Rockwell Automation, Inc. (ROK) Q1 2011 Earnings Report, Transcript and Summary

Thank you for holding and welcome to Rockwell Automation Quarterly Conference Call. [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, Wanda. I appreciate it. Good morning. Thank you everyone for joining us for Rockwell Automation's first quarter fiscal 2011 earnings release conference call. Our results were released this morning. The press release and charts have been posted to our Web site at www.rockwellautomation.com. Please note that both the press release and charts include reconciliations to non-GAAP measures. Additionally, a webcast of this call is accessible at that website and will be available for replay for the next 30 days. 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 will include his comments on our company’s performance in the first quarter and some outlook comments, and then Ted will provide more details around the fourth quarter results and our revised guidance for fiscal 2011. We’ll take questions at the end of Ted’s remarks and we want to get to as many of you as possible, so please limit yourself to one question and a follow-up. We expect the call today to take about an hour, and 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. But before I turn it over to Keith, I have to say that we have a pretty unique situation here at Rockwell. As you may or may not know, Keith is from Wisconsin, but Ted is from Pittsburgh and they both played college football, so football is definitely in their blood. So it's Packer nation against Steeler nation here at Rockwell until the Super Bowl. So we'll try not to get too distracted about that and sorry, Ted, but I think you're outnumbered. So with that, Keith I'll turn the call over to you.

Thanks, Rondi, I think. Good morning, everyone and thank you for joining us on the call today, I certainly appreciate your time and interest in Rockwell Automation. We had a great start to the fiscal year. The 28% revenue growth in Q1 was broad-based, with all regions and both segments exceeding our expectations. We believe a few points of this growth came from year-end budget consumption by our customers, similar to last year, but even if we stripped that out, it was a great quarter. We delivered our fifth consecutive quarter of operating earnings improvement and topped 16% consecutive operating margin, and we almost doubled earnings per share from a year ago. After-cash return on invested capital at the end of December was 25.6%, which is now well above our long-term goal of 20% and is approaching the 26% peak that we saw in the last cycle. I'm sure by now you have all seen the reported financial results, but let me highlight some other indications of progress in Q1. EMEA had year-over-year sales growth of over 30%, not quite back to 2008 levels, but after lagging the rest of the world in recovery, it looks like our business in the EMEA region has turned the corner. Our sales growth in emerging markets was well above the company average in Q1. This was our third consecutive quarter of 40% or higher year-over-year growth in China. The comps shared will get tougher from here on out, but we are confident China will deliver more than 20% growth in fiscal 2011. India grew over 30% and Latin America, with 42% growth, had its third consecutive quarter of robust growth. Our OEM business was strong again this quarter, over 50% growth in our Machine Safety business. This is an indicator that our OEM strategy is working, and we are seeing more penetration of safety content on machines. And Logix grew 38% in the quarter, establishing a new high for quarterly revenue, exceeding the previous high in Q4 of 2008. All of this is evidence that our global sales and marketing organization is doing a great job of executing our targeted initiatives. Lastly, we announced the acquisition of Hiprom, a system integrator based in South Africa that is focused on the mining and mineral processing industries. This is right in the sweet spot of our acquisition strategy, a niche acquisition that supports process in emerging markets that will be catalytic to organic growth. We expect to close this transaction around the end of February. Overall, a great quarter for us and an excellent start to the fiscal year. Let's shift gears and talk about 2011. Our performance in Q1, along with positive macroeconomic trends and forecasts, make us optimistic that the recovery will continue in fiscal 2011. The tone from our customers regarding their CapEx spending is improving, but the timing of larger project spending in mature markets remains somewhat uncertain. No recovery is linear, and our quarterly results will oscillate around a trend line, but the good news is that the trend line is heading in the right direction. We expect our year-over-year growth rates to moderate in the remainder of the year, as the comparisons to last year begin to get more difficult. Taking all of that into consideration, we are revising our guidance for fiscal 2011. We are now projecting revenue growth of 12% to 16%, excluding currency. Based on this revenue outlook, we are revising fiscal 2011 earnings per share guidance to $4.30 to $4.60. This is about an 11% increase in EPS at the midpoint, and if we end the year anywhere in this range, that will represent record earnings per share for the company. Let me close by saying that I'm very proud of the people and partners of Rockwell Automation. Through their dedication and expertise, they have proven that they can execute in the tough times and capitalize on growth opportunities that this recovery has progressed. The members of our global organization, both those that touched the customer and those behind the scenes, know how to be flexible and responsive to customer needs and that is what it takes to succeed. And that is why I'm confident that we will continue to grow and deliver superior returns to our shareholders. And even though that Ted is a Steelers fan, I will now turn it over to him to provide more details on the financial results for the quarter and our outlook for 2011. Ted?

Good morning, everyone. As you can imagine, this is a somewhat difficult time to be a Steelers fan in Wisconsin, and since I am surrounded by Packers fans at the moment, including my boss, I guess what I can safely say is I'm looking forward to a good game. At any rate, as Rondi mentioned, we posted charts for our website and my comments will reference those charts. As Keith noted, the Q1 results reflect a continuing global economic recovery, good execution across our businesses and regions and another very strong quarter for financial performance. So starting with Chart 1, the Q1 results summary. Revenue in the quarter was $1.366 billion. That's up 28% compared to Q1 last year. The year-over-year impact of currency translation was less than $2 million, so a negligible impact. Segment operating earnings were $222 million, and increase of 62%, compared to $137 million in Q1 last year. General corporate net was $15.7 million, down from $19.5 million a year ago. We indicated about $86 million in general corporate net expense for the full year in our November guidance, so Q1 was well below that run rate. The lower level was due primarily to a gain on the sale of an investment. The effective tax rate in the quarter was 19.6%. That's slightly below the low-end of our full-year guidance range. We benefited in the quarter from the retroactive impact of the R&D tax credit extension. Diluted earnings per share from continuing operations was $1.04, almost double last year's $0.54. Average diluted shares outstanding in the quarter was 144.5 million. We repurchased approximately 700,000 shares in Q1 at a cost of about $49 million. Despite share repurchases over the past year, the average diluted share count is up about 800,000 shares year-over-year. That increase is primarily due to the effect of a higher share price on the dilution calculation. Moving to Chart 2, the Q1 Results: Rockwell Automation. As I noted previously, sales for quarter one increased 28% year-over-year, but also increased about 1% sequentially. Q1 is our third consecutive quarter with year-over-year growth over 25%. Regarding the sequential sales increase of 1%, we typically experienced a modest decline sequentially from Q4 to Q1, so this was a better-than-expected start to the fiscal year. We suspect Q1 may have benefited from some customers using calendar year capital and operating expense budgets and in Asia, it appears that some project business may have been pulled in from Q2 due to the timing of the lunar new year this year, but clearly Q1 also saw continued growth in fundamental demand. Moving to the earnings side of the chart. You can observe a steady improvement over the course of last year, and I would also point out the sequential step up in earnings from Q4 to Q1 on a relatively modest sales increase. Operating margin for the quarter was 16.3%, up 3.5 points from 12.8% in Q1 last year. That margin improvement reflects some good volume leverage offset by both higher compensation costs and growth spending. Q1 last year was the last quarter to benefit from the salary reductions and the suspension of the 401(k) match that we implemented during the downturn. It was also the last quarter before increased compensation expense associated with the global salary and wage increase. You might also remember that we began to accelerate growth spending in the second half of last year. So in Q1, volume leverage had to overcome both of these items to deliver the improved operating margins. On a different note, although it's not displayed on the chart, our trailing fourth quarter return on invested capital was 25.7%. That's up from 9.5% in Q1 last year, largely due to the increased earnings. As Keith noted, ROIC is almost back to the peak of 26% that we experienced in the second quarter of fiscal year '08. Now please turn to Chart 3, which summarizes the Q1 results in the Architecture & Software segment. Looking at the left side of this chart, we'll now experience seven consecutive quarters of sequential sales growth in the Architecture & Software segment. You can see four of those quarters reflected here. Year-over-year growth in Q1 was 31%. Currency had a slight negative impact on sales on a year-over-year basis. Architecture & Software sales in Q1 were up 7% sequentially and operating margin for the quarter was 24.9%, up 3.8 points from Q1 last year and up 2.6 points sequentially. Chart 4 covers our Control Products & Solutions segment. Sales in Q1 were up 26% compared to last year, with a very minor positive impact from currency. Sales were down 4% sequentially. In the product portion of Control Products & Solutions, sales were up 4% sequentially, but that was offset by a 9% sequential decline in solutions and services, and that's a typical Q4-Q1 pattern in that portion of the Control Products & Solutions segment. Segment operating earnings increased 82% year-over-year with a related 2.9-point improvement in operating margin. Sequentially, operating earnings were down 10% and operating margin contracted by less than a point, in both cases consistent with the lower volume. The next chart, Chart 5, provides a geographic breakdown of our sales in the quarter. I'll focus my comments on the far right column, excluding currency effects. Very strong sales growth to every region, the U.S., Canada, EMEA and Asia-Pacific were all in the high 20s to low 30% in terms of year-over-year growth, with Latin America leading all other regions at 42%. Emerging markets were particularly strong in the quarter. In total up 38%, with China up 40%. This is the third consecutive quarter for 40-plus percent year-over-year growth in China. I'll turn now to Chart 6, Free Cash Flow. Free cash flow for the quarter was $4 million, slightly better than a breakeven result. Q1 is typically a weaker cash flow quarter and we expected this Q1 to be especially low due to the larger-than-normal payout of performance-based compensation that was earned and expensed in the last fiscal year. You can see that impact in the compensation and benefits line. Despite the slow start in Q1, we continue to expect free cash flow conversion of about 100% for the full year. The only qualifier I would put on the free cash flow expectation is that we will continue to monitor the status of our pension plan funding and if we choose to make a discretionary contribution this year, cash conversion could be somewhat lower. And that takes us to the final slide, which addresses our current outlook for fiscal '11. As Keith mentioned, we're revising guidance. We've increased the range of full-year sales to $5.5 billion to $5.7 billion. That's a $200 million increase across the range compared to our previous guidance. The new low-end of our revenue range is equal to the previous high-end. Excluding currency effects for the full year, net revenue range now represents growth of 12% to 16%. The previous range was 8% to 12%, so that's a four-point increase in year-over-year growth across the range. For the full year, we expect currency to contribute about one point of growth, which is the same expectation as previous guidance. We expect segment margin to be about 17% or maybe a bit higher. The previous range was 16% to 17%. We've increased our fiscal 2011 guidance per diluted earnings per share to a range of $4.30 to $4.60. We continue to expect the full-year tax rate of 20% to 22%, and perhaps the other item worth commenting on is general corporate net. There we now expect expense to be closer to $80 million for the full year. This guidance includes the expected results of the acquisition we recently announced, but with respect to full-year sales and earnings, it's not really large enough to make a meaningful impact. With that, I'll turn it back over to Rondi and we'll begin the Q&A session.

Okay, great. Thanks, Ted. So Wanda, we're ready to open the line for questions.

[Operator Instructions] Your first question comes from the line of Bob Cornell with Barclays Capital.

So obviously a remarkable quarter, but when you look at the results, I mean it looks like you're still getting a lot of the MRO short-cycle stuff driving your software and are still looking to see that some of the systems projects, the bigger projects later in the year in fiscal '12. I mean, could you just give us a little color on that broad picture thought, please?

Sure, Bob. The large projects, just to clarify: Really, we continue to see large projects in Asia-Pacific and in Latin America. So there, we're continuing to see the opportunities and the conversion and converting of those large project business. The large projects though, in EMEA and the U.S., what we would call the mature markets, there we have seen a significant pick-up in activity, but not really a significant change in the placement of those orders at this point in time. So you're right in that we're expecting that to pick up in the second half of the year. That's certainly what our analysis has told us so far. As that plays out in the second half of the year, it's really timing now as to whether the majority of that revenue will come within this fiscal year or slide in to fiscal '12.

Also the growth in Logix all of a sudden is truly remarkable. I mean maybe you could just give us some color around what's driving that. Maybe it's this project business you're talking about, but what's really driving that?

Well, I think there's a couple of things, Bob. One, automotive. There's no question that automotive, as a discrete industry, is a very significant utilizer of Logix, if you will. And so those projects, and we talked about that picking up in the second half of last year and strong into this year, that has been part of it. The other, I would say, two pieces of it is one, OEMs, and that's a global story. And certainly the other piece of that OEM story is the expansion of our portfolio to where we have more price-point products to be able to focus at a broader spectrum of the machine builders machines. And so we talked about it as CompactLogix, as you know. And so I would say the combination of strength at OEMs, a combination of our motion and safety capabilities within the Logix platform, and then the actual scalability of the Logix platform are all things that are expanding the business in addition to the process and the project activities. So I would say those are the three, four, five things that are creating it. But certainly, as you know, I mean, I have to make the comment, I don't think 38% is the ongoing rate of growth there. But it's just as evidence, I think, of the continued expansion of our served market and the execution of the strategy in that business.

What's the view of sort of the incremental growth spend this year? You're starting the year with a lot of momentum. Is there the opportunity to spend more for growth? I mean, what's the view there and what should we think and plan for?

Yes, Bob, I'll be frank. I mean, we're trying to get away from talking about a specific number for incremental spending, but our guidance does reflect some increased spending as sales continue to improve. And that would just be kind of a normal amount we would continue to layer on to ensure that we're investing appropriately for future growth.

Your next question comes from the line of Mark Douglass with Longbow Research.

Keith, how is PlantPAx progressing? What's going on as far as market penetration, share gains, any color on certain verticals or regions?

Well, with our Process business, we continue to expand the capabilities in that platform. One of the things that you probably remember from our investor conference in Automation Fair is that we're introducing, and that will be this quarter, PlantPAx 2.0, which really helps us expand into a number of areas. And we certainly think that that's going to be an advantage for us and it will allow us to address some of the larger continuous process industries and we are on track for that release. With respect to industries and applications, certainly as we started the process, it was really closely linked to the batch hybrid areas, and now we find it evolving into the heavier industries. And certainly one of the reasons we made the acquisition of Hiprom is because of the ability to address more of the mining and metals processing areas. And so that's another add to our capabilities in emerging markets, where obviously natural resources are more important. And we had a very successful quarter in Asia, where our Process business was up 40% year-over-year. So I would say emerging markets is where we're seeing the biggest impact of our process capabilities at this point in time. There's a lot of green field there. And there's a lot of expansion in those heavy industries. So that pretty much is where we are seeing it at this point in time.

And have you tried to quantify potential effects of bonus depreciation in the U.S.? And what are customers saying? Or really is it just way too early to tell?

I think you answered it there. It is early to tell. I don't know if ever we're able to quantify it. We certainly believe though that anything that encourages investment is good for Rockwell Automation, but it's going to be hard to peel that piece of it out. And I think on the margin, it helps. And I think it's more beneficial to smaller and mid-sized companies that probably make more of their decision based upon that type of a benefit than large multinational corporations. But it's still early. I think we're seeing the conversations of improved outlooks and capital spending at customers, but to be able to make the call as to what's pushing that, that's still difficult.

Certainly, it would probably be a nice tailwind to the OEM business that you're already getting a nice pickup.

Agreed. It will be a tailwind. It's just a question of how much.

Your next question comes from the line of John Inch with Merrill Lynch.

Keith or Ted, your China and India growth, if you were to sort of look at it from a vertical perspective. I know legacy, the growth in Automation in those markets has been in heavier industries right where you just haven't been as penetrated. I know you're taking steps to address that, but are you seeing the emergence of more kind of consumer-facing industries driving this? Or what do you really think is behind the China growth? Is it the way you filled in your distribution over the last three years? Or are there other things?

In China, I think, it's multidimensional, John. One is, there's no question infrastructure spending, stimulus spending in China, helped us in our sales. Two, your specific question around consumer, there is no question that automotive is growing and I think you're probably seeing the commentary about China is now the largest automotive market. So we're obviously strong in automotive, and we work very well with Chinese customers, both JDs, as well as indigenous Chinese manufacturers, so I would say that's it. And then in Q1, food, beverage and home and personal care had a strong quarter as well. So I think we're seeing that evolution into the consumer industry. That's one of the reasons we've talked about our ability to be successful in China. But today, the predominance is still the heavy industry resource-based activities and there we do very well, infrastructure and a few others. So Water Wastewater is one of those. But the consumer is coming on, and we think that will drive the growth in China over the next five to seven years.

Ted, the compensation and accelerated growth spending for the quarter, is there a way to quantify that? And can you confirm that sequentially there's no step-up, it's just basically we're now at that run rate? How much of a drag was it this quarter and what's the outlook?

Well, I mean, there are a bunch of factors in the quarter. So the transactions ball parked probably about $0.06 or $0.07. That was somewhat offset by lower incentive compensation expense in the quarter and the ramp-up of gross spending last year probing the quarter, between the gross spending comp and the temp action, it's about five points of margin impact, negative margin impact in the quarter year-over-year.

So how does that sort of play on sequentially? Like there's no incremental step up is there as you roll into the Q2 through Q4?

Well, around the temp actions, basically no incremental step up. We will have a normal merit increase, salary and wage increase that will be effective basically at the beginning of Q2. So there will be some step up there. And then in growth spending, we're continuing to increment growth spending, but nowhere near at the kind of rate we did in the second half of last year.

If anything on a sequential margin basis, we had maybe a point or so of benefit from lower performance-based compensation expense in Q1 versus Q4.

But you're saying that's not on a net basis. That's just with respect to that item, right?

Yes, I know. Correct.

And then what actually happened to your solutions orders or backlog in the quarter? It's obviously kind of a precursor to future product demand. I realize Solutions were down sequentially as they were normally on a seasonal basis. If you were to kind of adjust for that, what's the trend you were seeing in Solutions? And maybe there's a way to -- if you could give a little more color around sort of where or what industries or something like that?

Well, our Solutions business, once again, we had a book-to-bill that was over one. We would expect that based upon the strong shipments that Ted talked about. We normally have a decline in revenue in our Solutions business, Q4 to Q1. But orders continue to be strong and quite frankly, that's one of the reasons that we were able to raise our guidance range in revenue that we were able to see that backlog that we have built. And I believe the backlog Solutions is up 20% year-over-year. So that's what's giving us the confidence in the ability to have a stronger second half in Solutions. And right now, as we get towards the end of this quarter, really we talk about having six months of backlog in Solutions business, but that's not shippable backlog. That converts about 60% two quarters out. So we'll need to get a little more in between now and March. But at that point in time, most of the added orders will flow into fiscal year '12 revenue. But we continue to see the Solutions business grow on a year-over-year basis.

And North America and Europe versus emerging markets, is there any sort of Solutions color you could give there in terms of the backlog order growth?

Certainly in both the U.S. and Europe, we're seeing an uptick in the front log in our Solutions business and the activity, and we think that bodes well for later in the year and the first half of fiscal '12. I would say that's still where we're not seeing significant order increases from what we've been seeing previously. So I think the activity level is up, the front log is up and the large project solution placement we expect in the second half of this year.

Your next question comes from the line of Richard Eastman with Robert W. Baird. Richard Eastman - Robert W. Baird & Co. Incorporated: Just a quick question, maybe for Ted. In the A&S segment of the business, I'm trying to come up with -- the incremental margin there was about 37%, which is a very good number. If you capture some of the growth investments and maybe make an assumption there, pull those growth investments out, the incremental margin was up closer to 50%. I mean are we trying to manage that to this 40%, 35% to 40% incremental? Is that kind of what we're balancing the growth investments with the underlying volume gains?

I think we talked about this a little bit last quarter. I mean to say that we try to manage incrementals to that 30% to 40% range we have talked about probably gives us a little more credit to our ability to truly manage, especially on a quarter-to-quarter basis, then it's plausible. Basically we think that 30% to 40% incremental range in total across the company is the right balance of kind of delivering current period earnings, but also ensuring we've got the right level of investment to kind of continue to maximize organic growth in the latter part of this year and going forward. So we are managing to those levels, but I'd say not on a quarter-to-quarter basis. Richard Eastman - Robert W. Baird & Co. Incorporated: Keith, in terms of end markets within the A&S business in total, would your commentary be very similar in terms of those driving the growth? In other words, automotive, some of the infrastructure stuff, could you just give a little bit of color there in terms of maybe the three best growth markets there?

Certainly in A&S, the growth markets would be automotive and OEM would be the top two and then below that would be basically the product flow into the Solutions project-type of activities, in particular into process industries and food and beverage types of applications, which are always more Logix-centric. But one and two would definitely be automotive and OEMs.

Your next question comes from the line of Shannon O'Callaghan with Nomura.

Interested in the comments about the year-end budget flush, which I think is consistent with what we've been hearing. You also mentioned the Asia pull-forward. How do you -- obviously you're not that concerned about the hangover from that. I mean, can you talk about how the first few weeks of January are looking? And if you feel like there's any catch-up effect after that in the second quarter?

Sure, certainly the quarter one was drawn throughout the quarter and obviously that's what made the comment about the end of the year performance. As we have move now into January, basically, we'll be seeing a typical January. And January always starts out slow. This one started out slow, but that's nothing that we didn't expect. Not all of that is simply because of the year-end pull-in, that's just basically everybody getting back from the holidays and budgets being reset and the normal pipeline time to get it back up into the cadence that they're going to use for the rest of the year. So we didn't see anything unusual up to this point in time. And we took all of that into consideration when we formulated our new higher level of guidance. So at this point, no surprises and no changes from what our expectations were as we exited last quarter and started this quarter.

And then on the larger project activity in developed markets, you were saying it's obviously activities picking up, cadence that comes, I guess, later in '11 or potentially '12. What are you assuming at this point from a guidance standpoint comes through in terms of large projects?

I think with our guidance, for us to be able to get to the high-end of the guidance, we're expecting a pick-up in our Solutions business in the second half of the year. And I think it would be fair to say, Shan, what we need to see is some large projects hitting as orders pretty much in Q2 or maybe worst-case very early in Q3 in the mature markets. We need to see an uptick in order entry, in large project activity in mature markets in order for that to kind of impact our second half of year sales.

And we're just looking for a continuation of the large projects that we're currently seeing in Latin America and Asia Pacific throughout the remainder of the year. Based on what we're seeing in the front log in the mature markets and based on our most recent debriefing of sales organization, we think that it's a reasonable possibility and that's why it's reflected in the high-end of our guidance.

Your next question comes from the line of Rich Kwas with Wells Fargo Securities.

Just Ted. I know you've answered this question a couple of different ways, but just in terms of incremental spending, I think $70 million was slated for this year. Should we assume that that's going to increase a little bit, but not too materially? Is that the way to think about it?

Yes, I mean, I think that's fair. $70 million was kind of the year-over-year carry-forward of the growth spending we started in the second half of last year. And in the guidance, particularly at the higher end, we are anticipating that we will continue to ramp that up, I don't think it would be large in comparison to the $70 million carry-over.

And then in terms of just longer-term on margins here. You're still well below peak segment margins with your guidance and still have more to go with Solutions from a CapEx investment that's going to likely be made over the next 18 months. But just how should we think about ultimate margins, segment margins, timing in terms of getting back to that peak level and seems like you're on a little bit of a quicker trajectory in getting to that level. If you could just provide that color on that, that'd be great.

Well, I guess what I would say is we never try to kind of look out and say we're going to get to peak margins in a certain year. But two things: First, I would say the margin recovery primarily based on top line recovery had been more quick that we expected in this economic cycle so far. And the other thing I would say is the notion of sustaining something in the order of 30% to 40% conversion margins on average through the, what I'd call the middle part of this growth cycle, I think, gives you some pretty good indication of when you would expect to see us back near peak margins.

Your next question comes from the line of Julian Mitchell with Crédit Suisse.

My first question was just on the sort of capital allocation outlook. You've done a small deal recently, your cash flow remains very high, you mentioned some share buyback at the beginning. So could you clarify how you see the landscape on acquisitions and how maybe those can help you continue to expand your product portfolio?

Well, we continually look at acquisitions. We believe that after investing in our organic growth in the business that acquisitions is the next priority for our capital allocation. And we have an active pipeline at this point in time. It's getting late in the year to see how many more will close, but we certainly are continuing to look at them. We see them as a viable way to accelerate organic growth. We think of it as catalytic in nature. And we look for ones that basically are bolt-on types of applications that either fill a technology gap, help broaden our domain expertise and allow us to be more global in both our product portfolio or our engineering deployment resources. So we do acquisitions as a key to utilization of our allocation and continue to buy opportunities on a real global basis. I mean one of the things that have helped us in emerging markets has been the ability to generate revenue growth and generate domain expertise via our acquisitions and build the critical mass faster in some of those countries and the recent Hiprom win certainly fits that category as well.

And you've given a lot of details about how you've improved your distribution and sales network in China or India. I was just thinking about the EMEA region. You're making a push in process and process, I guess, particularly sort of Middle East and Africa will become increasingly important. So could you clarify a little bit what steps you're taking in those regions in terms of, I guess, stepping up perhaps the sales force of distribution network, these kinds of measures or you feel you're already at a very good place?

Well, certainly if we're talking specifically about process, a lot of that flows through our Solutions business. Because in process, many times that industry has grown up with the automation supplier also being the integrator. So we are expanding our own resources to be able to address the process segment and we also continue to expand the system integrator solution provider market access model that allows us to address the industry as well. With respect to distribution, even in Europe and in the Middle East, we continue to look for opportunities to improve our capabilities, particularly with respect to safety and the ability to address the smaller and midsized OEMs with both our Logix platform and our intelligent motor control. So we have enhanced our distribution in certain countries. Europe is not monolithic. There's a different go-to-market access model in different countries, so there's really no one-size-fits-all or one approach and our team over there is putting together the distribution market access strategy that's required for the focus that we have in every country. Europe, being a more mature market, has a pretty defined approach for how they utilize distribution and so we're trying to make sure that we can fit into that model and do that country by country.

And then just lastly, you mentioned once or twice the automotive sort of segment. I mean obviously, production growth in some regions like Europe will slow this year at least in terms of sort of consensus opinion on all the rest of it. But I guess the automotive OEM commentary on CapEx is actually extremely upbeat, not the production, but the right capital spending. So do you think that you will see sort of a multiyear program of very strong demands from your automotive OEMs in terms of their CapEx plans? Because the commentary certainly suggests that and I don't know what your view was.

Well, quite frankly, that's the one industry that I'm very uncomfortable saying multiyear with. They are very capable of turning that off at any time and they more typically approach it model-year by model-year as opposed to -- we have a cast-in-stone five-year program, so there's no question that all of them are looking at expanding their capital spending. They all have projects on the books. But the reality is it boils down to the consumer and how they're seeing their sales evolve. Right now, it's an optimistic environment and we feel very good over this model year coming up, which would be model year '12 actually by the time the projects get instituted. So it's good in the short term. It sounds positive in the intermediate term, and the long term will really depend upon the winners and losers in the industry and the introduction of new models.

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

Just one quick clarification, I missed the tax rate guidance.

20% to 22%. Same as previous guidance.

So that catch-up on the investment tax credit really wasn't material?

Well actually, I guess you could think of it as -- with the upward increase in the earnings guidance puts a little bit of pressure, generally upward pressure on tax rate. And that's being offset in part by that extension on the R&D tax credit.

I was wondering if we could go through some of the metrics that drive the Logix process or business. You commented on overall Logix cycle, if you could talk about the growth of process legacy and the overall processors.

Sure. The overall processors were -- grew at, it was for Q1, it was 30% -- actually in total it was a little under 30% in total. And legacy sales were up 6% and total was basically, I guess, it's 32%, not a little under 30%, a little over 30%. So total processor sales were up 32%, legacy processors were up 6%. Now that is a phenomenon in legacy that we're expecting to turn during the year. I'm not exactly sure when, but if you remember, we had -- our long-term forecast on legacy is 8% to 10% decline per year. Last year, we grew mainly because of the MRO expansion and the continuation of existing machines. And this year, at the start, we're still seeing that growth in the legacy processors heavily driven by OEMs, but we do expect that to continue to decline and ultimately this year switch back to the negative model of 8% to 10% per year decline.

If you guys hit the upper-end of your revenue guidance, you'll be effectively at the same revenue that you peaked out at in 2008. And I'm wondering in that scenario, are you expecting your overall Processor business in dollar terms or as a percent of mix to be roughly the same as that prior peak? Or do you think there's going to be significant mix differences this year relative to that prior peak period? Can you help us understand sort of the complexion of the business that's evolving this year?

I mean, we'll have to get back to you on that. We haven't looked at it that way, Mark, to be candid. The one thing I do know is that project sales will be higher at that number. I'm not sure what the total is and then what the rest of the mix is on a comparison from the two years, but I do know Logix is going to be a higher number.

Your next question comes from the line of Steve Tusa with JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co: Maybe just an update from a longer-term perspective on the Software business? What was the growth in the quarter and are some of these projects coming through? Are you seeing any uptick in the activity there?

Sure, Steve. Well, in the quarter, basically revenue in the Software business was consistent with what we talked about in the other parts of our business and it met our expectations, where we continue to develop the information software. We had some good orders in the month and in particular, we did see one of our pharmaceutical companies implement an enterprise global rollout of our suite portfolio. So that's one of the wins that we had talked about. That's a win in one of the areas that we talked about last year with respect to a pilot that was going on that now will become a global rollout. So we continue to make progress there in our pharmaceutical portfolio. We're also continuing to build out the automotive suite and we're engaged now in building the food and beverage and more consumer industries space. So right now we like where we're at and it continues to be, as you said, one of those longer-term opportunities for us that we keep executing on. C. Stephen Tusa - JP Morgan Chase & Co: And then lastly, how much was the auto vertical up this quarter? Or just transportation in total?

It was up 40%.

Your next question comes from the line of Scott Davis with Morgan Stanley.

I'm intrigued by the South Africa system integrator deal that you did. I always view this industry as having so many kind of thousands of integrators at the end of the day. Is there an opportunity out there beyond emerging markets to start to roll up and have a larger integration business? I mean, another way to say it is, could you do something like this in the U.S. in size? Or does it just not make sense to do that?

Well, you go where the expertise is. And obviously South Africa has a very strong mining industry and our intention is to utilize this hundred people to be a center of excellence for the mining industry and to evolve that globally. Because many times in the mining industry, the players are global. They're very large companies and we're going to try to be able to create the environment where we can work with them wherever they're located, wherever the mines are located and to utilize the resources that dramatically expand our capabilities in this industry to work globally. And there's no reason it can't be utilized in the U.S. I think mining actually will be a bigger play in Canada than it will be in the U.S. And certainly we're already looking at the ways that this can help expand a business that we are already good in Canada, but will allow us to take advantage of the expertise that comes in the mines and in South Africa as well. And the other aspect of this acquisition is they also are involved in mineral processing, not just mining. And so that moves us one step downstream or upstream, whichever way you view that world, but not more than just the extraction dimension of that industry and of that vertical. So that was another key aspect of what they brought us. And that processing part really is what is associated with our process industry. Mining historically is more of a motor control-types of applications, intelligent motor control. The processing of those minerals is what gets you into the process industry and we'll be able to use that, in particular in Latin America, Canada, Australia and also China and India.

On the topic of Latin America. I mean, I think, the strengths you see in Latin America, you probably have to go back to the early '90s before when you saw that type of magnitude of strength. I mean can you give us a sense of -- you understand that the mining industry is strong, but can you give us a sense of the mix between new capacity and a capacity build-out versus just a replacement cycle or just old equipment that finally the region is wealthy enough to kind of open the purse strings and invest in some modern equipment? I mean, I'm guessing it's a little bit of both, but can you give us a better sense if there is something kind of unusual going down there that sustains this recovery more than in the past?

Well, I think there's a couple of things going on. To answer your question specifically, I don't know the splits. But what I can do is give you a little color around what we see happening down there. If you take mining -- obviously there's been mines in Chile and Peru for many years. So a portion of this is replacement. But I would say a higher percentage is new capacity coming on stream and the key is the commodity prices and the continued appetite for these resources globally, which is really being driven by the expansion of the economies in emerging markets. So, yes, we do see this continuing, but it's really dependent upon the utilization in the other industries, particularly China, India, as time goes on. But we see that as a real driver in this space. If you look at other dimensions of what's going on in Latin America, oil and gas is very strong. Historically, it was very strong in Venezuela. It continues to be positive there, but I think everyone understands what's happened with capacity there and the evolution of that industry. But it's picking up in Brazil. Brazil is more than making up. You're hearing all the time about deepwater finds in Brazil. They probably have some of the most sophisticated deepwater talents in engineering in the world, quite frankly, today. Colombia continues to expand in gas in particular. So we see oil and gas as another layer on top of what's going on in the traditional mining industries. And in Brazil, in mining obviously, you have one of the world's leaders in Bally, so a true global company and a true globally competitive company with great technology and great productivity. And then I would say the area that is now growing is the growing middle class of Latin America and the fact that they've had, to your point, a number of years of stability. There's been more investment. There's been more wealth creation. There's been more of the security of investment, less inflation, although in some cases reasonably high, but much less than it used to be. So it's stable politically, stable economically and the middle class is building and that's what's driving automotive investment, food investment and the diversity of the industry there. So I think it's a combination of things across Latin America and really is an area that we have had and we'll continue to have success with our capabilities.

Great. I think we're out of time. We're going to have to wrap up today's call. Great questions today. So thanks everyone for joining us and go Packers. Operator, we're ready to disconnect.

Thank you. That concludes today's conference call. At this time, you may now disconnect. Thank you and have a great day.