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

Yes. I think it's -- if you think about ROI and how do I keep the overhead and complexity of the business flow and not have this sort of intertangled web of different solutions of applications that don't look the same, but feel the same. And it really becomes, again, starting small and expanding over time. It's really about when you think about these new next-generation technologies and cloud and Software as a Service is one of the ways to do that because it's sort of infinitely elastic, right. That's the beauty of it. It takes all of the complexity if you think about infrastructure and DevSecOps and all of those things and take it off of the plate of the manufacturer and puts it in the hands of best-in-class professionals, but then it can also scale with your business. And then I think the other piece is, as you think about the areas and the problems that you want to go tackle, it's starting with quality, like everything is around quality, right, people quality, product quality, process quality. But that touches all areas of the business, but then being able to say, I've got that and then expand out logically to the next problems. But again, in a way that isn't required you to go think about 40 different vendors and stitching together 40 different solutions on 40 different platforms.

Yes, not having disparate solutions, but looking for that solution that brings it all together. And you mentioned cloud, and we have a lot of great interest and adoption of cloud in the report this year. And it was the #1 area that organizations are planning to increase their investment. Having gone through the pandemic, globally manufacturers came to understand the cloud is a free way for business continuity to be reinforced and helping the organization, connecting people, going back to our earlier slides about having your workforce connected with your technology, cloud is a great part of that and other areas to look at automation ranked second highest tier. Anthony, do you have more around cloud that you could give guidance to our organization of the importance of it?

Yes. I mean, if you think about even going back to the conversations we were just having, it is all about how do you scale and how do you handle today's problems, tomorrow's problems and the big after whatever that is. And the way to do that is through not having to absorb those on your own, right. And so when you think about the importance of cloud is, a, it allows you to be anywhere at any time, right, but it also allows you to burst up and burst down as your business needs to change. And so as the manufacturers are sort of thinking about what does my business model look like today, what does it again, look like tomorrow, and where will I need to be operating, it's all about creating that adaptability, that elasticity of the business. And again, cloud is one of those technologies that it's fundamentally underpinning all of the other technologies and enabling those technologies. And so it really is a way to drive that sort of adaptability in manufacturers business.

And thinking about the cloud and where you can get started with it, these were some of the solutions that we asked our respondents about. And to me, what really stood out on this slide was the top 2 and the bottom 2. Looking at production monitoring and quality management systems as the # 1 and #2 that have already been adopted and looking at CMMS and APM as the bottom 2 for adoption, but the top 2 for planning to adopt. What I see when I look at that is a modular approach, incremental approach to build that ROI that we've talked about. And these types of solutions, when you bring them in, they're lower cost by comparison to a full ERP deployment and a lower drain on resources. So you're able to efficiently and effectively get that solution implemented and build payback and ROI so that you can keep moving on your digital journey and keep your organization functioning, fine-tuning and moving along. Anthony, we've talked a lot about this, and I know you have more depth to that conversation. Would you mind sharing a little bit?

Yes. And I think it highlights really well what the conversations that we are having with manufacturers and even the things that we were talking about earlier, which is being able to start where you've got the biggest challenges and the biggest pain and then continuing to grow from there. And it's pretty interesting to see, and if you think about it from manufacturing, it kind of makes sense, right, like quality touches everything, people, product, process. And then you think about production monitoring and visualizing the key KPIs and maximizing as you think about things like OEE. But then that becomes this nice on-ramp to full digitization and solving other core use cases, right. And so you can kind of see like how these things ladder up or ladder down depending on where you're at in the use case to things like MES and even full ERP, right. And so it makes a ton of sense because you're solving the core challenges that can -- again, as you think about continuous improvement and you think about changing your culturally, those 2 things touch every department in every aspect of the business.

All right. Why is quality so important, Anthony?

My goodness. So it's -- I love talking about quality, especially coming from my manufacturing roots and background. It was always one of those things sort of -- it was like a feel like it just gets in the way, right, like I just want to get product out the door. But quality, if you think about it and you step back at it and you look at it holistically, it is literally the foundation of manufacturing. We've said it a couple of times now around product, process and even people. And so when we think about it, it's -- quality is really a culture or a mindset and thinking about things as we think about a holistic approach and systems-based approach, thinking about the processes and thinking about doing it right the first time every time. But it becomes a sort of guidepost on how to go about satisfying the customers in the broader market, right. And so that's really why it's important because it is encompassing of everything as manufacturers do. But if you think about it, especially in the automotive space, as an industry, we're not quite there yet, right. Recalls are still not uncommon. In 2021 alone, there were 1,000 safety recall campaigns on the road, which means 35 million cars that are out on the road had an open recall, right. And that's a lot. And recalls are sort of systemic and their symptoms. But if you think about it, regardless of your role in manufacturing, it's not just about the dollars and cents, right, it's about protecting and saving lives. And so there's a couple of other interesting stats, like I love numbers, right. There are something like 6 million car crashes every single year, which equates to about 16,000 per day or 1 out of every 5 seconds. So by the time we get through the stats, there will have been a car accident. And roughly 4.4 million people go to the hospital every single year as a result of accidents, but only for minor injuries. And so the thing that stands in the way of those 4.4 million injuries becoming more serious, it's the quality of the safety systems in the vehicle. So you think about the airbags and the seat built, but there's so many other things that are involved there. There's these nocuous pieces of plastic and steel that the consumer never really thinks about. They're all layered across the vehicle, all designed to save lives, but it's about not only having those installed but produced well and produced to spec. And so that's why quality is so important, but it also has financial impacts, too, right. So we're absolutely in the business of as manufacturers and specifically automotive manufacturers producing great product and making sure that people are safe and healthy, but we have a business as well. And on the business side, if you think about -- I have to recall, and it impacts my business, there's brand risk and reputation there, right. It's a recall cost millions of dollars in true cost, but the brand damage is bigger yet. Like trying to go and win new business when you've been subject of a recall is really, really tough. When you think about all of the supply chain shortages as well, like not only is it tough pulling back all that material, but then having to try and replenish and then meet your existing order demand that just has this sort of compounding effect. And if you look at it in terms of the hard dollars and cents as well, right, there's something like the average cost of the recall is about $500, and it's increasing as you think about EVs as well. And the total charge to the automotive market is something like $20 billion a year. So if you take all of that together, right, it is a significant impact and a significant both in terms of dollars and cents, but also as you think about the broader impact to the consumer and to the people who use the products. And so quality is important because it is about the business, but it's all about the people as well. And so if we think about, it's like well, goodness gracious for it's 2023, right, it feels like we should have made some good progress there. If you look at part of the reason why, and we'll get into some cultural bits in a second, but part of the reason why we've got some of the challenges that we do is we talk to as Rockwell and as Plex not only manufacturers, but we also talk to the OEMs as well. And one of the things that we hear from the OEMs is they take their supplier quality engineers and they go out to their supply base is that a lot of their suppliers are still using Excel, but it's not delivering the results. And you've seen that come out with Ford and some of their recent changes as they think about the new PFEMA that they're driving out with IATF. And so something -- it's like greater than if you look at design in process and PFEMA is a greater than 56% are still using Excel. Now imagine there's some -- like Excel can't drive a process, right, it can create a document at best. But how do you keep up with 1,000 line Excel document like I need to go make that change there, and then I got to come over here and do this. It's just -- it's not scalable. And again, if you think about using our people and our talent effectively, I think you don't hire quality engineers to come in and manage an excel document, right? So not only is it not driving the process, it's not allowing us to use your talent and your team and your resources effectively. And as you think about onboarding or even attracting new talent, like who wants to come in and work with Excel, right, it's just -- it's not a new modern technology. And so it's also driving a lot of quality issues as well. And so when you think about it, again, thinking about 2023, there's this and sort of where some of the issues lie is, a lot of companies are still using a paper-based and Excel-based system. Now you've got the sort of the document creation as you think about DFMEAs and PFEMAs and Excel. But then the rest of the process is paper-based as well, and paper can only follow the process, right. It can't drive operational rigor. It can't collect information in real time and surface that to you or your team and allow you to make decisions. So we see a lot of manufacturers that are still using paper and it kind of goes a little bit like this, right. So you create your Excel FEMAs and then getting your quality requirements from the customer, building those out, putting them in binders, hand them off to somebody. I love this slide. But -- and someone is walking around and distributing those documents to the workforce, right, down to the individual work center or down to the line, right. And then at the end of the day or at the end of the shift or every 4 hours, all the way back around again collecting all that information and giving it to somebody and they're keying in the information. And so at BaaS, if you're following a process like this, it's 4 hours behind, right? Because someone is collecting the information and then it's got to be keyed in. The worse it could be days or weeks behind, and that tends to be more the case if they're the manufacturer is following a paper-based process. And then you think about it if you have a deviation or a change to the spec, you got to try and collect all of that. And my favorite is when you're sure, you've gone out and you've collected every piece of paper possible every old traveler or a job sheet or spec, you've updated all the documents, you placed all the things in the binder and the auditor comes in, and they find that one operator who's got their favorite print of the spec or their favorite traveler that they have like hidden in their little desk and they pulled that out and that's what they're running to and the auditor is always the one that finds it, right. It's like I just spent all that time and so that's part of the challenge, right. Paper can't drive the process. Paper can't surface insights and frankly, paper can't connect people to continuous improvement. And so it's a big part of the challenge. And so this is what we -- the typical workstation that you'll see, again, as manufacturers who have not yet started their digital journey, centralized, they're somewhere out in the plant that everything kind of comes together, maintenance, quality, work instructions, hey, here's some new stuff that you need to be aware of. We've got a big customer coming out and that gets posted as a bulletin, but it doesn't control anything, right. All it does is at best inform, and it informs based on when the piece of paper was printed out. And so you think about, again, all that replacement of documentation and trying to communicate in real time trying to empower the team to use frankly, their skills and their experience, it just doesn't allow for that. And so this is some of the stuff that we look at is when you think about like, well, goodness gracious, 2023, we've just spent a bunch of time talking about the state of smart manufacturing and all of this really great technology that's out there. Why do we still struggle with the same issues? And why is paper and frankly Excel still sort of a prolific tool. And I think the reason for that is, is because most of manufacturing, and I want to anchor on that most little asterisks there. Most of the manufacturing thinks of and approaches quality the same way we did in the industrial area, right. We kind of approach it like an assembly line. It's this kind of linear and algebraic approach. And I mean, here's what I mean by that. So we take our inputs around process training, product training and people training, right, that makes sense. Those are the inputs. That's where we start. And then we expect, and we hopefully that those things lead to good outputs around product quality, delivery quality right, are we on time for our customers' audit quality. And then that hopefully, we expect leads to good outcomes and all sorts of measures around cost support, quality first, pass yield, et cetera, right. So that's how we measure successes through those outcomes. And again, it's the sort of like linear A+B equals C approach. But if you think about like where we are today, it's more interconnected, right. We talked about the global workforce, the global supply chain, frankly, all the challenges as we think about people. And so quality is a big part of that, but quality can't be and it isn't, and it frankly was never supposed to be just one department's job, and we can't look at it through the lens of just product quality. It has to be that holistic approach, and it has to be continuous and in the spirit of continuous improvement. And so this is kind of a what we -- when we talk about quality and we talk about it as a foundation and as a culture, that's what it matters or what it means. Now we like numbers. And frankly, in manufacturing, it's all about the numbers and all about the business and all about how do we drive and improve margin. And so I think it's important to anchor on the fact that quality of the culture is important. Continuous improvement is important, but it has a real impact to the bottom line. And so we'll dig in and talk a little bit in numbers, so you know that our heart is in the right place. There was a multiyear study done by CEB and they looked at more than 5 dozen, both domestic and international, manufacturers, and they surveyed nearly 1,000 employees and they export again, what does quality look like, what does culture look like, and how do you drive quality as a culture, and likewise, what are the benefits. And then they ranked those companies based on the success of their business, the profits, they look at employee and customer loyalty. So again, we're talking about earlier about how you leverage your talent correctly, but also keep them. And so they ranked the manufacturers based upon that. And what they found is that the bottom 20%, so those who ranked the lowest on the companies that they surveyed again against those hard metrics were focusing on the old, frankly, quality, the ways that we measure quality, monetary incentives, piece count. They, of course, did training, but it was the sort of the old and that linear way of looking at things. And from there, what they found was that those bottom 20% of manufacturers spent 64% more time on mistakes and issues and errors. So they had more mistakes, more issues, more errors. So 60% more of those, and it took them twice the amount of time, right, to correct those errors. So just imagine if you had 2x more like time to go do productive things, right, imagine all the great stuff that you could do. And so when you think about it, right, that's why these things are super important. Now they also found that when talking to those employees of, again, the bottom 20%, 60% of those employees said that they work in an environment without a culture of quality, right, where peers don't go above and beyond, right. So not only is it impacting the business overall, right, but you can see it and feel it in the employee base. And if you think about what does it mean to really drive transformation, you need your people. And so they're not seeing -- these people are not seeing like others do the right thing. Now when you contrast that with the top performers, the top 20% still did like we can't forget about piece counts, and we can't forget about training, and we can't forget about cost of quality. We need that total quality management mindset. But the other thing that we were doing in addition is building out grassroots, peer-driven and mission informed practices. And so it's not just like I'm going to measure your piece counts and frankly, do that on paper, it's all about connecting the team to the work that they're doing and sort of building that community and that culture that you were talking about earlier, Gerry. And when they measured that out, they found 46% fewer mistakes, issues and errors, right, that math checks out. So they have less than half of the same amount of challenges. And likewise, they're spending 50% all less time resolving them. So they've got more time to do more innovative, constructive things, get more throughput, solve some of these bigger and stickier challenges. And that becomes -- you can focus on the future now, again, because you've got your foundation built out. And so it's just -- it's obviously -- you could see it in the data, you can see it in the numbers that it's super impactful and super important. Now that's the bottom line, but the top line is important as well. And so this same study, they took those manufacturers and they went out and looked at all of the different customers that those manufacturers did business with and found that 50% of the buyers were looking for brands or suppliers that match their core values. So it's not just the race to the bottom. It's are you someone to trust and respect and sort of share the same sort of ethos as I do. And then likewise, a big part of the way they got to that business was through word of mouth and references. And so as you think about what does it look like, we're talking about recalls a little bit earlier. I think people are talking and saying, hey, what suppliers would you recommend and imagine if you've got a recall because you were following Excel or following paper, didn't have your processing control, that impacts your ability to be successful. And so then you think about it in terms of, again, hard dollars and cents when they did the math, there's $67 million in savings moving from a bottom performer to a top performer, right. Now that's for 5,000 employees. But if you think about it and break it down even a little bit further, again, it's about $1.3 million per 100 employees, and you can continue to break that down even further, depending on the size and scale of your business. But imagine having $1 million to go do something that's super productive and super transformative, and implementing new technology to automate a process, right. That's why these things are super important. And so one of the things that as you think about metrics and how you measure, we talked about that sort of A+B equals C approach like only looking at things like parts per million and cost of poor quality and sort of redefining the metrics that you measure to be across the board, right, to think about quality more holistically. And again, this is where digital solutions become more important because trying to collect all of this stuff manually with paper and then build all of that in some sort of like Excel or reporting tool and then try to disseminate that out to the team in real time is impossible, right, because we're talking about measuring things around employee retention, turnover and engagement. How fast you're responding to customers is not only thinking about things like turning around quotes, but responding to issues. How are you retaining and satisfying customers, right? These are measures and metrics of quality. And then likewise, thinking about quality itself in terms of the business in the terms of the financial ratios, right, and so audit costs, scrap costs as percentages of revenue and expense, and then likewise, trending out some of the data. And so if you think about it, it's holistic. It's foundational. It's touching all areas of the business, being able to drive that and likewise collect that information and report on that and do continuous improvement. It becomes difficult, if not impossible, if you don't have digital tools and solutions. And so when we think about quality, and we think about what it means to have a foundation of quality, it should drive the process at every step of the way. So no more people with shopping carts, distributing paper, right, but everything from your compliance and your document creation down to how you're executing, down to how you're communicating to the customer, all of that needs to be underpinned and fully interconnected, and that helps drive the process. So from a Plex perspective, quality is something that we spend a lot of time on and frankly, have a deep history with -- it is one of our first solutions, and we continue to enhance it as we think about all the new compliance regulations that come up, frankly, the challenges and the speed of which manufacturers need to comply. And so we think about it across the whole spectrum, but 4Q lenses. And the first is you think about it in a holistic manner, like time from the compliance and the first thing I need to do is I think about whether it's some sort of regulatory body or even something I'm doing inside of my own facility to make sure I comply. But having that sort of digital articulation, whether it's legal or ethical or quality regulations and then being able to not only drive what is it? I need to comply with who's responsible for it and what do I need to do and how often do I need to update. But then taking that click deeper and we think about FEMA, right, so back to our no more 1,000 line FEMA documents, but pulling all of that into a digital tool that feeds in from compliance and likewise can feed into the execution, but also fully up to date with all the latest standards if you think about AIAG and VDA back in 2019, all of the things that Ford is driving now, and we expect other OEMs to take advantage of all sort of integrated, all holistic, so you don't have to worry about it. And likewise, taking off the administrative burden of having to key in all that information and maintain those spreadsheets. And then driving that into the control plan. So you have this sort of predetermined way and again, interconnected way, created directly from the FEMA so you can drive that operational behavior, right, and that governance and that control. And so it becomes, again, no need to create this separately. No need to worry about if I update one, do I have to go update the other, it's all completely linked. And so you can say what you do and do what you say. And then into what we call check sheets, but this is sort of the execution layer of quality, right. And so you're directing the control of what's happening on the shop floor at every step of the process in both qualitative and quantitative right, is the workstation clear and free from debris? Yes. Did you measure the OD of this and the OD should be whatever it is in millimeters, right, within a tolerance range, but you're driving that operator behavior and helping them do the right thing, making it almost impossible to do the wrong thing and taking information directly from gauges and machines where necessary. And then the last piece, and this is about continuous improvement. It's all about the spirit of continuous improvement. And so we also have what we call problem control, which is just you can link directly to an offending record, whether it's a check sheet or a piece of inventory, a problem record and say, hey, this didn't go the way we expected. We need to go do something about it. And you can do everything from -- we have built-in forms around 8Ds and 5Ys, so you can drive the standard processes. You can build your own forms without needing complex IT, so it's just a low code tool you can pull things together. But part of that is driving that culture and bringing people together, where it has a team-based approach. And you can assign of actions to people from across the organization, drive awareness, but also drive reporting. And then that naturally bakes into the cycle, right, if you think all the way back to your compliance, your too many control plan, hey look, we had failure mode. This is what happened. We didn't catch it. Here's what we're going to do about it. All right, make the change back into the full digital flow. And so that's the -- when you think about how all of these things interact and interrelate, when you think about how do you drive a culture of quality and you do that at scale in today's problems, tomorrow's problems and the day after a problem, that's why technology and digital solutions are so important, and that's sort of the underpinning of how we think about things and build. Build product is at every step of the way, right, we've got it covered. And so there is obviously the quality professionals in the group of like, Anthony, but there is a lot more that goes into quality than just compliance team of control plans and check sheets and then you're spot on. And so that's why if you look at the full breadth of what it means to have a quality solution and what we deliver as part of our quality solution, it is everything from how you drive quality planning CP QP PPAP, supplier PPAPs into the core tools and even document offering and just statistical process control and likewise the execution, all of that underpinned. But the ability to take that as you need it, right, not everybody is ready to do all of that in one shot like, hey, look, I just got to comply with Ford and the documentation, and I need to roll those things out. But my problem today is in the document creation, we're in APQP, right, it's that ability to sort of take it as you need it, solve today's problem without having to jump to a whole different solution and worry about integration.

All right. And that brings us right into a good sweet spot here, thinking about regulations, compliance, but also thinking about how we reinforce processes and empower workers. Sustainability has moved into the mainstream for manufacturing. And last year, we had 97% of our respondents say that they had a formal or informal policy. This year, 95% said that they have a formal or informal policy, that's 95% of those 1,353 global respondents. And why are they looking at having these policies around sustainability and ESG? One of the top of mind things is regulations, new regulatory frameworks are coming in, and they're putting pressure on manufacturers to have a policy around sustainability in ESG. There's also tons of data out there about the importance of having that for an organization to help contribute to develop and drive that culture that we're talking about, the community within your organization where employees feel belonging and ability to impact change and contribute. And if we look at the next slide here, we're looking at some of the reasons why manufacturers are looking at sustainability. What are they getting out of it? For automotive, specifically, 49% said they're developing these policies as a competitive differentiator. So there's 2 pieces there. One, it's feeding into how they're supporting their workforce; and 2, it's helping the organization get ahead of those regulations as they come in, regardless of what size organization you are, you're going to be impacted by this change. There are huge organizations out there with these big bold net-zero goals, and they're putting pressure on their entire supply chain up and down the value chain to meet and quantify these goals. And what does that mean? It means moving along your journey of digitalization, being able to produce, capture data and produce an actual output that quantifies what your impact is for your organization, what type of energy amounts you're using, what's going into the product and so many other pieces. Anthony, we've presented on sustainability over the last couple of years and talked about it. Do you have any points to add specific to our conversation here today?

Yes. Again, I get an opportunity to talk to a lot of manufacturers and have been able to see the sort of the shift in thinking and sustainability as it becomes more and more prevalent in Scope 1, 2 and 3. And it's one of those things that literally touches every aspect of manufacturing, it's not only how do I reduce my carbon footprint, but can I get more efficient in how I make my product and look at different material, more materials and manufacturing processes. But as you think about it from the OEMs on down, it becomes more and more of a requirement and touches more and more of the overall process. And I had a conversation with a couple of manufacturers that said, the way we're thinking about sustainability now is certainly in doing good and reducing our footprint, but it is really the next ISO standard. And it will be a requirement from all OEMs across the globe, and you will have to comply and be able to generate the necessary reports just to be able to fill out RFPs. And so again, it comes -- they're coming back to how do we not only collect this data to satisfy the reporting, but be able to action it. And so I do think it is a very big transformation that's coming more and more rapidly in the manufacturing industry.

Absolutely. And to your point, the quality ranked highest when talking about sustainability throughout the report. And I know we're getting close on time, so I'm going to move on to our next slide here. Where do you get started? And maybe this where it will end talking through a couple of these key points. We put in this guide talking about where to get started. And it's important to have a plan and a guide regardless of how much technology you've adopted and implemented over the years and whether you're moving from a paper-based organization to your first steps on digitization? Or you've been moving along and you've progressed. These are key questions for any organization to be prepared to gather the right stakeholders to quantify the metrics. Anthony, I know you're a big personal metrics as we've gone through here. How important is it to be clear on the metrics and ROI as you take a step forward in your technology adoption?

I think it's critically important. Anything we do in manufacturing, you have to have -- I'm trying to improve something and have to have a gold line. And I'm doing this for a reason. And so not only having the end in mind with the business case that you expect, but being able to measure that and measure it not only against core things like what's the ROI of the business, but thinking about what are the business measures that's going to move as we think about scrap rates or inventory turns, those types of things. And so making it highly visible, highly pragmatic, but driving to something that truly matters for the business. Not only can you get visibility, but you can get those quick wins, get people excited and that help to generate, as you think about, okay, we solved this problem, we need to go solve other problems in the future. And again, ladder up to more transformation in other areas of the overall business.

Thanks, Anthony. And while you're talking, I just advanced for that ladder up slide, looking at solutions from the ground up, where you can enter in. And just a reminder of how Plex is here is one of those solutions that can help you with all of that. And I know we're at the end of our presentation. So I just want to say thank you, Anthony, and thank you to our audience. It's been awesome having this opportunity today, and we really appreciate your time.

Yes, it's good to see, and thanks, everybody, for hanging out with us.

Thank you, Gerry. Thank you, Anthony. You are a dynamic duo. And thank you, everyone, for attending today's webinar. Just wrap up items in an effort to keep improving and providing topics of value to you. We would kindly ask for your participation in a brief survey, and you can speak to a representative for more information and get that information in the webinar survey. And we look forward to seeing you at our next event. Thank you.