Explanation:

Box 1: Label 2 only
How multiple conditions are evaluated when they apply to more than one label
* The labels are ordered for evaluation, according to their position that you specify in the policy: The label positioned first has the lowest position (least sensitive) and the label positioned last has the highest position (most sensitive).
* The most sensitive label is applied.
* The last sublabel is applied.
Box 2: No Label
Automatic classification applies to Word, Excel, and PowerPoint when documents are saved, and apply to Outlook when emails are sent. Automatic classification does not apply to Microsoft Notepad.
References:
https://docs.microsoft.com/en-us/azure/information-protection/configure-policy-classification