Rockwell Automation, Inc.

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 the lines for questions. If you have a question at that time, please press star one. At this time, I would like to turn the call over to Steve Edsel, Vice President of Investor Relations and Treasurer. Mr. Edsel, please go ahead.

Good morning and thank you for joining us for Rockwell Automation's first quarter fiscal 2019 earnings release conference call. With me today is Blake Moret, our Chairman and CEO, and Patrick Gores, 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.

Thanks, Steve, and good morning, everyone. Thank you for joining us on the call today. I'll start with some key points for the quarter. So please turn to page three in the slide deck. I'm pleased with our results for the quarter. Organic sales were strong, up almost 6% and well above expectations. From a vertical perspective, growth was led by consumer and heavy industries. In consumer, Food and beverage and life sciences were strong. Heavy industries growth was led by mining, pulp and paper, and metals. Oil and gas grew slightly above the company average. Within transportation, automotive was down about 10% in the quarter, weaker than expected, and tire was up low single digits. In the quarter, logics grew 7% organically, and process grew 5%. Revenue from information solutions and connected services, which is a measure of adoption of new value from the connected enterprise, once again profitably grew double digits. Commenting on regional performance in the quarter, North America, which for us is the combination of the US and Canada, grew 6% organically. We saw good growth across a wide range of industries, with the exception of automotive, which was weak. EMEA was down slightly in the quarter. Growth in consumer verticals was offset by declines in heavy industries. Asia grew 4%, with most countries in the region contributing to growth. China's sales were up mid-single digits. Latin America's sales were up 20%. We saw good growth in Brazil and Chile was strong due to increased mining activity. As you may recall last year, we won a big order with Codelco and we're starting to see this in our results. I'll make a few additional comments about our Q1 results. Adjusted EPS was up 13% and segment operating margin was up 40 basis points year over year. Book-to-bill performance for our solutions and services businesses was a strong 1.12 in Q1. We grew backlog in the quarter. Patrick will elaborate on our first quarter financial performance in his remarks. Let's move on now to the macro environment and our current outlook for full year fiscal 2019. We see continuing uncertainty due to trade tensions and geopolitical risks. However, forecasts continue to call for industrial production growth. We had a good first quarter and project quoting activity was strong. With one quarter behind us, our four-year outlook for organic sales growth and adjusted EPS guidance remains unchanged. We continue to expect our fiscal 2019 organic sales to be up 5.2% year-over-year at midpoint of guidance. Currency is now expected to reduce growth by 1.5 percentage points. Including the revised impact of currency, our fiscal 2019 guidance is sales of about $6.9 billion. Our guidance for adjusted EPS remains a range of $8.85 to $9.25. Now I'll turn it over to Patrick to provide more detail about our Q1 results and our 2019 sales and earnings guidance.

Thank you, Blake, and good morning, everyone. Before I go through our results and outlook, I want to mention that we made some reporting changes starting the first quarter of fiscal 19. We outlined these changes in today's press release, and I will cover them briefly when I get to slide nine in the deck. For comparability purposes, fiscal 18 numbers have been recast to conform to fiscal 19 reporting. With that said, we'll start on slide four, key financial information, first quarter. As Blake mentioned, we had a good first quarter of the fiscal year. We reported sales up 3.5%. Organic growth was 5.7%, about 200 basis points better than we expected. Currency translation was about a two-point headwind to sales growth, worse than expected. Segment operating margin was very strong at 22.8%, up 40 basis points compared to last year. A margin tailwind from good organic growth was partially offset by higher investment spending. Earnings conversion, whether you include or exclude the impact of currency, was between 30% and 35%. General corporate net expense of $22 million was down $2 million compared to last year. Adjusted EPS of $2.21 was up 25 cents compared to the first quarter of last year, an increase of 13%. 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. As expected, the net impact of tariffs was a small headwind. First quarter adjusted EPS performance was significantly better than we expected, given stronger than expected organic sales growth and somewhat lower than expected investment spending. Pre-cash flow was 170 million in the quarter or 63% of adjusted income. During the first quarter, we paid the annual incentives that our employees earned in fiscal 18. A few additional items to cover not shown on the slide. For adjusted EPS, average diluted shares outstanding in the quarter were 121.5 million down 8.6 million or about 7% from last year. We repurchased about 1.8 million shares in the quarter at a cost of $292.8 million. This is slightly ahead of pace to get to our $1 billion full-year target. At December 31st, we had $816 million remaining under our share repurchase authorization. Slide five provides a sales and margin performance overview for the architecture and software segment. This segment had 2.4% reported sales growth organic sales were at 4.6% year-over-year. Currency translation decreased sales by 2.2%. For the quarter, segment margin increased 100 basis points year-over-year to a very strong 31.5%. Operating leverage associated with sales growth was partially offset by higher investment spending. Moving on to slide six, control products and solutions. Reported sales were up 4.5% for this segment. Organic sales growth was 6.6%, and currency translation reduced sales by 2.1%. Growth in our solutions and services businesses in this segment was strong at about 8%. The product businesses in this segment were up about 5% on an organic basis. Operating margins for this segment was slightly compared to Q1 last year, primarily due to higher sales offset by higher investment spending. As Blake mentioned, book-to-bill performance in our solutions and services businesses in this segment was 1.12 in Q1. Next slide seven provides an overview of our sales performance by region. Blake covered most of this in this slide in his remarks. So I will just mention that growth was broad-based across geographies with the exception of EMEA. Also, we saw good growth in emerging markets, which were at high single digits compared to last year. This takes us to slide eight, guidance. We now project sales of about $6.9 billion. Our organic sales growth range remains unchanged at 3.7% to 6.7%. We updated our currency assumptions and we now expect the headwind from currency translation to be closer to 1.5%. We continue to expect segment operating margin of about 22%. Our expected adjusted effective tax rate for fiscal 19 remains about 19.5%. And as Blake mentioned, we are maintaining our adjusted EPS guidance range of $8.85 to $9.25. With respect to tariffs, we still expect to offset the incremental costs through supply chain changes and negotiations with vendors, as well as targeted price increases on affected products. Our supply chain and pricing folks have done tremendous work in this area, and we remain on track to neutralize the impact of tariffs for fiscal 19. We continue to project free cash flow conversion of about 100% of adjusted income. As to general corporate net, we now project it to be about $95 million. As a reminder, general corporate net now excludes interest income. Net interest expense of 2019 is expected to be about $90 million. Before I turn it back over to Blake, let me add a couple of comments on slide nine. As I mentioned at the beginning of this call, we made some reporting changes effective the first quarter of fiscal 19. As you can see on this slide, these changes include the adoption of ASC 606 revenue recognition, as well as the new standard that defines operating and non-operating pension and post-retirement benefit costs. We transferred some business activities from one segment to the other, and we also combined U.S. and Canada into North America, consistent with the way we run this region. Finally, we removed interest income from general corporate net. Our press release provides additional detail related to these changes. In addition, slides 10 and 11 of this deck provide a summary of the changes, as well as a walk of fiscal 18 first quarter results. Updated data books will be available on our website that will include prior year financial results recast to the new reporting format. After our earnings call, Steve will be available to cover any additional details and questions you may have about the reporting changes. With that, I'll hand it back to you, Blake. Thanks, Patrick.

I'll make some additional remarks related to the execution of our strategy. We are performing well in our key focus areas. There are three components of our growth strategy, which are share gains in our core platforms, double-digit growth in information solutions and connected services, and a point or more of growth per year from inorganic investments. Core platform performance in the quarter was highlighted by 7% logics growth. Our strategic partnership with PTC continues to gain momentum. We've had wins across all regions and in our key industry verticals, and the pipeline of opportunities is growing every day. We're also working well with PTC to converge our IoT technology roadmaps. Our pipeline for inorganic investments remains robust. Yesterday, we announced the acquisition of Emulate 3D, a UK-based software company whose products digitally simulate and emulate industrial automation systems. This software enables customers to virtually test machine and system designs before incurring manufacturing and automation costs and committing to a final design. Emulate 3D was a member of our partner network, and we've seen customers benefit by combining their solutions with our technology. Emulate 3D software will become part of our factory-taught design suite. For each of the components of our growth strategy, we have the financial flexibility to execute, all within the capital deployment framework described during Investor Day. An industry where this strategy is delivering tangible results is Life Sciences, where we've had several years of good growth. Pharmaceutical companies benefit from our multi-discipline logics control platform, which addresses discrete, batch, and continuous process applications. Customers are implementing our independent cart motion technology for greater throughput. and our software offerings such as MES and FactoryTalk Innovation Suite are important competitive differentiators. Our connected services offerings also provide us another way to win. Recently, we received another order from Pfizer to help them increase cybersecurity at their global manufacturing facilities. We will plan, implement, and support security technology and solutions along with key strategic partners across Pfizer's global manufacturing supply chain. We're becoming more important to customers in every industry on their individual journeys to become more productive. Finally, I want to thank our employees, partners, and suppliers for their contributions to a good start to the fiscal year. Our entire organization is energized and excited about our new offerings and the opportunities that are ahead of us. And with that, I'll turn it over to Steve to start the Q&A. Steve?

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

And if you'd like to ask a question at this time, please press star 1 on your telephone keypad. And your first question comes from Rich Kwas with Wells Fargo Securities. Your line is open. Your next question comes from John Inch with Gordon Haskett. Your line is open.

Thank you. Good morning, everyone. Good morning. Can you hear me? Yeah, good morning, guys. Hey, so... Just in terms of the quarter versus the flat EPS expectation and your results, I think, Patrick, you mentioned it was driven basically by higher sales. Where did you actually see the surprise to the upside, and do you think those trends continue for the rest of the year?

Yeah, so for the first quarter, all regions except EMEA came in better than expectations, particularly Latin America, which was up 20%. From an industry perspective, some of the heavy industries were better than we expected. In those, we include metals, pulp and paper, oil and gas was a little bit better as well. And then consumer was better, particularly life science, which had very strong growth. So, I'd say across multiple regions and particularly heavy and life sciences.

And, Patrick, the reason for not changing your guidance given the beat is because you expect things to soften still given sort of, you know, uncertain international markets. Are there any other clues? Like how did January do as part of the cadence toward the rest of the year?

January is consistent what we have in our guidance for the full year. I think one of the ways you can think about this, John, is we have one quarter behind us.

Meaning you're not anticipating a slowing or you're just not sure?

I mean, I'm... No, we've had one quarter behind us, which was a little bit better than we expected. And we see no reason at this time to change our guidance for the full year.

I got it. And then my follow-up is really on the cadence of investment spending. If I remember, I think you said you spent 70 to 80 in fiscal 18, and you were going to spend three to four more with much of that focused in the first quarter. Are you still on track for that? And what actually did you spend in the first quarter with respect to investment spending? And did that help margins in any way versus kind of heading into the quarter versus your thoughts around investment spending?

Yeah. So you remember well, John, what we said was that we expected our investment spend to be up about $70.7 million for the full year. Most of that we expect in the first half of this year. We still expect that. The timing is just a little bit different. Q1 was light by about $10 million. Q1 spend was up about 5% year over year. That's about 25. We expect the first half of the year to, of the 70 million, we think about two-thirds of that will happen in the first half of the year.

Q1 was just a little bit lighter than we expected. About 10 million. Okay. Thanks very much. Appreciate it. Thanks, John.

Your next question comes from Scott Davis with Milius Research. Your line is open.

Hi. Good morning, guys. Morning, Scott. Just starting to get a little bit concerned about earnings after Caterpillar yesterday, but you guys came up with a pretty strong number. I mean, some of the folks out there have seen real weakness in China and some haven't, but you guys clearly haven't seen much. I mean, can you give us a little... Local color.

So China is mid single digits up and some of the industries that contributed to the growth are mass transit. So the metro system continues to be an area where we differentiate and have had good winds and this year continues that. Life sciences, as we mentioned before, globally was good, and China is adopting a lot of the new value that we provide in life sciences to complement the basic control. And then there were other industries of chemical, metals, still growth in semiconductor, and even automotive in China for the quarter.

Interesting. So Otto was going to be the next question, and then help us understand the divergence between SAR and CapEx and OpEx, obviously. I mean, SAR in China is struggling and inventories are rising, so that can be a really tough year, but capital spending seems to be on some sort of a solid footing. Is that correct, or how would you view the outlook there?

I would say globally for auto, CapEx is flat and there are challengers for the uses of CapEx beyond just plant expansions and capacity as they're devoting some of that CapEx spend to new technologies like electric vehicles and autonomous vehicles. In China, we continue to see gains in the electric vehicle market One of the recent wins was with Howson, providing powertrain for a local indigenous Chinese brand owner. And remember, we essentially reentered that powertrain market just a few years ago, and China's one of the places where we're winning not only for the joint ventures that involve American companies, but for indigenous Chinese manufacturers as well. The SAR count, if it's weak, will eventually have some impact on our business, but, of course, the model changes are the direct influence on our growth in automotive.

Yeah, fair enough. Thank you, guys. Keep up the good work. Thank you, Scott.

Next question comes from Steve Tusa with J.P. Morgan. Your line is open.

Hi, guys. Good morning.

Thanks, Steve.

Can you just talk about what you're seeing in kind of the global machine tool industry, whether it's some of those guys that operate out of Europe and into China, whether it's on the packaging side or elsewhere? It seems to us to follow on Scott's question. But there's a lot of foreign component suppliers that sell into that chain that are seeing pronounced weakness and destocking. So I'm just curious as to kind of what you guys are seeing on that front.

Yeah, I'll make a couple of comments on that, and then Patrick may have something to add. We think that the moderation, let's say, in China – is contributing to some extent to the weaker results that we see in EMEA. That being said, when we talk about machine tool, there's a high component of that that's going to be CNC-oriented versus ELC or logics-oriented, and so we may be relatively less exposed in the metalworking areas. Yeah.

Steve, I would only add that our OEM business globally was up a little bit less than the company average, so low single digits in the quarter, and EMEA was one of the weakest regions there.

Okay. And just to be clear for kind of the rest of the year, can you maybe give us a bit of a rundown on the major, what you expect for the major segments and how there's a trend? I know that you guys talked about last call auto accelerating. Maybe I missed that in the beginning, but is that still expected to be, you know, up this year, you know, transportation? Maybe just give us a little bit of color on, you know, what's embedded by vertical in the guidance now. Yep. Any calibrations there?

Sure. So what we said last quarter, Steve, is that we expected auto to be flat for fiscal 19. Given the first quarter and our current outlook, we think that auto will be down mid-single digits for the year. We think at this point that that will be offset by some of the better growth we've seen in some of the heavy industries that I just mentioned about the first quarter, but also life sciences. Within consumer, life sciences and food and beverage are doing quite well. So versus our call of November guidance, automotive now expected to be down mid-single digits for the full year, heavy industry, a little bit better, and then also strong consumer, particularly life sciences, and after that, food and beverage.

Thanks. Great caller as always. Appreciate it.

Thank you. Your next question comes from Julian Mitchell with Berkley's. Your line is open.

Hi. Good morning. Maybe just the first question around process markets. Your growth rate, I think, on sales slowed to about 5%, having been at double digits in the prior quarter. Are you starting to see any impact from oil or just the broader macro uncertainty starting to weigh on project activity? And maybe any updated thoughts on how you see process industries growing this year versus the group average?

So in the quarter, oil and gas was up slightly above the company average. We continue to make progress in process industries. And of course, that's concentrated in the batch of that we call heavy industries. Just as a reminder, that metric of process really measures the adoption of our process control technology and does not include that metric, the other things that we sell to industries like oil and gas and pulp and paper and metals, which would have a lot of the intelligent motor control as well. So we continue to see good growth. in those industries, and we expect that to continue with heavy industries contributing to our growth for the balance of the year.

And Julian, for the full year, we expect a process as we define it to be at or slightly above the company average.

Understood. Thank you. And then just circling back on a geographic basis, if you could talk a little bit about the EMEA region. I think you've talked about low single-digit growth. You had a slight decline organically in the first quarter. So how quickly do we think that that recovers, really? Is it solely to do with China, as you talked about, or do you think there's some domestic aspects which should drive up EMEA growth over the balance of the year in certain verticals?

Yeah, we think obviously it's a little bit broader in EMEA than just China, Julian. Obviously, growth in EMEA generally from a macro point of view has slowed. We've seen that over the last three, four quarters. From a vertical perspective, what we see in that region is that consumer is still doing pretty well except for single digits. Heavy industry was down, as was auto, and consumer growth not strong enough to offset the weakness in heavy and in auto. Actually, our order intake in the first quarter in EMEA was actually pretty decent, and we expect EMEA for the full year to be up but low single digits.

Yeah, I think that order intake helped build backlog, which also informs our outlook in the region. And just within transportation, auto was down and was somewhat canceled out by actual growth in the tire vertical.

Understood. So we should see EMEA improving in fairly short order then in terms of your sales growth.

Our expectation is that we see some year-over-year growth in that region in the back half of the year. Fantastic. Thank you very much.

Thanks, Julian. Next question comes from Rich Cross with Wells Fargo. Your line is open.

Hey. Good morning, everyone. Sorry. juggling a couple things here this morning. So I might have missed this, but an auto just in North America, was that down year-over-year within the context of that being down overall for the quarter?

It was, Rich. It was down. So auto was down about 10 globally and similar to North America in Q1. Okay. And I assume that was... Yeah, we thought that... Obviously, we see some weakness in MRO in auto. We've seen some project delays generally, but at the same time, we see EV and powertrain, as Blake was mentioning, continues to be strong. We still expect double digits. We see and expect double-digit growth there. It's just not big enough yet to offset the weakness elsewhere in that vertical.

And just on the North American with the Detroit-based OAs, there's a decent launch cadence this year, year over year. So, you know, is that just something where you're not seeing as much wallet of that in terms of the mix, or is there something that we're missing when we're looking at the broader numbers?

No, we do expect to participate actually even more broadly in some of those cases. So with some of the new value, particularly in information solutions and connected services, we actually expect on some of those launches to expand what our traditional content may have been. And I think some of it also goes back to the MRO comment that I was making.

Okay. Okay. And then last one on I think the John's earlier question around the guide. So what gets you to the top end of the guide in terms of the 6.7% organic? What has to work in terms of the various verticals or assumptions that you've got in here?

There are a lot of variables here, but you can think about some of the trade uncertainty being cleared up and then a little bit better performance in automotive. Okay.

Okay, so those are the keys to trade and auto. Okay. Thanks very much.

Your next question comes from Nigel Cole with Wolf Research. Your line is open.

Oh, thanks. Good morning. I just wanted to come back to, I think, Patrick, your comments on investment spending. I think you said it was about $10 million lighter than your plan in the first quarter. And then I think you said two-thirds of the $70 million happens in the first half. So just... Doing that math and trying to back into 2Q, is the headband about $30 million or so?

You mean from a year-over-year point of view in the second quarter? Yes. Yes. Probably a little less than that. Not far off, but actually a little less than that.

Yeah. Okay. So, but direction, okay, got it. And then, maybe just...

Nigel, the only thing I would add to that, some of that year-over-year increase is investments that we've released in fiscal 18, and we see the – I call it the analyzation impact of that. It's not all incremental in fiscal 19. Okay.

And then just one more clear-up, and then I've got a broader question on PEC. But I think you were talking about – About 120 dips of impact from ASC 606 all in one queue. Did that play through? And then maybe just talk about the PTC, you know, how that's progressed so far, and how much sales impact do you have baked into your F119 guide from the PTC resale?

Okay. I think Blake wants me to take 606, and he'll take PTC. Okay. Actually, the impact from 606 was as expected in the first quarter. The EPS impact was several cents negative, so as expected there, and no material impact on sales. The reason for the beat on sales was not related to 606. Okay.

Yeah, and regarding PTC, it was a good quarter. We had some interesting wins. In the quarter, we've talked before about Ford at the investor day, where we're providing value actually in a power transmission facility, and then at an Asia Pacific region mining company. But since then, a couple of additional ones. In food and beverage, Lava Food, a Vietnamese company that specializes in processing and providing fresh fruits and vegetables. An Indian tire manufacturer where we have an order of over a million dollars that includes PTC as well as our MES offering. Doosan Bobcat in the EMEA region. They make loaders and excavators. You probably recognize the name. and they were looking at additional analytics and visibility of their operations. And then in China, another metals and mining account, And those are just a few of the examples. I particularly like the diversity of where we're winning across geographies and industries. First, it says that the value that we're offering together is real. And second, it shows that our sales force is energized. They're out there talking about this, and it's a way to make us more important to customers. There's also discussions going on and a parallel path to converge our technology roadmaps, and so creating that tighter alliance as time goes on.

Thanks. That's great, Keller. And, Blake, what do you have baked into your sales guide from PTC products?

Yeah, so PTC falls in the Factory Talk Innovation Suite, which is also a part of the bucket that we look at as information solutions and connected services. And so we continue to talk about double-digit growth on top of the $300 million base that we talked about last year. And with the contribution of PTC, we expect that to double over the next four years.

Okay. Thanks, Ed. It's great, Philip.

Thanks. Thanks, Michael. Your next question comes from Andrew Obin with Bank of America Merrill Lynch. Your line is open.

Good morning. This is Ana Kaminskaya on behalf of Andrew Obin. Maybe most of the questions have been asked already, but would you be able to provide any additional details on the announced acquisition, just how impactful it is to your P&L for the rest of the year?

Yeah, emulate 3D won't have a material impact on the results in fiscal 19. But strategically and for customers, it's really an exciting addition because this is software that works along with our four configuration tools to help customers simulate and emulate the operation of their system. So, the simulation allows them to model the physical movement of their production system before they actually have to try it out with hard tooling on the line. And then the emulation capability allows them to look at the performance of the configuration tools, again, to make sure that it's working smoothly and with the kind of timing that's required. We've worked with them in the past. We mentioned that they were part of our formal partner program, and now we're going to be able to achieve even tighter integration with them. So, again, as with PTC, we had customers asking for us to get closer before we made this additional step. So we're excited about it. We think our customers are as well.

And then your numbers around how much you paid for it or any revenue contribution?

We're not disclosing that, Anna. And as Blake said, the impact on fiscal 19 will be immaterial.

Got it. And then with some of the changes to accounting and, I mean, strong 1Q, Any other moving parts as we think about GQ outlook, GQ EPS? Is it in line with historical seasonality? Anything you would like to call out besides the high investment year-over-year that we already talked about?

Not really, and I think the only thing I would say that we would expect the year-over-year growth to be somewhat balanced, year-over-year growth rate somewhat balanced first half versus second half of the year.

Great.

Thank you very much.

Thank you.

Your next question comes from Josh Perswinski with Morgan Stanley. Your line is open. Josh, your line is open.

This is Bryony Goldring on for Josh Perswinski. Good morning. Good morning. So looking at 2Q guidance with the move in investment, we come up with earnings down very slightly and EPS up a little. Is that the right way to think about it?

I'm not going to provide any additional color than I already did with respect to timing of spend and year-over-year growth rates, first half, second half. So I'm not going to provide more detail on the second quarter.

Okay. That's fine. Thank you.

Thank you.

Next question comes from Richard Eastman with Baird. Your line is open.

Yes. Good morning. Patrick, could you just speak to – there was $90 million of tariff headwind kind of heading into the year, and I think the commentary was, you know, half price – offset would be half price and half supply chain improvements. And in that price commentary, I believe – Ruppel took a second price hike, I think, in November. Could you just speak to maybe the stickiness of that hike and also the price capture at the top line in the first quarter?

Yes, Rick. So our price realization in the first quarter was about a point. And so we're on track to get close to a point and a half for the full year, which is what is in our guidance and our expectations. You're correct. So the $90 million was the gross annual impact. Half of that we expect to offset with supply chain changes and negotiations with vendors. The other half offset with pricing. We had the annual price increase in August of each year, as we always do. Then we had an off-cycle price increase in October. And then we had an off-cycle price increase in December. And those last two price increases all related to tariffs. We see, we realize that the price increase that we were targeting associated with those last two price increases. And so that's why I said we realized about a point. in the first quarter. We expect a little bit more than that for the full year, just given the timing of those last two price increases.

Okay, understood. And then just one question that probably relates to the A&S margin. You know, the incremental there was quite high. Now, there wasn't a great deal of incremental sales growth, but At the end of the day, is that more mixed around, you know, software sales? Do they increase at a faster rate than logics? Is there a mix in there or is that a price that's more the price capture than ANS? I'm curious how we delivered some of the margin there.

The way you can think about it there, Rick, is that our spend was light, as I mentioned earlier, and it was particularly light in that segment. Okay. From a mixed point of view, within that segment, logic did actually quite well, so there was not a big mixed driver within that segment.

Okay, because when you talk about, and Blake, you had mentioned this information solutions and the connected services, my guess is the information solutions piece probably outgrew connected services. I don't know if that's easy enough to parse through, but again, that seems like that would have helped the software factory talk suite products sales within A&S.

Yeah, I think on balance, the margin is between that bucket is at or slightly above the company average in over a period of time.

Okay.

Go ahead.

Okay.

Great. Well, again, I was just looking at the mix being more software friendly in ANS as the PTC agreement expands. Is that Is that going to be noticeable?

I think it will be, but it's going to take a while because when we resell some of that software or we add some of our software on top of that, it's on a subscription basis, Rick. And so, therefore, it will start out really small. And so, obviously, we'd like to grow it as fast as possible. But it being subscription and not license sales, it's going to be – and it's going to take some time before you'll see it have a mixed effect.

I understand. Because of the deferred component. Okay.

Very good.

Thank you.

Thanks, Rick.

Our next question comes from Andy Kaplowicz with Citi. Your line is open.

Good morning, guys. It's Mr. Keon for Andy. Morning. So can you guys talk a little bit more? I know you talked about Latin America, the strength in Latin America. So can you just give a little more color on really what's driving that strength in any particular countries and more about how you're thinking about the sustainability of the LATAM strength in 2019?

Yeah, a few comments in terms of the growth drivers in Latin America. Latin America for a long period of time has been a strong region force. There's a lot of diversity in the region in industries that we serve well. One of the key starting points in Latin America is the backlog in mining. And so we talked last year about the big Codelco mining project as one example. We're starting to see some of that order come out in quarterly results. And so that's a strong contributor for us. We also see continued growth in oil and gas, particularly in Mexico. And then finally, we've seen several quarters of good growth in Brazil as well. And so I think those would be three of the key contributors to the continued performance in Latin America.

Okay, that's helpful. And then just to circle back on the tariff impact for a moment, I know you talked about the pricing that you've put in. I think last quarter you said about two-thirds of the supply chain adjustments were already in that execution phase. Can you talk about, you know, are all of the supply chain adjustments and vendor negotiations sort of now underway or in execution, or do you still have more to do there to get to the net neutral on tariffs?

I think everything is being worked on. It doesn't mean that everything is buttoned up. But as I mentioned, we are on track, and our teams have done tremendous work on making it happen, which is why we continue to expect that for this fiscal year, the net impact will be zero.

Okay, perfect. And then maybe one last one for me. I know you aren't disclosing financials on Emulate 3D, but can you just talk more broadly about what you're seeing in terms of valuation multiples in the pipeline? Have you seen any movement there? Have you seen any valuations start to come in fall with recent market volatility?

I think there's been, in general, across a broad portfolio of names out there, there would be some contraction based on the macro.

Okay. Thanks very much, guys.

Thank you.

Your next question comes from Nicole DeBlaise with Deutsche Bank. Your line is open.

Yeah, thanks. Good morning. Good morning. So a couple piggybacks on questions that have already been asked. First on China, I know you guys saw mid-single-digit growth for the quarter. If you could kind of frame out what you expect for the full year.

Yeah, we see China growing mid-single digits for the full year as well. And we talked before about life sciences, which is really a macro trend across the world. But the Chinese companies are particularly vigorously adopting some of the new value, some of the software, again, that sits on top of it. basic control systems. We see growth in tire in China in the full year. We see growth in oil and gas in China, and then a little bit of growth in food and beverage as well.

Okay, understood. That's helpful. And then... piggybacking on the question on process. So I know you guys went through kind of what drove the growth this quarter, what happened with an oil and gas, but growth did decelerate. I think it was up about 10 organically in the fourth quarter. It's now at five. If you could just talk a little bit about the moving pieces from 4Q to 1Q.

Yeah, I would look at the majority of that as quarterly variability. We're not seeing a a meaningful slowdown in any one area of that versus another. And again, this is one component of what we're offering to those process applications. The other main piece being the motor control as well. So I wouldn't look at that as a trend at this point.

Okay. Understood. Thanks. I'll pass it on.

Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.

Hi, good morning. This is Ashay Gupta on for Joe. Morning. Hey, Patrick, so you mentioned that investment spend was $10 million lighter than expected in the quarter. Of the other two items that you mentioned on the 4Q call that was supposed to be headwinds, like ASU 606 and the impact of pricing, can you just comment on how those two items came in versus your expectations going in?

Yes. So, as I believe I mentioned earlier on the call, the earnings impact of 606 was as we expected. Also, a few cents of negative impact. And then with respect to tariffs, in November, we mentioned that we expected a headwind in the first quarter associated with tariffs. And that is exactly what we saw in the first quarter. So, the net of price and cost was a small headwind in Q1, and we expect the net impact of tariffs to be zero for the full year. So, both tariffs came in as expected basically in the first quarter.

Understood. And just secondly, I think in the beginning, you guys commented that semis was a strong area in the quarter. which is just surprising given some of the commentary we've heard from semis players and some of your competitors. So, like, what's different? Like, are you taking share? And what's your outlook for semis for the rest of the year? Thank you.

Yeah, I think our comment about semi was specific to China, where semi was up from a global basis. Semi was about flat for the first quarter. We've seen several years of good growth. In semi, we expected this year, and our guidance was a slower growth in semi, about mid single digits, and the first quarter was about flat, but with some growth in China, as Blake mentioned.

Great. Thank you.

Next question comes from John Walsh with Credit Suisse. Your line is open.

Hi. Good morning. Morning. Morning. So I guess maybe just one question here to piggyback off of some of the earlier price questions. If I just kind of go through your K and look at what price has done the last couple of years per your commentary, looks like it was a little bit less than a point in 17 and then about 50 basis points in 18. And if I do the rough math here on what you're talking about comes from tariff versus organic price. It looks like we're going to tick up a little bit above that 50 basis points you probably realized in 18. So wondering if this is all just, you know, rounding or if you're actually starting to see some, you know, real underlying price traction outside of kind of the tariff impacts where you're just you know, pushing the price through the channel?

Yes. So, I would say it's both. You're right. Last year, we realized about half a point in price. We did mention, I believe, that we were targeting for a somewhat higher price increase in fiscal 19, given generally increasing input costs leave alone the impact of tariffs. And so, we targeted a larger price increase given higher headwinds from input costs. And on top of that, there is, of course, the tariffs and some of the price increases that we have implemented as a result of that. And so, in total, we will realize more price this year. That's our expectation than last year, as I said, about a point and a half. This includes not only the price from the tariffs, but also our base price increase, the base price realization will be a little bit higher than what it was last year. So it's both. We realized a little bit more price from our annual price increase. And on top of that, there is the selected price increases related to the tariffs.

Ian, no, got you on that. I guess I was trying to get at, you know, maybe some value pricing as you, you know, move the portfolio more into your, you know, connected enterprise and what you're able to realize on that front, kind of absent the general inflation and tariff, what kind of the value add pricing you were getting, if you were starting to see any kind of tick up in that relative to where you've been historically. Okay.

As we come out with new product software and capabilities, obviously we try to price it appropriately, knowing that there's still some competition out there.

Got you.

Great. Appreciate the color. Thank you. Thank you. Operator, we'll take one last question.

Your last question comes from Scott Graham with BMO. Your line is open.

Hi. Good morning. Like I think others here, we've had a number of hearings this morning, so I've jumped off on the call. So forgive me if I'm double asking a question here. On the EMEA, you know, organic down, you know, seven-tenths of a percent, would you be able to split for us Europe versus Middle East and Africa there and the driver of whatever happened in Europe?

I believe that the way you can think about this, mature markets in EMEA generally, no, emerging countries in EMEA generally perform better than the mature countries in that region.

So, we're down this single digit? Say again? Would you say that the matures were down mid-single-digit or maybe low-sync, you know, companies?

There was a raise there. The way I would say this is some of the mature companies would be below the EMEA average, and some of the emerging companies would be a little bit better. Obviously, mature companies still account for the majority of our business in that region.

Understood. Thank you. And on oil and gas, I know that you're a little bit more tilted toward the upstream. I was just wondering if you know, what your customers were saying given, you know, North America. First half year kind of looks a little dicey where capital spending goes with some of these upstream guys. What are you seeing in North America and elsewhere in your upstream business in oil next six to nine months?

Yeah, so we continue to see growth in oil and gas. mid-simple digits growth for the year. You're right, a little more than half of our business is upstream, with the remainder split between midstream and downstream. We continue to see strength in the Permian. And one of the comments, because we're not as dependent on the big mega projects, regardless of the price of oil, people are going to be looking for productivity in their operations. And that's really our sweet spot, either with solutions or with individual products, is people find ways to make even more efficient their production operations. And so we continue to see that as a source of growth for us, including the U.S. Thank you.

Thank you. Okay, thanks. Now I'll turn it back to Blake for a few final comments.

Thanks for everyone's questions. I just want to summarize. The first quarter was a great start to the year. We delivered strong operating and financial performance. We're executing on our key initiatives, and our strategy is working.

Steve? Okay, that concludes today's call. Thank you for joining us. You may disconnect.

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