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Edited Transcript of ROK earnings conference call or presentation 25-Apr-19 12:30pm GMT

Q2 2019 Rockwell Automation Inc Earnings Call

MILWAUKEE Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Rockwell Automation Inc earnings conference call or presentation Thursday, April 25, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Blake D. Moret

Rockwell Automation, Inc. - Chairman, President & CEO

* Patrick P. Goris

Rockwell Automation, Inc. - Senior VP & CFO

* Steven W. Etzel

Rockwell Automation, Inc. - VP of IR & Treasurer

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Conference Call Participants

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* Charles Stephen Tusa

JP Morgan Chase & Co, Research Division - MD

* Jeffrey Todd Sprague

Vertical Research Partners, LLC - Founder and Managing Partner

* John Fred Walsh

Crédit Suisse AG, Research Division - Director

* John George Inch

Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials

* Julian C.H. Mitchell

Barclays Bank PLC, Research Division - Research Analyst

* Justin Laurence Bergner

G. Research, LLC - VP

* Nigel Edward Coe

Wolfe Research, LLC - MD & Senior Research Analyst

* Richard Charles Eastman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Robert Paul McCarthy

Stephens Inc., Research Division - MD & Analyst

* Robert Scott Graham

BMO Capital Markets Equity Research - Analyst

* Scott Reed Davis

Melius Research LLC - Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research

* Vladimir Benjamin Bystricky

Citigroup Inc, Research Division - VP

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Presentation

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Operator [1]

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Thank you for holding, and welcome to Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the line for questions. (Operator Instructions)

At this time, I would like to turn the call over to Steve Etzel, Vice President of Investor Relations and Treasurer. Mr. Etzel, please go ahead.

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Steven W. Etzel, Rockwell Automation, Inc. - VP of IR & Treasurer [2]

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Good morning, and thank you for joining us for Rockwell Automation's Second Quarter Fiscal 2019 Earnings Release Conference Call.

With me today is Blake Moret, our Chairman and CEO; and Patrick Goris, our CFO. Our results were released earlier this morning and the press release and charts have been posted to our website. Both the press release and charts include reconciliations to non-GAAP measures. A webcast of this call will be available at that website for replay for the next 30 days.

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

So with that, I'll hand the call over to Blake.

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [3]

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Thanks, Steve. Good morning, everyone. Thank you for joining us on the call today. I'll start with some key points for the quarter, so please turn to Page 3 in the slide deck.

Our results for the quarter reflect profitable growth in all regions led by strong process industry performance. We saw accelerating growth in Information Solutions and Connected Services, reflecting adoption of the Connected Enterprise. Our growth was tempered by weaker-than-expected automotive sales, which were down about 20% year-over-year. This impacted our product sales in the quarter, particularly in North America. In this region, we saw a strong product growth in January. February was weak with orders picking up in late March.

Globally, organic sales were up 3.6%. From a vertical perspective, growth was once again led by Heavy Industries, which grew high single digits, and Consumer which grew mid-single digits. Heavy Industries growth was led by oil and gas, pulp and paper and mining. Oil and gas grew double digits.

In Consumer, Life Sciences was very strong. I already mentioned Automotive, but within Transportation, Tire grew nicely, up double digits. Our KPI for process sales grew 10% organically. The weakness in Automotive drove the 2% decline in Logix.

Commenting on regional performance in the quarter. North America, which for us is the combination of the U.S. and Canada, grew 2% organically. While automotive weakness significantly impacted the overall growth rate for this region, growth was broad-based across a wide range of industries. In pulp and paper, we won a significant process and power control order this quarter with Green Bay Packaging. EMEA was up over 5% in the quarter led by Consumer and Tire. Asia grew about 4% led by Heavy Industries and Automotive. China grew 6.5%. Latin America sales were up 13% led by Heavy Industries.

I'll make a few additional comments about our Q2 results. Adjusted EPS was up 8% and segment operating margin expanded 40 basis points year-over-year. Book-to-bill performance for our Solutions and Services businesses was 1.09 in Q2. Backlog remains high. Patrick will elaborate on our second quarter financial performance in his remarks.

Let's move on now to guidance for full year fiscal 2019. Forecasts continue to call for industrial production growth. We continue to see broad-based growth with strong financial performance. However, given the weakness in Automotive, we are reducing the high end of our guidance range for organic sales growth and adjusted EPS. We expect our fiscal 2019 organic sales to be up 4.5% year-over-year at midpoint of guidance. Currency is now expected to reduce growth by 2 percentage points. Including the revised impact of currency, our fiscal 2019 guidance is sales of about $6.8 billion. Midpoint of the updated adjusted EPS guidance range is now $9 compared to $9.05 in previous guidance. As Patrick will discuss in a few minutes, this guidance does not include the impacts of the Sensia joint venture.

Moving on to Slide 4. I'll provide an update on 2 recent strategic investments to increase long-term value for our customers and share owners. Our strategic partnership with PTC is progressing well. We're winning profitable new business across all focus industries and geographies and some of our engagements are expanding to multisite rollouts.

Even in Automotive where overall spending is down, customers are excited about our FactoryTalk InnovationSuite. Recently, Ford decided to expand this new offering to additional locations. Another customer, ECARX, an affiliate of Geely Auto Group, chose the FactoryTalk InnovationSuite to improve production management and quality.

In Consumer, Rockwell Automation is partnering with Stanley Black & Decker to bring the Connected Enterprise to life through their Manufactury 4.0 digital manufacturing division.

As shown on the right side of this slide, in February, we now said that we will be forming the Sensia joint venture with Schlumberger, creating the oil and gas industry's first fully integrated automation solutions provider for the digital oilfield. The announcement has been well received by target customers. Activities to form the joint venture are well underway.

Now I'll turn it over to Patrick to provide more detail around our Q2 results and our 2019 sales and earnings guidance.

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [4]

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Thank you, Blake, and good morning, everyone.

I will start on Slide 5, key financial information, second quarter.

Reported sales in the quarter were about flat year-over-year, with 3.6% organic growth mostly offset by currency translation of 3.2%. Organic growth was lower than we expected, driven by weaker automotive sales in North America.

Segment operating margin remained strong at 21.3% and was up 40 basis points compared to last year. A margin tailwind from organic growth was partially offset by higher investment spend.

Corporate net expense of $27 million was up $2 million compared to last year. Adjusted EPS of $2.04 was up $0.15 compared to the second quarter of last year, an increase of 8%. The year-over-year increase in adjusted EPS is primarily due to the benefit of higher sales and lower share count, partially offset by higher investment spending and higher net interest expense.

Free cash flow was $105 million in the quarter, about 45% conversion and weaker than normal for us in Q2. There are several elements that contributed to this. First, our tax payments are overweight to the first half this year and specifically in Q2. We paid about half of what we expect to pay for the full year in Q2, including the first installment on the repatriation tax that is owed as a result of Tax Reform. Overall, tax payments were about $140 million in the quarter, about $65 million higher compared to Q2 last year.

Second, we issued $1 billion of long-term debt in the quarter. In advance of this transaction, we entered into interest rate hedges. We closed out the hedges at the time we issued debt, which resulted in us paying about $36 million to settle the hedges. Even though this relates to the debt financing and this amount gets amortized to interest expense over the length of the debt term, this payment gets reported as an operating cash outflow, which reduced free cash flow in the quarter. Working capital was another factor, particularly inventory. We've talked in the past about activities related to our supply chain including some manufacturing of E footprinting in Europe and the relocation of our U.S. distribution center. We have built safety stock to facilitate these activities, and we expect to reduce this inventory by fiscal year-end. I will talk about full year free cash flow when I discuss guidance.

A few additional items to cover not shown on the slide. For adjusted EPS, average diluted shares outstanding in the quarter were 120 million, down 8.5 million or about 6.5% from last year. We repurchased about 1.4 million shares in the quarter at a cost of $236 million. Through March 31, repurchases amount to $529 million and are slightly ahead of pace to get to a $1 billion full year target. At March 31, we had $580 million remaining under our share repurchase authorization.

Slide 6 provides the sales and margin performance overview for the Architecture & Software segment. Year-over-year sales declined 2.2% in this segment. Organic sales were up 1.2% year-over-year. Acquisitions added 0.1% of a point, currency translation decreased sales by 3.5%. For the quarter, segment margin contracted 30 basis points year-over-year, yet remains very strong at 28.4%.

Moving on to Slide 7, Control Products & Solutions. Reported sales were up 2.5% for the segment, organic sales growth was 5.7%, currency translation reduced sales by 3.2%. Growth in our Solutions and Services businesses in this segment was strong at over 8%. The Product businesses in this segment were up about 2% on an organic basis. Operating margin for the segment was up 140 basis points compared to Q2 last year, primarily due to higher sales, largely offset by higher investment spending.

The next Slide 8, provides an overview of our sales performance by region. Blake covered most of this slide in his remarks, so I will just mention that growth was broad-based across geographies. Also, we saw a good growth in emerging markets, which were up high single digits compared to last year.

This takes us to Slide 9, guidance. Before I cover what is on this slide, I will make some comments about Sensia, the JV that we and Schlumberger announced in February this year. JV formation activities are underway and regulatory approvals are pending. As Blake mentioned, the impact on our financial statement is dependent on timing of close and we have therefore not included the estimated impact of Sensia in our fiscal '19 guidance. Assuming a close by the end of our fiscal year, September 30, we continue to estimate a $0.05 EPS headwind for fiscal '19.

With that, let me move to guidance. We now project sales of about $6.8 billion for full year fiscal '19. We reduced the high end of our organic growth range to reflect continued expected weakness in Automotive. Our organic sales growth range is now 3.7% to 5.3%, with a midpoint of 4.5%. Currency translation is now expected to be about a 2 point headwind. We continue to expect segment operating margin of about 22%. Our adjusted effective tax rate for fiscal '19 is now about 19% compared to 19.5% in our January guidance.

We're also lowering the upper end of our adjusted EPS guidance range. Our new range is $8.85 to $9.15. Compared to prior guidance, volume and mix headwinds are partially offset by reduced spending and the benefit from the lower tax rate. We are assuming 119.5 million average diluted shares outstanding for fiscal '19.

With respect to tariffs, we remain on track to neutralize the incremental costs through supply chain changes and negotiations with vendors as well as targeted price increases on affected products. We continue to project free cash flow conversion of about 100% of adjusted income.

General corporate-net is now projected to be about $95 million to $100 million. As a reminder, general corporate-net now excludes interest income.

Net interest expense for fiscal '19 is expected to amount to about $90 million, consistent with our January guidance. In short, we expect another year of strong financial performance. Our updated guidance at the midpoint projects 11% adjusted EPS growth on 4.5% organic sales growth and the year-over-year increase in operating margin of about 0.5 point.

With that, I'll hand it back over to Steve.

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Steven W. Etzel, Rockwell Automation, Inc. - VP of IR & Treasurer [5]

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Thank you. Before we start the Q&A, I just wanted to say that we would like to get to as many of you as possible. (Operator Instructions) Thank you. Operator, let's take our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question here comes from Scott Davis from Melius Research.

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Scott Reed Davis, Melius Research LLC - Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research [2]

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I can't remember a quarter where Process was in that double digit, but everything else was a little bit slower. And help -- I know your business is lumpy, so quarter-to-quarter sometimes isn't the best way to look at things. But help us understand really the CapEx versus OpEx that you're seeing out there and maybe the type of visibility that you see on projects of various sizes.

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [3]

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So continuing the theme that we've talked about in the past few quarters, Heavy Industries continues to be strong and Heavy Industries are biased towards process application. So we had a really strong quarter in oil and gas. Mining continues strong due in part to high backlog that we entered the year with. And within those, we're seeing a mix of both capital projects as well as ongoing small projects and servicing the installed base. I'll mention as well, in my prepared numbers, I've talked about Information Solutions and Connected Services growth accelerating and there was a fair part of that, that was in process industries. So for instance, we received our largest ever MES order at the European pharma company, Lonza, and that is encouraging because it's new value in these process applications.

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Scott Reed Davis, Melius Research LLC - Founding Partner, Chairman, CEO & Research Analyst of Multi-Industry Research [4]

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Now that's helpful. And maybe this is a little bit picky again, but in Auto, I mean, we know auto sales are relatively weak, but is there any visibility on Auto CapEx coming back? I know there is -- seem to be a crap ton of EV launches coming in the next 2 years and just help us understand the cadence of when that spend may start to really kick in.

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [5]

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Yes. We're already seeing the very front end of what we do expect to be increased spend for CapEx in EV. It's still a small part of our overall total in Auto, but EV is set to double this year for us. It's just that it's -- we'll see some of that in the balance of this fiscal year and then we do see continued increases into '20. I think within the given CapEx spending for the general auto market, the capacity and the model changes have to contend with spending at the brand owners for investment in EV and autonomous vehicles. So they're new contenders for that CapEx spend regardless of the size of it.

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Operator [6]

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Your next question comes from Steve Tusa with JPMorgan.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [7]

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What are you seeing over in China? And how do we kind of read or maybe link what's going on with some of the robotics guys and some of the Japanese suppliers in there to kind of what's happening in your business? I know that there's definitely capacity being added, but a bit of slowing in that end market. I know you guys don't do anything kind of directly for the robot, but like how do we kind of reconcile what you guys are seeing versus what you're seeing from those customers?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [8]

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So we did have a reasonably strong quarter in China with 6.5% growth. That included growth in Automotive. And I think one of the reasons for that is China, the percentage of investment in EV is probably a little bit ahead of some of the other markets. And as we've talked about, we have a really good readiness to serve in the EV portion of the auto market. So I think that was part of it. We've also heard that some of the stimulus spending in China has helped prompt growth in metro and water projects and those are both good industries for us as well.

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Charles Stephen Tusa, JP Morgan Chase & Co, Research Division - MD [9]

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So how much do you think EV for you guys? How much was Auto in China up? And then how much of -- how much was EV, if you can break that up at all? And then also from a order timing perspective, would they order all kind of like the robots first and then order your stuff? Or does it all kind of come at the same time?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [10]

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So Auto was up mid-single digits in China for us. I don't know the split of EV versus traditional internal combustion projects other than to say it would be a higher weighting towards EV than in other parts of the world. And then in terms of the spend in the cycle for robotics, a lot of it has to do when our orders are released to the tooling suppliers and then when they decide to enter the orders to us, but I don't know that there's going to be a strict sequence when the robot orders are placed and when orders are placed for our products.

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Operator [11]

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Your next question comes from John Inch with Gordon Haskett.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [12]

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So the down 20% in Auto, is that the new run rate embedded in your guidance like, Patrick for the year? And -- or are there things that you think moderate that cadence, improve it, so to speak, towards the back half or into next year?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [13]

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Yes. John, I'll make a couple of comments and then Patrick will add a little bit. So we mentioned that we were down in the quarter around 20% in Auto and we're expecting the full year to be down about 10%. We do have line of sight for some projects that have already started to make purchases. We expect some of that will show up in the year. And with that, Patrick, maybe some additional comment.

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [14]

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We don't expect year-over-year growth in any quarter, Q3 or Q4, in Automotive, John. Sequentially, we expect Q3 and Q4 to pick up just a little bit, low single digit. Flat to slightly up and that refers to some of the larger projects that we know are in flight that Blake was referring to.

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [15]

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Okay. That's helpful. Switching actually just to the JV with Schlumberger, Sensia. How are you guys going to gauge success in this business? And I don't think I saw what financial targets you would establish, but is there anything you could share with us?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [16]

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Yes. It's a double-digit profitable growth. When you look at the digital oilfield markets, which is already over $5 billion, we believe the market itself is growing double digits. So we obviously expect to grow above the market. And so it is a very simply profitable growth in the upstream oil and gas business. From a financial target point of view, John, we talked about one. We expect to achieve our financial criteria through acquisition, so 10% free cash flow yield in years 3 to 5. The other thing is, for fiscal '19, assuming a close at the end of this fiscal year, which is not completely in our control given the regulatory approvals, we expect $0.05 EPS headwind. For fiscal '20, we expect it to be above EPS neutral, including about $0.10 of fees and intangible amortization

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John George Inch, Gordon Haskett Research Advisors - MD & Senior Analyst of Multi-Industrials [17]

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And Patrick, not to get nitpicky, what's the nature of the dilution. Is that because you're giving up profit to the JV, but don't you capture that back or is it investment spending?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [18]

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There are setup costs and deal fees and transaction fees associated with that in fiscal '19. And if we close it by the end of this fiscal year, we would see some of the setup costs, but wouldn't see any of the revenue that comes with the JV.

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Operator [19]

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Your next question comes from Jeff Sprague with Vertical Research.

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Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder and Managing Partner [20]

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Just 2 quick things from me. Just first on investment spending. Patrick, I think you said you're expecting lower investment spending. Are you just bringing that down in concert with the change in the revenue guide or is there some other kind of posture you're taking on investment spending here?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [21]

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No, Jeff. You're right. During the -- during our second quarter, and as Blake mentioned, we saw weakness starting in February. We decided to push out some of our increased spending for the full year. Last year, we talked -- last quarter, we talked about $70-or-so million. We're thinking about $20 million less increase for the full year. This is going to be focused on lower discretionary spend. We're protecting our most important investments, of course. And of that $50 million, $55 million increase we're talking about now, we still expect about 2/3 of that, that we would have seen in the first half of the year. So we've seen most of the, call it, ramp up and spend.

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Jeffrey Todd Sprague, Vertical Research Partners, LLC - Founder and Managing Partner [22]

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And in terms of process, Blake, could you just provide a little bit more color on what you're seeing upstream versus downstream? Is there any pause at all in your upstream activity as you're prepping for Sensia to happen? Just any other color there would be helpful.

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [23]

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Yes. We continue to see oil and gas activity continues strong. We had double-digit growth in the quarter. And as you know, we're a little bit heavier exposed on the upstream and midstream. So we think it's a good time for Sensia. Besides oil and gas and process, I mentioned in my prepared remarks about Green Bay Packaging. That was a significant paper machine project with all the ancillary equipment that'll be worth over $10 million to us. So we are seeing CapEx spend in different parts of the process market.

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Operator [24]

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Your next question comes from Julian Mitchell with Barclays.

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Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [25]

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Maybe just starting off with the North America business. You talked about the sharp slowdown there in organic growth in Q2 but a better -- or the sort of exit rates. So just wondered what should we expect for North America growth in the second half versus what you did in Q2 and were there any specific verticals that have seen that pickup?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [26]

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Yes. So Julian, for the second half of the year, we expect actually somewhat similar growth rates as we've seen in the second quarter for North America. And so in general, we expect continued above-average growth in our Solutions and Services business, which are most -- more exposed, of course, to some of the heavy industries that we're talking about, but our Product businesses, we expected about similar growth rates in Q3, Q4 than what we've seen in the second quarter.

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Julian C.H. Mitchell, Barclays Bank PLC, Research Division - Research Analyst [27]

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And then my second question would be around if you'd experienced much or any inventory adjustments for some of your particularly products, obviously, at any particular clusters of OEMs or distribution? Or whether you felt that inventory adjustments have been in line with kind of normal seasonality.

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [28]

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Julian, there is nothing that we've seen that indicates that inventory moves were of significant impact one way or the other on our quarterly results.

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Operator [29]

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Your next question comes from Nigel Coe with Wolfe Research.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [30]

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Yes. I'm having some problems here with the mute button. So a quick question. Your peers Seimens and Schneider have been quite cautious on The Street market commentary in general, ABB as well. Obviously, you called out Automotive down 20%, that's about a two-point drag to your guidance initially. But I'm wondering, how is the health of your other 3 markets? And in particular, I'm thinking about semis and just general manufacturing. How would you describe the health ex-auto industry?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [31]

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So when we look at the other, let's say clusters of more discrete industries than Consumer, we continue to see good growth there. There is a mix of discrete and process applications there. But through the year, I mentioned just a few minutes ago about the big project in pharma, Life Sciences continues to be a very strong growth vertical for us. And there's growth in other parts of Consumer as well. We also mentioned that Tire was a bright spot in this quarter. Tire is a great fit for our offering because it has elements of process as well as discrete. And Tire is strong in the worldwide picture as well.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [32]

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Okay, great. And semi. I think you were talking about that being up mid-single digits. Is that playing out the way you expected?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [33]

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Semi for the quarter, Nigel, was down about mid-single digit.

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [34]

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After a couple of years of strong double-digit growth, semiconductor has moderated. We continue to participate in projects, largely around the environmental control, a lot of software-based projects, but we have seen a moderation in semi.

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Nigel Edward Coe, Wolfe Research, LLC - MD & Senior Research Analyst [35]

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Okay. No surprise. I know that there's a lot of people in the queue. So I'll leave it there.

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Operator [36]

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Your next question comes from Richard Eastman with Baird.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37]

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Yes. Blake, could you just speak to the Information Solutions and Connected Services business? I think you mentioned was plus double digits. Can you just maybe sift out, if any, the PTC contribution, actually in dollars and pushing that growth rate up. Is there -- can you better define may be how PTC and some of the early wins there have maybe pushed the growth rate up there a bit? Are we seeing that?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [38]

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We are seeing that. And while in terms of showing up as revenue, it's still early given the subscription nature of these. It allows us to have richer conversations with customers across really all of our target industries and in multiple geographies. And so PTC's offering, whether it's the ThingWorx or the Kepware or even the Vuforia augmented reality, those add to our portfolio. And in addition to the offerings that we internally have been working on, the analytics and so on, it allows us to bring what is really the industry-leading portfolio to these customers. And the best proof is what customers are buying. Customers who've had exposure to all of our competitors, our traditional competitors, new competitors, are picking us because our offering and our focus on outcomes is carrying the day. And I would say it's not just traditional decision-makers that we're talking to. CIOs are in these discussions. CFOs. In some cases, we're seeing people leading the IoT programs if these customers actually report to the CFOs, and we're happy to have those discussions because of our focus on business outcomes.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [39]

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And just my follow-up question is just around given the mix of business and where we're seeing strength, whether on the Heavy Industries, Process businesses, which typically have a bit -- a longer tail to them. The business feels later cycle in general when I look at the end markets, the growth in the end markets. How do you assess that? When you look at your front log, the book-to-bill here at 1.02 is -- it's better than 1, but it seems to be a little bit softer than where it's historically run in the second quarter. And any thoughts about kind of length of cycle or what you're seeing from a front log standpoint relative to where you're showing growth in your -- in Rockwell's business?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [40]

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Sure. So first of all, book-to-bill in the quarter for Solutions and Services was 1.09, and so we thought that, that would help for the second quarter. And we believe that the quarter does point to success in increasing our exposure to additional industries some of which are traditionally looked at as more life cycle. So we talk about strength in oil and gas and in mining. We see, even in some of the more traditionally short cycle businesses adding the new value through the Information Solutions and Connected Services. Taken together, they really are part of our very deliberate attempt to find more ways to win and to increase recurring revenue, because in each of these areas there's a high component of subscription-based software and recurring service revenue.

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Unidentified Analyst, [41]

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(technical difficulty)

Just to suggest that things were pretty much in line with what -- outside of organic, probably currency was a bigger headwind. But my question is with regards to 2019 organic growth guide, up higher end at 5%. What kind of gets you there at this time? I mean, Automotive, you seem to -- you've obviously slashed expectations there, but what are the other industries that could get you to that high end of organic growth guide?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [42]

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Yes. So Heavy Industries, it would be the continued strong growth in Heavy Industries through the year that takes us to that high end. And in Automotive, meeting the expectations that we talked about earlier.

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Unidentified Analyst, [43]

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Okay. So you're not necessarily assuming Automotive's get -- I mean, you're assuming there's some -- it gets better from comps and stuff, but you're not necessarily expecting it to bounce back to positive on a year-over-year basis. Obviously, you're seeing it down 10%, but it's not...

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [44]

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We think we've taken a realistic approach to Automotive as were factored in the guidance for the year.

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Unidentified Analyst, [45]

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Got it. Got it. So you're pretty strong in Europe, especially with the OE machine builders. I mean, that region is weakening and looks like your outlooks probably contemplate that slowdown. But can you rightsize us on what your regional expectations are within that full year guide now, organic growth?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [46]

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So we think that for EMEA, we think it will be about the company average in terms of organic growth. Yes, for the full year. We strengthened in Tire and in Consumer.

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Unidentified Analyst, [47]

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How about the other regions too?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [48]

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Oh, you mean for the future?

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Unidentified Analyst, [49]

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No. China, Americas, et cetera?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [50]

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Sure. For the full year, we now expect North America to be a little bit below the company average at the midpoint. EMEA at above the company average. Latin America, we expect to be our strongest region, double-digit growth. Asia, we expect to be at above the company average. And same for China, above company average for China for the full year.

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Operator [51]

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Your next question comes from Robert McCarthy with Stephens.

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Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [52]

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If you could just review your Auto performance in the context of A&S and CP&S and talk about what you saw in terms of bridging year-over-year for the operating profit decline on a dollar basis? Is there anything -- any kind of color you can give us there, just so we get a sense of kind of the mix headwind?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [53]

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Yes. The way I would answer that question, Rob, is that our Automotive business would be overweight in Architecture & Software versus Control Products & Solutions. So the largest impact of Automotive would be on Architecture & Software, including Logix compared to the Control Products and Solutions segment.

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Robert Paul McCarthy, Stephens Inc., Research Division - MD & Analyst [54]

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All right. And then in terms of PTC, could you talk about how that relationship is going? And then, in particular, should we expect any kind of further product enhancements or launches around there for confab in Boston in June, the ThingWorx?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [55]

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Sure. So Rob, you may have heard last night when PTC announced, they talked about good bookings growth in IoT and satisfaction, probably more than satisfaction with the relationship, and we agree with that. We're seeing good success. We've had -- this really energized our sales force with 1,500 people in the organization trained on the PTC products and how they add to the overall solution. And the best proof is that customers in all industries and in all geographies are voting with their wallets that this is a great solution. So we think it's going well. It speaks well to the future and the additional value that we can provide from financial standpoint. This contributes to our ability to more than double the $300 million of Information Solutions and Connected Services business that we had last year. In 2022, that's profitable growth with a high element of recurrent revenue from subscriptions and services. So we're very happy with the progress of the relationship.

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Operator [56]

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Your next question comes from Andy Kaplowitz with Citi.

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Vladimir Benjamin Bystricky, Citigroup Inc, Research Division - VP [57]

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This is Vlad Bystricky on for Andy. So shifting back to the regions a bit. EMEA's strength in the quarter is a little surprising, just given some of the headlines we've seen out of Europe. So can you talk about what changed versus 1Q '19 when EMEA was down to now mid-single-digit growth and the growth that you're talking about seeing for the remainder of the year?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [58]

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I'll make a couple of comments and then Patrick might have some as well. As we mentioned, in EMEA, the growth was led by Consumer. And Tire was especially strong. As I mentioned, before, Tire is a good industry for us and a lot of the tire builders are in Europe and there was some significant purchases that contributed to those results.

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [59]

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Yes. I would also say the last quarter, we said that our backlog looks good and were a little bit higher, than we expected some organic growth in the balance of the year, which is what we started seeing in the second quarter. So we expect some modest growth in EMEA for the balance of the year as well.

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Vladimir Benjamin Bystricky, Citigroup Inc, Research Division - VP [60]

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Okay, that's helpful. And then just on the free cash flow outlook. I know you mentioned some of the headwinds that impacted F2Q, but can you talk about, one, whether the weakening in Auto was any incremental drag on free cash in the year and then just given the unchanged guidance, your level of confidence in driving that acceleration in the back half of the year.

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [61]

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Yes. So we don't believe that Auto has a significant impact on free cash flow other than, of course, a drag on sales that we've been seeing. In terms of our confidence, obviously, we have high confidence. We're going to be able to deliver 100% free cash flow for the year. That's why our guidance remains unchanged compared to the one we provided last quarter. And obviously, that guidance is second half weighted.

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Operator [62]

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Your next question comes from John Walsh with Crédit Suisse.

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John Fred Walsh, Crédit Suisse AG, Research Division - Director [63]

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So a lot of ground covered, but I wanted to go back to your comment around acceleration on the Information Solutions and Connected Services. It continues to grow double digit. That can mean a lot of things. Can you kind of talk about the order of magnitude of the acceleration you're seeing? And then I guess as a follow-up to that, one of the things we picked up over at Hanover is that payback periods are shortening on some of these investments. What's actually driving that acceleration in your mind? Is it quicker paybacks? Is there something else as people prepare for 5G, kind of anything you think.

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [64]

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Sure. Well, we are seeing acceleration and its strong double-digit growth in the quarter, which is helped by the PTC relationship complementing our own internally developed offerings. I think the biggest factor towards the growth of our business and really of the whole market is the ability to deliver positive business outcomes. So you have to start with the ability to quantify what savings you're providing for that customer. Everything else is really just talk.

And so by focusing on helping those customers get to market faster, being able to increase the OEE with operational productivity, the predictive maintenance, we understand those areas and the specific ways that we can help in our target industries. And so payback periods of less than a year should be realistic as company invests in that first pilot, quantifies the results and then moves on to multisite rollouts.

I would also mention that our success has been putting the software and the services on top of a wide variety of control systems. In some cases, it's on top of Logix-based systems. Other times, it's on top of the competitors where we'd come in and added that new value. So it's an exciting area for us to be.

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John Fred Walsh, Crédit Suisse AG, Research Division - Director [65]

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Great. And then maybe just one quick follow-up on that. So when you do put your -- when you come in and do the integration side of the work if it's not on top of Logix, I mean, how does the mix on that project look for Rockwell? Because I would think -- maybe not -- there's obviously going to be multiple projects and they're all going to look differently, but can you just talk about the mix impact that you see in some of those projects?

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [66]

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Sure. In general, it's going to be around the Rockwell average. And so the software is very profitable. When there's the delivery that's more labor-intensive, that's going to be a little bit below our average. But regardless of whether we're providing the Logix and the drives and so on along with the software and the services, just that bucket, the Information Solutions and Connected Services has profitability about the Rockwell average and it has a higher degree of recurring revenue than the Rockwell average.

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Operator [67]

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Your next question comes from Scott Graham with BMO Capital Markets.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [68]

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Kind of a question on tariffs. I know that you commented that you still fully expect to offset them for the year. I think the number coming into the year was something like $90 million. The plan at the time is, as I remember, was half price, half supply chain, I believe. And I was just kind of wondering if you could sort of, A, kind of tell us where pricing sort of landed in the quarter. B, is there any changes to the bucket? And C -- back to B, I guess, with the likelihood of moving up to 25% seemingly much dimmer now, does that change the $90 million?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [69]

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Yes, Scott. So with respect to pricing, our overall price realization in the quarter was about 1.5 which is consistent with what we expect for the full year.

With respect to changes in the tariffs, we still project to have a neutral impact on our financials. The cost versus what we realized through price and negotiations with vendors, if the 10% on this [3] does not go to 25, the full year impact or the annual impact of [9] headwinds will be closer to 70, 75. But then again, it wouldn't have an impact on our overall financials because we're targeting it to be neutral for our fiscal year.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [70]

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So you would say, in short, it's playing out as you expected?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [71]

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Say again, Scott?

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [72]

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Please. Well, I was just asking then you would pull back on your supply chain initiatives to balance that off?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [73]

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No. The way you could think about this is if the $10 million does not go to $25 million, there won't be a need for us to implement another price increase associated with tariffs.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [74]

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Fine. I want to maybe go back to Auto and beat that horse a little deader, I guess. So first quarter, Auto was down 10 and this quarter you're saying it's down 20. Yet you're projecting full year minus 10. On a situation, it looks like it actually deteriorated further this quarter. And I know you said you've got line of sight on some things and also know I think you're facing minus 10 comps in the second half. But I'm just kind of hoping you could give us a little bit more on kind of how we get there into the minus 10 in the second half of the year.

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [75]

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Yes, Scott. So the way you can think about this, whereas Q2 was down about 20% year-over-year, it was pretty much flat compared to our first quarter. And so for the balance of the year, we expect Automotive in Q3 and Q4 to be slightly up low single digits related to some of the larger projects that we know are in flight. And so call it flattish to slightly up for the balance of the year. From a year-over-year point of view, we still expect Auto to be down, just not as much as 20% year-over-year in Q3 and Q4.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [76]

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So Auto rest of year flat to slightly up from the first half, but down year-over-year?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [77]

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Correct.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [78]

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Got it. If I could just sort of sneak one last question in here and it's kind of more to do about what your customers are saying out there. And you've given us great color and I certainly appreciate that, but I was hoping maybe a little bit more from the customers' standpoint, away from the PTC agreement, which I know is working the whole thing. But when you're doing the portion of CapEx of your sales, customers kind of know now where they're going to be by the end of the year.

So I was just wondering, if you can sort of give us some flakes of what the customers are saying, maybe in Heavy Industries. We've talked about Auto, maybe in the Consumer areas, what the customers specifically are saying and, if possible, maybe loop in how orders in those businesses are.

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [79]

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Right. So we've mentioned before that, in Process, we continue to see CapEx being released and it's reflected in some of the projects that we're talking about. We talked previously in Life Sciences, Pfizer. Today, we talked a little bit about Lonza in Europe. Green Bay Packaging was $0.5 billion CapEx project in which we're playing a major role here in the U.S.

In Automotive, I mentioned that the CapEx that they are releasing has contenders for the uses of that CapEx with some of the electric vehicle, autonomous vehicle development in addition to capacity moves and model changes and that has resulted in some of the delays of the projects in Auto. Our machinery builders and Consumer continue to report healthy backlogs in their business, particularly in food and beverage. I mentioned Life Sciences. And so in general, there remains growth and there remains spending across the broad base of industries, automotive being a bit of the outlier, particularly in North America.

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Operator [80]

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Great. And your last question here comes from Justin Bergner from G. Research.

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Justin Laurence Bergner, G. Research, LLC - VP [81]

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In addition to the Auto guides, you're bringing down your organic full year guide by about 50 basis points, are there any...

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [82]

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Hello? Justin, you've cut out.

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Justin Laurence Bergner, G. Research, LLC - VP [83]

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Hopefully, I'm live again. I was asking outside of Auto bringing down your full year organic guide by about 50 basis points, are there any end markets that look materially better or worse with implicit in your full year outlook versus how they looked a quarter ago?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [84]

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Justin, I would say no. There's always some puts and takes that move a little bit, but it's really Auto that was the big mover of all our verticals.

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Justin Laurence Bergner, G. Research, LLC - VP [85]

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Okay. And on the segment margin performance, the strong increase in the margin in Control Products & Solutions seem to absorb a mix headwind in terms of solutions growth versus products growth. Any sort of comment there on how you delivered such a good margin improvement, while absorbing that mix headwind?

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Patrick P. Goris, Rockwell Automation, Inc. - Senior VP & CFO [86]

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Yes. So there was there the -- there was a modest headwind of mix between Control Products & Solutions. The main driver of the segment margin expansion was strong year-over-year organic sales growth, partially offset by higher spending. Those were the big -- those were really the big movers within that segment.

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Steven W. Etzel, Rockwell Automation, Inc. - VP of IR & Treasurer [87]

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Thank you. I'll turn it over to Blake for a few final comments.

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Blake D. Moret, Rockwell Automation, Inc. - Chairman, President & CEO [88]

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So just to summarize, we delivered 8% adjusted EPS growth driven by top line growth in all regions and in key verticals other than Automotive. 2 of our larger strategic investments, PTC and Sensia, are progressing well.

We are accelerating the execution of our strategy. I'm very encouraged to see employees and partners embrace our new ways to win, expanding value for customers and share owners

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Steven W. Etzel, Rockwell Automation, Inc. - VP of IR & Treasurer [89]

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

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Operator [90]

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