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Executives

Rondi Rohr-Dralle - Vice President of Investor Relations & Corporate Development

Keith D. Nosbusch - Chairman, Chief Executive Officer and President

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

Analysts

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Winifred Clark - UBS Investment Bank, Research Division

Terry Darling - Goldman Sachs Group Inc., Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

Scott R. Davis - Barclays Capital, Research Division

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Nigel Coe - Morgan Stanley, Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Rockwell Automation (ROK) Q2 2012 Earnings Call April 25, 2012 8:30 AM ET

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 Rondi Rohr-Dralle, Vice President of Investor Relations. Ms. Rohr-Dralle, please go ahead.

Rondi Rohr-Dralle

Thanks, Deanna. Good morning. Thank you for joining us for Rockwell Automation's Second Quarter Fiscal 2012 Earnings Release Conference Call. 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. Additionally, a webcast of this call is accessible at that website and will be available for replay for the next 30 days.

With me today as always are Keith Nosbusch; our Chairman and CEO; and Ted Crandall, our Chief Financial Officer. Our agenda includes opening remarks by Keith that will include highlights on the company's performance in the second quarter and the first half of the fiscal year, as well as some full year outlook commentary. Then Ted will provide more details around the second quarter and our guidance for fiscal 2012, and we'll take questions at the end of Ted's remarks.

We know it's been a busy earnings week for all of you, so we appreciate you dialing in today. We expect the call to take about an hour, maybe a little bit less.

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 hand over the call to Keith.

Keith D. Nosbusch

Thanks, Rondi. Good morning, everyone, and thank you for joining us on the call today. I appreciate your time and interest in Rockwell Automation. The first portion of my remarks will cover some highlights for the quarter and a summary of our performance in the first half of the year. Please turn to Page 4 in the slide deck. We had solid 8% growth excluding currency in Q2 and 7% organic growth.

I was really pleased to see solid organic growth in every region. North American market conditions have remained healthy. Our reported sales growth in the U.S. was 5% this quarter. But because of an unusually large project that shipped in quarter 2 last year, we believe that understates the strength of market conditions in the U.S. If we carved that large project out, growth in the U.S. would have been several points higher. Canada was a standout with 25% growth. We are successfully capitalizing on the strength of resource-based industries there.

Europe had another strong quarter despite macroeconomic headwinds. Our team there is executing very well in a difficult environment.

I was encouraged to see Asia return to double-digit growth in the quarter. China improved to high single-digit growth, and we are optimistic that market conditions will continue to improve in the second half of the year. Our outlook for India is more cautious. Sales in India were flat in the quarter, and we have yet to see evidence of improvement in the economy.

Lastly, while Latin America organic sales were only up 4% in the quarter, they have difficult comparison to a great quarter last year. Orders were strong in the quarter, and we continue to expect double-digit growth for the full year. I hope that regional color was helpful. I have a few other second quarter highlights to share before I move on to the first half.

Our Process business continued to gain traction and delivered another quarter of over 20% sales growth. We continue to expand our integrator network, which is enabling us to pursue a broader spectrum of applications in all regions. Process remains our greatest growth opportunity, and we are executing well. We introduced 2 new Logix mid-range controller platforms that improved scalability and Ethernet connectivity, plus enhanced motion for our OEM customers.

For the fourth time, we were recognized by the Ethisphere Institute as one of the World's Most Ethical Companies. This award is a real tribute to the efforts of all of our employees and the importance of ethics in our culture.

Ted will provide more detail on second quarter financial performance in his remarks. So I'd like to provide a few highlights on the first half of the fiscal year.

I am pleased with our year-over-year performance through the end of March. Sales grew over 8%, excluding currency. Operating margin expanded 1.7 points, and segment conversion margin was over 40%. Earnings per share in the first half grew 12% in spite of a pretty significant headwind from taxes, and we continue to generate best-in-class return on invested capital.

So far, the year has played out a little differently than we thought it would. Developed markets have been a bit stronger and emerging markets weaker than we originally expected. But overall, at the halfway point of the year, we're pretty much where we expected to be, and we're well positioned as we enter the second half.

So this is how we're thinking about the second half. We expect sequential sales growth in all regions and across our Product & Solutions and services businesses. We had a good first half in developed markets, and we expect those markets to remain solid for the rest of the year.

In emerging markets, we expect stronger growth in the second half of the year. Our outlook for China and Latin America is strong. We expect to return to double-digit growth in the second half. But we are more cautious on India, as we have yet to see signs of economic improvement there.

Despite some mixed signals in the macro environment, we expect the recovery to continue in 2012. We feel great about our market position and our pipeline of opportunities, and we continue to invest in innovation and differentiation.

With 2 quarters behind us and given our current assessment of global economic and market conditions, we are maintaining the midpoint of both our sales and earnings per share guidance for the year and narrowing the ranges. The narrowed range for earnings per share guidance is $5.10 to $5.40. Sales and earnings within our guidance ranges would represent another record year for the company. Ted will provide more color on the assumptions in our guidance in his remarks.

Let me close by thanking all of the employees and partners of Rockwell Automation. We are executing our growth and performance strategy well, and that will enable us to deliver superior returns to our share owners.

With that, I'll now hand it over to Ted.

Theodore D. Crandall

Thanks, Keith, and good morning to everybody out there. I'll be referencing the slides on the website, and I'll start with Slide #5, which is titled Second Quarter Results: Summary. Revenue in the quarter was $1,561,000,000, up 7% compared to the second quarter of last year. The year-over-year impact of currency fluctuations reduced sales by about 1 point, and the contribution from acquisitions increased sales by about 1 point.

Segment operating earnings were $268 million, an increase of 10% compared to a year ago. General corporate net was $25.1 million compared to $20.5 million in Q2 last year. The increase was due to a $7 million legacy environmental charge related to former Rockwell International sites. The effective tax rate in the quarter was 24.9%.

Diluted earnings per share was $1.16, up a bit from last year. While we had a reasonable increase in segment operating earnings, the combination of our legacy environmental charge and a higher tax rate reduced EPS by about $0.13. Average diluted shares outstanding in the quarter was 144.7 million, and during the quarter, we repurchased approximately 508,000 shares at a cost of about $41 million.

Moving to Slide 6. This is the total company results for the second quarter. As I noted on the prior slide, the year-over-year increase in sales for Q2 was 7%. Sales increased by 6% sequentially.

On the right side of the slide, segment operating earnings were $268 million, up 10% compared to Q2 last year, with segment operating margin at 17.2%, up by 0.5 point from last year. The year-over-year margin expansion is due primarily to volume leverage and a favorable contribution from price, partly offset by increased spending. It's a similar year-over-year margin causal in both segments. Sequentially, operating earnings declined by about 5%, and segment operating margin was 2 points lower.

Last quarter, we talked about Q1 being an unusually strong margin quarter, and we said that we expected lower operating margins in the balance of the year. All the factors we said would cause margins to be lower in the balance of the year came into play in the second quarter, and that was less favorable mix, the normal January wage and salary increases, other increased spending and less favorable impact from currency.

As Keith pointed out, we're pleased with the first half performance, including margins. Segment operating margin for the first half was 18.2%, up 1.7 points compared to the first half of last year and with a related conversion margin of 42%. Although it's not shown on the slide, our trailing 4-quarter return on invested capital was 30.5%.

I'll turn to Slide 7, which summarizes the Q2 results for the Architecture & Software segment. The left side of the chart displays the sales performance. Sales increased 7% year-over-year, reaching $665 million. Currency translation reduced sales by about 1 point. Sales increased 2% sequentially in the segment.

Operating margin for the quarter was 25.2%, up 0.8 point from Q2 last year. And year-to-date, operating margin in Architecture & Software is 26.9%, up 2.2 points from last year.

On Slide 8, you'll see the results for our Control Products & Solutions segment. Sales in the quarter were up 7% compared to Q2 last year. The increase included about 2 points of contribution from acquisitions, offset by about a 1-point reduction due to currency and with particularly strong growth in the Solutions and services businesses. Sales increased 9% sequentially in Control Products & Solutions.

Segment operating earnings were $101 million, with segment operating margin up 0.2 point from the same quarter last year. Year-to-date Control Products & Solutions operating margin is 11.5%, up 1.4 points compared to last year.

Switching to the next slide. This is a look at regional sales performance. You can see here the growth rates by region, both as reported and excluding currency effects. Keith covered most of the regional highlights in his comments. So perhaps, I'll provide just a bit more color for EMEA.

EMEA continued to deliver very good results with 12% currency-neutral growth. You can see that in the far right column. EMEA was the only region with a significant impact from acquisitions in the quarter. But excluding the effect of acquisitions, EMEA still had a very healthy 7% increase year-over-year.

I'll turn now to Slide #10, the free cash flow. Free cash flow for the quarter was $230 million. That's about 137% conversion on net income. We continue to expect free cash flow conversion of about 75% for the full year, and that includes the impact of the $300 million discretionary pension contribution that we made in the first quarter. We would expect conversion to be about 100%, excluding the pension contribution.

And that takes us to the final slide, which addresses our current outlook for fiscal '12. This slide provides a comparison of first half results to the full year guidance. Looking at the first half results, as I mentioned, we're pleased with the growth in sales, the margin performance and the EPS performance, and we're pretty much where we expected to be at the midyear point.

As Keith mentioned, with 2 quarters behind us, we have narrowed the guidance. We now expect sales for the full year in the range of $6.25 billion to $6.45 billion. That compares to the previous guidance of $6.2 billion to $6.5 billion. We expect currency translation to reduce sales by 2 points for the full year. Our previous guidance assumed a 1-point decrease due to currency.

Last quarter, you may remember, we identified currency as a risk to the full year sales guidance. With another quarter of experience behind us, we're now building that into the guidance. Excluding currency effects, we expect growth for the full year of between 6% and 9%. Previous guidance was 5% to 9%.

The $50 million drop at the top end of the sales range primarily reflects the increased negative impact due to currency. At the bottom end of the sales range, we're absorbing the negative currency impact but increasing our expectation for full year organic growth by about 1 point.

We still expect segment margin to be around 18%, probably a little better. As I mentioned earlier, we're at 18.2% year-to-date, and we expect diluted EPS in the range of $5.10 to $5.40. The $0.05 reduction at the high end of the EPS range includes the more negative impact of currency. We continue to expect a full year tax rate of about 24%.

And finally, we expect general corporate net expense to be about $90 million for the full year. That's up from the previous guidance of $86 million, and the increase reflects the legacy environmental charges that were incurred in Q2.

And with that, I'll turn this back over to Rondi.

Rondi Rohr-Dralle

Great. Thanks, Ted. [Operator Instructions] So Deanna, let's take our first question.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Rich Kwas, Wells Fargo.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Ted, on incrementals. Just when you look at on year-over-year basis, a little bit below our expectations. And I just was thinking of it in terms of commodity headwind, that was pretty significant last year at this time, and you put through price as the year went on. What was the spread on price cost in the quarter? And did that have any positive benefit on margin year-over-year?

Theodore D. Crandall

Well, I think on commodity costs, we are running a little bit higher than a year ago but not outside our expectations and, I'd say, consistent with our original guidance. On price, we said we thought we would realize about 1 point, maybe a little bit less. And I would say, through the first half, we're very much on track with that. So I think price cost through the first half and in the second quarter was pretty much as we expected.

Richard M. Kwas - Wells Fargo Securities, LLC, Research Division

Okay. And then just a quick follow-up on the mix with Solutions. I think you had raised that last quarter to 2 to 3 points incremental versus 1 point in the original guidance. Where are you now within the guidance for Solutions mix?

Theodore D. Crandall

Yes. I think what we have seen through the first half and with what we've got in backlog now, it looks like Solutions growth is even going to be a little bit better than we originally thought, and Product growth just may be slightly lower than we originally thought. So that 3-point difference has now become a several-point difference.

Operator

And the next question comes from the line of Shannon O'Callaghan, Nomura Securities.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

So interested in the pickup again in Asia-Pac and in China. Can you talk a little bit about how you saw that progress through the quarter and exiting the quarter?

Keith D. Nosbusch

Absolutely. We -- with respect to the trend in the quarter, it definitely got stronger. I think there's probably 2 reasons for that. One is, as we talked last time, there was the impact of liquidity, particularly on small and midsized customers, and China has been easing their reserve ratio in the period. But then second is just the holiday in Asia, with the Chinese New Year occurring generally a little -- in the early part of the quarter, that as we exited, we saw a stronger momentum building as we went through March. And March was very solid, which, I think, drove a lot of the performance that we talked about, improvement on a sequential basis from Q1. But I would say those 2 things with growing momentum as we exited the quarter.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Okay, great. And then just maybe, Ted, on the incremental. So I understand that the components in 2Q, obviously, I think hit a little bit more than we thought. We all knew they were coming down from 57, came down a little more. As you think about the back half, I mean, to work towards the higher end, it looks like they have to get a little better again. So can you maybe talk about the dynamics heading into 3Q, 4Q from an incremental standpoint?

Theodore D. Crandall

Yes. I mean, I think if you look at the implied incrementals for the full year now, we're kind of in the mid to high 30s. And given where we had been in the first half, that would put the second half in that same -- the high-30s range. So we're pretty comfortable with that given our expectations for volume growth in the second half, but we are going to have some headwind from mix in the second half.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

So I mean -- I guess relative to this quarter, what would be the key things that are not as much pressure on the 3Q, 4Q incrementals?

Theodore D. Crandall

Well, I think, there's going to be a contribution from volume compared to this quarter, a little bit of headwind from mix, and then there's just some other noise kind of stuff that affects quarter-to-quarter results. And when you do the conversion, you've also got the complication of what was going on in the quarter the prior year before.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Okay. So basically, no change to kind of thinking 35-plus or something on incrementals?

Theodore D. Crandall

I think that's right.

Operator

And the next question comes from the line of Winnie Clark, UBS.

Winifred Clark - UBS Investment Bank, Research Division

First of all, just quickly on end market color. Could you give us an update on what you're seeing by end market? I know transportation has been a bright spot. Does that continue to be the case? And you talked about some acceleration expected in Process end markets as well.

Keith D. Nosbusch

Sure. Let me comment on a couple of the end markets. You hit the first one, which was auto. And certainly, we felt auto was strong in the quarter, and we continue to believe that, that will help us as we go through the year. Associated with that would be tire. Tire has been a very strong market over the last, probably, 12 to 18 months now. While we're not seeing the growth there, tire is continuing to stay at the high level with just a little bit of shift of where and who's doing the investing, but the market itself continues to perform well. Oil and gas is strong pretty much across the board, and that is pretty much a continuation. Water wastewater, strong in the U.S. Mining, strong in Latin America, Canada and the South Africa, Middle East region for us, with respect to EMEA. The consumer products, consumer is a little bit mixed. When you look at it in total, the food and beverage market, a lot of the investment there is primarily in emerging markets as we go forward. Life sciences becoming a little stronger in EMEA. And then the one that's probably a little weaker within consumer is the home and personal care market at this point in time. So that gives you a little feel for the different end markets.

Winifred Clark - UBS Investment Bank, Research Division

Okay, great. And then just within EMEA. Can you talk about, within the different areas, what you're seeing there specifically? And you talked about the export market is strong last quarter. Is that something you're still seeing?

Keith D. Nosbusch

Yes, yes. Within EMEA, we see a continuation of what you just mentioned we talked about in Q1, and that is the strength of the exporting sector. I think the strength of the exporting sector is starting to diverge a little. And that is continued strong exports back into the U.S. but a little weakening of exports into Asia because of some of the slowdowns that were taking place there, so a little difference as we see that happening at the moment. Then we also have the phenomenon between north and south, I'll call it, Western Europe, if you will. The continuing debt crisis in the south impacting a little bit stronger into Spain and Italy now, and the north being more of the exporting region goes back to my earlier comments. And then the last point I'd make with respect to Europe would be that emerging aspects, which, for us, would be areas like Russia and Turkey, they continue to perform well in the second quarter, equally strong -- almost equally as strong as they were in our first quarter. So we see continued growth there, and then the Western Europe would be back to the earlier comments I made.

Operator

And the next question comes from the line of Terry Darling, Goldman Sachs.

Terry Darling - Goldman Sachs Group Inc., Research Division

So I wonder if you could just elaborate a little bit or clarify -- it sounds like you're looking on organic for a little bit of an acceleration in the second half versus where we've been here. And I'm taking it -- from that, Ted, your comments in response to Shannon's question, but also this idea that the U.S. was impacted by comps here in the March quarter. But -- I mean, if you could just flesh that out a little bit more.

Theodore D. Crandall

Well, I would say, on an x currency basis, on a year-over-year basis, the current guidance would call for growth about equal in the second half to the first half. And there's probably not enough acquisition impact in either half to affect that much, so think of that as organic.

Terry Darling - Goldman Sachs Group Inc., Research Division

Okay. And so what -- just the offset then in the context of a flatter -- so U.S. you're saying tough comp in the first quarter but something else decelerates in that mix. In other words, you’ve talked about EM getting better in the second half. That's pretty clear. So to offset that, you'd have to have a slowing in DM, and maybe that’s Europe, but...

Theodore D. Crandall

Well, I think that's exactly the case, Terry. I'm sorry. I didn't understand your question from a regional point of view. I mean, we do expect strong growth rates in the emerging market in the second half, and we do expect lower growth rates in the mature markets. But that's kind of what we've been talking about for a while in terms of a continuing deceleration in the mature markets as the -- just as the cycle continues to play out.

Terry Darling - Goldman Sachs Group Inc., Research Division

Okay. And then on your point with regards to margins and certain things happening in given quarters, I mean, just on CPS margins, that's really where the weakness was on our look of things. I guess it was our thought that you had very easy comps because of all the impact from material pressures and Japan supply chain issues last year. So is it really just mix going on here? Or are you seeing some pricing pressure there? I know you talked about 1 point, and that's in line. But you raised some prices in, I think, August or September that was likely to drive a better year-over-year comp, at least in the first half of the year. What else is going on at CP&S, given how easy that comp was that you didn't have a little bit stronger incremental than 15% year-over-year?

Theodore D. Crandall

Well, I would say we got a reasonable contribution from the volume. We've got the favorable contribution for price we were expecting. And actually, I talked about being a little under 1 point. It wasn't a lot -- it wasn't much different in either of the segments. There's a negative mix impact in CP&S year-over-year, and that's basically higher Solutions growth. And we've got the spending impact that we have talked about in both segments year-over-year.

Terry Darling - Goldman Sachs Group Inc., Research Division

And did you call that mix effect a 3-point impact? That's a revenue impact, presumably. But can you clarify how much that mix impact was?

Theodore D. Crandall

Well, it would have been less than 0.5 point of margin year-over-year.

Terry Darling - Goldman Sachs Group Inc., Research Division

Okay. And then just lastly, continue to sit on very strong balance sheet. Buyback has been slower in the first half of the year than the pace from last year. Are you looking to step up buyback in the second half of the fiscal year?

Theodore D. Crandall

Yes. I would say yes. I mean, obviously, our repurchases in any period are going to depend on the cash generation and what's going on with acquisition spending. But if you look at our expectations for cash flow generation this year and you back out some reasonable estimate of acquisition spending, we would expect to probably repurchase about 3 million shares this year. Obviously, we have not been at that pace in the first half. Partly in the first quarter, we stepped back a little bit because of the large pension contribution. I would say in Q2, we got a little bit of a slow start in January under a 10b5-1 plan. But our repurchases did accelerate through February and March, and we would expect to kind of be on pace through the rest of the year to get to that roughly $3 million number -- 3 million share number, I'm sorry.

Terry Darling - Goldman Sachs Group Inc., Research Division

Is that 3 million, Ted, is that net or gross of issuance-related options and so forth?

Theodore D. Crandall

That's gross.

Operator

And the next question comes from the line of Julian Mitchell, Crédit Suisse.

Julian Mitchell - Crédit Suisse AG, Research Division

Yes. My first question, I guess, on the -- just the margin outlook. If you're looking at your gross -- let's start with, I guess, CP&S or incremental margins or your operating margins. The operating margins there have been, I guess, around 11% last year, tracking at about 11.5% this year. Last cycle, they -- operating margins, they got up to towards mid-teens. I guess is there anything this cycle versus previous that you think will cap the operating margins in that business for the next sort of couple of years that would stop you getting back to that prior peak growth rate before, let's say, 2014?

Theodore D. Crandall

I don't think I would characterize it as something that's going to cap the margins. But we do have some headwind this cycle, particularly in CP&S, compared to last cycle. Part of that is an increasing Solutions content as a percent of the total, so we've got that mix headwind we have talked about previously. And the other thing I think we’ve talked about previously is we've got substantially higher pension expense this cycle than we had last cycle. And because CP&S tends to be our more people-intensive business, it has somewhat of a disproportionate impact in that segment.

Julian Mitchell - Crédit Suisse AG, Research Division

Okay. And then just on your sort of developed market growth assumptions for the second half year-on-year. I think you've said a couple of times that, that would -- that growth rate would decelerate year-on-year in the second half compared to what you delivered in the first half. But it sounds like the U.S. may be a little bit better because of easier comps. So what sort of growth rate are you expecting for EMEA in the second half? Is that a very big step down year-on-year?

Theodore D. Crandall

Yes. I mean, I would say we're thinking that -- and it'll vary across our sales guidance range, obviously. But at the midpoint of the range, we're thinking the second half on an apples-to-apples basis, excluding acquisition impact, might be maybe 3 points lower than the first half.

Operator

The next question comes from the line of Scott Davis, Barclays.

Scott R. Davis - Barclays Capital, Research Division

Want to get a sense -- your Process business continues to be strong. And a couple of questions here. I mean, first, how much of that is -- when you think of it being up 20%, I mean, how much of that is business you're going in with partnership and with Endress+Hauser? I mean, kind of how big of a help is that? And then I have a follow-on on that as well.

Keith D. Nosbusch

Sure. Well, certainly, it's hard for me to say exactly how much of a help that is. But it certainly is part of the broader strategy of a -- of our Process strategy, which is we can supply a complete integrated solution, including instrumentation, when that's the way the customer wants to purchase it and to do that from an ability to provide the integration services, the maintenance services, the asset management associated with that equipment and to provide a more seamless startup for our customers. So it's part of the Process strategy. In some customers, E&H has a strong position. In some customers, Rockwell has a stronger position, and we help each other. And then we target other customers where we just want to break into that market. So it's -- I just view it as it's a good partnership, and we help each other in growing our mutual business at our common customers.

Scott R. Davis - Barclays Capital, Research Division

Okay, understand. One of the things I think we're trying to figure out, if you -- byproduct of low natural gas prices, of course, we’ve got a bunch of ethylene crackers that are coming into the U.S. and other pretty large chemical projects as well. Are you guys kind of ready to step into some of these big projects or have credibility in the market to step into some of these projects and take a much larger role, as like a master automation contract or that type of thing? Or how do you kind of see that playing out?

Keith D. Nosbusch

Well, I think as far as being able to be a Main Automation Contractor, or a MAC, as you referred, we do that in a number of industries and a number of applications. And we've done that now for, certainly, over the last year or 2, particularly more outside the U.S. because, obviously, as you well know, that's where most of the greenfield and expansion had been going, particularly in the oil and gas industries. Your comments about, and specifically, to the U.S. and the expansion into large-scale chemical complexes, I would say that is one of the places that is not Rockwell Automation's sweet spot. That is very similar to what we talk about in the oil and gas segment, being refining, the bulk chemical projects. The majority of our applications there and where we do have and where we are capable and will participate is in the intelligent motor control aspects of that business, with our medium-voltage drives and motor control centers and our safety systems from a process standpoint. And there, we will become a significant participant and to work with the companies that are starting that up, that are talking about those new facilities. But when you look at the main process control, that is an area that while we have capabilities, that would not be our historical strength and, certainly, is an area that we will participate in. In the areas that I talked about, as well as our advanced process control, which is an area that we have worked with all of these companies globally on, in particular outside the U.S., and advanced process control is a capability that we do have where we're talking about reduction of process variability and improving the control of the -- of those core chemical processes with some very sophisticated modeling technologies and capabilities. So different pieces, absolutely. And we're aware of those expansions that you've referenced.

Operator

And the next question comes from the line of Steven Winoker, Sanford Bernstein.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Just first question on Logix and integrated architecture and the penetration rates that you're achieving. If you think about just sizing that now, I know it's not just a quarterly issue, but can you give us a little more color and flavor for that penetration and the size of the business in terms of how you see that -- playing out to the rest of the year so that we're not -- I’m not just focused only on the cycle but trying to think about your penetration share gains?

Keith D. Nosbusch

Yes. Well, certainly, let's take the near-end look, and that's for the remainder of the year. We would expect Logix to grow at a growth rate above the company average, and that's certainly what we're planning on. With respect to penetration, that's a larger -- well, let me just -- and we expect to see really solid high single, low double-digit growth rate for the year in Logix. As far as the penetration, we continue to expand the opportunities for Logix. So we have not -- and when I say that, I mean, we're expanding the served market for Logix, and that's what I talked about the new 2 controllers that came out. That's expanding the market that we have had -- that we cover going into OEMs, going in the process, the addition of safety, the addition of broader Ethernet capabilities, all of this is expanding the scalability and, therefore, the served market for Logix. So our penetration -- in one way, you can say it keeps going down because we keep expanding the market. So we believe we still have runway to grow Logix as we go forward, and certainly, that's one of the reasons we continue to invest in it, to be able to continue to expand the served market and, therefore, be able to continue to drive that higher growth that I talked about. And this year, for the first time, we expect Logix sales to be over $1 billion. So -- and we see no reason we can't continue to grow that above the company average into the -- certainly, the short and midterm future.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

And would you say -- how big a deal is the integrator network overall in terms of -- as a growth limiter to your ability to drive this? And how much investment -- or how does that relate to your investment, particularly overseas, in building that out?

Keith D. Nosbusch

Yes. Well, the fact of the matter is it's not our investment to build it out, other than the people that we have on staffs to grow the relationships, because these are independent third-party companies that create the integrator network. So ours is creating the relationships and building the interfaces and the day-to-day interaction with our sales and/or channel management teams. And certainly, we don't see it as a limitation from the standpoint of we continually grow and develop it. And we talk about it, particular in Process, one of the reasons we are growing at the rate we are is that we continue to expand the integrator network, and to your point, very much so in the emerging markets. And I think the challenge is more of finding competent, talented integrators in some of the emerging markets that can support the technology and have the domain expertise to grow into some of these new markets. So I think it's more the availability issue and having the competence to continue to expand. But we are constantly evolving and growing that partner network throughout the world.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Well, you haven't changed your approach in terms of either funding -- finding promising folks who aren't system integrators yet and putting them in the business so that they can help drive your growth. I'm just trying to get a sense on the emerging market side of how big a limiter or not this is.

Keith D. Nosbusch

No, I don't -- we don't see it as a limiter, and we operate in 2 dimensions here. One is, if you notice some of the acquisitions we've made have been system integrators in the emerging markets so that we can get a critical mass with domain expertise. But at the same time, we're expanding the partner network so that we can work with more customers. Because at the end of the day, it's the customer that decides how they want to work here. Do they want to work with a local integrator? Or do they want to work with a Rockwell Automation who can probably provide more commonality, more standardization globally than a local system integrator could. So we try to look at that as the best of both worlds and how do we balance the growth of local integrators versus continuing to expand our solutions capability and domain expertise in the emerging markets.

Operator

The next question comes from the line of Nigel Coe, Morgan Stanley.

Nigel Coe - Morgan Stanley, Research Division

Yes. So, Keith, you talked about the divergence between CPS and A&S growth rates to several points. And I'm just wondering, is this a temporary divergence? Or are we now at the phase of the cycle where large projects are going to be the primary driver of your top line growth?

Keith D. Nosbusch

No, we don't -- back to where we are in the cycle, we think we're still in a -- in the part of the cycle where we should see growth in both our Product businesses and our Solutions businesses. I think the gap that we talked about is mainly because of the -- excuse me, the slow start we had, particularly in Asia in emerging markets in our first quarter and the hole we dug with the expanded shipments we had in our fourth quarter last year. And as we rebuild that pipeline with orders, we're just seeing that order flow now come through in the second half of the year. So we're seeing some moderating in Product, but a normal expansion in our Solutions business. And we don't see that as an indication at this point yet of a movement towards end-of-cycle large projects in heavy industries. But the other part of that is, we're naturally growing our Process business. So we are seeing some of that as just the -- as far as just the natural evolution of our strategy as we go forward. So we would expect more larger projects, more in the heavy industries, particularly in the emerging markets, and some of that is just the natural evolution following our growth and performance strategy. And yet, for the remainder of the year, we still expect above-market growth in both Products and Solutions.

Nigel Coe - Morgan Stanley, Research Division

Okay. No, that's helpful. And then coming back to the U.S. "manufacturing renaissance." It's not just the chemical and crackers. We're also seeing some tire manufacturing relocations. We're seeing some heavy manufacturing expansions. Are you starting to see that in your numbers right now? Are you starting to see that in your order flow? Or is that to come in 2013 and beyond?

Keith D. Nosbusch

Well, we -- I would say we're not seeing that in our business at this point in time. We're starting to have the anecdotal commentary as we do our normal quarterly pulse check. I would say the U.S. organization would tell us that they're having conversations, that people are bringing it up. But we're not seeing a mass change of direction here going forward. But certainly, the topic and the interest in manufacturing in the U.S. has picked up. And I think that's good, not just for Rockwell Automation but also just for the economy in general. So conversation at this point, we would expect to -- if there is going to be an impact, that's a little longer term as far as an investment cycle that it would bring with it.

Nigel Coe - Morgan Stanley, Research Division

Okay. And then just one more quick one, if I may. You mentioned the prior second quarter 2011, you had a particularly large project, which I'm assuming is within CPS. Would you describe that as a particularly profitable project? Because it looked like your margins in the prior quarter were somewhat higher than they might otherwise have been.

Keith D. Nosbusch

No. I would not qualify that one as a -- I think it's what we would call it to be the average of our Solutions business for us, not one that was particularly strong. So I don't think that's had any impact into year-over-year performance.

Operator

And the next question comes from the line of Jeff Sprague, Vertical Research.

Jeffrey T. Sprague - Vertical Research Partners Inc.

Just a couple of things, if I could. Just first back to China. Keith, if you said it, I missed it. Could you just tell us what China actually did in the quarter on a standalone basis? And then more importantly, I was just interested in your view on what you're seeing change to kind of bolster your outlook in the second half of the year? What end markets, what type of activity is driving that?

Keith D. Nosbusch

Yes. Well, first of all, I did not mention it, but China grew at 7% for us this year -- this quarter. I'm sorry, this quarter, excuse me. And that was up from negative growth last quarter. What are we seeing that's different? Well, I think a couple of things. First, our team there is doing a very good job at uncovering new customers and new applications. And that does take a little bit of time, and that's why sometimes you get a dwell period, particularly when the economy is slowing. And we have seen that in China, and I think all of the statistics point to that, which is something that you've seen. As where are we seeing this now? I think we're starting to see some of the liquidity problems working their way through the system. We would hope that, that is going to be a continuing theme as we go through the year, which is why we believe the uptake will come up. And we see a split, really, between large customers and smaller customers yet. The larger companies are getting stronger and investing more. And we still see some of the pain at those smaller customers at this point, and that's really driven because of the liquidity problems that I talked about. The other reason we think we're going to see a better second half is our front-log activity has picked up, and that really goes back to the earlier comment I made about our sales organization is working very aggressively. We believe OEMs continue to be strong for us. To be able to create new OEMs, it takes time to work with them in the design phase and the design cycle. So we're expecting a pickup with OEMs as we go forward. And just the ongoing maturity of our distributors and our system integrators will help and should always help provide some tailwind as well. But that's a -- that's also a long-term process for us as well. So I think those would be the thoughts that we have with respect to China, both current, and why we feel we will expect to see an acceleration in the second half.

Jeffrey T. Sprague - Vertical Research Partners Inc.

Just one additional point on that. Clearly, a lot of what you said is about making your own luck. I guess the liquidity stuff is more a macro comment. How much of this do you think is you driving the business versus some genuine improvement in the underlying business and market conditions there?

Keith D. Nosbusch

Well, I think if you look at the underlying market conditions, they continue to be mixed. If you look at the PMI, depending upon which one you look at, the third-party one, which tends to be most of the multinationals, is still under 50% and has been under 50% for, I think, maybe 6 or more months now. So that tells you that manufacturing is slowing. If you look at the data that they communicate, they just recently lowered their growth rates another 0.5 point. And so their exports have been impacted to some degree. So I would say the majority of our success has been us working it as opposed to the continued growth or -- at a high level of -- while the growth rates are still strong, they're declining from where they were. So it isn't like the overall business is pulling us along with it. I think we're having to work harder, and we're having to create more of our opportunities and grow more customers. And that's why I'm complimenting our team in China because it's -- while it might have been stronger market growth previously, we have certainly strong growth, but our performance, I think, indicates that the team is outperforming the underlying market there as well.

Jeffrey T. Sprague - Vertical Research Partners Inc.

Yes, that's impressive. Just one other quick thing for me, and I'll jump off. Is there any color or anything you could share on just the state of distribution in the U.S.? Are distributors destocking, restocking? Just kind of where their head is around just kind of a general tone of activity in the U.S. market.

Theodore D. Crandall

Jeff, this is Ted. I think you know we've got pretty good visibility of North American distributor inventories. And I would say, nothing unusual going on in their inventories. They have increased proportionate to kind of what they're seeing as end demand increase. And if you look kind of at the underlying product sales in Q2 in North America, it was another very good quarter for our distributors.

Operator

And the final question will come from the line of Richard Eastman, Robert W. Baird.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Keith, could you just speak for a second to maybe the mix within the A&S business? Can you -- looking at the core growth rate of about 8%, was the Process & Software piece up more? Is that where the mix impact came versus the peripheral Products business?

Keith D. Nosbusch

I think around -- Logix was slightly higher than the average. And I would say, last time, we talked a little bit -- last year at this time, we talked about motion being much stronger, and that was the inner segment mix difference at that point. But motion would have grown this year slightly under the segment average. So really, it was a pretty tight band within A&S this quarter, not a big swing between the different businesses within there. Good, solid safety growth. Obviously, solid Logix growth. And the peripheral products, which would be motion -- really motion and sensing, motion slightly under and sensing basically right at.

Theodore D. Crandall

Rick, in the year-over-year causal, margin causal on A&S, there really wasn't much of a -- there wasn't much of a significant mix impact.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Okay. So in the 80 bps improvement, that's not necessarily mix. It's more volume and leverage?

Theodore D. Crandall

Correct.

Keith D. Nosbusch

Yes.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then could I just ask in terms of the orders on the Solutions piece of CP&S, was order growth -- how did that look in the quarter?

Keith D. Nosbusch

The book to bill was 1.1 in the quarter. So once again, 2 very good quarters of above 1 growth in our Solutions business, which is why, basically, Ted commented about the second half and the mix shift favoring more to Solutions. It's because of that backlog that we built after getting ourselves to hold in the third and fourth quarter of last year.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

I understand. And then just as a related question. I’m going to relate this just so I can sneak it in. But the growth investment in the second quarter, we had talked in the first quarter that you basically delayed some of the first quarter growth investment. Did -- if you look at that, the growth investment that you made in the second quarter, does that kind of true up your year-to-date investments? In other words, was it heavier in the second quarter since we kind of delayed the first quarter investment?

Theodore D. Crandall

Well, there were 2 things. When we talk about spending Q1 to Q2, so sequential change, probably the largest impact was just the merit increases that we normally put through in January. There was additional incremental spending increase sequentially beyond that. I don't think I would say we caught up year-to-date from some under-spending in Q1. If anything, we're probably still a little bit below where we thought we would be for the first half.

Rondi Rohr-Dralle

Okay. Thanks, everyone, for joining us today. That's going to conclude today's call. I'm available for follow-up calls, and so thank you again.

Operator

And that concludes today's conference. At this time, you may disconnect. Thank you.

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