30% to 35% of that products business is that type of flow. And then we also have what we send to OEMs for projects or SIs [ph] for projects or customers for projects and that's what makes up the other part of that 65%. So that's a little bit of a breakdown as to how we look at that business and certainly today the solutions business and the services businesses are growing faster than our products business. Stephen Tusa, Jr. - JPMorgan Chase & Co.: Great. Thank you.

Okay.

Operator, operator, this is Rondi Rohr-Dralle. We'd like to take one more question, but I do have to make... I do have to make a comment. I think something was missed on the call in the beginning and I just want to reinforce with the audience that, our results have been posted to our website at www.rockwellautomation.com. There will be all the charts and a replay of the webcast available at the website, and will remain there for the next 30 days. So I think that we missed those comments in the beginning and I just wanted to reinforce that. So, back to the queue operator.

Your next question comes from the line of Jeff Sprague from Citigroup. Please proceed.

Thank you. Good morning.

Good morning Jeff.

Hey Keith, can we drill a little bit more into your comments around the consumer related weakness, whether it's... I assume it's kind of consumer packaged goods that your talking about, food, beverage, pharma, but you did call up pharma, but can you give us a little bit more color on what you're saying there?

Sure. Well, first of all, the consumer is a much more stable spending to begin with. So, they tend to be below the company average and certainly that's the case. But, the two that are making a significant difference, you identified the one is Life Sciences. I think we're seeing a change in particularly global Big Pharma, particularly in a couple of regions, Puerto Rico, Ireland there is consolidation and restructuring going on in those key markets. And we continue to see that evolution in the vertical being a little bit offset by what's going on in the biotech and the medical device areas. But, Big Pharma is certainly going through some challenging times and we're looking at some of their spending and some of their manufacturing operations and we're feeling the impact of that. The second one is automotive, U.S. automotive. They've gone through a very tough quarter and certainly they have changed their spending patterns and that has dropped to a level lower than we thought, and quite frankly we've been talking... well, we haven't been talking about it the last quarters. But, we thought we had reached a steady state situation there late last summer, and quite frankly in the second half of the year, we had expected a pickup because of some projects, but that has not materialized. The good news in U.S. automotive is that they are fundamentally changing their strategy and they will be making investments in some of the small car platforms in the future, creating greater flexibility in their manufacturing and we will be able to take advantage of that. But that's kind of on the list of future projects and I think they'd stop the number of what we were expecting this quarter and next. So that's been the challenge there. With respective to food, obviously some of the increases in their input costs is causing them to take a look at some of their spending. While, we haven't seen any declines there, we're seeing a slowing in what they've been focused on. So, those are the consumer areas as we see them at this point in time Jeff.

And nothing particular on like the consumer package [ph] side like toiletries and things like that are on the beverage side?

No. Not at this point in time obviously, with some of the changes in the brewing industry. With the recent announcement, I'm sure there would be time when those investments get looked at as to which ones they want to go forward with and which ones will be... how they will combine the assets and I'm speaking now about InBev and Anheuser-Busch acquisition.

You serve InBev, I know Busch [ph] is a big customer.

Yes. Both are very good customers, so we expect that to be a positive for Rockwell Automation, but as always when you combine two large organizations, there is a law in the go-forward cap spending. But, we have a very good position with InBev. We work with them around the world and certainly, as you know Anheuser-Busch is a great customer. So, not... we are seeing some impact in the OEM market packaging to your point that has a weekend, which is a signal, that... that the food and beverage people are pulling back on some of their investments. And in particular, we saw that just this past quarter in some of our OEM analysis that went on. So, packaging is being impacted and that majority of that goes to the two segments that you talked about, which would be home, health and beauty and personal care and then our food and beverage.

And just a quick follow-up for Ted, maybe. On the deals, Ted can you just clarify what the deal impact is for Q4. You got that ICF that roles into organic. You've got these other small deals. What the impact is in Q4?

Jeff, are you asking kind of year-over-year EPS impact or...

No. The revenue impacts for deals in Q4?

Hold on a second. About 1%.

Okay. And then, also just one last one from me, I know I'm going on too long. This inventory build, does that have any bearing on the margin rates in Q3 or Q4, an absorption benefit that swings to an absorption negative or something as you work through this?

I mean, any time, you run up inventory, there will be some favorable impact on absorption. The impact of bringing inventory down, we have reflected in our full-year guidance number.

All right. Thanks a lot.

Okay Jeff. Thank you.

Okay. That concludes today's call, and thanks to all of you for joining us.

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect and have a wonderful day.