The paragraph is an introduction to Rockwell Automation's second quarter fiscal 2025 earnings release conference call. It starts with a reminder that the call is being recorded and will include a question-and-answer session later. Aijana Zellner, Head of Investor Relations and Market Strategy, welcomes participants and introduces Blake Moret, the Chairman and CEO, and Christian Rothe, the CFO. The earnings results were released earlier, and relevant materials have been posted online. The call will reference non-GAAP measures, with reconciliations available on their website. A transcript will also be available after the call. The remarks include forward-looking statements, noting that actual results may vary due to risks and uncertainties. Blake Moret then begins his comments on the second quarter results, highlighting the company's increased resiliency and flexibility amidst ongoing uncertainty.

In the second paragraph of the article, the company discusses its strategies to mitigate the impact of tariffs, highlighting effective pricing actions and progress in relocating production and securing alternative sourcing. These actions enhance Rockwell's business resiliency, benefiting profitability and competitive differentiation. Investments in operational resilience have provided additional flexibility in their supply chain and manufacturing processes. In Q2, the company experienced solid customer demand and maintained an order book-to-bill ratio in line with historical norms. The impact of tariffs on Q2 results was minimal, and sales exceeded expectations with high single-digit growth in organic sales.

In the recent quarter, Rockwell's sales declined due to challenging year-over-year comparisons and unfavorable currency impacts. Despite this, the company experienced strategic project wins across various industries, particularly in their Intelligent Devices segment, where they saw growth over the previous quarter. Notable successes included securing new customers in the power control business and winning projects with Cape Electrical Supply Integration and Fecient Solutions Provider. Additionally, their recent acquisition of Clearpath is expanding their customer base, exemplified by the adoption of OTTO brand mobile robots by Westfalia Technologies to enhance warehouse operations.

In the quarter, Software and Control organic sales increased by 2% year-over-year, surpassing expectations with growth driven by recovery in Logix and improved sales across hardware and software. Notably, there was increased adoption of the FactoryTalk Design Studio and a significant software win with Bracco Imaging. However, Lifecycle Services saw a 6% year-over-year decline, affected by trade and policy uncertainties impacting large CapEx projects and causing delays. Despite these challenges, total ARR grew by 8%, led by the Plex and Fiix software businesses. Rockwell achieved a segment margin of 20.4% and an adjusted EPS of $2.45, both exceeding expectations due to cost reduction and margin expansion efforts. The focus on productivity has been instrumental in surpassing targets, with confidence in exceeding the full-year structural productivity goal of $250 million.

In Q2, the company experienced mixed performance across its industry segments. Sales in Discrete industries rose slightly year-over-year, driven by significant growth in eCommerce, Warehouse Automation, and Semiconductors, despite a decline in Automotive due to tariff and policy uncertainties. eCommerce and Warehouse Automation sales exceeded expectations with a 45% increase, particularly in North America and EMEA, and are projected to grow 45% annually by fiscal year 2025. The data center business is gaining momentum, highlighted by a significant project in Asia. Meanwhile, the Hybrid industry segment saw flat sales, although Food & Beverage, Home and Personal Care (HPC), and Life Sciences surpassed expectations, focusing on customer productivity and efficiency projects. Notably, a US-based restaurant chain plans to use automation to enhance operations, demonstrating the company's success in these areas.

Rockwell’s Independent Cart Technology was chosen for its flexibility to enhance throughput and cost savings in the Life Sciences sector, which exceeded expectations. Significant wins included collaborations with GLP-1 producers and companies like National Resilience, which adopted Rockwell's OTTO AMRs for their automated warehouse systems. Despite setbacks in the Energy and Process sectors due to cautious capital spending and project delays, Rockwell secured a significant contract with DPA Ingenieria using their Logix PlantPax solution for a lithium mining company. North America was the top-performing region, and Rockwell anticipates strong performance there throughout fiscal year 2025, aided by favorable US manufacturing policies.

The company is expanding production of its OTTO autonomous mobile robots to the US, with operations in Kitchener, Ontario, and Milwaukee. They are addressing the minimal Q2 impact of tariffs through supply chain actions and pricing adjustments. The fiscal 2025 outlook is cautiously optimistic, with a balanced approach due to uncertainties in pricing, product purchases, and customer investments. Organic sales growth is expected to be between 2% and -4%, with currency translation contributing negatively. The company aims for year-over-year sales growth returning in Q3, a 10% increase in annual recurring revenue, and has raised its full-year segment margin target to 20% with adjusted EPS projected at $9.70, despite higher compensation costs.

The paragraph discusses the company's financial performance and outlook. Despite a 6% decrease in second-quarter reported sales and a 4% decline in organic sales, they achieved a higher segment operating margin of 20.4% due to strong execution and cost control measures. Benefits from cost reduction and favorable price/cost offset higher compensation and lower sales volume. Adjusted EPS was $2.45, surpassing expectations. The adjusted effective tax rate rose to 17.7% from 14.8% last year, primarily due to decreased discrete tax benefits. They project a 17% effective tax rate for fiscal 2025. Free cash flow was $171 million, a $102 million increase from the previous year, with a 61% conversion rate, influenced by timing-related accounts receivable.

The paragraph discusses the financial performance of a company across its three operating segments for Q2, highlighting various metrics such as return on invested capital, sales, and margins. It notes that despite challenges like lower sales volumes and higher compensation, cost reduction and margin expansion efforts led to improved performance in some areas. For Intelligent Devices, margins increased due to higher volumes and favorable pricing, while Software and Control achieved a significant margin increase despite flat sales. However, Lifecycle Services experienced a decline in margin due to lower sales and higher compensation but still met expectations due to effective cost management and strong project execution. Additionally, sequential improvements were observed across all segments from Q1 to Q2.

The paragraph discusses Rockwell's financial performance, highlighting nearly 100% flow-through for Software and Control due to price and margin expansion, while Lifecycle Services slightly increased operating earnings despite lower sales volumes through strong project execution. Overall, Rockwell achieved a 70% incremental margin on sequential sales growth, reflecting global team efforts. Year-over-year, core performance improved slightly despite a 4% organic sales decrease, driven by Intelligent Devices and Lifecycle Services' sales declines. However, strong cost discipline mitigated the impact, and margin expansion continued in Software and Control. The company maintained strong pricing and investment in R&D, with Software and Control R&D at a higher percentage. Cost reduction and margin expansion actions exceeded expectations, resulting in a $0.65 tailwind and $155 million in savings in the first half. Compensation impacts included a $0.60 impact from higher merit and incentive comp increases, exceeding expectations due to strong Q2 performance, with a projected year-over-year compensation increase of about $160 million.

The company expects full-year income to be around $185 million, translating to $0.25 per quarter for the remaining two quarters, despite a $0.15 net headwind primarily due to currency issues. Strong execution offset volume and compensation challenges through margin expansion, cost reduction, and price realization. Although the first half performance exceeded expectations, the company maintains its organic sales outlook due to uncertainty and demand unpredictability. Currency headwinds have decreased from expected 1.5 to 0.5 percentage points, and foreign exchange is expected to become a tailwind in the second half of the year. The operating margin guidance is raised to 20%, and adjusted EPS guidance is updated to $9.20 to $10.20, with a midpoint of $9.70. Segment-wise, Intelligent Devices margin is expected to decrease with a mid-single-digit sales decline, Software and Control margins to increase with mid-single-digit sales growth, and Lifecycle Services margin to decrease with a low single-digit sales decline, with changes reflecting performance and improved currency outlook.

The paragraph discusses the company's cautious approach amid uncertainty, maintaining wider ranges for sales and EPS forecasts. It anticipates low single-digit sequential sales growth from Q2 to Q3 and higher growth in Q4 due to seasonality and backlog. A favorable FX environment is expected to boost EPS by $0.20, split across Q3 and Q4, though sequential FX benefits are minimal. Temporary cost controls remain in place to mitigate FX impacts. Operating margins improved from Q1 to Q2, with slight further expansion expected. Fiscal 2025 guidance includes $150 million in corporate expenses, $145 million in net interest expenses, and 113 million diluted shares. The company exceeded its annual buyback target, reaching over $300 million due to favorable market conditions.

The paragraph explains that the company is no longer providing the dollar value of its orders as the supply chain crisis has passed and the order-to-shipment ratio is back to normal. The analysis found no evidence of pre-buys, and measures are in place to manage distributor and machine builder orders. The company has seen cost reductions and margin expansion, resulting in a significant EPS benefit in the second quarter, surpassing expectations. Direct sourcing has saved $18 million, with further benefits expected from supplier negotiations and transitions. The full-year benefit of the cost reduction program is anticipated to exceed $250 million.

The company is achieving savings in manufacturing through labor efficiency and process improvements, while rationalizing low-volume SKUs to simplify production. They face an estimated $125 million tariff cost for the second half of fiscal 2025. To manage this, they are adjusting prices and shifting production locations. These measures aim to offset tariff costs rather than drive sales growth, but they could positively impact organic sales performance when prices are adjusted to account for tariffs.

The paragraph discusses Rockwell's focus on maintaining their full-year EPS target despite tariff costs, by disclosing tariff impacts quarterly to highlight operational performance. The company managed a neutral tariff impact in Q2 and aims to continue offsetting these costs in the second half of the year. Blake Moret commends the team's ability to navigate challenges and highlights successful strategic investments in resilience, faster price realization, increased manufacturing capacity, new business lines, and improved operating margins. The collaboration of employees and partners is key to executing these changes, positioning Rockwell favorably in a challenging environment. This has strengthened the company's value proposition, with more customers involving Rockwell early in their transformation plans. The paragraph ends with Aijana Zellner opening the Q&A session.

In a Q&A session, Andrew Obin from Bank of America asked Blake Moret about the significant growth in e-commerce and warehouse automation, including data centers, and the drivers behind this robust recovery. Blake Moret explained that growth is occurring in multiple areas, including warehouse automation—particularly in consumer-facing industries—and e-commerce fulfillment centers, with data centers also contributing through Cubic power distribution. Andrew also inquired about the unexpected slowdown in growth for Lifecycle Services, which Moret attributed to delays in more capital expenditure-intensive projects within that segment.

The paragraph discusses the impact of lower commodity prices, such as cheaper oil and gas in the US, particularly affecting the Lifecycle Services business within the process verticals. There was a delay in spending on certain non-urgent digital services, though some delayed projects resumed in April. The company's competitiveness remains strong with a robust project pipeline. Blake Moret then addresses a question from Scott Davis about how customers are approaching reshoring versus macroeconomic concerns. Moret notes a generally optimistic long-term outlook among US-exposed customers, who view US manufacturing positively. However, some projects are delayed due to various underlying reasons.

The paragraph discusses various concerns and positives impacting different industries. Concerns include cost certainty due to tariffs, impacts of interest rates on the automotive sector, demand issues from end markets, lower US commodity prices affecting oil, gas, and mining, temporary overcapacity in tires, and funding issues related to the CHIPS and Science Act. Positives include growth in e-commerce, warehouse automation, and packaging in food, beverage, and personal care, with notable growth in Italy and Germany's machine building sectors. The Life Sciences sector is also highlighted as significant, with major investment announcements expected to benefit the company.

The conversation discusses the impact of tariffs on machine builders, particularly those with operations in Europe and China, exporting to the U.S. Blake Moret notes that tariffs can be a significant issue, especially for machines made in China, but less so for their business since China constitutes a small portion of their revenue. European partners are managing the impact through targeted pricing strategies and flexibility in manufacturing locations. Many have U.S. facilities, reducing their tariff exposure. The exchange then shifts to market demand trends, questioning whether increased visibility might prompt project announcements in coming quarters. Blake Moret acknowledges the uncertainty in cost and regulatory changes, hinting at potential for future projects as clarity improves.

The paragraph discusses delays in projects rather than cancellations, with cancellations remaining historically low. The speaker believes that customers will eventually invest despite not specifying a timeline. They note that manufacturers are seeking certainty regarding tariffs and demand. North America is highlighted as the strongest region for orders, contributing to a healthy backlog for the second half of the year. Chris Snyder asks about anticipated margins, suggesting only slight margin growth despite higher volumes, and inquires about potential headwinds like tariffs. Christian Rothe responds, noting significant margin expansion from Q1 to Q2 and addressing earlier concerns about margin growth.

In the paragraph, the speaker discusses their successful execution in the second quarter, which helped reduce risks and allowed them to increase their segment operating margin guidance from 19% to 20%. They emphasize continued opportunities for margin expansion, although changes are expected to be in basis points rather than full percentage points. The speaker expresses confidence in the team's ability to execute and highlights the benefits observed year-over-year. However, they note that sequential cost reductions and margin expansions are modest, likely in the millions rather than tens of millions. The speaker also differentiates between handling tariff impacts separately from the base business, focusing on operational execution and growth for the latter, while managing recovery for the tariffs. Andy Kaplowitz from Citigroup asks for more detail on the longer-term margin potential, acknowledging a good mix in the recent quarter.

In the paragraph, Blake Moret and Christian Rothe discuss the company's ongoing cost-reduction initiatives, which began as a response to the business environment and have since set a strong foundation for future benefits. They've achieved over $250 million in restructuring benefits, primarily through SG&A cost reductions and broader structural cost control efforts. The success of these initiatives is attributed to the hard work of thousands of employees across the company. Rothe mentions that these efforts are supported by hundreds of projects aimed at reducing costs and expanding margins, and they are continuously seeking further opportunities for structural cost savings.

The paragraph discusses the success of a team in hitting targets, contributing to strong performance in the first half of the year. The speaker is cautious about setting high expectations for the second half, wanting the team to continue its good work. Looking ahead to 2026, there is potential for margin expansion with ongoing projects and the Rockwell operating model. While specific numbers aren't available yet, they will be revisited in the future. In response to Andy Kaplowitz's question about orders, the expectation is to maintain a book-to-bill ratio close to 1 for the rest of the year, despite a challenging macro environment. Improvements in orders are partly due to machine builders resuming orders after a long period of destocking. Christian Rothe begins to address the question, with Blake potentially adding more insights.

The paragraph discusses the company's financial outlook for fiscal year '25, noting a book-to-bill ratio of around 1, consistent with the first half performance. They anticipate sales and order improvements for the remainder of the year, supported by a backlog set for Q4 shipment. Blake Moret highlights stronger product performance over capital-intensive projects, particularly among machine builders, who are moving past previous overstock issues. Growth is noted in the Italian machine builder market, with rising demand and increased shipments. New products, such as FactoryTalk Optics and the Armor PowerFlex and Motion portfolio, are well-received, offering new opportunities for the company.

In the Q&A segment, Julian Mitchell from Barclays asks about the third quarter financials, specifically regarding sales growth, operating margins, and EPS. Christian Rothe responds, indicating that while a 21% operating margin wasn't confirmed, they're aiming for around 20% for the latter half and full year. Rothe suggests an EPS of approximately $2.60 for Q3, slightly down from the previous year. Blake Moret discusses the PLC market, highlighting a good year for Logix but noting shipments haven't returned to pre-COVID levels yet. They expect continued growth with new innovations and modest share gains. Mitchell also inquires about future operating leverage assumptions, noting the beginning of a revenue recovery.

The paragraph features a discussion between Christian Rothe, Blake Moret, and Julian Mitchell, focusing on the company's incremental margins during a cyclical recovery phase. Christian Rothe indicates that the organization has set a target of 35% for incremental margins, acknowledging that this figure may fluctuate depending on volume changes. Blake Moret adds that the company is managing costs prudently, despite planning to add staff for new product innovation and customer-facing roles, and remains cautious with spending as they anticipate top-line growth. The conversation then shifts to Joe O'Dea from Wells Fargo, who inquires about a $125 million exposure related to tariffs, particularly concerning China.

In this paragraph, Christian Rothe and Blake Moret discuss their company's positioning and operations in various international markets. They highlight the company's significant imports from Mexico, Canada, and China, with most being USMCA compliant except for some Chinese imports subject to tariffs. Sales to China account for less than 4% of total sales, with a teen percentage of shipments going from the US to China. Additionally, they emphasize the importance of US manufacturing facilities, which generate the most revenue for the company. The redundancy measures introduced during supply chain disruptions are effectively maintained, with manufacturing capabilities spread across multiple locations worldwide. Lastly, there is a note on the expansion of a facility in the US.

The paragraph discusses various aspects of a company's strategy and market outlook. It highlights benefits like reduced tariff costs and increased capacity for anticipated growth and resilience. Joe O'Dea inquires about pricing and volume changes within a stable guide range, primarily related to the auto and process markets. Blake Moret explains the maintained organic range despite uncertainties, including tariff-related costs and CapEx project timings, noting existing backlog and potential new orders affecting the latter half of the year. Nigel Coe seeks clarification on the percentage of sales exported to China, confirmed by Christian Rothe as 4%, with a small portion imported into China. Coe also asks for insights into the company's 3Q segment outlook.

In the paragraph, Christian Rothe addresses a question about the growth of Lifecycle Services in the third quarter. He explains that while they haven't provided specific details by segment for the quarter, they have given a full-year view by segment. Rothe notes that performance in certain business areas is fluctuating, making quarter-to-quarter analysis challenging, but they are confident in the team's execution. Nigel Coe then inquires about the impact of tariffs in the third versus fourth quarters, to which Rothe responds that they expect the impact to be roughly similar. The call concludes with Aijana Zellner thanking participants and the operator closing the call.

This summary was generated with AI and may contain some inaccuracies.