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Presentation

Rockwell Automation, Inc. beats earnings expectations. Reported EPS is $2.45, expectations were $2.1.

Operator: 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. [Operator Instructions] 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.

Aijana Zellner: Thank you, Julianne. 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. 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.

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 our SEC filings. So, with that, I’ll hand it over to Blake.

Blake Moret: Thanks, Aijana, and good morning, everyone. Thank you for joining us today. Before we turn to our second quarter results on Slide 3, I’ll make a couple of initial comments. The quarter and our full year outlook reflect increased resiliency and flexibility in our business across our global operations, even as we and our customers continue to operate in an environment of heightened uncertainty. We talked about some of our actions to mitigate the impacts of announced tariffs on our last earnings call. I’m proud of how our team is executing these plans while maintaining world-class delivery and customer support. In addition to effective pricing actions, we’re seeing good progress with some of our production location moves and efforts to secure alternative sourcing.

Christian and I will cover these in more detail later on the call. Importantly, all these actions to add resiliency to our business model are further enhancing Rockwell’s position, both from a profitability and competitive differentiation standpoint, regardless of what happens in the broader policy environment. We made significant investments in our operational resilience during the supply chain crisis, and they have been instrumental in helping us navigate through the current situation by giving us additional flexibility in our supply chain and manufacturing footprint. Turning to our second quarter results on Slide 3. 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. Going forward, we will share additional information on total company order performance only when our overall book-to-bill is outside of the normal range.

We will still disclose book-to-bill in Lifecycle Services each quarter since lead times are longer for that business segment. While there might have been some isolated customer pre-buys ahead of tariff-related price increases in Q2, the overall value of these purchases did not have a meaningful impact on our top line. From a cost standpoint, the impact of tariffs on our Q2 results was also minimal. Our sales came in better-than-expected this quarter with organic sales up high single-digits sequentially. Reported sales were down 6% and our organic sales were down 4% versus prior year due to the difficult year-over-year comparisons we mentioned on our last earnings call. Unfavorable currency reduced sales by about 2 points. Even with customers continuing to adopt a cautious approach to their CapEx investments in this uncertain environment, we saw a number of strategic projects across a variety of industries and geographies in the quarter.

In our Intelligent Devices segment, our organic sales declined 6% year-over-year, but were above our expectations with double-digit sequential growth across all key product lines. Our strong growth over prior quarter was led by our power control business, where our industry-leading motor control center lead times continue to secure important new customers and help Rockwell gain domestic share. One example of these competitive wins in the quarter was with Cape Electrical Supply Integration, a leading package power provider focused on new power generation for the data center market. Our differentiated MCC solutions are helping them secure numerous greenfield wins here in the US, our home market. Another strategic MCC win in Q2 was at Fecient Solutions Provider.

This customer, an Asian panel builder, selected our Cubic modular power distribution systems for their flexibility and smaller footprint, a perfect application for an end-user greenfield plant in the food and beverage space. Our recent Clearpath acquisition continues to broaden our customer reach. OTTO brand mobile robots continue to add new logos, with a recent win at Westfalia Technologies, a leading US provider of automated warehouse solutions. Westfalia has a significant presence in food and beverage end 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 and Control organic sales were up 2% year-over-year and also exceeded our expectations in the quarter. While our high-single-digit sales growth over prior quarter was driven by another quarter of recovery in Logix, we saw sequential improvement in sales across both hardware and software businesses in this segment. We are pleased to see sharply increased adoption of the FactoryTalk Design Studio, which features a GenAI copilot to accelerate the time to design and commission automation projects. One of our software wins in Q2 was with Bracco 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, but the current trade and policy uncertainty has impacted some large CapEx 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 Fiix software businesses led our ARR performance. Rockwell segment margin of 20.4% and adjusted EPS of $2.45 were both above our expectations and were, in large part, driven by continued execution of our cost reduction and margin expansion actions.

Our team’s focus on productivity yielded another quarter of outperformance versus our target, and as we continue to look for further opportunities to expand our margins, we believe we’ll exceed our full-year target of $250 million in year-over-year structural productivity. Christian will provide some additional calendarization detail in his section. Let’s move to Slide 4 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 eCommerce 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.

This is one of the verticals where we saw an increase in project deferrals in the quarter. Our sales in eCommerce and Warehouse Automation grew over 45% versus prior year and were significantly above our expectations. We continue to see strong performance across our key customers in North America and EMEA. Our data center business is also continuing to gain momentum, including a significant data center project with one of Asia’s largest telecom providers, delivered through our strategic collaboration with a leading full-stack data center solutions provider in the region. Given the outperformance in the first half and a solid pipeline of projects, we now expect eCommerce and Warehouse Automation to grow 45% in fiscal year ‘25. 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 US-based restaurant chain with plans to leverage automation to improve speed and consistency of its operations 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 Bracco 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 OTTO AMRs within their automated storage and retrieval system warehouse as part of their initiative to expand their lights-out warehouse and automated material movements. Moving to Process. While we were expecting to see year-over-year softness due to very difficult comparisons in our Energy business, our performance in the quarter here came in worse than expected.

Within Energy, our customers continued to exercise capital discipline by choosing targeted productivity projects which help improve cost structure and boost profitability. 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 plans. Moving to Slide 5 and our Q2 organic regional sales. North America was our best-performing region this quarter, and we expect it to be our strongest market for the full year fiscal year ‘25.

We continue to believe Rockwell is a net beneficiary of policies that drive US 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 OTTO autonomous mobile robots to the US. We’ll be producing in both Kitchener, Ontario and at our Milwaukee headquarters. Let’s now turn to Slide 6 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 are taking a balanced approach to the outlook for the rest of the year. Our execution has been strong, and demand continues to be solid, including in April. However, second half uncertainty still remains. I group that uncertainty in three primary areas, the magnitude of pricing we’ll implement to offset any new tariffs, the impact of any advance 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. In terms of our fiscal ‘25 topline, we still expect our organic sales growth to be in the positive 2% to negative 4% range. Our reported sales midpoint now assumes 0.5 point of negative contribution from currency translation. Christian will provide more detail on FX and the calendarization of our second half shortly.

I will add that we expect to return to year-over-year sales growth in Q3. Annual recurring revenue is slated to grow about 10% this year. Taking into account our margin outperformance to-date and continued strong execution, we are increasing our full year segment margin target to 20%, and we now expect our adjusted EPS to be about $9.70 at the midpoint. Importantly, we are 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, enable the investment in our people and new technology even as we expand margins. We continue to follow a prudent approach to hiring, prioritizing roles that drive new product introduction and revenue growth.

We expect free cash flow conversion of 100% in fiscal year ‘25. I’ll now turn it over to Christian to give more detail on our Q2 and financial outlook for fiscal ‘25. Christian?

Christian Rothe: Thank you, Blake, and good morning, everyone. I’ll start on Slide 7, second quarter key financial information. 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 reflective of our strong execution across the company. About 3 points of our organic growth came from price and price/cost was favorable. Benefits from cost reduction and margin expansion actions and positive price/cost more than offset higher compensation and lower sales volume. Adjusted EPS of $2.45 was above our expectations, primarily due to the beat on segment operating margin.

This was another robust performance in execution and cost control, through both structural and temporary costs. The adjusted effective tax rate for the second quarter was 17.7%, above the prior year rate of 14.8%, primarily due to lower discrete tax benefits partially offset by favorable geographic mix of pre-tax income. We remain on track to achieve a 17% ETR for fiscal 2025. 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 shipments. As a reminder, Q2 is typically a lower cash conversion quarter due to TCJA catch-up payments. 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 tax rate.

Slide 8 provides the sales and margin performance overview of our three operating segments. As Blake mentioned, sales in Intelligent Devices and Software and Control exceeded expectations. Intelligent Devices margin of 17.7% increased by 120 basis points year-over-year. Despite the high- single-digit volume decline and higher compensation compared to last year, our cost reduction and margin expansion actions allowed us to keep segment operating earnings flat and drove margins higher. Price/cost and mix were also favorable to margin. Software and Control margin of 30.1% was up 440 basis points versus prior year even though sales were flat year-over-year. Higher margin was driven by cost reduction and margin expansion actions and positive price/cost, partially offset by higher compensation.

To underscore that, sales in Software and Control were essentially flat year-over-year, but segment operating earnings grew by about $25 million and took margins back over 30%. Really strong performance. Lifecycle Services margin of 14.5% fell 210 basis points year-over-year, driven by higher compensation and lower sales volume. Decremental margin in Lifecycle Services was about 40%. Even though higher compensation and lower sales volumes were headwinds, segment margin here was in line with our expectations due to our cost reduction and margin expansion actions and strong project execution. I want to take a moment to point out the sequential improvements we saw in each of our segments. Intelligent Devices had incrementals that were in the 40s from Q1 to Q2, reflecting the flow through on higher volume and solid price realization.

Software and Control had nearly 100% flow-through on their sequential volume increase, aided by price and margin expansion activities. Lifecycle Services was able to grow segment operating earnings slightly despite a slight decrease in sales volume. This was due to strong project execution. Overall, for Rockwell, the incremental margin on the 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. The next slide, 9, provides the adjusted EPS walk from Q2 fiscal 2024 to Q2 fiscal 2025. Year-over-year, core performance was up slightly on a 4% organic sales decrease. Sales declines were driven by Intelligent Devices and Lifecycle Services, but strong cost discipline in these segments softened the volume decline impact, and in Software and Control we saw margin expansion on continued improvement in Logix sales.

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-teens. We saw excellent execution and better timing on our cost reduction and margin expansion actions, which were above our expectations, resulting in a $0.65 tailwind. We’ve realized about $155 million of savings in the first half. You’ll see a $0.60 impact from compensation. This year-over-year delta reflects merit increases that came into effect at the beginning of the fiscal year as well as higher incentive comp versus prior year. This number is higher than we had expected in the quarter, reflecting a higher incentive accrual on the strong performance in Q2 and the increase to our expected EPS performance for the full year.

Also, remember that in Q2 last year, we had an incentive compensation accrual reversal. Coming into this year, we expected a year-over-year compensation increase to be approximately $160 million. We now expect that to be about $185 million for the full year. That translates to about $0.25 for each of the remaining two quarters. All other items resulted in a $0.15 net headwind. This was essentially all currency, as a slight tax headwind was offset by other, smaller items. Taking a step back and looking at this slide, we were able to completely offset the headwinds of volume and compensation through strong execution on margin expansion and cost reduction activities as well as price realization. Moving on to Slide 10, to discuss our updated guidance for the full year.

While our first half performance exceeded our expectations, we are leaving our organic sales outlook range unchanged. Frankly, we are allowing for uncertainty, less predictability in the demand environment, and project timing. Regarding currency, the weakening of the dollar since our last earnings call has changed our full-year expectations for currency headwind to be about 0.5 percentage point, down from prior guidance of 1.5 percentage points. We have already realized all of that currency headwind in the first half and FX turns to a modest tailwind for the second half of the year. Based on our strong execution in the first half of the year and a slight currency tailwind, we are increasing our segment operating margin guidance to about 20%, up from 19%.

At the midpoint of our reported sales guidance, from a segment sales and margin standpoint, we are expecting Intelligent Devices margin to be slightly down year-over-year on a mid-single-digit sales decline, 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. We are updating our adjusted EPS guidance to a range of $9.20 to $10.20, or $9.70 at the midpoint. The EPS guidance increase reflects our performance in Q2 as well as the currency change from a headwind to a tailwind. 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.

Let’s talk about calendarization. Our expectation is for reported sales to grow low single-digits sequentially from Q2 to Q3. In 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 $0.20 tailwind to EPS, which is split evenly in Q3 and Q4. Remember, this is compared to the prior year. The sequential benefit of FX is minimal. As we mentioned during Q1, we continued to take additional temporary cost measures in Q2 to offset the FX impact. We 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.

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, think basis points and not percentage points. As a result, on the low single-digit sequential sales growth from Q2 to Q3, incrementals would be in the low 30s. A few additional comments on fiscal 2025 guidance for your models. Corporate and other expense is 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.

That was originally our buyback target for the full year, but we view recent market pricing as an attractive opportunity to buy more Rockwell. Moving away from the slides, I’d like to expand on a few topics. First, you’ll see we are no longer providing the dollar value of our orders. We began giving this information during the supply chain crisis, as the ratio of orders to shipments diverged from the historical range of around 1 and we felt it was prudent to give that detail to investors. That situation has passed, and we are back to a normal book-to-bill of around 1, so we are dropping the additional orders data point. Second, similar to last quarter, we have analyzed our orders and shipments to see if there were any indications of pre-buys.

New demand on distributors was roughly equivalent to the demand those distributors placed on Rockwell. Distributor inventory levels are stable to slightly down compared to last quarter. And our surveys and channel checks with our OEM partners do not point to prebuys. So, we aren’t seeing specific examples. In addition, we have put measures in place to limit distributor and machine builder stocking orders to appropriate levels. While our diligence didn’t find specific evidence, and we have controls in place, we’re factoring in the possibility of limited prebuys. Third, focusing on the cost reduction and margin expansion activities that gave us a benefit of approximately $0.65 of EPS in the second quarter. This is faster than we had projected and reflects great performance by the Rockwell organization, particularly the Integrated Supply Chain team.

We expanded gross margin by 130 basis points in the second quarter, compared to the prior year, against a 4% organic headwind. While a lot of our outperformance on 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 been targeting. 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 transitioning 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 in the first half of the year.

This is coming from labor efficiency, and other areas like process optimization and reduced scrap. Last quarter, we talked about rationalizing 21,000 SKUs. That number through two quarters is approximately 36,000. These were heavily low to no-volume SKUs. There are another 4,000 to 5,000 SKUs that we evaluated and decided to take other action, meaning we didn’t rationalize them, but we’re taking pricing or other action. This work is ongoing and is truly a part-by-part analysis that is focused on optimization and simplification. This is particularly important as we move production and supply chains in response to tariffs. Let’s wrap things up by talking about tariffs. Assuming current tariff rates and scope that are in place today remain, we estimate our tariff cost exposure to be about $125 million for the second half of fiscal 2025.

We continue to manage tariffs through several actions, the fastest of which is pricing. We have enacted changes to our prices as part of our recovery program. This program will flex up or down as tariffs are enacted, modified, postponed or rescinded. We are also working on moving some production. Resiliency actions we took during the supply chain crisis means we have some flexibility to move production of key product lines as a response. In summary, we are positioned to fully offset our fiscal 2025 tariff cost through a combination of pricing and supply chain actions. The objective of tariff-based price changes is the recovery of the incremental cost, and not sales growth. But, to the extent pricing is used, our full-year organic sales performance could be improved due to tariff-based price realization.

Again, our full-year EPS target would stay intact because our intention is to offset tariff costs and have zero impact on second half EPS. As Blake mentioned, the impact of tariffs in Q2 was completely neutralized. 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 quarter. 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, 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. Investments in resilience are yielding results, including process changes to achieve faster price realization, capacity increases to create redundant manufacturing lines for high-value products in multiple countries, new lines of business that increase annual recurring revenue, and our comprehensive program to increase operating margins. These changes can only be successfully executed with the coordinated efforts of our employees and partners around the world. Transformation is hard in the best of times, and I’m especially proud of our team’s ability to position us so well in a very challenging environment.

Our value proposition is stronger than ever before, as demonstrated by customers in the US 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 will now begin the Q&A session.

Aijana Zellner: 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. Julianne, let’s take our first question.

Operator: [Operator Instructions] Our first question comes from Andrew Obin from Bank of America. Please go ahead. Your line is open.

Andrew Obin: Yes, good morning.

Blake Moret: Good morning.

Andrew Obin: Just a question on discrete. E-commerce and warehouse automation, relatively small, but obviously, I think, growing close to 50% really moves the needle. Does it include — is that where data centers are? And what is really driving this robust recovery? And where does this visibility into the second half come from? Thank you.

Blake Moret: Yeah, Andrew, within that vertical, we’re actually getting strong growth from multiple aspects of the businesses represented there. So there’s the warehouse automation that a lot of customers, especially in consumer-facing industries, home and personal care, food and beverage, which is — a lot of people are identifying that as a current source of inefficiency in their operations. And so that whole production logistics segment that we’ve talked about of our offerings is a really good fit. So that’s in warehouse automation across multiple customers. You also have the 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 Cubic power distribution equipment.

Andrew Obin: Got you. No, I really appreciate it. And just a question on Lifecycle Services, that business has really been consistently source of upside, a little bit surprised to see growth slowdown. 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 happening there because somewhat unexpected? Thank you.

Blake Moret: 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 in spend in some of the less time-critical digital services businesses as well. Our competitiveness remains very strong. There’s a good funnel. Some of the projects that were delayed in the quarter did come in, in April, but that’s where you probably saw the lion’s share of the delays when they happened.

Andrew Obin: Really appreciate it. Thanks so much.

Blake Moret: Thanks, Andrew.

Operator: Our next question comes from Scott Davis from Melius Research. Please go ahead. Your line is open.

Scott Davis: Hey, good morning, guys.

Blake Moret: Hey, Scott.

Scott Davis: I wanted to start kind of with a bigger picture question. I mean the debate, I think we’re getting the most [incomings] (ph) 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 are having. What are your customers — I know you’re selling to a lot of different end markets, but so maybe perhaps more — a little bit more discrete and hybrid focused here. But what are your — how are your customers thinking through that as it relates to — are they accelerating reshoring? Are they hunkering down? I mean what — any generalization would be helpful there. Thanks.

Blake Moret: Sure. There is still a generally optimistic long-term view among most of our customers, especially those with high exposure to the US because the idea of US manufacturing as a good thing for the US economy, resonates with a lot of us. And of course, Rockwell is a net beneficiary of that. Where we are seeing delays, as we analyze the projects that haven’t moved forward, the underlying reasons fall into a few different categories. First is concerns about cost certainty, which a lot of that would come from tariffs. We heard some comments regarding interest rates as well. Automotive is obviously affected by that given the amount of content from around the world there. Another underlying reason would be concerns about the demand from our customers’ end markets.

So I mentioned lower commodity prices in the US that will affect oil and gas and a little bit of mining, a little bit of temporary concerns, we think, with overcapacity in 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, Ts and Cs, people wanting to make sure that they have their tariff exposure covered. Those are the negatives. Those are the underlying reasons for delays where they are taking place. On the positive side, we talked about e-commerce and warehouse automation. We expect the positive growth trends to continue, quite frankly, into next year based on our customers’ investment plans across those areas I mentioned to Andrew.

We also see continued signs of green shoots in packaging within food and beverage and home and personal care. So we talked about some strength with Italian machine builders last quarter, that continues. We’ve seen some sequential growth in Germany with machine builders as well. So there’s a few places of positive business. And then the last one and maybe the most important is Life Sciences, and you’re seeing the announcements of major Rockwell customers announcing major multi-billion-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 US.

Scott Davis: Okay. That’s helpful, Blake. And then 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 tariff — I mean so many of those guys are in Europe or even Canada coming down into the US, how big of a deal are tariff to those guys? And I guess, kind of since we’re in uncharted territory here, I mean, when you think about if somebody is building a facility in the US and the cost of 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 delay a project for?

Blake Moret: Yeah. I think in 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 in many cases, that’s not a big part of our business. As we’ve mentioned, China is about a little less than 4% of our total revenue. In Europe, we’re working with those customers and our application of price increases is targeted. As I mentioned in the script, we have considerable flexibility in where we manufacture things. And a lot of those machine builders do have US locations as well. So they’re able by shifting their point of purchase to limit their exposure as well.

Scott Davis: Okay, that’s helpful. Thank you. Best of luck, guys. Appreciate it.

Blake Moret: Thanks, Scott.

Operator: 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. 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, is there an expectation that as visibility starts to come through, we could see more of these projects or announcements unlocking in the coming quarters? And was there any difference in Q1 order rates on a regional basis? Thank you.

Blake Moret: Sure. Yeah. So addressing the projects first, 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 cost that might come along with tariffs are what they’re looking for as well as making sure that the demand is still there from their end customers. In the majority of cases, they expect that this is a pause, not anything that lasts for a long, long time.

From an order trend standpoint, North America was our strongest region in the quarter, and we expect it to be our strongest region for the year. And that’s super helpful as we go into the second half because it reduces a lot of that ramp, and it builds a healthy backlog that will be important in the back half of the year.

Chris Snyder: Thank you, Blake. I appreciate that. And maybe following up with one for Christian. You guys did a 20.4% margin in Q2. It seems like maybe a 21% in the back half is what’s implied. So just a 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 tariff? Just any kind of maybe headwinds that we should be thinking about on these back half margins? Thank you.

Christian Rothe: Yeah, sure, Chris. 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. And again, we’re taking our segment operating margin guide number up from 19% where it was previously to 20% now. And so we still have opportunities to expand those margins. But again, we did — a 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.

I think your math around kind of what the second half implied number is. Yeah, you’re in that ballpark. The ability of this team to continue to execute, I have a lot of confidence in, the key is that we’re talking about some really nice numbers year-over-year where we’re still getting benefits. Sequentially, when we’re talking about the cost reduction and margin expansion activities, those are 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, 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. And on the tariff side, we’re focused on the recovery portion of it. That’s really — there are two separate things for us. Base business, continued growth, continued margin expansion, and let’s go execute.

Chris Snyder: Thank you. I appreciate that.

Operator: Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.

Andy Kaplowitz: Good morning, everyone. Nice quarter.

Blake Moret: Hi, 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 a good mix in the quarter. You are 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 you can give us some more color into what you’re seeing? Do you see ultimate restructuring benefit including SKU rationalization is actually way more than 250? Or maybe just what inning do you think you’re in, in terms of cost-out and ability to price at 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. It was actually at your conference last year, February, where we started talking about cost-out programs. And while some of that was to address the current business environment at that time; more importantly, it was to set a foundation, the results of which we’re starting to see now. It’s starting with an SG&A cost reduction and it moved as we continue to see the benefits of that into more structural cost. And I bring this up to just make it clear, this was part of a program that’s been undergoing — that’s been on the way for a while now and it doesn’t happen, and we don’t get to talk about exceeding expectations without really strong participation by thousands of people within the company.

And so it’s just an opportunity to give a shout out to the team that responded under difficult circumstances. We’re looking for more opportunities for structural cost and maybe this is the point where Christian can add some additional color.

Christian Rothe: 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. 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 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 volumes starting to come back up, 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’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 ’26, we’ll be revisiting that.

Andy Kaplowitz: That’s very helpful, guys. And then bigger question, I think you’ve talked about gradually improving orders previously, improving orders and sales throughout the year. We could see what your revenue guidance is, but is that still the expectation for orders? I know you don’t really want to get — talk about orders anymore, but is the expectation that generally, you deliver book-to-bill close to 1 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 destocking?

Christian Rothe: Yeah. 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 ’25, we’re looking for a book-to-bill of around 1, which is right about where we are for the first half. So yeah, that incremental improvement that we’re talking about for the remainder of the year in sales, we’re also expecting that in orders. A little nuance around that is that we did talk about in Q1 that we did have some orders that were slated for shipment later in the year. And so those are — that’s part of the backlog that I talked about in my prepared comments that helps us feel good about what we’re looking at for Q4. So generally, that — again, I think the book-to-bill number right around 1 and that we’ll get that continuous ramp. On the machine builder side, Blake, do you want to take that one?

Blake Moret: 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.

Christian Rothe: Yeah. And I think maybe just to build off of that, a touch more the — we talked last quarter about the Italian machine builder market continuing to improve. I think we saw that expand a little bit more in the second quarter. And when you see that demand coming in and that we are getting higher shipment levels, obviously, that’s a very strong indication that they’re not sitting on a ton of excess stock.

Blake Moret: Yeah. And just the other point that’s worth mentioning is we talked about really good adoption of our new products, the innovation that we’ve invested in over the last few years, offerings like FactoryTalk Optics, our on-machine portfolio of Armor PowerFlex and Motion, those are really getting a great response from machine builders and provide us new ways to win there.

Andy Kaplowitz: Appreciate all the color.

Christian Rothe: Thank you, Andy.

Blake Moret: Thank you.

Operator: Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.

Julian Mitchell: Hi, good morning. Maybe just the first question, I wanted to try and home in a little bit more on the third quarter. So, I just wanted to confirm it’s sort of sales 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? And within that, I wanted to understand kind of the PLC market, how quickly is that coming back up off the bottom?

Christian Rothe: 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% segment operating margins, didn’t actually confirm that, that was the number mostly around just second half and kind of for the full year, we’re looking at that 20%. To give you a ballpark on EPS for Q3, $2.60-ish is the neighborhood we’re thinking, which I believe would be down slightly year-over-year.

Blake Moret: Yeah. Regarding Logix, we’re having a really good year and there’s more room to run. The units of Logix 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 Logix. And as we see continued recovery on the machine builder side, of course, that’s right at the core of a lot of their systems. So we expect that to continue.

Julian Mitchell: That’s helpful. Thank you. And then just my follow-up would be around the operating leverage assumptions, and I understand you don’t want to get into kind of productivity savings guidance for 2026 and so forth. But you are sort of on the — you are starting a revenue recovery now year-on-year this quarter. And just to understand the operating leverage assumption in that recovery, I think it’s around sort of 40% or so incremental margins, it looks like, exiting the year in your guide. I just wanted to confirm if that’s roughly the right ballpark of what you should see early in the sort of cyclical recovery phase for your top line?

Christian Rothe: Sure. Julian, we have overall talked for the last couple of years around what we think our incrementals should look like as an organization. We debuted at Investor Day 1.5 years ago, reiterated it at Investor Day last year. And that number that we’re 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 better volume ramp can certainly help that number as well. So mathematically, that’s where I would put it as far as exactly where we’re looking for ’26. I’m not ready to talk about it yet.

Blake Moret: Yeah. We’ve talked about a prudent approach to managing costs. And while we are adding back some heads, prioritizing on new product innovation and customer-facing resources, we’re still more than 10% below our peak headcount. And we continue to look very closely at that. So, as we do see the return to growth on the top line, we’re very cognizant of managing spending levels.

Julian Mitchell: Great. Thank you.

Blake Moret: Thank you.

Operator: 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. 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 and you talk about your versus kind of key competitors and whether there are any advantages there that you can exploit?

Christian Rothe: 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. So last quarter, we talked about our exposure levels. And what we bring into the US from Mexico is in the neighborhood of $350 million, what comes into the US from Canada and China is in the neighborhood of $100 million each. Importantly, USMCA compliance, the vast majority of what’s coming in from Mexico and Canada is USMCA compliant. When we talk about what’s going into China that will be subject to tariffs. Again, Blake used the data point earlier, and I’m just going to give it back as a reference that China for us is a little bit less than 3% of sales — sorry, a little bit less than 4% of sales, pardon me.

When we think about what’s coming from the US and going into China, I think like teens-ish as a representation of the sales level, that’s the percentage of the shipments that are going into China on that side. So that gives you a sense, at least, of the magnitude of each of these. And those import numbers just to make sure, reference-wise, those are fiscal ’24 important numbers, that’s not the forecast for fiscal ’25. Obviously, that can move around a little bit.

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 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. It also provides needed capacity for the kind of growth we expect to continue to see as well as resiliency.

Joe O’Dea: And then within the guide, the unchanged range, is that kind of price up about 1.5% volume down an equivalent amount? And then just related to that volume that primarily auto and some process markets?

Blake Moret: So, we’ve talked about the uncertainty that kept the organic range unchanged. And pricing from tariff-related cost is a piece of that, continuing to watch closely for any signs to manage prebuys. 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. So we’ve got lots of backlog that supports the guide already in place. The question of when new orders would come in, some of which would be recognized in the back half of the year is another element of uncertainty. So that’s why we’ve taken the approach that we have.

Joe O’Dea: Got it. Thank you.

Blake Moret: Thank you.

Aijana Zellner: Julianne, we will take one more question.

Operator: Certainly. Our last question today will come from Nigel Coe from Wolfe Research. Please go ahead. Your line is open.

Nigel Coe: 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, roughly 4% of sales and a teens portion of that 4% is imported into China. Is that right?

Christian Rothe: That’s correct.

Nigel Coe: Okay. That’s great. Just trying to figure out, 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 on how you see the setup by segments? And I’d be particularly interested to see if Lifecycle Services might be back to growth in 3Q?

Christian Rothe: Yeah. So we didn’t actually give the color by segment for the quarter. We did give color by segment 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 moment, just because, again, I’m 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 we’re seeing some outperformance in certain parts of our business and the capital-intensive side of the business are moving around a little bit right now. 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 execute.

Nigel Coe: And then just quickly on the 3Q versus 4Q, would you expect the tariffs impact to be roughly similar?

Christian Rothe: Yeah. Generally, we’re expecting — I mean, obviously, the tariff impact that we have, we’re incurring them right now, yes.

Nigel Coe: Yeah. Okay, great. Thank you.

Aijana Zellner: Okay. That concludes today’s call. Thank you for joining us today.

Operator: At this time, you may disconnect. Thank you.