Thank you for holding, 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 one. At this time, I would like to turn the call over to Steve Etzel, Vice President of Investor Relations and Treasurer. Mr. Etzel, please go ahead.
Good morning, 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, Patrick Goris, our CFO. Our results were released earlier this morning, 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.
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, 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, up double digits. Our KPI for process sales grew 10% organically. The weakness in automotive drove a 2% decline in Logix. Commenting on regional performance in the quarter, North America, which for us is the combination of the U.S. and Canada, grew 2% organically. While automotive weakness significantly impacted the overall growth rate for this region, growth was broad-based across a wide range of industries. In pulp and paper, we won a significant process and power control order this quarter with Green Bay Packaging. EMEA was up over 5% in the quarter, led by consumer and tire. Asia grew about 4%, led by heavy industries and automotive. China grew 6.5%.
Latin America sales were up 13%, led by heavy industries. I'll make a few additional comments about our Q2 results. Adjusted EPS was up 8%, and segment operating margin expanded 40 basis points year-over-year. Book-to-bill performance for our solutions and services businesses was 1.09 in Q2. Backlog remains high. Patrick will elaborate on our second quarter financial performance in his remarks. Let's move on now to guidance for full year fiscal 2019. Forecasts continue to call for industrial production growth. We continue to see broad-based growth with strong financial performance. 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 two percentage points.
Including the revised impact of currency, our fiscal 2019 guidance is sales of about $6.8 billion. Midpoint of the updated adjusted EPS guidance range is now $9 compared to $9.05 in previous guidance. As Patrick will discuss in a few minutes, this guidance does not include the impacts of the Sensia joint venture. Moving on to slide four. I'll provide an update on two recent strategic investments to increase long-term value for our customers and shareowners. 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 roll-outs. Even in automotive, where overall spending is down, customers are excited about our FactoryTalk InnovationSuite. Ford decided to expand this new offering to additional locations.
Another customer, ECARX, an affiliate of Geely Auto Group, chose the FactoryTalk InnovationSuite to improve production management and quality. In consumer, Rockwell Automation is partnering with Stanley Black & Decker to bring The Connected Enterprise to life through their Manufactory 4.0 digital manufacturing vision. 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. 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 $0.15 compared to the second quarter of last year, an increase of 8%. The year-over-year increase in adjusted EPS is primarily due to the benefit of higher sales and lower share count, partially offset by higher investment spending and higher net interest expense.
Free cash flow was $105 million in the quarter, about 45% conversion and weaker than normal for us in Q2. There are several elements that contributed to this. First, our tax payments are overweight to the first half this year and specifically in Q2. We paid about half of what we expect to pay for the full year in Q2, including the first installment on the repatriation tax that is owed as a result of tax reform. Overall, tax payments were about $140 million in the quarter, about $65 million higher compared to Q2 last year. Second, we issued $1 billion of long-term debt in the quarter. In advance of this transaction, we entered into interest rate hedges. We closed out the hedges at the time we issued debt, which resulted in us paying about $36 million to settle the hedges.
Even though this relates to 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 free cash flow in the quarter. Working capital was another factor, particularly inventory. We've talked in the past about activities related to our supply chain, including some manufacturing 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, repurchases 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 six 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 0.1 of a point. Currency translation decreased sales by 3.5%. For the quarter, segment margin contracted 30 basis points year-over-year, yet remained very strong at 28.4%. Moving on to slide seven, Control Products and Solutions. Reported 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 and Schlumberger announced in February this year. JV formation activities are underway and regulatory approvals are pending.
As Blake mentioned, the impact on our financial statements is dependent on timing of close, and we have therefore not included the estimated impact of Sensia in our fiscal 2019 guidance. Assuming a close by the end of our fiscal year, September 30, we continue to estimate a $0.05 EPS headwind for fiscal 2019. With that, let me move to guidance. We now project sales of about $6.8 billion for full year fiscal 2019. 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%-5.3%, with a midpoint of 4.5%. Currency translation is now expected to be about a 2-point headwind. We continue to expect segment operating margin of about 22%. Our adjusted effective tax rate for fiscal 2019 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-$9.15. Compared to prior guidance, volume and mix 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 2019. With respect to tariffs, we remain on track to neutralize the incremental costs through supply chain changes and negotiations with vendors, as well as targeted price increases on affected products. We continue to project free cash flow conversion of about 100% of adjusted income. General Corporate Net is now projected to be about $95 million-$100 million. As a reminder, General Corporate Net now excludes interest income. Net interest expense for fiscal 2019 is expected to amount to about $90 million, consistent with our January guidance. In short, we expect another year of strong financial performance.
Our updated guidance at the midpoint projects 11% adjusted EPS growth on 4.5% organic sales growth, and a 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. Your first question here comes from Scott Davis from Melius Research. Please go ahead. Your line is open.
Hey. Good morning, guys.
Morning.
Morning.
I can't remember a quarter where process was in the double-digit, but everything else was a little bit slower. I know your business is lumpy, so quarter-to-quarter sometimes isn't the best way to look at things, but help us understand really the CapEx versus OpEx that you're seeing out there and maybe the type of visibility that you see on projects of various sizes.
Continuing the theme that we've talked about in the past few quarters, heavy industries continues to be strong, heavy industries are biased towards process applications. 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. Within those, we're seeing a mix of both capital projects as well as ongoing small projects and servicing the installed base. I mentioned as well in my prepared remarks, I talked about Information Solutions and Connected Services growth accelerating, there was a fair part of that that was in process industries. For instance, we received our largest ever MES order at the European pharma company, Lonza, that is encouraging because it's new value in these process applications.
No, that's helpful. Maybe this is a little bit picky again, in auto, we know auto sales are relatively weak, is there any visibility on auto CapEx coming back? I know there seem to be a crap ton of EV launches coming in the next two years. 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.
EV is set to double this year for us. We'll see some of that in the balance of this fiscal year, 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. They're 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 J.P. Morgan. Please go ahead, your line is open.
Hey, guys. Good morning.
Good morning, Steve.
What are you seeing over in China? How do we kind of read or maybe link what's going on with some of the robotics guys and some of the Japanese suppliers in there to kind of what's happening in your business? I know that there's definitely capacity being added, but a bit of slowing in that end market. I know you guys don't do anything kind of directly for the robot, but how do we kind of reconcile what you guys are seeing versus what you're seeing from those customers?
We did have a reasonably strong quarter in China. It was 6.5% growth. That included a growth in automotive. 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. As we've talked about, we have a really good readiness to serve in the EV portion of the auto market. 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.
How much do you think EV for you guys, how much was auto in China up, and then how much was EV, if you can break that up at all? Then also from an order timing perspective, would they order all kind of like the robots first and then order your stuff? Does it all kind of come at the same time?
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.
Okay.
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. 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, Blake. I appreciate the color.
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. The down 20% in auto, is that the new run rate embedded in your guidance, Blake and Patrick, for the year? Or are there things that you think moderate that cadence, improve it, so to speak, toward the back half or into next year?
John, I'll make a couple of comments and then Patrick will add a little bit. 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. With that, Patrick, maybe some additional comment?
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 digits. Flat to slightly up, that refers to some of the larger projects that we know are in flight that Blake was referring to.
That's helpful. Switching actually just to the JV with Schlumberger, Sensia. How are you guys going to gauge success in this business? I don't think I saw what financial targets you had established, but is there anything you could share with us?
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 digits, we obviously expect to grow above the market. 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 acquisition, so 10% free cash flow yield in years three to five. The other thing is for fiscal 2019, 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 2020, we expect it to be about EPS neutral, including about $0.10 of fees and intangible amortization.
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 2019. 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 Partners. Please go ahead. Your line is open.
Thank you. Good morning.
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, as Blake 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 million or so. 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. Of that $50 million-$55 million increase we're talking about now, we still expect about two-thirds of that we will have seen in the first half of the year. We've seen most of the, call it, ramp-up in spend.
In terms of process, Blake, can you just provide a little bit more color on what you're seeing upstream versus downstream? Is there any pause at all in your upstream activity as you're prepping for Sensia to happen? Just any other color there would be helpful.
We continue to see oil and gas activity continue strong. We had double-digit growth in the quarter, as you know, we're a little bit heavier exposed on the upstream and midstream, we think it's a good time for Sensia. Besides oil and gas in process, I mentioned in my prepared remarks about Green Bay Packaging. That was a significant paper machine project with all the ancillary equipment that'll be worth over $10 million to us. 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 talked about the sharp slowdown there in organic growth in Q2, but a better orders sort of exit rate. Just wondered, what should we expect for North America growth in the second half versus what you did in Q2? Were there any specific verticals that have seen that pickup?
Yeah. 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. 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. Our product businesses, we expect about similar growth rates in Q3, Q4 than what we've seen in the second quarter.
Thank you very much. My second question would be around if you'd experienced much or any inventory adjustments for some of your, particularly products, obviously, at any particular clusters of OEMs or distribution, or whether you felt that inventory adjustments have been in line with kind of normal seasonality.
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.
Your next question comes from Nigel Coe with Wolfe Research. Please go ahead. Your line is open. Nigel Coe from Wolfe Research, your line is open.
Yeah. Good morning.
Good morning.
I'm having some problems here with the mute button. Quick question. Your peers, Siemens and Schneider, have been quite cautious on discrete market commentary in general, ABB as well. Obviously you've called out automotive down 20%. That's about a two-point drag to your guidance initially. I'm wondering 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?
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. 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. Semi, I think you were talking about that being up mid-single digits. Is that playing out the way you expected?
The 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. Can you just maybe sift out, if any, 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. While in terms of showing up as revenue, it's still early given the subscription nature of these. It allows us to have richer conversations with customers across really all of our target industries, and in multiple geographies. PTC's offering, whether it's the ThingWorx or the Kepware or even the Vuforia augmented reality, those add to our portfolio. 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. 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. 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. We're happy to have those discussions because of our focus on business outcomes.
Just my follow-up question is just around, given the mix of business and where we're seeing strength, whether in the heavy industries, the process businesses, which typically have a bit longer tail to them. The business feels later cycle in general, when I look at the growth in the end markets. How do you assess that? When you look at your front log, the book-to-bill here at 1.02 is 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 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?
First of all, book-to-bill in the quarter for solutions and services was 1.09. We thought that that was healthy for the second quarter. 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. 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.
Great. Okay. Thank you much.
Thank you, Rick. Thanks.
Your next question comes from Deepa Raghavan with Wells Fargo Securities. Please go ahead. Your line is open.
Good morning, guys.
Morning.
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. My question is with regards to 2019 organic growth guide up higher end at 5%, what kind of gets you there at this time? Automotive, you've obviously slashed your expectations there, but what are the other industries that could get you to that high end of organic growth guide?
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.
You're not necessarily assuming Automotive. You're assuming it 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've taken a realistic approach to automotive as we factored in the guidance for the year.
Got it. You're pretty strong in Europe, especially with the OE machine builders. That region is weakening, and looks like your outlooks probably contemplate that slowdown. Can you right-size us on what your regional expectations are within that full-year guide now, organic growth? Thank you.
We think that for EMEA, we think it will be about the company average in terms of organic growth.
Yeah.
For the full year, with strength in tire and in consumer.
How about the other regions, too?
Oh, you mean for the-
The rest of the regions, yeah.
Yeah.
China, Americas, et cetera.
For the full year, we now expect North America to be a little bit below the company average at the midpoint, EMEA at above the company average. Latin America, we expect to be our strongest region, double-digit growth. Asia, we expect to be at above the company average, and the same for China. Above company average for China for the full year.
Great. Thank you very much.
Thank you.
Your next question comes from Robert McCarthy with Stephens. Please go ahead, your line is open.
Good morning. If you could just review your auto performance in the context of A&S and CP&S, and talk about what you saw in terms of overbridging 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 mix 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. The largest impact of automotive would be on Architecture and Software, including Logix, compared to the Control Products and Solutions segment.
All right. Thank you for that. In terms of PTC, could you talk about how that relationship is going? In particular, should we expect any kind of further product enhancements or launches around their confab in Boston in June, the ThingWorx?
Sure. Rob, you may have heard last night when PTC announced, they talked about good bookings growth in IoT, 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. The best proof is that customers in all industries and in all geographies are voting with their wallets that this is a great solution. 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. 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 Blake Bistricki on for Andy.
Morning.
Morning.
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. Can you talk about what changed versus 1Q 2019 when EMEA was down to now mid-single digit growth, and the growth that you're talking about seeing for the remainder of the year?
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's 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, and that we expected some organic growth in the balance of the year, which is what we started seeing in the second quarter. We expect some modest growth in EMEA for the balance of the year as well.
Okay, that's helpful. Just on the free cash flow outlook, I know you mentioned some of the headwinds that impacted F2Q, can you talk about, one, whether the weakening in auto was any incremental drag on free cash in the year? Just given the unchanged guidance, your level of confidence in driving that acceleration in the back half of the year here?
Yeah. We do not believe there are otherwise a significant impact on free cash flow other than of course, a drag on sales that we've been seeing. In terms of confidence, obviously we have high confidence we are 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. Obviously the guidance is second half-weighted.
All right. Back to 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. A lot of ground covered, but I wanted to go back to your comment around acceleration on the Information Solutions and Connected Services. 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? I guess as a follow-up to that, one of the things we picked up over at Hannover is that payback periods are shortening on some of these investments. What's actually driving that acceleration in your mind? Is it quicker paybacks? Is there something else as people prepare for 5G? Kind of anything you think.
Sure. Well, we are seeing acceleration, it's strong double-digit growth in the quarter, which is helped by the PTC relationship complementing our own internally developed offerings. I think the biggest factor towards the growth of our business and really of the whole market is the ability to deliver positive business outcomes. You have to start with the ability to quantify what savings you're providing for that customer. Everything else is really just talk. 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. 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 Logix-based systems. Other times it's on top of the competitors, where we've come in and added that new value. It's an exciting area for us to be.
Great. Maybe just one quick follow-up on that. When you come in and do the integration side of the work if it's not on top of Logix, how does the mix on that project look for Rockwell? I would think 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, 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. Regardless of whether we're providing the Logix and the drives and so on, along with the software and the services, just that bucket, the Information Solutions and Connected Services, has profitability about the Rockwell average, it has a higher degree of recurring revenue than the Rockwell average.
Got you. 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.
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, I believe. I was just kind of wondering if you could, A, kind of tell us where pricing sort of landed in the quarter. B, is there any changes to the buckets? C, back to B, I guess, with the likelihood of moving up to 25% seemingly much dimmer now, does that change the $90 million?
Yeah, Scott. 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 of the cost versus what we realize through price and negotiations with vendors. If the 10% on list 3 does not go to 25%, the full-year impact or the annual impact of $90 million headwinds will be closer to $70 million-$75 million. It wouldn't have an impact on our overall financials because we're targeting it to be neutral for our fiscal year.
you-
I would say in short.
Pull back on supply chain. I'm sorry
Say again, Scott?
Please. I was just asking, you would pull back on your supply chain initiatives to balance that off?
No, the way you can think about it 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 deader, 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. I know you said you've got line of sight on some things, I also know, I think you're facing minus 10 comps in the second half. I'm just kind of hoping you can give us a little bit more on kind of how we get there to the minus 10.
Yep
In the second half of the year.
Yes, Scott. 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. 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. 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.
auto rest of year, flat to slightly up from the first half, but down year-over-year.
Correct.
Got it. 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. 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. I was just wondering if you can sort of give us some flavor 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. 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 in 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 uses of that CapEx with some of the electric vehicle, autonomous vehicle development, in addition to capacity moves and model changes. 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.
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. 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.
Justin Bergner, if you could please press star one again to re-queue.
Hi. Hopefully, I'm live again. I was asking, outside of auto bringing down your full year organic guide by about 50 basis points, are there any end markets that look materially better or worse with implicit in your full year outlook versus how they looked a quarter ago?
Justin, I would say no. There are always some puts and takes that move a little bit, but it is 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 & Solutions seem to absorb a mix headwind in terms of solutions growth versus products growth. Any sort of comment there on how you delivered such good margin improvement while absorbing that mix headwind?
Yeah. There was a modest headwind of mix within Control Products & Solutions. The main drivers of segment margin expansion were strong year-over-year organic sales growth, partially offset by higher spending. Those were really the big movers within that segment.
Okay. Thank you.
Thank you.
Thanks, Justin.
Thank you. I'll turn it back to Blake for a few final comments.
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.
That concludes today's conference call. At this time, you may disconnect. Thank you.