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 up the lines for questions. If you have a question at that time, please press star, then 1. 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 second quarter fiscal 2019 earnings release conference call. With me today is Blake Moret, our chairman and CEO, and Patrick Gorath, 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. 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. 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 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. of double digits. Our KPI for process sales grew 10% organically. The weakness in automotive drove a 2% decline in logics. Commenting on regional performance in the quarter, North America, which for us is the combination of the US 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 Centsia joint venture. Moving on to slide four, I'll provide an update on two recent strategic investments to increase long-term value for our customers and shareholders. 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 multi-site rollouts, even in automotive. where overall spending is down, customers are excited about our FactoryTalk Innovation Suite. Recently, Ford decided to expand this new offering to additional locations. Another customer, eCarX, an affiliate of Geely Auto Group, chose the FactoryTalk Innovation Suite to improve production management and quality. In consumer, Rockwell Automation is partnering with Stanley, Black, and Decker to bring the connected enterprise to life through their Manufactory 4.0 digital manufacturing vision. As shown on the right side of the slide, in February, we announced 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 oil field. 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.

Thank you, Blake, and good morning, everyone. I will start on slide five, 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. General corporate net expense of 27 million was up 2 million compared to last year. Adjusted EPS of $2.04 was up 15 cents 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 a 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 fee 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 refootprinting 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 31st, the purchases amount to $529 million. and are slightly ahead of pace to get to our $1 billion full-year target. At March 31st, we had $580 million remaining under our share repurchase authorization. Slide 6 provides the sales and margin performance overview for the architecture and software segment. Year-over-year sales declined 2.2% in this segment. Organic sales were up 1.2% year-over-year. Acquisitions added one-tenth of a point. Currency translation decreased sales by 3.5%. For the quarter, segment margin contracted 30 basis points year-over-year, yet remained very strong at 28.4%. Moving on to slide seven, control products and solutions. Report sales were up 2.5% for this 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 this 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, eight, 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 good growth in emerging markets, which were up high single digits compared to last year. This takes us to slide nine guidance. Before I cover what is on this slide, I will make some comments about Sensia, the JV that we in Schlumberger announced in February this year. JV formation activities are underway and regulatory approvals are pending. As Blake mentioned, the impact on our financial statements is dependent on timing of close, and we have therefore not included the estimated impact of Centsia in our fiscal 19 guidance. Assuming a close by the end of our fiscal year, September 30, we continue to estimate a 5 cent 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 two-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 mixed headwinds are partially offset by reduced spending and the benefit from a 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 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 four and a half percent organic sales growth, and the year over year increase in operating margin of about half a point. With that, I'll hand it back over to Steve.

Thank you. 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.

Thank you. And your first question here comes from Scott Davis from Mellis Research. Please go ahead. Your line is open.

Hey, good morning, guys. Morning. I can't remember a quarter where process was in the double digit, but everything else was a little bit slower. And 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 the capex versus opex that you're seeing out there, and maybe the type of visibility that you see on projects, you know, of various sizes.

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 applications. 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 remarks, I 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.

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 mean, I know there seems to be a crap ton of EV launches coming in the next two years, and just help us understand the cadence of when that spend may start to really kick in.

Yeah, 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. We'll see some of that in the balance of this fiscal year, and then we do see continued increases into 2020. 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 there are new contenders for that CapEx spend regardless of the size of it.

Okay. That's helpful, Blake. Good luck. Thank you.

Thanks, Scott.

Your next question comes from Steve Tusa with JP Morgan. Please go ahead. Your line is open.

Hey, guys. Good morning. Good morning, Steve. What are you seeing over in China, and how do we kind of read or maybe, you know, link what's going on with some of the robotics guys and some of the, you know, Japanese, you know, 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, you know, customers?

So we did have a reasonably strong quarter in China. It was 6.5% growth. That included growth in automotives. 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.

So how much do you think EV for you guys, you know, how much was auto in China up, and then how much of, you know, how much was EV, if you can break that up at all, and then Also, from an 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?

So auto was up mid-single digits in China for us. I don't know the split, 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.

Okay. Thanks a lot. I appreciate the call. Thanks, Steve.

Your next question comes from John Inch with Gordon Haskett. Please go ahead. Your line is open.

Thank you. Good morning, everybody. Morning, John. Morning, guys. So the down 20% in auto, is that the new run rate embedded in your guidance, Blake and Patrick, for the year? And or are there things that you think moderate that cadence or improve it, so to speak, toward the back half or into next year?

Yeah, 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?

Yeah. 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.

Okay. That's helpful. Switching actually just to the JV with Schlumberger, Essentia. 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?

Yeah, it's double-digit profitable growth. When you look at the digital oil field market, which is already over $5 billion, we believe the market itself is growing double-digit, so we obviously expect to grow above the market. And so it is 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 for acquisitions, so 10% free cash flow yield in years three to five. 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 a $0.05 EPS headwind for fiscal 20. We expect it to be about EPS neutral, including about $0.10 of fees and intangible amortization.

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?

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

Got it. Busy morning. I'll leave it at that. Thank you. Thanks, John.

Your next question comes from Jeff Sprague with Vertical Research. Please go ahead. Your line is open.

Thank you. Good morning. Good morning, Jeff. Just two quick things for 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?

No, Jeff, you're right. During our second quarter, and as Lake mentioned, we saw weakness starting in February. We decided to push out some of our increased spending for the full year. 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, 55 million increase we're talking about now, we still expect about two-thirds of that that we will have seen in the first half of the year. So we've seen most of the college ramp up in spend.

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

Yeah, we continue to see oil and gas activity continue 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 processed 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. Thank you.

Thanks, Jeff.

Your next question comes from Julian Mitchell with Barclays. Please go ahead. Your line is open.

Hi, good morning. Maybe just starting off with the North America business. You know, you talked about the sharp slowdown there in organic growth in Q2, but a better orders sort of exit rate. 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 pick up?

Yeah, 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 more exposed, of course, to some of the heavy industries that we're talking about. But our product businesses, we expect that about similar growth rates in Q3, Q4 than what we've seen in the second quarter.

Thank you very much. And then my second question would be around, if you'd experienced much or any inventory adjustments for some of your particular 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.

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

Great. Thank you very much. Thanks, Julian. Thanks, Julian.

Your next question comes from Nigel Coe with Wolf Research. Please go ahead. Your line is open. And Nigel Coe from Wolf Research. Your line is open.

Yeah. Good morning. Good morning. I'm having some problems here with the mute button. So quick question. Your peers, Siemens and Schneider, have been quite cautious on discrete market commentary in general, ABB as well. And obviously, you've called out automotive down 20%. That's about a two-point drag to your guidance initially. But I'm wondering, you know, how is the health of your other discrete markets? And in particular, I'm thinking about semis and just general manufacturing. How would you describe the health ex-auto in discrete markets?

So when we look at the other, let's say, clusters of more discrete industries, then consumer, we continue to see good growth there. There's 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 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.

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

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

Yeah, 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.

Okay, no surprise. I know there's a lot of people in the queue, so I'll leave it there. Thanks, guys. Thank you.

Your next question comes from Richard Eastman with Baird. Please go ahead. Your line is open.

Yes, good morning. Blake, could you just speak to the information solutions and connected services business? I think you mentioned was plus double digits. Yes. Can you just maybe sift out, if any, you know, the PTC contribution actually in dollars and pushing that growth rate up? Can you better define maybe how PTC and some of the early wins there have maybe pushed the growth rate up there a bit? Are we seeing that?

We are seeing that. And while, you know, in terms of showing up as revenue, it's still early given the subscription nature of these stocks. 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, you know, the best proof is what customers are buying. Customers who have 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 our traditional decision-makers. that we're talking to, CIOs are in these discussions, CFOs. In some cases, we're seeing the people leading the IoT programs that these customers actually report to the CFOs, and we're happy to have those discussions because of our focus on business outcomes.

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

Sure. So first of all, book to bill in the quarter for solutions and services was 1.09. And so we thought that was healthy 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 late cycle. So we talked 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.

Okay, thank you much.

Thanks.

Your next question comes from Deepa Raghavan with Wells Fargo Securities. Please go ahead. Your line is open. Good morning, guys.

Your commentary seems to suggest that things were pretty much in line with what you were expecting, with perhaps the exception of Automotive, outside of organic, probably currency was a bigger headwind. But my question is with regards to 2019 organic growth guide, higher end at 5%, what kind of gets you there at this time? I mean, automotive, you're obviously fast to expectations there, but what are the other industries that could get you to that high end of organic growth guides?

Yeah, so heavy industries, it would be the continued strong growth in heavy industries through the year that takes us to that high end, and then automotive meeting the expectations that we talked about earlier.

Okay, so you're not necessarily assuming automotives get, I mean, you're assuming that some gets better from comps and stuff, but You're not necessarily expecting it to bounce back to positive on a year-on-year basis. Obviously, you're saying it's down 10%.

We think we're taking a realistic approach to automotive as we're factored in the guidance for the year.

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

So we think that for EMEA, we think it will be about the company average in terms of organic growth for the full year. with strength in tire and in consumer.

How about the other regions, too?

Oh, you mean for the full year?

China, no, China, America, et cetera.

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

Great. Thank you very much.

Thank you.

Your next question comes from Robert McCarthy with Stevens. Please go ahead. Your line is open.

Good morning. If you could just review your auto performance in the context of ANS and CPNS and talk about what you saw in terms of bridging year over year for the operating profit decline on a dollar basis. Is there any kind of color you can give us there, just so we get a sense of kind of the mixed headwind?

Yeah, the way I would answer that question, Rob, is that our automotive business would be overweight, in architecture and software versus control products and solutions. So the largest impact of automotive would be on architecture and software, including logics, compared to the control products and solutions segment.

All right. Thank you for that. And then in terms of PTC, could you talk about, you know, how that relationship is going and then In particular, you know, should we expect any kind of further product enhancements or launches around their CONFAB in Boston in June, the thing works?

Sure. So, Rob, and 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 energize 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 a 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 recurring revenue from subscriptions and services. So we're very happy with the progress of the relationship.

Thanks for your time.

Thanks, Rob.

Your next question comes from Andy Kaplowitz with Citi. Please go ahead. Your line is open.

Morning, guys. It's Black District. I'm for Andy. Morning. Morning. 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, you know, what changed versus 1Q19 when EMEA was down to now, you know, mid-single-digit growth and the growth that you're talking about seeing for the remainder of the year?

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 were some significant purchases that contributed to those results.

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

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

Yeah, so we do not believe otherwise 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, the guidance is second half weighted.

Right. Thank you. Thank you. Thank you.

Your next question comes from John Walsh with Credit Suisse. Please go ahead. Your line is open.

Hi. Good morning. Morning, John. Hi. So a lot of ground covered, but I wanted to go back to your comment around acceleration on the information solutions and connected services. You know, 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, you know, quicker paybacks? Is there something else as people prepare for 5G? Kind of, you know, anything you think.

Sure. Well, we are seeing acceleration and it's strong double-digit growth in the quarter, which is, you know, helped by the PTC relationship complementing our own internally developed offerings. I think the The biggest factor towards the growth of our business and really of the whole market is the ability to deliver positive business outcomes. 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 or the 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 a company invests in that first pilot, quantifies the results, and then moves on to multi-site rollouts. I would also mention that our success has been putting the software and these services on top of a wide variety of control systems. In some cases, it's on top of our logic space systems. Other times, it's on top of the competitors where we've come in and added that new value. So, it's an exciting area for us to be.

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 logics, I mean – How does the mix on that project look for Rockwell? Because I would think, you know, 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?

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 logics and the drives and so on along with the software and the services, just that bucket, the information solutions and the connected services, has profitability about the Rockwell average, and it has a higher degree of recurring revenue than the Rockwell average.

Gotcha. I appreciate that. Thank you. Thanks, John.

Your next question comes from Scott Graham with BMO Capital Markets. Please go ahead. Your line is open.

Hi. Good morning. Morning, Scott. I've got 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, as I remember it, was half price, half supply chain tariffs. 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 buckets? And C, back to B, I guess, with the likelihood of, you know, moving up to 25%, seemingly much dimmer now, does that change the 90?

Yes, Scott. So, with respect to pricing, Our overall price realization in the quarter was about a point and a half, 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 list three does not go to 25, the full year impact or the annual impact of 90 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. So I would say in short of playing out the effect. Sorry. Say again, Scott?

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

The way you can think about this is if the 10 does not go to 25, there won't be a need for us to implement another price increase associated with tariffs.

Fine. Okay, great. Thank you. I want to maybe go back to auto and beat that horse a little better, I guess. 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 that looks like it actually deteriorated further this quarter, and I know you said you've got line of sight on some things, and I also know I think you're facing minus 10 comps in the second half, but I'm just kind of hoping you can give us a little bit more on kind of how we get there and to the minus half of the second half of the year.

Yes, Scott. So, the way you can think about it is, 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.

So auto rest of year, flat to slightly up from the first half, but down year-over-year. Correct. 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 certainly appreciate that. But I was hoping maybe a little bit more from the customer 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 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.

Right. So we 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've talked previously about and Life Sciences, Pfizer. Today, we talked a little bit about Lonza in Europe. Green Bay Packaging was a half-billion dollar 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 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 a broad base of industries, automotive being a bit of the outlier, particularly in North America.

That's really helpful. Thanks a lot, guys.

You're welcome. Thank you. Operator, we'll take one last question.

Great. Thank you. And your last question here comes from Justin Bergner from G Research. Please go ahead. Your line is open.

Good morning, and thank you for taking my question. In addition to the auto guide sort of bringing down your organic full-year guide by about 50 basis points, are there any... Hello?

Justin, you've cut out.

And Justin Bergner, if you could please press star 1 again to recue.

Hi, hopefully I'm alive 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?

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

Okay, thanks. On the segment margin performance, the strong increase in the margin in control products and solutions seemed to absorb a mixed headwind in terms of solutions growth versus products growth. Any sort of comment there on how you delivered such good margin improvement while absorbing that mixed headwind?

Yes, so there was a modest headwind of mixed and controlled products and solutions. The main drivers of segment margin expansion were strong year-over-year organic sales growth, Parts of the offset by higher spending. Those were the big, those were really the big movers within that segment.

Okay, thank you.

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

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. Two of our larger strategic investments, PTC and Sensia, are progressing well. We're 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.

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

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