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

Thanks, and good morning, everyone. Again, this is Andy Kaplowitz, U.S. Sector Head of Industrial Research here at Citigroup. We're really, really excited to have Rockwell Automation with us. We've got Blake Moret, who is the Chairman and CEO of Rockwell, and we have Nick Gangestad, who will be starting as CFO in a couple of weeks. And so we're very excited to have the whole Rockwell team on. I know that Blake wants to make a couple of opening remarks, but I'll just say that I've gotten to know Rockwell over the years. And it really is one of my most innovative, if not my most innovative, interesting company. Very high growth potential. We continue to like the story here a lot. We think it sort of checks a lot of boxes here, whether it's automation-led growth, onshoring, ESG. You name it, we're going to talk about it. But with that intro, Blake, I'm going to turn it over to you in case you have any opening remarks.

Andy, I sure appreciate the words. And as you said, we're thrilled to be announcing Nick Gangestad in the role of CFO beginning on March 1, who joins us for the fireside chat here. For those of you who might be a little bit new to the name, Rockwell is a pure-play industrial tech company. We're bringing the Connected Enterprise to life for companies around the world in discrete, hybrid and process industry segments. We're increasing our value by helping these companies become more resilient, agile and sustainable as IT and operational technology, or OT, converge. And we think through our efforts, we're really helping them take manufacturing in their operations to a whole new level. So with that, Andy, I'll turn it back to you.

Blake, so look, just starting off, it's an interesting time, right, in the sense that your backlog, I think you talked about being up 20% coming into ending your fiscal first quarter, but revenue was still sort of down 10%, and we all kind of know Rockwell as a short-cycle business. So maybe you can talk about sort of the business environment. I think maybe, it was on the earnings call where you mentioned that when you get orders, they sort of deliver in weeks, so we should start to see that order trend sort of convert into revenue, which I know everybody sort of cares about. So maybe give us the lay of the land just to start out as to what you're seeing.

Sure. So in our first fiscal quarter, the quarter ended in December, we saw a sharp uptick in order activity, particularly in the product side of our business, in November and December. And we continued with the practice that we've adopted really through the pandemic of providing, let's say, an unusually high amount of detail about our order intake, even looking at a monthly basis. So on the earnings release, we showed a graph that showed, by month and by quarter, the development of our product orders, which is about 2/3 of our business. And you could see in November and December, we saw that uptick. We also mentioned on the earnings release that, that trend continued into January, which gave us confidence that it wasn't some sort of calendar year-end budget flush or restocking from our distributors. We have good visibility into our distributor inventories, and there's nothing unusual happening there. We're very confident that, that order development is based on underlying customer demand coming through our distributors. And so with that, we've raised the guide for organic growth for the year and as we're going through and taking what is record high backlog for the company working on shipping it out. You're starting from a pretty low trough that was seen in Q3 of last year, and so we don't return to strong year-over-year shipment growth until the second half of the year. And right now, we're -- it's all hands on deck to get that backlog shipped out, but we guided to around flat year-over-year sales in Q2. And then we see strong double-digit year-over-year sales growth rates as we get into the heart of getting everything shipped out as we expect that our solutions and engineer to order businesses start kicking in and as we get to some easier comps in the second half of the year as well.

Blake, I don't want to dwell too much on the short-term side. Just to ask you one follow-up there. There's nothing that you see that is stopping you from shipping product, right? And also like stepping back, the momentum that you've seen continues sort of as we sit here today.

So we typically avoid giving inter-quarter kind of guidance, and what we have said is that the orders strength continued through January. I do want to be clear that, like just about on everybody who makes things right now that have electronic components in them, we are working with our suppliers and with our freight carriers to maximize shipments and getting that record backlog shipped out. So I'm in constant contact with our supply chain team, and Ernest and his folks are working around the clock to manage supply chain constraints, which, while I don't think they're as severe as what has been written widely about in the automotive segment, it is a constraint on us with electronic components and boards and so on that we're working to maximize shipments.

And Blake, could I just go back on that and ask you, like when you look at Q1 or before even, like, because we have heard so much about supply constraints really in the industrial world, did that slow down some shipments even going back into Q1 when it comes down to it?

I don't know that we can point to supply chain constraints there. I think what we really saw is, as the orders rapidly returned and tending towards the latter part of that first quarter, it was just bringing back people into the shop to be able to respond to those higher demand levels. And so I can't really point to our supply chain as being a big factor in the Q1 results. It hit around what our expectations were, quite frankly.

Got it. So before I get too much further, I do want to welcome back Nick, and just ask Nick a very quick question. So 7 months in retirement, not very long. So why did you decide to come back? And why Rockwell?

Yes. Andy, one of my friends texted me yesterday and his quote to me was, "Nick, you suck at retirement," and I didn't take it personally. But -- so yes, I -- when I retired from 3M, I knew there would be options of what I do next, and there's been a number of options I've been looking at. And when the Rockwell opportunity presented itself, what I found was a company that I was very excited by where they're positioned to be making a big difference in the world as far as advancing where automation goes. I was excited by their strategy of what they're doing to enhance where they are. The people, I found the culture that I felt I would fit in nicely with. And I found the strategies and the direction they were going to be ones that were exciting to me and ones that I felt I could help with. So all of those things combined to say this looked like a really good opportunity, and I'm excited about this next adventure.

Awesome to have you back.

Thanks.

So Blake, let me follow up sort of maybe a little bit more longer term on the thought process around orders and sales. One of the things that Rockwell has out there is a 2x IP in terms of the growth rate for Rockwell over the longer term. So one of the main parts of our thesis is that the pandemic is accelerating automation that we're seeing that, whether it's just onshoring or the need for more digital period. So as you step back, based on what you're seeing here over the last couple of quarters, do you believe that, while understanding that the 2x target is not easy, that it's maybe more achievable now over the next couple of years? And is there anything from what you've seen that gives you more confidence, specifically a certain product as better, that kind of thing?

I think there's a few things that we have in our offering, in our portfolio that we didn't have even a few years ago. So as we look areas that the pandemic accelerated in our world, we talk a lot about resilience, agility and sustainability. And when you look at resilience, we look at customers who are trying to make their own supply chain more resilient. So they're introducing remote operations. They're adding augmented reality to help train their workforce as they're going through these volatile periods of staffing to be able to bring new talent on board and bring them up to speed quicker. That's an aspect of resilience, eliminating single points of failure in their supply chain. Rockwell is bringing online additional manufacturing capability, so that some of our highest value products can be made in more than one location. And if we're doing it, you can bet that a few hundred of our customers have made similar decisions. So I think that's -- those are all positive trends for us. And reshoring is a part of that under that general resilience theme. I think resilience is going to take place in a more vertical specific way. So we see semiconductor, life sciences, a couple of examples of food and beverage, the battery manufacturers are looking to set up shop in the U.S. So we see it, but I think it's important to take a vertical-by-vertical approach in considering the magnitude of it. Agility, digitization of operations, it's pretty clear that the companies that had a good head start on digitizing their production fared better. They were able to have the backbone -- the digital backbone to be able to introduce remote monitoring and operations of their production facilities. Packaging agility is something that we've heard a lot about during the pandemic, where companies have had to react to different customer buying behaviors. Nestlé, creating new packaging sizes to get a different price point for what they make, Mondelez and others. That packaging flexibility is something that's right in Rockwell's sweet spot with our motion control, including the Independent Cart Technology that we'll talk a little more about and over the last few quarters. And then finally, sustainability. It's real companies are voting with their wallets that this is going to be an important part of what they do and what their mission is. And whether it's the consumer packaged goods companies that are at the heart of our customer base, looking at creating packaging that doesn't create the same burden on the environment, if you look at oil and gas companies who are launching their new energy initiatives, these are all good opportunities for us. And so taken in total, it makes me more confident that we can go from our traditional 1.8x industrial production in our core to get to that 2x industrial production.

Blake, and so I wanted to ask you, because I get a lot of questions about sort of the regional performance of Rock, especially compared to some peers, right? And so the U.S. has lagged the recovery a bit, so let's talk about that a little bit. And then China may be not quite as strong as some peers. And it does seem to me that maybe there's a bit of misunderstanding into what Rock is these days. I mean, if I look at Rock in the U.S., for example, a lot of process business, as you know. And so when you think about Rock versus peers, and again, thinking about geography, is it more that you're more a balanced company these days and so Rock, because it's more processed, for instance, in the U.S. is a well sourced cover? Any color you give there to that narrative would be helpful, I think.

Sure. So we've talked a lot just here recently, looking at performance versus peers during a very volatile time, and I think calendarization does play a role. If you recall, you go back to Q2 in fiscal '20, and we outperformed the market, and part of that was because we didn't have the same exposure to China, which was right in the heart during that period of time with their -- the biggest impact of the pandemic. They came out of it earlier than other parts of the world, including North America. And what you were seeing is that recovery reflected on the part of some of our competitors who have greater exposure to China and, in particular, exposure to early cycle business selling products to machine builders, which is typically a leading part of our market when it is exiting a recession and moving into a period of what we expect to be expansion. Conversely, the U.S. was last in and is lagging in coming out of the pandemic. It's clearly our strongest market. We have the highest share, and we think that's reflected in the strong order uptick, which will be reflected in shipments as we move through the balance of the year. To your other point about our growing diversification, here's a figure that surprises, I think, long-time Rockwell watchers. Automotive is less than 10% of our business. And I can tell you, it was far north of that when I started in the company, and that doesn't mean that automotive and electric vehicle are not important to us, but our ability to serve across discrete, hybrid and process segments continues to strengthen. And I like that natural hedge, if you will, when one part of the industry is down, then we see strength in other parts that we have very high readiness to serve.

So Blake, it's interesting because I think you mentioned in the last call that you want to pick up the pace in terms of investments in China. And so what is that -- maybe you can give us more color into what that means. I mean, do you want to be the player that your competitor is there? How do you get there? And maybe talk about your business strategy in China right now.

I think we have an opportunity to be a disruptor in China. It's clear that we don't have the same share position that some of our competitors have, but that doesn't mean that we can't grow as fast or faster by looking at the things that we do really well and that are needed in the Chinese market and focusing on those high-growth areas. So we talked, even though the results were still down in terms of shipments in China in the last quarter, we saw some important EV wins, and that clearly is going to be both a cyclical and a secular trend for years to come. And our ability to add value in different parts of EV from battery through the traditional assembly process is very strong, and we're going to be more aggressive than ever around the world in areas like that. Our software offering continues to be strong and a differentiator in China. Looking at complementing our traditional electrical distributors with additional ways to bring our value to market is an important part of what we're looking at. I look at our electrical distributors, particularly in low share parts of the world as necessary, but not entirely sufficient. Some of these projects are going to require direct activity from Rockwell and other engineering value-add channels to market. We've added some talent within our own organization that allows us to look at these things a little bit differently than maybe we have in the past. So those are certain aspects of it. I would also say just making sure that we have products that are competitive around the world in those markets and for us to be willing to go and win that business is an important part of it. So the business units are on the hook as well to make sure that their products that they're developing are right for those markets and not just our traditional strong spots.

And Blake, just out of curiosity, would you say that the geopolitical environment is sort of net neutral now, maybe slightly more favorable given the new administration and sort of trying to compete as a U.S. company in China?

I think the uncertainty has gone down a little bit. I -- we still have to -- a ways to go to get on a really solid productive footing with certain parts of the world. But I think the day-to-day uncertainty has reduced.

Great. And then you mentioned EVs, so let's talk about auto for a second. Yes, less than 10%, but obviously, people still care quite a bit. And so when you look at sort of your auto performance, I guess my observation would be, it seems lumpier than I sort of expect. If I look at last quarter, I guess I was a bit surprised that it was down like it was when I look at auto production. And so maybe if you could talk about that, Blake. I know you're still expecting up 10% for the year, but why is it lumpier? And should we just expect that going forward in your conviction level that you can grow that business 10% auto this year?

Yes. Well, it's a volatile time for the industry as they're retooling to bring electric vehicles to market. We've talked about EV surpassing the number of internal combustion engine vehicles on the road by 2040, and it could happen maybe a little bit quicker than that as these start-ups as well as the traditional brand owners bring their product to market. They've got to get a product out there and sell units at scale to get the return on their investment, and they're all moving into that phase now as that new capacity comes online. And you can't build any of these vehicles without a high degree of automation intensity. It's just not possible to do any of this manually without a traditional amount -- a significant amount of automation. And on top of that, the software that drives additional productivity that we have some really good offerings in for -- particularly for electric vehicle operations. So I feel good about that in terms of the lumpiness. Again, I think it's partly a factor of the underlying industry itself going through that retooling, and the pandemic has thrown a lot of uncertainty over the last year into automotive operations. So being able to get labor, keeping labor on the line, making changes to move to electric vehicle, dealing with varying levels of demand, but people are going to still want to move around. And they're all interested in taking a look at the electric vehicles that are starting to hit the market.