Rockwell Automation, Inc. (ROK) Q4 2014 Earnings Report, Transcript and Summary

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

Thanks Ian. Good morning. Thank you for joining us for Rockwell Automation's fourth quarter fiscal 2014 earnings release conference call. With me today 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 fourth quarter and the full year and then some context around our outlook for fiscal 2015. Then Ted, will provide more details on the results as well as our sales and adjusted earnings per share guidance. As always we'll take questions at the end of Ted's remarks. 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 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 turn it over to Keith.

Thanks Rondi, and good morning, everyone. Thank you for joining us on the call today. I'll start with the highlights for the quarter and the full year, so please turn to Page 3 in the slide deck. Q4 results came in very close to the expectations we laid out on the July earnings call. Organic growth of over 4% in the quarter continued the pattern we saw most of the year, with product business growth exceeding growth in our solutions and services businesses. There was an unexpected currency headwind in the quarter due to the strengthening U.S. dollar. Profitability was strong in the quarter with over 22% segment operating margin. Q4 tends to be one of our better margin quarters and this was true for both segments this quarter. Adjusted earnings per share grew 15% and cash flow was good. So, very strong earnings performance and good sales growth in Q4. Ted will provide more details on the quarter, so I'll move to the full year. As we entered fiscal 2014, we told you to expect higher year-over-year growth rates in the first half of the year than in the second half and that is how the year played out. Fiscal 2014 sales by region were about as expected with the exception of stronger sales in the U.S. and weaker sales in Canada. Speaking to organic growth rates, the U.S. had a strong year with 7% growth and oil and gas was the best performing vertical. Canada was down 1% primarily due to weakness in resource based industries, the EMEA region grew 2% with 7% growth in emerging markets. Emerging markets represent about 20% of the EMEA region. Western Europe was mixed with the U.K. and Italy up, Germany flat and France down year-over-year. Asia Pacific came in as expected with 5% organic growth through the year. China grew 6% with food and beverage at the highest growth vertical, our OEM business continues to grow [technical difficulty] total sales in China. Although still in the early stages and we're starting to see the anticipated step up in manufacturing investment for consumer package goods. India grew 10% this year, albeit of easy comparison, but it appears that the weak industrial environment of the past few years has finally turned the corner. Latin America grew 6% for the year with strong sales in both Mexico and Brazil overcoming weakness in other parts of the region. Globally, we had another year of solid performance with OEMs. We continue to broaden our content on machines, which is reflected in strength in our motion and safety businesses this year. Here are a couple of other data points that are down the slide. Logic sales were up 7% this year. The compact logic portion is growing even faster than this with the highest growth rates in Asia Pacific. Process sales were up 4% for the year. This is below the growth rate we expected at the beginning of the year and certainly below where we need this business to be. Weakness in metals, and mining, and EMEA in Asia and the lack of business in Venezuela, turned out to be larger headwinds than we expected. Having said that, we continue to invest in our process capabilities, we are expanding our installed base of process control and continue to believe that processes are best growth opportunity. Let me just wrap up on the year before I move on to the outlook. Fiscal 2014 was another year of record sales and earnings for the company. For the second year in a row we expanded segment operating margin almost a point, while continuing to invest for growth. These results would not be possible without the efforts of our employees, partners and suppliers, and I want to thank them all for their ongoing commitment to our customers and their contributions to our success. Our strong track record of returning cash to shareholders continued in fiscal 2014 with over $800 million in dividends and share repurchases. That represents 87% of free cash flow for the year. As you probably saw, we raised a dividend last week which more than doubles our dividend per share in the last five years. During fiscal 2014, we also authorized an additional $1 billion in share repurchase. I'm proud to say, that during the last five years we've returned $2.8 billion of cash to shareholders in dividends and share repurchases. I keep looking forward to a year when everything is stable and the outlook is very clear, but I guess that's just wishful thinking. Here is what we are seeing out there. We are in the world of greater geopolitical uncertainty, falling oil prices and a stronger U.S. dollar. The U.S. economy remains strong but recently some Western European countries have slowed and there is heightened uncertainty related to Russia, Ukraine and therefore the Middle East. In China, overcapacity, lack of liquidity, and underperforming loans are still weighing on economic growth, and Brazil is in a recession. Having said that from a global macroeconomic perspective, forecast for GDP and industrial production, call for continued moderate growth in 2015. Most manufacturing PMIs are still above 50, and the U.S. PMI has been above 55 since June. More specific to Rockwell and the automation market, the need for productivity and modernization, growing consumer demand in emerging markets and the connected enterprise are key drivers fueling continued market growth, and I believe we have the right strategy to capitalize on these opportunities. Taking all of these factors into consideration, we expect total company organic sales growth in the range of 2.5% to 6.5% in fiscal 2015.And we are initiating fiscal 2015 adjusted EPS guidance of $6.55 to $6.95. With another solid year in our sights, we continue to invest in innovative technology and domain expertise to expand the value we provide to customers while delivering superior returns to our shareowners. Before I end my remarks, I’d like to give you a little preview of Automation Fair. For those of you who haven’t been to an Automation Fair, we expect to host thousands of customers and partners from all over the world. It's a great opportunity for us to showcase our capability, provide technical training, and facilitate best practice sharing among our customers. It's taking place in Anaheim this year, and we will have an emphasis on the connected enterprise and how we are helping customers drive to the next level of productivity with our Integrated Control and Information portfolio. If you're coming to Anaheim next Thursday, you’ll hear from John McDermott, our Head of Global Sales and Marketing, Terry Gebert, who leads our Global Systems & Solutions business, and from one of our process system integrator partners. Then we'll take you on a hosted tour of the show floor, after lunch we'll hold a webcast where Frank Kulaszewicz, Blake Moret, Ted, and I will talk more about our strategy and progress on the connected enterprise and Integrated Control and Information. We hope you'll take advantage of this opportunity and we look forward to seeing many of you there. So now, I’ll turn it over to Ted. Ted?

Thanks, Keith, and good morning, every one. You’ll note that we’ve made some changes to several of the slides. We hope you’ll find the new formats more informative and helpful. I’ll start with Page 4, fourth quarter key financial information. As Keith mentioned, organic growth, sales performance across the regions, and adjusted EPS were all pretty much as we expected and consistent with the mid-point of our guidance from July. Currency turned out to be a headwind. We didn't expect that at the beginning of the quarter. Sales in the quarter were $1,782 billion, an increase of 3.9% compared to Q4 last year. Organic sales growth was 4.4%, currency translation reduced sales in the quarter by 70 basis points. Segment operating margin was very strong at 22.2%, that's up 130 basis points from Q4 last year. The year-over-year margin increase was primarily due to the higher sales partially offset by some increased spending. You might recall that in Q4 of 2013, margin included some significant income from legal settlements and some larger restructuring charges, in the year-over-year comparison if you net legal settlement income and restructuring charges, we faced about $9 million margin headwind in Q4 of 2014. General corporate net expense was $22.3 million in Q4, compared to $39.7 million a year ago. Last year, GCN expense included a $12 million charge related to legacy environmental matters. That item accounts for the largest share of the year-over-year difference. Adjusted earnings per share were $1.86, up $0.24 or 15% compared to last year. Average diluted shares outstanding in the quarter were $138.5 million. The adjusted effective tax rate in the quarter was 27%, compared to 23.7% in Q4 last year. I’ll provide more color on tax rate when I cover the full year results. Free cash flow for Q4 was $282 million, a little below Q4, 2013, but a very good result. Conversion on adjusted income was 110% in Q4. During the fourth quarter, we repurchased 1.2 million shares at a cost of $140 million, for the full year we repurchased a total of 4.1 million shares at a cost of $484 million. That was about 10% more than the $440 million we projected at the beginning of the year, and related to our strong cash flow performance. Our trailing four quarter return on invested capital was 30.1%, that's a little below last year but still about 30%, and we consider that to be a best-in-class result. Turning to Page 5, this is the full year version of the key financial information. Sales reached $6,624 billion for the full year, up 4.3%. Organic growth was 5.1%, currency translation reduced sales by almost one full point. Segment operating margin for the full year was 20.4%, up 90 basis points from last year. Earnings conversion was 42% for the year. We realized very good leverage on the higher sales that more than offset spending increases. Spending for the full year increased pretty much inline with the sales growth. Adjusted EPS was $6.17, up 8% compared to last year. And as Keith already mentioned, that represents another year of record sales in EPS for the company. Free cash flow for the full year was $922 million, which was 107% conversion on adjusted income. The next slide provides an adjusted EPS walk comparing the full year 2014, to 2013. I’ll just hit a couple of items here. Lower general corporate net expense contributed $0.08 to the adjusted EPS improvement. For the full year GCN was $81 million, down from $97 million in 2013. GCN expense was unusually high in 2013, primarily due to the legacy environmental charges that we took in fourth quarter of 2013, that I mentioned previously. Moving to the far right side, you can see on the bridge that we picked up an additional $0.04 from reduced share count in 2014. And then coming back to tax rate, the increase adjusted effective tax rate in fiscal 2014 reduced the adjusted EPS by $0.30. The year-over-year increase in the rate is primarily due to significant net favorable discrete items realized in fiscal 2013, and a smaller amount of net unfavorable similar items realized in fiscal 2014. Excluding the effect of the higher tax rate, adjusted EPS would have increased by 13%. The next two slides present a graphical view of the sales and operating margin performance of each segment. I’ll start with the architecture and software segment on Page 7. I'll cover Q4 and then the full year. On the left side of this chart, you can see that architecture and software segment sales reached $747 million in Q4, an increase of 4.6% compared to Q4 last year. Organic growth was 5.2%. Moving to the right side of the chart, on the 5.2% organic growth ANS margins increased by 60 basis points to 31.1%. A great quarter for the segment was strong conversion despite the headwind from the legal settlement income in Q4 of last year. For the full year, ANS sales were up 6.1% as reported, with 6.8% organic growth. We're very pleased to see that high rate of growth and almost profitable segment. Segment operating margin for the full year was 29.5%, up 120 basis points from 2013. Now, I'll turn to Page 8, a similar view for the Control Products & Solutions segment. In the fourth quarter, Control Products & Solutions segment sales increased by 3.3% year-over-year, as organic growth of 3.8%. Organic growth for products, sales and segment was 5.3% about the same as architecture and software, organic growth for solutions and services sales was 3%. The book-to-bill in Q4 per solutions and services was 0.84%. That's low. We expected something more in the range of 0.9% to 0.95%. You might remember we experienced the similar book-to-bill at the end of 2012. This past quarter was not quite as low as Q4 2012, but we ended fiscal 2014 with lower than expected backlog and that will have a negative impact on solutions and services sales in the first half of fiscal 2015. CP&S delivered very good operating margin in Q4 at 15.8%, that's up 180 basis points compared to last year. Q4 is generally the strongest margin quarter in this segment. The operating margin increase was quite strong leverage on higher sales and good productivity in the quarter. For the full year CP&S sales reached $3,778 billion up 3% year-over-year or 3.8% organic growth. Organic growth for product business sales and the segment was 4.7% for the full year and 3.2% for solutions and services. CP&S segment operating margins for the full year was 13.6%, an increase of 60 basis points compared to 2013. Page 9, provides a geographic breakdown of our sales and shows organic growth results for the quarter and for the full year. Keith provided a good deal of color on the full year results, I'll just speak to the quarter. U.S. growth in Q4 at 5% will continue to see a very healthy underlying market. In Q4 oil and gas and home and personal care verticals were the highest growth. Canada delivered a quarter of positive growth at 6%. The underlying market in Canada remains relatively weak. The results in Q4 are more about project timing and driven primarily by automotive and consumer. EMEA was down slightly in the quarter. The emerging countries in aggregate experienced some modest growth. For Western Europe was down about two points year-over-year. Two of the weaker verticals in the quarter were metals and water wastewater. In Asia Pacific sales were up 5% year-over-year in Q4. India was up over 20%. We are pleased to see India continue to demonstrate growth, admittedly off an easy comparison. China was up 1% year-over-year in Q4. Based on the amount of project business in China and last year's quarterly comparisons, I think the full year growth rate for 2014 of 6% is a better indicator of underlying market conditions and our performance. In Q4 in China the strongest verticals were consumer industries. In Latin America another good quarter with 12% growth once again led by Brazil and Mexico. Both countries had solid double-digit growth rates and that allowed for the 12% overall region growth despite a significant year-over-year decline in Venezuela. Best verticals in Latin America in Q4 were consumer industries. Organic growth in emerging markets was 8% led by Latin America. And that takes us to the fiscal 2015 guidance slide. Just to reinforce some of Keith's comments on the macro outlook, in 2015 we expect global GDP and IP growth to be similar to last year. With IP growth in North America lower than in 2014, but IP growth somewhat higher in the other regions compared to 2014. We expect fiscal 2015 sales to be approximately $6.8 billion plus or minus about 2%. That's an organic growth range of 2.5% to 6.5%. By region, we expect growth rates in 2015 to be similar to last year. The U.S., Asia Pacific and Latin America should all see mid-single digit growth. We expect EMEA to be low single digit growth with growth driven primarily by emerging EMEA. This is the region we are watching most closely due to recent macro data and political uncertainties. We expect Canada to be about flat year-over-year for 2015 with continued weakness in the oil sands. Based on the beginning solutions and services backlog and recent order trends, we expect 2015 to be a second year of higher growth in our product businesses, about 5% organic growth compared to 3% organic growth in our solutions and services businesses. We expect currency to reduce sales by above 180 basis points next year. That’s significant and primarily weaker Europe. Our projection for translation impact assumes average rates for 2015 at above the average level for October. For example, we're assuming an average euro rate of 1.27. Yesterday the euro rate was 1.24, if it stays that way for the full year, we'll have additional translation headwind to contend with. We expect segment operating margins to be about 21% that would be about half point increase compared to 2014 with conversion margin of about 35%. We expect the full year tax rate to be about 27%, a little over than in 2014. Our guidance for adjusted EPS is $6.55 to $6.95. We expect free cash flow conversion on adjusted income of about 100%. And there are a couple of other items not shown here. General corporate net expense should be approximately $80 million next year. We expect average diluted shares outstanding to be about $136 million for the full year. Because of the lower than expected backlog at the end of 2014, you should expect a slower than normal start in Q1. We typically see a sequential decline in total company sales from Q4 to Q1 but in 2015 that's likely to be at larger than average client. Reported sales in Q1 will likely be down year-over-year with headwind from currency and roughly flat organic growth, the flat organic growth due to the lower backlog in solutions and services. The final slide on Page 11 provides a walk from fiscal 2014 to fiscal year 2015 for adjusted EPS at the mid point of guidance. I'll start with operating pension expense. Interest rates dropped over the course of 2014 and that's created a $0.04 headwind in operating pension expense for 2015. I mentioned currency effects on the prior chart. We expect currency effects to reduce earnings next year by about $0.17. The lower tax rate contributes about $0.05 increase. We expect share count increased adjusted EPS by $0.17 in 2015. We intend to continue to return excess free cash flow to investors. We announced the 12% increase in the dividend last week as Keith mentioned. The amount we spend on share repurchase in 2015 will depend on free cash flow and acquisition spending. But assuming 100% conversion on adjusted income and about $100 million of spending on acquisitions, we would expect to spend about $470 million on repurchases in 2015. And with that, I'll turn it over to Rondi for questions.

Great. Thanks Ted. Before we get started, I'd just like to remind you that and ask you to limit yourself to one question and a follow up and then if you have another question on a different topic to get back in the queue. So we’d appreciate that. Ian, let's go ahead and take our first caller.

[Operator Instructions] Your first question comes from the line of Scott Davis of Barclays. Please go ahead, Scott.

Good morning, everybody.

Good morning, Scott.

Hi, Scott.

I know it's tough. You guys don't have a lot of visibility so guidance can be a little challenging, but what does it -- historically if you go back and look at longer data series, what does it mean when solutions and services comes in week like that? Is there a canary in a coal mine effect there, or is it just a lumpy enough business where we shouldn't read too much into it?

I think historically it's been a lumpy business and there is not a lot to read into it with a quarter or two of data. I think if you go back to 2012 which Ted referenced, the second half of 2013 was very strong in the solutions business. So I think it's just a matter of the ability to rebuild the backlog particularly in the SSB portion of that business and the medium voltage portion of that business. And right now from a front log standpoint, we still see activity other than some project push-outs and delays because of the commentary that Ted and I talked about with respect to whether its geopolitical or economic uncertainty in some of the regions in particularly Asia Pacific and EMEA. We are still seeing and are still quoting at a – I'll say pre-Q4 rate. So we don't see the indication of one quarter of, quit candidly week book-to-bills that it's telling us anything at this time.

Okay. And as a follow up, can you give us a sense of there's -- you'll have an increased headwind maybe with oil and gas, but when you think about mining which has been tough for the last couple of years, does that turn the corner for you in 2015 and start to become a neutral or at least potentially a modest tailwind from a very low level?

Well we would expect it to be a neutral, I mean that is our plan. I think the upside would come from the opportunity to see China grow a little faster and drive demand at a higher rate than they have this past year. And the other part would be the conversion of spending from I'll say CapEx to operating spending where they’re trying to drive productivity. And I think there is a lot of emphasis particularly in some of the larger mining companies to now focus on productivity and generating better asset utilization on their existing investment. So, I think that’s the other space that we can look for. But right now we see mining as a neutral next year.

Okay. Fair enough. I'll pass it on. I'll see you guys next week.

Thanks for coming Scott. We will see you then. Thank you.

Thank you, Scott. We have another question for you, this one is from Rich Kwas of Wells Fargo. Please go ahead, Rich.

Hi, good morning everyone.

Good morning, Rich.

How you're doing? Just wondered a second, what's the expectation for process growth for 2015 at this point? I know that it was a little bit below expectation for 2014. How are you thinking about the puts and takes there?

Well for process for 2015, we expect process to grow mid-to-high single digits. So definitely a better growth rate than this year.

Okay. And then is the oil and gas vertical -- how do you think about that in terms of your exposure between upstream and midstream? And what are you seeing in terms of front log activity that would bolster the growth rate or detract from the growth rate at this point?

Well from our position we've been a stronger in the upstream sector over the last couple of years and certainly that plays to more of our strengths in both motor control as well as process control. And what we are seeing now is some of the investments moving to midstream and ultimately downstream. And there in the midstream sector, we do well in some of the transportation and storage facilities. I think one of the weaknesses that we’ve seen is when there is a lot of investment in that midstream petrochemical and chemical market, that's an area where we don’t have a lot of installed base and its also an area that we don’t have the perfect match with our plant-wide optimization strategy and so its much more focused on safety and intelligent motor control there. As we see it move further downstream, and when I meant in that area, I would say that chemical and the bulk chemical and the oil refining areas is what I was talking about. As it continues to move downstream, we think it’s much more suitable, in particular lot of those applications are batch whether it would be specialty or refined chemical and we see that as another opportunity for us. With the current situation of what the pricing levels of oil are, we don’t see a significant change at this time. This is an industry that really invest in the long term and so our two quarters of reduced prices not going to dramatically change a lot of their investment decisions. In fact last throughout 2015 that would be a different situation than what we currently have. And quite frankly oil and gas is one of the better growth verticals in fiscal year 2014. It's still healthy. We see the growth and I think I might have said 2014, I meant 2015, next year we see it as one of our better growth initiatives and we expect it to grow above the company average. So, we still see that as an opportunity for us and an opportunity to expand our share in that vertical.

Okay. Thanks, Keith. That's helpful. Just a quick one, Keith or Ted I might have missed this. Did you get a buyback expectation for 2015? I might have missed this.

Yeah. I mean, assuming the 100% conversion on adjusted income and assuming about $100 million of acquisitions spending, we expect to spend about $470 million next year on repurchases.

Okay. Thanks. I’ll pass it on.

Thanks Rich.

And Keith, we have another question for you. This is from the line of John Inch, Deutsche Bank. Please go ahead, John.

Thank you. Good morning, everyone.

Good morning, John.

Hi, John.

Could you provide a little bit more color on if you call it lumpiness within solutions by vertical? Is that possible, Ted and Keith? Is there a vertical or two that's maybe providing the somewhat lower conversion rates or book-to-bill today?

No. It's not so much specific verticals, it’s more of just a timing of projects, which can occur in many of the verticals. However, I would say, it's probably more significant in heavy industries where the projects tend to be bigger, they tend to be predicated around resource based pricing, commodity pricing. So I would say those are the ones that are most impacted as opposed to consumer, where they tend to be plant investments that are as significant in magnitude of dollars. So, I would characterize it that way, but any quarter, it could be any one of the industries, it could be metals, mining, oil and gas, pulp and paper, water wastewater, and - I think we mentioned this quarter, that more difficult ones were metals and mining, particularly in EMEA and Asia.

And actually that all dovetails with the phenomenon that you've seen these larger more complicated projects get pushed to the right. So I'm presuming solutions is caught up a little bit in that. Can I ask you about process? If you look at Honeywell and Emerson and some of the others, they're seeing pretty good orders kick in for North America for lots of different reasons. And I realize that you're not completely apples to apples with those companies, but you do play in a lot of the same spaces. Do you think process needs a bit of a kicker to get it to the next level, Keith? Or are you satisfied that based on this positioning, new product backlog, and the cadence of business that it's on track to capture incremental share, based on the way it performed earlier in this cycle?

Well, John, great question. I mean, quite frankly I am not satisfied with our results in process. I think because of its importance to us, the fact that it is our best growth opportunity that we can't reach our growth objectives without a share increase. And so, we are continuing to invest to expand our capabilities and our commercial reach in process applications. We will continue to make specifically targeted investments to accelerate our growth, and quite frankly this is a very important focus for me and us in 2015. To be fair, some of these areas are not where we have a large installed base, and it's not where we - I would say are recognized as the key player. But certainly we have expanded our capabilities and for us to continue to grow our presence, grow our share, we have to win in some of these new applications and new areas - geographies and so, we can and will do better here. And I think it's just a continuation and evolution of our growth and our maturing as a process control DCS supplier, and we’re very excited about our modern DCS system that we think brings tremendous value and certainly that is – that will be one of the key points of our conversations during Automation Fair, and we see that as a continuing evolution of our business strategy and capabilities. John Inch – Deutsche Bank AG: And Keith, do you think you can do this organically, or does the experience of process in the past year and as markets fluctuate and evolve, maybe you have to begin to add more on the M&A front for whatever purpose or whatever application? Has your thinking evolves or changed in any way with respect to that business and capital allocation?

I don't think that we need to make an acquisition. We constantly look at different acquisitions, process would be an area where we continue to evaluate opportunities and also the rest of the process base, and how can we do more in the entire market. So, I don't see where acquisition is silver bullet here. I think we look at it as how can we continue to grow our domain expertise, how can we build up the resources that we have calling on customers in various geographies and various industries, and various engineering environments. And I think it’s something we can do a lot ourselves and if the right opportunity comes along given that this is an area for growth for us, we'll certainly look at an acquisition to accelerate what we would view as a more organic play at this point in time.

Got it. Thanks very much. Appreciate it.

You're welcome, John. Thank you.

Thank you, John. We have another question for you, this one is from the line of Steve Tusa of JPMorgan. Please go ahead, Steve.

Hey guys, good morning.

Good morning, Steve.

So I'm just having even with the solutions book-to-bill the way it is in the first quarter. I'm having a hard time getting to flat organic. How much is the ForEx headwind in the first quarter?

It will probably be about two points.

Okay. And then just how does that impact the incremental? Maybe if you could also talk about why the incremental margin in architecture and software was so strong this quarter? You guys have called out the net benefits of in the fourth quarter of 2013, so maybe just some color around how the incrementals trend year to year? Obviously you're going to be down in the first quarter, so maybe just a little bit of high-level on how the - will margins be down in the first quarter as well?

It would not be unusual to see a decline in margins with a decline in sales, and there's always a sequential decline in sales Q4 to Q1.

Okay. That's helpful. One last question just on the forward guide. What are you assuming for specific growth in oil and gas? And then maybe if you could give -- do you have a breakout of what your upstream versus down and mid is for that business?

If you lumped upstream and midstream together our split of business is about 90% upstream, midstream and about 10% downstream.

Right. So that obviously would explain the difference between you guys and Honeywell and Emerson to a good degree as far as differences in trends I would assume. And so what are you thinking for growth there? Is that at the high end of the process range of high-single digits oil and gas this year?

We don't give guidance generally by vertical I think. But I think it would be fair to say we expect oil and gas to be kind of at or above company average next year.

One last question. Just very quickly if you start at flat organic, should we think about this as kind of -- are you going to be better than seasonal for the last three quarters of the year? Or are you assuming - is there anything that bounces back? Is this an issue of the funnel isn't clicking here, but you have such a big funnel that at some point in the next three or four quarters there's going to be a lot of stuff that falls through despite the little bit of a weaker start to the year?

I think you've characterized it well. I mean, product businesses like two-thirds of our total business, and we’re seeing good momentum and continuing healthy order trends in the product business. We have a hole in the backlog in the solutions and services business to begin the year. So compared to the average, our loading in the year is going to be a little more back-end weighted than the average. Keith talked about - we don’t think that, that's all in the backlog in Q4 is kind of indicative of fundamental change in the market, rather it's just kind of a lumpiness in that business, in that regard. We're seeing pretty healthy orders performance in the month of October. It's only one month. We don't want to draw conclusions based on that, but it’s somewhat encouraging.

And is most of that oil and gas that's expected to come back?

No. I wouldn't say that. I would say - I think Keith addressed this, I mean - it was broad, the performance in the fourth quarter in solutions and services – what we saw shortfall was pretty broad across verticals, I would say if anything it was maybe more regional in terms of being weak in Asia and weak in EMEA.

Okay. Great. Thanks for the color.

Thank you, Steve.

Thank you, Steve. We another question for you, this one is from Steven Winoker at Bernstein Research. Please go ahead, Steven. Steven Winoker - Sanford C. Bernstein & Company, Inc.: Thanks and good morning. Ted, let me start with you. On the incremental margin front for the guidance at about 21%, I'm thinking about that at 60 basis points in 2015 versus 90 in 2014 on just slightly better growth. You talked about Q1 just now. But maybe talk a little bit about the investment -- pace of investments in R&D and sales expense. What are the kinds of things are you picking up at all on that front that -- or is this just a question of look, at the midpoint range that's how we get there, but there's obviously a significant amount of upside to the op margin target as well if we hit high end of our range? Maybe a little color there.

So, there's a lot there. Steven Winoker - Sanford C. Bernstein & Company, Inc.: That's just the first question.

We have 5.1% organic growth in 2014, and spending was up about 4%. So relatively in line but a little bit below the organic growth. The midpoint of guidance for 2015, is 4.5%, so little bit lower organic growth, but with roughly the same increase expected in spending, maybe even a little bit more. Okay. And so that's in part - I mean there's a lot of factors that are in that margin including currency. But I would say that’s probably the largest factor that results in a 60 basis point improvement rather than a 90 basis point improvement year-over-year. In terms of where that investment is going, it is not significantly different than what we’ve talked about in the past. The larger share of that is going to increase R&D, and with our focus on continuing to expand the capabilities of the Logix platform, and building on some of the things we’ve talked about around Integrated Control and Information. And then it's also in continuing to extend commercial resources so that we can grow in the targeted industries. Steven Winoker - Sanford C. Bernstein & Company, Inc.: Okay. Great. Keith, maybe a little more color, and this may be more appropriate next week when I see you, but some of the other competitors that were mentioned earlier in particularly maybe more some of the downstream applications, but you see some of the technology investments around everything from the world evolving from Emerson's charmed approach originally to Honeywell's making a big deal out of universal I/O and cloud engineering and virtualization and the kinds of things that can take out installation time. I think it's beyond just a specific domains where their installed bases are strong. But from a process perspective, are you starting to -- is this an area that you guys are starting to already ahead of addressing? Is this any part of the process discussion that you just mentioned earlier? How should we think about that area?

Well, quite frankly we've had capabilities in all of those areas already. We do have a capability to utilize virtualization for helping customers simplify their plant floor and also to isolate them from some of the changes in software technologies. Cloud is something that quite frankly I think we pioneered in the industry, in particular in remote monitoring applications, and in particular around critical assets. So we feel really good in that. We have a very broad IO portfolio that is able to simplify the customers installation and application and maintenance which is a very big part of this. So, on our technology front, I think we have a very strong story there. And then of course, we continue to have two major differentiators and one would be a plant wide optimization, there is still an awful lot of multi-discipline control that occurs in many of these applications. And we have the ability to have integrated intelligent motor control, which is very key in particular in the heavy industries and those differentiators continue to be very viable against the pure DCS companies. So, I think we continue to be able to demonstrate a value proposition that can give us a competitive differentiation, and a customer value proposition that helps them reduce their business cost. So, as I said, we've been a leader in some of these spaces, and two of those would have been virtualization, which we started a couple of years ago, and then remote asset monitoring and cloud based solutions which is about a year ago, we created that capability. So, I think from a technology standpoint, we feel good. Obviously there is a lot more we need to do and continue to evolve these technologies, but I don't think that we see ourselves at a disadvantage. Steven Winoker - Sanford C. Bernstein & Company, Inc.: Great. I look forward to learning more and seeing you next week. Thanks.

Hey, sounds great. And we'll have people being able to cover all of those areas for you when you're there. Steven Winoker - Sanford C. Bernstein & Company, Inc.: Thanks.

Thanks, Steve. And we have another question for you. This one is from Jeremie Capron from CLSA.

Hi, good morning. A question on the factory automation side of the business and your alliance with FANUC. Keith, I wonder if you could give us more details on this alliance? It looks like it's taking a new dimension beyond automotive powertrain. And in particular could you explain us what are the benefits from Rockwell's perspective?

Well first, the primary focus is on powertrain. So let me talk a little bit about that, and then I can expand to the point that you were making. But certainly fair enough, the benefits to Rockwell Automation is that FANUC is world leader in CNC and in robotics, and industrial robotics. So, we see it as an opportunity to help our mutual customers have a more seamless integrated solution that enables them to provide a safer contemporary work environment, as well as - as we talked now, the Integrated Control and Information Solution to help them do a better job of creating zero downtime, which is something that’s very critical in the powertrain automotive space in their plants today with the way they run them. So we see customer benefits, we see two world leaders providing a best-in-class solution of Integrated Control and Information, and it basically helps faster time to market and reduce total cost of ownership. So, we see great business value for our customers. As far as the expansion of that, I mentioned the robotics area and certainly in some of the consumer products industries and the line applications where you’re doing palletizing and taste packing or other types of material handling applications, we see the integration with robotics as very important, and the ability to do that with an integrated solutions once again creates differentiation and value for customers. So, automotive is the first place where this will create differentiation and then we’ll see it moving to other industries, other verticals, particularly through the robotics side of it, and the CNC is heavy in the machining which is obviously powertrain.

Thanks. And a follow-up question for Ted this time. On the tax rate we are looking at 27% for next year. So pretty much the same as last year, but somewhat higher than in previous years. So should we think of that 27% as the right level in other years as well? Could you explain the dynamics behind this increase in the effective tax rate in recent years?

I would say the biggest dynamic in terms of the increase from where we were in 2012 and 2013, is – in those years we had some favorable discrete items, some larger favorable discrete items that were recognized that brought down the tax rates. In 2014, we actually had some smaller, unfavorable discrete items, I think the 27% in 2015, it's reasonable to think of as kind of more of a underlying run rate tax rate.

Great. Thanks very much. And see you next week.

Looking forward to it.

Thank you. We have another question for you. This one is from Julian Mitchell of Credit Suisse. Please go ahead, Julian.

Hi, thanks. Just on your China business, the slowdown that you had was similar to what a lot of other electricals had seen in the September quarter. It sounds like you think that will be up about mid-single digits in fiscal 2015. So just wondered what the visibility was like on China and when you think that will start to return to growth?

Well, we expect growth next year. So, I think the challenge for us this past year was in our solution business. We had very good growth in OEMs and with our product portfolio for OEMs, and OEMs now continue to become a bigger portion of our total sales. As far as the solution side of it, I think we see continued slowness in metals because of the overcapacity that's in China today. And we see improvements in oil and gas in China, next year. And I think – and somewhat in mining is hopefully one of the areas that will see an increase, but as far as the visibility, Ted mentioned some of the improvements in October and certainly China had a stronger solutions order month than in Q4. So, some of that was project push-outs that we have been talking about, that in the last call and now this call that we saw in Q4. So, we’re starting to see some of that flow through the pipeline so to speak at this point. So, we obviously with the cycle being extended, which we definitely have seen the order cycle in the solutions business has doubled in the last half year. So we know things have slowed down and so it’s just a matter of when do those break loose, and certainly that’s part of how we characterize the outlook for this year, and I think it was an earlier question that we do see the second half stronger solution sales than we’re going to have in the first half.

Thanks. And then just my follow up is on the food and beverage market. You've heard some industrial companies talk about slowdowns there or order push-outs in food and beverage. That had been very strong for Rockwell. I just wondered if you'd seen any change in customer spending there?

Not really in food and beverage, I think that’s been a little more regional where things have gone up or down, we talked about the strength, Ted mentioned it as far as Q4, there was good strength in China, in particular Latin America, and certainly that's part of the reason we have the OEM growth is because of what's happening there, and food and beverage was the strongest vertical in China in fiscal year 2014. And at the end of the year I think Q4 in Latin America, it was the strongest vertical as well. So, we see food continue to be strong. I think that was reinforced with some of the commentary at Pack Expo this last week in Chicago. I think of the two segments, beverage maybe the one that will be a little weaker as we go through 2015, given some of the changes that's going on in the industry dynamics themselves. But we do see this as an opportunity for us next year.

Great. Thank you.

Thank you, Julian.

Okay. Ian, we’re going to go ahead and we’ll take one last call.

Thank you. The last one is from Jeff Sprague of Vertical Research. Please go ahead, Jeff.

Thank you. Good morning, thanks for squeezing me in.

Good morning, Jeff.

Morning, morning. So, you covered a lot of ground, so I'll be brief in the interest of time. I was just wondering on your upstream oil and gas exposure obviously was a very big focus last year at Automation Fair in Houston. How much of it is actually North America centric? We obviously already have the weakness in the Canadian Oil Sands, but when we think about North America in aggregate, how would you size it?

From a geographic standpoint, it's probably around 60/40, North America and certainly when I say North America, I would be including Mexico in that. So we’ve got Mexico, we’ve got U.S. and Canada, it’s probably about 60% of our upstream business. And then obviously we’ve done work in China, we do work in the North Sea, and the Middle East, and Brazil. So there is a number of other areas where we have our capabilities, but the largest footprint would be the totality of the North American region.

And interestingly the dispersion of our - the geographic dispersion of the oil and gas revenue is in a lot different than our total revenue.

Okay. And then just on Europe, obviously the macro weakness understandable and visible. I'm just wondering if you're seeing anything different in the European OE machine builders? In other words any early indication that euro weakness is helping them in any way kind of pulling through to your business differently?

No. We haven't seen any changes in that dynamic. What I would say - what we are seeing is with the challenges going on in Russia and Eastern Europe, we are seeing some slowness in the exporting of Germany. And Germany has a lot of business that flows East through Central and Eastern Europe, and into Russia. And I think with the issues there, I would say that's where there’s been some impact with the OEM performance in Europe for us. We still see good shipments back into the U.S., good shipments into the majority of the Asian countries, but that flow into the East as probably been the only area that we've seen a dynamic or I should say a change from what we would be talking about six months ago.

Thanks. And then just one little quick final follow-up for Ted. Ted, just the cash geographically, is the repo that you laid out pretty much kind of all you are really kind of capable of given kind of stranded cash issues? Could you just kind of address where we're at with that currently?

I think it would be - I think it would be fair to characterize it as what we’re capable of without significant increase borrowings.

Great. Thank you.

Thanks a lot, Jeff. Appreciate it.

Okay. Well, that concludes today's call. We're going to wrap it up here. So, thanks everybody for joining us. We look forward to seeing bunch of you next week at Automation Fair in Anaheim.

Thank you, ladies and gentlemen. That concludes your conference. You may now disconnect.