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

Good morning. My name is Brendan Luecke, and I'll be covering the multi-industry sector for Bernstein. I'm very excited to welcome all of you to today's fireside chat with Rockwell Automation. Thank you for joining us. Before we get started, I'd like to touch base on a couple of quick housekeeping items. As always, our aim is to make this session as interactive as possible. [Operator Instructions] And we'll try and make sure we touch base on all the hot topics during our conversation. With that, I'm very happy to introduce Blake Moret, Chairman and CEO of Rockwell Automation. Prior to his appointment as CEO in 2016, Blake built a career with the company through many roles over the past 3 decades; and of course, Nick Gangestad, who recently joined Rockwell CFO, following his tenure with 3M. Blake, Nick, it's an absolute pleasure to have you with us today. Thank you so much for coming out. I understand you've got some opening remarks prepared. So I'll hand it off here.

Brendan, thanks so much. I am thrilled to be here this morning. If we could advance a couple of slides, I do want to make some introductory remarks.

Of course.

First of all, Rockwell Automation is a pure play. We're the only pure play devoted to industrial automation and digital transformation. We combine industrial technology and our expertise to create positive business outcomes for customers. Many times, this contributes to an industrial company's resilience or agility or sustainability. These were all trends that were important prior to the pandemic, but the pandemic has thrown these requirements into even sharper focus. We also take an open approach to applying technology and work with the best ecosystem in the business, and this further sets us apart. If we can move to the next slide. A couple of years ago, we introduced a framework for accelerating profitable growth. This continues, we're happy with the progress so far, and we remain committed to accelerating this growth within this clear framework. As I mentioned, resilience, agility and sustainability are on the minds of all industrial companies. And we have very important value in each of these areas, whether it's remote operations for resilience; cybersecurity services, our cybersecurity business, over $100 million; agility shown in flexible packaging and digitization; and sustainability, and we'll talk a little bit more about that later. Our industry outlook shows a return to good growth, particularly in our discrete and hybrid industry segments. Oil and gas is lagging a bit, but we do see good sequential improvement in that area as well. And very importantly, we win the right way, and that's about creating long-term value for all of our stakeholders. At the foundation of our success, current and in the future, is a very strong culture, about willing to compare ourselves with the very best other alternatives to make sure that we're taking an outside-in perspective; increasing the speed of decision-making because the market has picked up the pace; a steady stream of new ideas by bringing in new perspectives, new acquisitions; and to continue to strengthen a culture of integrity and diversity and inclusion. Sustainability is increasingly important. We've always provided great value for our customers, helping them with their efficiency. But with our commitments for our internal operations and additional value that we're providing in renewables and contributing to the circular economy with our value for recycling, you're going to see more from us as we increase our impact on the world and the efforts to become more sustainable. What I'd like for you to take away from these brief comments is that Rockwell is creating more ways to win. More ways to win to add new value to our customers, which, in turn, contributes to our value in the market as a quality compounder. We've reorganized in 3 clear segments, each contributing to the value that we provide for a single customer set of industrial companies. And with that, Brendan, I'll turn it back to you.

Wonderful. Thank you for the overview, Blake. It's very informative. I'd like to sort of start our conversation by talking about growth strategy and particularly the digital side of the business, some really innovative things happening at Rockwell Automation here. And one of the areas where I see the most uniqueness is really around partnerships, PTC being the most prominent, but Cisco, Microsoft, ANSYS also come to mind as well. When you think about setting these up, how do you -- what's the mental model? Why do you choose to be a partner versus doing it alone? And what do you see is the key to success as you try to drive innovation through partners?

Oh, it's really about efficiency and coverage of the market, which is moving faster and faster. I think, quite frankly, it's arrogant to think that all of the best ideas can come from one company. And it's also inefficient to try to own everything even if you can't differentiate in certain areas. So we go through a thoughtful process to look at where do we need to own certain technologies or certain expertise, what do we need to develop ourself, what do we need to acquire, and where is it best to partner to be able to move at speed to make sure that we're working with the best partners in the business as we work with Microsoft or Azure for their cloud expertise and capabilities, as we work with ANSYS for their physical simulation and modeling. These are great complementary technologies, and we partner like we mean it. So when we enter into a partnership, it's with the resources and the commitment that this is for the long term because it's important for customers to see that these partnerships are not ephemeral and that they're going to survive long after the initial boost of a press release. So it's a thoughtful process, we have a well-defined organization within the company for how we manage these, and we think it contributes materially to our overall value.

Fantastic. And just a quick double-click there. You recently re-upped the PTC partnership. I've got an audience question here. What's different this time around? And what motivates the change?

So we extended and expanded the commercial relationship a few months ago. We added time as well as we gave ourselves the option for being able to source some of their additional design tools like CAD and PLM. And conversely, they have access to some of our exciting new offerings, such as Emulate3D simulation software. We really -- a large part of that was prompted by our acquisition of Kalypso, which does a considerable amount of consulting in the digital transformation, digital threat area. They were an important partner to PTC as well, and it gave access. So when a customer was asking to source those additional technologies, the focus of the partnership remains on IoT technology as well as the Vuforia augmented reality. So I want to make that clear. More recently, we updated the share purchase agreement really to match the term of the commercial agreement. I wouldn't look at the changes that we made with the share purchase agreement as much more than that.

Okay. That's helpful. And I guess taking a step back, looking at Connected Enterprise overall, where do you see sort of white space or penetration-driven growth opportunities versus places where you're going to be displacing an established solution or an incumbent in an established market?

It is still a fairly fragmented market in that what customers are looking for is a specific combination of the technology and the expertise to help them address their business challenges. And so in certain areas, it's a little more stratified. When you look at MES software, for instance, that's becoming more of a have to have. But in IoT, the application of analytics, predictive maintenance solutions, this is still a fairly fragmented area. There's a number of places that have strong adjacency with Rockwell's, let's say, home field advantage, our core. And so being able to look at additional areas for expansion to connect the supply chain with what we're doing on the production floor. Quality management, interfaces with other design tools, these are all great opportunities for expansion, and even with our traditional applications being able to more fully penetrate additional geographies, additional vertical industries. When we talk about more ways to win, it's a truly exciting time because we can go and add value in so many of these different vectors. I would also make the comment that in -- again, to enforce this idea of a fragmented market. If you take the leading suppliers, us and Siemens and others, and you put them together, there's still a tremendous amount of the market, really more than half, that's going to other smaller niche suppliers who don't have the scope that we have.

Excellent. It's interesting you mentioned supply chain management and quality management. Where do you see, I guess, your sandbox kind of starting and stopping with -- across your software ambitions? Are you sort of rooted into the factory floor? Or would you consider plays in digital transformation extend beyond the 4 walls of the factory?

No question that it extends beyond the 4 walls of the factory. And specifically, with respect to supply chain, being able to look upstream at your suppliers is becoming more of an imperative as opposed as to a nice to have. And so being able to look at the demand and to be able to communicate that and to see how your suppliers are responding to that demand is becoming more and more important. We get a lot of our insight on what's going to be most important going forward from our own internal operations. Rockwell, ourselves, we are a considerable size manufacturer ourselves. And so we look at that and look at what Ernest and his team need. When we're considering partnerships or acquisitions, we very often test it out in our own facilities. It's a good early indicator of the value of certain technologies that we're considering.

Excellent. And you mentioned sort of value prop by technology. One of the struggles that I think we see a lot in digitization efforts is proving value. You get a lot of -- a lot of companies, particularly subscale startups, they kind of get stuck in pilot purgatory. How do you think about proving value to your customers? Is there a systemic approach to this? How do you go to market here?

Yes. There's -- it's very systemic, very repeatable approach that really hit its stride, I'd say, with the acquisition of Kalypso. I can't overstate how much that helped us to be able to bring in consultants with deep industry experience to help quantify the value of expected moves with respect to the addition of automation or information solutions. So our consultants will go in, they work with the customer, and they'll quantify what the expected benefit will be. Now very often, these customers as they apply the technology and take advantage of that expertise, they'll find lots of other wonderful things that can help them be more competitive themselves. But you start with that clear definition of the business problem, the expected quantified results, and that helps you ensure that you've got the consensus within the organization. The CFO loves to see that. We always like it, for instance, when the Chief Digitization Officer works for the CFO because then you know that if they're working with us on a project, then if it gives the returns that we expect, that it's going to get rolled out. It's not going to just sit in idle somewhere looking for a sponsor. So that's an important starting point, and we found that to be very effective over the last year, particularly as we've got to scale with those consultants within Kalypso.

And a bit of an aside on this topic. I mean when you sell -- we talk a lot about IT/OT convergence, do you find yourself in the CTO's office much at all? Or is it more of a CFO, COO conversation?

Yes. The COO, the plant manager, I mean that's the heart of where we live. But increasingly, the CIO is being drawn into these conversations, particularly as we're applying cybersecurity solutions, assessments and remediations. The CIO is very often given overall responsibility within the plant operations, but they know but don't have the experience to identify exactly what's different in that part of the enterprise as opposed to the carpeted part of the enterprise. And so that's where we're very much a friend to them. And we're -- again, our recent acquisitions, Avnet, Oylo, have complemented the strong organic presence in these areas. It is a very clear path for us to be able to make ourselves known to the IT organization and the CIO that cybersecurity and, obviously, a lot of other great things are pulled along as we have conversations about our software applications where they will also be part of that decision-making process.

Excellent. Now Rockwell is not alone with digital ambitions. How do you see yourselves stacking up against other major players in the space, like Siemens or ABB and Dassault have announced a partnership or maybe Honeywell and Process?

Yes. I'm really happy with our ability to compete and win in the market. We have market access that differentiates us from many of the names that you just mentioned. Our knowledge of the machine is our home field advantage and that open approach. More than half of our information solutions, our IoT solutions, are being applied on top of someone else's control solution, whether it's Siemens or Schneider or somebody like that, that wouldn't happen if we didn't have a really great solution that can stand on its own.

Okay. Excellent. I'd like to pivot here or maybe talk about the shape of the recovery. We're pretty far into the quarter at this point. Can you offer any color around what you're seeing?

Not about the quarter, but I will -- I'll say that the guidance we -- in the last quarter, we raised guidance. And that was driven by the very strong orders that we saw beginning -- at the end of the last calendar year and has continued. We're encouraged about the way that the recovery has increased across a broad set of the industries that we serve within discrete industry segment, hybrid. And even in the process where oil and gas has lagged, we expected it to lag, and we do see sequential improvement as we move through the end of the fiscal year.

Fantastic. And taking a step back sort of thinking about the cycle here, I mean COVID's clearly been a pretty unusual downturn. But -- and aside from the obvious, how would you say this time it's different? How would you say Rockwell is different this cycle versus '16, versus '09?

We're more resilient in a number of dimensions. So our industry diversification continues at a good pace. When you think about automotive for Rockwell being under 10% of our business, that's not a -- that's not because we've become less competitive in auto, it's because we've added additional capabilities across discrete, hybrid and process industry verticals. That's one thing. The commitment to ARR is another very important piece of this. And while it's still a relatively small part of our overall business, the commitment within the organization, the engagement of employees in contributing to that, adding additional recurring software revenue, additional high-value connected services, that's already had some impact. Without Information Solutions & Connected Services and the focus that we put on it as well as some of the acquisitions that we've made, I don't think we would have come out of the pandemic in a stronger position as we are.

Fantastic. Would you be able to share some color on the end markets you guys are excited about here?

Sure. Yes. As we move through -- starting with the discrete industry segment, e-commerce, we grew over 70% in the last quarter. It's still relatively small for us, but I wouldn't bet against the secular trends of e-commerce. And it's not just the pure e-commerce providers like Amazon and so on, it's the back of the big-box stores as they look to automate the receipt of material, the distribution of it. We have a great readiness to serve there with our core automation products with disruptive technologies like independent cart, so e-commerce, semiconductor. Every day, you're reading about the need to add additional capacity in semiconductors and particularly for their facility management solutions, controlling the temperature, the humidity, the cleanliness of the air in which they're operating, we have great solutions there and these are multimillion-dollar projects. Automotive and electric vehicle. The only way that these EV companies get a return on investment is to bring new vehicles to market. And you don't produce a competitive vehicle without a high degree of core automation and information. You just can't do it. When you look at hybrid, life sciences, pharmaceuticals, people -- even apart from the vaccine production where we're heavily involved, people want to live longer, healthier lives. And that's not going to change, I don't think. And we play a huge role there. Food and beverage is our single biggest vertical. People want to eat. They want clean water. So these are some great areas for us. Across the street in hybrid, it's hard to find something that's not looking at good period of sustainable growth. In process, again, oil and gas is recovering. I like our position there because it's about the efficiency of existing resource. It's not focused on new capacity. And I think efficiency is going to be the important word within that industry going forward. And then we look at chemical, pulp and paper, mining, these all are looking more positive than not as we look out over the next half year and year and so on. Higher commodity prices certainly contribute to that. Miners, for instance, have been a little bit slow to recover their spending, but they have to continue to develop their resources to feed the machine, so to speak.

Excellent. You mentioned oil and gas. So the Sensia JV then were really focused on online production rather than new barrels on the margin.

Yes. Exactly right. It's about the efficiency. And there's broad opportunities for increasing that efficiency, reducing the breakeven point, but also to be an effective steward of the resources and to make sure that you're getting the most out of what is being produced. And that was the whole rationale for the Sensia joint venture.

Excellent. So I've got a couple of incoming questions here from the audience. First one, how do you think about the long-term implications of renewed focus on supply chain, automation and onshoring for manufacturing driven by the pandemic?

Well, I look at onshoring or reshoring as part of the broader topic about resilience. I think a lot -- it's important to start with what manufacturers, what we're looking at, what customers are telling us they're looking at. It's about increasing their resilience, about decreasing single points of failure. And so in many cases, the growth that we've seen in the U.S. is about an additional capacity. It's not necessarily moving capacity from one place to another. But as these companies are thinking about the expansion of their operations so that they have the capacity, they're making decisions to be close to what is still a really, really important consumer market. So when Stanley Black & Decker brings capacity on, when you see capacity with respect to vaccine production in the U.S., batteries for electric vehicles, this isn't necessarily moving capacity, but it's making decisions to put new capacity in the U.S. And that's why the U.S. was our fastest-growing country as we -- fastest-growing major country as we were looking at orders in the second quarter.

Excellent. One other question here just around performance last quarter, and this goes back to competition. So how do you think about sort of the differential between yourselves and Siemens digital industries over the last couple of months, a bit of a delta there?

Yes. We look at the regional mix as probably the single biggest factor there. We have less penetration, less of our business in China. China was first into the pandemic and first out, and that contributes to a lot of the differences. At the front end of this, in Q2 of last year, we materially outperformed Siemens and Schneider and others. And that was, again, a factor that we weren't hit as hard when China sales plummeted. And so as the U.S. recovers, which was towards the end of moving into the pandemic, our home markets, then we expect to see a return to very strong growth.