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Rockwell Automation, Inc. (NYSE:ROK)

F1Q 2014 Earnings Conference Call

Jan 29, 2014, 08:30 AM ET

Executives

Keith D. Nosbusch - Chairman and Chief Executive Officer

Theodore D. Crandall - Chief Financial Officer and Senior Vice President

Analysts

Richard Eastman - Robert W. Baird & Co., Inc.

Scott R. Davis - Barclays Capital

John G. Inch - Deutsche Bank

Richard Kwas - Wells Fargo Securities

Jeffrey Sprague- Vertical Research

Julian Mitchell - Credit Suisse

Steven Winoker - Sanford Bernstein

Stephen Tusa - JPMorgan

Nigel Coe - Morgan Stanley

Operator

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. (Operator Instructions)

At this time I would like to turn the call over to CFO, Ted Crandall. Please proceed, sir.

Theodore D. Crandall

Good morning and thank you for joining us for Rockwell Automation’s first quarter fiscal 2014 earnings release conference call. I am filling in for Rondi today who unfortunately is a bit under the weather and unable to join us. Keith Nosbusch, our Chairman and CEO is here with me this morning.

Our agenda includes opening remarks by Keith that will include highlights of the company's performance in the first quarter and outlook for the full year. Then I will provide more detail on both of those and we’ll take questions at the end of my remarks.

Our results were released this morning, and the press release and charts have been posted to our website at www.rockwellautomation.com. Please note that both the press release and charts include reconciliations to non-GAAP measures. A webcast of this call is accessible at that website and will be available for replay for the next 30 days.

Before we get started I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings.

And with that I will turn it over to Keith.

Keith D. Nosbusch

Thanks, Ted and good morning everyone. Thanks for joining us on the call today. I hope everyone is enjoying winter. I know we’re all having fun with the snow and a bit of cold here in the Midwest.

I will start with the highlights for the quarter, so please turn to Page four in the slide deck. We had a very good start to the year with 7% organic sales growth in the quarter. I will start with some color on the region and verticals.

The U.S. led the way with 10% growth. Oil and gas and food and beverage were the strongest industries in the U.S. Canada sales were basically flat with mixed performance across the verticals. And EMEA enjoyed some momentum with 5% growth as they continue to find opportunities to grow and outperform the market. It was great to see Asia return to growth led by China. Latin America, our best growth region all of last year was a little soft due to difficult business climates in Argentina and Venezuela and weakness in mining across the region. However Brazil and Mexico continue to perform well as both grew double-digit.

Overall the picture for verticals is similar to what we said last quarter. Oil and gas and food and beverage were the strongest, automotive was pretty flat and mining and metals were the weakest. Here are a couple of other sales related metrics that I know you are always interested in. Process grew 8% in the quarter with the U.S leading the way. We are now including vMonitor in our numbers, so our full year growth expectation is closer to 10%.

Logix grew 6% in the quarter, the same as architecture and software as a whole. The Motion Control business within A&S experienced very strong growth reflecting continued success with OEM customers.

We closed on two important acquisitions recently. vMonitor which brings wireless solutions for monitoring and controlling well head and upstream oil and gas applications; and Jacobs Automation which is a leader in intelligent track motion control technology for OEM machine builders. Both of these acquisitions bring intellectual capital and differentiated technology and we are excited to have them as part of our company.

So to finish with this slide. Profitability was very strong in the quarter with adjusted earnings per share growth of 20%. I'll let Ted provide more details of our earnings in his remarks.

I guess I want to mention one more thing before I leave the quarter. Control Magazine an industry leading publication exclusively dedicated to the global process automation market recently issued the results of this year’s readers’ choice survey. We had another very strong showing with 41 wins in control industry and product categories, the most of any process company. Of the six controlled discipline awards we won three with no other company winning more than one. This again reinforces the power of our differentiated multi-discipline logics control platform.

In the industry awards we won 28 out of 53, the second place supplier won only 14. These results along with the diversity of applications we continue to win, reflect the breadth of our capabilities and domain expertise in process. We continue to gain ground as a leading DCS supplier.

So let me give you our thoughts about fiscal 2014. From a macroeconomic perspective forecasts for GDP and industrial production are similar to what they were a quarter ago and call for increased growth as we proceed through the fiscal year. Global PMI has improved somewhat. And while most of our customers have not yet declared their CapEx plans our front log of opportunities is solid.

Given this macro perspective and our results for the first quarter we are raising the lower end of our guidance. We now expect fiscal 2014 organic sales growth of 3% to 6% and adjusted EPS guidance of $6 to $6.35. Ted will provide more details about sales and earnings guidance in his remarks.

Before I close I'd like to thank those of you who came to Houston to attend Automation Fair and our Investor Conference. We introduced integrated control and information which expands our served market and enables our customers realize their vision of a connected enterprise. We are confident that integrated control and information deepens our focus on innovation and domain expertise which enables us to provide attractive returns for our shareholders.

So to wrap it up, Q1 was a strong start to the year. We are executing very well across the globe and I want to thank our employees, suppliers and partners for their dedication and expertise in continually expanding the value we provide to our customers.

With that I'll turn it over to Ted.

Theodore D. Crandall

Thanks, Keith, good morning, everybody. My remarks will start with page five with our first quarter result summary. This was a good quarter with very healthy top line growth and strong earnings conversion.

Revenue in the quarter was $1.592 billion, that's up 7% compared to compared to the first quarter of last year. The net impact of currency fluctuations and acquisitions was negligible. So organic growth was also 7%. Segment operating earnings were $328 million, up 19% compared to $276 million in Q1 last year.

General corporate net expense was $21.7 million compared to $18.5 million in Q1 last year. That's pretty close to the expected full year run rate. The adjusted effective tax rate in the quarter was 27.8%. That compares to an adjusted effective tax rate in Q1 last year of 26.6%.

Adjusted earnings per share was $1.47, up 20% compared to $1.23 a year ago. Average diluted shares outstanding in the quarter were 140.4 million. During the quarter we repurchased approximately 1 million shares at a cost of about $111 million. And at the end of Q1 there was $424 million remaining under our $1 million share repurchase authorization.

Moving to page six, this is the graphical version of total company results for the first quarter. As I noted on the prior slide the year-over-year increase in sales for Q1 was 7%, sales declined 7% sequentially, a pretty normal result for Q1.

On the right side of the chart you can see the year-over-year increase in operating earnings. Operating margin in Q1 was 20.6% that’s a 2.1 point increase compared to Q1 last year and primarily reflects volume leverage on the 7% organic sales growth and just a modest increase in spending year-over-year. It’s not unusual for increases in our spending to start off a bit slower in the beginning of the year and we expect spend to increase as we proceed through the balance of the year.

Q1 operating earnings included $6 million of income related to a legal settlement in our Architecture and Software segment. This settlement increased operating margin in the quarter by four-tenths of a point. This was a follow on to the legal settlement income we talked about last quarter and we believe this is the final income we will recognize related to this matter. It's not displayed on the chart but our trailing fourth quarter return on invested capital was 31.4%.

Now let's turn to page seven which summarizes the Q1 results of the Architecture and Software segment. Looking at the left side of this chart sales increase 6% year-over-year, organic growth was also 6%. Sales decreased 3% sequentially. Operating margin for the quarter was 30.4%, up 2.5 points compared to Q1 last year. The A&S margin benefited from higher sales as-well-as the aforementioned legal settlement. For the segment the legal settlement increased operating margin by nine-tenths of a point.

The next page covers our Controlled Products and Solutions segment. Sales in the quarter were up 8% compared to last year. Currency effects reduced sales in this segment by one point. So organization growth was 9%. The Solutions and Services portion of this segment grew by 10% and the product portion by 7%. Sales declined 11% sequentially with products down 2% sequentially and solutions and services down 16%.

Book-to-bill for solutions and services was 1.1. We were pleased to see that above 1 but that's a little lower than normal for our first quarter. We did have a relatively strong growth in solutions and services sales but even with that we would have liked to have seen the book-to-bill more in the range of 1.15 to 1.2.

Operating margin in Controlled Products and Solutions was 13% compared to 11.2% in Q1 last year, that's up 1.8 points.

Turning to the next page, this provides a geographic breakdown of our sales in the quarter and Keith covered a lot of in his comments. I'll focus just a few comments on the far right column which displays organic growth. First I would reinforce a very strong performance in the U.S. with 10% growth.

As Keith mentioned it was another strong performance in EMEA with sales up 5%. Growth was stronger in emerging markets in EMEA and it was another good quarter for growth with OEM customers.

Asia Pacific was up 7% year-over-year also with strong results in emerging markets. China was up 21% and India returned to growth up to 13%, in both cases admittedly off easy comparisons.

In Latin America growth was 3%. As Keith mentioned we continued to see strength in Mexico and Brazil, both with double-digit growth in the quarter. But we experienced sales declines in the Andean region primarily related to mining. We had a large mining project that hit in Q1 last year so a difficult comparison. And sales declined year-over-year in Argentina due to import restrictions.

In Canada sales were down slightly compared to Q1 last year with growth in automotive and consumer more than offset by declines in mining and other heavy industries.

I'll turn now to page 10 the free cash flow. Free cash flow for the quarter was $179 million. That represents about 86% conversion on adjusted income. That's also a good start to the year.

Turning to the final slide, page 11 summarizes our current outlook for fiscal '14. As Keith mentioned we've increased the lower end of our sales and EPS guidance range. We continue to expect sales to be approximately $6.6 billion. We now expect organic growth to be between 3% and 6% compared to the previous range of 2% to 6%. At the low end and mid-point of sales guidance we now expect slightly higher organic sales partially offset by increased currency headwinds.

We believe that currency and acquisitions were about to offset for the full year but that net amount has gone from slightly positive in our previous guidance to now slightly negative. We continue to expect segment operating margins to be about 20%. The new adjusted EPS guidance range is $6 to $6.35. We now expect the full year adjusted tax rate to be between 26% to 27%. That's up from our previous guidance of 26%.

The new adjusted EPS guidance range reflects the benefit of our somewhat higher organic sales, offset by unfavorable currency effects, slightly higher incentive compensation expense and a little higher tax rate. We don't provide quarterly guidance but as it relates to the second quarter and particularly as it relates to margins I would remind you that our annual merit increases kick in on January 1st and we do expect to ramp investment spending. We also will not have a reoccurrence of legal settlement income, so we don't expect operating margin in Q2 to be as high as it was in Q1.

Last week there were significant currency movements, primarily in some emerging markets. The changes in those rates are not included in our new guidance and if those rates remain at current levels through the balance of the year that would create some additional currency headwind for us.

We continue to expect free-cash flow conversion to be about 100% of adjusted income subject primarily to acquisition opportunities we still expect to spend about $440 million on repurchases this year. However we're now projecting that full year average shares outstanding will be about 140 million. That's up less than 1 million shares from what we expected in November and due to a higher share price.

And finally we still expect general corporate net expense to be about $85 million for the full year. And with that I think we can move to Q&A. As we do so I would like to ask you that you limit yourself to one question and a quick follow-up so that we can try to get to as many of you as possible today. Operator we can move to first question.

Question-and-Answer Session

Operator

Thank you sir. Our first question comes from Richard Eastman, Robert W. Baird. Please proceed.

Richard Eastman - Robert W. Baird & Co., Inc.

Yes, good morning. Just a question on the book-to-bill, you basically did flag the fact that it was maybe a little bit softer than you expected, still comfortably north of one. But I am curious if you can pinpoint any industries or perhaps geographies that you know maybe led just slightly less seasonal uptick and a book to bill.

Theodore D. Crandall

Yeah Rick I think where we saw a little bit weaker was primarily in our motor control businesses and we think probably more than any other industry a slowdown in mining is responsible for that.

Richard Eastman - Robert W. Baird & Co., Inc.

Okay and then also just quick follow-up, the tone in the auto or transportation side of the business?

Keith D. Nosbusch

With the automotives we would say that it’s basically hit out flat but remember this is at a very high level of investment. And I think we are starting to see mixed results with obviously Europe a little lower, as Ted mentioned automotive was strong in Canada and auto will remain strong in Latin America and it will probably flatten in the U.S. and remain flat in the U.S. and Asia is how we see the automotive at this point in time.

Richard Eastman - Robert W. Baird & Co., Inc.

Okay, very good. Thank you.

Theodore D. Crandall

You are welcome Rick.

Operator

Next question, Scott Davis, Barclays. Please proceed.

Scott R. Davis - Barclays Capital

Good morning Keith and Ted.

Theodore D. Crandall

Good morning Scott.

Scott R. Davis - Barclays Capital

Couple of things, first I just wanted to get a little bit more color on China and India. I mean China has been a real rollercoaster. Is there any sense of stability there for you and any sense of increased predictability there going forward?

Theodore D. Crandall

Okay well let me start with the second part of that. The answer is no, unpredictability. I think you know I think China is going through the natural evolution from high growth to a more stable type of growth and I think they are going to see cyclicality or I should say isolations around that growth trend line. And so I would say we don't believe we’ll have more predictability and we’ll continue to see fluctuations.

We certainly believe now that we’re in a stable point in the China market and with the China economy but as you know they have a number of potential issues that continue to be concerning whether it be the credit availability or the shadow banking or the excess capacity with SOEs in some of the heavy industry. So they continue to work through those areas but I think we are at a stable part and exports appear to be reasonable at this point in time as well as investment in some of their consumer industries which is one of the areas that we’re very focused on and the OEMs continue to perform well in China.

Keith D. Nosbusch

Hey Scott maybe what I would add is in both China and India our sales quarter to quarter tend to be a little more variable because of project content and in the case of India the underlying orders were not as strong as the growth and I don't think we would stay there. We think we have turned the corner yet. And in China our expectations for the full year is still high single digit so we’re not getting overly excited about 21% quarter.

Scott R. Davis - Barclays Capital

Yeah it makes sense. Guys can we just talk quickly about oil and gas. And you know there is a lot of mixed feedback we’re getting from companies you know, some notable big companies like Shell for example they cut CapEx recently. I mean are you seeing any slowdown in your front-log in that specific vertical?

Theodore D. Crandall

No, our front-log has remained pretty stable. I think what we need to be watching for with respect to your comment is are we starting to see projects being slowed pushed out and at this point in time we have been seeing that with the exception of Canada where they’re in the middle of some very large project rollouts and it’s just not the availability to work the next stage of projects at this point. So we see a little bit of a low in the order rate in Canada and certainly that's related to the previous heavy investments that were going into the oil sands.

Scott R. Davis - Barclays Capital

Okay that's very helpful. Thanks guys and good luck.

Theodore D. Crandall

Thank you.

Operator

Our next question is from John Inch, Deutsche Bank. Please proceed.

John G. Inch - Deutsche Bank

Good morning everyone.

Theodore D. Crandall

Good morning John.

John G. Inch - Deutsche Bank

Strength in the U.S. Keith and Ted do you have any sense may be if you could just give us a sense of how December played out and do you think there might have been any kind of the U.S. company say I don't want to use the term budget flush because I think that's a little too sensational but I think I've been spending maybe based on confidence just kind of what you are hearing from the channel what you saw in the United States to help drive the 10%?

Theodore D. Crandall

Well quite frankly December was very strong for us. And as far as on a year-over-year comparison it was the strongest month in the entire quarter. And quite candidly that's a comment worldwide not just the U.S. But that would lend to believe that there was some, that there was end of the year spending that was going on and I think that was a piece of it. Plus I think it was just the continued belief in an improving the economy and a little more confidence in that, after I would say during the summer timeframe, I think it was a little weaker in that regard. And so the combination of the end of the year and greater confidence probably led to a little higher spending as we exited the calendar year.

Keith D. Nosbusch

John that said I would also say though that January has been pretty much what we expected.

John G. Inch - Deutsche Bank

Right. okay, so that makes economic sense. Some of your industrial peers are perhaps making a little bit more of mountain out of a molehill in terms of this weather issue. You guys see any of this, obviously weather has been pretty austere right, throughout the Midwest, Northeast. Have you seen any sort of an impact with respect to may be your flow goods business or anything that you would perceptively call out that maybe could have offset some of this budget spending?

Theodore D. Crandall

No, at this point we have not seen order pattern aberrations based upon a very, either miserable day in the Midwest or East Coast or wherever it’s occurred in different phases. So I think that has been a minimal impact for us and I wouldn't call that any different than what we normally see during let's just say a milder winter.

John G. Inch - Deutsche Bank

Okay. And then just may be lastly. Keith could you characterize sort of the state of China with respect to competition because clearly you have Japanese competitors that could be perhaps taking advantage of the yen. I think it's clear that China is improving right for lots of automation players which have done exceptionally well and I just want to sort of fixed up a little bit to Scott’s question could you may be comment towards your confidence or the sustainability of improvement maybe north of 20%, given the backup really of what could be some advanced competition from either local players, Japanese players that sort of things.

Keith D. Nosbusch

You are absolutely right there is no question China is a place that we see the Japanese competition more than any other region in the world. And they continue to be a very strong competitor. We believe that the portfolio that we have and the focus that we have in particular on OEMs and consumer industries that we're able to compete very effectively.

I would say the other dimension of competitiveness or I should say competition is given that there is a slowing in particular some of the heavy industries, metals and cement in China, that those projects when they do come up are very, very competitive from a project and therefore solutions business.

So I think we're seeing increased competitiveness simply because there is fewer projects in the heavy industries and you know that’s not unusual and we think we can continue to win our fair share of those. But the fact of the matter is there are just not as many and that’s why I made a comment earlier about some of the overcapacity, particularly in the SOE.

The one exception to that would be China will continue to invest in oil and gas and they are continuing to invest in offshore projects and they’re just at the start of determining whether or not they can create a shale industry. There’s been recent reports that indicates they have shale reserves greater than the U.S. and the real question is how difficult is it to get to and they don't have the technology but will western technology be able to help them untap that. And I think that’s a wild card down the road but I think that’s the other potential play that we see in China going forward to offset the other heavy industry comments I made.

John G. Inch - Deutsche Bank

And I am sorry, do you think you are positioned to capture that opportunity in oil and gas in China?

Keith D. Nosbusch

I think if we look at what we’re able to do in the U.S. in that space I think we have a good opportunity to compete effectively. Capture, I mean that’s we’ll see how it plays out. I think the bigger question is will China be able to tap that energy resource if they are I believe we will be able to compete effectively for projects just like we have in some of their offshore business and shale opportunities in the U.S. over the last couple of years.

John G. Inch - Deutsche Bank

Got it. Okay, thank you very much.

Keith D. Nosbusch

You are welcome John.

Operator

Our next question is from Rich Kwas, Wells Fargo. Please proceed.

Richard Kwas - Wells Fargo Securities

Hi good morning everyone. Just a few questions. Can you talk on auto, I know we’re at a high level CapEx and your North American production is growth that we see slowing down but when you look at some of the investments being made by the transplant European base, Asian base transplants in Mexico and in other places, how much benefit do you get from that over the next couple of years? I know you’re mix with the Detroit guys is pretty strong and very strong position there but how do you frame the opportunity with the other manufacturers over the next few years?

Keith D. Nosbusch

Yes well Mexico is the place where we will see continued investment to your point. There has been number of plants announced by both Asian and European as well as continued expansion of U.S. so let’s take the Asian transplants. I would say that’s probably the most difficult market for us because many times they work with their same partners they have in Japan and those tend to be the Japanese control manufacturers. So we can win pieces of that business but the heavy investment, particularly via what comes in on some of the OEM lines tend to be more Japanese brand.

With respect to European competitors our toughest challenge there would be with BMW and Audi quite candidly. That will come in with Siemens equipment on but we can certainly compete for portions of the business even there, but also the other European transplants we have a much better opportunity to win those projects, and certainly we also believe with some of our expanding capabilities in power training now that we’re in a better position to compete in that portion of the projects as well.

Richard Kwas - Wells Fargo Securities

Okay that’s helpful. So it sounds like Daimler and BMW are potential and you already have a good position there but there is opportunity to grow if they grow there.

Keith D. Nosbusch

Yes we do well with them in their transplants in the U.S. So Mexico is not that -- we think we can be consistent with our supporting capabilities in Mexico as we have demonstrated in their U.S. clients already.

Richard Kwas - Wells Fargo Securities

Okay, great. And then just two quick ones for Ted on Logix, I think 6% growth this quarter, is the outlook still on that high single digit growth rate for Logix in ' 14? And then the other piece of it is with the incremental being so strong this quarter it seems like the bias for the year that the incrementals are getting close to the 35, rather than 30 is that a fair statement?

Theodore D. Crandall

Yes. So first on Logix, we would continue to expect for the full year that Logix would be somewhere above the average for Architecture and Software. So I would say higher single digits. In terms of the margins I think you are right on for the balance of the year. I mean we are not expecting, obviously the 20.6% is above our full year guidance for operating margin.

Richard Kwas - Wells Fargo Securities

All right. Okay, great. Thank you.

Keith D. Nosbusch

Thank you.

Operator

Next question is from Jeff Sprague, Vertical Research. Please proceed.

Jeffrey Sprague- Vertical Research

Hi. My first question just goes a little bit just more around that question of incremental margins and kind of investment spending. Can you give us a sense of just order of magnitude there and then what it's point at and can it play a role on the top line in the 2014 or is it more a kind of setting at 2015 and beyond?

Theodore D. Crandall

Yeah. So let me start at the back of that. I think clearly the investment spending that we put in place going forward now in the balance of the year will benefit us beyond 2014 and we should not expect to return in 2014. What we spend on is largely R&D and product development related, we have talked about in the past our focus on continuing to expand the Logix capabilities and also continued investment in our Intelligent Motor Control offering.

In terms of ramp, I think what you should expect is the rate of growth in spending in the balance of the year is going to exceed our rate of growth in sales in the balance of the year.

Keith D. Nosbusch

And I would also just add to that, that we also will have an increase in spending due to the acquisitions that we just recently completed but they would add in the same categories that Ted mentioned but that's another incremental increase from a year-over-year standpoint.

Jeffrey Sprague- Vertical Research

Thank you for that. And then just I guess back to kind of the tone of business. Is there any change in kind of the nature of demand that you are seeing, you said there is a little bit of increased confidence to spend money but are we shifting from MRO or smaller projects to kind of greenfield or bigger expansions projects. Is there anything there to kind of spike up?

Keith D. Nosbusch

Well that would depend on the region, Jeff. In the U.S., I would say we are not seeing large projects, the majority of the increases and front logs that we see at this time is continued small project and I will say expansion and productivity investments continued as opposed to what I would call greenfield.

If you go to Europe certainly the strength that we had in the emerging markets, that is all greenfield with respect to, I will call it, mature Europe, there we are seeing some greenfield investment in oil and gas. It may not be -- it may not end up in Europe, but the engineering and procurement occurs in Europe and a lot of that is offshore activities in oil and gas. And as we see the continuing investments at OEMs in Europe and a lot of that gets exported back into the U.S. and Asia and Latin America and so OEMs right in Europe.

And in Latin America we said that mining is down, but oil and gas continues to be strong in Latin America other than Mexico, the vast majority of that is greenfield investment. And in Mexico, a lot of it is just ongoing efforts to commoditize their existing equipment.

Canada, I mentioned we did see the slowing in some of the major projects in oil and gas and mining in Canada. And I think that we had a very strong previous year in some of those heavy industry investments. And so there is a natural low before they can go forward.

And then Asia certainly we're seeing continued greenfield in the Southeast Asia region and in oil and gas in China. We're not seeing much greenfield in metals. As I mentioned there’s very few projects there same for cement. But we are seeing greenfield in consumer industries particularly food and beverage, significant growth in there and so that would be a picture for you Jeff by region.

Jeffrey Sprague- Vertical Research

Thanks, Keith that was good around the world run down actually. Then just finally Ted can you give us a little bit of color and I'll move, the currency do stay where they are at all year along what kind of headwind are you looking at?

Theodore D. Crandall

Yeah, so probably the three currencies that will make the most difference for us that were moving last week where Brazil, South Africa and Canada. If all of those stay where they are probably creates about a $20 million top line headwind.

Jeffrey Sprague- Vertical Research

Okay. Thank you very much.

Theodore D. Crandall

You are welcome.

Operator

Next question Julian Mitchell, Credit Suisse. Please proceed.

Julian Mitchell - Credit Suisse

Hi, thank you. I just had a question on the December quarter on the operating margins. So I guess you and also your main European competitors both have very good margins in that fiscal Q1, they cited kind of software mix as a big boost. So I just wondered if that was true for you or if that was more just about fixed cost leverage because you had good organic growth?

Theodore D. Crandall

Julian I think for us it's primarily about the organic growth and volume leverage.

Julian Mitchell - Credit Suisse

Okay. There was nothing abnormal around mix in the quarter that you would call out?

Theodore D. Crandall

No, I wouldn't say anything significant around mix. I mean obviously the margins are benefiting from that legal settlement that we talked about.

Keith D. Nosbusch

We had good growth in solutions as we mentioned. So there really was to Ted’s point no big mix difference here that created the margin expansion.

Julian Mitchell - Credit Suisse

Great, and then my second question is just certainly it is little bit tiresome but circling back to kind of the U.S. automotive investment outlook, I just wanted to clarify what you had said earlier. I think you talked about U.S. being kind of flattish going forward. I just wondered if that was the status quo that you've had recently or if it's been pretty good and you expect it to flatten out from here?

Theodore D. Crandall

Well it has been pretty good. I mean as we talked last year automotive was one of the key drivers of our performance in the U.S. So we're expecting it to flatten out, slow a little from a very high level. So I think that's just the natural evolution of project spending in that industry and but we're still looking for continued opportunities and projects in automotive in the U.S.

Julian Mitchell - Credit Suisse

Great, thank you.

Theodore D. Crandall

You're welcome.

Operator

Our next question is from Steven Winoker, Sanford Bernstein. Please proceed.

Steven Winoker - Sanford Bernstein

Thanks and good morning Ted and Keith.

Theodore D. Crandall

Good morning, Steve.

Steven Winoker - Sanford Bernstein

So I just wanted to be clear on the whole end market growth acceleration and deceleration, you've got 7% for the quarter last year and you're still guiding 3% to 6% for the year. So you're obviously looking at deceleration through the rest of the year and can you just again clarify a little bit more where you're expecting the most deceleration or headwinds to come from for the rest of the year that we should be planning in?

Theodore D. Crandall

Sure. Well we think at the end of the year the U.S. will definitely be down from 10% growth quite frankly. And we expect the U.S., Asia Pacific and Latin America to be slightly above the company average. And EMEA will be up for the year but below the company average but still we believe outperforming the market. And Canada will be slightly down year-over-year and that’s basically how we come up with the 3% to 6% and I would say that basically my commentary taken it comments around the midpoint of our guidance range.

Keith D. Nosbusch

Keith here, Steve. I think also look there is some normal variability in our quarter-to-quarter sales and as you will remember I think first half last year for us is a pretty easy comparison in our solutions and services businesses because we came into the year with the hole in the backlog. So we expected coming into this year that we’re going to see better growth in the first half than the second half.

Steven Winoker - Sanford Bernstein

Okay, that’s helpful. And then you guys are up to what looks like an all-time high on cash, I guess $1.25 billion and you have done couple of acquisitions. Could you maybe talk Keith to the strategic value of those? And then second Keith and Ted both maybe some thoughts around capital deployment as you go forward. It’s been very consistent for Rockwell over the years. I am just wondering how you are thinking about that as that cash builds.

Keith D. Nosbusch

Okay well let me talk about the acquisitions and we’re very pleased with both of them and with vMonitor we think it’s a great opportunity because it expands our technology and solutions, our reach and domain expertise in the oil and gas well head and really that gives us some differentiation with the integrated approach for the design in those systems and gives us additional capability in the production side, which is an area that we have been very strong and we can also continue to develop what’s been called in the industry, a difficult oil field and this enables us to have a much broader solution for those requirements.

So think of it as in the production side upstream and wellhead applications and those are quite frankly all over the world and we see a great opportunity in all geographies with that.

With respect to Jacobs, Jacobs is a -- Jacobs Automation has really unique technology that we believe will provide faster speed and greater flexibility for machine builders. So it fits right into the OEM initiative that we have and the focus that we have been growing OEM sales on a global basis and really we see this as a way for customers to increase their productivity, help them reduce their energy consumption and really help them with speed of changeovers and therefore productivity that these OEMs can offer the end customers.

So really a good fit with our motion capability and we’ll continue to integrate that technology with our integrated architecture and that is a technology that will take some time to be absorbed in the OEM community but we think we have some good leading edge capabilities there. So that’s a little commentary around the acquisition. I will let Ted comment on the other part of your question.

Theodore D. Crandall

So Steve as it relates to cash deployment I mean I think I would characterize it as steady as she goes. I mean our commitment remains to exhaust our free cash flow after acquisitions either in dividend or share repurchase and we did that pretty much last year and our plan is to do that this year and that’s reflected in $440 million of repurchases I talked about earlier.

As it relates to the cash on the balance sheet we have talked about the issue there before of most of that cash being outside the U.S. and not having an easy way to repatriate without incurring significant tax liability. And I would say as it relates to that we have no plan to change that at the moment.

Keith D. Nosbusch

And just to reinforce the two comments is that the vMonitor acquisition the majority of that was made with cash outside the U.S.

Steven Winoker - Sanford Bernstein

Okay, thanks guys.

Keith D. Nosbusch

Thank you.

Operator

Our next question is from Steve Tusa, JPMorgan. Please proceed.

Stephen Tusa - JPMorgan

Hey good morning guys.

Keith D. Nosbusch

Good morning Steve.

Stephen Tusa - JPMorgan

Hey Ted great job filling in for Rondi. Doing a fantastic job.

Theodore D. Crandall

Thank you.

Stephen Tusa - JPMorgan

On the oil and gas side I remember OTC last year I was talking to one of your guys and he talked about being offshore being a great growth driver for you guys and I think he said it was 50% of your -- I don't know whether he said it was 50% of your upstream oil and gas business. Could you maybe just provide some color on what the offshore market is as a percentage of your oil and gas sales? I know that you guys do a tremendous amount of high quality work on the BOP and stuff like that. So I am just curious as we kind of parse out Canada and stuff like that, this is getting a little more interesting, the percentage of business from offshore I guess is my key question?

Theodore D. Crandall

Yeah. Steve. I don't have that number right now. I think instead of just giving out one that I couldn't support long-term, we will get back to you with that one. I want to make sure we look at the information and have something there that we have confidence in the number.

But certainly to your point we are very strong in the offshore both from a control as well as safety systems as the ICFT acquisition is very helpful there and we will have to pull together the make-up of our oil and gas business with respect to offshore and automobile as well and we will get back to you.

Stephen Tusa - JPMorgan

And I guess it’s mostly upstream and a little bit of midstream, is that kind of how we should think about the oil and gas?

Theodore D. Crandall

Yes, Steve. Absolutely right. When we talk about our process initiatives, what we are accounting there will be heavily weighted to upstream and midstream. So when we talk about motor control it would be across the board, upstream, midstream and downstream. Likewise safety systems would play across that entire continuum. But when we talk about our expansion in the oil and gas we are mainly talking about control and what we do with our solutions capability and the majority of that would be the production side.

Stephen Tusa - JPMorgan

And then one last question just on…

Theodore D. Crandall

We monitor this exactly in to that production side.

Stephen Tusa - JPMorgan

Right. So then just on the margin maybe just kind of a little bit different way and try and kind of understand what you guys were saying. So for the second quarter I guess a 35% incremental year-over-year or 30% to 40% kind of gets you to that high 19% kind of 20% range, if you will. I mean is that I am just trying to understand how this investment kind phases in and impacts that number. I mean is that kind of a way good way to think about kind of the step down from first quarter to the second quarter?

Theodore D. Crandall

Yeah, I think it is.

Stephen Tusa - JPMorgan

Okay.

Theodore D. Crandall

Steve, what we expect is something in that 30% to 35% range in terms of conversion as compared to the 50% in Q1.

Stephen Tusa - JPMorgan

Okay, great. Thanks a lot.

Operator

Thank you. We have time for one more question coming from Nigel Coe, Morgan Stanley. Please proceed.

Keith D. Nosbusch

Nigel, are you there?

Operator

Mr. Cole, please proceed, sir.

Nigel Coe - Morgan Stanley

Hello.

Keith D. Nosbusch

Hi, Nigel.

Theodore D. Crandall

Hi, Nigel.

Nigel Coe - Morgan Stanley

Can you hear me?

Keith D. Nosbusch

Yes, we can now.

Nigel Coe - Morgan Stanley

Okay. Good, good. So I guess I will ask the question again. So I just want to ask this way because you will always see this tick down in margins from Q1 to Q2, just a ramp up in spend and I know also because of the normalization impact effect. But did you say Ted that operating income or operating margin is down Q-over-Q?

Theodore D. Crandall

Margin.

Nigel Coe - Morgan Stanley

Margin, okay. I thought that’s what you said. And then just on the, I just wanted to pick up on the trend about the book-to-bill for the quarter you mentioned again that it sounds like mining and Canada are the two factors there. But then Ted you mentioned the encouraging front-log activity. So I am just wondering, I am just trying to reconcile the two comments and I am wondering are you seeing this pickup in RFP activity through, do you see a pick-up in RFP activity through the quarter and going forward. The front-log activity suggests a pick-up in book-to-bill activity go through the year?

Theodore D. Crandall

Well I think we wanted to characterize the front-log as stable at this point, not growing, but still solid as we look forward. And we would expect that to be starting to convert at normal rates as we go through the remainder of the year.

Nigel Coe - Morgan Stanley

Okay.

Keith D. Nosbusch

I think Nigel, maybe what would help is I think I’d say that our backlog and our front-log at this point is consistent with the guidance.

Nigel Coe - Morgan Stanley

Right, okay, that’s helpful. And then Ted you mentioned about the yen currencies and obviously we are watching these with interest. You had an $11 million headwind I believe this quarter from currencies. And I am wondering is the impact on operating income, is it fairly linear, for the 15% -- for the 20% up in margin on that FX movement, would that equate to the impact of earnings or there’s some unusual margin impact from currency?

Theodore D. Crandall

I would say as you would expect quarter-to-quarter it can be very variable. Over a longer period of time generally I would say the translation effect comes in on earnings, comes in pretty close to kind of our normal operating income percent. But in any quarter what drives variability tends to be re-measurement blockers or gains.

Nigel Coe - Morgan Stanley

Okay, and was there any unusual impact last quarter from the currency moves?

Theodore D. Crandall

No, nothing significant in Q1.

Nigel Coe - Morgan Stanley

Okay, that’s helpful, thanks very much.

Keith D. Nosbusch

Thank you, Nigel.

Operator

Ladies and gentlemen, I would now like to turn the call over to Ted Crandall for closing remarks.

Theodore D. Crandall

Well, that concludes today’s call. So thank you everybody for joining us and we will see you next quarter.

Operator

Thank you, sir. Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Good day.

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