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

Welcome, everyone, to the 2022 Industrial Tech and Mobility Conference here in Citigroup. I am extremely excited to do this in person. It's going to be a great event. We're looking forward to everybody here joining us. The first -- well, let me set a couple of ground rules. First of all, we do have interactive Q&A, but you have QR codes in front of you. And you just scan the QR codes and you can ask questions. I've got my handy dandy iPad right in my seat there, and I will see the questions and be able to ask them for you. That's a nice, socially distant thing to do. I'm supposed to ask you to wear masks. If you can, please do. I'll just leave it at that. And then I'm going to turn it over. We are very excited to have Rockwell Automation with us. We have Nick Gangestad, who is the SVP and CFO of Rockwell. Rockwell -- Nick joined Rockwell less than a year ago now and I think has already imprinted his mark. We just -- the basic answer here is that Nick has done a great job in just a short amount of time. And Brian Shepherd, SVP and Software Controls, is with us today. Brian leads Strategy, Product Management and Product Development for Rockwell's portfolio of control and visualization software and hardware.

So let me start off with just maybe a big picture question, and I'll come over to you here. We talked about the cycle. And can you talk about the cycle actually lasting a little bit longer this time? And one of your goals here is to be 2x IP. And so maybe you can talk about sort of why he's talking about this being a longer cycle. And then we can also sort of weave in -- we've seen some geopolitical issues out there recently. Obviously, there's Russia, Ukraine, but sort of speaks to the local-for-local nature that companies have. So maybe we could start out with that, Nick.

Yes. Andy, thanks for having us here, and thanks for starting us off with a question like that because I think it's a really important question. Just to parse it out a little on how we think about this and why we're saying things like we think this is a longer cycle, I'm going to talk first about some things that we see as secular trends going on of what many of our customers and what industries are facing a shortage of labor, higher inflation, the need to have more resilient manufacturing that COVID has shown them something in their need for more resiliency, more agility in manufacturing. Those are things that are behind a lot of what we're seeing, and we think those are more secular. Now in terms of your question about the cycle. Industry after industry, think of electric vehicles, batteries, semiconductor, e-commerce, pharma, like the big players there are committing a lot of capital in the coming years. And what we're seeing is even higher intensity in that capital spending for spending on automation and software that goes with that automation. And so that's why we feel pretty strongly that this is going to be a longer cycle for us that we're thinking of it in terms of years, not in quarters. And we still think of ourselves as early in that cycle. And then the last thing you were talking about as far as geopolitical, one of the, I'll say, secular trends we're also seeing is more local for local, you said it earlier. And especially in a place like North America, where many of our customers have presence around the world, but also an interest in their North America presence in the manufacturing [Audio Gap] since that's one of our strongest geography [indiscernible] what we are -- what we said a month ago, very strong demand. We continue to see that. We are seeing things play out just as we said that they would in terms of higher inflation. That was one of the things I talked about in the last quarter earnings call that while we still see price cost net being fairly close to 0, a little positive. From when we first announced that in November to January, we've seen costs go up, which caused us to have yet another price increase. And we're seeing that all play out as expected. So in terms of anything changing in that front, it continues to be a dynamic situation when it comes to supply chain and access to semiconductor chip, that's the big constraint that we've been talking about for several quarters now. And that continues to be a dynamic situation. We keep updating with what we feel as the latest, and you always get our latest best view on that each quarter.

And Nick, you had -- when you sort of guided, you talked about Q2 maybe being a little harder than Q1 in terms of chip availability. Sort of any update there? Have you seen any sort of improvement? Obviously, we've seen a [Audio Gap]

Not been very much of an issue for us. It really comes down to our ability to procure semiconductor chips, the chips that we need for our devices. And it's really less about Omicron and really more about what the semiconductor suppliers are able to provide and the access they have to the components they need in order to be manufacturing our -- the chips for us that we need. So nothing's really changed on that front for us.

Got it. And so like there are many different ways that you've talked about getting your core sales to 2x. So you have some key initiatives here that I sort of listed down, whether it's expanding verticals or accelerating software growth. You've talked about independent cart, market share gains in Europe and Asia. Maybe talk about sort of when you look at these initiatives, what's been the most impactful on the ability for Rockwell to hit that 2x target as you go forward?

Yes, Andy. That's a little like asking which child do you love the most. So I -- but there's a lot of them that are just going very well for us in terms of like our vertical access, our vertical, expanding vertical and our focus there. We've seen our focus on these industries paying off and that we have the right solutions, the right technologies in these industries and lining up with the verticals that we see having the most growth potential in the coming years. So that seems to be playing out as expected or better. Things like independent cart, where we have a really differentiated technology that's meeting needs in places like this technology to be agile, often in a compact space, high customization really hitting the sweet spot of what our customers are needing and how Rockwell can be part of that. And so that's going. As far as the geography, Asia and Europe and expansion of market share there, that I'd say we're seeing success in pockets that -- we're seeing some places of good progress, some where we want to increase that penetration. Like if I use a place like China, where we're seeing some success, we're investing in the right mid-level portfolio there, shifting our focus away from just what could have been a few years ago just products to more of the service and the broader solutions that we can provide and the software and having the right commercialization resources equipped to go to market and to win in that. Those are some things we're doing, and we're seeing early signs of success there.

If I may follow up on that briefly on China because you had good growth there last quarter. And so you talked about sort of more of this mid-market. It's a pretty big change for you guys when it comes down to because I think there's been a fear of value losing share there. So maybe talk about sort of where you go from here in China and the ability to outgrow in China moving forward.

Well, of course, it's a very large market, and we're at relatively low share there. And so for years, I would say way our strategy was -- that we were content with a smaller share and just playing at the fringe of the market. In the last few years, we've made a more intentional effort of increasing our relevance in that market and making sure that we have the right things, the right products at the right price with the right people behind it, the right commercialization effort, the right go-to-market effort to be successful there. And I'd say we're slowly chipping away at increasing our share there, but we still have a long ways to go, Andy.

So you guys put out an order target, $9 billion as you know, I would say confusion maybe is the right word in the sense that some people are very excited about it. Some people noted that maybe it was a peak comment. Like so maybe you could sort of talk about in the context of Blake had talked about this sort of $9 billion revenue goal for a long time, right? And right now, you have guidance out there that either in '23 or '24, you could hit $9 billion. Does the $9 billion in orders this year give you more confidence in a '23 $9 billion in sales? Or should I not be thinking about it like that?

You asked several questions in there, Andy, so let me break that down. First of all, just on the orders themselves before I get into revenue, we had $2.5 billion of orders in our first quarter. And part of what we said last month is there's about 10% of that, that we see as orders placed in advance of when they normally would based on lead times that we have in place. And so part of our commentary about the future of orders and guiding that we think it's going to be greater than $9 billion, I wouldn't construe it as, oh, Rockwell's seeing things at a peak. It's really more just acknowledging that there's a portion of the orders that we saw in the first quarter that were placed in advance. And when those actually reverse on us, we don't know. It might be later this year, might be in '23, might be in '24, might be never. We just don't know that. So that's why you hear us saying like we think -- we feel confident it will be $9 billion or higher. But just how much and whether it's the peak, I don't think we're ready to say that. And then in terms of revenue, it really does come down to supply chain constraints and the pace at which semiconductor manufacturers are really able to provide. Your commentary and thought, well, this does indicate like things are looking pretty positive. I think your general premise there is the way we are seeing it as well. But in terms of '23 itself, I'm -- give us a few more months to just see what happens with supply chain before it. And by the way, Andy, I'd be disappointed if you weren't trying to get guidance for next year in '23.

It's my job.

So way to go. I'd expect nothing less.

So let me ask you in that context. You have tough comparisons in the second half of this fiscal year. The way the guidance sets up, I think you need sort of low teens growth in the first half of the year against easier comps and about 20% growth in the second half of the year. And so again, there's -- some people don't have the confidence that you can hit those targets. So you said to me, look, you're contemplating supply chain issues in the guidance, but at the same time, Q2 ended up being a little lower than The Street, as you mentioned, in terms of when you guide us. So how do we get confidence in this sort of ramp up as we go into the second half of the year?

Part of how we're guiding and how we're doing it. We're in daily contact with our suppliers, working with them about what their plans are. And so it's -- it won't be what I would call, Andy, a wish and a prayer of what we see happening with supply chain. It's data driven based on what we are hearing from our suppliers of what they're able to do. Now as soon as I say that, I just want to be careful to say, this is a dynamic situation. If someone says for sure they know what's going to happen with supply chain and semiconductor availability in the second half of this year, I think they may be overconfident. It's a dynamic situation. Just as we've been every quarter giving our best view. If I go back to third quarter, our -- what we thought would happen in Q3, we did a little better than that. What we thought we would do in Q4, we did a little worse. What we thought we'd do in Q1, we did a little better. So it's -- we're close, but I mean -- but when it comes to the actual amount of chips we're able to get and put into our products and then ship out our finished goods, it is dynamic. Now part of what we are doing, I mean, we have built many of our products where they're sitting as work in progress with everything except that last 1 or 2 components. So as they come in, we're ready to ship them out the door as quickly as possible. And so those are things happening and what we're doing. And by the way, on that front, Andy, I'd also say, looking at it, when things are not so much a demand driven -- in a demand-driven situation where that's what's driving our revenue, like a year-on-year comparable makes a lot of sense to me. But right now, we're in a supply chain constraint. So I tend to, in that world, look more on a sequential basis of what's changing sequentially and less on what was the comp a year ago. And this is based on some sequential improvement that we are expecting in our third and fourth quarter.

Got it. So there are a few questions here on the iPad, but let me weave in -- because there's a pricing question here. So let me ask sort of my pricing question. I think it will take into account this pricing question. So when you think about pricing, I think you had sort of guidance here of 200 basis points of headwind in the first half. And then by the second half, you get 100 basis points of tailwind in pricing. So maybe talk about -- you just sort of told us that you instituted another price increase, so -- but costs are higher, right? So do you still generally have that view in terms of how the pricing dynamic is going to work? And then the question that was asked here is about how pricing you think evolve when costs eventually decline?

Yes. So a couple things. First, we have been seeing unprecedented inflation on our input costs. And it is our philosophy not to use that to try to increase our profit level, that our approach with our customers is here's the cost inflation we're seeing, and we're pricing to be offsetting that. So when we see extra inflation come in, we institute additional price increases. There can be a lag in that. And that's why in what we're seeing in the first half of the year is a margin headwind flipping to a tailwind in the second half of the year because based on some of the contractual arrangements we have on pricing and also based on backlog and pricing that we're honoring on our backlog that it takes some time before we see that pricing offset. So that's what we're seeing as a pricing dynamic. Now at a point in the future where if things stabilize, like part of our reaction would be slowing down or tempering future price increases. We also have one aspect of our price increase that we instituted late last year, late calendar year last year that was positioned as a temporary price increase until producer price index comes back down to a certain level. So there is some aspect of our pricing that there is a self-correcting if input costs come down. I'm not sure I'm planning on that as a very probable thing. But if it does happen, we're prepared for that as well.

So Brian, I want to get to you because you've been so patiently sitting here. Let me ask one more question from the iPad here of Nick, and then sort of we'll go over to you because this question is definitely a Nick question. So it says 1Q results were strong in total but with uneven margin performance across the segments. Can you please talk through margin expectations and confidence in the margins across the segments?

Yes. So in our first quarter, our Intelligent Devices business led the company in terms of year-on-year margin expansion. It was a strong quarter for Intelligent Devices. We think for the full year, Intelligent Device will be one of our stronger amongst the 3 businesses in margin expansion. And so we remain -- for the total company, we have 150 basis points of margin expansion that we're expecting this year. And we expect Intelligent Device to be contributing at or above that level for the full year. And we have high confidence in that. Our Lifecycle Services businesses was a challenging margin. We had single-digit margin in the first quarter, and it was year-on-year down. We were facing some planned increased spending with not quite as much growth as what -- that was needed to match that increased spending. We also had a mix of project, a less-than-favorable mix than what we normally have in Lifecycle Services. So our plan in our Lifecycle Services business is that we see that margin expanding in the coming quarters. Seeing margin in the low double digits for Lifecycle Services is what we're expecting for the full year. And then Software & Control as we segue over to Brian, I think, there we saw some contraction in margin, not at all a surprise to us in the first quarter. It was part of what we had planned with some of our integration spending we were doing with Plex, some of our increased investment spending we're doing. For the full year, we don't expect a lot of margin expansion in Software & Control. And we see that closer to flat partly driven by what -- by the continued integration spending we're doing in Plex and the higher investment spend. But that's how it plays out across our 3 businesses. And I'd say we still feel very comfortable and confident in all 3 of those margin projections.

And so Brian, you started here not too long ago at Rockwell. So maybe talk about sort of what you've been able to sort of change so far, biggest accomplishments, sort of what do you see as the challenges with Software & Control, and then we'll get into sort of more specifics.

Yes. Well, it's been a busy year. I just crossed my 1-year anniversary at Rockwell. I think one of the best kind of developments over the year has been the maturation of our software strategy at Rockwell, really completing an intent to pivot to the cloud in a big way. And we've done that both with organic development as well as with our Plex acquisition. It kind of made a perfect home, if you will, for acquiring Plex into Rockwell. So I think that's gone great. We've made some great improvements too in kind of operational effectiveness in the Software & Control business, just kind of modernizing tools, processes, policies to kind of increase our ability to deliver to the market. So a lot of great things, including Blake's kind of revamped leadership team. It's a great team with a lot of great new insights and spirits. And it's been a great place to work over the last year for sure.

That's good to hear. And Brian, maybe since you talked about Plex, let's talk about Plex a little bit. So I think the guidance was breakeven in '22 when you announced the deal, $0.25 to $0.35 of underlying accretion in year 2. Are you still on for those goals? And can you give us some more on sort of the integration of Plex and how it's going and the capabilities? You mentioned cloud and what it's bringing to Rock and maybe revenue synergies over the long term.

Yes. So Plex has been in Rockwell for almost 6 months now. So we have spent a lot of time on the integration plan and activities since close. We've started to see some of the first synergy opportunities that the idea of having the Rockwell direct sales and channel contributing deals to the Plex portfolio. So that's beginning to happen, which is not bad given the kind of time to build an opportunity from lead to close. So we're happy to see that. One of the things we announced in our Q1 call was the Plex win at Shyft Group, right? So that was a great kind of, in my mind, positive vote from the market saying, "Hey, what made Plex special continues on inside of Rockwell and able to close what was the biggest deal for Plex in the last several years now under Rockwell ownership." So the integration is coming along great.

Andy, I'll just throw into this. We did something, I'll say, a little unprecedented when we acquired Plex that we laid out for '21, '22, '23 a pretty detailed walk of what we expect out of this business from revenue, earnings, all the different components. And when I look at where we are in '22, we -- it's remarkable. This is just playing out exactly what we expected, if not even slightly better than what we expected.

No, it's good to hear. And Brian or Nick, like toward the goal of sort of a one-stop shop in software, you acquired Plex, Fiix, AVATA, all these things. Like how far along are you in sort of that goal? Because if you look at sort of one of your major competitors, right, they'll sort of pitch that they have a solution. Like how far are you in sort of solution-based outcomes?

Yes. We've really drawn out that map that our customers need for their production systems, kind of thinking holistically and from the customer's point of view on what they need. Rockwell has a tremendous set of assets, products, capabilities to deliver against that. But it's not enough. And so that's what's been driving a lot of our partnerships, activities with PTC, with Microsoft, with Accenture, with ANSYS and others, right? So it's that kind of connection, that ecosystem approach that Rockwell is super comfortable with, right? We have this distribution ecosystem that works really, really well for us. That kind of expands into these technical partnerships with the companies I mentioned. So together, right, that provides a really compelling set of solutions to cover that production system of our customers.

And so Brian, you also have sort of a lot of potential, right? You've got the Emulate3D. You, I think, rolled out pilot of augmented reality. How is that going? And when you sort of step back, how does long-term growth for your business look? And Nick mentioned the flattish margin this year. I thought last year was a big investment year in Software & Control. So like when do you sort of get the margin uptick on what you're doing?

There's a lot in that question, Andy. So first of all, we are believers in this cycle of technology adoption. You spent time with Nick talking about the CapEx cycle. But there's another cycle, which is technology adoption in manufacturing, kind of this long anticipated Industry 4.0 revolution, bringing new technology like augmented reality or advanced analytics into manufacturing. So that's happening now. And so that's what's driving our investment across the portfolio. So I'll let Nick talk about margin expectations if he wants to go any deeper than his previous answer there. But as far as across what we're working on, I think the potential for us is huge. And it's up to us to kind of organize ourselves and our partners to go tackle that.

Yes, Andy, what I would add to it is where we are in the cycle that Brian was just talking about, there is growing opportunity. And I think we'd be doing the whole opportunity Rockwell has a disservice if we were overly focused right now on margin. What we have found over time in Rockwell is nothing expands our margin like growth. And so making these investments that Brian is talking about now, while we're growing now, contributing very strong margins, that in itself, I think, sets up a margin expansion story for us in the future that I feel pretty confident about and pretty excited about.

Just to pick off a couple of the other points of your first question. Emulate3D, we're seeing a huge interest in that because companies are trying to minimize the ramp-up time to manufacturing. Like how valuable is it to an industrial company to be able to get to volume production quickly? So they want to do more of that prove-out in the virtual world, right, this virtual commissioning idea. Emulate3D applies to that, so does our FactoryTalk Echo product, which we released last year. So big improvements there. And then our ANSYS partnership also delivers on that. On the augmented reality side, our partnership with PTC, we've really kind of with them brought new products to market that make it easier for companies to adopt and roll out augmented reality, kind of democratizing that approach, taking advantage of the CAD models they already have or the experts they already have to bring that kind of AR connected worker experience to life. So there's a lot we kind of, as we say, a lot of ways for us to win across the market in all these different portfolio options.

I want to get to some more of these audience questions. But Brian, let me ask you one more. Like are there any white spaces that you still have that you sort of need to fill through acquisitions?

Yes. Of course, there's always an interest in growing the software portfolio, to build out that production system view that I mentioned earlier. I think we also like the connected services space, this kind of ARR view of services because our customers need this kind of expertise as trusted guide. I think there's also opportunities in Intelligent Devices with kind of material handling. And we talked a little bit about our growth goals in Europe and Asia. So plenty of opportunities across the board for us to grow through M&A.

Got it. So a question from the audience. As U.S. manufacturers begin to focus more investment in their U.S. ops, what kind of competitive response are you seeing from other automation providers, seeing them ramp their focus, competitiveness in the U.S.? And what can you do to protect and build on your strong U.S. market position?

Andy, we've been really pleased with the win rate that we are seeing around the world, and I'll say in particular in North America. Of course, it's a competitive landscape. But time and time again, we see ourselves winning, and we're pleased with that win rate.

So there's another question here on sort of largest end market opportunities. But I wanted to ask you -- so I'll ask you that, but I'll also ask you about process automation. If you think about Lifecycle Services, you've talked about sort of that business coming back now and being relatively strong this year. So you're very upstream-focused. So what are you sort of seeing there in your business this year? And how strong a recovery is this in process automation?

So in Process, we're expecting Process to grow 15% for us this year. So strong growth in Process. Places like oil and gas, seeing strong growth there. Our Sensia business joint venture with Schlumberger, seeing really strong demand right now. And we see that growth continuing and building as we go throughout the year. So it's after, I'll say, more bumpy last 1.5 years or 2 years with Sensia, it's nice to see that coming along and moving closer to what we originally projected for that business. Broader in Process, we've introduced technologies that we think increase our relevance and contributions on Process, working on our capability that the things we provide not only -- that can provide solutions not just for discrete and hybrid, but also process that our customers don't have to think about 2 different types of technologies when they have a combination of process here and discrete at another point, that they can use one set of technologies. So that's been part of how Rockwell approaches the market, how can we simplify this. So the Process market, we're expecting the market itself to be positive, and we're expecting good growth for us.

And then in terms of the other question about end markets. What do you think is the biggest growth opportunity as you look at '22 or '23 for Rockwell?

Well, it might depend on whether we think about it in percentages or absolute dollars like e-commerce, high growth for us last year to the point that it became a specific part industry that we're calling out in our map of the industries. We're expecting 25% year-on-year organic growth in the e-commerce space. Automotive is a type of industry that with all the capital investment going on in EVs and with batteries, we think that's an attractive place. But places like life science, where like pharma, places like semiconductor -- semiconductor, if I go back a few years, we didn't even call it out. And it's now 5% of our -- approximately 5% of our total revenue. That represents opportunities as we expand our offering into the semiconductor space. And then like one of our biggest ones, if not our biggest one, food and beverage. That's a place where we have very good capability, and we have customers that are continuing to seek automation. So again, it's -- sorry to not isolate it to 1 or 2, but there's a lot of positive things from across the industries there.

And Nick, just your comment on semiconductor. How is that going for you guys in terms of like, to your point, you're focused on facility management solutions in the past. But obviously, a lot of fab facilities or a few of them coming over here. So what's the TAM for you guys now when we think about it?

Yes, I don't -- maybe Brian has the TAM. I don't have the TAM, but let me describe it. You're correct in saying historically, like the facilities management has been the majority of our semiconductor revenue, but we've been working to how to expand our offering there. Things like material handling within the fab and technologies like independent cart and what does that do in there, some of the things we have around cybersecurity and network infrastructure and the capabilities there. And then even a couple of our acquisitions like Kalypso, they come with domain expertise in the oil and gas space, amongst other spaces and how they can be not semi -- I meant to say semi -- in the semiconductor. They have that capability from a consulting standpoint. So there's a wide array of things how we're expanding what we are bringing into that semiconductor space.

Got it. And you mentioned cybersecurity, so I should ask about it. The last time I checked, it was about $100 million business, so not too large, but certainly, you've talked about it many times as a huge opportunity. So what do you see going forward for that business? Does it become a big growth driver for you even though it's relatively small right now?

Yes, it's still relatively small. It's not that long ago that we quoted that $100 million revenue. First quarter, we saw really good demand. We're expecting it to grow double digits in '22. And it's something that's important to us, not just in the actual providing of the cybersecurity services to our customer, but it gives us -- Brian used the term a few minutes ago, more ways to win. It gives us one more avenue and channel in with our customer. And that's part of the value we see being driven by our cybersecurity business, which we continue to expect to be a fast-growing part of our portfolio.

And I wanted to ask you about hybrid and life sciences, particularly. You've talked about investments sort of in life sciences in the past. So what are these investments you're making? And how big an opportunity is life sciences now? And maybe I'll just step back and ask one more question. The whole concept of reshoring. I know it's hard to sort of talk about it, right, in the sense. But does it seem like it's playing out as you guys foresaw across multiple end markets? It's not just fab or life sciences, it's much more broad? And what's your guys' opinion on that?

Yes. So -- and Brian can add on another thought on this after I share. Like a year ago, it felt to us or I'll say to me, it felt like I think it's there, and -- but I can't point to any specific hard facts of what's happening here. In the last year, it's become clearly more tangible to us that, yes, there is movement afoot of increased activity with our customer base of what it means to be putting more investment, CapEx investments into their North America operations. We are seeing that. And it's part of what we think we're seeing -- one of the factors in what we're seeing in our strong demand that -- and our strong growth that we're seeing. In terms of life science, in particular, like some of the things we're working on is what we see with our customers is the need for agile manufacturing. They want to be able to have things very quickly, able to make sometimes in smaller batches, utilizing their technology. And that's where we think what we are bringing to the table helps them. And I'm not going to go in -- I can't go into a lot of detail on that. But with their need for increased agility, they are -- we see our solution set there being most helpful into the pharmaceutical industry.

Just quickly, I'd add our MES offering for pharma companies is growing nicely as they see increased pressure to perform against those amazing targets that they're setting for themselves, right? So they really need our help in kind of the planning and execution of their pharma business, their pharma production. And then across hybrid, more integrated control, things like integrated robotic control, integrated vision into one control architecture. So there's kind of a hyper automation approach that hybrid manufactures, food and bev, pharma, et cetera, find really attractive in our portfolio.

And Brian, I should just ask you to sort of wrap up, like what are you most excited about on the software side? Because there's so many sort of avenues that Rockwell's sort of pursuing.

Yes. I've been waiting my whole career for this kind of technology adoption to strike manufacturing. And it's happening, right? Finally, we've been waiting for it for a long time. But we're moving past these kind of pilot projects and experiments. And companies are seeing real tangible benefits from deploying these technologies. Hardware, software, doesn't matter. It's about kind of bringing technology to the fore, using the data and manufacturing, take advantage of expertise that Rockwell has a lot of to kind of transform their manufacturing. So I think the time is now, and that's what excites.

I think that's a good time to wrap up. So look, we very much appreciate the time, guys, and thank you very much.

Thanks, Andy.