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With me today is Blake Moret, our Chairman and CEO and Christian Rothy, our CFO. Our results were released earlier this morning and the press release and charts have been posted to our website. Both the press release and charts include and our call today will reference, non GAAP measures. Both the press release and charts include reconciliations of these non GAAP measures. A webcast of this call will be available on our website for replay for the next thirty days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward looking statements. Our actual results may differ materially our projections, due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all our SEC filings. So with that, I'll hand it over to Blake. Thanks, Aishana, and good morning, everyone. Thank you for joining us today.
10m 53s
Before we turn to our second quarter results on Slide three, I'll make a couple of initial comments. The quarter and our full year outlook reflect increased resiliency and flexibility in our business across our global operations even as we and our customers continue to operate in an environment of heightened uncertainty. We talked about some of our actions to mitigate the impacts of announced tariffs on our last earnings call. I'm proud of how our team is executing these plans while maintaining world class delivery and customer support. In addition to effective pricing actions, we're seeing good progress with some of our production location moves and efforts to secure alternative sourcing. Christian and I will cover these in more detail later on the call. Importantly, all these actions to add resiliency to our business model are further enhancing Rockwell's position both from a profitability and competitive differentiation standpoint regardless of what happens in the broader policy environment. We made significant investments in our operational resilience during the supply chain crisis and they have been instrumental in helping us navigate through the current situation by giving us additional flexibility in our supply chain and manufacturing footprint. Turning to our second quarter results on slide three.
12m 25s
Q2 marked another quarter of solid sequential improvement in customer demand across many parts of our business. We had a healthy intake of orders in the quarter with our total company book to bill in line with our historical norm of about one point zero. Going forward, we will share additional information on total company order performance only when our overall book to bill is outside of the normal range. We will still disclose book to bill in Lifecycle Services each quarter since lead times are longer for that business segment. While there might have been some isolated customer pre buys ahead of tariff related price increases in Q2. The overall value of these purchases did not have a meaningful impact on our top line. From a cost standpoint, the impact of tariffs on our Q2 results was also minimal. Our sales came in better than expected this quarter with organic sales up high single digits sequentially. Reported sales were down 6% and our organic sales were down 4% versus prior year due to the difficult year over year comparisons we mentioned on our last earnings call. Unfavorable currency reduced sales by about two points. Even with customers continuing to adopt a cautious approach, to their CapEx investments in this uncertain environment, we saw a number of strategic projects across a variety of industries, and geographies in the quarter.
14m 4s
In our Intelligent Devices segment, our organic sales declined 6% year over year but were above our expectations with double digit sequential growth across all key product lines. Our strong growth over prior quarter was led by our Power Control business where our industry leading motor control center lead times continue to secure important new customers and help Rockwell gain domestic share. One example of these competitive wins in the quarter was with Cape Electrical Supply Integration. A leading package power provider focused on new power generation for the data center market. Our differentiated MCC solutions are helping them secure numerous greenfield wins here in The U. S, our home market. Another strategic MCC win in Q2 was that Fiicient solutions provider. This customer, an Asian panel builder, selected our Cubic Modular Power Distribution Systems for their flexibility and smaller footprint. A perfect application for an end user greenfield plant in the food and beverage space. Our recent ClearPath acquisition continues to broaden our customer reach. Auto brand mobile robots continue to add new logos with the recent win at Westphalia Technology a leading U. S. Provider of automated warehouse solutions Westphalia has a significant presence in food and beverage end users across North America.
15m 47s
Rockwell's AMRs were chosen to reduce the use of manual forklift trucks resulting in faster throughput and reduced finished goods damage as well as a safer operating environment for the customer's workforce. Software and Control organic sales were up 2% year over year and also exceeded our expectations in the quarter. While our high single digit sales growth over prior quarter was driven by another quarter of recovery in Logix, we saw sequential improvement in sales across both hardware and software businesses in this segment. We are pleased to see sharply increased adoption of the FactoryTalk design studio which features a GenAI co pilot to accelerate the time to design, and commission automation projects. One of our software wins in Q2 was with Braco Imaging, a global leader in diagnostic imaging. The customer is using our PharmaSuite MES software to accelerate its revenue growth by improving quality control and increasing speed to market. Lifecycle Services organic sales decreased 6% year over year and were a bit lower than expected. Book to bill in this segment was a solid 1.07 and was above one point zero across all our solutions services and Sensia businesses. But the current trade and policy uncertainty has impacted some large CapEx projects across our customer base.
17m 27s
We saw some project delays in automotive and energy and some deferrals of more discretionary spend in digital services. These customers are seeking additional certainty about the impact tariffs will have on their cost base and whether the volatility will impact their demand. Despite these delays, our total ARR for the company grew 8% in the quarter, Double digit growth by Plex and fixed software businesses led our ARR performance. Rockwell segment margin of 20.4% and adjusted EPS of $2.45 were both above our expectations and were in large part driven by continued execution our cost reduction and margin expansion actions. Our team's focus on productivity yielded another quarter of outperformance versus our target And as we continue to look for further opportunities to expand our margins we believe will exceed our full year target of $250,000,000 in year over year structural productivity. Christian will provide some additional calendarization detail in his section. Let's move to Slide four to review key highlights of our Q2 industry performance. Sales in our discrete industries were up low single digits year over year with growth in e commerce and warehouse automation and semiconductor more than offsetting. The decline in automotive. Consistent with our expectations, our Q2 automotive sales continue to be challenged by the ongoing tariff and policy uncertainty.
19m 15s
This is one of the verticals we saw an increase in project deferrals in the quarter. Our sales in e commerce and warehouse automation grew over 45% versus prior year and were significantly above our expectations. We continue to see strong performance across our key customers in North America and EMEA. Our data center business is also continuing to gain momentum including a significant data center project with one of Asia's largest telecom providers. Delivered through our strategic collaboration with a leading full stack data center solutions provider in the region. Given the outperformance in the first half, and the solid pipeline of projects, we now expect e commerce and warehouse automation to grow 45% in fiscal year twenty twenty five. Turning to hybrid. Sales in this industry segment were flat year over year with food and beverage, home and personal care, and life sciences all exceeding our expectations in the quarter. Within Food and Bev, and HPC, we continue to see an improvement in our machine builder performance especially in our North American and European markets. Similar to last quarter, the majority of customer spend in these verticals is driven by productivity and efficiency projects aimed at improving their profitability and sustainability.
20m 49s
Good example of these customer wins in Q2 was our work with a U. S.-based restaurant chain with plans to leverage automation to improve speed and consistency of its operations while reducing its labor intensity. Rockwell's independent card technology was selected for its flexibility, and agility to help increase throughput and improve cost savings. Our Life Sciences business also exceeded our expectations for the quarter. Building on our strong presence with leading GLP-one producers and the broader life sciences ecosystem. I already mentioned our Bronco software win in the med device segment earlier on the call. Another strategic win in this vertical was with National Resilience, an innovative contract drug manufacturer specializing in bringing accessible and affordable biologic medicines to the market. This customer is investing in our auto AMRs within their automated storage and retrieval system warehouse as part of their initiative to expand their lights out warehouse and automated material movements. Moving to process. While we were expecting to see year over year softness due to very difficult comparisons in our energy business, our performance in the quarter here came in worse than expected. Within energy, our customers continued to exercise capital discipline by choosing targeted productivity projects which help improve cost structure and boost profitability.
22m 32s
Energy and process broadly were another area where we saw an increase in project delays during the quarter. Despite this pause in larger capital investments, we continue to secure competitive wins in the process control space. This quarter, DPA Engineeria a Chilean system integrator specializing in mining and energy industries selected our Logix PlantPAx solution to help a leading global lithium mining company advance their ambitious expansion plans. Moving to Slide five, and our Q2 organic regional sales. North America was our best performing region this quarter. And we expect it to be our strongest market for the full year fiscal year 2025. We continue to believe Rockwell is a net beneficiary of policies that drive U. S. Manufacturing and we are investing in our own operations to improve our resiliency and agility. For instance, we've recently decided to expand production of our auto autonomous mobile robots to The U. S. We'll be producing in both Kitchener, Ontario and at our Milwaukee headquarters. Let's now turn to Slide six to review our fiscal twenty twenty five outlook. As I said earlier, the impact of enacted tariffs on our Q2 results was minimal [indiscernible] offset by price and supply chain moves.
24m 9s
We continue to take necessary steps to offset the impact of April 2 tariffs through a combination of supply chain actions and pricing. We will share the actual tariff impact by quarter as we progress through the year and Christian will provide additional detail in a few moments. We're taking a balanced approach to the outlook for the rest of the year. Our execution has been strong, and demand continues to be solid including in April. However, second half uncertainty still remains. I group that uncertainty in three primary areas. The magnitude of pricing we'll implement to offset any new tariffs the impact of any advanced product purchases in our flow business and the timing of CapEx investments by our customers especially in our life cycle services and Configure to Order businesses. In terms of our fiscal twenty twenty five top line, we still expect our organic sales growth to be in the positive 2% to negative 4% range. Our reported sales midpoint now assumes a 0.5 of negative contribution from currency translation. Christian will provide more detail on FX and the calendarization of our second half shortly. I will add that we expect to return to year over year sales growth in Q3.
25m 37s
Annual recurring revenue was slated to grow about 10% this year. Taking into account our margin outperformance to date, and continued strong execution, we are increasing our full year segment margin target to 20% and we now expect our adjusted EPS to be about $9.7 at the midpoint. Importantly, we were able to expand our margins year over year despite higher compensation costs. Continuing benefits from the SG and A actions we took in the second half of fiscal twenty twenty four along with the team's focus on additional structural COGS productivity, in fiscal twenty twenty five enable the investment in our people, and new technology even as we expand margins. We continue to follow a prudent approach to hiring. Prioritizing roles that drive new product introduction and revenue growth. We expect free cash flow conversion of 100% in fiscal year twenty twenty five. I'll now turn it over to Christian to give more detail on our Q2 and financial outlook for fiscal twenty twenty five. Christian? Thank you, Blake, and good morning, everyone. I'll start on Slide seven. Second quarter key financial information. Second quarter reported sales were down 6% versus prior year. Currency had a negative impact of two points in the quarter, organic sales declined 4%.
27m 10s
Segment operating margin of 20.4% compared to 19% a year ago was above our expectations and reflected a strong our strong execution across the company. About three points of our organic growth came from price and price cost was favorable. Benefits from cost reduction and margin expansion actions and positive price cost more than offset higher compensation and lower sales volume. Adjusted EPS of $2.45 was above our expectations primarily due to the beat on segment operating margin. This was another robust performance in execution and cost control. Through both structural and temporary costs. The adjusted effective tax rate for the second quarter was 17.7% and the prior year rate of 14.8%. Above the prior year rate of 14.8%, primarily due to lower discrete tax benefits. Partially offset by a favorable geographic mix of pretax income. We remain on track to achieve a 17% ETR for fiscal twenty twenty five. Free cash flow of $171,000,000 $102,000,000 higher than the prior year. Free cash flow conversion was 61% in the second quarter, with accounts receivable being a use of cash during the quarter due to higher shipments and the timing of those shipments. As a reminder, Q2 is typically a lower cash conversion quarter due to TCJA catch up payments.
28m 35s
Not shown on the slide, return on invested capital was 14.2% for the twelve months ended, March 31, and three eighty basis points lower than the prior year. Primarily driven by lower pre tax net income partially offset by a lower effective tax rate. Slide eight provides the sales and margin performance overview for our three operating segments. As Blake mentioned, sales in Intelligent Devices and Software and Control exceeded expectations Intelligent Devices margin of 17.7% increased by 120 basis points year over year. Despite the high single digit volume decline and higher compensation compensation compared to last year, our cost reduction and margin expansion actions allowed us to keep segment operating earnings flat and drove margins higher. Price cost and mix were also favorable to margin. Software and control margin of 30.1% was up four forty basis points versus prior year even though sales were flat year over year. Higher margin was driven by cost reduction and margin expansion actions, positive price cost. Partially offset by higher compensation. To underscore that, sales and software and control were essentially flat year over year, but segment operating earnings grew by about $25,000,000 and took margins back over 30%. Really strong performance.
29m 55s
Lifecycle Services margin of 14.5% fell two ten basis points year over year. Driven by higher compensation and lower sales volume. Decremental margin in Lifecycle Services was about 40%. Even though higher compensation and lower sales volumes were headwinds, segment margin here was in line with our expectations due to our cost reduction and margin expansion actions, and strong project execution. I want to take a moment to point out the sequential improvements we saw in each of our segments. Intelligent Devices had incrementals that were in the 40s from Q1 to Q2, reflecting the flow through on higher volume and solid price realization. Software and Control had nearly 100% flow through on their sequential volume [indiscernible] aided by price and margin expansion activities. Lifecycle Services was able to grow segment operating earnings slightly despite a slight decrease in sales volume. This was due to strong project execution. Overall for Rockwell, the incremental margin the sequential sales growth was about 70%. This is reflective of strong execution by our teams around the world. I wanna thank them for their outstanding efforts. The next slide nine, provides the adjusted EPS walk from Q2 fiscal twenty twenty four to Q2 fiscal twenty twenty five. [indiscernible] Year over year core performance was up slightly on a 4% organic sales decrease.
31m 17s
Sales declines were driven by Intelligent Devices and Lifecycle Services, but strong cost discipline in these segments softened the volume impact and decline impact. And in Software and Control, we saw margin expansion on continued improvement in logic sales. Pricing was strong and we continue to fund new product development with company R and D at 6% of total revenue. Software and control R and D as a percentage of segment sales was in the low teens. We saw excellent execution and better timing on our cost reduction and margin expansion actions, which were above our expectations. Resulting in a $0.65 tailwind. We've realized about $155,000,000 of savings in the first half. You'll see a $0.60 impact from compensation. This year over year delta reflects merit increases that came into effect at the beginning of the fiscal year as well as higher incentive comp versus prior year. This number is higher than we'd expected in the quarter. Reflecting a higher incentive accrual on the strong performance in Q2 and the increase in our expected EPS performance for the full year. Also, remember that in Q2 last year, we had an incentive compensation accrual reversal. Coming into this year, we expected a year over year compensation increase be approximately $160,000,000 We now expect that to be about $185,000,000 for the full year.
32m 35s
That translates to about $0.25 for each of the remaining two quarters. All other items resulted in a $0.15 net headwind. This was essentially all currency as a slight tax headwind offset by other smaller items. Taking a step back and looking at this slide, we were able to completely offset the headwinds of volume and compensation through strong execution on margin expansion and cost reduction activities as well as price realization. Moving on to slide 10, to discuss our updated guidance for the full year. While our first half performance exceeded our expectations, we are leaving our organic sales outlook range unchanged. Frankly, we are allowing for uncertainty less predictability in the demand environment and project timing. Regarding currency, the weakening of the dollar our last earnings call has changed our full year expectation for currency headwind to be up zero five percentage point. Down from prior guidance of 1.5 percentage points. We've already realized all that currency headwind in the first half and FX turns to a modest tailwind for the second half of the year. Based on our strong execution in the first half of the year and a slight currency tailwind, we are increasing our segment operating margin guidance to about 20%.
33m 49s
Up from 19%. At the midpoint of our reported sales guidance, from a segment sales and margin standpoint, we are expecting Intelligent Devices margin to be slightly down year over year on mid single digit sales declines software and control margins to be up year over year on a sales increase of mid single digits and we expect life cycle services margin to be down year over year on a low single digit sales decline. We are updating our adjusted EPS guidance range to a range of $9.2 to $10.2 or $9.70 at the midpoint. The EPS guidance increase reflects our outperformance our performance in Q2 as well as the currency exchange currency change from a headwind to a tailwind. Under normal circumstances, would have narrowed ranges for both sales and EPS but it seems prudent to keep a wider range due to ongoing uncertainty. Talk about calendarization. Our expectation is for reported sales to grow low single digits sequentially from Q2 to Q3. In Q4, expect higher sequential sequential sales due to a combination of our normal seasonality and our backlog. On a year over year basis, the more favorable FX outlook is expected to result in a $0.20 tailwind to EPS, which is split evenly in Q3 and Q4.
35m 13s
Remember, this is compared to the prior year. The sequential benefit of FX is minimal. As we mentioned during Q1, we continue to take additional temporary costs measures in Q2 to offset the FX impact. We like how the temporary controls are flowing through the P and L, and the organization is executing well. In this period of uncertainty, we feel better keeping those costs in check. Segment operating margins were strong in Q2 and expanded nicely from Q1. As we look forward to the rest of the year, we are expecting very slight margin expansion from the Q2 level. Six basis points and not percentage points. As a result, on the low single digit sequential sales growth from Q2 to Q3, incrementals will be in the low 30s. A few additional comments on fiscal twenty twenty five guidance for remodels. Corporate and other expense is now expected to be about $150,000,000 Net interest expense for fiscal twenty twenty five now expected to be about $145,000,000 We're assuming average diluted shares outstanding of about 113,000,000 shares. Our share buybacks in Q2 were approximately $450,000 shares in the quarter a cost of $129,000,000 Our opportunistic overlay on our buyback program kicked in over the last month we recently exceeded $300,000,000 in buybacks year to date.
36m 33s
That was originally our buyback target for the full year, but we view recent market pricing as an attractive opportunity to buy more Rockwell. Moving away from the slides, I'd like to expand on a few topics. First, you'll see we are no longer providing the dollar value of our orders. We began giving this information during the supply chain crisis as the ratio of orders to shipments diverge from the historical range of around one felt it was prudent to give that detail to investors. That situation has passed, and we are back to a normal book to bill of around one we are dropping the additional orders data point. Second, similar to last quarter, we have analyzed our orders and shipments to see if there were any indications of pre buys. New demand on distributors was roughly equivalent to the demand those distributors placed on Rockwell. Distributor inventory levels are stable to slightly down compared to last quarter. And our surveys and channel checks with our OEM partners do not point to pre buys. So we aren't seeing specific examples. In addition, we put measures in place to limit distributor and machine builder stocking orders to appropriate levels.
37m 39s
While our diligence didn't find any didn't find specific evidence, and we have controls in place, we're factoring in the possibility of limited pre buys. Third, focusing on the cost reduction and margin expansion activities that that gave us a benefit of approximately $0.65 of EPS in the second quarter. This is faster than we had projected and reflects great performance, by the Rockwell organization. Particularly integrated supply chain team. We expanded gross margins by 130 basis points the second quarter compared to the prior year against a 4% organic headwind. While a lot of our outperformance in the cost reduction and margin expansion program in the first half was timing, we do expect the full year benefit of the program to exceed the $250,000,000 we have been targeting. Looking at some cost reduction wins, in direct sourcing we've saved about $18,000,000 in the first half of the year, and are expected to continue to yield benefits in the second half, supplier negotiations and transition to new suppliers. Savings are coming from areas like cables and wires, fewer broker buys, electronic components, and drives. On the manufacturing side, we've seen about $20,000,000 of savings in the first half of the year.
38m 50s
This is coming from labor efficiency and other areas like process optimization, and reduced scrap. Last quarter, we talked about rationalizing 21,000 SKUs, That number through two quarters is approximately 36,000. These were heavily low to no volume SKUs. There are another 4,000 to 5,000 SKUs that we evaluated and decided to take other action. Meaning we didn't rationalize them.
39m 15s
But we're taking pricing or other action. This work is ongoing and is truly a part by part analysis that is focused on optimization and simplification. This is particularly important as we move production and supply chain in response to tariffs. Let's wrap things up by talking about tariffs. Assuming current tariff rates and scope that are in place today remain, we estimate our tariff cost exposure to be about $125,000,000 for the second half of fiscal twenty twenty five. We continue to manage tariffs through several actions, the fastest of which is pricing. We have enacted changes to our prices as part of our recovery program. This program will flex up or down as tariffs are enacted, modified, postponed or rescinded. We're also working on moving some production. Resiliency actions we took during the supply chain crisis means we have some flexibility to move production of key product lines as a response. In summary, are positioned to fully offset our fiscal twenty twenty five tariff costs through a combination pricing and supply chain actions. The objective of tariff based price changes is is the recovery of the incremental cost and not sales growth. But to the extent pricing is used, our full year organic sales performance could be improved due to tariff based price realization.
40m 34s
Again, our full year EPS target would state intact because our intention is to offset tariff costs and have zero impact on second half EPS. As Blake mentioned, impact of tariffs in Q2 was completely neutralized. Going forward, an effort to give visibility to underlying operational performance, our intention is to disclose tariff impact on both sales and earnings in each quarter. In conclusion, had a solid Q2. Looking forward, it remains a dynamic and unpredictable environment, but operationally, focusing on the items we can control the Rockwell team has shown its ability to profitably navigate uncertainty. We have a plan and we have runway. This team is focused to finish the second half of the year strong. With that, I'll turn it back over to Blake for some closing remarks before we start Q and A. Thanks, Christian.
41m 24s
We're pleased to report another quarter that reflects our focus consistent execution. Investments in resilience are yielding results. Including process changes to achieve faster price realization, capacity increases to create redundant manufacturing lines, for high value products in multiple countries, new lines of business that increase annual recurring revenue and our comprehensive program to increase operating margins. These changes can only be successfully executed with the coordinated efforts of our employees and partners around the world. Transformation is hard in the best of times, and I'm especially proud of our team's ability to position us so well a very challenging environment. Our value proposition is stronger than ever before as demonstrated by customers in The U. S. And around the world who are getting Rockwell involved earlier their own transformation plans because nobody is better positioned than Rockwell to provide this value. Aishana will now begin the Q and A session.
42m 33s
Thanks, Blake. We would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up. Julian, let's take our first question.
42m 43s
Thank you. Our first question comes from Andrew Obin from Bank of America. Please go ahead. Your line is open.
42m 54s
Yes, good morning. Just a question on discrete. You know, ecommerce and warehouse automation, relatively small, but obviously anything growing close to 50% really moves the needle. Does it include is that where data centers are? And, you know, what is really driving this robust recovery and where does this visibility into the second half come from? Thank you.
43m 21s
Yeah. Andrew, within that vertical, we're actually getting strong growth from multiple aspects of the businesses represented there. So there's the warehouse automation that a lot of customers, especially in consumer facing industries, home and personal care, food and beverage, which is a lot of people are identifying that as a current source of inefficiency in their operations. And so that whole production logistics segment that we've talked about of our offerings is a really good fit. So that's in warehouse automation across multiple customers. You also have ecommerce players as their building again new fulfillment centers and things like that. And then finally, as you said, data centers are a part of that, especially with our exposure to data centers. Through the Cubic power distribution equipment.
44m 22s
Got you. No, really appreciate it. And just a question on Lifecycle Services. That business has really been consistently a source of upside. A little bit surprised to see growth slowdown Interestingly, we've seen some PTC, I think, talking about slowing down over the next couple of quarters. Just can you just tell us what's happening there? Because somewhat unexpected. Thank you.
44m 48s
Sure. So that's where the majority of the more CapEx intensive projects are going to be. And where we did see delays that's where it came from. Within the process verticals, which is a big part of, life cycle services business, lower commodity prices, particularly in The U. S. So cheaper oil and gas has put some pressure on that. And then within Lifecycle, we did see a pause in spend in some of the less time critical digital services businesses as well. Our competitiveness remains very strong. There's a good funnel. Some of the projects that were delayed in the quarter did come in. In April, but that's where you probably saw the line share of the delays when when they happened.
45m 42s
Really appreciate it. Thanks so much. Thanks, Andrew.
45m 46s
Our next question comes from Scott Davis from Melius Research. Please go ahead. Your line is open.
45m 53s
Hey, good morning, guys. [indiscernible] Hey. I wanna wanted to start kind of with a a bigger picture question. I mean, the the debate, I think, we're getting you know, the most incomings on is is actually where you guys are sitting in a position of of having the most visibility, and that is just this whole balance of kinda reshoring acceleration versus kind of the macro realities. And and concerns that folks have been. But what what are your customers? And I'm you're selling to a lot of different end markets, but so maybe perhaps more a little bit more discreet and hybrid focused here. But what are your how are your customers thinking through that as it relates to are are they reaccelerating reshoring? Are they hunkering down? I mean, what what what any generalizations would be helpful there. Thanks.
46m 40s
Sure. There is still a generally optimistic long term view among most of our customers, especially those with high exposure to The US. Because the idea of, US manufacturing as a good thing for The U. S. Economy, resonates with a lot of us. And of course Rockwell is a net beneficiary of that. Where we are seeing delays, as we analyze the projects that haven't moved forward the underlying reasons fall into a few different categories. First is, concerns about cost certainty, which a lot of that would come from tariffs We heard some comments regarding interest rates as well. Automotive is obviously affected by that given the amount of content from around the world there. Another underlying reason would be concerns about the demand from our customers' end markets. So I mentioned lower commodity prices in The U. S. That will affect oil and gas and a little bit of mining. A little bit of temporary concerns we think with over [indiscernible] Another reason would be outside funding. And I'm thinking specifically of Chips and Science Act allocation. So for the semi industry, and then, and then general risk. You know, t's and c's, people wanting to make sure that they, have, their tariff tariff exposure covered.
48m 20s
Those are the negatives. Those are the underlying reasons for delays where they are taking place. On the positive side, we talked about e commerce and warehouse automation. We expect the positive growth trends to continue quite frankly into next year based on our customers' investment plans across those areas I mentioned to Andrew. We also see continued signs of green shoots in packaging within food and beverage, and home and personal care. So we talked about some strength with Italian machine builders last quarter that continues.
49m
We've seen we've seen some sequential growth in Germany with machine builders as well. So there's a few places of positive business. And then the last one and maybe the most important is Life Sciences. And you've seen the announcements of major Rockwell customers announcing major multibillion dollar plans and that's an important segment for us. And we're on it and we expect to benefit from those investments in The U. S. Okay. That's helpful, Blake. And then you know, natural follow on is just the machine builders, It just it's an important customer, for you guys. And how big of a deal are are the I mean, so many of those guys are in Europe or or even Canada coming down into The U. S. How big of a deal are tariff to those guys? And I guess kind of since we're in uncharted territory here, I mean, when you think about if somebody's building a facility in The US and the the cost of them you know, their their their machines just doubled or whatever, is that a game changer, or is it just not not big enough as a percent of the total cost of the facility generally to to delay a project for?
50m 12s
Yeah. I think in the current, you know, the current tariff regime, if you're trying to, sell a machine made in China into The US, it's a big deal and probably a showstopper in in many cases. That's not a big part of our business. As we've mentioned, China is about a little less than four of our total revenue. In Europe, we're working with those customers, and our application of price increases is targeted, as I mentioned in the script, we have considerable flexibility in where we manufacture things And a lot of those machine builders do have US locations as well. So, they're able by shifting their point of purchase to limit their exposure as well.
51m 3s
Okay. That's helpful. Thank you. Best of luck, guys. Appreciate it. [indiscernible] Scott.
51m 8s
Our next question comes from Chris Snyder Morgan Stanley. Please go ahead. Your line is open.
51m 14s
Thank you. I wanted to follow-up with some of the prior commentary around the market demand trends. So I think it's understandable and makes sense that all the uncertainty out there, maybe it's hard to move forward, with a big project if you don't know how much it costs and, you know, know if the rules are changing. But when you guys talk to customers, is there an expectation that as visibility starts to come through, we could see more of these projects or announcements unlocking? In the coming quarters. And was there any difference in Q1 order rates on a regional basis? Thank you.
51m 50s
Sure. Yes. So addressing the projects first. You know, Delays, not cancellations. Cancellations remain in a low historical band. And so we absolutely do expect that these customers are going to pull the trigger on some of these investments. We're not going to call a specific date or quarter on that. But as I mentioned, we saw some of those projects come in April and we think we have a pretty good handle on what they're grappling with. As all manufacturers are looking for more certainty and consistency with the tariffs and the cost that might come along with tariffs, are what they're looking for as well as, making sure that the demand is still there. From their end customers. In the majority of cases, they expect that this is a pause not anything that lasts for a long, long time. From a order trend standpoint, North America, was our strongest region in the quarter. And we expect it to be our strongest region for the year. And that's super helpful as we go into the second half. Because it reduces a lot of that ramp and it it builds healthy backlog that'll be important in the back half of the year.
53m 20s
Thank you, Blake. I appreciate that. And maybe following up with one for Christian. You guys did a 20.4% margin in Q2. It seems like, you know, maybe a 21% in the back half is what's implied. So, you know, just the kind of a relatively muted step up given, you know, the volumes are going higher into the back half. It sounds like there's even more cost savings coming through into the back half. So I mean, I guess, there headwinds on tariffs and that it's hard to get an incremental margin on a tariff Just any kind of maybe headwinds that we should be thinking about on these back half margins? Thank you.
53m 55s
Yeah. Sure, Chris.
53m 57s
You know, when when you think about this kind of where we went from Q1 into Q2, really, really nice margin expansion. I think, you know, earlier in the year, we would have gotten some grief from folks about the ramp on the margin expansion, through the course of the year. We did do a really good job through Q2 execution to derisk a lot of that. And, again, we're taking our our segment operating margin guide number up from 19% where it was previously to 20% now. And so we still have opportunities to expand those margins. But again, we did a a lot of that heavy lift was done in the second quarter and we want to continue to build off of that. But as I said in my prepared comments, talking about basis points, not full percentage points. And I think your math around kind of what the second half implied number is, yes, you're in that ballpark. You know, the the ability of this team to continue to execute, I I have a lot of confidence in. You know, the the key is that, you know, we're talking about some really nice numbers year over year where we're still getting benefits sequentially.
55m
When we're talking about the cost reduction and margin expansion activities. Those are in millions, not probably not tens of millions, But again, we're feeling pretty good about that. On your question on whether or not we can get margin expansion in a tariff based environment, Again, we're really our objective is is that we're going to try give that information to you all around what the impact of tariff is for each of these quarters going forward. We're super focused on operational execution on the base business excluding what happens with the tariff side. On the tariff side, we're focused on the recovery portion of it. That's really you know, they're they're two separate things for us. Base business continued growth, continued margin expansion, and let's let's go execute.
55m 44s
Thank you. I appreciate that.
55m 48s
Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.
55m 53s
Good morning, everyone. Nice quarter.
55m 55s
Hey, Andy. Thanks.
55m 57s
This question is probably more for Christian. Can you give more color into your longer term margin potential? I know you had good mix in the quarter. You're holding down temporary costs. It's noticeable though that you said you get more than $250,000,000 of restructuring benefits from your program and that you're generally getting better price versus cost. So can you give us more color into what you're seeing? Do you see ultimate restructuring benefits including SKU rationalization, is actually way more than $250,000,000 or maybe just what inning do you think you're in, in terms of cost out and ability to price at rock?
56m 29s
Andy, I'm gonna start with that one and then hand it over to Christian just for a little bit of historical You know, it was it was actually at your conference, last year, February, where we started talking about cost out programs. And while some of that was to address the current business environment, at that time, You know, more importantly, it was to set a foundation the results of which, we're starting to see now. It started with an SG and A cost reduction. And, it moved, to as we continue to see the benefits of that into more structural cost. And know, I bring this up, to, just make it clear. This was part of a program that's been undergoing that's been on the way for a while now and it doesn't happen, and we don't get to, talk about exceeding expectations, without really strong participation, by thousands of people within the company. And so it's just an opportunity to give a shout out to the team that responded under difficult circumstances. We're looking for more opportunities for structural cost and maybe this is the point where Christian can add some additional color. Yes, absolutely. Thank you, Blake.
57m 47s
And I also echo those comments. The team has done really well. And so as we're kind of sizing the full year benefit this year, keep in mind, again, we've talked about this before. Hundreds of projects are underpinning this cost reduction and margin expansion activity. The team has done a really good job in trying to hit those targets. In fact, was able to pull in a number of them, which is why we saw the outperform in the in the first half. And frankly, we didn't wanna put a lot more pressure on them, when we talking about what the second half expectations are because I think they've done such a great job. We want to let them continue to do the work they've done. There is definitely runway there. I I I to I'm glad you asked the question though because to build off of that, I am really excited as we think about 2026 and beyond that. [indiscernible] these programs, what we're building with the Rockwell operating model, with the continuation of, you know, of these these projects that are underway right now, But then also when we think about volume starting to come back up, I think there's a really good opportunity to expand the margins.
58m 53s
I'm not a position to give you an exact number yet. I'm sure you're you're fully expecting that answer, but not not going to sign up for that number yet, but I do think when we continue through the remainder of this year and start talking about 26, we'll be revisiting that.
59m 9s
Very helpful, guys. And then bigger question, I think you've talked about gradually improving orders previously, improving orders and sales throughout the year. We could see what your revenue guidance is, but is that still the expectation for orders? I know you don't really want to talk about orders anymore, but is the expectation that generally you deliver book to bill close to one for the rest of the year given the macro environment as a current currently stands? And when you look at the improvement in orders that you've seen how much is driven by, for instance, your machine builders actually order again after that long period of destocking?
59m 42s
Yes. So I'll start with this and Blake can jump in has additional comments to make. But generally, the full year fiscal twenty twenty we're looking for a book to bill of around one, which is right about where we are for the first half. So yes, that incremental improvement that we're talking about for the remainder of the year in sales, we're also expecting that in orders. A little nuance around that is that we did talk about in Q1, that we did have some orders that were slated for shipment later in the year. And so those are that's part of the backlog that I talked about in my prepared comments that helped helps us feel good about what we're looking at for Q4. So generally, again, I think the book to bill number right around one ends that that we'll get that continuous ramp. On the machine builder side, Blake, do you wanna take that one?
1h 30s
Sure. Broadly, stronger performance across the company in products versus the more capital intensive projects. And a significant portion of that product flow does come from machine builders. As they move past the overstock situations that we talked so much about last year. Yeah. And I think maybe to build off of that, a touch more of the you know, we talked last quarter about the Italian machine builder market continuing to improve. I think we saw that expand a little bit more in the second quarter. And when you see that demand coming in and that we are getting higher shipment levels, obviously, that's a very strong indication that they're not sitting on a ton of excess stock.
1h 1m 14s
Yeah. And and just the other, the other point, that's worth mentioning as we talked about really good adoption of our new products. You know, the innovation that, we've invested in over the last few years. Offerings like FactoryTalk Optics our on machine portfolio, of, Armor PowerFlex and, Motion those are really, getting a great response. From machine builders and provide us new ways to win there.
1h 1m 44s
Appreciate all the color.
1h 1m 47s
Thanks, Andy. Thank you.
1h 1m 49s
Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.
1h 1m 54s
Hi, good morning.
1h 1m 57s
Maybe just the first question, wanted to try and hone in a little bit more on the third quarter. So I just wanted to confirm it sort of sales up low single digits margin maybe of 21%. And so does that mean even with the tax rate headwind year on year sort of EPS is up in Q3 and within that, wanted to understand kind of the PLC market how quickly is that coming back up off the bottom?
1h 2m 33s
Yes. Julien, I'll start on the EPS question and general profitability. And then we will we'll let Blake talk about the PLC demand side. When we're talking about the EPS number, you mentioned a 21% segment operating margins. Didn't actually confirm that that was the number mostly around just second half and kind of for the full year, we're looking at that 20%. To give you a ballpark on EPS for Q3, dollars 2.6 ish is is the the neighborhood we're thinking. Which I believe would be down slightly year over year. Yes. Regarding logics, we're having a really good year. And there's there's more room to run. The, the units of logics being shipped are still not quite back to pre COVID levels. So there's there's opportunity there. We've talked before about seeing modest share gains in our controllers. New innovation, from, things like factory talk Studio that I mentioned before. So I'm I'm very happy with the performance to date with Logix. And as we see continued recovery on the machine builder side, of course, that's right at the core of a lot of their systems. So expect that to continue. That's helpful. Thank you. And then just my follow-up would be around the operating leverage assumptions.
1h 4m 10s
And I understand you don't want to get too into kind of productivity savings guidance for 2026 and so forth. But you are sort of on the you are starting a revenue recovery now year on year this quarter. And just to understand the operating leverage assumption in that recovery I think it's around sort of 40% or so incremental margins, it looks like exiting the year. In your guide. I just wanted to confirm if that's roughly the right ballpark of what you should see early in the sort of cyclical recovery phase for your top [indiscernible] Sure. Julien, we have overall talked for the last couple of years around what we think our incremental should look like as an organization. We we debuted at Investor Day a year and a half ago reiterated it at Investor Day last year. And that that number that we're that we're signing up for is 35% incremental. And I I definitely recognize that at various points in the cycle that number could be up or down. Again, depending on what's going on with volume. And of course, getting a little better volume ramp can certainly help that number as well. So mathematically, that's where I would put it as far as exactly where we're looking 26, I'm not ready to talk about it yet.
1h 5m 34s
Yes. We've talked about a prudent approach to, to managing costs. And while we are adding back some heads prioritizing on new product innovation and customer facing resources. We're still more than 10% below our peak headcount. And we continue to look very closely at that So as we do see the return to growth on the top line, we're very cognizant of managing spending levels.
1h 6m 5s
Great. Thank you.
1h 6m 7s
Thank you.
1h 6m 10s
Our next question comes from Joe O'Dea from Wells Fargo. Please go ahead. Your line is open. [indiscernible] Can you just dig in on tariffs a little bit?
1h 6m 24s
And $125,000,000 and give a little bit of color the breakdown of that exposure? When we think about China and other parts of it? And then related to that, how you think about your positioning in this environment and given your foot [indiscernible] talk about yours versus kind of key competitors and whether there are any advantages there that you can exploit?
1h 6m 49s
Sure. So Joe, I'll hit on a few of the data points first and then and then Blake can can jump in on the footprint side of it. So last quarter, we talked about our exposure levels in we bring into The U. S. From Mexico is in the neighborhood of $350,000,000 What comes into The U. S. From Canada and China is in the neighborhood of $100,000,000 each. Importantly, USMCA compliance the vast majority of what's coming in from Mexico and, and Canada is USMCA compliant. When we we talk about what's going into China, that will be subject to tariffs. Again, Blake used the data point earlier, and I'm just gonna give it back as a reference that China for us is a little bit less than 3% of sales. Sorry. A little bit less than 4% of sales. Pardon me. When we think about what's coming from The US and going into China, think, like, teens ish as a representation of the the sales level. That's the the percentage of of the shipments that are going into into China on that side. So that gives you a sense at least of the magnitude in each of these.
1h 7m 58s
And the those import numbers just to make sure reference wise, those are fiscal twenty four import numbers. That's not the forecast fiscal twenty five. Obviously, they can move around a little Yeah. Just a couple of additional comments. Our US manufacturing facilities provide more revenue for Rockwell than any other country. So just to frame it up, just to frame it up that way, And again, a lot of the redundancy that we put in place during the supply chain crisis is really serving us well. We make logics The US. We also have the capability in Singapore. We have manufacturing multiple places around the world for our major product lines. I talked about the recent announcement of ClearPath expanding to The U. S. It certainly gives us a benefit in terms of reducing tariff costs. It also provides needed capacity for the kind of growth we expect to continue to see as well as resiliency.
1h 9m
And then within the guide, the unchanged range is that kind of price up about 1.5% volume down an equivalent amount? And then just related to that volume, that primarily auto and some process markets So we've talked about the uncertainty. That kept the organic range unchanged. And pricing from tariff related costs is a piece of that. Continuing to watch closely for any signs to manage pre buys. And then the timing of when those CapEx intensive projects return you know, is another piece of it, because those CapEx intensive projects typically carry with them a longer lead time. So we've got lots of backlog, that supports the guide already in place The question of when new orders would come in some of which would be recognized in the back half of the year. Is another element of uncertainty. So that's why we've taken the approach that we have.
1h 10m 10s
Got it. Thank you.
1h 10m 12s
Thank you. Julian, we will take one more question.
1h 10m 16s
Certainly. Our last question today will come from Nigel Coe from Wolfe Research. Please go ahead. Your line is open.
1h 10m 24s
Wow. Okay. Thanks. Just beat the bell there. Thanks for the question. So Christian, wanted to clarify the comment on the China kind of U. To China exports. So I think you said, if I heard it rightly, roughly 4% of sales and a teens portion of that 4% is imported into China. Is that right?
1h 10m 44s
That's correct.
1h 10m 45s
Okay. That's great. Just trying to figure out, because by the time we we convene there could be very different rates and systems in place. Just wanted understand the sensitivity. And then good color on 3Q. I'm just wondering if you can provide any color on how you see the setup by segments. And I'd be particularly interested to see if Lifecycle Services might be back to growth in 3Q.
1h 11m 13s
So we didn't actually give the color by segment for the for for the quarter. We did did get color by segment for the for the remainder of the year to give you a kind of a full year view.
1h 11m 23s
So probably not gonna get into the detail around individual segments at the at the moment. Just because, again, not sure that it's going to provide a ton of value. And and as, we talked we have had a couple of changes around You know, we're seeing some outperformance in certain parts of our business and and the capital intensive sides of the business are are moving around a little bit right now. And so the the nuance of quarter to quarter is a little bit more difficult right now. But again, we feel really good about the team's ability to execute.
1h 11m 54s
And then just quickly on the 3Q versus 4Q, would you expect the tariff impact to be roughly similar?
1h 12m 2s
Yes. Generally, we're expecting I mean, tariff impacts that we have, we're incurring them right now.
1h 12m 8s
Yes.
1h 12m 10s
Yeah. Okay. Great. Thank you.
1h 12m 13s
K. That concludes today's call. You for joining us today.
1h 12m 19s
At this time, you may disconnect. Thank you.
Key Insights
Q2 results showed solid sequential improvement in customer demand, with organic sales up high single digits sequentially, though reported sales were down 6% and organic sales down 4% year-over-year due to tough comps and unfavorable currency.
Segment operating margin reached 20.4% and adjusted EPS was $2.45, both above expectations, driven by strong cost reduction and margin expansion actions; full-year segment margin target was raised to 20% and adjusted EPS guidance increased to $9.70 at the midpoint.
E-commerce and warehouse automation sales grew over 45% year-over-year, significantly above expectations, with strong performance in North America and EMEA; this segment is expected to grow 45% in fiscal 2025.
Tariff impacts in Q2 were minimal and fully offset by pricing and supply chain actions; for the second half of fiscal 2025, tariff cost exposure is estimated at $125 million, with management confident in fully offsetting these costs through pricing and supply chain moves.
The company expects organic sales growth for fiscal 2025 in the range of +2% to -4%, annual recurring revenue to grow about 10%, free cash flow conversion of 100%, and plans to continue structural cost reductions and margin expansion initiatives into 2026 and beyond.
