Rockwell Automation, Inc. (ROK) Earnings Call Transcript & Summary

Good. Well, welcome back, everyone. It's my pleasure to have up next Blake Moret, Chairman and CEO of Rockwell Automation. Blake will, I think, go through a couple of slides first. And then we'll have some Q&A after that. So Blake, please go ahead.

Great. Well, thanks for your interest this morning. Happy to be here in Miami from Milwaukee. And as Julian said, I'll take a couple of minutes to set the stage and then answer some questions. So to start with, for those of you who are not as familiar with Rockwell Automation, our exclusive purpose is to bring the Connected Enterprise to life for industrial companies. We integrate control, the basic automation of industrial processes, with the information through applying analytics to drive productivity for industrial companies and their people to help them become more productive as well as more sustainable, and that's an important part of our mission. We also focus on winning the right way, concentrating on long-term value through integrity and a sense of inclusion across our employee workforce. We introduced this framework for accelerating profitable growth at our November Investor Day. And so you see on the right side the different elements -- primary elements of our revenue. Certainly, it's continuing to grow at a multiple of industrial production in our core through innovative new products, like Independent Cart, through greater exposure to process-oriented industries, an increased and more aggressive posture in terms of growing outside of North America. It's also growing double digits with the Information Solutions and Connected Services, and we'll talk some more about that. I'm happy to say that for several years now, we've been on that double-digit growth pace, and we expect that to continue. And then increase use of acquisitions, and we'll talk a little bit more about that, all within a disciplined framework for financial performance with high conversion to profit on incremental revenue, disciplined approach to acquisitions and a fundamentally asset-light business where our value is in our intellectual property and in our expertise on the plant floor. We had some investments over the last few years that are working well for us, PTC was the largest. We're happy to say that we continue to see the pilots of this information software expanding to enterprise-wide rollouts. We're on track to more than double the business of Information Solutions and Connected Services to over $600 million in 2022 -- in our fiscal year 2022. Interestingly, about half of the engagements that we have with PTC are on competitive hardware platform, so it gives us more ways to win. And we're also seeing a significant percentage, about 1/3 of these, with augmented reality, which is a new capability. And customers are starting to vote with their wallets that this is important to them. Sensia is a joint venture with Schlumberger targeted at oil and gas, especially upstream, onshore oil and gas, but not limited just to those applications. And it's about increasing the productivity, reducing the cost to produce a barrel of oil. We had a great first quarter, and we continue to see strong customer interest in what we offer together. MESTECH is an Indian-based integrator of information software. We're already seeing some synergies from the work we're doing together. They were a partner for many years. And we're very happy about the way that, that has started for us. And then Avnet, providing data security, an Israeli company focusing on cybersecurity. And again, as they help us establish an EMEA Center of Excellence and to be able to extend the strong growth that we're seeing in this part of our business, which is under the Connected Services part of our offering. So we're happy with that. But we also announced this morning 2 additional acquisitions. ASEM is an Italian manufacturer of industrial PCs, and they also produce HMI and remote access software. Their customer base is primarily machine builders in Italy and in Germany, and so this helps our stated intention of pursuing increased market share in Europe. But as part of our technology portfolio, we're very excited about welcoming ASEM to the Rockwell Automation family. And then Kalypso, which is a U.S.-based provider of consulting and digital transformation consulting as well as software delivery services. And again, as customers are interested in bringing the digital thread together, Kalypso is full of expertise in this area and we think is going to be a meaningful addition and catalyst to the growth as we see customers looking to pull together these disparate often varying suppliers, then we have the ability to provide a solution that's cohesive and focused on outcomes, while respecting that customer's installed base. So we're happy about that. When it comes to fiscal '20 guidance, this is the information that we provided in January for the fiscal year. And as you know, we don't update guidance intra-quarter, but I do want to add a couple of comments here. Depending on when the recent acquisitions, the 2 I just mentioned, close, we'll provide the specific information on their impact on fiscal '20 at the earnings call in April. We did mention on the prior slide that we expect, in a full year, for those acquisitions to contribute over 1 point of revenue as well as being accretive to adjusted EPS and free cash flow in the first year. Also with respect to current events, with respect to the coronavirus, we are experiencing some impact in our business. And we're focused on mitigating and managing that and, obviously, protecting our employees. I'll also say that some of the moves that we made to mitigate tariffs in terms of moving parts of our supply base around are helping to mitigate the impact of coronavirus on our business. We are also encouraged with what we're seeing so far this quarter in North American product sales in terms of -- on the other hand, to the coronavirus impact. So again, it's still early in the quarter, but that's what we see so far. And with that, I'll turn it over to Q&A.

Thank you very much, Blake, for that.

Maybe just following up on a couple of the things you mentioned at the end. In your China operations, maybe just give us some update around what level of production capacity back to their -- how you're thinking about the supply chain logistics on the grounds. And then your point on North America product sales, any particular vertical or type of industry customer that you'd call out there?

So with respect to China, we have a couple of operations in China, in Shanghai as well as in Harbin, that would be one of the areas that, obviously, we're tracking very closely in terms of a potential impact. You also have the impact of our supply chain, right, of component suppliers that are also located in the region and then the potential impact of orders in the China market. Now China is a little over 5% of our sales, so it's not a huge amount of our total business. But we're looking at those 3 primary aspects. Above all those, it's, of course, making sure that we're ensuring the safety of our employees that are in China in manufacturing or in sales roles. And so that's kind of the landscape. It's obviously an extremely dynamic situation. The comment I made about the tariffs is that some of our supply chain was moved outside of that area, of China as a result of some of the actions that we took to mitigate tariffs, and that's providing some benefit in terms of mitigating the potential impact of coronavirus. With respect to the U.S., it's still early in the quarter. And so we haven't done the same depth of analysis of what particular industries, products, areas. But as we're seeing so far, we're seeing some encouraging early results in terms of our sales of products in North America.

Great. And then on the acquisitions, you mentioned at the end, ASEM and Kalypso. So you scaled the size nicely for us. Maybe talk about the organic growth that those 2 assets have seen.

Yes. So we expect that the growth of this business, along with the synergies of these businesses, along with the synergies, will be double-digit growth. And there's a high demand for the products on the ASEM side on one hand and then on the services and the consulting from Kalypso on the other. And so double-digit growth with the synergies is a reasonable assumption for these businesses.

And when you think about further acquisition opportunities, maybe just characterize the environment as you see it today, how much cash you think could be used for transactions in the next 12 months and how satisfied you are with Rockwell's M&A capabilities internally.

Yes. I think I'm very happy that over the last few years, we have built this capability to a greater level than I think we've had in Rockwell before. We want to use all our strengths. Obviously, we have a strong balance sheet. The technology is moving rapidly. And we fundamentally believe that, in addition to great talent and great innovation within Rockwell, there's an opportunity to move faster by partnering and, in some cases, acquiring technology and services outside. The augmented reality capabilities through the relationship with PTC are a good example to that. The industrial PC technology from ASEM is going to be extremely valuable as we look going forward. And the value for our -- from our smart products, Logix and drives and so on, those will be on different form factors. Over time, the value is going to stay the same. And we want to make sure that both in terms of evolving the software as well as the hardware platforms, we're at the front of the pack. And we're really excited about that relationship with ASEM.

And in terms of the scope for further transactions, there's some management bandwidth absorbed in integrating what you've already just announced. If you think about that and the balance sheet state, what sort of rate of acquisitions you think investors should expect from here?

So we've talked about a framework that adds 1 point or more of growth from acquisitions a year, on average. And obviously, that will be lumpy. And in terms of the amount being spent on acquisitions, we've given a framework in November in terms of our capital deployment, acquisitions, along with, of course, dividends and share repurchases. And so we gave rough guidelines of $400 million, $500 million a year, I think, in terms of the expenditures of acquisitions. But again, that's going to be lumpy because there's going to be different types of businesses acquired. What we're looking at first is the strategic fit. And we've talked about our priorities, which are the Information Solutions and Connected Services; the process expertise, Sensia is a good example of that; and then the increased share expansion in Europe and Asia, and ASEM certainly is a factor in Europe as Kalypso is for Information Solutions and Connected Services. So we think we've done a good job of staying true to that framework. We still have a robust pipeline. Your point, we got a lot going on, and we got to make sure that we integrate these really well and to get the benefit both for customers and financially. And I think we have that well in hand.

Got it. And Sensia was something that closed, I guess, just a few months ago. Maybe any initial impressions and -- post the close and talk about the sales trends within that business. Clearly, it's selling into a very challenged CapEx environment.

Yes. So the majority of Sensia sales are expected to be purchased with OpEx as opposed to CapEx, in fact, maybe at an even greater percentage skewed towards OpEx than some of our other oil and gas business because this is really more about driving productivity in existing assets, reducing the cost to produce a barrel of oil, doing it as efficiently as possible as opposed to being as much focused on, say, the drilling process or new capital. And it's not just at the wellhead. It's also to the collection point into terminals and even safety systems downstream. We've seen a great start to that business. The first quarter went well for us and, more importantly, customers are seeing the possibilities. The business is characterized by having maybe a little larger projects than is typical for Rockwell. And I think that's also encouraging because customers are trusting the combination with some really important processes to keep them competitive.

And if you look sort of in and around of the organic and acquisition moves that you've made, you put up that $9 billion revenue number at the Investor Day, which I thought was interesting 3 months ago. Sort of help us understand why you put that number out there, what kind of time frame for realization you think is reasonable for people in the room to consider.

Yes. I think to put that kind of graphic or that kind of framework in place, I think it's important to pull the various pieces together because I've been very happy with the way that we've stayed true over the last 4 years, really, to our strategy and, fundamentally, how our efforts are focused on accelerating profitable growth. And so this is a way of pulling those various pieces of information into one place, the areas that we're going to grow in, again, the core, the Information Solutions and Connected Services as well as through acquisitions, but then the financial framework to make it very clear that even though, for instance, we're doing more acquisitions than we have in the past, we're still being very clear on preserving that disciplined approach. So the 30% to 35% conversion on incremental revenue, expecting that revenue to be in mid-single digits, the free cash flow expectations that are generated from acquisitions, the fact that we still remain an asset-light business, all of that we thought was important to say and to give some information about when we do this, this is where we expect to get to in, say, the midterm. The growth rate is still paced to some extent by industrial production. That core is the biggest part of our business. And we said that we're going to work to increase the multiple of IP, so going from a traditional 1.8x industrial production for our markets up to 2. But if you think about that, industrial production being historically maybe about 1.5, that's about in a 3% CAGR for the core. You add that to continued double-digit growth with respect to IS and CS, 1 point or more of acquisitions each year, and you look at 2025 as kind of the point where you get to that $9 billion figure. The journey of that is really important, being able to continue to make the moves to provide increasing customer value, growing but growing profitably. So that's the point.