Q2 2020 Earnings Call
[music], Thank you for holding and welcome to Rockwell automated.
<unk> quarterly conference call and each remind everyone needs conference call is being recorded later in the call me will open up the lines for question. If you have a question at that time. Please press start one at this time I would like to turn the cover to just got correctly as Investor Relations. Miss Correct goes. Please go ahead.
Think Sharon good morning, and thank you for joining us for Waffle automation second quarter fiscal 2020 earnings release Conference call.
Me today is blakemore at our chairman CEO I'm Patrick Chorus R.C.F.M.R. results were released earlier this morning, and the press release in charge haven't posted to our website Oh suppressed we've been sharks included and I'll call today with our friends Nongaap measures Oh, the French we've been trying to include reconciliation.
These on gap measures a web cast of this call will be available at that website for we fight for the next 30 days.
For your convenience in the transcript of our prepared remarks will also be available on her website at the conclusion up today's call.
Before we get stuff.
Remind you that our comments will include statements related to be accepted teach results of our company and are therefore forward looking statements are actual results may differ materially from our projections.
A wide range of risks and uncertainties.
In our earnings released and details and all R.S.C.P. files, so with that I have come over to Blink.
Thanks, Jessica and good morning, everyone.
For joining us on the call today.
Before I begin let me say to everyone listening on this call.
Thank you for your interest in support.
I hope that you and those close to you are safe and healthy.
We are truly an unprecedented times.
In our first priority is protecting employee health and safety.
Employees are doing outstanding work, keeping our customers operation Jeff.
And running strong during this crisis.
We are on the central business that supports critical infrastructure, because our customers cannot build new products subscale without automation.
So thank you <unk> our suppliers.
Distribution partners.
And everyone else, what's been working hard to serve our customers in communities.
This pandemic will change how we live our lives and operate our businesses in the future.
Rockwell's financial strength positions as well to overcome the current challenges and to be more valuable than ever.
Customers learned to operate in this new environment.
Let me now review the topics for today's call.
First offer some cold on how are people in our customers are effectively managing during this crisis.
Then provide a brief overview of R. Q2 performance, including a status report on our operations and supply chain and then focus more time on what we are seen today in our outlook.
Please turn to page three of the slide deck.
When I think about Howard business has been conducted right now and how we were handling the current environment I started with our employees in our customers.
Safety of our employees is always our first priority.
Closely follow U.S.C.D.C. and World Health organization guidelines.
For a manufacturing workforce, we provide health screening enhance cleaning measures and use of safety equipment. It had implemented chauffeured distancing between workstations across our facilities.
Or 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 2500 sheets of euphoria augmented reality activated internally.
Conduct witness testing as well as customer support in training.
Turning to our customers.
This health crisis is bringing us even closer to our customers.
Everyone is rallying to help manufacture more necessary goods than ever before.
For example, we have a strong partnership with three yeah.
Say ramp up respirator production.
And we recently collaborated with Hank train machinery, or Chinese hygiene products machine builder to increase the production capacity of their high speed masked making machine.
Are solution based on logic in our next generation motion controllers increase their output from 100 5500 mashed per minute.
We're also supporting Abbott labs, and other pharmaceutical companies to increase testing capacity and with G. health care and others to ramp up their production of ventilators.
We're also supporting companies like Roach inside Chiba, we're working tirelessly to develop treat mentioned vaccines and are investing in manufacturing capabilities. So that they are ready to scale up production as soon as possible.
Well sure helping companies, who have reap hopeless manufacturing assets to now produce mash ventilators test kits and other equipment our communities desperately need.
For example, automotive in mind, you know, we I'm sure now, making ventilators and food and beverage machine builders are now making masks.
Even the Jamieson distillery, which is located near officers in Ireland as diverted somebody or whiskey production lines to now produce alcohol sanitizing jails for hospitals and medical centers.
Just a few story showcasing the integration going on in these difficult times.
It's my turn dislike for for a cue to performance and some key accomplishments in the corridor.
Total sales grew slightly in the corner, including a three point contribution from inorganic investments primarily related to our sense. She a joint venture.
Organic sales were flat versus last year.
And we're in line with what we were expecting heading into the quarter. Despite an 18% decline in China related to covert 19.
Organic sales performance benefited from strong sales of logics, which group, 8% versus the prior year led by strength in North America, particularly in automotive and food and beverage.
In addition to lodge, it's we continue to see strong growth. Another court platforms like independent core technology for motion control and network infrastructure.
Both at the screen double digits in the quarter and we think we're taking share.
We also had a number of important strategic wins, an automotive food and beverage life Sciences mining entire well, we were not being combined control platform.
Information solutions and connected services or I have C.S. for short.
Slightly largely due to a difficult comparison with major projects last year.
That shed the pipeline for I.F.C.S. remained strong we build strong backlog in the corner and we still expect are you see a sales to reach $400 million for the year.
R.I.O.T. offering continues to differentiate itself in the marketplace in the corridor rock what was awarded the industrial I.O.T. company up a year by Compass intelligence, which adds to our recent recognition in gardeners annual Magic Quadrant survey as a leader in <unk>.
Software.
We also saw very strong orders for for Euphoria, as we help customers expand their remote engineering capabilities. During this pandemic.
Turning out a cue to earnings adjusted D.P.S. Green, 19% and includes the release of our bonus a cruel.
Finally free cash flow grew about 90% in the quarter underscoring Rocco solid financial help and strong balance sheet position.
But smell turn disliked five well will provide a few highlights of our cute to organic and market performance.
Or discrete market segment grew high single digits led by auto which grew by over 20% euro per year.
Double digit sequentially.
Auto performed well above expectations in the quarter in almost every region.
We continue to see very good growth in electric vehicle programs. We also benefited from some traditional projects that we've been tracking.
Or hybrid market segment was flat in Q. too.
Largest segment food and beverage low single digits, including growth and packaging <unk>.
Life Sciences decline modestly due to the very tough comparison to last year.
Many of our customers, particularly those in consumer focused hybrid industries I've been render operations 24 seven.
Meet very high demand and I've had little opportunity to implement projects.
Divert resources from current production.
Process markets were down mid single digits with oil and gas also down mid single digits.
Talk more about our outlook for oil and gas and just a few minutes.
Turning now the slide six and our organic regional sales performance in the corridor.
Wrote 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 E.V. battery.
Me always down low single digits, but with relative strength in automotive food and beverage life Sciences and semi conductor.
Turning out a slide seven.
Let me take a few minutes here to discuss how we're navigating the current environment.
First want to say that I'm very proud of the afterwards, we have taken to build resiliency in or operations and supply chain over the years.
Or plants or operational and meeting current demand.
Involving many actions we had taken to mitigate tariffs over the last couple of years reduce the impact from coping 19 on our Chinese supply chain segments of our global supply chain are seeing some disruption.
The biggest challenges have been reworking product flows templeman, social distancing managing ships to limit the number of employees in a facility at one time.
We are actively managing what is a very fluid situation.
Patrick we'll have more details on her 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 the federal line or costs with a reduction in demand.
The following principles of the foundation for our decision making.
Keep our customer focus.
Protect employment as much as possible.
Protect are most important initiatives and investments to drive long term differentiation.
Position our company for success over the long term.
I don't think the near term with the long term is extremely important. This is why we haven't we intend to maintain a strong balance sheet.
Capital deployment priorities remain in order organic and inorganic investments followed by dividends and repurchases.
Turning dislike 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 four year basis.
Together with our rather inorganic investments, we expect total panic sales to contribute about four four and a half points of top line growth in fiscal 2020.
Turning down to our outlook on slide nine.
We're focused on delivering value to all of our stakeholders through these rapidly changing market conditions.
The passive recovery is difficult to predict.
As we put together a forecast we looked at a variety of the inputs.
A recent performance in China, Italy.
Near term industrial production for cash.
Our daily sales in order intake through April.
And what we are hearing from an 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% it the midpoint.
We continue to expect inorganic investments now, including awesome in calypso to contribute about four to four and a half points of growth to the year.
Adjusted D.B.S. of $7 at 30 cents at the midpoint.
And we're projecting free cash flow to convert it over 100%.
As you can see from our work and market projections for the second half and full year on slide 10.
Point of our projections assumes both automotive and oil and gas, we'll see particularly steep declines in the second half of the year.
We are also modeling more modest declines in food and beverage in other industries.
We expect most verticals, including auto to bottom in Q3 and gradually recover starting in Q. for.
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.
Lab rate on our second quarter financial performance and fiscal 2020 outlook in his remarks, Patrick Thank you Blink and good morning, everyone.
I will keep my remarks, some second quarter results very brief and then switched 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 a slight 11.
But the second quarter organic steals grow.
Organic fields were down 0.2% compared to last year and acquisitions contributed three per cent total grow.
Currency translation was the larger head went than expected you to a stronger us dollar and decreased seals by one and a half points.
Within the quarter organic seals were up low single digits through February would eat with very weak performance in China again through February China was down in about 30% more than offset by better than expected North America product sales.
Global organic seals, we can in March and we're down a little less than 4% for the month compared to last year.
Overall company back lobby, including for products and for solutions and services increase both sequentially and on a year over year basis for the quarter.
Segment up reading margin was 22.1% 80 basis points compared to last year, primarily you to lower in 10th compensation expense.
Are incentive programs are highly correlated to financial performance of the company.
We no longer expect an incentive compensation tea out to be aren't for fiscal 2020, and we therefore released are incentive a cool.
Represents a little over 200 basis points of segment margin till one which is partially offset.
Margin headwins related to currency.
A little over half a point of margin and the impact of acquisitions on about half a point.
General carpet net expense.
<unk> lower compared to last year, mainly as a result, the favorable mark to market adjustments related to our deferred and not qualified compensation plans.
Oh covered you adjusted heap, Yes bridge <unk> following slide.
Be adjusted effective tax rate for the second quarter of 12.4% was lower than we expected you to several discrete items.
Precast really in a quarter of about $200 million.
Included 831 million dollar tax payment, which represents the second installment on the repatriation tax that is okay. As a result of tax before.
Slight 12 provide the seals and Martin performance overview for up reading segments.
Architecture in software at good organic growth in the quarter with strong logic performance.
Lower in tips compensation was a margin till wind of about 200 basis points for the segments currents. He was about 100 basis points Edwin.
Organic seals of the control products and solution segments decrease 3.6%.
Would be products within the segment down, 3% and the solutions and services down about 4%.
Sense, Yeah represents almost all of the 5.8% revenue growth from you know ganic investments in the second.
Second quarter organic book to build for our solutions and services businesses.
1.10.
As I mentioned earlier, we built back block 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 practical solution segment was down 70 basis points compared to last year.
The next slide 13 provide the adjusted E.P.S. walk from Q2 fiscal 19 to to to 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 still it's related to incentive compensation and the lower tax rate were partially offset by the impact of currency.
I was expected the impact of acquisitions was about neutral.
I'll switch gears now and will provide some comments about a balance sheet and liquidity.
We've moved to slide 14.
We continue to be in a strong position with regard to our capital structure and liquidity.
<unk> 31 cash on the balance sheet was about 640 million.
And our total debt was about 2.1 billion.
Our next step to adjust the diva.
One point no.
Last week.
We executed the 400 million dollar term loan.
Which provided the funds to close to previously announced acquisitions.
<unk> as well as funds were under general corporate purposes.
The two acquisitions are expected to close in the next few weeks with D. combined purchase price of approximately $300 million.
We expect both acquisitions and about half a point the revenue.
Fiscal 20 seals and expect the fiscal 20, adjusted E.D.S. impact, including one time costs to be about a five cent headwind.
From a liquidity perspective in addition to our strong balance sheet of free cash flow generation profile, we have access to the commercial paper market for our operating needs.
Are single eight credit ratings provide us good access to the capital markets and finally, our liquidity is also supported by already existing 1.25 billion dollar credit facility, which expires in November of 2023.
Discredit facility remains available and <unk>.
The only financial confident we haven't are dead agreements as many but that's of interest expense calming him you know credit facility and a new terminal.
We have plenty of room under that component, which we have pressure tested in our scenario analyses.
You know, we have a history of generating some with free cash flow and we expect.
Liking prior downturns working capital reduction to be as a source of cash.
We're also differing non critical capital expenditures and now expect fiscal 20 capital expenditures to be closer to $130 million compared $260 million prior guidance.
Finally, as we have mentioned in the past week.
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 till 2025 in a nutshell, we continue to being a strong financial position and are focused on maintaining.
Next don't make some comments about what we're seeing in our supply chain manufacturing distribution operations as well as our solutions and services businesses on flights 15.
We have a global supply chain, including a net worth of suppliers in manufacturing and distribution facilities are supplied <unk> managing our into and supply chain with a particular focus on all critical end at risk suppliers and supplier locations globally.
In late January and early February we proactively increase inventory levels of certain mostly China source components in products.
We are currently experiencing some isolated supply and cross border transit disruptions and do see some increase supply chain costs, particularly related to reduce air freight capacity.
We're implementing free 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 to implement additional safety and I didn't prophecies.
Booting separation of shifts and social distancing between workstations to keep our employees safe.
Some of the operational changes implemented.
Well as some unplanned employee absenteeism are driving some inefficiencies in our operations, which we are in the process of addressing.
Or solutions and services businesses include thousands of domain experts.
They understand our customers challenges and priorities and design and implement solutions and provide services to a combination of domain expertise and aren't technology.
Physical access to our customer facilities is often important as we deliver those solutions and services.
Result of covert 19 access to customer facilities in some instances has been difficult for example for on site conditioning.
Well, we have been leveraging our technology and that of our partners to deliver certain services and solutions remotely.
Decrease access has let's do some project delayed as well as inefficiencies due to lower LIBOR utilization.
We intend to protect our domain experts as much as possible during this period.
Movie disliked 16.
Review of cost actions.
April we announced civil actions to address the current anticipate a business conditions as a result of the pandemic.
I won't go through all of these but will point out that all these actions are expected to you.
Over $150 million a savings for fiscal 20.
As the Saudi reduction stick affect me first we expect most of the seems to be realized in our fourth quarter.
We have identified additional cost actions to implement.
If business conditions required or to reallocate resources door highest priority.
Finally note that well our overall cost structure is coming down we have maintained in in some cases are selectively increasing investments in some of our highest priority areas in order to increase differentiation and create long term value.
Customers and cheerleaders.
Just take just the slide 17.
This last prevents no presents an overview of the business conditions, we saw in China, and Italy, two of our larger and markets, which were impacted by Kubat 19 before other geography.
Note that the China, and Italy charged provided an overview of the year over year growth in order intake for our product business is only.
Products are two thirds of our business and represent their shorter cycle book and Bill business.
As you can see the impact in China with severe in January and February.
Followed by a very strong v. shaped recovery in March.
Has continued in April through Friday of last week.
In Italy, we saw you will be your product <unk> through January followed by a week February and March.
What are the intake in Italy remains we can April.
But it's up about 10% sequentially when compared to March order rates.
Using our product order trends in China in Italy of leading indicators.
We expect most of our other geography used to be down significantly in the third quarter.
And expect a more gradual recovery starting late in the third quarter into our fourth quarter.
<unk>, we expect solutions and services to also followed this trend.
Moving to the right side of the slight.
This represents our total company sales, including solutions and services.
Our guidance midpoint assumes that cute three overall company organic seals will be down about 20% you'd have a year.
Followed by a sequential improvement in our fourth quarter.
Which we estimate to be up about 10% sequentially, but still down over 10% compared to last year.
Let's move on to slide 18 guidance.
Incorporating the expected revenue contributions from asked them in calypso as well as update apparently forecasts. We now expect fool. Your fiscal 20 reports sales of about 6.35 billion and project organic sales to be down between nine and a half and 6.5% compared to last year.
Segment margin is expected to be in a range of 18 and a half the Nike didn't <unk>.
Compared to 20, and a half 21.5% card guidance, mostly as a result of lower volumes, partially offset by our costs actions.
The lower adjusted effective tax rate, mainly reflects some of the discrete benefits we recorded in the second quarter.
Flight 19 represents the full year fiscal 2020 adjust the V.P.S. bridge.
Midpoint of generally guidance the midpoint to people guidance.
Court performance includes the large unstable in fact, the volume and mix.
Well 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.
Headwinds from parents in acquisitions as most of the offset by the lower tax me.
On a year over year basis are guidance that the mid point.
Assumes full year quarter full year core earnings conversion.
Which excludes the in fact with current seen acquisitions of a little over 35%.
We expect a particularly challenging third quarter. This is the quarter of June which we expect our steals the trough with the weakest performance you know higher margin product businesses.
And we won't have to fool runrate savings of all the actions we implemented.
We expect third quarter, just the D.P.S. to be a little over one dollar per share.
A few additional comments.
General corporate net it's now expected to be closer to $95 million.
Purchased accounting Amortizations expense for the full year is expected to be about $45 million up 30 million compared to last year.
<unk> interest expense for fiscal 20 still expected to be about $100 million.
We expect non controlling interest now to be about neutral given lower expected sales and earnings at Cynthia.
Average loot average fully diluted shared count is not expected to be $160 million for fiscal 2020.
With respect to repurchases. We are currently in the markets, 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 per cent of adjusted income as we liquidate working capital, particularly in the fourth quarter.
What's that Oh hand, it back to you Blake for some closing remarks before queuing it thanks Patrick.
We're managing our costs and protecting our balance sheet against the current reality of unprecedented volatility.
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 coping 19, and about rockwell's role in increasing business resilience.
Here's some thoughts about that future starting with the industries that we think will be especially important.
It's clear that countries like the U.S. want to increase local manufacturing capabilities for madison's and medical devices.
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 it's not an option.
<unk> beverage business is roughly 70% retail for grocery stores and home delivery and 30% food service for restaurants.
And users as well as machine builders depend on Rockwell for the speed flexibility in support that we can provide.
Electric vehicles are going to continue to increase their share.
Q to growth in auto had a significant E.V. and battery component.
And while we expected tough road for the auto industry over the next few corridors our investments in motion technology and software for these applications will continue to bear fruit.
The oil and gas industry, it's going to be focused on lower costs production not cap x. driven capacity or.
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 planned capacity.
We are increasing the resilience of our own worldwide system, and we know our customers have plans to do the same.
We're already seeing some manufacturers plans to return manufacturing to North America, where we have higher share.
Remote supportive operations will be important across many industries.
Provide expertise virtually wouldn't be physically on site is impossible [noise].
<unk> already doing this for hundreds of companies.
To ensure the highest quality and safety your products.
Product trace ability is becoming more important which is an application we know very well from our life Sciences experience.
Rapidly ramping up output designing lines to run multiple products and changing packaging to meet evolving demand, it's likely to be even more important in the future.
Software that simulates throughput under different conditions and Optimizers production is a part of this flexibility 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 partnerships and the humility 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 position for a bright future.
With that I'll turn it over to just go to start Q. and I.
Things like before we started to kill any I just want to say that we would like to get as many as possible. So please let it yourself to one question.
Thank you sharing let's take a first question if you'd like to ask a question that this please but star one on your telephone keypad, if you'd like with all your question press. The pound key first question comes from Steve to stop what C.P. market.
Hi, good morning, guys.
<unk>.
So just talking to all these cost actions <unk> how much of this flows into 2021.
Steve <unk> 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 and doing some of these temporary actions.
Do do do any of the states carry over into 2021 like is there another step up I mean, the incentive calm 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 wheel structural kind of change in in the costs pay. So I'm. Just wondering you know is there any <unk>.
Are there any incremental savings.
If rather than use don't come back.
Yes. So obviously, we have taken some structural actions in step in September which are Yeltsin savings. This year, we implement a temporary not permanent cost reductions at this time, because we think it's a temporary not a permanent event you want to protect our development programs that are are indeed.
No also those temporary actions enabled us to have a quick cos it back with no cast costs to implement and as I mentioned, we have identified additional including structural costs actions that we can implement if business is business conditions require or to reallocate resources to higher priorities yeah.
Oh, Okay, and then just on the the the fourth quarter.
Yeah. Obviously, you know you guys are conservative. So you know the dollar will take with a grain of salt, but I'm still kind of the bounce back from even a number that's close to a dollar in four Q.E. is that based on kind of.
Visibility front log of what what what kind of what gives you the confidence of that kind of bounced back in a in fourth quarter.
Yes, the the dollar Steve what's for the third quarter that I mentioned, the little over the dollar so the fourth quarter <unk> sequential improvement.
Just because then get most of what we've seen in geography is like in China in Italy, we've seen a deep call. It pullback followed by a gradual improvement and that is dark 10 per cent <unk> sequential improvement in the fourth quarter, which we expect to be brought based but with the exception.
Oh boy than guess, we're we're not projecting an improvement yeah, and if you if I can add to that as well like Steve we did build backlog of year over year and sequentially in the corridor and we have seen project delays has Patrick mention but we haven't seen cancellation. So so we still do seat.
People in certain of the industries that we talked about continuing with plans and that's separate from the current rush to increase capacity and somebody essential products and we've certainly seen additional business in those areas.
Great Alright, guys think like appreciate it.
<unk>.
Question comes from Julian Mitchell at Berkeley.
[noise] Hi, good morning, maybe we want and just wanted to drill in firstly on that second hall. The decremental margins look very severe in that second half, maybe 50, 60% tosto year on yeah.
Maybe just help us understand the phasing first call for a second hawk or the hundred million or sub investment spans and also the hundred and 50 million plus it's it's savings and any color you could give like how much of an impact from mix, So you dialing and and from those supply chain.
Inefficiencies.
Yeah, Julian if you look at our earnings conversion for the full year and I call, it's quarter convergence white exclude the effective acquisitions whichever significant impact and currency for the full year earnings conversion is a little over 35%.
Eight per cent revenue organic revenue drop at the midpoint for the second half again adjusting for the impact of currency and acquisitions are conversion is a little bit below 40%.
I see that's helpful. Thank you and and what's the phasing give that investments span Patrick that hundred maybe you know so if you could split that at all first called the second half full something.
Yeah.
Julia you're referring to the temporary actions.
Yeah, the temporary actions and also I think he talked about some yeah you'd lowered the investment spending a step up assumption for the years to just one good how that spending delta shifts at all first call for a second off.
Right. So the temporary actions will have a bigger impact in the fourth quarter versus the third quarter, just because the timing.
<unk> 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 a two per cent year over year, that's about $40 million.
At least we expect that to be down 3% for the full year.
So that's 100 million dollar swing versus are generally guidance.
Think that two or three Q4 will be down about six 7% each compared to the prior year.
In terms of spend.
Dollar terms it would be a little bit morning, Q. Ford any Q3.
That's very helpful. Thank you.
Thank you.
X. question comes from kept sprayed with vertical research.
Thank you a good morning, everyone like a couple of just a further clarify on the cost actions ER 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 they're yields 150 million Twoxten 2020.
What is the annualized run rate up those actions again, you may not continue them for a four year, but what what does the annualized runrate those actions you've taken.
Yeah. So the the run read of these actions if I looked at the bonus we cannot count them that after this year, but the food run rate of pay cuts, it's up north of 100 million dollar since so we get less than half of that this year.
<unk>.
That is another over $50 million called of an analyzed in fact, if we continue that into next year, but as I said it will depend on business conditions, what did we do so.
Correct, and and and just on the incentive compensation just to be clear into two we have not only the absence of in a cruel, but we have the reversal of a cue want a cruel and then I'm just wondering in in the second half what is the comparisons so we'll have zero a cruise.
Oh, and the second half of 2020 versus what actually fell on the second half the 2019.
Yes, so in the for the balance of the year, we will have a.
<unk>.
$30 million decrease in bonus expensive that well, mostly falling queue for.
Okay.
Well I. Thank you very much that's bullock, thank you Jeff extra.
X. question comes from John <unk> with Gordon has it.
Oh, good morning, everybody.
Oh.
Gosh, 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 the delays if they've been picking up sorted through April and I know Patrick you would also talked about you put China in Italy into a context, certainly put China into.
Text up a v. shaped recovery, which over all commentary seems to be anticipating something more of a gradual recovery. So I'm I'm curious if you could juxtaposed those two that two commentary do you think kinda is this something of an anomaly at rebounds, much more quickly versus the rest of world or can rest of world actually picked up steam based and everything you're saying backlog and all that.
Sort of self.
Yeah, <unk>, so with respect to project delays I don't think we saw any acceleration through April but you know think of final acceptance cash where requires it might require some visitation those are the type.
Things in projects that are causing delays because people just died either can't get to the factory to take a look at the system before they take delivery or or on site for the commissioning that the Patrick talked about so those are the types of things that characterize.
Oil and gas would certainly see some of those because those are often coordinated coordinated type systems.
You know in terms of the modeling for the recovery mention some of the inputs that we looked at a we looked at China, which was a strong shape recovery would look good, Italy, which was a little bit more gradual and you know consumer demand for our customers and products will be something that will be looking at.
Closely but we thought taking something between between the two would make a would make sense and so that's what we've incorporated in our guides were watching the water's daniely 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.
<unk> is this comparable to Oh wait on nine or is there something that's very different you know if there's 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 I realize that you guys were about objects in it really it's about productivity and so forth, but you know how are you thinking about that vertical.
One of your largest enough presumably most profitable.
Yeah. So a couple of things so first of all with respect to comparisons with a weight of nine I think there was more of a structural element to Oh wait Oh nine with respect to finance infrastructure. We really continue to look at this as an event driven activity now based on the duration.
And some other things could come into play, but we really do characterized this is something of a of a different Beast. Then then oh wait Oh nine in terms of oil and gas we have significant we have significant backlog in new Orleans gas <unk>.
Safety represent some of the the <unk>.
Stronger recent order activity and processed safety, it's going to tend to hold up.
Through three this type of event our assumptions for world prices are.
Up to but not above $30 a barrel for W.T.I. for West, Texas intermediate. So, we're we're not expecting or or pricing in some major recovery in terms of oil prices as the basis for our guidance.
No. It's very helpful. If I could just ask one more yeah, I think there's a not insignificant risks that the U.S. could enter a partial or full on cold war with China, It's actually becomes apparent the Chinese you know manufactured and released the current by Resend No I'm. Just wondering you. Obviously took these supply chain actions like is that enough like how are you thinking about you're trying to opera.
<unk> strategically Oh, So you mentioned <unk>, that's going to benefit Rockwell.
Do you potentially need to step up some of the work around China actions are there other things that you think you could perhaps be doing or thinking about.
Yeah, I think I'd be 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 had been looking at their supply chain for awhile now it's costing 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 were thinking the same thing that doesn't necessarily mean.
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 are <unk> pharmaceuticals manufactured in China. Thanks, very much guys appreciate it.
Thanks, John.
Next question comes from Josh Kolinski with Morgan Stanley.
Hey, good morning, everybody.
Hey, Josh morning, just.
Just current following that that last question I guess, yeah like you mentioned already seeing some input from customers on you know regionalized manufacturing a reassuring <unk> what kind of specific industries I guess, maybe outside of of Pharmaceuticals have you had those discussions on seems seems awfully early I I get maybe.
If someone wants to kick the tires or at least you know kind of formulate a plan, but need specific articles that you're starting to see in uptake on that discussion on.
Yeah. So you mentioned a pharmaceuticals, a medical devices, a there's certainly a a actions that have been dramatically accelerated through this current crisis other consumer products. So Stanley Black and Decker is talked about bringing got closer to their north American market. So some of their.
Manufacturing operation So that would be another example, but I think close getting closer to our customers and consumer markets would be a common theme.
Oh God that's helpful. And then just what we've heard from some other folks that there was a good amount of kinda pulled forward in you know some isolated pushout, but in general a lot of order shifting I guess in marches folks decide what they want to do did you see any kind of.
Oh forward into the quarter as folks anticipated, either trouble and getting products or imminent shut down touch that they wanted to finish something up before they were done I think it along run that yeah.
Timing noise thing, but just trying to to level side, if if anything got pulled into the quarter.
Yeah, we looked at that and then we really didn't see meaningful Poland's in the corridor. So we looked at our red distributor inventories, which we work closely with a distribution on in 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 a battery, making equipment in Asia, which is an ongoing a series of success is that we've talked about in previous corridors. We also had line of sight to some more traditional projects by brand donors.
And internal combustion engines. These are projects that would've been tracking for well over a year now and then some activity. Additionally, an auto from some of the cheer suppliers in Europe, especially in eastern Europe, and so we've seen these projects. So we've been tracking them for awhile.
Oh, and we really haven't seen a a distinctive trend that contributed to our strong Q2 results.
God, that's that's very helpful and appreciate all the color. This morning specially something pure other peers out there pull guy so all the detail greatly appreciated desolate.
Thanks draw shouldn't need just on that no. We thought it was important to share an extra amount of information that we thought was most helpful and navigating the current environment.
Thank you <unk>.
Question comes a national coat with both research.
Thanks him on a guy.
Really appreciate this all the the additional color he talked about you know what you've seen in China, and Italy, you know in in April I'm I'm, sorry, if I Miss the Buddha discussion, we've seen in the Americas and your upper body, but how does that downplayed the thing compared to what you've seen in April across your portfolio.
<unk> in April.
Globally and this is for both orders and ships our product businesses are down above 20% through Friday last week.
So.
Consistent with our our projection for the third quarter, what we've seen so far.
This month and as I said this is for products two thirds of our business.
<unk> April to be with and <unk> you know the papers when we were in the you know sort of the ice storm. If you will have punk shutdowns <unk> why wouldn't we see sequential improvement in in in May and <unk>.
Nigel It of course, it's it's a difficult question, we 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 a bottom and that we call a bottom. So it's unclear when we may bottom out we do believe that that will be some time in Q3 in that late.
This quarter mid or late June.
Into the fourth quarter, we will see a sequential improved.
[noise], Okay fair enough and then I <unk> I.
Do you want to come back to the three Q. E.P.F. question again, the dollar seems like a very low Bob but the different emotions imply by that's extremely high <unk> I just wanted to ask a question different way is there anything we should need to think about and sends a mix all costs presses or and they deletion ethics hedges et cetera in.
Tim's if you know right setting three Q.U.P.S.
Yeah, so specific to keep.
Q treat organic feels down about 20% that represents well over $300 million of revenue, which is weighted towards our product businesses would just you know Kerry 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 you treat to be the trough. So cute three excluding the impact of acquisitions and currency, we expect our decrementals to be close to about 50 per cent for that quarter because of the reasons I mention.
Right, Okay. Thanks metric.
Yeah. Thank you.
Next question comes from Robert Mccarthy was Stevens.
[noise] Hello, everybody.
<unk> <unk>.
Yeah, I guess, a couple of questions and thank you for taking a me towards the end the call I guess kind of the first question. Maybe you just you know update of something you know P.P.C. and the relationship there in terms of what's going on progress and you know do you do get anticipate we'll have a virtual live.
Works this year and and you know kind of what are the what's the agenda, particularly in this environment to drive growth from that collaboration.
Yeah, Rob.
Still very happy with the partnership with C., We we continued to see orders in the quarter both on top of our control platforms and also at a competitive strongholds.
Where the expanded scope of those offerings in software and augmented reality are a winning us to new business that we would not have otherwise one.
The live works or rock alive activity will be will be virtual I'll be participating in that we'll be talking about.
New products that where a that we're working on and go so the partnership remains vibrant even under these conditions and we continued to strengthen it.
That's helpful and you know obviously, congratulations on <unk> quarter, and a constructive god and providing all the detail now that being said you know we have seen the market rally pretty significantly here and at least passively there seems to be some expectation of what looks like you know an interruption and then perhaps you.
Shape or or or be recovery, but.
You know as Anthony Fallaci always says the virus gets to make the call. So if if we go into a bit of a double here in terms of the virus comes back and.
You're seeing companies cut cap x. across the board by 20% to 30% and there's not.
You know there's not a reason to believe if we've creeping uncertainty filters that vaccine at 16 18 months that you you couldn't have a you you know it continued tough business cat backs and fixture environment, which is not good for your despite some of these interesting secular transferred near shoring you know how do you think of how you dress set environment and you know back.
Some of the questions around structural cost what what are some of the actions you could take to take some more structural costs down at the business.
Yeah right. We're we're looking closely at that we're modeling different views are the recovery both in terms of shape of the recovery as well as a timing adept in duration all of those things and we have plans that are appropriate to though it was a that go into a deep or a structural.
Productions, 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 as the crisis unfolds.
Well, we're coming to get above the gets 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 without I'll <unk> I'll, let you go.
Okay. Thank you Rob.
Thanks.
Well my question.
No question from <unk> Oppenheimer. Please go ahead.
Well, thanks to squeeze me again here and I guess the real you know 10000 dollar question like is he talked about a lot of actions that manufacturers of all like are going to be taking to improve their business resiliency really at the direct response to this crisis.
And in the past you talked about even after they talked about being able to grow and a multiple of I.P. and increasing that should we be thinking and is it your view that coming out of that nature. The industrial countries such that you are multiple.
Even expand.
As manufacturers take actions that play into your wheel huh.
You know, we're optimistic know about an hour ability to play and even more important role for customers as we go forward and I've given some insight as to the industry's and some of the trends that we think we're well positioned to a partner with those customers on and we're going to be.
Working hard in those areas just Patrick mentioned in some cases, even investing into areas of highest value and we prefer to when those opportunities see the growth and then we'll talk about the resulting multiples, but our intention is to make it happen.
Yeah I appreciate that thanks, very much you're taking the question.
Yeah. Thanks.
Thank you.
Today's call. Thank you all for joining up.
<unk>.
That could cause today's conference call at this time you may disconnect. Thank you.
Yeah.
Oh.
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