Rockwell Automation, Inc. F4Q09 (Qtr End 9/30/09) Earnings Call Transcript

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 |  About: Rockwell Automation, Inc. (ROK)
by: SA Transcripts

Operator

Thank you for holding and welcome to 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 the lines for questions. (Operator Instructions)

At this time I would now like to turn the call over to Rondi Rohr-Dralle, Vice President of Investor Relations.

Rondi Rohr-Dralle

Great. Thanks Mika. Good morning and thank you for joining us for Rockwell Automation’s fourth quarter fiscal 2009 earnings release conference call. Our results were release this morning and the press release and charts have been posted to our website at www.rockwellautomation.com. Please note that both the press release and charts include reconciliations to non-GAAP measures.

A webcast of the audio portion of this call and all of the charts that we reference during the call are available at that website. The webcast will be available for replay and the materials from this call will be accessible for the next 30 days.

With me today are Keith Nosbusch, our Chairman and CEO; and Ted Crandall, our Chief Financial Officer. Our agenda includes opening remarks by Keith that will include overviews of 2009 and our 2010 outlook along with a preview of what you’ll hear during our investor conference on Thursday. Then Ted will provide more details around the fourth quarter and full year 2009 performance and 2010 guidance. There will of course be time at the end of the call to take your questions and we’ll try to get to as many of you as possible, so please limit yourself to one question and a follow-up.

We expect the call today to take about 45 minutes. As is always the case on these calls, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release, and detailed in all of our SEC filings.

So, with that, I’ll turn the call over to Keith.

Keith Nosbusch

Thanks, Rondi and good morning to everyone who’s joined us on the call today. 2009 was clearly a very difficult year. More than a year ago we saw a slowdown coming and took early cost actions in Q4 of 2008. We were one of the first industrial companies to provide an outlook for declining revenue in 2009. But business conditions deteriorated even more rapidly than we had expected and for most of the year we were mired in the deepest and broadest global recession of my career.

The turmoil in the financial markets exacerbated the economic decline and was a contributing factor in most industrial company’s decisions to slow down production, slash spending, and conserve cash. In this economic environment, we experienced a full year organic revenue decline of 19%. But we did see demand levels in our product business start to flatten out in the latter part of the year.

Although our solution order rates declined throughout the year, those declines slowed considerably in the third quarter. So at this point we would characterize business conditions as relatively stable but at demand levels well below the peak of the cycle.

In spite of the challenges in 2009, I want to highlight several key accomplishments. We acted decisively throughout the year to right size the cost structure, achieving $300 million of savings in 2009 with incremental savings expected in 2010. We carefully balanced these actions with preserving investments in our core technologies and global domain expertise.

We also generated great cash flow this year by quickly aligning inventory levels to lower demand, effectively managing receivables in a difficult credit environment, and appropriately constraining capital spending. I want to thank our employees, partners, and customers for their unwavering support during this difficult year.

Before I turn to 2010, I’d like to reflect on our transformation on why the future is bright for Rockwell Automation. Roughly six years ago we developed a core strategy of diversifying our revenue base and expanding our served market. This strategy guided our investments since then and we have seen real results.

We diversified geographically and now earn about half our revenues outside the US. The percentage of our revenues from emerging markets has more than doubled since 2000. We diversified in end markets and now serve a broader range of consumer and heavy industry and applications.

We continued enhancing logics and as a result, dramatically expanded our served market and are the market leader in plant wide control. We made extraordinary progress in process and are now recognized by process customers as a DCS provider. We gained the number one position in the global machine and process safety market. We expanded our capabilities in service and solutions to capitalize on domain expertise with existing and new customers.

Lastly, we recognize the growing importance of OEMs and automation decisions and have expanded our product and solutions portfolio to meet their needs and aligned commercial efforts to further penetrate this market. While diversification did not save us from the ravages of the latest down cycle, it did make the cycle’s impact on us less severe.

Ted will provide more detail about our guidance in his comments, but let me set the stage. While macroeconomic indicators such as GDP, industrial production, and PMI are improving, it is still an uncertain environment for manufacturers. Unemployment remains high and consumer demand is less than robust. We expect a recovery but no one knows what the shape of the recovery will be. Our order rates seem to have stabilized but it is too soon to call it a trend. Our quoting activity is up but we are still seeing some project delays and a cautious approach to spending by most of our customers.

With this backdrop, we are providing an outlook for revenue excluding currency to decline 9% to 2% from 2009. Remember, in Q1 of ’09 we were just starting to see the sharp drop in business. Consistent with this outlook, we expect to show sequential and year-over-year revenue growth in the second half. These volume declines will put a downward pressure on EPS but with the significant benefit of our cost actions, we are providing EPS guidance of $1.25 to $1.75.

Before I turn this over to Ted, let me leave you with a few key thoughts. At our investor conference on Thursday, I will go into more depth on why we believe Rockwell Automation will outperform the market in the next cycle.

Here is a preview: manufacturers will need to invest in automation to remain globally competitive. Automation markets will grow in excess of GDP. We invested in and expanded our capabilities over the last cycle. We continue to make inroads in process applications and are expanding our capabilities in both batch hybrid and continuous. We have improved our number one global safety position.

We are winning OEM conversions and will see increased orders when end market demand picks up. We have expanded [posit] activities for our information software solutions and we are well-positioned to benefit from growth in emerging markets. Though we remain very confident in the future of Rockwell Automation, our technology remains a differentiator. We have great employees and partners who remain dedicated to solving our customers’ business needs.

We have demonstrated our agility in responding to rapidly changing market conditions. We have improved our cost structure, and we continue to have a strong balance sheet and liquidity position. We have executed well in this downturn and are well-positioned for when the economy does recover. Please join us on Thursday to hear more.

Now I’ll turn it over to Ted.

Theodore D. Crandall

Thanks, Keith, and good morning. As Rondi noted, we’ve posted charts to our website and my comments will reference those charts. I’ll start with the full year results on Chart 1.

Sales for the full year ended at $4.332 billion, a 24% decline compared to fiscal year ’08. Currency contributed 5 points to the decline. Excluding currency, sales declined 19%. Segment operating margin for the year was approximately 10%. Diluted EPS from continuing operations was $1.53. Excluding Q4 restructuring charges and special items from Q2, EPS for the full year fiscal ’09 was $1.68, that puts us at the top end of our July guidance range.

Free cash flow for the year was $431 million. That’s conversion of almost 200%. We’re very pleased with that result. ROIC for the year was 11% below our long term target levels due to the significant decline in earnings in fiscal ’09.

Moving on to Chart 2, Q4 Results Summary, sales in Q4 were $1.074 billion down 28% from Q4 last year. Currency contributed 3 points to the decline. Segment operating earnings were $80 million down from $269 million last year. The decline in operating earnings is primarily due to the significant year-over-year revenue loss.

Segment operating earnings in Q4 included pre-tax restructuring charges of $33 million related to our ongoing efforts to appropriately align our cost structure to current demand levels. After tax the EPS impact of the Q4 restructuring charge was $0.17.

The $33 million charge was higher than we projected for Q4 at the time of our last earnings release in July. We went deeper on restructuring actions to achieve a total of $80 million of incremental savings for fiscal ’10. The $80 million of savings includes actions taken in Q4 as well as actions taken previously in fiscal ’09 and that compares to the $50 million to $100 million of savings for fiscal ’10 that we targeted earlier in fiscal ’09.

The charges were also higher because we took broader actions in Europe than originally expected. As you know, Europe tends to be the most expensive region for such actions. We took broader actions in Europe in part to reallocate commercial resources to emerging markets where we anticipated better growth opportunities.

There were also charges incurred in the quarter to exit non-core lines of business in the architecture and software segment. Given the very difficult market conditions in fiscal ’09, we took early and aggressive action to address the cost structure. As Keith mentioned, we achieved our target to take out $300 million of cost for the full year of fiscal ’09.

Moving further down on the chart, purchase accounting expense and interest expense were each lower year-over-year by about $1 million. General corporate net was $31 million in Q4, up from $24 million last year and higher compared to run rates earlier in fiscal ’09. The increase was primarily due to a decision in Q4 to fund $8 million to the Rockwell Automation Charitable Corporation.

Taxes were a minor benefit in the quarter and our full year rate finished at 20.4%, better than we had expected. The lower rate in Q4 is primarily due to discrete tax items which were resolved in the quarter. Diluted EPS for Q4 was $0.20. Excluding restructuring charges, diluted EPS for Q4 was $0.37. Last year in Q4 we incurred restructuring charges that were shown on the P&L as special charges. Consequently, those charges did not run through segment operating earnings.

Diluted EPS in Q4 last year excluding those special charges was $1.08. This is a comparable EPS number to the $0.37 in Q4 of fiscal ’09. Average diluted shares in the quarter was 143.3 million, about 1% below last year. There were no shares repurchased in Q4 of fiscal ’09.

Moving to Chart 3, Q4 Results Rockwell Automation. On the left side of the chart you’ll see sales performance. As I mentioned on the prior chart, sales for Q4 declined 28% year-over-year with currency accounting for 3 points of the decline. Sales increased 6% sequentially, about the same sequential increase in both segments.

We’ve seen some significant weakening of the dollar over the course of fiscal ’09. That continued through the fourth quarter and adjusting for currency, the sequential sales increase was about 4%. The right side of the chart displays segment operating earnings. Segment operating margin excluding restructuring charges was 10.5%. That’s much lower than last year due to the substantial decline in revenue but up sequentially about 1.3 points and that’s excluding restructuring charges from both Q3 and Q4. Also excluding restructuring charges, earnings conversion for Q4 was 38% and that’s similar to last quarter.

Please turn to Chart 4 which summarizes the Q4 results of our architecture and software segment. Sales declined year-over-year by 31% in the quarter, two points of that decline due to currency. Architecture and software sales were up 6% sequentially. Segment earnings were $37 million. Architecture and software incurred the larger portion of restructuring costs in the quarter, approximately $22 million. Excluding restructuring costs, operating margin was 13.8%. That’s down from 23% last year but up about two points sequentially.

Turning to the next page, Chart 5 covers controlled products and solutions. Sales were $650 million down 25% year-over-year but with the same 6% sequential increase. On a year-over-year basis, currency contributed three points to the decline. Sequential growth was 6% and products and solutions each improved sequentially with slightly stronger sequential growth in solutions. In solutions, this was a typical quarterly pattern. Segment operating margin was 6.6% or 8.3% excluding restructuring charges. In either case, down from 14.7% last year.

Moving to the next chart, Chart 6 provides a geographic breakdown of our sales in Q4. I’ll focus my comments on the far right column which shows the regional growth rates excluding currency effects, though I will note that the currency impacting Q4 was the smallest impact of any quarter this year.

Similar to previous quarters, the mature economy has lead the year-over-year declines. The US was down 30%, Canada down 28%, and EMEA down 22%. Asia Pacific sales were down 16% year-over-year but up several percent sequentially. Exporting countries in Asia Pacific remain weak. In China, sales were down about 10% compared to last year but up 11% sequentially. Latin America sales were down this quarter 15% year-over-year but up 19% sequentially.

I’ll move to Chart 7, free cash flow. Q4 was another very strong cash generation quarter and a strong ending to the full year. Free cash flow for the quarter was $88 million and free cash flow for the full year was $431 million. The full year conversion was almost 200%. As I said, we’re very pleased with the results we achieved this year in working capital management and in reducing capital spending.

We ended the year with working capital down about $255 million after a difficult start in Q1. Over the balance of the year, inventories were appropriately managed down to current demand levels and we carefully managed receivables in a tough global credit environment. We also took steps early in the year to constrain capital spending and ended fiscal year ’09 with capital expenditures of $98 million, 35% below last year.

Just a couple comments on our balance sheet. It remains an important strength for us. Our liquidity position remains very healthy. At year end cash and equivalents totaled $644 million. That’s up from $582 million last year. We had no short term debt outstanding at year end and we have no maturities on long term debt until 2017.

Debt to capital at the end of Q4 was 41%, up from Q3 due to the year end adjustment to equity related to the pension valuation. But net debt to capital remained at 17%, equal to last quarter.

Now on Chart 8, we’ll move on to fiscal ’10 and I’ll start with some anticipated headwinds and tailwinds. The most important sales headwind is related to the timing and magnitude of the sales declines that we experienced in fiscal ’09. The steepest declines occurred from the latter part of Q1 into Q2. Consequently, we will face difficult year-over-year comparisons in the first half of fiscal ’10, particularly in Q1.

In our solutions businesses, order levels remained below sales over the latter half of fiscal ’09 and backlog continued to drop. We ended fiscal year ’09 with solutions business backlog down about 11% year-over-year. Consequently, we expect to see lower solution sales in the first half of fiscal ’10 compared to Q4 and year-over-year until order rates pick up and backlog is rebuilt.

Regarding sales tailwinds, based on some recent encouraging signs and economic indicators and projections of economic activity for next year from a number of sources, and also based on input from our sales organization and customers, we do expect improved market conditions and related year-over-year sales growth in the second half. We should begin to benefit in fiscal ’10 from the end of de-stocking in our channel. We believe that bottomed in Q4 of fiscal ’09.

Based on recent currency rates and an expectation that rates will stay at recent levels on average for fiscal ’10, we expect translation to create some positive impact. For earnings we anticipate three [inaudible] headwinds. The first headwind is lower full year sales in fiscal ’10. Although we expect improved market conditions and year-over-year growth in the second half, because of the difficult first half comparisons for the full year excluding currency, we expect a year-over-year sales decline across our sales guidance range.

Pension expense will be a headwind in fiscal ’10. We have a lower discount rate and declines this past year in asset values. Pension expense in fiscal ’10 will be about $40 million higher than in fiscal ’09.

Also in fiscal ’09, some of our cost savings came from what we have described as temporary actions. Those included no merit increase, lower incentive compensation payments, mandatory time off or pay cuts, and the suspension of the 401(k) match. There will be a natural re-set of incentive compensation in fiscal ’10 and given the expectation of some year-over-year growth in the second half, we expect to restore some of the other compensation related items as the year progresses.

There are also some expected tailwinds for earnings. The cost actions taken throughout fiscal ’09 will create tailwind for us in ’10, including the $80 million of savings I mentioned earlier, and adding in carry over savings from ’09, we expect a full year fiscal ’10 impact of about $120 million. These incremental savings do not include volume related savings or temporary actions.

We also expect significantly lower restructuring charges next year. There was a total of $60 million of restructuring charges incurred in fiscal ’09. We expect a broader product, a better product versus solutions mix in ’10 and of course some earnings benefit from currency, assuming that we see the top line currency contribution.

So now moving to Chart 9, our 2010 guidance. I’ll start with sales. We’re expecting sales next year of approximately $4.1 billion to $4.4 billion. In percentage terms, that range represents a decline of 6% to an increase of 2%. We expect currency to add about 3 points to the top line year-over-year in ’10. So excluding currency, the range would be a full year decline in sales of between 9% and 2%.

We expect fiscal ’10 to be a tale of two halves. In the first half we expect sales to be down year-over-year as a consequence of the difficult comparisons I referred to earlier and the level of our solutions business backlog at the end of September.

In the second half we expect to see improving market conditions with year-over-year growth but we don’t expect a sharp upturn so not enough second half growth to get sales for the full year ’10 above fiscal year ’09 sales.

We expect segment operating margins for the full year to be in the range of 9% to 11%. We expect diluted EPS in the range of $1.25 to $1.75. At the midpoint of the EPS range despite lower full year sales, headwinds from pension expense and the restoration of some of our temporary cost actions, EPS is about equal to fiscal year ’09 and that’s primarily due to savings associated with the restructuring actions taken in ’09 and lower restructuring charges in fiscal ’10.

Our longer term objective is to average above 100% conversion on free cash flow through the cycle and we expect to be above 100% in fiscal ’10.

With that, I’ll turn it over to Rondi to begin Q&A.

Rondi Rohr-Dralle

Operator, we’re ready to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Stephen Tusa - J.P. Morgan.

Stephen Tusa - J.P. Morgan

So Ted, you said earlier in the call an $80 million number on restructuring. So is that just basically the $120 million incremental restructuring benefit you’re going to get minus kind of the $40 million in partial restoration? Is that the right number or is there something different going on?

Theodore D. Crandall

Think of the $120 million as two pieces. $40 million of the $120 million is carryover from saving that started in fiscal ’09 and are not related to [inaudible] or temporary actions. The other $80 million of savings is restructuring actions taken in ’09 for which there was no savings in ’09, so it’s $80 million against that $50 million to $100 million of incremental savings we talked about in ’10.

Stephen Tusa - J.P. Morgan

How quickly would you expect the restoration of temporary cost actions to come through?

Theodore D. Crandall

There will be some natural reset of incentive compensation as we progress into ’10 and you’ll see that basically comes in about equally over the course of the year. On some of the other compensation related actions, we would not expect to begin restoring until sometime later in fiscal ’10, probably closer to mid year when we start to hopefully see some pick up in sales levels.

Stephen Tusa - J.P. Morgan

So if you’re down kind of at the high end of your range, I know you start out kind of a $50 million number for temporary stuff that may have to come back in, is there a [gating] factor around whether you’re down 2 or down 9 or if you’re at the midpoint of the range, is that $50 million all coming back or how do we think about that?

Theodore D. Crandall

Think about it this way. At the midpoint of the range there’s about a $30 million headwind in fiscal ’10 as a consequence of restoration of temporary actions.

Stephen Tusa - J.P. Morgan

Just lastly, when we look at the seasonality from 4Q to 1Q and the good times you continue to grow from 4Q to 1Q, in the last few years you’ve been down anywhere from I guess 25% last year to down 3% from 4Q to 1Q ’08. Given that this is neither ’08 or ’07, how do we think about kind of the inherent seasonality of the business now in this kind of more depressed level?

Keith Nosbusch

I think a couple of things. One, obviously we’re not providing quarterly guidance but the way to think about this year and how we’re thinking about it goes back to a little bit about Ted’s comments, but it’s based upon we saw some sequential gain in the quarter with our product businesses. We would expect that to hold in the first quarter and what would be a detraction would be the solutions business that will be down on a sequential basis, so the net will probably be slightly down on a sequential look at the business and then obviously the year-over-year will be significant decline because of just the timing of the declines in our last fiscal year and it was only a 5% decline in Q1 last year. So sequential slightly down Q1.

Stephen Tusa - J.P. Morgan

Then one last quick question. When you think about the way the companies have spent their capital this year, obviously Cap Ex budgets are down but in the first half people pretty much froze their spending. We’re hearing some of the packaging companies talk a lot about a significant budget flush in the fourth quarter. Maybe you don’t want to use that strong of a term but is there anything with regard to the seasonality this year that makes you feel a little bit better about the flow of business and the products businesses in the fourth quarter?

Theodore D. Crandall

In the fourth quarter, you mean our –

Stephen Tusa - J.P. Morgan

Calendar fourth quarter.

Theodore D. Crandall

No, we just believe that the continuation of what happened in our fourth quarter is the return of some spending in particular in our products businesses around the growth in industrial production that we’ve been seeing starting in the late summer time frame, so I don’t think we’re going to see a spending spree in the quarter that runs up to the end of the year.

Operator

Your next question comes from John Inch - Merrill Lynch.

John Inch - Merrill Lynch

Firstly, as a point of clarification, the EPS guidance, Ted and Keith, does or does not include further restructuring costs?

Keith Nosbusch

You know restructuring costs in ’09 was about $60 million. We have built in some modest restructuring costs for ’10, ballpark $10 million. And it is in the guidance.

John Inch - Merrill Lynch

I’m just sort of looking at the puts and takes here. You’ve got about $0.20 to $0.25 of pension headwind. It looks like the restoration of some temporary actions, would I would call fixed labor issues are about $0.16. If you annualize the fourth quarter, ex restructuring of $0.37, that gets you to the midpoint. You look at this sort of $0.35 to $0.40 of headwinds but then you’ve got currency, you’ve got what appears to be a substantial contribution, over $0.65 from restructuring cost savings based on the $120 million. How are you getting $150 million kind of as a midpoint? Am I missing something or is there some obvious large

Keith Nosbusch

Actually I think you just walked through a pretty good bridge and the only thing you did not talk about is the relatively significant ex currency volume decline year-over-year at the midpoint.

John Inch - Merrill Lynch

That’s fair. Now is it also fair to say that… you sort of talked about the restoration of some variable contribution. As you restore some of this contribution later with volume, that will still create for a positive EPS contribution, correct? Because if you’re matching associated volume improvement. Is that not the way to think about it?

Keith Nosbusch

I think that’s fair although I mean, we just walked through it, we kind of broke those pieces up, right? We talked about the loss from volume and then there was an offset in part as a consequence of the restoration of the temporary actions.

John Inch - Merrill Lynch

Okay, that’s fair. What are you seeing in your MRO business and does that provide any kind of a prospective clue as to what may be going on maybe in some of your more shorter cycle businesses?

Keith Nosbusch

I think the fact that we have seen sequential growth in our product businesses tell us and just the macroeconomic indicators of improving industrial production tells us that we are seeing stronger MRO I would say operating business and I think also the other thing that you see is that the amount of de-stocking dropped again in Q4 and we believe it’s over now and so that provided a little bit of benefit as well and basically what we’re seeing is manufacturing is running slightly stronger than what it was in our second and third quarters and certainly the pick up in our product businesses is I believe an indication that we’re starting to see some spending in MRO plus people are understanding the cash situation that they’re in, the credit markets, while not great, have certainly stabilized and people understand what they can and can’t do with respect to providing the grease to run their operations, so I think all of that is what we saw starting to play out as we went through our fourth quarter.

John Inch - Merrill Lynch

Is there any way to size what you think the de-stock had in terms of the earnings per share impact or just earnings impact in fiscal ’09?

Theodore D. Crandall

I’ll be honest, I haven’t thought about it in terms of an EPS impact. We think for the full year fiscal ’09 we took about a 2.5 point top line hit as a consequence of de-stocking.

John Inch - Merrill Lynch

Couldn’t you just multiply that --

Theodore D. Crandall

I could, I just haven’t got it in my head.

John Inch - Merrill Lynch

But in theory that provides a tailwind as well from the absence of de-stocking, right?

Theodore D. Crandall

I think that’s fair and then most of that was over, we think we had about a 1% impact in Q4 so as we enter the year off a Q4 run rate, that 1% is not a big number in terms of what we were hoping we will start to see as real economic improvement.

Operator

Your next question comes from Nigel Coe - Deutsche Bank Securities.

Nigel Coe - Deutsche Bank Securities

I just want to clarify the margin question first. You said first quarter sequentially down from 4Q but is that just 1Q or is that the first half of the year?

Keith Nosbusch

Let me characterize the first half I guess if that will help you. Basically in the first half what we would expect to see is sales run rates in our product business about equal to Q4 and we would expect solutions to be down in the first half compared to Q4.

Nigel Coe - Deutsche Bank Securities

The net would be in the first half slightly lower on a run rate basis in 4Q?

Keith Nosbusch

Yes.

Nigel Coe - Deutsche Bank Securities

Then just looking at the [second half] margin guidance of 9% to 11%, and if I reference that to the 10.5% you did in 4Q, I just want to understand given some of the cost savings running through here and the beneficial mix impact of products and solutions, what would drive down the separate margin towards the lower end of that guidance?

Theodore D. Crandall

I think at the lower end of that guidance it’s basically sales levels, right, and as John has asked about the bridge and he was doing it in EPS, you’re asking basically the same question as it relates to operating margin. I mean, even at midpoint we’re going to face a year-over-year ex currency volume decline and at the low end of the range, it’s a reasonably significant ex currency volume decline.

Nigel Coe - Deutsche Bank Securities

On a full year basis I agree but from 4Q run rates, it looks like full year’s going to be maybe flat volume wise this 4Q.

Theodore D. Crandall

Even against a 4Q run rate, the low end of the sales guidance range is substantially lower than the 4Q run rate.

Nigel Coe - Deutsche Bank Securities

Okay, that’s fair. Then finally if you could maybe just make some comments on how the process business performed this quarter?

Theodore D. Crandall

Process performed better than the company average for the quarter and actually is another one of the indicators as to why we believe our diversification strategy is working. Certainly the acceptance of planned PAX as a process automation system continues to gain traction in our served markets and that in conjunction with ICS Triflex puts together a very powerful bundled package for both the control and the safety systems for Rockwell Automation and certainly is one of the reasons we continue to be very optimistic in our ability to grow share in process and on a year-over-year basis, we were down 8% in process which is substantially better than the company in general so once again an indicator of the success of the diversification strategy.

Nigel Coe - Deutsche Bank Securities

So that means that 4Q is probably what, high teens?

Keith Nosbusch

Yes.

Operator

Your next question comes from John Baliotti - FTN Midwest Securities.

John Baliotti - FTN Midwest Securities

Kind of a housekeeping question to start. The tax rate for 2010 ballpark?

Theodore D. Crandall

We’re expecting something between 21% and 25%.

John Baliotti - FTN Midwest Securities

Given that the trends you’re seeing more MRO pickup here which may be the beginning of things getting better, what gets you to, considering you’ve got about $0.45 or so of restructuring benefits in 2010 offset by some of the other things like pension, what has to happen for $1.25 to show up? How did you get to that other side of the range?

Theodore D. Crandall

I think that is basically a flat run rate from Q4 and certainly as many of you have always told us, our visibility is limited so if we do not see that pick up in the second half of our year, that would be what we bracketed for the bottom of our guidance range is basically Q4 flatlined for the entire year.

John Baliotti - FTN Midwest Securities

And if you look at the last month of durables, it seems like if you break down the different categories that they provide and the different end markets, it seems like you’re getting a positive month, a negative month, a positive month, but what you’re starting to see, as it looks like the demand, If you dig into the numbers, it looks like it’s more immediate demand? Is that consistent? As the customer sees demand he does something about it but he doesn’t appear necessarily to be thinking longer term. Is that consistent with what you’re seeing from your customers?

Keith Nosbusch

It’s mixed. I would say not in general are we seeing only short term immediate needs. Certainly if you look into more mature markets, that would be a very true statement. It’s much more short term oriented and what can I do given that I backed off so strong in the first half of the year or the first two-thirds of the year. I have to do some minimal work at this point in time and I think that’s what we’re seeing at this point.

If you move to some of the emerging markets, certainly there we are seeing some interest in our activity in longer term projects and in particular in some of the commodities businesses. We’re seeing more engineering work going on at the present time. It’s not translated to orders yet but we are seeing some activity and what I would call more longer term investments based upon the belief that those commodity and resource prices will stay reasonably well behaved at the current levels, so I think that it’s a mixture at this point.

John Baliotti - FTN Midwest Securities

I remember toward the end of, just before things started to tail down, you saw nice growth in the emerging markets. I think you guys are talking about the fact that there’s not a third party integrator network like there is in the mature markets like North America so you guys are doing more of the work out of CP&S. Have those customers yet or is it still too early for them to transition to A&S? Is that business still coming out of the CP&S segment?

Keith Nosbusch

It’s mainly still from CP&S mainly because it’s infrastructure and resource based industries which has a higher content of CP&S product and then to your point, the emerging markets will have a mix simply because we provide more solutions there for just the reasons you mentioned, that you would expect that to continue, whether it be our growth in our process base or just the fact that there’s a limited SI channel capability for companies to do that via third parties.

Operator

Your next question comes from Mark Douglass - Longbow Research.

Mark Douglass - Longbow Research

Can you talk about what kind of sales and volumes would be necessary for the two segments to kind of return to maybe closer to the peak margins that they saw? Considering the restructuring charges you’ve incurred, what would it take to get A&S to say the mid 20s and controlled products say to the mid teens? Do you have any feel for that at this point?

Theodore D. Crandall

That’s a difficult question to answer and one I’m very reluctant to answer as we are just starting to come out of the worst recession I’ve ever experienced. If you look back on ’09 we lost basically $1 billion of sales ex currency. So I guess an easy answer would be something in that ballpark, maybe a little bit less because of things we’ve done to hopefully improve leverage as we move up.

Mark Douglass - Longbow Research

Can you talk about logics, how it’s doing at this point, is the mix still been more towards growing share from micro and compact logics, and is that kind of negatively impacting the margins at this point? What do you see for logics in 2010?

Keith Nosbusch

Logics for 2010 we would expect to continue to grow. The logics was down this year but certainly performed better than the company in total and logics performed better than A&S in total, and in Q4 logics was up sequentially. So we're beginning to see the pickup in that portion of our business and, yes, compact logics is the fastest growing segment of the logics family.

If we talk about going into 2010 we would expect logics growth in the high single digits and certainly we would expect to see continued deterioration of our legacy business. And we think it will get back to the more normal declines of roughly 8% to 10% on a year-over-year basis. So that's in general how we have baked the plans for that into our guidance for the year.

Mark Douglass - Longbow Research

And then just related to that, so with compact the fastest growing, does that also play into your focus on OEM sales?

Keith Nosbusch

Yes, a great comment. Certainly the reason we're pushing harder and harder into OEM is because we have continued to improve the scalability of the logics platform over the last couple of years and now we can address a growing portion of the OEM machine builders' portfolio. And certainly we believe the highest growth in our OEM segment will come with the compact logic's platform in addition to certainly our motion and visualization packages as well, in addition to safety. We think safety will be a big part of OEM total package and our total capabilities as well.

So we've had a lot of good interaction with OEMs the last six months given that their business is down. This is a good opportunity for them to look at new machine designs or cost reduce existing designs. And our technical collaboration resources, design resources have been very heavily utilized in helping these OEMs work on the next generation machines and certainly as demand picks up we're viewing that as one of the areas that we would expect to see improvement on a year-over-year basis once their order books start getting filled up again.

Operator

Your next question comes from the line Jeffrey Sprague - Citi.

Jeffrey Sprague - Citi

Just a couple things to clean up from my end, pension contribution, Ted, in cash in 2010, anything on the boards?

Theodore D. Crandall

I would expect it to be similar to our contribution in '09 which was roughly $30 million, $30 million to $40 million.

Jeffrey Sprague - Citi

Okay, and your tax rate is going to vary based on your income level. That's a pretty wide range.

Theodore D. Crandall

I would say principally based on income levels.

Jeffrey Sprague - Citi

Okay. Keith, just given how much things have moved around in the last year with this down draft, can you roughly reorient us on your vertical market end exposures, even if it's by kind of big buckets, consumer auto, resources, etc.?

Keith Nosbusch

Sure. With our markets today we're probably around 35% consumer. We're around 10% auto and transportation, which would be auto and tire, which means auto is less than 10% to date, probably 5% to 7%, 5% to 8%. We have about 5% that would be in the other category which is marine, water, waste water types of applications. But then we also have the process industry which now probably has grown to about 50% of our revenue. And out of that the biggest one would be oil and gas given our recent acquisitions plus the strength of that vertical. That has been a positive market for us over the last couple of quarters. So that's how I would break it down for you, Jeff.

Jeffrey Sprague - Citi

So then in process you're including kind of the mining and materials business?

Keith Nosbusch

Yes, in the process, the heavy industries, we would include oil and gas. We would include mining. We would include metals. We would include chemical. We would include pulp and paper and utility power generation. So water, waste water would also be in there.

Jeffrey Sprague - Citi

And the Pharma business is in there too or that's up in consumer?

Keith Nosbusch

No, Pharma business, life sciences businesses would be in our consumer products area. It would be part of that 35%.

Jeffrey Sprague - Citi

Okay, and, Keith, to your point about kind of the short visibility, you addressed it a little bit in some of the earlier questions but just using the compass that you have, how should we expect kind of business trends just to kind of evolve across your portfolio? I mean, as you're looking for the path out of this thing, what are the sorts of milestones, consumer behavior, end market orders, what have you, that you're looking for for validation that we're coming out?

Keith Nosbusch

Well, I think a couple of things, Jeff. One, it would be the continuation and growth in our product businesses and that would be an indication that manufacturing is picking up for two reasons. One, that should be an indication that MRO is happening as well as smaller projects that people are running mainly to drive productivity, improve their cost competitiveness or smaller projects just replacing an aging system or an aging line. So that's why we believe product flow would be the first indicator.

As it evolves further down, we would expect to see a pickup in our solutions businesses. And a precursor to that will be an order pickup with the front end of that would be quotation activity and in that quotation activity, converting into orders and then the orders be a little longer. And we would expect that consumer industries would be first here in those areas. And obviously the key there will be consumer spending and consumer confidence.

And so we need to see that continued steady increase there in the current levels and that will tell these industries to continue to invest and certainly that would be what we believe will be the first and the most powerful engine to come out will be an increase in consumer spending. So that's how I would characterize it, Jeff.

And then obviously the differentiation from all of that is in emerging markets it's still going to be just the investment to continue to support their growth. And if they're an exporting country then it comes back to the earlier things I mentioned because most of those exports go to the mature economies. But we would expect to see some growth simply because of the high GDP growth in some of the key Asian and Latin American emerging markets.

Jeffrey Sprague - Citi

Great, and just one brief follow-up on that. So as it relates to that list of things, really we're just seeing perhaps the very beginning, the modest growth in product business and MRO. What percent of your business is MRO now do you believe? I know it's going to wax and wane as the cycle goes up and down.

Keith Nosbusch

Well, it's probably around a quarter to our business, maybe up to a third. But it does move around quite a bit and we don't have an ability to track it real succinctly.

Operator

Your next question comes from Scott Davis - Morgan Stanley.

Scott Davis - Morgan Stanley

I just want to talk a little bit about China. I mean, we've seen some pretty big government numbers so it's hard to know exactly what they are, but numbers coming out of the region and then auto sales today were very, very high, up 60% or so, your business down 10%. I mean, you can talk a little bit about is there increase in competition and some market share shifts that are going on there, the businesses that you're selling into, growing maybe a little less robustly or is CapEx really trailing the recovery.

Keith Nosbusch

Well, certainly with respect to China we had negative organic growth in Q4, but sequentially we grew 11%. And China had very, very tough comparables for the quarter. And in total for the year we were down only 5% in China and we have a lot of solutions business there so some of that is lumpy. But we have seen the investments in infrastructure paying off in the second half of the year. That's one of the reasons why we had the sequential growth.

And we've also grown, and to your point, automotive has continued to be strong for us in China. And looking forward we expect China for us next year to grow in the low teens and certainly we continue to do well in a lot of the infrastructure investments but also with OEMs and the expansion in some of their more consumer facing industries that they're trying to drive more local consumption on. So we view China as a continued great opportunity for us and certainly do not feel that we are losing any share in China.

Scott Davis - Morgan Stanley

Okay, can we talk a little bit about - and I know you alluded to this in some past questions - but pricing on your longer-term contracts. I mean, when you think about some of the big bids that have been out there we've heard of price weakness anywhere between kind of 5%, 30%, even some a little bit higher. I mean, I know there's not a lot of contracts have been out there and big, big projects, but can you talk to the pricing that you're seeing and maybe compare that to last cycle and give us a sense of kind of what's normal, what's not normal?

Keith Nosbusch

Well, as we've been saying all year, we ended fiscal year '09 with pricing about a neutral. And there was a recent Morgan Stanley control engineering survey that concluded what we've been saying and that is I think there was a quote in there that there was really no evidence of a price war in automation equipment. So that's the environment that we see.

Now, obviously, there are certainly projects that depending upon some of the background or the way some companies view that project is it can be a very competitive situation and certainly that's one of the reasons we need to make sure that our cost structure is aligned so that, if necessary, we can be very competitive. But we haven't seen much of a change compared to previous cycles and we don't expect that to become a headwind for us in next year.

Scott Davis - Morgan Stanley

Okay, and then the last question, can you talk about what kind of - you're always looking for [bullying] acquisitions but what kind of assets - do you feel like you have product apps or geographic apps? Can you kind of help us understand what kind of assets would you be looking at? Obviously you can't name names but most of the stuff is much smaller, private companies. It's not much of a conflict for us.

Keith Nosbusch

Yes, we're looking for areas that continue to fill those gaps, could be a small core chunk of technology. It could be something allows us to grow our share in a non-US market. And it's also areas that allow us to expand our domain expertise, so our solutions and services areas and then specific vertical applications in information software would be a potential area as well. So they tend to continue to be small bolt-on types that really at the end of the day just let us do more for the customer and allows us to leverage the other pieces of our total portfolio.

Rondi Rohr-Dralle

Okay, I think we have run out of time, so time to wrap up the call. I want to thank you all for joining us. And, of course, for those of you who have questions, we do look forward to seeing many of you at Automation Fair later this week. And for those of you who can't come out to Anaheim please join us for the Web cast on Thursday morning, so, Operator, back to you.

Operator

That concludes today's conference call. At this time, you may disconnect. Thank you.

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