Rockwell Automation, Inc. (ROK) Q1 2017 Earnings Report, Transcript and Summary

Thank you for holding, and welcome to Rockwell Automation’s Quarterly Conference Call. I need to remind everyone that today’s conference call is being recorded. Later in the call, we will open up the line for questions. [Operator Instructions]. At this time, I would like to turn the call over to Patrick Goris, Vice President of Investor Relations. Mr. Goris, please go ahead.

Good morning and thank you for joining us for Rockwell Automation’s First Quarter Fiscal ‘17 Earnings Release Conference Call. With me today are Blake Moret, our President and CEO; and Ted Crandall, CFO. Our results were released earlier this morning and the press release and charts have been posted to our website. Both the press release and charts include reconciliations to non-GAAP measures. A webcast of this call will be available at that website 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 projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. So with that, I’ll hand the call over to Blake.

Thanks, Patrick, and good morning, everyone. Thank you for joining us on the call today. I’ll start with some key points for the quarter so please turn to page three in the slide deck. We had a good start to fiscal 2017. Organic growth was 4% better than we expected. Our largest market, the U.S., returned to growth and we saw double-digit growth in emerging markets. Globally, consumer and transportation were our strongest verticals. Oil and gas and mining remained our weakest verticals but have now been stable sequentially for several quarters. While the quarter was better than we expected, we believe we may have seen a somewhat higher than normal budget flush at the end of the quarter primarily in the U.S. and we did see some larger projects hit in Q1 that we expected later in the year. From a regional perspective, as I mentioned, U.S. returned to organic growth earlier than we expected. Strong growth in consumer and automotive was partially offset by weakness in heavy industries including oil and gas and mining. As expected, EMEA started the year slowly and was down about 2% year-over-year. However, orders were up year-over-year and we expect sales growth for the balance of the in this region. Our performance in Asia was better than we expected, with strong in the consumer and transportation verticals. We saw growth across all countries in this region including China where we saw double-digit growth. And in Latin America, growth was driven by Mexico and Brazil. A couple of additional comments about the quarter. Our recent acquisitions performed well and contributed almost 2% to sales growth. Our process business improved and was about flat year-over-year organically. Including our recent Maverick acquisition, process was up high single digits. Architecture & Software had a very strong quarter with almost 8% organic growth. Within this segment, Logix was also up 8% compared to last year. I’m also pleased with over 21% segment margin in the quarter. Ted will elaborate more in Q1 financial performance in his remarks. Let’s move on to our outlook for the balance of fiscal 2017. The macro outlook remains consistent with our assumptions earlier in the fiscal year which - continued growth in the consumer and transportation verticals. Oil and commodity prices have been stable or inched up and our business in these markets has been relatively flat now for few quarters. We expect every industry to be about flat year-over-year. Recent projections continue to call for improving GDP and industrial production growth rates as well as higher levels of local capital expenditures. Taking the macro outlook and our strong first quarter into consideration, we now expect fiscal 2017 organic sales to be up about 3% year-over-year. Including the impact of acquisitions and a larger headwind from currency, we continue to project fiscal 2017 sales of little over $6 billion and revising the adjusted EPS guidance range to $5.95 to $6.35. Ted will provide more detail around sales and earnings guidance in his remarks. Before I turn it over to Ted, let me add a few comments. A couple of months ago we hosted many of you at our annual Automation Fair in Atlanta. Once again it was a resounding success as thousands of customers and partners attended and learned about our latest technology innovations and capabilities. We’ve heard that our customer testimonials resonated with many of you and provided powerful examples of how we partner with our customers and help them become more globally competitive. Strong underlying demand for our products enables us to accelerate investments this year in core technologies and domain expertise and to expand in new value, we’re providing information solutions and connected services. Together, these will further enhance our ability to bring the connected enterprise to light and profitably grow share at customers globally. And the powerful indicator that our integration is creating value for customers is the recognition we are receiving. Control magazine, a leading process industry publication recently released its 2017 Readers’ Choice Awards. Our results looked great as we again won both first place awards than any other company. Now, as we get ready to hear from Ted, I want say a few words about him. As you probably all know by now, this is Ted’s last earnings call in the CFO role but I’m very happy to be able to continue to leverage his well recognized experience and understanding of our connected enterprise strategy in the CP&S segment leadership role. I’m also very pleased to welcome Patrick to my senior leadership team. With his proven leadership and extensive experience, I’m confident he will move seamlessly into his new role as CFO. The leadership changes are the result of a thoughtful and long-term leadership succession plan that maximizes the contribution of our experienced leaders while ensuring the continuous addition of new talent and prospective for our company, customers, partners and investors. On a personal note, Ted has helped immensely with my own transition. I believe we have a great management team in place. With that, Ted.

Thank you, Blake and good morning everyone. I’ll start my comments on page four which is the first quarter key financial information. Sales in the quarter were $1,490 million, an increase of 4.5% compared to Q1 last year. Sales increased 3.8% on an organic basis. Acquisitions contributed 1.8% to growth and currency translations reduced sales in the quarter by 1.1%. Segment operating margin was 21.2%, 50 basis points higher than Q1 last year and primarily due to higher sales and lower spending and despite the restoration of incentive compensation that we talked about in the November guidance. Spending was a bit light in the first quarter and you should expect spending to increase as we proceed into the balance of the year. The margin result also reflected a good productivity result in Q1 including savings from our restructuring actions in Q4 last year. General corporate net expense was $15 million compared to $18 million a year ago. Adjusted earnings per share were $1.75, an increase of $0.26 or 17% compared to the first quarter of last year. The increase is due to the combination of higher sales, improved margins and a lower tax rate. The adjusted effective tax rate in the quarter was 18.1% compared to 22.8% in Q1 last year. As expected, the adjusted effective rate in Q1 included a significant benefit from discreet tax items. We talked about this benefit when we provided guidance in November. A relatively small part of the discrete tax benefit was due to our adoption of the new accounting standard regarding equity based compensation. Free cash flow for Q1 was $271 million, free cash flow conversion on adjusted income was 119%. Our trailing four quarter return on invested capital was 34.6%. And a couple of other items, average diluted shares outstanding in the quarter were $129.7 million, down about 2% compared to last year and during the first quarter, we repurchased almost 650,000 shares at a cost of about $81 million. At the end of the quarter, we had $864 million remaining under our share repurchase authorization. The next two slides present the sales and operating margin performance of each segment. Page five is the Architecture & Software segment. Beginning on the left side of this page, Architecture & Software segment sales were $696 million in Q1, up 8.3% compared to Q1 last year. The organic sales increase was 7.6%, currency translation reduced sales by 1% and acquisitions contributed 1.7% to sales growth. Moving to the right side of the chart, A&S margins were 30%, up 2.6 points compared to prior year and primarily due to the operating leverage associated with higher sales coupled with lower spending. Moving to page six, the Control Products & Solutions segment. In the first quarter, Control Products & Solutions sales were $794 million, up 1.3% year-over-year. Organic sales increased 0.7%, currency translation reduced sales by 1.3% and acquisitions contributed 1.9% to growth. In the CP&S product businesses, the organic sales increase was about 3%, solutions and services sales were down about 1% organically. The book-to-bill in Q1 for solutions and services was 1.11. CP&S operating margin was 13.6% in Q1, down 1.7 points year-over-year, the biggest factor being higher incentive compensation costs. Moving to page seven, this provides a breakdown of our sales and shows the year-over-year organic growth results for the quarter. Blake covered much of this in his remarks, I’ll add just a couple of comments. The organic sales growth in Q1 was driven primarily by Asia-Pacific and North America. Asia-Pacific was up 20% year-over-year with China and India each up mid-teens. We experienced strong growth in both product and solutions and services businesses in the region. The strong growth in Asia-Pacific was admittedly off[ph] relatively easy comparisons and as Blake mentioned, sales performance benefited from some favorable timing on larger projects that we thought would hit later in the year. Overall for the company, organic growth for emerging markets was 11% this quarter. And that takes us to the guidance slide. As Blake mentioned, we’re making some changes, primarily based on the better than expected sales performance in Q1, we’re increasing our expectations for organic growth by one point across the range to a midpoint for organic growth of 3% for the full year compared to the previous 2% and the new range of 1% to 5% organic growth. The better than expected organic growth in Q1 accounts for most of the increase the organic growth guidance for the full year, though our outlook for sales for the balance of the year remains reasonably constant with our November guidance. Based on recent currency rates, we now expect the larger headwind from currency translation, the headwind increasing from about 0.5 point to a little less than 2 points. We still expect total sales to be a little over $6 billion with the additional currency headwind offsetting the higher organic growth. Our previous margin guidance was about 20%. In November I said may be that would be a little lower than 20%. Now we think maybe it’s a little higher than 20%. Previously, we expected a full year adjusted tax rate of 24%, we now expect that to be closer to 23.5% and basically that reflects a somewhat higher discrete tax benefit in Q1 than we previously thought. We’re revising adjusted EPS guidance from the previous range of $5.85 to $6.25 to a new range of $5.95 to $6.35 and the midpoint increases from $6.05 to $6.15. For the full year, we expect free cash flow conversions to be above 100% of adjusted income. A couple of items not shown here, we now expect general corporate net expense to be approximately $70 million for the full year. Also, we now expect average diluted shares outstanding to be about 129.5 million, that’s about 1.5 million shares higher than the November guidance. We continue to expect to spend about $400 million on repurchases this year but the share prices increased. Before I turn it over to Patrick to begin our Q&A session, as Blake noted, this will be my final earnings call as CFO. I’d just like to say that it has been an honor to be the Chief Financial Officer at Rockwell Automation. As you can imagine, it’s a lot easier job when you’re representing a great company with such great culture and such great people. I’m really pleased to have Patrick Goris succeed me as CFO. Most of you have gotten to known him over the past few years in his industrial relations role. He has a great breadth of financial management experience across our different businesses and functions. He’s very well prepared for this and I know he’s going to do a great job. I’ve really enjoyed the CFO role in the past 10 years. Part of that was the opportunity to interact with all of you, the analysts and the investors. I learned a lot from your questions, the challenges and sometimes your different views on the industry and the company. I’m excited to be moving back to an operating role where I think I can make a different contribution [indiscernible]. I won’t be interacting with this group as often going forward, but if not before then, I look forward to seeing many of you at the next Automation Fair. And since this is my last earnings call, I expect you all to take it easy on me in Q&A. So thank you and over to you, Patrick.

Before we start the Q&A, I just want to say that we would like to get as many of you as possible, so please limit yourself to one question and a quick follow-up. As usual, Blake and Ted will handle the Q&A today. Thank you. Operator, let’s take our first question.

Certainly. [Operator Instructions]. And first today is Scott Davis from Barclays. Please go ahead. Your line is open.

Good morning guys and Ted, we’re going to miss you but I must say on behalf of shareholders, we’re happy you’re not retiring and at least Rockwell’s not losing you altogether. So thankfully you’re staying on board so best of luck to you. It’s been a pleasure.

Thank you.

And I know Patrick will do a great job, but anyway, I’m intrigued by your comment about capital spending I mean when I think about the world, people struggle with the concept of new capacity just given how limited growth is out there. But what are people spending money on I mean if you could generalize? Are we going back into the existing factory stock and upgrading? Is it the supply chain? Is it distribution? I mean what’s your sense of - if capital spending is coming back, what people actually are spending money on?

I think it’s primarily around increased productivity and as we’ve seen a lot of people implement the first waves of productivity in terms of just basic automation replacing hardwire control, the next wave in many cases involves the integration of that basic control and information. So taking advantage of the basic data that’s part of their production processes and integrating the information software and the analytics so that operators could make better decisions about the manufacturing processes.

Scott, I think too in this quarter from a vertical perspective, the acceleration we saw was largely in consumer and transportation.

Okay. And just Ted, you commented on spending will go up as Rockwell going through a – compensation, accruals and stuff like that. But what explicitly do you feel like you need to spend money on? Is it few capacity on your own? Have you been under-investing at all, just give us a little color on that.

Yeah I mean I think the spending is more. It’s not so much about capacity and supply chain. The spending is going to be more about R&D and commercial expenses and very much targeted some of the new opportunities we have related to connective enterprise.

Okay. I’ll pass it on. you guys have done a great job and it’s been a pleasure, so good luck to you Ted.

Thank you.

Your next question comes from John Inch from Deutsche Bank. Please go ahead. Your line is open.

Thanks. Good morning everyone.

Good morning, John.

Good morning, Ted. Patrick, congratulations. So first question China up mid-teens that has been running down. China has sort of been this tail for Rockwell kind of two halves right? The consumer piece up there very strongly and then the heavy industry piece down a lot. What happened in China in the quarter? Did the consumer get even stronger or did heavy industry revert? You talked about some – could you just provide a little more color please? And is it sustainable really?

And the first thing I would say is we mentioned that there were some pool-ins, we think there were some pool-ins of jobs we expected to hit later in the year, that was true in Asia generally, but particularly in China. I would say the vertical profile that we experienced most of last year which was strength particularly in consumer to a lesser extent in transportation and weakness in heavy industry, that continued but we had particularly strong quarter entire in China. Heavy industry was better although still weaker and I don’t think -- we do not expect China to be 15% growth for the full year. We still think for the full year an expectation of something in the mid-single digits is appropriate.

So it sounds like Ted, based on your commentary, this is may be more Rockwell specific rebound versus a China market rebound? I mean – talked up China, some other companies have talked up Parker sort of talked about China rebound a little bit and some of the heavier stuff. Are you suggesting that this is a pull-forward initiatives you were working on, I mean how much is Rockwell versus how much you think is sort of market in the fourth quarter for China?

I’m not sure I know exactly how to quantify that, but my guess would be may be half of the growth in the quarter was kind of pool-ins and unique to Rockwell projects. And the other half was kind of underlying market.

Strong parts of the China market are playing to our strengths.

Yeah, absolutely. Makes sense. Can we then, just as my follow up, can you please talk about your export versus import position? We know kind of had a very sort of high level what your situation is in Mexico. Obviously we’re going to wait to see sort of what Trump does, but could you just talk about sort of - again export versus import position in United States? And then your own thoughts toward repurposing perhaps some of the production say in Monterrey or whatever, back to the U.S. or alternative sourcing, anything you could add at this point would be helpful. Thank you.

Yeah, so may be just to start with little context. We’re a U.S. based company, but we serve a global customer sect and our global supply chain has been constructed to serve those customers all around the world. Today, we are a net importer into the U.S., but I think it’s very important to note that we’ve got flexibility in our global supply chain and we believe we could make adjustments if there were changes in the tax law that made that appropriate.

That’s it?

Yes.

Thank you.

Your next question comes from Steve Tusa with JP Morgan. Please go ahead. Your line is open.

Hi guys. This is Dan on for Steve. Just wondering if you can give us some color on how the quarter looks from a monthly perspective? Did they get better as you moved along? And then how has January started off? Are you seeing kind of a similar environment or a step up or down in activity?

Dan, I would say that the quarter played out in a pretty typical fashion which is it started a little bit slower and then picked up as we moved through the quarter. I would say may be the only unusual thing in the quarter was, a last couple of weeks in December were stronger than normal and it’s the reason that we think there might have been a little bit of budget flush particularly in North America. January has started off slowly as a typical January, but things have picked up a little bit as the month is going on.

Great. And then just as a quick follow up, what was auto for you guys in the quarter, I guess both globally and do you have any color on strength by region?

So auto was up over 10% in the quarter.

Got it. Thanks, guys.

Next we have Nigel Coe from Morgan Stanley. Please go ahead. Your line is open.

Yes, thanks. Good morning guys. Nice strong quarter. You mentioned some budget flush between North America, what do you think caused that? Why would we have seen that budget flush in December? And on top of that, what do we see in your channel inventories specifically within North America?

So Nigel I’m not sure I know I don’t know that we know what caused the budget flush. We heard that comment from several of our distributors and we also observed that there was a little bit higher than normal order rate in those last couple of weeks in December, that’s why we’re speculating that there may have been some higher than normal budget flush. In terms of distributor inventories, particularly in North America, we have very good visibility on that and distributor inventories were up slightly from September.

Okay. That’s helpful. And then on the segment margin guidance for FY17, didn’t change obviously there’s a squiggle in front of the number, but you’ve given the higher organic growth and given the strong incremental margins in A&S, would have expected to see a slightly better or slightly higher segment margins guidance. Is there any change in the way you’re planning the year between CPS and A&S or are there some offsets in FX and/or comps that we should consider?

I think it’s more about the latter. I mean basically we’ve got more currency headwind now, top-line and bottom-line as a consequence of what’s happened with exchange rate. There were also the higher spending in the latter half of the year, some of that is just a ketchup from under-spending in Q1, but we also believe we’re going to spend a little bit more in total for the year now consistent with higher organic growth. And then incentive comp will also be higher as a consequence of higher organic growth and higher EPS.

Okay, that’s clear. Thanks guys.

Your next question comes from Shannon O’Callaghan from UBS. Please go ahead. Your line is open. Shannon O’Callaghan: Good morning guys.

Good morning.

Good morning. Shannon O’Callaghan: Congratulations Ted and Patrick, Ted glad -- to be around we’ll see you at Automation Fair. Relative to that, the last few Automation Fairs at least the last couple, it seems like Blake you’ve had a lot of these productivity solutions that you’re talking about you’ve offered customers, but may be adoption wasn’t great because there wasn’t a lot of business confidence out there. I mean have you heard in the last couple of months a change in tone from your customers, has there been sort of better follow-on to Automation Fair than we’ve seen in the last couple of years in terms of people’s willingness to adopt these sort of productivity related solutions that you’re offering.

Yeah, the progress is still relatively slow and of course, customers are in different stages in their journey as they begin to adopt some of our new solutions. But it starts with having the foundation placed with smart products. And so we do think that customers are getting that message as they know they have to have the data at the foundation of their manufacturing process to be able to do something with it. The pilot projects that we’ve been running, I think have become a little more formalized over the last few months, we’re getting better at it. Our customers are understanding the process and so we have a large number of engagements that are just moving through the pipeline and we’re happy with that progress and some of the increased spending is going to acceleration of those activities.

Shannon I also think when we debriefed our sales organization this quarter, we did hear kind of a more positive sentiment both from our own sales people and from the channel that would have been the case six months ago. Shannon O’Callaghan: Okay, great. Thanks. And then on the oil and gas piece, given kind of the upstream waiting of your business and things, I mean almost think you’re starting to see a little bit more improvement there than you need to be indicating. Any change in activity that you’re seeing there or when would you expect I know you’re kind of still assuming it’s flattish, but anything on the margin that you’re seeing improving there? Any reason that you wouldn’t expect your business to kind of turn with an improvement in some of the U.S. upstream activity?

After the last two years, what we’ve experienced the last couple quarters is getting close to flat year-over-year, that feels pretty good actually. We do think there’s potential for some improvement as we move through this year, but for the full year, we still think it’s going to be close to flat.

The sentiment in heavy industries in general is a little bit more positive but when that’s actually going to turn into orders and shipments, these are longer term projects. Oil and gas continued strong in Latin America but for the rest of the world, we’re still not seeing that manifest itself in sharply increased orders. Shannon O’Callaghan: Okay, great. Thanks a lot guys. Congrats.

Thank you.

Your next question comes from Jeffrey Sprague from Vertical Research Partners. Please go ahead. Your line is open.

Thank you. Good morning, gentlemen and congratulations, Ted and Patrick.

Hi, Jeff.

Just to the A&S business, wondering if you could comment on A&S U.S. performance in the quarter specifically and whether it was different than kind of the modest increase in total U.S. that we saw on a [indiscernible] basis?

The A&S business in Q1 was pretty similar to the balance of the company in Q1. It was strong growth.

And the A&S margins Ted, did they not have the incentive comp pressure that CP&S did or it was just overwhelmed by the volume leverage in the mix and therefore it wasn’t apparent?

You’re exactly right. I mean the year-over-year margin impact of incentive comp was pretty similar in the two segments, with almost 8% organic growth in A&S, it just got us swamped that impact.

Right. And just wondering if you could step back perhaps just play big picture on automotive - automation obviously there’s a lot going on in Washington D.C. Any auto plan I believe is pretty highly automated these days. But is the, for a lack of a better term, is the Rockwell calorie count likely to be higher in a U.S. automotive plant than it is say in a Mexican automotive plant? And how would you think about that, how would you frame that to us?

So I think that’s a fair assumption that as U.S. manufacturers increase or as manufacturers increase their U.S. footprint, it’s going to be done with a higher relative content of advanced manufacturing. And that’s great for us. We have of course a very large market share particularly in that industry and so anything that encourages increased manufacturing in the U.S. is a good thing for Rockwell automation given our footprint. And that impact on sales is something that has us very optimistic and talking to customers about what additionally we can do to help them as they make those decisions to increase their footprint here in the country.

Now I know rule of thumbs are dangerous, but if we thought about a typical auto plant that maybe it’s 200,000 or 300,000 units plant, can you give us some idea of what you think the revenue upside in the U.S. versus some other market might be kind of a percentage terms or index or whatever kind of framework you might want to give us?

I think it depends on a lot of factors of course and in terms of when that plays out for us, timing is a big issue, but if you look at some of the numbers that were published for instance with the recent board plan and you can look at the labor differences between what they were going to employ outside of the U.S. versus their expectations for new jobs in the U.S., you can’t apply that linearly to the increased dollar count for Rockwell, but it gives you some idea of an order of magnitude.

Thank you very much.

Your next question comes from Richard Eastman from Robert W. Baird. Please go ahead. Your line is open.

Yes, good morning and congrats on a nice quarter and good luck Ted and Patrick for that matter.

Thank you.

Just very quickly on the CP&S segment margins, Ted could you may be run through that a little bit. I think what’s kind of noticeable here is on the sales growth our incremental or decremental margin here is almost a 100%. And I’m curious, I realized Maverick comes in a lower margin, but is that business losing money? And then also, if not, is the margin on the core CP&S business is that lower than historic norms?

Well, so couple of things, first Maverick will not lose money, so we’re not expecting in the first year for both purchase accounting and integration cost that we’ll get a significant profit contribution from those sales. On the CP&S core, I don’t think I would say this performance was significantly worse than historic results, but I would say if we’re going to have some margin pressure in this business compared to last year, I mean we had a particularly good margin performance last year, that included some higher margin project business that isn’t going to repeat this year. And as we progress through the year with downturns and heavy industry and the pressure, we’ve got some lower margin projects in the backlog they’re going to work their way out this year as a consequence of some more aggressive pricing. So we’re going to have some margin pressure in that business this year. I think that our full year margins will be a little bit lower than last year, but I don’t expect them to get worse as we proceed through the year compared to the first quarter.

Thank you. And just a follow up question, Blake you had noted in the press release this issue of investing a bit more in the business given the fast start on the core growth. Could you may be just define that in terms of dollars Ted, pre-tax, I mean are we talking about $0.05 or $0.10 per share and hence again the full year outlook – adjusted EPS outlook may be only going up a dime we’ve got negative currency there and is there another 5% to 10% -- $0.05 to $0.10 of incremental investments?

See may be think about it this way, there’s probably about $10 million that we under-spent in Q1 that we’re going to catch up on now in the balance of the year and compared to our previous guidance, there’s another incremental $10 million that we now expect to spend.

Okay. Okay, very good and good luck again. Thank you.

Thank you.

Your next question comes from the line of Andrew Obin from Bank of America/Merrill Lynch. Please go ahead. Your line is open.

Yes, good morning.

Good morning.

Congratulations Ted and Patrick.

Thank you, Andrew.

Just a question, as we look at software sales at Rockwell and specifically software excluding embedded software. Could you share what kind of growth you are seeing in the channel and what are the trends, what are the customers asking for?

So if we look at the information solutions then we’re seeing double digit growth in that area. So this is the MES solutions, this is the modular software, this is where our new analytic offerings would be. And so, that’s part of the information solutions and connected services which we’re expecting double digit growth in.

And when you say double-digit, is it low-teens, high-teens, just sort of ballpark?

I think you can think of that for this year it’s kind of low-to-mid teens

Thank you. And just to follow up on Jeff’s question on what -- can you give us some color just general post the election, what kind of conversations are you having with customers, what industries are the most interested in talking to you in putting capacity in North America because you guys probably are the cutting edge of what’s happening on the kind of conversations people are having?

I think a lot of the early conversations are around discrete manufacturing or batch so again, it’s right in our wheelhouse in consumer and transportation. And there’s some obvious things that we can do to help those manufacturers ensure that they have the labor that’s ready to address the advance manufacturing technology, that’s a big issue for manufacturers particularly if they deferred those investments in automation for some time. So we’re well positioned to be able to offer to enable that workforce and then when they need additional sources of labor to augment their own existing workforce, then we have a lot of solutions there. And so we’re actively engaged with those manufacturers to be able to put specific new proposals in place on top of what we already offer them.

Thank you.

Your next question comes from the line of Steven Winoker from Bernstein. Please go ahead. Your line is open.

Thanks. Good morning and congrats I’ll echo everybody’s comments. So just may be going, covered a lot of ground but going back to your comment that larger projects were pull forward, larger projects at the end of the year were pulled forward in terms of your expectations. Can you maybe expand on that a little bit? I know there’s only a certain level of visibility given the nature of the business, what makes you believe that there’s not something behind that as well and what kind of projects we’re talking about?

Well I mean the larger projects pulled forward primarily occurred in Asia-Pacific, it was kind of a combination of cross vertical as it affected both transportation and heavy industry, semi-conductor was one of those. Look Steve, if I had to estimate, I would estimate that our organic growth in the first quarter between project pull forwards and potential budget flush, may be 1 point of the organic growth was related to that. And even if you take that out, this was still a better quarter than we expected.

Okay, okay. And then as we think about your $20 million or so of spending in how things are going to layer in through the year as well as kind of growth. Normally, in terms of seasonality I might start to look at the Q2 being may be a little more challenging, but you have this acceleration and then you have a very strong back half now. Can you may be comment on how you think we should or how we should think about kind of layering into seasonality given the commentary you’ve had?

Well I think there are two things you ought to think about, one is our normal merit increases occur basically effective January 1st across the company and so sequentially, there will be a step-up in spending probably about $10 million on a sequentially quarterly basis, it’s just a consequence of that merit increase. And then in addition to that, you’ll start to see us ramp what I would call more underlying spending and I think that will ramp as we proceed through the year, so probably a little lower in Q2 and a little bit higher in Q3 and Q4.

And then but from a growth perspective as well as you’re thinking about that step up in organic growth, is this something you think about kind of natural year-on-year acceleration each quarter from here?

I think on sales, you’ll see some increase from Q1 but not a lot of sequential growth in Q2, Q3 then you ought to expect kind of a step-up in Q4 which is typical for us on a seasonal basis.

Great. Helpful. And I guess one more thing Ted, in your response to John’s comments about being a net importer, I think it’s probably we kind of know that you’re a net importer, the question is more about size. We’re talking about low hundreds of millions not something more than that or the possibility…

That’s correct. We think we’re probably about $250 million in net importer.

Okay. Thanks so much. Good luck. Look forward to our next conversation. Bye.

Your next question comes from Rich Kwas from Wells Fargo. Please go ahead. Your line is open.

Hi. Good morning. Congrats, Patrick, Ted. Look forward to working with you in your new capacities. Two questions, quick ones. So, on the change to the organic growth outlook the 100 basis point improvement, how would you segment that between heavy industry may be a little bit better versus automotive and consumer coming in better than expected because I know you put some guidelines out there underpinning the growth act in November and it looks like at least this quarter both of those areas came in better. So how should we think about that?

Rich, I think it’s fair to think about that increase as primarily transportation and consumer.

Okay. And then based on what you’re seeing right now on heavy industry flattish which is a little bit better than flat to down, but need to see more evidence of order improvement to get constructive?

I think that’s fair. I mean I think Blake mentioned earlier, we’re hearing some better things about potential investment in heavy industry, but we’re not seeing it translate into orders yet.

Okay. And then just a quick one, Ted, on free cash flow there’s a plus sign in that 100%, now seasonally speaking, you did pretty well this quarter on conversion, anything puts and takes what we should think about the balance of the year as we try to model this out?

The only thing I would remind you of is because there were no incentive compensation earned last year, there was no payout this year either in the first quarter or in the balance of the year. So, that’s going to contribute somewhat to a better conversion on the year. That’s probably the most important thing.

Okay, great. And then just a quick follow up on auto and consumer, are you still thinking mid-singles for the year growth…?

Yeah I would say may be now it’s mid-to-high singles.

Okay. Thank you.

Your next question comes from Robert McCarthy from Stifel. Please go ahead. Your line is open.

Yeah I’ll echo all the comments Ted and Patrick and I’ll also remind you the importance of comparers and remember Patrick you were a very tough comparer and Ted I think you had a very interesting compare. So anyway, congratulations. Alright, moving over from the ridiculous to the sublime, clearly you talked about the budget flush and the reacceleration and underlying growth and the pace of business. This has been kind of talked about with the several other analysts in the call, but could you just comment across the board how you’re feeling about the front log, are you seeing a change in the pace of business? You talked about the budget flush but could you talk anything about January trends, anything about just kind of the current state of what you’re seeing? And are you seeing a change in the underlying psychology association with business with the change of administrations?

I think it’s fair to say that there’s a general optimism but front log is flat and it’s still early in the year. Our backlog overall is up a little bit and – positive signs. Importantly, we’re releasing new products and that has an impact as well, but it’s still early to call this a different trajectory in terms of the outlined months.

Okay. And then obviously I think John asked a series of intrigue questions, he may have covered this, but what I would ask is may be just talk about the prospect for cash repatriation, the uses of cash, the M&A environment, how you’re looking at that, that kind of old chestnut

Yeah, so it’s I think we’re encouraged by some of the things that are being talked about around U.S. corporate tax rate and house proposal that’s been put out there we think addresses a number of important issues that currently created disadvantage for U.S. based companies, a lot of corporate tax rate, territorial tax system, potential to repatriate foreign earnings. We view all of those as positive for Rockwell for U.S. manufacturers and for U.S. economic growth generally. Specifically as it relates to repatriation, what we would repatriate ultimately would depend on the rate -- the tax rate that would apply to that and any conditions that might apply to the repatriation. But we probably currently have about $2 billion that could be repatriated at some point. Those funds if repatriated, could be used for investments in organic growth, they could be used for acquisitions especially U.S. based companies, it could be used for retirement of debt or better funding of our pension plans, or to return to shareowners through dividend repurchases. And once we get a clearer view on what the conditions might be, we’ll be prepared to talk in a little more detail about specifically about how we would use it.

Just one follow up with a M&A question, do you think it’s a better environment now for M&A just given the standpoint of perhaps optimism and of reacceleration of the underlying cycle and may be the ability to stomach some valuations in that context? I mean do you think there’s been a change in the psychology around M&A for you at all?

We haven’t passed on attractive acquisitions in the past for a lack of U.S. cash. We continue to look at acquisitions as opportunities to accelerate what we’re doing in terms of technology, domain expertise to market access. And we’re pleased with the results of our recent acquisition, we’ll talk more about the need to be present in M&A to accelerate our strategy, so I don’t really see it as a significant accelerator to the amount of M&A we would otherwise do.

Thanks for your time.

Your next question comes from Julian Mitchell from Credit Suisse. Please go ahead. Your line is open.

Hi, this is [indiscernible] on for Julian Mitchell. As a follow up for the M&A question, can you just talk about the M&A pipeline right now and touch on any specific end markets or geographic regions that look particularly attractive right now?

I think if you were to look at where the concentration of our activity is, it’s really in that the new value that come from information solutions and connected services. So in the network space, in the software space it sits up above the real-time control, those are the areas where we’re probably relatively active and it’s spread across the world, it’s not constrained to any one geography.

Understood. And could you just quantify the impact of incentive comp on CP&S margins for the quarter please?

It was approximately one point.

Great. Thank you very much for your time.

Thank you.

Your next question comes from Joe Ritchie from Goldman Sachs. Please go ahead. Your line is open.

Thanks. Good morning everyone and congratulations, Ted and Patrick. My first question is really on pricing, you guys have done a great job on continuing to get price through this malaise that we’ve been in the last couple of years. Just wondering if we do see this CapEx acceleration, is there an opportunity for you to get greater than point in price or how does that -- how do you guys foresee that?

Joe, I think what’s reflected in our current guidance is what we talked about in November which we think for the full year price will be little less than a point and similar to what it was last year. If the economy heats up, who knows, I mean maybe pricing could be a little better.

Okay. And I guess maybe I guess along those lines, if things were to heat up and just along the lines of your guidance and the higher end of that range getting to 5% growth, what would have to happen for us to get to that higher end of the range? And then if we do get towards the higher end of the range, what kind of incremental would you expect to see across the business because historically they’ve been a lot higher than your gross margins?

So in answering the first question which is about the top-line, I mean may be the way to think about the higher end of the range is, clearly, we had a better organic growth result in Q2 than we were expecting coming into the year. But basically, we have not changed our balance of the year guidance. So if Q2 is truly kind of a new baseline, and we should expect the same sequential growth we were originally expecting in the November guidance, that’s a way to think about how we would get to the higher end of the range on the top-line. Our conversion now in the new guidance is about 20% which is almost double what it was in our November guidance and that’s the spike the headwinds we talked about November around incentive compensation and pension in particular. So, there will be some better conversion at the higher end than we would see at the low end or midpoint.

Okay, fair enough. May be in fact sneak one more in there, going back to the question we had on the repatriation, I guess Ted when you think about bringing in cash back, I mean it feels like today company is a facing a little bit of a conundrum in that, valuations are really high from an M&A perspective, stocks are hitting all-time highs. How do you think about the allocation of capital if you are able to bring back overseas cash? And then, specifically, do you need to invest internally if we do accelerate from a CapEx standpoint?

One of the things we’ve always talked about is we’re not all that capital intensive as it relates to growth. With immediate deductibility of CapEx, is it possible we might spend more than we originally planned, I think it’s possible but I don’t think that’s a very big number particularly compared to the amount of earnings we’ve got sitting overseas.

The bigger impact would be the increased sales for our more capital intensive customers.

That makes sense. Thanks guys.

Thank you.

Your next question comes from Andrew Kaplowitz from Citi. Please go ahead. Your line is open.

Good morning guys, Ted and Patrick congratulations.

Thank you.

Solutions and services, they were down 14% last quarter, I think you said down 1% this quarter and you mentioned previously that the business may stay negative in the first half of ‘17 but based on what you’re seeing, you mentioned the strong bookings in the quarter. Is any of the improvement there timing, can it be up now sequentially going forward in that business?

Well I mean I would love to think that we’re going to start to see some improvement in heavy industries as we proceed through the year. But we haven’t seen that yet and it’s not reflected in the guidance. I mean I think our solutions and services business right now we believe will be about flat year-over-year and any improvement that does start to occur in heavy industry, for a significant part of that business, we really need to see it in Q2 or may be early Q3 in order for that to have an impact on shipments in the year.

Okay. Thanks for that. And then Blake, you mentioned that you had a slow start in EMEA this year as expected. Last quarter, you talked about strong orders in the region, I think it was up mid-single digits, it didn’t seem like last quarter’s orders translated but you did talk about improving from here. So did you see any actual weakening in any part of EMEA and specifically in the Middle East, how is that region doing?

So for EMEA overall, the orders were actually up, they were up year-over-year and sequentially and we do expect the result for the full year to be growth in EMEA.

I think the Q1 performance in EMEA was just more about timing of when projects hit, principally in the solutions and services businesses.

Okay. Thanks guys.

Operator, we will take one more question.

Our final question today comes from Eli Lustgarten from Longbow Securities. Please go ahead. Your line is open.

Thank you. Good morning and thanks for taking the questions and my congratulations to both of you.

Thank you.

Just a quick clarification, the shipments that were brought forth in the first quarter, was it all A&S and would it b added in the second quarter or was it spread out over the year?

So I would say it was primarily advanced into the second quarter and it was not all A&S it was kind of a combination of A&S and CP&S.

Okay. And so, we understand the weakness in margins that we saw in with control solutions business, but A&S had a very strong margin I suspect that with – brought forth, [indiscernible] and I suspected it to be sustained at that level and expected to be off a little bit…

That’s correct, we do not expect A&S margin at 30% for the balance of the year, we expect lower margins for A&S for the balance of the year.

And one final, one of the things we heard from a lot of companies you saw the Trump Bump I guess it’s what referred to these days. But we’re hearing from a lot of companies particularly in the heavy industries, of an almost wait and see for spending they talk a lot wait and see for spending to see what policies really because not much can change in the first half of the year. Are you hearing any of that from your customers, that there’s a lot of talk but more excited about ‘18 spending than ‘17 spending at this point?

I have not heard specifically that people are waiting to ‘18 but I do believe as we are before we make specific changes in any plants, we want to see what actual changes to various elements of tax code or rather incentives might be. So I think that is a fair characterization.

Eli, maybe it’s a little bit different approach to the answer and this is not intended in any way to be a political commentary, but I don’t think we’re hearing anything from investors that would cause us to believe that what we saw as the acceleration in the first quarter is related to upcoming potential tax changes.

Okay. Thank you very much and congratulations to both of you.

Thank you, Eli.

Thank you.

Okay. That concludes today’s call. Thank you for joining us.

This does conclude today’s conference call. You may now disconnect. Thank you for attending.