Q2 2026 Earnings Call Transcript

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. [Operator Instructions] At this time, I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead.

Thank you, Julianne. Good morning, and thank you for joining us for Rockwell Automation's Second Quarter Fiscal 2026 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 are available on our website.

These materials as well as our remarks today will reference non-GAAP measures. Reconciliations of these non-GAAP measures are included in both the press release and charts. A replay of today's webcast and a transcript of our prepared remarks will be available on our website at the conclusion of today's call. Before we begin, please note that our comments today include forward-looking statements regarding the expected future results of our company.

Our actual results may differ materially due to a wide range of risks and uncertainties described in our earnings release and SEC filings. And with that, I'll hand it over to Blake.

Thanks, Aijana, and good morning, everyone. Before we turn to our detailed results on Slide 3, I'll make a couple of opening comments. Rockwell delivered especially strong operating performance this quarter with sales, margins and EPS all coming in above our expectations. Double-digit year-over-year growth in orders, sales and earnings reflects our strong market position led by North America and the team's continued focus and execution in a dynamic global environment.

Our technology continues to perform in the most demanding mission-critical environments. Last month, Rockwell supported NASA's Artemis II mission, enabling ground control systems for the first crude mission to the moon in more than 5 decades. It's a powerful example of how customers trust Rockwell when reliability, precision and safety are paramount. These same capabilities, including our digital engineering, robust security and deep domain expertise are what our customers depend on every day to improve productivity, augment their workforce and modernize operations.

We saw an improvement in customer demand across a broader range of industries in Q2, such as e-commerce, warehouse automation, data center, semiconductor and energy. Book-to-bill for the company was slightly higher than our historical average. This includes the increasing contribution from projects to build new capacity in the U.S. However, persistent trade volatility and geopolitical uncertainty continued to delay large capital investments in other industries, including automotive and consumer packaged goods.

We're doing a good job of managing cost increases in areas affected by tariffs, demand for memory and fuel. At the same time, we're accelerating the release of new technology to grow our customer value and share over the long term. The investments we made over the last half dozen years in cloud native software and modern development tools are contributing to this measurably faster pace, including the ability to incorporate AI capabilities within months of their initial release to the market. Turning to our second quarter results on Slide 3. Q2 sales were above our expectations with organic sales growing 9% year-over-year.

Reported sales were up 12% with favorable currency contributing 3 points of growth. Intelligent Devices organic sales were up 9% versus prior year, with strong growth in our Motion, I/O and Safety & Sensing businesses. We continue to build momentum with our production logistics offering where our OTTO AMRs are gaining adoption across a broader range of industries, including automotive, food and beverage, home and personal care and even pilots in data center applications. A great example of a strategic OTTO win in the quarter was with Subaru of Indiana Automotive, where our autonomous mobile robots are helping scale their production by improving efficiency, flexibility and safety.

In our Software & Control segment, organic sales were up 17% year-over-year and well above our expectations, driven by continued double-digit sales growth of Logix, especially in North America. Our Logix growth was broad-based in the quarter and we saw a particularly strong performance with our data center customers, where we continue to see increasing demand for our industrial grade controllers. A great example of this momentum in Q2 was our win with ATS Automation, who is leading the conversion from commercial controls to our robust Logix PLCs at a new AI data center in Texas. Lifecycle Services organic sales were down 1% versus prior year.

Our longer cycle business was largely in line with expectations with customers deferring some of their larger projects and continuing to prioritize smaller scope productivity and modernization investments. Book-to-bill in this segment was 1.07. The dissolution of our Sensia joint venture is now complete and executed as planned. Christian and I will cover the expected impact on full year fiscal '26 financials later on the call. Annual recurring revenue was up over 6% in the quarter, including high single-digit growth from software ARR and mid-single-digit growth from recurring services.

We continue to see slower growth in our services business with customers temporarily delaying and reprioritizing their spend. One notable ARR win in this quarter was with Prometeon Tyre Group, who selected our cloud native Fix software as their digital maintenance platform, enabling asset management and operational discipline across complex multisite operations worldwide. From a profitability standpoint, we delivered strong margin performance this quarter. Beginning in Q2, we are now reporting enterprise operating profit and enterprise operating margin, which include corporate expenses.

This is due to SEC requirements around non-GAAP measures and is simply a change in presentation with no impact to net income, EPS, cash flow or individual segment margins. Christian will add more detail on this in a few moments. Enterprise operating margin of 22.5% and adjusted EPS of $3.30 were up significantly year-over-year and well above our expectations, driven by higher volume, positive price/cost, favorable mix and productivity. Let's move to Slide 4 for Q2 industry highlights.

Sales in our Discrete industries grew mid-teens versus prior year, led by better-than-expected growth in automotive, e-comm and warehouse and semiconductor. Within Discrete, automotive had a strong quarter with sales of mid-teens year-over-year. While we are starting to see a broader normalization in production schedules and the release of select larger projects, the majority of customer investment is still focused on productivity and smaller modernization initiatives. In addition to our Subaru win mentioned earlier, we secured several strategic AMR wins with global brand owners where our autonomous material movement solutions are replacing traditional AGVs and forklifts across their global operations.

This quarter, we also had an important new logo win with an energy infrastructure company who chose Rockwell to automate the entire production line for their greenfield facility in China, marking our first end-to-end deployment across a complete battery manufacturing process. E-commerce and warehouse automation delivered another strong quarter with sales up over 30% year-over-year as customers continue to prioritize upgrades and retrofits within existing warehouses over new greenfield builds. Semiconductor performance improved in Q2 with sales growing high teens versus prior year, supported by a stabilization in core semi demand and an accelerating contribution from AI and data center-driven investment.

This is one of the verticals where we saw broadening demand. Our data center business was one of the strongest end markets in the quarter, with sales more than doubling year-over-year. Customers are prioritizing speed to capacity, resilience and energy optimization driving investment in both upgrades to existing facilities and select new builds. Turning to hybrid.

Sales in this segment were up high single digits, led by strong year-over-year growth in food and beverage. Sales in Food & Beverage grew high single digits with good growth in North America and EMEA. We continue to see customer investments in healthier products, including protein, dairy and nonalcoholic drinks. CapEx for new construction remains constrained in consumer packaged goods, including Food & Beverage, but we're seeing the impact of our new offerings such as autonomous mobile robots and contribution from midsized customers that we cover so well along with our distributors.

This quarter, Agropur, a leading dairy producer, selected Rockwell's digital services to support its digital transformation and advance its factory of the future strategy. Our Life Sciences business grew low single digits versus prior year and double digits sequentially with new capacity projects in North America and Asia Pacific. In the quarter, our combination of FactoryTalk PharmaSuite MES, and FactoryTalk Optics helped secure a competitive win for an active pharma ingredient application. Another strategic life sciences win in the quarter was with Butantan Institute, one of Brazil's largest biopharma and vaccine producers, which expanded its PharmaSuite MES footprint to optimize and automate production processes, reinforcing Rockwell as a long-term digital manufacturing partner.

Turning to Process Industries. Sales in this segment grew mid-single digits with solid growth across energy, metals, pulp and paper, and chemicals. Energy sales were up mid-single digits in the quarter and were above our expectations, particularly in the Americas. A great example of our continued momentum in oil and gas was a win with Petrobras where Rockwell will provide integrated automation services across multiple FPSOs in the Buzios offshore field.

This reflects customers' continued trust in our capability to support complex offshore operations at scale. In mining, we formed a strategic partnership with BHP to support them in advancing the next generation of autonomous operations combining Rockwell's leadership in automation and AI with BHP's deep operational expertise to help enable scalable execution across complex safety critical environments. Another example of our increased presence in Process this quarter was our new capacity win with a leading North American packaging customer who chose Rockwell to deliver an integrated automation solution for one of the region's largest mill expansion projects, expanding our installed base and positioning Rockwell as a platform for future phases of this multiyear project.

Moving to Slide 5 for our Q2 organic regional sales. We saw broad-based growth across most of our regions this quarter. While the conflict in the Middle East has paused some near-term customer activity, mainly in our Lifecycle Services business, the impact to results is limited today, and we see potential for reinvestment as customers restore operations over time. Organic sales in the U.S. were up 10% versus prior year and we continue to expect North America to be our strongest region in fiscal '26. Let's now turn to Slide 6 to review our fiscal 2026 outlook.

I'm pleased with our performance in the first half of the year. Customer demand continues to gradually improve and broaden across more of our end markets. However, we are balancing this momentum with a prudent approach in an uncertain environment. We now expect both our reported and organic sales growth to be in the 5% to 9% range.

Our reported sales midpoint now assumes 1.5 points of positive contribution from currency translation, offset by the negative sales impact from the Sensia dissolution. We expect organic annual recurring revenue to grow high single digits this year, led by cloud-native software. We're increasing our enterprise operating margin outlook to 21.5%, up from about 20% in our prior guide, and we now expect our adjusted EPS and to be about $12.80 at the midpoint. The increase is driven by volume and very strong conversion, even as CapEx spending in some verticals remain subdued.

We continue to expect free cash flow conversion of 100% in fiscal year '26. I'll now turn it over to Christian for more detail on our Q2 and financial outlook for fiscal '26. Christian?

Thank you, Blake, and good morning, everyone. Let's go to Slide 7, second quarter key financial information. Second quarter reported sales were up 12% versus prior year. About 3 points of growth came from currency.

Our Q2 results still include Sensia as the JV was dissolved on April 1. Three points for organic growth in Q2 came from price, with about half coming from underlying price realization and half from tariff-based pricing. There were lots of puts and takes from tariffs in the quarter, including the removal of IEPA tariffs, the new Section 122 tariffs and the changed approach with Section 232 tariffs. We continue to expect pricing actions to fully recover tariff costs this year. We'll continue to evaluate and modify our plans as more details become available, especially related to the expected Section 301 tariffs.

Maintaining earnings neutrality remains our focus. Our second quarter and full year guide do not include any impact from expected IEPA refunds or claims resulting from the Supreme Court decision. Moving on to the rest of the P&L. Gross margins expanded year-over-year by 160 basis points to more than 50%.

The strong performance was driven by volume, ongoing benefits from productivity and favorable mix. SG&A spend was 2% higher year-over-year in the second quarter, primarily due to higher compensation, reflecting our annual merit increase and strong outperformance in Q2. Engineering and development spend was up about 11% year-over-year on pace with our sales growth as we continue to invest for the future. Our total innovation spend was about 8% of sales in the quarter. As Blake mentioned, beginning this quarter, we are now reporting enterprise operating profit and enterprise operating margin, which are both -- which are replacements for total segment operating earnings and total segment operating margin.

We are making this change due to SEC requirements, as these new measures include corporate and other expenses and therefore, reflect enterprise level operating performance. There is no change to how we report individual segment operating earnings and segment operating margin for Intelligent Devices, Software and Control and Lifecycle Services. These will continue to be reported on a consistent basis with prior periods. Slide 15 of our earnings deck shows the recast information for the last 10 quarters, bridging previously reported total segment operating margin to the new enterprise operating margin.

This is a change in presentation only and has no impact to reported net income, earnings per share, cash flows or overall financial position. Our enterprise operating margin expanded 350 basis points year-over-year, reflecting the strong growth in volume, positive price/cost, inclusive of productivity and favorable mix, partially offset by higher compensation. In short, we are getting great leverage on our P&L. Our adjusted effective tax rate in the quarter was 20.6%, slightly higher than our expectations.

We continue to expect an adjusted ETR of 19.5% for the full year. The broad-based strength in our business delivered results that exceeded our expectations with Q2 adjusted EPS of $3.30, up more than 30% year-over-year. Free cash flow in Q2 of $275 million was above our expectations. It was $104 million higher than the prior year, primarily due to higher pretax income driven by our strong Q2 results.

Receivables were a use of cash in the quarter, reflecting strong shipments. Slide 8 provides a sales and margin performance for our -- of our 3 operating segments. Intelligent Devices margin of 20.9% increased by 320 basis points year-over-year and was ahead of our expectations due to positive price cost inclusive of productivity, higher sales volume and favorable mix, partially offset by higher compensation. Resulting segment year-over-year incrementals were in the mid-40s.

Software & Control margin of 34.9% was up 480 basis points versus prior year and was also higher than our expectations, driven by strong sales volume and positive price cost, partially offset by compensation. This segment saw year-over-year incrementals in the high 50s. Lifecycle Services margin of 14.6% was flat year-over-year, slightly ahead of our expectations. Lifecycle Services had another quarter of good project execution and productivity, offset by higher compensation.

Sequentially, all 3 segments expanded margins from Q1 to Q2 with Intelligent Devices and Software & Control gaining more than 300 basis points each. For total Rockwell, the incremental margin and the year-over-year sales growth was in the low 50s in Q2, repeating the strong incrementals that we saw last quarter. Let's move to the next Slide 9, for the adjusted EPS walk from Q2 fiscal 2025 to Q2 fiscal 2026. Year-over-year, core performance had an impact of $0.80 in Q2. Our core performance was driven by volume, price/cost, productivity and mix, partially offset by higher compensation. A quick shout out to the operations team, who leveraged the volume increase to drive great margin performance.

A $0.15 currency tailwind was offset by a $0.15 tax headwind. All other items had a neutral impact on adjusted EPS. Moving on to the next slide, 10, to discuss our guidance for the full year. We are increasing both our reported and organic revenue guidance to a range of 5% to 9% or 7% at the midpoint.

That is up 3 points from our prior guidance. This increase reflects the outperformance in the first half of the year and a broadening of the end market strength that Blake discussed in his remarks. On April 1, after the close of our second quarter, we dissolved our Sensia JV. As we previously mentioned, the dissolution lowers reported revenue, increases Lifecycle and Rockwell margin percentage and is EPS neutral.

Our full year guidance now reflects this impact. Slide 16 of the deck provides an estimate of the sales impact from the now divested businesses for the past 4 quarters. We're providing this pro forma, so you can update your models. The prior midpoint for reported sales guide was $8.8 billion.

Our new guide of $8.9 billion reflects about a $200 million increase in our organic sales forecast, partially offset by a $100 million reduction due to the Sensia dissolution. This nets to a $100 million increase in the reported sales guide. Turning to Slide 11. We are increasing our adjusted EPS guidance range to $12.50 to $13.10. The new midpoint of $12.80 is $1 higher than the midpoint of our prior adjusted EPS guide. As we move into the second half, we expect inflationary costs to step up, primarily across key components, memory, transportation and general supplier inflation.

For instance, memory costs continue to increase in Q2 and are now expected to represent a double-digit million dollar headwind in the back half. We are actively managing these pressures, including through increased safety stock to secure supply and protect operations. We've taken some additional pricing actions to help offset these cost increases, and we now expect 250 basis points of total price for fiscal 2026, with 150 basis points coming from underlying price and 100 basis points from tariff-based price. This is an increase of 50 basis points from our prior outlook, all from underlying price.

The cost inflation and corresponding price realization won't 100% align in any given quarter. Our full year guide reflects sequential margin pressure in the second half. That said, our initial guide for fiscal 2026 expected incremental margin to be about 40% for the year. This new guide puts incrementals above 50% for the full year.

For your models, CapEx for fiscal 2026 remains targeted at about 3% of sales. Now let me share some additional color on our outlook for the third quarter. In Q3, we expect total company reported sales to be roughly flat sequentially with correspondingly flat enterprise operating margin. We are losing about $50 million of sequential sales due to the Sensia dissolution, offset by growth predominantly in the Intelligent Devices segment.

Sequential segment margin performance is expected to be up slightly in Intelligent Devices, down in Software & Control and up slightly in Lifecycle as expected post Sensia. We expect third quarter adjusted EPS to be up about $0.05 sequentially or up mid- to high teens year-over-year. For the full year, we expect Intelligent Devices reported revenue to grow in the high single digits, with segment operating margin around 20%. For Software & Control, reported revenue should grow in the low double digits, with segment margin in the low 30s, up several hundred basis points year-over-year.

For Lifecycle Services, we expect reported revenue to be down about $100 million year-over-year given no second half revenue contribution from the portion of the Sensia business we have now divested with segment operating margin flat to slightly up year-over-year as margin in this segment benefits from the dissolution of Sensia. A few additional comments on fiscal 2026 guidance for your models. We expect corporate and other expense, which is now part of enterprise operating profit and margin, to be around $110 million. Net interest expense for fiscal 2026 is targeted at about $120 million.

During the quarter, we repurchased 1.2 million shares at a cost of about $450 million. We are now expecting approximately $850 million in repurchases for the year. And we're now assuming average diluted shares outstanding of about 112.1 million shares. With that, I'll turn it back to Blake for some closing remarks before we start Q&A.

Blake?

Thanks, Christian. You may have seen the announcement last week of Clock Tower Farms, a highly automated hydroponic farm, that will start production in our Milwaukee headquarters later this year. Particularly with the developments in software-defined automation, AI and robotics, we are unlocking new applications for our technology that improve the quality of life. I'm proud of the Rockwell team and our unmatched ecosystem, winning new business, managing costs and delivering impactful solutions, all of that came together in the quarter.

We're in a strong position, and we intend to make the most of it. 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 1 question and a quick follow-up. Julianne, let's take our first question.

[Operator Instructions] Our first question comes from Scott Davis from Melius Research.

Everything seems pretty clear. Look, I guess this data center market, if it's doubling must be getting to somewhat of a material size, I would think. I'm remembering it kind of 1% of sales was doubling that means 2% of sales, you double from there, it's 4%. If you get my point.

I'm just -- are you comfortable sizing it for us and helping us understand kind of what that TAM may look like for your products?

Sure. Scott, we're really proud of the progress we're making in data centers. We've talked about it as being low single digits. So a modest amount of base revenue and we don't change the percentage splits of the individual verticals that we show in the slides, except annually.

And so we'll take a look at that and see where it lands to determine whether there's more explicit dimensioning of the data center business. But just for review as well, data center for us comes from, I'd say, 3 main places in our offering. The first would be the power distribution, largely through our Cubic technology that we acquired a few years ago. The second would be the growing trend to replace commercial grade controls with industrial PLCs.

Logix has a natural choice for its safety and reliability. And then participating with some of our large HVAC customers. So think about the chiller demand and so on in drives from those customers. So we're proud of the progress, and we'll take a look at the numbers at the end of the year.

Okay. Helpful. And then, look, I think twice in the prepared remarks, you mentioned kind of productivity and modernization projects being the emphasis versus kind of the larger scale stuff. What does that mean as it relates to kind of content intensity and differences? I mean, how meaningful is that change for Rockwell?

Well, I'd say the modernizations, the expansions of existing brownfields, it's the same products that ultimately go into the solutions as when CapEx is being invested. There's probably a little bit heavier involvement in capital projects for Lifecycle Services. So that's part of what's muting the Lifecycle Services growth. But those modernizations, those expansion, lots of Logix, lots of Intelligent Devices and so on in those projects.

Our next question comes from Andy Kaplowitz from Citigroup.

Like, it seems like you raised your forecast for several CapEx-intensive end markets. Semicon, Energy, Chemicals, I think. Is it fair to say that you're seeing some decent unlock in larger projects versus last quarter? Then maybe you can give more color to the drivers and durability of the unlock.

Obviously, looks like short cycle has gotten a bit better. We all see the improvement in the USIS 7. But the customer decision-making on large projects just accelerate? And why do you think that is?

So it's -- in certain of the industries that we've been talking about, where CapEx is being invested, we've talked about e-commerce and warehouse automation for a while now, or data center, we added to that semiconductor and energy as well. And so we are seeing enough of a broadening in the capital being invested to make particular note of that. What I should mention, however, is that we're still not seeing a wholesale unlock of capital in some of our biggest end markets, namely automotive and consumer packaged goods, including food and beverage. We had good results in those verticals in the quarter.

But in the case of consumer packaged goods, in particular, it's more a factor of those modernizations that I mentioned, good performance with midsized customers where our channel particularly in North America is so valuable. And then the impact of new offerings, some sizable projects with mobile robots and some of the newer additions to the Rockwell portfolio.

Helpful, Blake. And then like Christian, obviously, operating leverage is helping you. But when we look at your major segments, such as Intelligent Devices and Software & Control, you mentioned positive pricing and productivity is helping. As you've said, you're now focused on averaging 50% incrementals in '26 versus 40%, I think, which was your original guide.

So I know you're focused on continuous improvement, but how much is that helping and impacting, for instance, price versus cost? And are we starting to think the core incrementals at Rockwell could be higher than your previous longer-term algorithm?

Yes. Sure, Andy. I appreciate the question. The productivity cadence that Rockwell has been really good over the last couple of years and quite pleased with the progress of the team.

And I think you're noticing something that's really great to see, which is it's not just the productivity programs overall in and of themselves, but it's actually a broadening of the thought process of the organization and continue to drive additional ways to win, additional ways to bring through that profitability. As you know, we're getting some really nice growth on the volume side, and that's flowing through nicely. You mentioned about the incremental margins for 2026 coming in at around 50% in our guide, which is great. Historically, we talk about 35% flow-through.

I think when you think about a cycle and how the incrementals work through the cycle for us, we still feel very comfortable with that 35% that we've signed up for. As we move forward and we get to a point where we start talking about other targets for the organization, we do it under the overall umbrella of our growth algorithm. That will be the moment if we were to revisit it, that's what we would do. But again, 35% is a really good flow-through number for us to target for an industrial company.

So we're happy with that.

Our next question comes from Julian Mitchell from Barclays.

Just wanted to start with the enterprise operating margin guidance because I think it's pegged at about 22% in the second half of the year and the quarter just delivered was 22.5%. So it's very, very rare for margins in the back half to come down versus fiscal Q2, but that's what the guide is implying. Is this all just this sort of inflation from memory and so forth? Anything else in there, maybe mix is assumed to reverse or something like that?

I think mix was a decent tailwind in the first half.

Yes. Maybe I'll start with that one and Blake can jump in. But first of all, to confirm the -- historically, we've talked about a total segment operating margin percentage target for medium term, that's in the 23.5%. Now that we're talking about enterprise operating margin, you're right, the math is about 22% is what that target is.

And we are -- we just did a number that's slightly above that. As we talk about and think about the second half of the year, and I said this in my prepared comments, we do have some inflationary pressures that are coming into play, specifically around memory, but also on raw commodities and other supplier inflation. So we also have some additional spending coming through in the second half. And I think it's just as important to note that Q2 was a really strong outperform.

We had a number of things that converged all quite nicely for us, and that's everything from the volume increase that we had sequentially that the factories performed really well on that. The spending level was kept in check. We were able to get really good price realization in the quarter. So it all converged quite nicely.

And when you look at the incrementals that we had from Q1 to Q2, that flowed through really well. So to be able to try to hold on to that and keep that total enterprise operating margin flat sequentially from Q2 to Q3. And then again, when we think about the full year numbers, we will have a little bit of mix shift that happens in the fourth quarter, which is normal for us that will be somewhat detrimental to our margins sequentially from Q3 to Q4. So overall, we feel comfortable with how this rolled together.

Yes, just the only other thing to add to that are that mix shift in the fourth quarter, that's the typical seasonal higher deliveries of Lifecycle Services and engineered lineups that we typically see in the fourth quarter. We're taking a prudent approach to this. The other comment that Christian made about cost is really associated with the accelerated pace of new product introduction that is really across all of our businesses, but especially in Software & Control and Intelligent Devices, we're going to see a lot of new products at automation fair this year and into next year. And so that's what the majority of that spend is associated with.

That's helpful. And then my second question, just on the demand front. I guess, first off, was there any kind of surge in orders in recent weeks? There were some other kind of industrial companies or shorter cycle industrial companies who saw very, very high orders growth in the March quarter, multiples of their organic revenue growth.

I just wondered on the extent of the orders increase that you've seen? And any particular color on the Logix platform within that, please?

Sure. Julian, we continue to look very carefully at the buying patterns at our distributors. We look at their inventory levels and we continue to regularly survey our machine builders so that we make sure we understand and can ensure that the demand is natural. And that was the case in the quarter.

We did not see any pull forwards or advance orders in the quarter. So we're encouraged by that. Logix itself grew over 20% in the quarter. We continue to see strong gains in Logix.

We're introducing new products. We're seeing conversions in data center. So that business is doing quite well with some very exciting additional introductions planned over the coming year.

Our next question comes from Chris Snyder from Morgan Stanley.

I wanted to follow up on the demand commentary. I think if I heard correct that you said the book-to-bill was above the normal range. So if you could just confirm that and like just maybe confirm what the normal range is, if I heard that correct? And then just, I guess, more broadly, have customer conversations changed?

It felt like over the last year, the messaging was that there's a lot of interest in relocating production into the U.S. but companies were just not pulling the trigger yet. Do you think that has flipped, and if so, why?

Sure. So Chris, I'll start with some comments and Christian might add to that. Look, we've talked about a normal corridor for book-to-bill orders over shipments as being between 0.95 and 1.1. In the quarter, it was a little bit above that. For the first half, it was within that corridor, and we expect the full year to be within that corridor.

So there was good demand, good conversion in the quarter of orders received, but we just saw orders particularly strong, especially in products in the quarter. From an overall customer demand standpoint, the sentiment is still positive. There's excitement, I would say, about the focus on manufacturing in America, our home market, and while we have seen the uncertainty around tariffs and geopolitical and some inflation delay capital in a few of the markets I mentioned, like consumer packaged goods and automotive, in these other industries, including a couple that we started talking about this quarter that we haven't talked about in the past, capital is being spent.

And so I'd say the general mood is positive. But undeniably, there is still some uncertainty and volatility in the areas that I mentioned.

Maybe just a quick follow-up on the book-to-bill number that Blake mentioned. So the book-to-bill in that range we talked about the 0.95 to 1.1, for us, that is the range for Q1 to Q3. Q4 for us, it's very common for us to have a book-to-bill that's below 1. We don't call that out typically, just because of the fact that, again, Q4 tends to be a higher shipment quarter for us. So we build up a little bit on the backlog during the course of the year and Q4, it comes back down to a more normalized level. But again, I can't overemphasize just slightly above that corridor in the second quarter and for the first half inside that corridor.

I appreciate that. If I could follow up on margins, and I understand there's a lot of moving parts with inflation changing quickly and mix. But I wanted to ask about the structural self-help margin opportunity for the company. At the Investor Day, you guys talked about a lot of opportunity.

Clearly, a lot of that has been realized if we look at the margin expansion over the last couple of years. And I guess you guys are running ahead of that 23.5% medium-term target already. So I guess, like where are we in the self-help journey? When you guys look into '27 and '28, do you still see more opportunity on that front?

Or from here, is it more about driving volumes to get the margins higher?

Yes. Thanks, Chris. For sure, we never shy away from volume. Volume is extremely important.

And of course, we want that. But from the productivity in the self-help side, I am -- and we talked about this at Investor Day as well, I think we're quite happy with how things are progressing with the organization and the number of projects we have that are underpinning our productivity program and that productivity program is alive and well. It did not conclude. We are, in fact, adding to it.

We have more projects under that today than what we did a year ago and more projects a year ago than what we had 2 years ago. So we continue to build on that base. Yes, the projects probably have a little bit smaller overall number or average size, but we continue to execute against that. And importantly, as I'm on the road and going out and visiting our facilities and going into our operations, it's really exciting to have the operations team.

They want to show all the different productivity projects they're working on. They are being very creative. We're doing everything from starting to build our own automated final assembly stations. There's in-sourcing projects that are happening.

I heard a project last week around saving on labels that were costing us less than $0.01 already, and they were able to save a whole bunch of costs on that. We're streamlining our builds. That's all -- those are all great. And that's exactly what the operations should be doing in a continuous improvement environment, but it's beyond that also.

The selling organization, the marketing team, the overall office staff inside the corporate office, yes, AI is enabling a portion of this. but it's also unlocking a lot more around what we can do as an organization. And so yes, we are excited about the future. We do think there's really good productivity opportunities for us for quite some time. The '27 pipeline is being built right now for us to go execute against, and we feel really good about our ability to finish out '26 well too.

Yes, absolutely. And I think additional comment about where are we in this journey? We've had good success, especially the back half of fiscal '24 as we set a new base, '25 and now '26, and we're operationalizing this. So this becomes a part of the total company's operating rhythm as enshrined in the Rockwell operating model.

And so additional work to make this just a fundamental part of what we do going forward, that's not relying on individual heroics. It's a part of our processes, I think, is the exciting part of the journey that we're in now.

Our next question comes from Quinn Fredrickson from Baird.

Just wonder if you could unpack a bit more of your expectations around discrete for the back half, just given the really strong start, you're off to in first half and the sequential acceleration you saw this quarter? Full year guide would seem to imply some deceleration in the back half. Is that just a function of comps get tougher or some conservatism embedded around CapEx or any other factors to call out?

So I'll start with -- I can start with some comments about Discrete. For the full year, we're looking at Discrete being up low double digits. We continue to expect automotive for the year to be up mid-single digits. Semiconductor, which we talked about a little bit on this call, up around 10%.

And then e-commerce and warehouse automation up around 20%. So Discrete is a good industry end market force. We're seeing growth in hybrid and process as well as we've talked about. But I'd say, Discrete with the e-commerce and warehouse automation, data center, that's strong for us right now.

And the -- just to build off of that, we are still looking at modest sequential growth in Discrete as we go through the remainder of the year. Yes, indeed, the comps get harder as we go through the second half of the year. And that's not just in Discrete that's also in the overall organization.

Sure. Okay. And then specifically within automotive, just wonder if you could unpack a little bit more the strength you did see relative to the fact that CapEx still is weaker. Is that being driven mostly by ARR or just healthy brownfields share gains? Just any color there? And then any visibility on when the CapEx side might start to turn based on your customer discussions?

Sure. In automotive, we've seen the brand owners balance their approach. So internal combustion engines where we have such a large installed base, is still a very important part of their portfolios. They're making investments in hybrid, and there's some in battery electric, but I'd say, hybrid has been a more recent source of focus.

We've got that installed base across our hardware portfolio, but also some of the new ways to win that we've added. So Plex with tier suppliers, fixed or maintenance, autonomous mobile robots. Automotive is the single largest vertical for AMRs, and we saw some great wins recently there. So I think that characterizes it.

Now in terms of when we could see an upturn in more wholesale capital spending in automotive, I think the tariffs are a big part of that. Everybody is watching USMCA as those negotiations begin, and it's especially important for the automotive companies.

Our next question comes from Amit Mehrotra from UBS.

I wanted to just double-click on warehouse automation growth. Obviously, that's been very robust. I just wanted to ask a little bit more color. Is that a few large customers restarting spending? Or are you seeing demand broadening out? And then just related to that, could you talk about how margins compare in that vertical versus maybe the company average?

Yes. So I'll talk about 4 main aspects of e-commerce and warehouse automation. First is the data center component. The second is new fulfillment centers with e-commerce.

Third is production logistics, which is where companies, in many cases, consumer packaged goods companies are seeing dramatic increases in efficiency by improving the flow of components and material to the production line and then finished goods taken to the loading dock or into the warehouse, and then parcel handling companies as well. So it's fairly broad-based. There's some different customers and each one of those let's say, subsegments, but they're all robust. And when we look at the profile of what's being provided there, it's really more weighted towards hardware.

And it's just the standard products, it's Logix, it's motion control for conveyors and diverters, it's sensors from our industrial components business. So it's products that we've been known for, for a long time in a vertical that's experiencing a very high sustained level of multiyear investment.

Regarding the margin profile, these are -- keep in mind, for Rockwell, our offerings are horizontal. That is, we were able to use the same products and solutions for lots of different applications. The end result is that is a similar margin profile by offering. Now depends on what exactly the -- is being given in the warehouse automation space.

So really the difference in profitability in warehouse automation for us has to do the products versus solutions and the mix of those that we see. And that really depends on customer and application. But overall, the margin profile is similar to other offerings.

Got it. Great. And then just as a follow-up, one thing I noticed is obviously more balanced growth between North America, EMEA, AsiaPac. Can you just talk about if you're seeing the international market catch-up? It's primarily been kind of a North American let story, and that's your biggest growth region, but I'm curious if you're seeing EMEA and Asia Pac kind of accelerate as well?

Sure. So as you noted, it's good balanced growth in the quarter. We do expect for the full year that North America will be highest but when we look at what is contributing to the growth in Europe, it's largely the strength of machine builders. We saw high single-digit growth in Germany.

We saw a low double-digit growth in Italy, two of the more machine builder intensive countries for us. And that's certainly for machinery that's bound for the U.S. but also other parts of the world because our portfolio is becoming more and more competitive for applications where the U.S. is not part of the mix. In Asia, we saw growth in China in the quarter, led largely by semiconductor in Taiwan. We've got some very large customers there, and we talked about semiconductor more generally, but that was a particularly strong spot there and then -- and growth in other countries in Asia as well.

I would characterize the growth in Asia as systems integrators, engineering firms, users and machine builders. In Europe probably a little bit more concentrated on machine builders.

From a comparable perspective, I just want to point out that Q2 last year Asia Pacific and EMEA were down year-over-year. North America was flat year-over-year. So our comps were a little bit easier in the EMEA and AP regions last year.

Julianne, we will take one more question.

Our next question comes from Andrew Buscaglia from BNP Paribas.

A similar line of question on the end markets and regions. I think intra quarter, you see the geopolitics, heightened energy prices up a lot. And I think there's a lot of concerns around what that means for your process business, both near and long term. Can you talk about how process took out intra quarter? It sounded fine. But what are your thoughts long term in that segment?

Yes. Look, we're excited to bring back the oil and gas-focused process automation business from Sensia into full control under Rockwell. And that business, specifically is about 10% of our total energy if you include other forms of energy is about 15%. And we specifically called that out as you said, a good contributor in the quarter.

People are going to be concerned about efficiency. They're taking a very disciplined approach to capital. And particularly where we're most exposed upstream, there's still a lot of opportunity to increase the efficiency of those operations, either in process control, with Logix, power control, with our variable speed drives, digitization, so providing digital twins of those processes to debottleneck. All the things that we've talked about in other industries are opportunities there.

We talked about a nice FPSO win in Brazil in the quarter. LNG, although it's a relatively small part of our total exposure in oil and gas, is obviously doing very well and participating in some compressor trains there. So look, there's a strong correlation between energy abundance and the standard of living around the world, and we expect to be able to continue to participate in that we're all very concerned about the ongoing conflict in the Middle East. We see that on our business as having paused certain projects.

But in general, we don't expect a material impact on our business results for the year.

Yes, okay. That's helpful. And I wanted to check on one other thing within Software & Control. So the second -- second quarter in a row of great results.

And that margin of close to 35%, I know you're signaling near-term that's going to be down. But what were the biggest factors driving that performance in Q2? And is that a high water mark we likely don't see for a long time? Or is that kind of where you think that margin can shake out over the medium term?

Yes. So I'll make some comments and then Christian may have some additional thoughts on it. Look, we're very proud of the way Logix is trending. We've talked about a 31% to 34% margin corridor in our midterm targets.

We're happy to have performed above that in this quarter. Volume certainly helps. Productivity is helping there. Software, in Software & Control, very profitable Plex business, for instance, certainly helps that.

And as we said, ARR for software was up high single digits in the quarter. So we're proud of that. We're looking to sustain high levels of margin performance in that business, of course, but we indicated some of the factors in the second half of the year.

Yes. And I think we're just -- we want to make sure we're being prudent about how we think about that performance. Blake just highlighted a bunch of things of all converge on what really went well for us in the second quarter. When we think about third quarter and second half overall, though we do have those inflationary impacts that are definitely coming into play.

The memory side, it is real. We also have some additional engineering and development spend and other project spend. And importantly, Q2, the disciplined spending was outstanding, and that was great. But I think, again, to be prudent, we're expecting that there's going to be some spending that comes back in the second half for us.

So really strong quarter for Software & Control. Really happy for that -- for all of us in that group. But again, trying to make sure we're balanced as we think about the full year.

That concludes today's conference call. Thank you for joining us today.

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