Rockwell Automation, Inc. (ROK) Q4 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 Rondi Rohr-Dralle, Vice President of Investor Relations. Ms. Rohr-Dralle, please go ahead.

Thank you, Katrina. Good morning. Thank you all for joining us on Rockwell Automation's fourth quarter 2008 earnings release conference call. Our results were released yesterday afternoon and the press release has been posted to our website at www.rockwellautomation.com. A webcast of the audio portion of this call and all the charts that we reference during the call are available at that website. The webcast will be available for replay and the materials from this call will be accessible for the next 30 days. 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 and a more detailed discussion of 2009 guidance. Please note that Keith will brief chart one in the chart deck before your result summary so you might want to have that handy now. There's will of course be time at the end of the call to take your questions and we'll try to get to as many of you as possible. 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. So, with that I will turn the call over to Keith.

Thanks Rondi and good morning to everyone who have joined us on today's call. Let me start by making a few brief comments on our results this quarter and for the full year and then provide an assessment of the current business environment and conclude with a few comments about fiscal year '09. First, I am extremely proud of the focus and hard work of our employees and partners around the world in delivering these impressive results. Second, our strong performance in the quarter again demonstrated our ability to execute on our growth and performance strategy. And finally, this quarter capped another very good year for Rockwell Automation. Let me highlight the few things which are referenced on chart one. This year, we delivered 9% revenue growth excluding currency, demonstrating the ongoing diversification of our revenue base. We continue to benefit from our increasing global presence particularly in the emerging markets. Our business accelerated with particular strength in Asia and Latin America both growing almost 15%. We've also achieved greater penetration in the process industry and a strong growth year in our solutions business. Both of these were growing over 25% excluding acquisitions. Largest growth was 15% in quarter four and 12% for the full year in line with our expectations and a strong finish to the year. And we continued the ongoing globalization of our business as we reached our goal of generating 50% of our revenues outside the U.S. For the full year, segment operating earnings were up 4%, although segment operating margins contracted to 18%. This was primarily due to investment spending and revenue mix. We increased earnings per share from continuing operations excluding special charges by 11% to $4.11. This was slightly above the guidance range we provided in July. Free cash flow for the year was $458 million or 75% of net income from continuing operations excluding special charges. Ted will talk more about cash flow in a moment and we have maintained ROIC at 24% in a challenging environment. Now let me shift gears and focus on the future. 2009 will be a very challenging year for Rockwell Automation. We are operating in a period of unprecedented volatility and uncertainty with respect to the global economy and financial markets. The full impact of constrained credit markets, volatility in commodity and currency markets, and a slowing global economy will not be known for some time. While we have yet to see any significant weakening in our order levels, leading economic indicators and projections continue to deteriorate. In the U.S. industrial production fell at an annual rate of 6% in the third quarter. The October PMI was 38.9, the lowest level since 1982. Industrial equipment investment was down 7% in September and capacity utilization fell to 76.4%. In Europe, GDP growth has stalled and the September purchasing managers index came in at 45%. Industrial Production fell 3.6% in Germany in September, the biggest drop since January 1995. And in emerging markets, industrial production is slow. China steel production is slowing down 20% and GDP's are also slowing. There is no doubt that all the indicators and trends are heading down. The U.S. and EMEA have turned decidedly negative and are in a recession. Growth in the emerging markets will continue but at a slower rate. All of this will have a negative impact on capital expenditures globally. I know from talking to many of our customers and partners that they are now being very cautious about CapEx spending. I also expect that when budgets are reset in January, spending will slow and likely be reduced. I also believe that the second half of fiscal 2009 will be much tougher than the first half. Given this uncertainty and my experience in this business for a long time, I believe it is prudent for us to expect and plan for a contraction in our top line revenue for fiscal 2009. Current and future economic conditions will be markedly different. This is today's reality. As a result, in 2009 we are expecting a revenue decline between 1% to 5% from 2008 levels, excluding the effects of currency. We will also face currency headwinds associated with a stronger U.S. dollar. Based on this sales forecast, earnings per share for the full year are expected to be in the range of $3.10 to $3.60. In this environment, we are operating our company in a disciplined manner. We are taking actions to concentrate on cost control and cash flow. Executing on the restructuring cost reduction program we announced in September, I am pleased to report that everything is on track. Executing our ongoing productivity actions, we are planning to hit the high end of our annual 3% to 4% cost productivity goal next year. Improving working capital and in particular inventory management, clamping down on headcount with only very selective hiring in key growth areas such as Asia Pacific and Latin America, reducing capital expenditures and taking an extremely tough look at all discretionary spending and building in some additional expense for fiscal year '09 to permit pay as you go cost reduction actions depending on how market conditions evolve in '09 and what it portends for fiscal 2010. Additionally, our strong balance sheet and consistency in generating free cashflow provides a real competitive advantage in difficult times like these. We have the flexibility to continue to invest in growth, strengthen our portfolio as well as make acquisitions, fund our current dividend, and repurchase shares as appropriate. At the same time we remain focused on executing our long-term strategy. Our financial strength combined with the diversification strategies we have been implementing over the last several years position us to outperform the market in these difficult conditions. We have invested in new technologies and applications and continue to expand our footprint beyond discreet control. We are successfully evolving in the plant-wide control, information, safety, and networks. At the same time we are increasing our solution delivery and service capabilities. We have increased our end market diversification and are better positioned in a greater number of end markets than before. And we remain committed to expanding our global footprint and presence in emerging markets. Before I turn it over to Ted to discuss Q4, the full year and 2009 outlook, I would like to conclude by saying, no one really knows what it will be like in 2009. What I do know, is that Rockwell Automation remains intensely focused on running its business day-to-day and executing on our growth and performance strategy. We have a solid seasoned management team who has the experience to deal with anything that comes our way and committed, talented employees who in combination with our partners are focused on customer success. We will remain flexible and control what we can control to the best of our ability. We remain committed to top line growth while maintaining best in class return. I am confident we will deal effectively with the current environment, we will emerge from this downturn an even stronger company, more competitive, and more successful than ever before. Now let me turn it over to Ted.

Thanks, Keith, and good morning. As Keith addressed the full year results on chart one my comments will start with chart two, the Q4 results summary. Starting at the top of the slide, revenue in the quarter with $1.484 billion an increase of 8% over 2007 that includes 5% organic growth, 1% growth contributable to acquisitions, and 2% due to the effects of currency translation. The contribution from acquisitions is lower in Q4 than in previous quarters this year. We acquired ICS Triplex at the beginning of Q4 last year, so in Q4 this year, ICS is in base. The 2% contribution from currency is down from 5% to 6% contribution in earlier quarters as the dollar gained significant strength in Q4. Segment operating earnings were $269 million, a decrease of 2% year-over-year reflecting primarily continued business mix and spending headwinds. Purchase accounting expense declined to $5 million in Q4. General corporate net was $24.5 million, up about $2 million from last year. The difference primarily relates to higher legal expenses partially offset by lower corporate staff expenses. At the end of Q4, we announced a restricting action intended to reduce costs in light of current and expected market conditions and a better aligned resources with what we now view as the best growth opportunities. We took a charge of approximately $51 million that was partially offset by a reversal of $4 million of severance accruals from our 2007 restructuring actions. The net charge was approximately $47 million that was roughly $30 million after tax or $0.21 per share. We expect the Q4 actions to generate about $75 million in savings in '09, growing to $85 million in fiscal '10, this will help to offset expected inflation in '09 and the annualization of expense increases to the current joint fiscal year '08. The fourth quarter effective tax rate was 28.9% compared to 29.2% for the fourth quarter of 2007. Earnings per share excluding special charges was $1.08, that is at the high end of the implied Q4 guidance we provided in July. Average diluted shares outstanding in the quarter were $145.1 million. During the quarter we repurchased approximately 2.5 million shares at a cost of a $103.5 million and as of September 30th had 671 million available under our current $1 billion repurchase authorization. Moving to chart three, Q4 results for Rockwell Automation, as noted previously growth in the quarter was 8% year-over-year excluding the effects of currency translation, growth in the quarter was 6%, sales increased to 1% sequentially. In a few slides we will cover regional sales performance but I will note here, that this is was a very strong growth quarter for Asia Pacific and particularly our business in China. Moving to the earnings side of the chart, you'll see that segment earnings grew sequentially over Q3 but we're down 2% year-over-year. Segment operating margin in the quarter was 18.1% up 60 basis points from last quarter but down 200 basis points from the fourth quarter of last year. Similar to the past two quarters, the year-over-year decline is due primarily to increased investment spending put in place to support globalization and growth and revenue mix that has continued higher rates of growth in our lower margins solutions businesses than in our product businesses. The impact of acquisitions had a modest negative impact on margins and currency was actually slightly positive for the quarter. Please turn to chart four which summarizes the Q4 results of the architecture and software segment. Sales in Q4 were up 8% year-over-year, 6% including the effects of currency translation. Q4 was the highest organic growth quarter of the year for architecture and software. On a sequential basis sales declined about 1%. Operating margin was 22.9% down a 180 basis points sequentially and down 260 basis points from the fourth quarter of last year. The year-over-year decline is primarily due to increased investment spending that being offset by our original expectation of higher growth as well as the year-over-year impact of acquisitions. Chart five covers our controlled products and solutions segment. Sales in Q4 were up 8% year-over-year, that included 6% organic growth and 2% growth from currency translation. Sales were up 2% sequentially. This was a lower organic growth rate than earlier quarters but Q4 of 2007 was a difficult comparison. And all in all controlled products and solutions had a great year with full year organic growth of 9%. Operating margin expanded by 250 basis points sequentially to 14.7% but declined by a 150 basis points compared to last year. Q4 this year was the highest margin quarter and the decline versus last year was primarily due to business mix and increased spending including spending related to the globalization of our supply chain. The next chart, chart 6 shows a geographic breakdown of our sales in the quarter. In the center column; you'll see the overall growth rates by region. I'm going to focus my comments on the far right column which shows growth rates excluding the effects of currency translation. We saw growth of 3% in the U.S. this quarter, about in line with our expectations. Full year organic growth was 4%, a good result given the economic environment in the second half of the year. Canada grew 3% in the quarter and the full year organic growth was 5%. For the quarter, Latin American sales were up only 3% well below year-to-date levels. Q4 of '07 was a very strong quarter so it was a tough comparison and in addition, sales in the quarter were negatively impacted by a couple of large projects that pushed out to Q1. Orders in Latin America were up 16% year-over-year in Q4. And even with the low Q4 shipments growth Latin America delivered a robust 14% organic growth for the full year. In EMEA, sales were up 8% in the quarter that is partly due to very strong growth at IPS which as I mentioned is now rolled into the base, but even without IPS, EMEA was up 5%. Including acquisitions EMEA organic growth was 5% for the full year. That was below our expectations at the beginning of the year but we are pleased with the stronger results in Q4. As I mentioned earlier, Asia Pacific had another very strong quarter with 17% organic growth. CHINA delivered, continues to deliver great results with 39% organic growth this quarter and 30% organic growth for the full year. Again, this quarter we realized a good balance in global revenue mix with more than 50% of our sales outside the U.S. in spite of a lower revenue benefit from currency translations this quarter. Please turn to chart 7, Q4 results free cash flow. Free cash flow for the quarter was $197 million and $458 million year-to-date. If we add back the Q4 restructuring charge to net income, that's 126% conversion in Q4 and 75% conversion year-to-date. That latter result is consistent with the high end of the cash flow conversion guidance that we provided last quarter. We're not pleased with the full year conversion performance. As we discussed last quarter the shortfall was primary in two areas, working capital and the timing of tax payments. As you can see on the slide, working capital was a use of cash for the full year of $141 million but we did turn the corner on working capital in Q4 and made some good progress with regard to inventory. We are committed to continuing to improve working capital management throughout next year and we are also expecting a more normal tax expense versus tax payments outcome in fiscal year '09. Now please turn the chart 8. We've often talked about the importance we have placed on maintaining a strong balance sheet. Given the recent turmoil in the credit markets, I thought it might be helpful to discuss some key elements of our capital structure. We ended fiscal year '08 with a strong balance sheet and in a good position regarding liquidity. Our debt-to-total capital ratio is 37% and our net debt-to-total capital ratio is only 20%. We've strong coverage ratios and dividend as a percent of free cash flow was 37% this past year. We ended the year with cash and cash equivalents of $582 million and our short term debt was $100 million. Our $600 million revolving credit facility matures on October '09 and we're in active discussion with our bank group on renewing the facility, we don't anticipate any issues with renewing that facility this year. Our long-term debt maturities are well distributed. We think we locked into some pretty good rates last November on $500 million of 10 and 30 year debt and our first maturity of long-term debt doesn't occur until 2017. From a balance sheet point of view, we believe we're well positioned, to weather more difficult market conditions and as Keith pointed out, to do so with some significant flexibility. Now, please turn to chart 9 for a summary of how we're thinking about headwinds and tailwinds, as we head into 2009. We see some important revenue headwinds. Each spoke to the credit market situation and what appears to be continuing deterioration and relevant macro economic indicators. We expect to see deteriorating market conditions as we move into next year. Specifically, we believe we will see declining demand in North America and Western Europe but we expect to see market growth in Asia Pacific and Latin America, but at substantially lower rates in some of the cases this past year. Also related to revenue headwinds, the recent strengthening of the dollar has been dramatic especially against selective currencies. If rates are staying at current levels, we will experience a significant top line headwind. And dropping to earnings headwinds, at present currency rates and mix of rates, we believe we will also experience a somewhat higher conversion on translation sales creating an unfavorable margin impact. We also see earnings headwinds related to our business mix and inflation. Regarding business mix we expect to continue to see higher rates of growth in our solutions businesses. We base this in part on an expectation that emerging market will continue to grow faster than the mature markets and that we will continue to see better relative market conditions and resource based industries. Both tend to have higher solutions content. Inflation is not as great a headwind as we would have expected just a few months ago. Commodity prices of these considerably recently but we will still face some material cost increases compared to the average of last year and we will have to deal with inflation and wages and benefits. We believe we have some tailwinds regarding earnings including it is a good momentum in our productivity programs. The savings we will get from the Q4 restructuring actions and EPS will benefit year-over-year from reduced share count. That brings us to chart 10, fiscal year '09 guidance. For fiscal year '09 as Keith mentioned we are expecting a revenue decline excluding currency effects of between 1% and 5%. Acquisitions which occurred in fiscal year '08 have a very small impact on fiscal year '09 growth rates and we have not included any revenue in these projections from acquisitions that may occur in fiscal year '09. So, you can think of this basically as organic growth. We are assuming that currency effects will reduce sales next year by about 5%. Including currency effects we are expecting revenues to be down between 6% and 10% year-over-year. We expect operating margins at a range of 15% to 16.5%. That assumes the business mix impact of a bit less than one point year-over-year. It also assumes a negative impact due to currency effects of about half a point. And we have assumed additional expense next year for pay as you go actions that maybe necessary to continue to adjust the cost structure as the market conditions continue to evolve. Those pay as you go expenses account for another roughly half point reduction in margin. We expect the tax rate in the range of 26% to 28% next year. We expect an average share count next year of about a 142 million shares and we expect diluted EPS in the range of $3.10 to $3.60. We expect free cash flow conversion of about 90%. Now that includes the roughly $50 million of cash outlays related to the Q4 of fiscal year '08 restructuring actions. Excluding that, conversion would be about a 100%. And at this time, I'll turn us back over to Rondi to start the Q&A. Question And Answer

Thank you. [Operator Instructions]. Your first question comes from the line of Bob Cornell, representing Barclays Capital. Please proceed.

Hey, good morning everybody.

Good morning Bob.

Interesting times. I have two questions. I guess the first is to ask you to expand on the comment you made about not yet seeing the adverse impact of the market downturn in your orders. I mean is that through September and the supporting period Keith, or is that through November, or I mean maybe to expand on that point, and I have one another question?

Absolutely Bob. That comment is basically through October. And certainly we're very cautious as we go forward, but we actually built a backlog in October. And we have not seen significant changes in the front log in the majority of our solutions and services businesses and quotation activity remains unchanged. What we have seen is there has been a few order cancellations from the backlog in the last half of October, but we had a good order month and as I said the total backlog was up. And certainly our greatest concern right now is really the economic indicators and what that is foretelling and what it fortends for the future.

Got it. We'll find out in 6 months or so. The other question is in articulating, you haven't had a chance to articulate actually what you are targeting with the 50 million restructuring, you started out the year with a higher growth rate of expected for A&S, didn't come in as high, maybe it articulate, which verticals, which geographies didn't quite meet expectations? And what the restructuring is actually targeted to accomplish?

Okay. Where did we not perform where we thought? I would say the biggest shortfall was in Europe. And while we liked the exiting of the year, certainly we felt that our performance throughout the year was not at the levels we expected. And basically was about half of what we expected at the start of the year. The biggest and from a geographic standpoint I would say that's where our biggest challenge was. And quite candidly within Europe, we had positives and negatives. So when I say Europe, I am treating it as a broad brush, but we had some very strong performance but unfortunately that was offset with numerous underperforming --

That CompactLogix that didn't come true?

No, CompactLogix grew well in Europe. I think the biggest activities there were some of the economic declines. And then, as we said at the last call, some of our execution aspects in certain countries not across the Board. But CompactLogix was strong and certainly we felt improved as the year went on. And we did some specific targeting for CompactLogix where we did some good opportunities of bundling the products, creating the logistics requirements and capabilities to meet the growing needs and the specific needs of the OEM's in Europe. So, I think the team there did a good job of targeting for CompactLogix success as we went through the year. If you look at the other aspects of where the cost actions were taken, it was really... I mean, other than a couple of areas just to do some rebalancing, the other areas were in the evolution of our sales model where we really went to a more segmented selling model and we've accelerated some of the execution of that strategy, I would say, accelerated to the end gain model which is more segmented and more direct selling people calling on customers and less indirect people supporting the customers. And we could do that because we... as I've said went to a more segmented model. And so what we did was rebalance some of the sales organization around the world, as we evolve that model that we've been talking about now for about two years. And in fact, in the pilots that we ran in the U.S. with that model, we had some very good success throughout the year. So, we're very excited about how that positions us for the future. But we needed to, because we did not see the revenue growth particularly in A&S. We needed to accelerate to the end gain in that evolution of the selling model. I would say those were the greatest areas of impact with the restructuring.

Okay. Thank you. I will pass the baton, thank you.

You bet, Bob. Thank you.

The next question comes from the line of John Baliotti, representing FTN Midwest Securities. Please proceed.

Good morning.

Good morning, John.

Actually a question for Ted and question for Keith. Ted, first, you guys talked about the charge back in October and the expected benefit, are you offsetting that? Are you planning on offsetting that in '09 with additional charge, is that maybe, can you quantify that?

Yes, John. I'm not sure we have said offsetting with additional charges. We took the $15 million charge at the end of September so that it goes into the fourth quarter.

Right.

We have also provided for in this guidance about $25 million of "pay as you go" charges that we would expect to incur over fiscal year '09 to kind of continue to address and adjust the cost structure?

Okay, the 25 is a full year number?

Yes.

Okay and Keith, one question is as CP&S had been growing faster during the year or at various periods, I guess part of the theory is that that would exceed an increase to our installed base. So it exceeds some new customers for higher margin after market business. Is there any expectation or is there any sign that you would see any of that in 2009?

No John, but first you are absolutely right. That's why we talk very strongly about the positive aspects of growing our solutions businesses. It's just what you've said. It exceeds an installed base that becomes very sticky as times goes on. But that is a multi-year process and we will not see the benefits of that in 2009 and quite candidly nor really in 2010.

Okay, and just would you mind in the past you have run down some of your larger end markets and kind of talked about, either growth rates or just body language of what you are seeing, would you have a quick second to go through that?

Sure, let's talk about the fourth quarter first and then how were thinking about '09. In the fourth quarter we had a very strong growth or above average Rockwell growth in oil and gas. At about the average we had, actually we had global auto at about the... automotive at about that. Slightly below would have been the food and beverage, the consumer products, home and personal care. And then the lowest performance was really in life sciences and also U.S. auto. The Detroit up three auto was significantly below the Rockwell average. If we progress out in '09, we believe oil and gas will continue to be strong but lower, not at the levels that it was this year but higher than the Rockwell average. Food and beverage and home and personal care, I think you will see that these are the ones that we expect to be more consistent, more stable and therefore at our leverage and helping us as it will turnout to minimize the decline that we mentioned. And we certainly believe that automotive is going to get worse. Detroit automotive is going to get worse. And previously we had said we thought it was at a stable point. I think given what you've seen in the last couple of days and/or weeks, the U.S. automotive industry and market is going through a very, very difficult time. And that will impact our business and global auto will slow. And I think you've seen probably some of the announcements from Toyota and others where they are revaluating their growth investments throughout the other geographies, including emerging market investments. And we also believe that Life Sciences will remain tough. One that we normally don't talk about but because it's part of our global portfolio at the end of the day, the steel industry we believe, metals markets will be tough next year. You've already seen the pronouncement by China of reducing production by 20% and Macau reducing output in the mid 30% to 35%. So, I think that's going to be a tougher, much tougher market for us going forward as well.

Okay. Thanks.

You bet, John.

The next question comes from the line of Nigel Coe representing Deutsche Bank. Please proceed.

This is actually Nicole Dibotto asking questions on Nigel's behalf. I had just a couple for you. You obviously have a very strong balance sheet, can you just comment on your free cash flow deployment plans going into 2009?

Yes. I think our... really there is no difference in our cash deployment priorities. It's investing in organic growth, making catalytic small, bolt on acquisitions and after that it is returning any excess free cash flow to our shareholders. We will do that obviously first in maintaining our dividend and secondly, any excess will be used to repurchase shares and obviously that will be the discretionary aspect as we see the markets unfold. And we're very pleased to have the strength of that balance sheet in today's markets to be able to actually do all of that and still maintain very strong credit ratings.

Great, thanks. And could you just comment on growth and your Logix business versus Legacy PLC?

Yes. Be happy to. As we mentioned that we had a very strong growth in this quarter in Logix which was 15% as it turned out, and 12% for the year. In Legacy sales, Legacy sales were down 11% in Q4 and 12% in 2008 and that is a little higher than what we have been talking about with our longer term expectation of 8% to 10%. But yet, if you look at the total processor sales, they were up 7%, almost 7% for the quarter and that was the highest for the year. So, we're seeing a pickup in performance as we went through the year across our processor, our combined processor business.

Great. Thank you.

You are welcome.

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

Hi good morning.

Good morning Mark.

Keith, just to build on your last comments with processors so strong in 4Q, it seems like the margin in the architecture and software business was the weakest of the years. So what was the offset there if overall processors were strong?

Well, I think... I think a couple of things; one, we continue to see the same spending impact that we had previously in the year. We have not cut back on all of those investments and then secondly, also a little more impact of acquisitions and certainly the... we are seeing more of the integration of CEDES and Incuity that impacted the quarter more as they rolled more strongly into the organization in that quarter. So, I would identify those two Mark as really what's driving the A&S margin performance.

Okay, and my real question was really to ask about '09 expectations across geographies, if you could kind of handicap strongest to weakest and then also A&S versus CP&S?

Absolutely, let's start with the geographies first. If we look at the U.S., we think the U.S. will be about 2 to 3 points lower than the Rockwell Automation range that we gave. We believed that Canada likewise will be 2 to 3 points below the average range. EMEA likewise two the three points below. Asia Pacific, we expect to be mid to high single digit growth. Latin America likewise, mid to high single growth. And these are now all against the organic rate numbers of minus 1 to minus 5%. If we look at A&S and CP&S, I think it is important... why don't I talk maybe the easiest way to talk about that is to talk about our products businesses and our solutions businesses. And basically products businesses is all of A&S and roughly 40% of CP&S. So, if we look at our product businesses we expect our products businesses to be 2 to 3 points below the Rockwell Automation percentage and we expect our solutions business to have low single digit growth next year. So, that gives you a little more flavor and color behind the minus 1 to minus 5 organic decline in our revenue.

Great that's pretty helpful, thank you.

You're welcome.

The next question comes from the line of Mark Douglas representing Longbow Research, please proceed.

Good morning.

Good morning.

Hi, can you give an indication of where software is performing recently, has that in particularly been hit yet with anticipated declines in CapEx versus solutions and products?

Well, software is a very broad portfolio for us. So, let me try to split it up a little. The majority of our software business today is really associated a lot with our automation product. And those automation products would be the PLC, SLC in our visualization. And so, that software moves at about the same pace as our controller business and as our visualization business moves. The software which is the information software is more tightly associated with, I think when you were getting that solution businesses and that's a business now that we've been investing in and we're starting to develop the portfolio to be able to do more and more of the plan for application. And that business is growing very rapidly but it's a small total percent of our... it's the smallest part of our software business today. But now we're now evolved with that in a number of key industries particularly life science, automotive and consumer goods industry and we're starting to create that pipeline and the pilots that are required to grow that. And specifically we have not seen any decline in the customer interest or activity in that portion of our business yet. It is a part of our portfolio that is very important to customer productivity and is also of capable of helping them reduce a lot of their legacy costs and legacy maintenance of existing software systems. So, currently, no impact and we're looking for that to be a part of our positive growth activities of next year.

Okay, great. Thank you. And finally, can you go a little bit more into Logix, I mean you mentioned the CompactLogix was doing well in Europe, can you flush other areas where you saw the really strong growth in Logix?

Yes. I think we're seeing it in a couple of areas. You mentioned the one in Europe. I would say in general where we see the greatest growth in Logix is at OEMs and in that CompactLogix family. That is the area that is growing substantially. We are seeing in quarter four CompactLogix grew 22% and as I said, that is really about share gains at OEMs. If the other area that I would identify that we are seeing good growth with Logix is in the process industries and that continues as I mentioned earlier process group of the year over 20% without acquisitions and certainly that continues to be important. We have just released towards the end of the year, late summer we introduced the next functionality and release what we would call version 17 of our software for Logix and we also released some additional low end processors that really extend below, it gives us another price point in the CompactLogix family and we think that will help more at OEMs, give us a better match for some of the simpler machines, and some of the functionality in 17 we believe augment and adds to our capabilities in the process space. So really as we grow Logix, it's about OEMs and it's about the ability to address more and more of the process applications. So we continue to grow faster than the market in Logix and we believe we continue to take share.

Great, thank you.

Okay, operator we'll take one last caller.

Thank you. Your final question comes from the line of Mark Penki, representing Newburger Burman. Please proceed.

Okay, thank you for taking my call first of all. Keith, in the course of the presentation you've made several comments regarding current order rates looking reasonably solid and but you expect really a contraction in the second half, can you sort of walk through how you see the year progressing sequentially in terms of the business?

Well, I mean first of all I guess Mark, we don't really give a quarterly guidance. But I will just expand a little on my earlier comments that I believe the second half of the year will be tougher and why do I believe that, well a couple of reasons one, just our current intake and orders are performing similar to what they did in the fourth quarter. So, we haven't seen as we have gone through October a significant change. How we see it going out in the longer term is it's clear that the economies have slowed in all regions of the world and if you look at that, if you look at every projection over the last three to six months they've always, the net forecast has always dropped. So we're anticipating that that will come and play out particularly as we go into calendar 2009. The other aspect of this is, we see that the OEMs and the projects that we're working, those have a visibility that says they'll be strong for us into calendar 2009, but the tone at our customers that are telling us to be cautious as we look further out. And we believe as they do their capital spending budget for 2009 which will become more real inside their organization after January 1st that we are hearing and the tone of our customers is more cautious than its previously been and so that combination of macroeconomic whether it be including sentiment, indicators, the fact that the consumer spending has dropped dramatically in the last two months in the U.S. and in Western Europe, that we believe that will ultimately bleed over into the capital expenditures in our markets and really, that is what is causing us to have less optimism as fiscal year 2009 unfolds for us Mark.

Okay. A couple of questions for Ted regarding some of the details of the guidance that was provided, could you speak to tax rate, interest expense, and corporate expense?

Well, on tax rate, we said 26% to 28% which would be down a little bit from this year and that's basically a consequence of lower income levels and kind of the mix of income globally. On interest expense, Mark, not a significant change from fiscal year '08. And on GCN probably a little higher or equal to or a little bit higher than '08.

Okay. Is that driven by legal expense or something else in there?

I would say legal expense was one element of that. GCN tends to be a little bit lumpy quarter-to-quarter.

Okay, and your own CapEx budget?

What we are targeting is to be about 15% below this year and this year was about a $150 million, this year meaning '08.

Okay. Thank you.

You're welcome Martin.

Okay. So, we're ready to end today's call but before we do that, what I'd like to do is just say that we're hoping you are able to join us for our investor conference at Automation Fair which is in Nashville on November 19th. If you need any more information about logistics or anything just please contact me and we'll help you get set up for that. So we are hoping that you can join us for that and thanks for joining us today and that concludes today's call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day. .