Q2 2025 Rockwell Automation Inc Earnings Call
Unknown Executive: Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions.
Thank you for holding and welcome to Rockwell automation quarter quarterly conference call.
To remind everyone that todays conference call is being recorded.
Later in the call we will open up the lines for questions. If you have a question at that time. Please press star one.
Unknown Executive: If you have a question at that time, please press star one.
Aijana Zellner: At this time, I'd like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead. Thank you, Julian. Good morning, and thank you for joining us for Rockwell Automation's second quarter fiscal 2025 earnings release conference call. With me today is Blake Moret, our chairman and CEO, and Christian Rothe, 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.
Speaker Change: At this time I'd like to turn the call over to John Zillmer head of Investor Relations and market strategy is on there. Please go ahead.
John Zillmer: Thank you Julien good morning, and thank you for joining us for Rockwell automation is second quarter of fiscal 2025 earnings release Conference call with me today is Blake Moret, our chairman and CEO and Christian Vogt our CFO.
John Zillmer: Our results were released earlier this morning, and the press release and charts have been posted to our website.
John Zillmer: Both the press release and charts include in our call today will reference non-GAAP measures.
John Zillmer: Both the press wasn't charts included affiliations of these non-GAAP measures.
Aijana Zellner: A webcast of this call will be available on our website for replay for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call.
John Zillmer: Of course of this call will be available on our website for replay for the next 30 days.
John Zillmer: For your convenience a transcript of our prepared remarks will also be available on our website at the conclusion of today's call.
Aijana Zellner: 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. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all our SEC files.
John Zillmer: Before we get started I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings.
Blake Moret: So with that, I'll hand it over to Blake. Thanks, Aijana, and good morning, everyone. Thank you for joining us today.
John Zillmer: I'll hand, it over to Blake.
Blake Moret: Thanks, John and good morning, everyone. Thank you for joining us today before.
Blake Moret: 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.
Blake Moret: Before we turn to our second quarter results on slide three I'll make a couple of initial comments.
Blake Moret: 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.
Blake Moret: We talked about some of our actions to mitigate the impacts of announced tariffs on our last earnings call.
Blake Moret: Brown of how our team is executing these plans, while maintaining world class delivery and customer support.
Blake Moret: In addition to effective pricing actions, we're seeing good progress with some of our production location moves and efforts to secure alternative sourcing kristian and I will cover these in more detail later on the call.
Blake Moret: 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.
Kristian: Importantly, all of 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.
Kristian: 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.
Blake Moret: Turning to our second quarter results on slide three. 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 1.0.
Kristian: Turning to our second quarter results on slide three Q.
Kristian: 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 1.0.
Blake Moret: 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 and life-cycle 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 of high single digits sequentially.
Kristian: 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.
Kristian: We will still disclose book to Bill in lifecycle services each quarter since lead times are longer for that business segment.
Kristian: 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.
Kristian: From a cost standpoint, the impact of tariffs on our Q2 results was also minimal.
Kristian: Our sales came in better than expected this quarter with organic sales up high single digits sequentially reported.
Blake Moret: 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 2 points.
Kristian: 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.
Kristian: Favorable currency reduced sales by about two points.
Blake Moret: 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. In our Intelligent Devices segment, our organic sales declined 6% year-over-year, but we're 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.
Kristian: Even with customers continuing to adopt a cautious approach to their capex investments in this uncertain environment.
Kristian: We saw a number of strategic projects across a variety of industries and geographies in the quarter.
Kristian: And 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 are.
Kristian: Our strong growth over prior quarter, which 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.
Kristian: 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.
Blake Moret: Our differentiated MCC solutions are helping them secure numerous greenfield winds here in the U.S., our home market. Another strategic MCC win in Q2 was that efficient 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.
Kristian: Our differentiated MCC solutions are helping them secured numerous greenfield wins here in the U S. Our home market.
Kristian: Another strategic MCC win in Q2 was that efficient solutions provider.
Kristian: This customer in Asia 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.
Blake Moret: Our recent ClearPath acquisition continues to broaden our customer reach. Auto Brand Mobile Robots continue to add new logos with the recent win at Westfalia Technologies, a leading U.S. provider. of Automated Warehouse Solution. Westphalia has a significant presence in food and beverage and users across North America. 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 in 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 and logics, we saw sequential improvement in sales across both hardware and software businesses in this segment.
Kristian: Our recent clear path acquisition continues to broaden our customer reach auto brand mobile robots continue to add new logos with a recent win at Westphalia technologies, a leading U S provider.
Kristian: The automated warehouse solutions.
Kristian: Westphalia has a significant presence in food and beverage end users across North America Rockwell's <unk> 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 customers work for.
Kristian: <unk>.
Kristian: 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 logics, we saw sequential improvement in sales across both hardware and software.
Kristian: <unk> businesses in this segment.
Blake Moret: We are pleased to see sharply increased adoption of the FactoryTalk Design Studio, which features a Gen-AI co-pilot to accelerate the time to design and commission automation projects. One of our software wins in Q2 was with Brocco 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 1.0 across all our Solutions, Services, and Sensia businesses.
Kristian: We are pleased to see sharply increased adoption of the factory talk design studio, which features a gen AI co pilot to accelerate the time to design and commission automation projects.
Kristian: One of our software wins in Q2 was with Bronco imaging.
Kristian: A global leader in diagnostic imaging.
Kristian: The customer is using our pharma suite mes software to accelerate its revenue growth by improving quality control and increasing speed to market.
Kristian: 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 1.7 and was above 1.0 across all our solutions services and <unk> businesses, but the current trade and <unk>.
Blake Moret: But the current trade and policy uncertainty has impacted some large CAFX projects across our customer base. 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 Fix software businesses led our ARR performance. Rockwell's 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 of our cost reduction and margin expansion actions.
Kristian: <unk> uncertainty has impacted some large capex projects across our customer base, we saw some project delays in automotive and energy.
Kristian: And some deferrals of more discretionary spend and digital services.
Kristian: These customers are seeking additional certainty about the impact tariffs will have on their cost base and whether the volatility will impact their demand.
Kristian: Despite these delays our total IRR for the company grew 8% in the quarter double digit growth by Plex and fixed software businesses led our performance.
Kristian: Rockwell's segment margin of 24% and adjusted EPS of $2 45.
Kristian: Were both above our expectations and were in large part driven by continued execution of our cost reduction and margin expansion actions. Our teams focus on productivity yielded another quarter of outperformance versus our target and as we continue to look for further opportunities to expand.
Blake Moret: Our team's focus on productivity yielded another quarter of our health performance versus our target. And as we continue to look for further opportunities to expand our margins, we believe we'll exceed our full-year target of $250 million in year-over-year structural productivity.
Speaker Change: And our margins, we believe we will exceed our full year target of $250 million in year over year structural productivity Chris.
Christian Rothe: Christian will provide some additional calendarization detail in his section.
Christian Vogt: Christian will provide some additional calendar as Asian detail in his section.
Blake Moret: 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 continued to be challenged by the ongoing tariff and policy uncertainty.
Speaker Change: Let's move to slide four to review key highlights of our Q2 industry performance.
Speaker Change: 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.
Speaker Change: Consistent with our expectations, our Q2 automotive sales continued to be challenged by the ongoing tariff and policy uncertainty. This is one of the verticals, where we saw an increase in project deferrals in the quarter.
Blake Moret: This is one of the verticals where 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 the leading full-stack data center solutions provider in the region. Given the outperformance in the first half and a solid pipeline of projects, we now expect e-commerce and warehouse automation to grow 45% in fiscal year 25.
Speaker Change: Our sales in E Commerce, and warehouse automation grew over 45% versus prior year and were significantly above our expectations.
Speaker Change: We continue to see strong performance across our key customers in North America and EMEA.
Speaker Change: 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.
Speaker Change: Given the outperformance in the first half and a solid pipeline of projects. We now expect e-commerce and warehouse automation to grow 45% in fiscal year 'twenty five.
Blake Moret: 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. A 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.
Speaker Change: 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.
Speaker Change: Within food and Bev and HBC, we continued 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.
Speaker Change: They are improving their profitability and sustainability.
Speaker Change: A 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.
Blake Moret: while reducing its labor intensity. Rockwell's independent cart 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-1 producers and the broader life sciences ecosystem. I already mentioned our Brocco 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.
Speaker Change: Rockwell's independent cart technology was selected for its flexibility and agility to help increase throughput and improve cost savings.
Speaker Change: Our life Sciences business also exceeded our expectations for the quarter building on our strong presence with leading GOP, one producers and the broader life Sciences ecosystem.
Speaker Change: 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 and innovative contract drug manufacturer specializing in bringing accessible and affordable biologic medicines to the market.
Speaker Change: <unk>.
Speaker Change: This customers investing in our auto amr's within their automated storage and retrieval system warehouse as part of their initiative to expand their lights out warehouse and automated material movements.
Blake Moret: as part of their initiative to expand their lights out warehouse and automated material movement.
Blake Moret: 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 continue to exercise capital discipline by choosing targeted productivity projects, which help improve cost structure and boost profitability.
Speaker Change: Moving to process.
Speaker Change: 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.
Speaker Change: Within energy, our customers continue to exercise capital discipline by choosing targeted productivity projects, which help improve cost structure and boost profitability.
Blake Moret: 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 Ingenieria, 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 plan.
Speaker Change: Energy and process broadly were another area, where we saw an increase in project delays during the quarter.
Speaker Change: Despite this pause and larger capital investments, we continue to secure competitive wins and the process control space.
Speaker Change: This quarter DPA engineering.
Speaker Change: Chilean system integrator specializing in mining and energy industries selected our logic plant <unk> solution to help our leading global lithium mining company advancing our ambitious expansion plans.
Blake Moret: Moving to slide five in 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 of fiscal year 25. We continue to believe Rockwell is a net beneficiary of policies that drive U.S.
Speaker Change: Moving to slide five and our Q2 organic regional sales.
Speaker Change: North America was our best performing region this quarter and we expect it to be our strongest market for the full year fiscal year 'twenty five.
Speaker Change: We continue to believe Rockwell as a net beneficiary of policies that drive U S manufacturing and we are investing in our own operations to improve our resiliency and agility.
Blake Moret: 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. will be producing in both Kitchener, Ontario, and at our Milwaukee headquarters.
Speaker Change: For instance, we've recently decided to expand production of our auto autonomous mobile robots to the U S will.
Speaker Change: We will be producing in both Kitchener, Ontario, and at our Milwaukee headquarters.
Blake Moret: Let's now turn to slide six to review our fiscal 2025 outlook. As I said earlier, the impact of enacted tariffs on our Q2 results was minimal, with increased cost offset by price and supply chain moves. We continue to take necessary steps to offset the impact of April 2nd 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.
Speaker Change: Let's now turn to slide six to review our fiscal 2025 outlook as.
Speaker Change: As I said earlier the impact of enacted tariffs on our Q2 results was minimal with increased costs offset by price and supply chain moves we continue to take necessary steps to offset the impact of April 2nd tariffs through a combination of supply chain actions and pricing we will share the actual.
Christian Vogt: 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.
Blake Moret: However, second half uncertainty still remains. I grouped that uncertainty in three primary areas. The magnitude of pricing will 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 lifecycle services and configure to order business In terms of our fiscal 25 top line, we still expect our organic sales growth to be in the positive 2% to negative 4% range. A reported sales midpoint now assumes a half a point of negative contribution from currency translation. Christian will provide more detail on FX and the calendarization of our second half shortly.
Christian Vogt: However, second half uncertainty still remains I group that uncertainty in three primary areas.
Christian Vogt: <unk> to pricing will 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 lifecycle services and configure to order businesses.
Christian Vogt: In terms of our fiscal 'twenty five topline, we still expect our organic sales growth to be in the positive 2% to negative 4% range. Our reported sales midpoint now assumes a half a point of negative contribution from currency translation.
Christian Vogt: Christian will provide more detail on FX in the calendar <unk> of our second half shortly.
Blake Moret: I will add that we expect to return to year-over-year sales growth in Q3. Annual recurring revenue was slated to grow about 10% this year. Taking into account our margin outperformance today 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 $9.70 at the midpoint. Importantly, we were able to expand our margins year over year despite higher compensation costs. Continuing benefits from the SG&A actions we took in the second half of Fiscal 24, along with the team's focus on additional structural COGS productivity in Fiscal 25, enabled the investment in our people and new technology even as we expand margins.
Christian Vogt: I will add that we expect to return to year over year sales growth in Q3.
Christian Vogt: Annual recurring revenue was slated to grow about 10% this year.
Christian Vogt: 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 70.
Christian Vogt: At the midpoint.
Christian Vogt: Importantly, we were able to expand our margins year over year, despite higher compensation costs continuing benefits from the SG&A actions. We took in the second half of fiscal 'twenty four along with the team's focus on additional structural cogs productivity in fiscal 'twenty five enabled.
Christian Vogt: The investment in our people and new technology, even as we expand margins we continue to follow a prudent approach to hiring.
Blake Moret: We continue to follow a prudent approach to hiring.
Blake Moret: Prioritizing roles that drive new product introduction and revenue growth.
Christian Vogt: <unk> roles that drive new product introduction and revenue growth.
Blake Moret: We expect. Free cash flow conversion of 100% in fiscal year 25.
Christian Vogt: We expect.
Christian Vogt: Free cash flow conversion of 100% in fiscal year 'twenty five.
Christian Rothe: I'll now turn it over to Christian to give more detail on our Q2 and Financial Outlook for Fiscal 25.
Christian Vogt: I'll now turn it over to Christian to give more detail on our Q2 and financial outlook for fiscal 'twenty five Christian.
Christian Rothe: Thank you, Blake. And good morning, everyone. I'll start on slide seven, second quarter key financial. Second quarter reported sales were down 6% versus prior year. Currency had a negative impact of 2 points in the quarter, and organic sales declined 4%. segment operating margin of 20.4% compared to 19% a year ago was above our expectations and reflected our strong execution across. About three points of organic growth came from price and price cost was Benefits from cost reduction and margin expansion actions and positive price cost more than offset higher compensation and lower sales. Adjusted EPS of $2.45 was above our expectations, primarily due to the beat on segment operating margins.
Christian Vogt: Thank you Blake and good morning, everyone.
Christian Vogt: I'll start on slide seven second quarter key financial information.
Christian Vogt: Quarter reported sales were down 6% versus prior year currency had a negative impact of two points in the quarter and organic sales declined 4%.
Christian Vogt: <unk> operating margin of 24% compared to 19% a year ago was above our expectations and reflected a strong exit our strong execution across the company.
Christian Vogt: About three points of organic growth came from price and price cost was favorable.
Christian Vogt: <unk> 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 and execution and cost control through both structural and temporary costs.
Christian Rothe: This was another robust performance and execution and cost control through both structural and temperature. 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 pre-tax . We remain on track to achieve a 17% ETR for fiscal year 2021. Free cash flow of $171 million was $102 million 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.
Christian Vogt: The adjusted effective tax rate for the second quarter was 17, 7%.
Christian Vogt: In the prior year rate of 14, 8%.
Christian Vogt: Above the prior year rate of 14, 8%, primarily due to lower discrete <unk>.
Christian Vogt: Tax benefits, partially offset by favorable geographic mix of pretax income.
Christian Vogt: We remain on track to achieve a 17% ETR for fiscal 2025.
Christian Vogt: Free cash flow of $171 million.
Christian Vogt: It was $102 million higher than the prior year.
Christian Vogt: 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.
Christian Rothe: As a reminder, Q2 is typically a lower cash conversion quarter due to TCJA catch-up. Not shown on the slide, return on invested capital was 14.2% for the 12 months ended, March 31, and 380 basis points lower than the prior year, primarily driven by lower pre-tax net income, partially offset by a lower effective rate.
Christian Vogt: As a reminder, Q2 is typically a lower cash conversion quarter due to T C J a catch up payments.
Christian Vogt: Not shown on the slide return on invested capital was 14, 2% for the 12 months ended March 31, and 380 basis points lower than the prior year, primarily driven by lower pretax net income partially offset by a lower effective tax rate.
Christian Rothe: Slide 8 provides the sales and margin performance overview for our three items. As Blake mentioned, sales of intelligent devices and software in control exceeded expectations. Intelligent devices margin of 17.7% increased by 120 basis points. Despite the high single-digit volume decline and higher compensation compared to last year, our cost reduction and margin expansion actions allowed us to keep segment operating earnings flat and drove margins. Price, cost and mix were also Software control margin of 30.1% was up 440 basis points versus prior year, even though sales were flagged. Higher margin was driven by cost reduction and margin expansion actions and positive price cost.
Christian Vogt: Slide eight provides some sales and margin performance overview for our three operating segments.
Blake Moret: As Blake mentioned sales of intelligent devices and software and control exceeded expectations.
Blake Moret: Intelligent devices margin of 17, 7% increased by 120 basis points year over year.
Blake Moret: Despite the high single digit volume decline and higher compensation compared to last year, our cost reduction and margin expansion actions allowed us to keep segment operating earnings flat and drove margins higher.
Blake Moret: Price cost and mix were also favorable to margin.
Blake Moret: Software and control margin of 31% was up 440 basis points versus prior year, even though sales were flat year over year.
Blake Moret: Higher margin was driven by cost reduction and margin expansion actions and positive price cost, partially offset by higher compensation.
Christian Rothe: Partially offset by higher... underscore that sales and software and control were essentially flat year over year but segment operating earnings grew by about 25 million dollars and took margins back over really strong. Lifecycle services margin of 14.5% fell 210 basis points year-over-year. Driven by higher compensation and lower sales. Decoramental Margin and Life Cycle Services was about 40 Even though higher compensation and lower sales volumes were headwinds, segment margin here was in line with our expectations to do our cost reduction and margin expansion actions and strong project performance.
Blake Moret: To underscore that built in software and control were essentially flat year over year with segment operating earnings grew by about $25 million of took margins back over 30%.
Blake Moret: Really strong performance.
Blake Moret: Lifecycle services margin of 14, 5% fell 210 basis points year over year, driven by higher compensation and lower sales volume.
Blake Moret: Incremental margin lifecycle services was about 40%.
Blake Moret: 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.
Christian Rothe: I want to take a moment to point out the sequential improvements we saw in each of these. Intelligent devices had incrementals that were in the 40s from Q1 to Q2, reflecting the flow-through on higher volume and solid price relations. Software in Control had nearly 100% flow through on their sequential volume. Ada by Price, and Marginal. Lifecycle Services was able to grow segment operating earnings slightly despite a slight decrease in sales. This was due to strong projec Overall, for Rockwell, the incremental margin on the sequential sales growth was about 70%. This is reflective of strong execution by our teams around the world.
Blake Moret: I want to take a moment to point out the sequential improvements we saw in each of our segments.
Blake Moret: <unk> intelligent devices at Incrementals that were in the $40 from Q1 to Q2, reflecting the flow through on higher volume and solid price realization.
Blake Moret: Software and control had nearly 100% flow through on their sequential volume increase aided by price and margin expansion activities.
Blake Moret: Lifecycle services, we'll be able to grow segment operating earnings slightly despite a slight decrease in sales volume. This was due to strong project execution.
Blake Moret: Overall for Rockwell the incremental margin on a sequential sales growth was about 70%. This is reflective of strong execution by our teams around the world I want to thank them for their outstanding efforts.
Christian Rothe: I want to thank them for their outstanding.
Christian Rothe: The next slide, 9, provides the adjusted EPS walk from Q2 Fiscal 2024 to Q2 Fiscal 2020. year over year core performance was up slightly on a 4% organic sales Sales declines were driven by intelligent devices and life cycle services, but strong cost discipline in these segments softened the volume impact and declined. At Software in Control, we saw margin expansion on continued improvement in logic. Pricing was strong and we continue to fund new product development with company R&D at 6% of total revenue. Software and Control R&D as a percentage of segment sales was in the low We saw excellent execution and better timing on our cost reduction and margin expansion efforts.
Blake Moret: The next slide nine provides the adjusted EPS walk from Q2 fiscal 2024 for Q2 fiscal 2025.
Blake Moret: Year over year core performance was up slightly on a 4% organic sales decrease.
Blake Moret: Sales declines were driven by intelligent devices and lifecycle services with strong cost discipline. In these segments saw from the volume impact and decline impact and in software and control. We saw margin expansion on continued improvement in logic sales.
Blake Moret: Pricing was strong and we continue to fund new product development with company R&D at 6% of total revenue.
Blake Moret: Software and control R&D as a percentage of segment sales was in the low teens.
Blake Moret: We saw excellent execution and better timing on our cost reduction and margin expansion actions, which were above our expectations, resulting in a 65 tailwind.
Christian Rothe: which were above our expectations resulting in a 65 cent. We've realized about $155 million of savings in the You'll see a 60 cent 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 expect.
Blake Moret: We've realized about $155 million of savings in the first half.
Blake Moret: Youll see a <unk> <unk> 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.
Blake Moret: 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.
Christian Rothe: September 17, 2018 Coming into this year, we expected a year-over-year compensation increase to be approximately $160 million. We now expect that to be about $185 million. Translates to about 25 cents for each of the All other items resulted in a $0.15 net. This was essentially all currency as a slight tax. was offset by other smaller.
Blake Moret: So 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 to be approximately $160 million.
Blake Moret: We now expect that to be about $185 million for the full year that translates to about 25 for each of the remaining two quarters.
Blake Moret: All other items resulted in a 15 net headwind. This was essentially all currency as a slight tax headwind was offset by other smaller items.
Christian Rothe: 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. as well as.
Blake Moret: Taking a step back and looking at this slide.
Blake Moret: We were able to completely offset the headwinds of volume in compensation through strong execution on margin expansion and cost reduction activities as well as price realization.
Christian Rothe: 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 unchecked. Frankly, we are allowing for uncertainty, less predictability in the demand environment, and project... Regarding currency, the weakening of the dollar since our last earnings call has changed our full year expectation. currency headwind to be a half a percent. down from prior guidance of 1.5. You've already realized all that currency headwind in the first half, and FX turns to a modest tailwind for the second half. 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...
Blake Moret: Moving on to slide 10 to discuss our updated guidance for the full year.
Blake Moret: While our first half performance exceeded our expectations, we are leaving our organic sales outlook range unchanged.
Blake Moret: <unk>, we are allowing for uncertainty less predictability in the demand environment and project timing.
Regarding currency the weakening of the dollar since our last earnings call has changed our full year expectation for currency headwind to be half a percentage point down from prior guidance of one five percentage points.
Blake Moret: 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.
Blake Moret: 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% up from 19%.
Christian Rothe: up from 19. At the midpoint of our reported sales guidance, from a segment sales and margin We are expecting intelligent devices margin to be slightly down year over year on mid single digit sales. software control margins to be up year over year on a sales increase And we expect lifecycle services margin to be down year over year on a low. We are updating our adjusted EPS guidance to a range of $9.20 to $10.20 or $9.70 at The APS guidance increase reflects our performance in Q2, as well as the currency change from a headwind to a tailwind.
Blake Moret: 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.
Blake Moret: Software and control margins to be up year over year on a sales increase of mid single digits, and we expect lifecycle services margin to be down year over year on a low single digit sales decline.
Blake Moret: We are updating our adjusted EPS guidance range guidance to a range of $9 20 to $10 20.
Blake Moret: Our $9 70 at the midpoint.
Blake Moret: <unk> guidance increase reflects our outperformance our performance in Q2 as well as the currency currency change from a headwind to a tailwind.
Christian Rothe: Under normal circumstances, we would have narrowed ranges for both sales and EPS, but it seemed prudent to keep a wider range due to ongoing Talk about calendarization. Our expectation is for recorded sales to grow low single digits sequentially from Q2 to Q3. Q4, we expect higher 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 20-cent tailwind. which is split evenly in Q3 and. Remember, this is compared to the prior year. There's a potential benefit about that.
Blake Moret: Under normal circumstances, we would have narrowed ranges for both sales and EPS, but it seemed prudent to keep a wider range due to ongoing uncertainty.
Blake Moret: Talk about calendar <unk>.
Blake Moret: Our expectation is for reported sales to grow low single digits sequentially from Q2 to Q3 and Q4, we expect higher sequential sequential sales due to a combination of our normal seasonality and our backlog.
Blake Moret: On a year over year basis, and a more favorable FX outlook is expected to result in a <unk> <unk> tailwind to EPS, which is split evenly in Q3 and Q4 remember this as compared to the prior year the sequential benefit of FX is minimal.
Christian Rothe: As we mentioned during Q1, we continue to take additional temporary cost measures in Q2 to offset the effort. We like how the temporary controls are flowing to the P&L, and the organization is executing well. In this period of uncertainty, we feel better keeping those costs... 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. Thick basis points and not As a result, on the low single-digit sequential sales growth from Q2 to Q3, incrementals will be in the low.
Blake Moret: As we mentioned during Q1, we continue to take additional temporary cost measures in Q2 to offset the FX impact.
Blake Moret: Like how the temporary controls are flowing through the P&L and the organization is executing well in this period of uncertainty, we feel better keeping those costs in check.
Blake Moret: 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 nine percentage points as a result on a low single digit sequential sales growth from Q2 to Q3 Incrementals will be in the low thirties.
Christian Rothe: A few additional comments on fiscal 2025 guidance for your models. Corporate and other expenses now expected to be about $150 million. Net interest expense for fiscal 2025 is now expected to be about $145 million. We're assuming average diluted shares outstanding of about 113 million shares. Our share buybacks in Q2 were approximately 450,000 shares in the quarter at a cost of $129 million. Our opportunistic overlay on our buyback program kicked in over the last month, and we recently exceeded $300 million in buybacks year-to-date.
Blake Moret: A few additional comments on fiscal 2025 guidance Remodels.
Blake Moret: Corporate and other expense is now expected to be about $150 million.
Blake Moret: Net interest expense for fiscal 2025 is now expected to be about $145 million.
Blake Moret: We're assuming average diluted shares outstanding of about 113 million shares.
Blake Moret: Our share buybacks in Q2 were approximately 450000 shares in the quarter at a cost of $129 million.
Blake Moret: Our opportunistic overlay on our buyback program kicked in over the last month, and we recently exceeded $300 million in buybacks year to date.
Christian Rothe: That was originally our buyback target for the full year, but we view recent market pricing as an attractive opportunity to buy more.
Blake Moret: That was originally our buyback target for the full year, but we will.
Blake Moret: We view recent market pricing is an attractive opportunity to buy more rockwell.
Christian Rothe: 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 We began giving this information during the supply chain crisis as the ratio of orders to shipments diverged from the historical range of around 1, and we felt it was prudent to give that detail to investors.
Blake Moret: Moving away from the slides I'd like to expand on a few topics first youll see we are no longer providing the dollar value of our orders will be.
Blake Moret: Again, given this information during the supply chain prices as the ratio of orders to ship ins diverge from the historical range of around one and we felt it was prudent to give that detail to investors.
Christian Rothe: That situation has passed, and we are back to a normal book-to-bill of around 1, so we are dropping additional orders data.
Blake Moret: That situation has passed and we are back to a normal book to bill of around one two were dropping additional orders data point.
Christian Rothe: Second, similar to last quarter, we have analyzed our orders and shipments to see if there were any indications of pre-vaccine. 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.
Blake Moret: Second similar to last quarter, we have analyzed our orders and shipments to see if there were any indications of pre buys.
Blake Moret: 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 servicing channel checks with our OEM partners do not point to pre buys.
Christian Rothe: And our surveys and channel checks with our OEM partners do not point to So we aren't seeing specific examples.
Blake Moret: We arent seeing specific examples.
Christian Rothe: In addition, we put measures in place to limit distributor and machine builder stocking orders to appropriate While our diligence didn't find specific evidence, and we have controls in place, we're factoring in the possibility of limited...
Blake Moret: In addition, we put measures in place to limit distributor in machine builder stocking orders to appropriate levels.
Blake Moret: While our diligence didn't find any didnt find specific evidence and we have controls in place we're factoring in the possibility of limited pre buys.
Christian Rothe: Third, focusing on the cost reduction and margin expansion activities that gave us a benefit of approximately 65 cents of EPS in the second quarter. This project was faster than we had projected and reflects great performance by the Rockwell organization, particularly the integrated supply chain. We expanded gross margins by 130 basis points in the second quarter compared to the prior year against a 4% organic. 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 million we have now.
Blake Moret: Third focusing on the cost reduction and margin expansion activities that that gave us a benefit of approximately <unk> 65 of EPS in the second quarter. This was faster than we had projected and reflects great performance by the Rockwell organization, particularly the integrated supply chain team.
Blake Moret: We expanded gross margins by 130 basis points in the second quarter compared to the prior year against the 4% organic headwind.
Blake Moret: While a lot of our outperformance on the cost reduction and margin expansion program in the first half was timing, we do expect a full year benefit of the program to exceed the $250 million, we have been targeting.
Christian Rothe: Looking at some cost reduction wins, in direct sourcing we've saved about $18 million in the first half of the year and are expecting to continue to yield benefits in the second half from 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 million of savings.
Blake Moret: Looking at some cost reduction wins and direct sourcing we've stayed at about $18 million in the first half of the year and are expected to continue to yield benefits in the second half from supplier negotiations and transition to new suppliers.
Blake Moret: <unk> are coming from areas like cables and wires fewer broker buys electronic components and drives.
Blake Moret: On the manufacturing side, we've seen about $20 million of savings in the first half of the year. This is coming from labor efficiency in other areas like process optimization and reduced scrap.
Christian Rothe: https://www.larryweaver.com Last quarter, we talked about rationalizing 21,000. That number through two quarters is approximately 30. These were heavily low to no volume. There are another 4,000 to 5,000 SKUs that we evaluated and decided to take other action, meaning we didn't rationalize them, but we're taking pricing or other actions. This work is ongoing and is truly a part-by-part analysis that is focused on optimization and simplification.
Blake Moret: Last quarter, we talked about rationalizing 21000 skus.
Blake Moret: That number through two quarters is approximately 36000.
Blake Moret: These were heavily low to no volume skus.
Blake Moret: There are another 4000 to 5000, Skus that we evaluated and decided to take other actions, meaning we didn't rationalize them, where 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.
Christian Rothe: This is particularly important as we move production and supply chain in response to Let's wrap things up by talking about Assuming current tariff rates and scope that are in place today remain We estimate our tariff cost exposure to be about $125 million for the second half. We continue to manage tariffs through several actions, the fastest of which is. We have enacted changes to our prices as part of our recovery. This program will flex up or down as tariffs are enacted, modified, postponed, or restricted. 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.
Blake Moret: This is particularly important as we move production and supply chain in response to tariffs.
Blake Moret: Let's wrap things up by talking about tariffs.
Blake Moret: Assuming current tariff rates in scope that are in place today remain we estimate our tariff cost exposure could be about $125 million for the second half of fiscal 2025.
Blake Moret: We continue to manage tariffs through several actions the fastest of which is pricing we've enacted changes through our prices as part of our recovery program. This program will flex up or down as tariffs are enacted modified postponed or rescinded.
Blake Moret: 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.
Christian Rothe: In summary, we are positioned to fully offset our fiscal 2025 tariff costs through a combination of pricing and supply chain. The objective of tariff based price changes is the recovery of the incremental cost and not sales. But, to the extent pricing is used, our fully organic sales performance could be improved due to tariff-based price reductions. Again, our full year EPS target would stay intact because our intention is to offset tariff costs and have zero impact on second... As Blake mentioned, the impact of terrorists in Q2 was completely neutral.
Blake Moret: In summary, we are positioned to fully offset our fiscal 2025 tariff costs through a combination of pricing and supply chain actions. The objective of tariff fees price changes is the recovery of the incremental cost and not sales growth.
Blake Moret: But to the extent pricing is used our full year organic sales performance could be improved due to tariff fees price realization again, our full year EPS target with state intact, because our intention is to offset tariff costs and have zero impact on second half EPS.
Blake Moret: As Blake mentioned the impact of tariffs in Q2 was completely neutralized going forward forward in an effort to give visibility to underlying operational performance. Our intention is to have closed tariff impact on both sales and earnings in each quarter.
Christian Rothe: Going forward, in an effort to give visibility to underlying operational performance, our intention is to disclose tariff impact on both sales and earnings in each In conclusion, we had a solid Q- 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 operations.
In conclusion, we 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.
Christian Rothe: We have a plan, and we have. Team is focused to finish the second half.
Blake Moret: With that, I'll turn it back over to Blake for some closing remarks before we start. Thanks, Christian. We're pleased to report another quarter that reflects our focus on 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 a 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 in a very challenging environment.
Blake Moret: I'll turn it back over to Blake for some closing remarks before we start Q&A.
Blake Moret: Thanks Christian we're pleased to report another quarter that reflects our focus on consistent execution.
Speaker Change: <unk> and 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 in our <unk>.
Speaker Change: 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.
Speaker Change: <unk> transformation is hard and the best of times, and I'm, especially proud of our team's ability to positioned us so well in a very challenging environment.
Blake Moret: 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 in their own transformation plans because nobody is better positioned than Rockwell to provide this value.
Speaker Change: 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 in their own transformation plans, because nobody is better positioned than Rockwell to provide this value.
Aijana Zellner: Aijana will now begin the Q&A session. 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.
Speaker Change: We will now begin the Q&A session. Thank.
Speaker Change: Thanks, Blake and we'd like to get to as many of you as possible. So please limit yourself to one question and a quick follow up Julien, let's take our first question.
Unknown Executive: Julian, let's take our first question. Thank you.
Speaker Change: Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Unknown Executive: As a reminder, to ask a question, please press star followed by the number one on your telephone keypad.
Andrew Obin: Our first question comes from Andrew Obin from Bank of America. Please go ahead. Your line is open. Yes, good morning. Morning.
Speaker Change: Our first question comes from Andrew <unk> from Bank of America. Please go ahead. Your line is open.
Andrew: Good morning.
Speaker Change: Good morning.
Andrew Obin: Just a question on discrete, you know, e commerce 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 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.
Speaker Change: Just a question on discrete e-commerce and warehouse automation relatively small, but obviously anything growing close to 50% really moves the needle.
Speaker Change: Does that include is that for Datacenters are.
Speaker Change: What is really driving this robust recovery.
Speaker Change: Where does this visibility into the second half come from thank you.
Speaker Change: Yes, Andrew well within that vertical we're actually getting strong growth from multiple aspects of the business is represented there so theres the warehouse automation.
Speaker Change: That a lot of customers, especially in consumer facing industries home and personal care food and beverage.
Speaker Change: 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 thats in warehouse automation across multiple customers.
Blake Moret: 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 e-commerce players as they're 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 Qubit power distribution. Gotcha. No, really appreciate it.
Speaker Change: You also have e-commerce players as they are 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 data centers through the queue based power distribution equipment.
Speaker Change: Got it turned out really appreciate it.
Andrew Obin: And just a question on lifecycle services. You know, that business has really been consistently a source of upside, a little bit of surprise to see growth slow down. Interestingly, we've seen some, you know, PTC, I think, is talking about slowing down over the next couple of quarters. Just can you just tell us what's what's what's happening there? Because somewhat unexpected.
Speaker Change: Just a question on lifecycle services that business has really been consistently source of upside a little bit surprised.
Speaker Change: To see growth slowdown.
Speaker Change: Interestingly, we've seen some PTC I think just talking about slowing down over the next couple of quarters. Just can you just tell us what's what's happening there because somewhat unexpected. Thank you.
Blake Moret: Thank 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 lifecycle services business, lower commodity prices, particularly in the US, so cheaper oil and gas has put some pressure on that. And then within lifecycle, we did see a pause and 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.
Speaker Change: 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.
Speaker Change: Verticals, which is a big part of our lifecycle services business lower commodity prices, particularly in the U S. So cheap.
Speaker Change: Cheaper oil and gas has put some pressure on that and then within lifecycle. We did see a pause in spend at some of the less time critical digital services businesses as well.
Speaker Change: Our competitiveness remains very strong.
Speaker Change: Theres a good funnel some of the projects that were delayed in the quarter did come in in April, but Thats, where you probably saw the lion's share of the delays when when they happened.
Andrew Obin: But that's where you probably saw the lion's share of the delays when they happened. Really appreciate it.
Speaker Change: Really appreciate it thanks so much.
Unknown Executive: Thanks so much. Thanks, Andrew.
Andrew: Thanks, Andrew.
Scott Davis: Our next question comes from Scott Davis from Melius Research. Please go ahead. Your line is open. Hey, good morning, guys. I wanted to start kind of with a bigger, bigger picture question. I mean, the debate I think we're getting You know, the most incomings on is actually where you guys are sitting in a position of having the most visibility. And that is just this whole balance of kind of reshoring acceleration versus kind of the macro realities and concerns that folks have. What are your customers? And I know you're selling to a lot of different end markets, so maybe perhaps a little bit more discreet and hybrid focused here, but how are your customers thinking through that as it relates to, are they accelerating reshoring?
Speaker Change: Our next question comes from Scott Davis from Melius Research. Please go ahead. Your line is open.
Scott Davis: Hey, good morning, guys. Thanks.
Speaker Change: Thanks Scott.
Speaker Change: I wanted to start kind of with a bigger bigger picture question I mean.
Speaker Change: The debate I think we're getting.
Speaker Change: The most incoming is on is actually where you guys are sitting in a position of having the most visibility on that is just this whole <unk>.
Speaker Change: Allen have kind of re shoring acceleration versus kind of the macro realities.
Speaker Change: And concerns that folks have been what what are your customers and I know youre selling to a lot of different end markets. So maybe perhaps more a little bit more discrete and hybrid focused here, but.
Speaker Change: What are you how are your customers thinking through that as it relates to our they reaccelerate or the accelerating re shoring are they hunker.
Scott Davis: Are they hunkering down? I mean, what what any generalizations be helpful there. Thanks.
Speaker Change: Hunkering down I mean, what.
Speaker Change: What any generalizations be helpful. There. Thanks.
Blake Moret: Sure, you know, there is still a generally optimistic long term. among most of our customers, especially those with high exposure to the U.S. because the idea of U.S. 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.
Speaker Change: Sure.
Speaker Change: There is still a generally optimistic long term view.
Speaker Change: Most of our customers, especially those with high exposure to the U S because the.
Speaker Change: Idea of.
Speaker Change: U S manufacturing as a good thing for the U S economy resonates with a lot of us and of course Rockwell as a net beneficiary of that.
Speaker Change: Where we are seeing delays as we analyze the projects that havent move forward.
Speaker Change: The underlying reasons fall into a few different categories first is <unk>.
Speaker Change: Concerns about cost certainty, which a lot of that would come from tariffs we heard some comments regarding interest rates as well.
Blake Moret: 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 and markets. As 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 overcapacity and tire . Another reason would be outside funding, and I'm thinking specifically of CHIPS and Science Act allocations for the semi-industry. And then general risk, you know, T's and C's, people wanting to make sure that they have their tariff exposure covered.
Speaker Change: Automotive is obviously affected by that given the amount of.
Speaker Change: Content from around the world there.
Speaker Change: Another underlying reason would be concerns about the demand from our customers and markets. So I mentioned, our lower commodity prices in the U S that will affect oil and gas and a little bit of mining.
Speaker Change: A little bit of temporary concerns, we think with overcapacity and tire.
Speaker Change: Another reason would be outside funding.
Speaker Change: Thinking specifically of chips and Science Act allocations for the semi industry, and then and then general risk Ts and CS people wanting to make sure that they.
Speaker Change: Have their tire tariff exposure covered most of the negative exposure to the underlying reasons for delays, where they are taking place on the positive side, we talked about e-commerce and warehouse automation.
Blake Moret: Those are the negatives. Those are the underlying reasons for delays where they are taking place.
Blake Moret: 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, you know, some strength with Italian machine builders last quarter. That continues. We've seen some sequential growth in Germany with machine builders as well. So there's a few places of positive business.
Speaker Change: We expect positive growth trends to continue quite frankly into next year based on our customers' investment plans across those areas I mentioned to Andrew.
Speaker Change: We also see continued.
Speaker Change: 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 we've seen we've seen some.
Speaker Change: Sequential growth in Germany with machine builders as well so there's a few places of positive busy.
Speaker Change: Business and then the last one and maybe the most important is life sciences and you've seen the announcements.
Blake Moret: And then the last one, and maybe the most important, is life sciences. And you've seen the announcements of, you know, 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.
Speaker Change: Major Rockwell customers announcing major multibillion dollar plans.
Speaker Change: 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.
Blake Moret: Okay. That's helpful Blake and then.
Blake Moret: And then, you know, natural follow on is just the machine builders, just it's an important customer for you guys and How big of a deal are the terror... I mean, so many of those guys are in Europe or even Canada coming down into the U.S. How big of a deal are terror... 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 U.S. and the cost of their you know their their machines just doubled or whatever is that a game changer or is it just not big enough as a percent of the total cost of the facility generally to to delay a project for?
Blake Moret: Natural follow on is just the machine builders and it's an important customer.
Blake Moret: And for you guys.
Blake Moret: How big of a deal or the <unk> I mean, so many of those guys are in Europe, or even Canada coming down into the U S. How big of a deal or tariffs.
Blake Moret: To those guys and I guess kind of since we're in uncharted territory here.
Blake Moret: Do you think about if somebody's building facility in the U S. The cost of them.
Blake Moret: Their machines, just doubled or whatever it is that a game changer or is it just not big enough as a percent of the total cost of the facility generally two to delay a project core.
Scott Davis: 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. and more anonymously. And a lot of those machine builders do have U.S. locations as well, so they're able, by shifting their point of purchase, to limit their exposure as well. That's helpful. Thank you. Best of luck, guys. Appreciate it. Thanks.
Blake Moret: Yes, I think it would occur in the.
Blake Moret: The current tariff regime, if youre trying to sell a machine made in China into the U S. It's a big deal and probably a showstopper and in many cases, that's not a big part of our business.
Blake Moret: We have mentioned China is about less than 4% of our total revenue in Europe.
Blake Moret: We're working with those customers and.
Blake Moret: Our application of price increases is targeted as I mentioned in the script.
Blake Moret: We have considerable flexibility in where we manufacture things.
Blake Moret: And a lot of those machine builders do have U S locations as well so they were able by shifting their point of purchase to to limit their exposure as well.
Blake Moret: Okay. That's helpful. Thank you best of luck guys I appreciate it.
Speaker Change: Thanks Scott.
Chris Snyder: Our next question comes from Chris Snyder from Morgan Stanley. Please go ahead. Your line is open. 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 don't know if the rules are changing. But when you guys talk to customers, you know, is there an expectation that as visibility starts to come through, we could see more of these difference in Q1 order rates on a regional basis?
Speaker Change: Our next question comes from Chris Snyder from Morgan Stanley. Please go ahead. Your line is open.
Chris Snyder: Thank you I wanted to follow up with some of the prior commentary around the market demand trends.
Chris Snyder: I think it's understandable and makes sense that all of the uncertainty out there maybe it's hard to move forward with the Big project. If we don't know how much. It costs you don't 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.
Chris Snyder: <unk>.
Speaker Change: In the coming quarters and was there any difference in Q1 order rates on a regional basis. Thank you.
Chris Snyder: Thank you. Sure. Yeah.
Speaker Change: Sure, yes, so addressing the projects first.
Chris Snyder: 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 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 costs 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.
Speaker Change: Delays not cancellations cancellations remain in a low.
Speaker Change: Historical band and so we absolutely do expect that these customers are going to pull the trigger on some of these investments.
Speaker Change: Where 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 in April and.
Speaker Change: And we think we have a pretty good handle on what they are grappling with.
Speaker Change: As all manufacturers are looking for more.
Speaker Change: Certainty and consistency.
Speaker Change: With the tariffs and the cost might come along with tariffs are what they are looking for as well as making sure that the demand is still there from their end customers and the majority of cases. They expect that this is a pause.
Blake Moret: In the majority of cases, they expect that this is a pause, not anything that lasts for a long, long time.
Speaker Change: Not not anything that 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.
Blake Moret: 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, you know, that's super helpful as we go into the second half, because it reduces a lot of that ramp, and it builds healthy backlog that'll be important in the back half.
Speaker Change: And that's Super helpful. As we go into the second half because it reduces a lot of that ramp and.
Speaker Change: It builds healthy backlog that will be important in the back half of the year.
Chris Snyder: Thank you, Blake. I appreciate that.
Speaker Change: Thank you Blake I appreciate that and maybe following up with one for Christian.
Christian Rothe: Maybe following up with one for Christian, you know, you guys did a 20.4 percent margin in Q2. It seems like, you know, maybe a 21 in the back half is what's implied. So, you know, just to 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, are 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.
Speaker Change: You guys did a 24% margin in Q2, it seems like maybe a 'twenty one in the back half is what's implied.
Speaker Change: So just to kind of a relatively muted step up given 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 are there headwinds on tariffs and that it's hard to get an incremental margin on a tower or just any kind of maybe headwinds that we should be thinking about on the back half margins.
Christian Rothe: Thank you. Yeah, sure, Chris. You know, 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 de-risk a lot of that. And again, we're taking our This is a 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.
Speaker Change: Thank you.
Chris Snyder: Yes sure Chris.
Speaker Change: When you think about this kind of where we went from Q1 into Q2 really really nice margin expansion I think 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.
Speaker Change: And again, we're taking our segment operating margin guide number up from 19%, where it was previously to 20% now.
Speaker Change: So we still have opportunities to expand those margins, but again 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, we're talking about.
Christian Rothe: But again, we did 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, we're talking about basis points, not full percentage points. And I think your math around kind of what the second half implied number is, yeah, you're in that ballpark. You know, the ability of this team to continue to execute, I have a lot of confidence in. You know, the key is that, you know, we're talking about some really nice. Numbers year-over-year where we're still getting benefits.
Speaker Change: <unk> points not full percentage points.
Speaker Change: I think your math around kind of what the second half implied number is you're in that ballpark.
Speaker Change: The ability of this team to continue to execute I have a lot of confidence in.
Speaker Change: The key is that we're talking about some really nice <unk>.
Speaker Change: <unk> year over year, where we're still getting benefits sequentially.
Christian Rothe: Sequentially, when we're talking about the cost reduction and margin expansion activities, those are in the millions, 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, our objective is that we're going to try to give that information to you all around what the impact of tariffs 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.
Speaker Change: We're talking about the cost reduction and margin expansion activities.
Speaker Change: Those are in millions not probably not tens of millions, but again, we're feeling pretty good about that.
Speaker Change: On your question on whether or not we can get margin expansion of tariff based environment.
Speaker Change: Then we're really our objective is is that we're going to try to give that information to you all around what the impact of tariffs 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 they're two separate things.
Christian Rothe: That's really, you know, they're two separate things for us, based business, continued growth, continued margin expansion. And let's, let's go ahead. Thank you, I appreciate that.
Speaker Change: For Us these business continued growth continued margin expansion and look let's go execute.
Speaker Change: Thank you I appreciate that.
Andy Kaplowitz: Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead, your line is open. Good morning, everyone. Nice quarter. Hey, Andy, thanks.
Speaker Change: Our.
Speaker Change: Next question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.
Speaker Change: Everyone nice quarter.
Andy: Andy Thanks.
Andy Kaplowitz: 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 million 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 million? Or maybe just what inning do you think you're in in terms of cost and ability to price at rock?
Speaker Change: It's probably more of a question can you give more color into your longer term margin potential I know you had good mix in the quarter you are holding on temporary cost. It's noticeable does that you said you would get more than $250 million of restructuring benefits from your program 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 restructure.
Speaker Change: <unk> benefits, including SKU rationalization is actually way more than $2 50.
Speaker Change: Just what inning do you think you're in in terms of cost and ability to price that rock.
Blake Moret: Andy, I'm going to start with that one and then hand it over to Christian just for a little bit of historical. You know, it was actually at your conference last year, you know, 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&A cost reduction, and it moved, as we continue to see the benefits of that, into more structural cost. And, you 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.
Speaker Change: Andy I'm going to start with that one and then hand it over to Christian just for a little bit of historical.
Speaker Change: It was actually at your conference last year.
Speaker Change: February we started talking about.
Speaker Change: Cost out programs.
Speaker Change: While some of that was to address the current business environment at that time.
Speaker Change: More importantly, it was to set a foundation the results of which were starting to see now it started with an SG&A cost reduction and it moved.
Speaker Change: As we continue to see the benefits of that into more structural cost and.
Speaker Change: I bring this up to just make it clear. This was part of a program thats been undergoing that's been underway 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.
Christian Rothe: 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 was just an opportunity to give a shout out to the team that responded under difficult circumstances.
Christian Vogt: And so it was 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 a point where Christian can add some additional color yeah, absolutely. Thank you Blake and I would also echo those comments the team has done really well.
Christian Rothe: We're looking for more opportunities for structural cost, and maybe this is the point where Christian can add some additional color. Yeah, absolutely. Thank you, Blake. And I would 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 and, in fact, was able to pull in a number of them, which is why we saw the outperform in the first half.
Speaker Change: And so.
Speaker Change: As we're kind of sizing the full year benefit this year.
Speaker Change: Keep in mind again, we've talked about this before hundreds of projects are underpinning this cost reduction and margin expansion activity.
Speaker Change: The team has done a really good job in trying to hit those targets and in fact was able to pull in a number of them, which is why we saw the outperformance in the first half.
Speaker Change: And.
Christian Rothe: Frankly, we didn't want to put a lot more pressure on them when we were 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 a runway there. 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, because these programs, what we're building with the Rockwell operating model, with the continuation of 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.
Speaker Change: And frankly, we didn't want to put a lot more pressure on them. When we were 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.
Speaker Change: 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 because these programs. What we're building with the Rockwell operating model with the continuation of these.
Speaker Change: These projects that are underway right now, but then also when we think about volume starting to come back up.
Speaker Change: I think there's a really good opportunity to expand the margins I'm not in a position to give you an exact number yet I am sure you you were fully expecting that answer but.
Christian Rothe: I'm not in a position to give you an exact number yet. I'm sure you were fully expecting that answer, but I'm 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 2026, we'll be there.
Not going to sign up for that number yet, but I do think.
Speaker Change: We continue through the remainder of this year and start talking about 26, we'll be revisiting that.
Christian Rothe: It's very helpful, guys. And then, Blake or Christian, I think you've talked about gradually improving orders previously, improving orders and sales throughout the year. We can see what your revenue guidance is, but is that still the expectation for orders?
Speaker Change: That's very helpful guys and then a question I think you've talked about gradually improving orders previously improving orders and sales throughout the year. We can see what your revenue guidance is but is that still the expectation for orders I know you don't really want to get talk about orders anymore, but is the expectation that generally deliver book to bill close to one for the rest of the year.
Christian Rothe: I know you don't really want to talk about orders anymore, but is the expectation that generally you deliver a book to bill close to one for the rest of the year, given the macro environment as it 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 de-stock? Yeah, so I'll start with this and Blake can jump in if he if he has additional comments to make. But generally, for the full year fiscal 25, we're looking for a book to bill of around one, which is right about where we are for the first half.
Speaker Change: Given the macro environment as it 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.
Speaker Change: Yes, so I'll start with this and Blake can jump in if he has additional comments to make but generally for the full year fiscal 'twenty five we're looking for a book to bill of around one which is right about where we are for the first half so that incremental improvement that we're talking about for the remainder of the year and sales were also expecting that in orders a little.
Christian Rothe: So yeah, that 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, you know, we did talk about in Q1, that we did have some orders that were 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 help helps us feel good about what we're looking at for Q4.
Speaker Change: Once around that is that.
Speaker Change: We did talk about in Q1 that we did have some orders that were that were.
Speaker Change: 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 help helps us feel good about what we're looking at for Q4.
Speaker Change: Generally that.
Blake Moret: So generally, that, you know, again, I think the the book to bill number right around one, and that, that we'll get that continuous ramp on the machine builder side, Blake, do you want to take that one? 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, the, you know, we talked last quarter about the Italian machine builder market continuing to improve.
Speaker Change: Again, I think the book to Bill number right around one.
Speaker Change: And that that will get that continuous ramp on the machine builder side Blake do you want to take that one 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 talk so much about last year and I think maybe to build off of that a touch more of the.
Speaker Change: 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.
Blake Moret: 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 the market. Yeah, and just the other the other point that's worth mentioning is 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 factory talk optics, our on machine portfolio of armor, power flex and motion. Those are really getting a great response from machine builders and provide us new ways to Appreciate all the color.
Speaker Change: When you see that demand coming in and we are getting higher shipment levels. Obviously, that's a very strong indication that they are not sitting on a ton of.
Excess stock and just the other the other point.
Speaker Change: Worth mentioning as we talked about really good adoption of our new products.
Speaker Change: Innovation that we've invested in over the last few years offerings like factory talk optics are on machine portfolio.
Speaker Change: Armour power flags and motion.
Speaker Change: They are really getting a great response from machine builders and provides us new ways to win there.
Speaker Change: Appreciate all the color.
Andy Kaplowitz: Thanks, Andy.
Andy Kaplowitz: Thanks, Andy Thank you.
Julian Mitchell: Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open. Hi, good morning.
Speaker Change: Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.
Julian Mitchell: Hi, good morning.
Christian Rothe: Maybe just the first question, I wanted to try and hone in a little bit more on the third quarter. I just wanted to confirm, it sort of sails up low single digits, a 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?
Julian Mitchell: Maybe just the first question I wanted to try and.
Julian Mitchell: <unk> been a little bit more on the.
Julian Mitchell: Third quarter so.
Julian Mitchell: I just wanted to confirm its sort of sales up low single digits a margin maybe it's 21%.
Julian Mitchell: And so does that mean, even with the tax rate headwind year on year sort of EPS is up in Q3.
Blake Moret: And within that, I wanted to understand kind of the PLC market, how quickly is that coming back up off the bottom? Yeah, Julian, I'll start on the EPS question and general profitability. And then We'll have Blake talk about the PLC demand side. When we're talking about the EPS number, you mentioned a 21 for segment operating margin. didn't actually confirm that that was the number, mostly around just second half. For the full year, we're looking at that $20 million. to give you a ballpark on EPS for Q3. $2.60-ish The neighborhood we're thinking, which I believe would be down.
Julian Mitchell: Within that wanted to understand kind of the plc market how quickly is that coming back up.
Julian Mitchell: Off the bottom.
Julian Mitchell: Yeah, Julien I'll start on the EPS question in general profitability and then.
Julian Mitchell: We will.
Julian Mitchell: Blake talk about the plc demand side.
Julian Mitchell: When we're talking about the EPS number.
Julian Mitchell: Mentioned, a 'twenty one for segment operating margins.
Julian Mitchell: Didn't actually confirm that that was the number of mostly around just second half and kind of for the full year, we're looking at that 20%.
Julian Mitchell: To give you a ballpark on EPS for for Q3.
Julian Mitchell: $2 60 ish.
Julian Mitchell: The neighborhood, we're thinking which I believe would be down slightly year over year.
Blake Moret: Yeah, regarding logics, we're having a really good year. And there's more room to run. The units of logics being shipped are still not quite back to pre-COVID levels. So there's opportunity there. We've talked before about seeing modest share gains in our controllers, new innovation from things like FactoryTalk Design Studio that I mentioned before. So I'm very happy with the performance to date with logics. 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 we expect that.
Julian Mitchell: Yes regarding.
Julian Mitchell: Regarding logics.
Julian Mitchell: We're having a really good year.
Julian Mitchell: There's more room to run.
Julian Mitchell: The units of logics being shipped are still not quite back to pre COVID-19 levels. So.
Julian Mitchell: There is there is opportunity there we've talked before about seeing modest share gains in our controllers, new innovation from things like factory talk design studio that I mentioned before so.
Julian Mitchell: I'm very happy with the performance to date with logics and as we see continued recovery on the machine builder side of course, that's right at the core of a lot of their system. So we expect that to continue.
Julian Mitchell: That's helpful, thank you.
Speaker Change: That's helpful. Thank you and then just my follow up would be around the operating leverage assumptions and understand you don't want to get too into kind of productivity savings guidance for 2026, and so forth, but you all sort of on the.
Christian Rothe: And then just my follow up would be around the operating leverage assumptions and 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 know, 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 line.
Julian Mitchell: Starting at revenue recovery now.
Year on year this quarter.
Julian Mitchell: And just to understand the operating leverage assumption in that recovery.
Julian Mitchell: I think it's around sort of 40% or so incremental.
Julian Mitchell: 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.
Julian Mitchell: Early in the sort of cyclical recovery phase for your top line.
Christian Rothe: Sure, Julian, you know, we https://www.youtube.com or the link in What we're signing up for is 35. https://www.youtube.com.uk © The Bulletproof Executive 2013 Mathematically, that's where I would put it as far as, you know, exactly where we're looking. Yeah, we've talked, you know, 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.
Julian Mitchell: Sure Julien.
Julian Mitchell: We have.
Julian Mitchell: Overall talked for the last couple of years around what we think our Incrementals should look like as an organization.
Julian Mitchell: We debuted at an Investor day, a year and a half ago reiterated it at Investor day last year and that number that were that were signing up for is 35% Incrementals and 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 bit better volume ramp can certainly.
Julian Mitchell: Helped at that number as well so.
Julian Mitchell: <unk>, that's where I would put it as far as exactly where we are looking for 26, not ready to talk about it yet yes, we've talked about a prudent approach to managing costs and while we are adding back some hedge prioritizing on new product innovation and customer facing resources.
Julian Mitchell: <unk>, we're still more than 10% below our peak headcount and we continue to look very closely at that so as we do see that return to growth on the top line, we're very cognizant of.
Julian Mitchell: Managing spending levels.
Christian Rothe: Great. Thank you.
Speaker Change: Great. Thank you.
Julian Mitchell: Thank you.
Joe O'Day: Our next question comes from Joe O'Day from Wells Fargo. Please go ahead. Your line is open. Hi, good morning. Thanks for taking my questions. Hi.
Speaker Change: Our next question comes from Joe O'dea from Wells Fargo. Please go ahead. Your line is open.
Joe O'dea: Hi, good morning, Thanks for taking my questions.
Christian Rothe: Can you just dig in on the tariffs a little bit and $125 million and give a little bit of color on 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 footprint, you talk about yours versus kind of key competitors and whether there are any advantages there that you can exploit. Sure, so Joe, I'll hit on a few of the data points first and then Blake can jump in on the footprint side of it.
Speaker Change: Hi can you just dig in on the on the tariffs a little bit in $125 million and give a little bit of color on 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 there.
Speaker Change: This environment and given your footprint.
Speaker Change: You talk about yours versus kind of key competitors and whether there any advantages there that you can exploit.
Speaker Change: 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.
Christian Rothe: So last quarter we talked about our exposure levels and what we bring into the U.S. from Mexico is in the neighborhood of 350 million. What comes into the U.S. Canada and China is in the neighborhood of 100 million each. Importantly, USMCA compliance. The vast majority of what's coming in from United cliche – Parts of Management Inc, Normal Office Word microsoft Microsoft Microsoft easier to understand Microsoft Mandarin English Amazon Word Document MSWordDoc Word.Document.8 Again, Blake used the data point earlier, and I'm just going to give it back as a reference that China for us is a little bit less than 3% of sales.
Speaker Change: Last quarter, we talked about our exposure levels.
Speaker Change: What we bring into the U S from Mexico is in the neighborhood of $350 million what comes into the U S from from Canada, and China is in the neighborhood of $100 million each.
Speaker Change: Importantly, U S MCA compliance.
Speaker Change: The vast majority of what's coming in from Mexico, and Canada is U S MCA compliant.
Speaker Change: When we talk about what's going into China that will be subject to tariffs.
Speaker Change: Again, Blake use the data point earlier, and I am just going to give it back as a reference that China for us is a little bit less than 3% of sales.
Christian Rothe: 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 the shipments that are going into into China on that side. So that gives you a sense at least of the of the magnitude. And those import numbers, just to make sure, reference-wise, those are Fiscal 24 import numbers. so they can move around.
Speaker Change: Sorry, it's a little bit less than 4% of sales pardon me.
Speaker Change: When we think about what's coming from the U S in going into China.
Speaker Change: I think like teens ish is a representation of the sales level.
Speaker Change: The percentage of the shipments that are going into the into China on that side. So that gives you a sense at least of the of the magnitude in each of these.
Speaker Change: The most important numbers just to make sure reference wise those are fiscal 'twenty four important numbers, that's not the forecast for fiscal 'twenty five obviously that can move around a little bit yes.
Blake Moret: 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 Logix in the US, we also have that 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 US. It certainly gives us a benefit in terms of reducing tariff costs.
Speaker Change: A couple of additional comments, our U S 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.
Speaker Change: In the U S. We also have the capability in Singapore, we had manufacturing multiple places around the world for our major product lines I talked about the recent announcement of clear path expanding to the U S. It certainly gives us a benefit in terms of reducing tariff costs. It also provides.
Blake Moret: It also provides needed capacity for the kind of growth we expect to continue to see, as well as resilience. And then within within the guide, the unchanged range is that kind of price up about one and a half percent volume down an equivalent amount and then just related to that volume that you know, primarily auto and some process market. 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 is another piece of it, because those CapEx-intensive projects typically carry with them a longer lead time.
Speaker Change: We needed capacity for the kind of growth, we expect to continue to see as well as resiliency.
Speaker Change: And then.
Speaker Change: Within within the guide.
Speaker Change: Unchanged range.
Speaker Change: Is that kind of price up about one 5% volume down an equivalent amount and then just related to that volume.
Speaker Change: Primarily auto and some process markets.
Speaker Change: So so we've talked about the uncertainty.
Speaker Change: That.
Speaker Change: Kept the organic range unchanged.
Speaker Change: Pricing from.
Speaker Change: Tariff related cost is a piece of that continuing to watch closely for any signs to.
Speaker Change: To manage pre buys and then the timing of when those capex intensive projects return.
Speaker Change: He is another piece of it because there was 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 and some of which would be recognized in the back half of the year as another element of uncertainty. So that's why we have.
Christian Rothe: 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. Got it. Thank you.
Speaker Change: <unk> taken the approach that we have.
Speaker Change: Got it thank you.
Thank you Julien we will take one more question.
Unknown Executive: Julian, we will take one more question.
Unknown Executive: Certainly.
Nigel Coe: Our last question today will come from Nigel Coe from Wolf Research. Please go ahead. Your line is open. Wow, okay, thanks. Just beat the bell there. Thanks for the question. So, Christian, I just wanted to clarify the comment on the China, kind of US to China exports. I think you said, if I heard it rightly, you know, roughly 4% of sales and a teens portion of that 4% is imported into China. Is that right? That's correct. Okay, that's great.
Speaker Change: Certainly our last question today will come from Nigel Coe from Wolfe Research. Please go ahead. Your line is open.
Speaker Change: Wow, Okay, just just beat the belt.
Speaker Change: Thanks for the question so.
Speaker Change: Chris I just wanted to clarify the comment on the China.
Speaker Change: U S to China exports. So I think you said.
Speaker Change: Roughly 4% of sales.
Speaker Change: Teens portion of that 4% is imported into China is that right.
Speaker Change: That's correct.
Speaker Change: Okay, that's great and just trying to figure out because by the time, we convene.
Christian Rothe: Just trying to figure out, you know, because by the time we convene, there could be very different rates and systems in place. I just wanted to understand the sensitivity. And then, good color on 3Q. I'm just wondering if you can provide any color and how you see the setup, you know, by segments. And I'd be particularly interested to see if, you know, lifecycle services might be back to growth in 3Q.
Speaker Change: That could be very different rates and systems in place I just wanted to.
Speaker Change: The sensitivity and then.
Speaker Change: Good color on <unk> I'm, just wondering if you can provide any color on how you see the setup.
Speaker Change: By segments, and I'd be particularly interested to see if.
Speaker Change: Lifetime.
Speaker Change: Lifecycle services might be back to growth in <unk>.
Christian Rothe: Yeah, so we didn't actually give the color by segment for the for the quarter, we did give color by segment for For the remainder of the year to give you a kind of a full year view, so probably not going to get into the detail around individual segments at the at the moment. Not sure that. provide a ton of value. And as we talked about, we have had a couple changes around, you know, we're seeing some outperformance in certain parts of our business. And then the capital intensive sides of the business are moving around a little bit right now.
Speaker Change: Yes, so we didn't actually give the color by segment for the for the quarter, we did give color by segment for the.
Speaker Change: For the remainder of the year to give you a kind of a full year view.
Speaker Change: It's probably not going to 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 as we talked about we have had a couple of changes around.
Speaker Change: We're seeing some outperformance in certain parts of our business and then.
Speaker Change: And then the capital intensive sides of the business are moving around a little bit right now and so the the.
Christian Rothe: And so 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 And then just quickly on the 3Q versus 4Q, would you expect the tariff impact to be roughly similar? Yeah, generally, we're expecting I mean, obviously, the tariff impact that we have, we're incurring Yeah, okay, great. Thank you.
Speaker Change: But 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.
Speaker Change: And then just quickly on the <unk> versus <unk> would you expect the tariff impact to be roughly similar.
Speaker Change: Yeah, generally we're expecting I mean, obviously the tariff impacts that we have we're incurring them right now yes.
Speaker Change: Yeah, Okay, great. Thank you.
Speaker Change: Okay.
Unknown Executive: Okay, that concludes today's call. Thank you for joining us today. At this time, you may disconnect. Thank you.
Speaker Change: That concludes today's call. Thank you for joining us today.
Speaker Change: At this time you may disconnect. Thank you.
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Speaker Change: Thanks.
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