Rockwell Automation, Inc. (ROK) Q1 2015 Earnings Report, Transcript and Summary

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. Later in the call, we will open up the line 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.

Thanks, Dan. Good morning. Thank you for joining us for Rockwell Automation's first quarter fiscal 2015 earnings release conference call. With me today as always are Keith Nosbusch, our Chairman and CEO and Ted Crandall our Chief Financial Officer. Our agenda includes opening remarks by Keith that include highlights on the Company's performance in the first quarter and some contexts around everybody's outlook for fiscal '15 then Ted will provide more details on the results as well as sales and adjusted earnings per share guidance. As always we take questions at the end of Ted's remark. We expect the call to take about an hour today. Our results were released this morning and the press release and charts have been posted to our website, at www.rockwellautomation.com. Please note that both the press release and charts include reconciliations to non-GAAP measures. A webcast of this call is accessible at that website and will be available for replay for the next 30-days. Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are, therefore, forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. So with that, I'll hand the call over to Keith.

Thanks, Rondi. Good morning everyone. We appreciate you joining us today. We hope those of you in the Northeast have weather the storm okay. I’ll start with the highlights for the quarter, so please turn to page three in the slide deck. We had a good start to the year with 2% organic sales growth in the quarter. This was better than we expected given the strong sales last year in Q1 and especially giving the low backlog in solution and servicing at the beginning of the quarter. I’ll start with some color on the top line. Architecture & Software delivered its six straight quarter of at least 5% organic growth, our investments there are paying off. Logic sales were up 7% in the quarter, so back to more normal expected relationship. The Logic sales exceeding the segment average and we continued to see traction with our mid-range portfolio. It’s not on the chart, but our process business grew 4% in the quarter. Latin America was a standout region with 18% growth. Brazil and Mexico continued to grow about 10% and we saw even higher rates of growth in selected other countries in the region. Our team there is executing very well and I congratulate them on an outstanding quarter. We expect Latin America to be our highest growth region this year and they are off to a great start. Ted will provide additional color on the other region’s performance. Operation margin EPS growth and free cash flow were all very strong in the quarter, so all in all that was a very good start to the fiscal year. Let’s move on to the macro environment. One of the big changes since I talk in November is a continued strengthening of the U.S. dollar against a broad basket of currencies. At current rates, we are facing a significantly larger sales headwind then we originally expected. Ted will provide more detail regarding currency impacts in his remarks. As it relates to underlying market condition with the exception of oil and gas, things haven’t changed much at all. The U.S. continuously demonstrating strength, we are watching EMEA closely as we deal with geopolitical and economic challenges, but we aren’t expecting any significant change in market conditions there. In Asia, things are looking better in India and a bit softer in China. Despite lower commodity prices, we expect to see continue growth in Latin American markets. Regarding vertical markets, generally we’re seeing continued healthy investment in consumer verticals and transportation. In heavy industries, we’re expecting mix market conditions for relative stability overall, however there is obviously a good deal of noise related to oil and gas. Just like other suppliers, the oil and gas industry, we are trying to understand the near-term and longer term implications of the rapid decline in the price of oil. We did not see any negative impact to our business in Q1 and our front log [ph] in oil and gas is stable. Most of our oil and gas customers had not yet declared their capital spending plans for calendar 2015, a lot of that will become public in the next several weeks. But at this point, here is out view. There will be a negative impact on CapEx investment due to the lower price of oil, but the timing of spending cuts is harder to predict. We think oil and gas customers are likely to complete large projects already underway and proceed with those they consider strategic. Generally this industry takes a longer-term view of their CapEx investments. Any negative impact on spending will likely be more significant in exploration especially for unconventional sources. We expect to see some shift in spending from large projects in exploration to smaller productivity improvement projects in production similar to what we’ve experienced in the mining industry over the past couple of years. Lastly, we think midstream and downstream investments are likely to be sustained. Taking all of this into consideration, we see modest risk to our previous sales outlook for fiscal ’15 related to lower oil prices. With all of that said, let’s move on to our updated outlook for fiscal ’15. Our most GDP and industrial product forecast continue to call for stable growth in 2015. We are incorporating the more significant headwind from a stronger dollar and the anticipated impact of lower oil prices into our revised outlook. For full year sales, we’re increasing the currency headwind by almost three points and lowering the top end of our organic growth guidance of 6.5% to 5.5% while these results in a preferred change to the top line, the midpoint for EPS guidance in only $0.10 lower. We now expect fiscal 2015 reported sales of about $6.6 billion with organic growth in the range of 2.5% to 5.5% and adjusted EPS of $6.50 to $6.80. Ted will provide more detail around sales and earnings guidance in his remarks. So to wrap up, Q1 was a very good start to the year, even though I’ve talked a lot about oil and gas here, it is only 12% of sales. In fact, the oil prices remain low, we expect to see some benefit in our other verticals especially consumer, which is sweet spot for Rockwell Automation. We’ve remained excited about the opportunities we see in consumer and automotive in process with OEMs and to the connected enterprise. We continue to invest in all of these areas. Our revenue diversification works and we’re executing very well across the globe. I want to thank our employees, suppliers and partners for their dedication in expertise and continually expanding the value we provide to our customers and shareholders. Now, I’ll turn it over to Ted. Ted?

Thanks, Keith and good morning everyone. I’ll start with page four, first quarter key financial information. Sales in the quarter were $1.574 billion, 1.1% lower than Q1 last year. Organic sales growth as Keith mentioned was 2.1%, a current translation reduced sales in the quarter by 3.4 points. Segment operating margin was very strong at 22%, up 140 basis points from Q1 last year, despite the small sales decline. The year-over-year margin increase was primarily due to the higher organic sales, favorable mix and a strong productivity quarter, partially offset by a modest increase in spending. General corporate net expense was $23 million in Q1, up about $1 million compared to a year ago. Adjusted earnings per share were $1.64, up $0.17 or 12% compared to the first quarter of last year. The adjusted effective tax rate in the quarter was 26% compared to 27.8% in Q1 last year. The 26% adjust effective rate in Q1 reflects the retroactive extension of the U.S. R&D tax credit for calendar year 2014. Free cash flow for Q1 was $233 million, a very good result for the first quarter and strong start for the year. Free cash flow conversion on adjusted income was 103% in Q1. Our trailing four quarter return on invested capital was 30.1%. There were couple of items not shown here. Average diluted shares outstanding in the quarter were $136.9 million that’s down about 2.5% compared to last year. And during the first quarter, we’ve repurchased 1.55 million shares at a cost of about $167 million. At the end of the quarter, we had 884 million remaining under our share repurchase authorization. The next two slides presents the sales and operating margin performance of each segment, I’ll start with the Architecture & Software segment on page five. On the left side of this chart, you can see that Architecture & Software segment sales were $708 million in Q1 an increase of 1.7% compared to Q1 last year. Organic growth was 5.1%. Moving to the right side of the chart, on 5.1% organic growth A&S margins were 31.3% up 90 basis points compared to Q1 last year. With the improved margin primarily due to the higher organic sales and a good productivity quarter. Now turning to page six, a similar view for the Control Products & Solutions segment. In the first quarter, Control Products & Solutions segment sales were down 3.3% year-over-year and essentially flat year-over-year on an organic basis. Organic growth for product sales in the segment was a solid 3.3%. Solutions and services sales were down 2.8% organically. That was actually a bit better than we expected given the low starting backlog. The book-to-bill in Q1 for solutions and services was 1.13 that’s pretty healthy and starts to rebuild the backlog that we need to drive growth in the balance of this year in this part of our business. CP&S delivered very good operating margin in Q1 at 14.5%, up 150 basis points compared to last year, despite the decline in reported sales. The earnings conversion on the negative currency impact was modest in this segment. Mix was somewhat favorable. Project margins were better in the solutions and services businesses and that was particularly strong productivity quarter. Page seven, provides a geographic breakdown of our sales and shows organic growth results for the quarter. The organic sales growth in Q1 was driven largely by Latin America with Canada and Asia Pacific also contributing. The U.S. was flat year-over-year in Q1 with 3% growth than the product businesses and a 4% decline in the solutions and services businesses. The decline in solutions and services was expected and consistent with our comments last year regarding a low beginning backlog. The underlying market in the U.S. remains very healthy and that was reflected an orders growth in the U.S. in the mid-single digits. Canada saw 8% growth that was partly about project timing and an easy comparison in the last year. But with the exception of the Oil Sands, we’re seeing some pickup in most other markets in Canada. EMEA was down 1% organically, it was somewhat unusual quarter for the region in that sales and Western Europe were actually up 1.6%. However that was more than offset by declines in emerging countries particularly South Africa and to a lesser extent Turkey and Russia. Asia Pacific was up 2.9%, growth was pretty broad based across the region with the exception of China which was down 2%. I would attribute the decline in China more to project timing than any change in underlying market conditions. China orders in the quarter were up mid-single digit. India organic growth in Q1 was 9%, so we continue to see improvement in that market. Keith already talked about Latin America, so I’ll close out this slide, I’ll just add that overall for emerging markets, organic growth was 4.4% and that obviously led by Latin America. And that takes us to the fiscal year ’15 guidance slide. As Keith mentioned, we’re revising our full year guidance. We’re reducing full year sales guidance primarily to reflect a much more significant headwind from currency and to a lesser step, less optimism about the high end of the sales range. We’re dropping the high end of the sales range primarily due to the very significant decline in oil prices, but also because we’re continuing to see forecasts for IT and GDP be revised downward in most regions although the forecast still call for growth in 2015 that’s similar to 2014. Our previous guidance call for reported sales of approximately 6.8 billion at the midpoint, in the original guidance, we expected currency to reduce sales by 1.8 points and we expect organic growth of 2.5% to 6.5%. Now for the full year, because the dollar is continued to appreciate against the broad basket of currencies, we expect currency to reduce sales by 4.5 points. That difference in currency impact from previous to current guidance results in a reduction and reported sales for the full year of about $180 million. We’re also reducing the high end of organic growth from 6.5% to 5.5%. We’re maintaining the low end of organic growth to 2.5% that will drop organic growth at the midpoint by 1.5 point. We’re revising EPS guidance from the previous 655 to 695 to a new range of $6.50 to $6.80. From the old to the new midpoint, EPS will be down by $0.10, that’s a very modest EPS decline on a roughly $200 million sales decline coupling the currency impact and the organic sales change. In part based on our performance in Q1, we now expect slightly higher operating margins for the full year about 20 basis points, but still about 21%. We’re projecting an adjusted effective tax rate of 26.5%, half a point lower than previous guidance and largely due to the R&D tax credit. We didn’t plan on the extension of the R&D credit in the original guidance. Those factors allow us to absorb a pretty large drop in the sales guidance with a relatively small impact on EPS. We continue to expect converted by 100% of net come to free cash flow and that’s couple of items not shown here, we continue to expect general corporate net expense to be approximately $80 million for the full year and we continue to expect average diluted shares outstanding to be about 136 million for the full year. The last slide is a walk for adjusted EPS from the previous to the revise guidance midpoint. Starting on the last slide, the previous guidance for adjusted EPS midpoint was $6.75. The big change as you can see here is currency compared to prior guidance with the additional top line translation headwind of a 180 million. All in, we expect a related earnings impact to reduce adjusted EPS by about $0.25. A little higher operating market is more than offsetting the impact of a half point lower organic sales growth at the new midpoint and the net effect adds about $0.09 to quarter. Lower tax rate and share counts add an additional $0.06 compared to prior guidance that gets us to the new midpoint of $6.65. And with that I’ll turn it over to Rondi to begin Q&A.

Great, that said, before we start the Q&A, just look at the list, we have quite few callers and that few I know we’re not going to be able to get everyone, but I guess in the spirit of trying to get to as many as possible if you can you know letting yourself to a question and one follow-up that would be great. We appreciate your cooperating on that and so let’s take our first question.

And your first question comes from the line of John Inch, Deutsche Bank. Please go ahead.

Thank you, good morning everyone.

Good morning, John.

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

I would say probably about a quarter of it.

Okay.

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

You know greater called out transaction exposure in Canada, do you have that in other words, are you selling Canadian customers U.S. made product that’s going to create for perspective margin headwinds, just again trying to be somewhat proactive in the through process?

Well it cuts both legs and then we do have transaction exposure in Canada because we manufacture around the globe and selling to Canada, but we also manufacture in Canada and export to the rest of the world. So we’ve got some natural hedge, we do have some transaction exposure and we hedge that.

Okay, the other question I had was just automotive powertrain, I know you guys are making a lot of head growth into that arena, what point do you think we might actually, maybe this question for Keith, started actually realize some sales from the powertrain, start for orders you’d be talking about because right now the popular view is your auto business is peaked but in theory you’ve got two - you know you got another 50% of the market that you just beginning to tab?

Yeah, John, I would say we’ve had limited success only because - at this point only because these are projects that are lawn in the planning stage and we just started a little over a year ago in the - I’ll say in the pursuit. So we’re seeing that the backlog on powertain opportunities increase, we don’t have a lot of booked orders at this point in time. I would say that we should see an increase as we go through this year with a stronger outlook in the next three - two to three years with respect to strictly the powertrain segment of automotive.

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

But John, we’ve had a lot of conversations about this in the last couple of years and as part of that talked about cash balances and where they are. I think we’ve been very consistent in our cash deployment philosophy or expectation is that we will continue to exhaust free cash flow each after organic growth funding and acquisitions and return the balance to shareholders. Last year, you know we did a little bit more than that because of the strong cash flow year. This year we’ve got north to start that is in pace of brought back you know given that we will - it’s possible that we won that spending a little more than that this year. But I don’t think we are fundamentally changed our approach.

Got it, thank you.

Welcome.

Thank you, John. We have another question for you. This one is from the line Scott Davis of Barclays. Please go ahead Scott.

Hi, good morning, guys.

Good morning, Scott.

Can you help us understand, I mean I am picturing a scenario where it seems is calls other people are going to say that you are not being conservative in oil and the impact. I mean, can you give us a sense of what you’ve learned in mining and what the parallels are here as far as how fast things can ramp down and how you mentioned in your prepared remarks, how project can gravitate. But help us understand and maybe a first point to start is, give us a sense of where mining when peak the trough for you guys and where you see some parallels in oil?

Well I think the parallels are more along the lines of that new investments in expansion is the area that gets impacted first and obviously they were rising commodity prices when there were a lot of process going on and the commodities pricing was going up mainly driven by the China growth. And I think that we’ve seen in mining and what we think is in parallel is the major projects that were going on were not stopped, those continued to move through to conclusion. And as those were moving through what we saw was a decline in new investments in new capacity and a switch of that to more including productivity and taking cost out of their existing operations. And they were doing that obviously because the prices were going as opposed to prices going up and you can sell everything you can mine. And so I would say those were the learnings and I think the other thing that we feel is similar is that both of these industries take a long term view of their investments, a mine is plan to run generally for decades and oil depending upon the magnitude the field is also for decades. So it’s not a decision they take are literally or capriciously based upon a short term swing in the price of oil - in the price of whatever the commodity is. In this case, obviously there has been a dramatic drop in about six months. So I think the important thing in here is I won’t say we’re not being aggressive in our beliefs here. I don’t think that final card has been placed to understand what’s going on in the market yet. You know very few companies have come out with their CapEx guidance. I think we’ve seen one of the major oil company so far. I think we’ve seen some oil services company respond, but we need to at least wait until we get a little more insight before we’re making calls in this industry and I just think it’s still too early to say anything more than we have at this point in time. So we’re obviously monitoring it. But to your point, in mining what we say was a 15% decline over two years, so that gives you a little bit of a scale of what is possibly ahead of us in oil, but we just feel at this point, it’s too early to make that call given that CapEx budgets haven’t been outlined and secondly it takes time, it takes time for these decisions to ripple through organization, they don’t happen in the same day, the same week, the same month that the decisions are made. So they have to prioritize, they have to recalibrate, they have to reevaluate and then come up with the new list and how that impacts us, we’ll not be knowing for a meaningful down the road. So we’re trying to keep it write down the middle of the fair way here and call it by what we’re seeing today and to your point, we making it a little bit to experiences that we’ve had in and perhaps a similar industry of mining.

And I think people on this call it down 15 of two years of victory, but so I hope that happens, but anyway I just wanted to ask a quick follow-up on currency in competition. You know you guys have done really well with the machine builders in Europe for probably ten years, but this is a different level of yen for the Japanese competitors and clearly depend level for euro. But have things change to the point where you have such a fantastic relationship with the OE builders that somebody coming in at 5% or 10% lower price is not enough to get on the switch or is it still somewhat of aggressive, you know a more commoditize product?

Well, I don’t think it’s a more commoditize product, I certainly don’t feel that’s the core of our business quite frankly. But that the issue is more around machine cycles than it is around price. With OEMs, the important thing and what we’ve been working on over the last decade is how do we get in the design cycles and how do we validate our differentiation that enables them to get better machine performance utilizing our technology. And at the end of the day, it’s that combination that is more important than strictly a short term price based upon currency fluctuations which obviously moving both directions at some point in time. So I think it’s about creating that value and creating that differentiation to enable us to build the loyalty and the confidence that we are the best solution for them and not have to be 5% to 10% price up - on upfront cost advantage because it really is all about the total lifecycle cost for the end users and that’s where the bigger emphasis is placed.

Scott, I think that the price that was talked about previously is you know historically we have not seen a lot of changes in price dynamics and price behavior associated with currency changes and we’ve had a lot of discussion about that over the last couple of years as it relates to the yen. You know our global supply chain isn’t perfectly balanced but it’s certainly not like we build everything that we manufacture in the United States. And most of our major competitors have a similarly global supply chain. And so I think that’s partly the reason that you don’t see big changes in pricing behaviors consequence of the currency changes.

It’s very helpful. Good luck guys, best of luck this year.

Thanks, Scott.

Thank you, Scott. We have another question for you. This comes from Steve Tusa of JP Morgan. Please go ahead Steve.

Hey guys, good morning.

Good morning, Steve.

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

Yeah, so I mean maybe the easiest thing is to think about it as, we’re expecting no growth at midpoint.

Okay, no growth in oil and gas at the midpoint, okay. And within that I guess you know what do you guys looking for over the next couple of weeks as far as what should we be watching and looking for when it comes to these CapEx budget, I mean is there specific sliver at the market that you guys are more focused on, you said you’re looking for another turn of the cards, just curious just to you know maybe a little more detail on and maybe were you most worried or where you think you have the best change of stability and what the cap for over the next month or so.

Sure, first half, it’s just the magnitude of their CapEx reductions. I think that’s the first test period. And then it goes back to okay, so how does that - how does that really play out against the different applications and the different segments of the market. And certainly, we’re more exposed to upstream and so that would be our greatest concern. If a lion share of that reduction was targeted in the upstream, we certainly think there is opportunities to continue to improve the productivity of well, so we believe that as they move to OpEx in upstream that is beneficial for us and would be helpful as an offset to the new well drilling and then the split between unconventional and conventional spending and how they are seeing the impact of the lower prices and the stock of oil.

Got it and so clearly the solution to book-to-bill, you are saying you are seeing really any unusually behavior from your customers?

That would fair, we haven’t seen any at this point.

Yeah, I think that was the Q1 takeaway, we have no change.

And Steve to your question about then the announcement will come up in the next couple of weeks, we’re key started, I think what we get a better picture for is the magnitude of expected cuts. I suspect what was still be a little bit uncertain is the timing of that and all that based on experiences, it’s going to take a little longer to implement those cuts then some others might be expecting.

And will this be like the big guys or you know like the Exxon to the world or is it mostly you know is it really broad based.

It’s yes, it’s very broad based because, today our business is you know with majors but also with the NOCs and also with the Tier-2s given the magnitude of unconventional, a lot of that has been driven by Tier-2s. So it really is across all the spectrum of the industry which as you have known has grown pretty dramatically, so with the advent of unconventional. So we would look at it in each one of those segments and then look at our exposure into those segments and our front lot against those segments and then have a better feel. And obviously when I am taking upstream, we’re move heavily into production then we are into exploration. So that’s the other split. And we think the safest area quite frankly is downstream where all of this low cost oil and gas is going to flow into the chemicals and petrochemicals market and while that at this point is a smaller segment of our total sales. It’s an area that we feel we’ll be state the most stable for the longest period of time going forward. So we think that is where the opportunities can remain and can grow even if there is a reduction in the upstream segment. So it’s a complex market that has many different variables and that’s why we’re going to - we need to evaluate each one of those as we get more influence.

One last question, any impact on that, your margins were very strong and the growth in emerging markets are strong and several years ago that was headwind. Any impact from you know, did the movements in foreign exchange on your margin because the margins are just absolutely blowout this quarter very strong when this expected with the growth in Latin America and Canada, so any impact from hedges or like that on the margins in the quarter?

I would say, I mean that you are saying any significant favorable impacting. Answer is no. Actually currency in the quarter probably converted a little bit more negatively than what we expect is average conversion.

Great execution.

Thanks, Steve.

Thank you, Steve. We have another question for you. This comes from the line of Jeff Sprague of Vertical Research.

Thank you. Good morning, everyone.

Good morning, Jeff.

Good morning. Keith, just on the comments that oil and gas being 12%, is that all away through the entire complex down through petrochemicals or is there you know you kind of stopping at on refining when you say that. Can you just put fine point on kind of whole complex?

Absolutely, my comment would be, mainly the 12% is oil and gas, we would put chemical at about 4% about sales.

Okay, thank you.

And that would include petrochemical.

Right, what do you think you know kind of describes the serves that you saw in the quarter on kind of the low starting backlogs and you know is there some kind of budget flush or something else going on that this seems the - you know that in fact happens?

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

And on the outlook for oil and gas, there is kind of a wait really a little bit more clarity of what the customers are actually going to do. Is there you know kind of prevented or predictive draw out in distribution that starting to happen or that’s not even underway either?

No, we’ve seen - there has been no draw down. Our outgoing flow is as you know we basically match our distributors shipments with our deliberates and we’re not seeing any deviation at this point in time in anticipation of any future activities.

And this another quick one. I think last time you know I mean is up 18 right with Brazil and Mexico of 10, I would imagine those are 75% or 80% of lifetime. So how do you get up, I mean what was up 100% or some crazy number in Latin America?

Well the two of those are generally about two thirds, so a little less than what you’re talking about. But if you remember probably one of the biggest that the biggest differences was Argentina which a year ago was pretty much shutdown for us anyways and we’re now back to a more I’d say stable environment that could change at any time. But in our entire first quarter that was probably were the biggest doubt that came. And then we also had some Central American activities that were stronger and the Andean Regions are Chili was another benefit and that’s a little bit back an earlier commentary around mining, mining was very weak in Chili last year and we’re starting to see some of the operation OpEx spending that’s kicking in as opposed to pure CapEx. So I would put it into those two to three countries.

Great, thank you for that color, I appreciate it.

You are welcome Jeff.

Thank you for your question, Jeff. We have another for you. It’s coming from the line of [indiscernible]. Please go ahead.

Good morning, guys.

Good morning, Shawn.

Hey, Keith maybe can you dig in a little bit more in terms of these you know the pickup in investment you are seeing in the consumer industries and you know are these capacity investments are the new product related or technology migrations, I mean you know it seems like you are probably seeing a pickup there the cycle and just maybe a little more color on what types of things you are seeing?

Well, I think with the consumer industries, it’s always dependent upon the regions that we’re seeing it. And basically you can think of everything in emerging market is new investment particularly as far as developing, I’ll call it more sophisticated manufacturing processes in particular with domestic in suppliers. Take China as the primary example, you all know that they’ve had a food scares, so that they are going to much more rigger in their internal processes and that requires automation investments. We also know that they are continuing to expand capacity in their food sector as the middleclass continues to grow which is the other driven in the immerging markets and that’s not just China that would be Latin America, Mexico as well. So I would put a lot of it into that space in immerging. In the mature economies I think the majority of it is continued drive for cost reduction and productivity and out of that they also get some capacity expansion. But generally speaking, it’s more along the lines to reduce cost and to be able to continue to drive higher levels of productivity. And really as always in the mature markets, packaging styles change and whether it’s the materials used or how they do printing on them or the size of the package, it’s a little bit like the automotive industry where you have model change years even though you don’t have capital spending - you don’t have a lot of increase in new card sales, they just have to modernize their portfolio. And in consumer industry, it’s a lot of times around the packaging that is very similar to the styling of cards. And so they have to buy new packaging lines, take advantage of new technology, so I would say that’s what we see more in the matured markets.

Okay, great, that’s really helpful. And then Ted, maybe you know free cash flow was up around I think 30% year-over-year and the buyback was up about 50, I mean any reason you know either of those were elevated in the quarter and why they would moderate from what happened in 1Q?

Yeah, I mean on the cash flow, I’d say quarter-to-quarter, there are a lot timing issues just about you know things like payables and receivable cutoff dates and also timing of tax payment. So I think we’re off to a good start but we’re not really changing forecast for cash flow at this point. On the repurchases side, you know we’re facing a significant drop in the price in October from the time previous to that and under a 10b5-1 plan; we bought very aggressively with the drop in price. As the drop in price continue to end at November and December, we continue to buy what I would call above average rate and so I think that explains that the first quarter repurchases.

Okay, great, thanks a lot guys.

Thank you.

Thank you. We have another question for you. This comes from Andrew Obin of Merrill Lynch. Please go ahead, Andrew.

Yes, good morning.

Good morning, Andrew.

Just a question you know you were talking about expanding capacity of logics you know adding sales people in the Gulf region, what are these capacity expansion plans are right now given decline market dynamic?

Well, we continue to see a - I am assuming when you are talking about oil and gas in the Middle East.

Yeah.

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

I think I was also refurnishing the Gulf of Mexico as well because you guys are pretty optimist think about the dealt out there?

I am sorry, I misunderstood the gulf. Okay.

Hey I am Russian, it’s not my first language.

That’s fair enough, but it might my ears too. With the Gulf, we have not seen at this point any change in the activities there. A lot the Gulf is - we’re not a lot but a significant portion of the Gulf is Mexico production, it’s obviously very important to their economy. And I think we’ll see a bunch of that continue as the - as we see that some of the majors determine what’s going to happen with their CapEx. I think the question in the Gulf is, some of the modernization and some of our comments about the modernization of those wells and the ongoing expansion could be at risk going forward. And really most of our previous comments on the Gulf were what would happen along the Gulf of the U.S. We were very - not very, we were more positive about the downstream activities and the impact on the Gulf of Mexico, U.S. region which was really about the chemical and petrochemical industry and we still feel bullish about that. We think those investments will continue to go forward, they are building the ethylene crackers, they are building the new ammonia and other chemical plants. And we see that is continuing basically because of the ongoing cost their input cost if anything have gotten better over the last six months than they were previously. So I now remember the questions around the Gulf and it was really the Gulf region of the U.S and we invigoration of the chemical, petrochemical industry in the Texas, Louisiana area and we still see that as a growth opportunity for Rockwell Automation.

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

I would say in 2017, is a long time out for predictions with respect to the energy market. But I think the one thing that has probably proving now overtime is technology works and the U.S. is probably the most innovative technology country when it comes to oil and gas. So I would never count that dimension out. But I just can’t forecast two years out.

I also think - I also think at least at this point most of our customers and don’t think this is a prediction for Rockwell but if it goes to our customers, don’t expect oil price is to say 50 bucks a gallon or 50 bucks a barrel, certainly for two years.

I really appreciate it. Thank you very much.

You’re welcome. Thank you, Andrew.

Thank you, Andrew. We have another question for you. This comes from Nigel Coe at Morgan Stanley. Please go ahead, Nigel.

Thanks guys, good morning. Fed and then Keith, you brought some pretty good 1Q color, I hope - I think the 1Q color was more in line because of the softer book-to-bill during 4Q. But I am wondering, anything standard for 2Q which is better minded, Ted?

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

Okay, that’s - but you’d expect organic to accelerate from 1Q levels?

What we certainly in the balance of the year, we’re expecting higher rates of organic growth in the remaining nine months that in Q1.

Okay, now that’s helpful. And then follow-on question, you know I think the relative mining is a good one and you mentioned Keith that mining was down you know picking up for the two years and I am wondering you know over that period, did the pricing holdup and then that did you margins in mining holdup as well?

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

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

Okay and that’s we are seeing right now in the - you mentioned actually that’s more OpEx driven?

Yes, that is correct.

Okay and then just the final one, we think sometime think of Latin and Canada as resources markets, currently you are seeing down there, is that primarily within oil and gas in resources, so is it broader than that?

I say much broader, I mean in Canada right now, we’re seeing significant weakness as you would expect and Alberta with the oil sands, we’re seeing some improvement in other markets in Canada, consumer, automotive, primarily in the Eastern part of the country and Latin America, you know our growth in the quarter and I’d say for last couple of years has been pretty broad based especially in Mexico and Brazil. In Mexico, we’re seeing great growth consumer and transportation. In Brazil, you know transportation not as great, the consumer has been pretty good in additions of the resource based industries.

Okay, thanks guys.

Thank you for your question. And we have another question for you. This comes from Steven Winoker from Bernstein. Please go ahead, Steven.

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

Yeah, so Steve, this is Ted. You know last year, especially with what we’re seeing is the slowdown in our solutions and services businesses, we started the kind of adjust the cost structure in those businesses and we took some restructuring action in the second of the year and some charges in the fourth quarter to facilitate that. And there just one other reason we’re driving the levels of productivity that you saw in the first quarter. So we think we got a little bit ahead of that with the outlook we have for the balance of this, we don’t think we require any additional large restructuring actions, but obviously we’ll continue to monitor that and conditions to material way, we’ll make the appropriate adjustments to our cost structure.

Ted on that, you know you talked a little bit about GDP in IPI forecasts weakening as well locally, maybe some sense on the sensitivity around that, so when you say you know much weakening from here, I mean how well do you think you are protected, is it just sort of you know miles deceleration from here that you could handle a flat or the absence of growth or have to be something much more than that?

Well, I mean obviously we got roughly 1.5% to 2% decline from our midpoint, that was reflected, you can see the earnings impact, that is reflected in that low end of the guidance range. And I would say impart, our assumption is that also reflect some cost actions we would take if we saw sales coming in at that level. You know things deteriorate beyond that would be in kind of new booking.

Okay, alright. And then just a second question on process and your progress interaction on that front. In this environment, are you seeing any further reduced opportunities in terms of your ability to penetrate new customers and new project opportunities, is that as your - is the environment changing and so we be thinking about growth here differently?

No, I think you know we saw 4% growth in process in Q1, we think that is a good growth in this current environment. It’s obviously improved from where we were at the end of last year. And we do - we did lower process growth for the full year, so we were in the mid to high single digits, we are now in the mid-single digit. So we’re little lower about one to two points lower. So our outlook is a little less or bullish and it was at the start of the year, but the majority of that is because of the anticipation of oil and gas as opposed to and inability to be able to continue to find opportunities for Rockwell in process. We still see this as a good growth market for us and opportunity to expand our share. But given the oil and gas environment, we just started would be a little lower than what we started off in - at the start of the year with our November guidance. So process still importance to the good market and something that we can continue to grow and expand our footprint in.

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

Well, as I mentioned a little bit when we were talking about consumer, we certainly thing that’s a market that’s going to continue to take off as they continue to grow and they continue to demand more from their food supplier. So food, beverage, home and personal care, the consumer related markets were very bullish long term. On China, I think the difficulty in China is the metals markets and overcapacity, liquidity, the banking structures with the bank loans, so I think there was some financial - as far as the underlying markets other than overcapacity mainly in metals. We think consumer there is probably a little overcapacity in the total automotive market, but the multinationals and the JVs continue to growth their share, that’s where we’re obviously the strongest. So we have a good outlook in consumer and transportation. We think oil and gas will continue to be good in China and so that scenario that we’ve been investing more in. And also the infrastructure with the one area that the Chinese our government has continued a stimulus in has been in their metro and rail systems and that scenario where we have opportunities as well and have participated previously. So we think China even with the slowing growth rates will continue to be a market that we find opportunities in.

Thank you.

Thank you.

Okay, we have reached the end of our hour or little bit less than hour, so I think we’re going to ramp it up here and I appreciate everyone’s questions. I think we had very great thoughtful questions today on the call and I look forward to talking to most of you afterwards. So thanks for joining us and we’ll talk soon.