Rockwell Automation, Inc.

Thank you for holding, and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone, 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 1. At this time, I would like to turn the call over to Jessica Caracos, Head of Investor Relations. Ms. Caracos, please go ahead.

Thanks, Sharon. Good morning, and thank you for joining us for Rockwell Automation's second quarter fiscal 2020 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, and our call today will reference, non-GAAP measures. Both the press release and charts include reconciliations of these non-GAAP measures. A webcast of this call will be available at that website for reply for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. 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 our SEC filings. So with that, I'll hand the call over to Blake.

Thanks, Jessica, and good morning, everyone. Thank you for joining us on the call today. Before I begin, let me say to everyone listening on this call, thank you for your interest and support, and I hope that you and those close to you are safe and healthy. We're truly in unprecedented times, and our first priority is protecting employee health and safety. Our employees are doing outstanding work. keeping our customers' operations up, and running strong during this crisis. We are an essential business that supports critical infrastructure because our customers cannot build their products at scale without automation. So thank you to our employees, our suppliers, our distribution partners, and everyone else who has been working hard to serve our customers and communities. This pandemic will change how we live our lives and operate our businesses in the future. Rockwell's financial strength positions us well to overcome the current challenges and to be more valuable than ever as our customers learn to operate in this new environment. Let me now review the topics for today's call. I'll first offer some color on how our people and our customers are effectively managing through this crisis. then provide a brief overview of our Q2 performance, including a status report on our operations and supply chain, and then focus more time on what we are seeing today and our outlook. Please turn to page three of the slide deck. When I think about how our business is being conducted right now and how we are handling the current environment, I start with our employees and our customers. The safety of our employees is always our first priority. We closely follow U.S. CDC and World Health Organization guidelines. For our manufacturing workforce, we provide health screening, enhanced cleaning measures, and use of safety equipment, and have implemented social distancing between workstations across our facilities. Our non-manufacturing workforce has been exercising social distancing and working from home for over a month now, and we have restricted non-essential business travel. Where we can, we are using our own technologies and services to keep our people productive and support our customers. For example, we now have 2,500 seats of Vuforia augmented reality activated internally to conduct witness testing as well as customer support and training. Turning to our customers. This health crisis is bringing us even closer to our customers as everyone is rallying to help manufacture more necessary goods than ever before. For example, we have a strong partnership with 3M as they ramp up respirator production. And we recently collaborated with Hecheng Machinery a Chinese hygiene products machine builder, to increase the production capacity of their high-speed mask-making machine. Our solution, based on Logix and our next-generation motion controllers, increased their output from 150 to 500 masks per minute. We're also supporting Abbott Labs and other pharmaceutical companies to increase testing capacity and with GE Healthcare and others to ramp up their production of ventilators. We're also supporting companies like Roche and Cytiva who are working tirelessly to develop treatments and vaccines and are investing in manufacturing capabilities so that they are ready to scale up production as soon as possible. We're also helping companies who have repurposed manufacturing assets to now produce masks, ventilators, test kits, and other equipment our communities desperately need. For example, automotive and mining OEMs are now making ventilators, and food and beverage machine builders are now making masks. Even the Jameson Distillery, which is located near our offices in Ireland, has diverted some of their whiskey production lines to now produce alcohol sanitizing gels for hospitals and medical centers. These are just a few stories showcasing the innovation going on in these difficult times. Let's now turn to slide four for our Q2 performance and some key accomplishments in the quarter. Total sales grew slightly in the quarter, including a three-point contribution from inorganic investments primarily related to our Sensia joint venture. Organic sales were flat versus last year, and were in line with what we were expecting heading into the quarter, despite an 18% decline in China related to COVID-19. Our organic sales performance benefited from strong sales of Logix, which grew 8% versus the prior year, led by strength in North America, particularly in automotive and food and beverage. In addition to Logix, we continue to see strong growth in other core platforms like independent cart technology for motion control and network infrastructure. Both of these grew double digits in the quarter, and we think we're taking share. We also had a number of important strategic wins in automotive, food and beverage, life sciences, mining, and tire, where we were not the incumbent control platform. Information Solutions and Connected Services, or ISCS for short, was down slightly, largely due to a difficult comparison with major projects last year. That said, the pipeline for ISCS remains strong. We built strong backlog in the quarter, and we still expect ISCS sales to reach $400 million for the year. our IoT offering continues to differentiate itself in the marketplace. In the quarter, Rockwell was awarded the Industrial IoT Company of the Year by Compass Intelligence, which adds to our recent recognition in Gartner's annual Magic Quadrant survey as a leader in IoT software. We also saw very strong orders for Vuforia as we help customers expand their remote engineering capabilities during this pandemic. Turning now to Q2 earnings, adjusted EPS grew 19% and includes the release of our bonus accrual. And finally, free cash flow grew about 90% in the quarter, underscoring Rockwell's solid financial health and strong balance sheet position. Let's now turn to slide five, where I will provide a few highlights of our Q2 organic end market performance. Our discrete market segment grew high single digits, led by auto, which grew by over 20% year over year and grew double digits. We continue to see very good growth in electric vehicle programs. We also benefited from some traditional projects that we've been tracking. Our hybrid market segment was flat in Q2. Our largest segment, food and beverage, grew low single digits, including growth at packaging OEMs. Life sciences declined modestly due to the very tough comparison to last year. Many of our customers, particularly those in consumer-focused hybrid industries, have been running their operations 24-7 to meet very high demand and have had little opportunity to implement projects that divert resources from current production. Process markets were down mid-single digits, with oil and gas also down mid-single digits. We'll talk more about our outlook for oil and gas in just a few minutes. Turning now to slide six and our organic regional sales performance in the quarter, growth in North America and Latin America was offset by an 18% decline in China, which accounts for about 6% of our global revenue. We saw growth in Asia Pacific, excluding China, led by EV battery. EMEA was down low single digits, but with relative strength in automotive, food and beverage, life sciences, and semiconductor. Turning now to slide seven. Let me take a few minutes here to discuss how we're navigating the current environment. I first want to say that I'm very proud of the efforts we have taken to build resiliency in our operations and supply chain over the years. Our plants are operational and meeting current demand. And while the many actions we have taken to mitigate tariffs over the last couple of years reduced the impact from COVID-19 on our Chinese supply chain, Segments of our global supply chain are seeing some disruption. Among the biggest challenges have been reworking product flows to implement social distancing and managing shifts to limit the number of employees in a facility at one time. We are actively managing what is a very fluid situation. Patrick will have more details on our operations and supply chain. As part of our actions to mitigate risk in our business, and maintain our strong financial position, we announced earlier this month a series of temporary actions that better align our costs with a reduction in demand. The following principles are the foundation for our decision-making. Keep our customer focus. Protect employment as much as possible. Protect our most important initiatives and investments to drive long-term differentiation. and position our company for success over the long term. Balancing the near term with the long term is extremely important. This is why we have and we intend to maintain a strong balance sheet. Our capital deployment priorities remain in order, organic and inorganic investments, followed by dividends and repurchases. Turning to slide eight, the acquisitions we announced last quarter, Awesome and Calypso are expected to close in the next couple of weeks and we will continue to look for additional inorganic investment opportunities that advance our strategic objectives. We expect Awesome and Calypso to contribute about half a point of revenue growth this year and over a point of growth on a full year basis. Together with our other inorganic investments, we expect total inorganic sales to contribute about four to four and a half points of top line growth in fiscal 2020. Turning now to our outlook on slide nine, we're focused on delivering value to all of our stakeholders through these rapidly changing market conditions. The path of recovery is difficult to predict. As we put together our forecast, we looked at a variety of inputs. our recent performance in China and Italy, near-term industrial production forecasts, our daily sales and order intake through April, and what we are hearing from end customers and distributors. We expect that our fiscal third quarter sales will be down approximately 20% year over year, followed by sequential improvement in the fourth quarter. As a result, These are our expectations for the year. Organic sales down 8% at the midpoint. We continue to expect inorganic investments, now including Awesome and Calypso, to contribute about four to four and a half points of growth to the year. Adjusted EPS of $7.30 at the midpoint. And we're projecting free cash flow to convert at over 100%. As you can see, From our organic and market projections for the second half and full year on slide 10, the midpoint of our projections assumes both automotive and oil and gas will see particularly steep declines in the second half of the year. We are also modeling more modest declines in food and beverage and other industries. We expect most verticals, including auto, to bottom in Q3 gradually recover starting in Q4, with the exception of oil and gas that we think will take longer to recover. With that, let me now turn it over to Patrick, who will elaborate on our second quarter financial performance and fiscal 2020 outlook in his remarks. Patrick?

Thank you, Blake, and good morning, everyone. I will keep my remarks on second quarter results very brief and then switch to comments about our strong financial position, what we see in our supply chain and operations, cost mitigation activities, and fiscal 2020 outlook. I'll start on slide 11. For the second quarter, organic sales growth. Organic sales were down 0.2% compared to last year, and acquisitions contributed 3% to total growth. Currency translation was a larger headwind than expected, due to a stronger U.S. dollar and decreased sales by one and a half points. Within the quarter, organic sales were up low single digits through February, with very weak performance in China. Again, through February, China was down about 30%, more than offset by better than expected North America product sales. Global organic sales weakened in March, and we're down a little less than 4% for the month compared to last year. Overall company backlog, including for products and for solutions and services, increased both sequentially and on a year-over-year basis for the quarter. Segment operating margin was 22.1%, up 80 basis points compared to last year, primarily due to lower incentive compensation expense. Our incentive programs are highly correlated to financial performance of the company. We no longer expect an incentive compensation payout to be earned for fiscal 2020, and we therefore released our incentive accruals. This represents a little over 200 basis points of segment margin tailwind, which is partially offset by margin headwinds related to currency at a little over half a point of margin, and the impact of acquisitions at about half a point. General corporate net expense was lower compared to last year, mainly as a result of favorable market-to-market adjustments related to our deferred and unqualified compensation plans. I'll cover the adjusted EPS bridge on a following slide. The adjusted effective tax rate for the second quarter of 12.4% was lower than we expected, due to several discrete items. Free cash flow in the quarter of about $200 million included a $31 million tax payment, which represents the second installment on the repatriation tax that is owed as a result of tax reform. Slide 12 provides the sales and margin performance overview of our operating segments. Architecture and software had good organic growth in the quarter with strong logics performance.

Lower and

the solutions segment decreased 3.6% with the products within the segment down 3% and the solutions and services down about 4%. Sensia represents almost all of the 5.8% revenue growth from inorganic investments in this segment. Second quarter organic book to build for our solutions and services businesses was 1.10. As I mentioned earlier, we built backlog in the quarter, including for solutions and services, but starting in March, we have seen an increase in project delays initiated by customers. Operating margin for the control products and solutions segment was down 70 basis points compared to last year. The next slide, 13, provides the adjusted EPS walk from Q2 fiscal 19 to Q2 fiscal 20. As you can see, core performance was up a little less than five cents despite no organic revenue growth in the quarter. Large tailwinds related to incentive compensation and the lower tax rate were partially offset by the impact of currency. As expected, the impact of acquisitions was about neutral. I'll switch gears now and we'll provide some comments about our balance sheet and liquidity. Please move to slide 14. We continue to be in a strong position with regard to our capital structure and liquidity. At March 31, cash on the balance sheet was about $640 million, and our total debt was about $2.1 billion. Our net debt to adjusted EBITDA ratio was 1.0. Last week, we executed a $400 million term loan. which provides us the funds to close two previously announced acquisitions, Assam and Calypso, as well as funds for other general corporate purposes. The two acquisitions are expected to close in the next few weeks with a combined purchase price of approximately $300 million. We expect both acquisitions to add about half a point of revenue to fiscal 20 sales and expect the fiscal 20 adjusted EPS impact including one-time costs, to be about a $0.05 headwind. From a liquidity perspective, in addition to our strong balance sheet and free cash flow generation profile, we have access to the commercial paper market for our operating needs. Our single A credit ratings provide us good access to the capital markets. And finally, our liquidity is also supported by our existing $1.25 billion credit facility, which expires in November of 2023. This credit facility remains available and undrawn. The only financial covenant we have in our debt agreement is an EBITDA to interest expense covenant in our credit facility and the new term loan. We have plenty of room under that covenant, which we have pressure tested in our scenario analyses. As you know, we have a history of generating solid free cash flow, and we expect, just like in prior downturns, working capital reduction to be a source of cash. We're also deferring non-critical capital expenditures and now expect fiscal 20 capital expenditures to be closer to $130 million.

$60 million prior guidance.

Finally, as we have mentioned in the past, we do not expect to have any mandatory U.S. pension contributions in the next few years, and we have no long-term debt maturities until 2025. In a nutshell, we continue to be in a strong financial position and are focused on maintaining it. Next, I'll make some comments about what we're seeing in our supply chain, manufacturing distribution operations, as well as our solutions and services businesses on slide 15. We have a global supply chain, including a network of suppliers and manufacturing and distribution facilities. Our supply chain team is closely managing our end-to-end supply chain with a particular focus on all critical and at-risk suppliers and supplier locations globally. In late January and early February, we proactively increased inventory levels of certain, mostly China-sourced components and products. We are currently experiencing some isolated supply and cross-border transit disruptions and do see some increased supply chain costs, particularly related to reduced air freight capacity. We're implementing freight surcharges to help mitigate the impact of these higher input costs. All of our manufacturing facilities and distribution centers are operating at this time. We have implemented additional safety and hygiene processes, including separation of shifts and social distancing between workstations to keep our employees safe. Some of the operational changes implemented, as well as some unplanned employee absenteeism, are driving some inefficiencies in our operations, which we are in the process of addressing. Our solutions and services businesses include thousands of domain experts. They understand our customers' challenges and priorities and design and implement solutions and provide services through a combination of domain expertise and our technology. Physical access to our customer facilities is often important as we deliver those solutions and services. As a result of COVID-19, access to customer facilities in some instances has been difficult, for example, for on-site commissioning. While we have been leveraging our technology and that of our partners to deliver certain services and solutions remotely, decreased access has led to some project delays as well as inefficiencies due to lower labor utilization. We intend to protect our domain experts as much as possible during this period. Moving to slide 16, overview of cost actions. In early April, we announced several actions to address the current and anticipated business conditions as a result of the pandemic. I won't go through all of these, but we'll point out that all these actions are expected to yield over $150 million of savings for fiscal 20. As the salary reductions take effect May 1st, we expect most of the savings to be realized in our fourth quarter. We have identified additional cost actions to implement if business conditions require or to reallocate resources to our highest priorities. Finally, note that while our overall cost structure is coming down, we have maintained and in some cases are selectively increasing investment in some of our highest priority areas in order to increase differentiation and create long-term value for customers and shareholders. This takes us to slide 17. This slide presents an overview of the business conditions we saw in China and Italy, two of our larger end markets, which were impacted by COVID-19 before other geographies. Note that the China and Italy charts provide an overview of the year-over-year growth in ordered intake for our product businesses only. Products are two-thirds of our business and represent our shorter cycle book and bill business. As you can see, the impact in China was severe in January and February, followed by a very strong V-shaped recovery in March that has continued in April through Friday of last week. In Italy, we saw year-over-year product orders growth through January, followed by a weak February and March. Order intake in Italy remains weak in April, but is up about 10% sequentially when compared to March order rates. Using our product order trends in China and Italy as leading indicators, we expect most of our other geographies to be down significantly in the third quarter, and expect a more gradual recovery starting late in the third quarter into our fourth quarter. Directionally, we expect solutions and services to also follow this trend. Moving to the right side of the slide, this represents our total company sales, including solutions and services. Our guidance midpoint assumes that Q3 overall company organic sales will be down about 20% year-over-year, followed by a sequential improvement in our fourth quarter, incorporating the expected revenue contributions from Asim and Calypso, as well as updated currency forecasts. We now expect full-year fiscal 20 reported sales of about $6.35 billion and project organic sales to be down between 9.5% and 6.5% compared to last year. Segment margin is expected to be in a range of 18.5% to 19.5% compared to 21.5% prior guidance, mostly as a result of lower volumes, partially offset by our cost actions. The lower adjusted effective tax rate mainly reflects some of the discrete benefits we recorded in the second quarter. Slide 19 represents the full year fiscal 2020 adjusted EPS bridge midpoint of January guidance to midpoint of April guidance. Core performance includes the large unfavorable impact of volume and mix, as well as some of the inefficiencies in our supply chain operations and solutions and services I referred to. These are partially offset by our cost reduction actions, including lower incentive compensation. A headwind from currency and acquisitions is mostly offset by the lower tax rate. On a year-over-year basis, Our guidance at the midpoint assumes full-year core earnings conversion, which excludes the impact of currency and acquisitions, of a little over 35%. We expect a particularly challenging third quarter. This is the quarter during which we expect our sales to trough with the weakest performance in our higher margin product businesses, and we won't have the full run rate savings of all the actions we implemented. We expect third quarter just at EPS to be a little over $1 per share. A few additional comments. General corporate net is now expected to be closer to $95 million. Purchase accounting amortization expense for the full year is expected to be about $45 million, up $30 million compared to last year. Net interest expense for fiscal 20 is still expected to be about $100 million. We expect non-controlling interest now to be about neutral, given lower expected sales and earnings at Centsia. Average fully diluted share count is now expected to be $116 million for fiscal 2020. With respect to repurchases, we are currently in the market, but are monitoring business conditions closely to inform the level of repurchases going forward. Finally, We expect continued strong free cash flow performance with free cash flow conversion over 100% of adjusted income as we liquidate working capital, particularly in the fourth quarter. With that, I'll hand it back to you, Blake, for some closing remarks before Q&A.

Thanks, Patrick. We're managing our costs and protecting our balance sheet against the current reality of unprecedented volatility, but we're also considering long-lasting changes that are being accelerated by the pandemic. We remain optimistic about a world that learns to reduce the human toll from COVID-19 and about Rockwell's role in increasing business resilience. Here are some thoughts about that future, starting with industries that we think will be especially important. It's clear that countries like the U.S. want to increase local manufacturing capability for medicines and medical devices, and we continue to grow share and capabilities in life sciences. I've spoken earlier about some of the ways we're helping pharmaceutical and medical device companies scale up the production of critically needed products during this crisis. Packaged food and beverages are critically important when going out is not an option. Rockwell's food and beverage business is roughly 70% retail for grocery stores and home delivery, and 30% food service for restaurants. End users as well as machine builders depend on Rockwell for the speed, flexibility, and support that we can provide. Electric vehicles are going to continue to increase their share. Our Q2 growth in auto had a significant EV and battery component. And while we expect a tough road for the auto industry over the next few quarters, Our investments in motion technology and software for these applications will continue to bear fruit. The oil and gas industry is going to be focused on lower cost production, not CapEx-driven capacity. Our focus on new technology that lowers ongoing production costs from existing assets will be most important for operators for the foreseeable future. innovation will be necessary to lower the break-even point for a barrel of oil. With respect to manufacturing footprint, we expect companies to reduce single points of failure in their supply chain and plant capacity. We are increasing the resilience of our own worldwide system, and we know our customers have plans to do the same. We are already seeing some manufacturers' plans to return manufacturing to North America where we have higher share. Remote support of operations will be important across many industries. To provide expertise virtually when being physically on site isn't possible. We're already doing this for hundreds of companies. To ensure the highest quality and safety of products, product traceability is becoming more important, which is an application we know very well from our life sciences experience. Flexibility is one of the biggest benefits of automation. Rapidly ramping up output, designing lines to run multiple products, and changing packaging to meet evolving demand is likely to be even more important in the future. Software that simulates throughput under different conditions and optimizes production and we have a strong and growing offering in this area. Finally, we're seeing diverse companies come together to solve tough problems quicker than we ever thought possible. This is about the power of partnerships and the humility to recognize that no one company can do it all. Partnering is a fundamental part of our culture. For all of these reasons, we believe we are well positioned for a bright future. With that, I'll turn it over to Jessica to start Q&A.

Thanks, Blake. 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. Sharon, let's take our first question.

If you'd like to withdraw your question, press the pound key. First question comes from Steve Toussaint with J.C. Morgan.

Hey, good morning, guys. Morning. So just on all these cost actions, how much of this flows into 2021?

Steve, back up here. It will depend on when we undo some of those temporary actions, and that will depend on the business conditions. So the answer is it depends on when business conditions improve and when we feel comfortable undoing some of these temporary actions.

Do any of the saves carry over into 2021? Like is there another step up? I mean the incentive comp seems like it's kind of an annual thing. I would assume you're now down to kind of zero on that. I guess I don't see any real structural kind of change in the cost base. So I'm just wondering, you know, is there any, are there any incremental savings if revenues don't come back?

Yes. So, obviously, we have taken some structural actions in September, which are yields and savings this year. We implemented temporary, not permanent cost reductions at this time because we think it's a temporary, not a permanent event. And we want to protect our development programs and our R&D. Now, also, those temporary actions enabled us to have a quick cost impact with no cash cost to implement. And as I mentioned, we have identified additional including structural cost actions that we can implement if business conditions require or to reallocate resources to higher priorities.

Okay. And then just on the fourth quarter, obviously, you know, you guys are conservative. So, you know, the dollar will take with a grain of salt. But still kind of the bounce back from, even a number that's close to a dollar in 4Q. Is that based on kind of backlog visibility, front log? What gives you the confidence of that kind of bounce back in fourth quarter?

Yes, so the dollar, Steve, that was for the third quarter that I mentioned, a little over a dollar. So the fourth quarter, we expect sequential improvement just because, and given also what we've seen in geographies like in China and in Italy, We've seen a deep pullback, followed by a gradual improvement. And that is our 10% sequential improvement in the fourth quarter, which we expect to be broad-based, but with the exception of oil and gas, where we're not projecting an improvement.

As Patrick mentioned, but we haven't seen cancellations. So we still do see people... in certain of the industries that we talked about continuing with plans, and that's separate from the current rush to increase capacity in some of the essential products, and we've certainly seen additional business in those areas.

Great. All right, guys. Thanks a lot. Appreciate it.

Thank you. Next question comes from Julian Mitchell with Barclays.

Hi. Good morning. Maybe just wanted to drill in firstly on that second half. The decremental margins look very severe in that second half, maybe 50, 60% or so year on year. Maybe just help us understand the phasing first half to second half of the 100 million or so of investment spend. and also the $150 million plus of savings. And any color you could give, like how much of an impact from mix are you dialing in and from those supply chain inefficiencies?

Yeah, Julian, if you look at our earnings conversion for the full year, and I call it core conversion, so I exclude the impact of acquisitions, which have a significant impact, and currency. For the full year, earnings conversion is a little over 35%. on 8% revenue, organic revenue drop at the midpoint. But the second half, again, adjusting for the impact of currency and acquisitions, our conversion is a little bit below 40%.

I see. That's helpful. Thank you. And what's the phasing of that investment spend? Patrick, that $100 million or so, if you could split that at all, first half, second half, or something.

Julian, you're referring to the temporary actions?

Yeah, the temporary actions, and also I think you talked about some, you know, you'd lowered the investment spending step-up assumption for the year, so just wondered how that spending delta shifts at all first half or second half.

Got it. So the temporary actions will have a bigger impact in the fourth quarter versus the third quarter just because of the timing of our pay cuts. So that's one. If I look at the investment spending specifically in our January guidance, we had said investment spending would be up about 2% year over year. That's about $40 million. Currently, we expect that to be down 3% for the full year. And so that's $100 million swing versus our January guidance. We think that Q3, Q4 will be down about 6%, 7% each compared to the prior year in terms of spend. And in dollar terms, it would be a little bit more in Q4 than in Q3.

That's very helpful. Thank you.

Thank you. Next question comes from Jeff Sprague with Vertical Research.

Thank you. Good morning, everyone. A couple just to further clarify on the cost actions. Patrick fully understand the earlier comment about the, you know, the decision on 2021 will come at a later point in time. But if we look at these actions that you're taking that do yield 150 million plus in 2020, what is the annualized run rate of those actions? Again, you may not continue them for a full year, but what is the annualized run rate of those actions you've taken?

So the run rate of these actions, if I look at the bonus, we cannot count on that after this year, but the full run rate of the pay cuts is north of $100 million, and so we get less than half of that this year. And so there is another over $50 million call of an analyzed impact if we continue that into next year, but as I said, it will depend on business conditions whether we do so.

Correct. And just on the incentive compensation, just to be clear, in Q2, we have not only the absence of an accrual, but we have the reversal of a Q1 accrual. And then I'm just wondering, in the second half, what is the comparison? So we'll have zero accrual in the second half of 2020 versus what actually fell in the second half of 2019?

Yes. So in the... for the balance of the year, we will have a $30 million decrease in bonus expenses that will mostly fall in Q4. Okay.

All right. Thank you very much.

Best of luck.

Thank you, Jeff. Thanks, Jeff. Next question comes from John Inge with Gordon Haskett.

Good morning, everybody. Guys, you mentioned project delays, but like you said, there are no cancellations. I'm wondering if you could give us a little more color on what verticals or areas of the world you're seeing these delays, if they've been picking up sort of through April. And I know, Patrick, you had also talked about you put China and Italy into a context, or certainly you put China into a context of a V-shaped recovery, but your overall commentary seems to be anticipating something more of a gradual recovery. So I'm I'm curious if you could juxtapose that to commentary. Do you think China is something of an anomaly? It rebounds much more quickly versus the rest of the world? Or can the rest of the world actually pick up steam based on everything you're seeing, backlog and all that sort of stuff?

Yeah. John, so with respect to project delays, I don't think we saw any acceleration through April. But, you know, think of final acceptance tests where it requires – It might require some visitation. Those are the types of things in projects that are causing delays because people just either can't get to the factory to take a look at the system before they take delivery. ...for the commissioning that Patrick talked about. So those are the types of things that characterize delays. Oil and gas would certainly see some of those because those are often coordinated-type systems. You know, in terms of the modeling for the recovery, I mentioned some of the inputs that we looked at. We looked at China, which was a strong-shape recovery. We looked at Italy, which was a little bit more gradual. And, you know, consumer demand for our customers and products will be something that we'll be looking at closely. But we thought taking something between the two would make sense. And so that's what we've incorporated in our guidance. We're watching orders daily to see the development around the world and in different industries.

So that makes sense. I guess, you know, in terms of, just in terms of the environment, like is this comparable to 08-09 or is there something that's very different, you know, is there something that's very different about it? And also, I mean, are you expecting oil and gas to cancel? I mean, oil prices are pretty darn low. Like I realize that you guys are about OPEX and it really, It's about productivity and so forth. But, you know, how are you thinking about that vertical? It's one of your largest and presumably most profitable.

Yeah, so a couple of things. First of all, with respect to comparisons with 08-09, I think there was more of a structural element to 08-09 with respect to finance infrastructure. We really continue to look at this as an event-driven activity. Now, based on the duration, some other things could come into play. But we really do characterize this as something of a different beast than 08-09. In terms of oil and gas, we have significant backlog in oil and gas. Process safety represents some of the stronger recent order activity, and process safety is going to tend to hold up through this type of event. Our assumptions for oil prices are up to but not above $30 a barrel for WTI, for West Texas Intermediate. So we're not expecting or pricing in some major recovery in terms of oil prices as the basis for our guidance.

That's very helpful. If I could just ask one more question. You know, I think there's a not insignificant risk that the U.S. could enter a partial or full-on Cold War with China, you know, especially if it becomes apparent the Chinese, you know, manufactured and released the coronavirus. And, you know, I'm just wondering, you obviously took these supply chain actions Like, is that enough? Like, how are you thinking about your China operations strategically? So you mentioned reshoring of the U.S. That's going to benefit Rockwell. Do you potentially need to step up some of the work around China actions, or are there other things that you think you could perhaps be doing or are thinking about?

Yeah, I think the key point to think about is what I mentioned earlier, and that is reducing single points of failure. in our supply chain. So whereas people have been looking at their supply chain for a while now as costs in what were previously lower cost areas are rising, and then with the trade war putting further stress on that, I think this event is going to cause people to make some changes in their supply chain. We're considering changes to add resilience to our operations. And when we're thinking about it, I'm sure there are hundreds of our customers who are thinking the same thing. That doesn't necessarily mean that they're going to bring it all back to the U.S., but the concept of being local to their most important markets and to have more than one place where you're manufacturing your high-value products, we think a lot of manufacturers are going to follow that path coming out of this.

Yeah, I agree. And it just doesn't make sense to have all our pharmaceuticals manufactured in China. Thanks very much, guys. Appreciate it. Thanks, John.

Next question comes from Josh with Morgan Stanley.

Hey, good morning, everybody. Hey, Josh. Good morning. Just to kind of follow on that last question, I guess, you know, Blake, you mentioned already seeing some input from customers on, you know, regionalized manufacturing or reshoring. What kind of specific industries, I guess, maybe outside of pharmaceuticals have you had those discussions on? It seems awfully early. I get maybe someone wants to kick the tires or at least kind of formulate a plan. But any specific verticals that you're starting to see an uptake on that discussion on?

Yeah. So you mentioned pharmaceuticals, medical devices. There's certainly actions that have been dramatically accelerated through this current crisis. Other consumer products. So Stanley Black & Decker has talked about bringing closer to their North American markets some of their manufacturing operations. So that would be another example. But I think getting closer to our customers and consumer markets would be a common theme.

Got it. That's helpful. And then we've heard from some other folks that there was a good amount of kind of pull forward and, you know, some isolated push out. But in general, a lot of order shifting, I guess, in March as folks decided what they wanted to do. Did you see any kind of pull forward into the quarter as folks anticipated either trouble in getting products or, you know, imminent shutdown such that they wanted to finish something up before they were done? I think in the long run, you know, this is all a timing noise thing, but just trying to level set if anything got pulled into the quarter.

Yeah, we looked at that, and we really didn't see meaningful pull-ins in the quarter. So we looked at our distributor inventories, which we work closely with distribution on, and there was nothing unusual going on there. And then with respect to automotives, some of the projects that contributed to our strong growth in the quarter included battery-making equipment in Asia, which is an ongoing series of successes that were talked about in previous quarters. We also had line of sight to some more traditional projects by brand owners and internal combustion engines. These are projects that we've been tracking for well over a year now. And then some activity additionally in auto industry. from some of the tier suppliers in Europe, especially in Eastern Europe. And so we've seen these projects. We've been tracking them for a while, and we really haven't seen a distinctive trend that contributed to our strong Q2 results.

Got it. That's very helpful. And I appreciate all the callers this morning, especially some of your other peers out there, poll guidance. So all the detail, greatly appreciate it. Best of luck.

Yeah, thanks, Josh. And just on that note, we thought it was important to share an extra amount of information that we thought was most helpful in navigating the current environment.

Thank you. Next question comes from Nigel Cole with Wolf Research.

Thank you, guys. Really appreciate the additional color. You talked about, you know, what you've seen in China and Italy, you know, in April. I'm sorry if I missed the broader discussion on what you've seen in the Americas and Europe more broadly, but how is that down 20% compared to what you've seen in April across your portfolio?

Good night. So Patrick here. In April, globally, and this is for both orders and shifts, our product businesses are down about 20% through Friday of last week. And so... consistent with our projection for the third quarter. What we're seeing so far this month, and as I said, this is for products, two-thirds of our business.

And would you expect April to be worse than 2Q? I mean, you know, April is where we're in the, you know, sort of the eye of the storm, if you will, of time shutdowns. Why wouldn't we see sequential improvement in May and June?

Yeah.

Nigel, of course, it's a difficult question.

We've seen a weakness start at the end of March. I think it's too early for us to say that in April, given where we are, that we have seen a bottom and that we call a bottom. So it's unclear when we may bottom out. We do believe that that will be sometime in Q3 and that late this quarter, mid or late June, into the fourth quarter, we will see a sequential improvement.

Okay, that's fair enough. And then I do want to come back to the 3Q EPS question. Again, the dollar seems like a very low bar, but the detrimental margins implied by that are extremely high. So I just want to ask the question a different way. Is there anything we should need to think about in terms of mix or cost pressures or M&A dilution, FX, hedges, et cetera, in terms of, you know, right setting 3Q EPS?

Yeah. So specific to a key question, Q3, organic sales down about 20%. That represents well over $300 million of revenue, which is weighted towards our product businesses, which, as you know, carry higher margins. We're not getting the full run rate of our cost actions, given the timing of the pay cuts, and so we expect Q3 to be the trough. So Q3, excluding the impact of acquisitions and currency, We expect our decrementals to be close to about 50% for that quarter because of the reasons I mentioned.

Right. Okay.

Thanks, Patrick. Yep. Thank you.

Next question comes from Robert McCarthy with Stevens.

Hello, everybody.

Hey, Rob.

Hello, Rob. Yeah, I guess a couple questions, and thank you for taking me towards the end of the call. I guess kind of the first question, maybe just, you know, update us on, you know, PTC and the relationship there in terms of what's going on, progress, and, you know, do you anticipate we'll have a virtual LiveWorks this year and, you know, kind of what's the agenda, particularly in this environment, to drive growth from that collaboration?

Yeah, Rob, we're still very happy with the partnership with PPC. We continue to see orders in the quarter, both on top of our control platforms and also at competitive strongholds where the expanded scope of those offerings and software and augmented reality are winning us new business that we would not have otherwise won. The LiveWorks or Rock Live activity will be virtual. I'll be participating in that. We'll be talking about new products that we're working on. And so the partnership remains vibrant even under these conditions, and we continue to strengthen it.

That's helpful. And, you know, obviously congratulations on a solid quarter and a constructive guide in providing all the detail. Now, that being said, you know, we have seen the market rally pretty significantly here. And at least tacitly, there seems to be some expectation of what looks like, you know, an interruption and then perhaps a U-shape or B recovery. But, you know, as Anthony Fauci always says, the virus gets to make the call. So if we go into a bit of a double here in terms of the virus comes back and, you know, you're seeing companies cut CapEx across the board by 20 to 30 percent and there's not you know, there's not a reason to believe if we have creeping uncertainty until there's a vaccine in 16 to 18 months that you couldn't have, you know, a continued tough business capex and fixture environment, which is not good for you despite some of these interesting secular trends for nearshoring. You know, how do you think of how you address that environment? And, you know, back to some of the questions around structural costs, what are some of the actions you could take to take some more structural costs out of the business?

Yeah. Rob, we're looking closely at that. We're modeling different views of the recovery, both in terms of shape of the recovery as well as timing, depth and duration, all of those things. And we have plans that are appropriate to those that go into deeper structural reductions if necessary. And so we watch that. We've taken those actions in the past and we'll take them now if we feel like that's the appropriate response as the crisis unfolds.

Well, we're coming up against the market open, and, you know, from that standpoint, I think a lot of guys have to write up their cover their ass upgrade notes to neutral. So with that, I'll let you go.

Okay. Thank you, Rob.

Thanks, Operator. We can take one more question.

We have a question from Noah Kay with Oppenheimer. Please go ahead.

Well, thanks for squeezing me in at the end here. And I guess the real, you know, $10,000 question, Blake, is you talked about a lot of action that manufacturers of all types are going to be taking to improve their business resiliency, really as a direct response to this crisis. And in the past, you've talked about, even at your investor day, talked about being able to grow at a multiple of IP and increasing that. Should we be thinking, and is it your view, that coming out of this, the nature of the industrial recovery is such that your multiple could even expand as manufacturers take actions that play into your wheelhouse?

You know, we're optimistic, Noah, about our ability to play an even more important role for customers as we go forward. And I've given some insight as to the industries and some of the trends. that we think we're well positioned to partner with those customers on. And we're going to be working hard in those areas, as Patrick mentioned, in some cases even investing in the areas of highest value. And we prefer to win those opportunities, see the growth, and then we'll talk about the resulting multiples. But our intention is to make it happen.

I appreciate that. Thanks very much for taking the questions.

Yeah, thanks, Noah.

Thank you. That concludes today's call. Thank you all for joining us. Really appreciate your support.

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