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

Rockwell Automation presentation. I'm Rob Mason, the Senior Analyst at Baird that covers the advanced industrial equipment space. Rockwell Automation is the largest pure-play industrial automation company globally. It's expanding solutions offering of software and smart hardware and service is used for automating factories and adding resiliency, sustainability and productivity to manufacturing operations. Here today to tell us a little bit more about Rockwell, we have Scott Genereux, who is their Chief Revenue Officer; Aijana Zellner from Investor Relations also joins us. Scott's going to walk through just a few slides to give us a brief overview, then we'll go into the fireside chat portion. [Operator Instructions] And we are [email protected]. All right, Scott.

All right. Well, thanks, everybody, for joining us this afternoon. I want to take just a couple of minutes, and for those of you who might not be as familiar with the journey that we've been on, to talk a little about Rockwell. As you just heard, Rockwell Automation is a pure-play focus on industrial automation and information. We bring value to our customers through increased resiliency -- I guess I should have put that up first. Resiliency, agility and sustainability. We bring value to our customers through capabilities, additional capabilities in addition to that, in areas that not only help our customers win but help Rockwell win across the board. When we look at market access, we have today great access across companies that are very industrial-focused across the board in discrete and hybrid and process areas. This includes a broader reach into verticals, when you think about it, that are high in growth and profitability opportunity. And some of those verticals, when you look at it, are electric vehicles and battery, semiconductor, warehouse and e-commerce across the board. Food and beverage, which is our largest industry and vertical. You look at home, personal care. Pharmaceuticals is a big area. medical devices, energy, both renewals and also fossil fuels, is a big area, chemicals and mining. So for me, across all of these, Rockwell has great market access, and this is an area where we're taking wallet share. When you look at this slide here, we look at one of the factors of our success and our profitability is that we are a pure play and that we have a single control platform. And that platform has a great market access across the discrete, hybrid and process applications that I already mentioned. But in addition to that, when you look at this slide, for those of you who have been familiar with the company, is there's a lot more software in here now. When you think of Rockwell, you might think of ourselves as a hardware play, but there's been a lot of investments in the software side also. And with that, that gives us an opportunity to go after a whole new potential market space inside our installed base and also in our competitor space. It also allows us to be able to generate more APIs that not only focuses on our software, but also third-party software across the board when we interface, and also our hardware products to communicate the data through. And I also think that when you look at this, AI becomes extremely important. We've had AI integrated into our technology stack for many years. It's something that we do naturally. But as we look at AI develop over the next future years, we think we'll integrate that more not only at the device level, the control level, but also on the cloud level. From go-to-market acceleration, this area here, we've spent a lot of time, and we think we've had a lot of success specifically in a few areas. Talent is one of them. As you can see when you look at the previous slide, you can say to yourself that we obviously, as a company, have been investing and driving in new areas, so talent becomes extremely important. We've done a good job of recruiting and bringing on board more newer skill sets around software, cloud, machine learning, AI. That's predominantly my background. But we also complement that with people who've been with the company for a long time who really understand industrial automation, and we think that's a good combination. Through acquisitions, we've also been able to take advantage of some of the acquisitions from a go-to-market point of view like Kalypso, which allows us to be able to go in and have conversations and really broaden our conversations with C-level executives across the board. So that's been a great addition. And then from a partner point of view, Rockwell Automation has always had a very strong partner ecosystem. From a distribution point of view, we think that we have the best in the industry when it comes to that. But in addition to that, driving and partnering with technology partners have been a big focus area for us, so when you think about Microsoft, ANSYS, Cisco, those particular type of companies. And in addition to that, that complements it is that we have a very strong OEM machine building environment and system integrators across the board. So once again, we think there is nobody in the industry, and this is a very big competitive to us as a company. You'll hear a little about this, but we've been real busy from an acquisition point of view when you look at the last 6-plus years. When I look at this, I think to myself that the biggest advantage this has had from a go-to-market point of view has been being able to allow us to win in more particular areas that maybe we couldn't before compete in across the board. Acquisition, sales growth organically have doubled the pace of the rest of the company, so we've had a lot of success here. And when you think about what are we focused on from an organization point of view or a company point of view, you can see here on the bottom the advanced machine areas, the market access in Europe and Asia, Information Solutions and Connected Services and Process Expertise. These are the areas that we continue to focus on in these areas. So lastly, we truly believe that when you look at Rockwell today that there are just more ways to win across the board. A lot more opportunities that we can go into our customer base and sell more and be more consultative selling and sell more solutions and also in our competitive space. Look, we are committed to driving accelerated profitable growth. I think that's very important through all this process. And look, I think in a relatively short period of time, we've become a scale provider of software, digital services and OT cybersecurity, and that's a very different space for us that we've gone into. And then you can also read down here, we're obviously increasing our ARR business, supply chain agility and really be able to come out with new disruptive technologies not only in software and services, but also in hardware. So look, we truly believe we have the technology, the people and the ecosystem to make manufacturing -- take manufacturing to a whole new level, and we're excited about it. So let's get to the Q&A.

Perfect. Perfect. Scott, maybe just to start off. I want to drill into the solutions offering, some of the changes in the commercial activity. But just high level, you're obviously in regular conversations with customers. The macro environment shifting, has shifted. Your business itself, you've actually taken revenue guidance up as we go -- the year has unfolded. Some of that supply chain play in your way. But I'm just curious from your perspective in those conversations, how have those conversations shifted over the last 12 months in terms of what customers are focused on? And here and now, what are things getting prolonged, pushed out? Just what their perspective is and what's their sense of urgency around some of the automation efforts?

Yes. It's interesting. I just was in Europe last month, I just got back from Asia a couple of weeks ago. And as you can imagine, when I'm in a room with either customers or partners, this is the conversation we like to have right away, which is how's demand? How's activity? Where is the spend coming from? And I'm cautiously being optimistic. I mean, a lot of our conversations are that they see very strong demand still in spite of some of the economic issues that are going on across the board. Some, I think, industries are stronger that we see some big strength in emerging. EV battery is an area where it's still relatively new. Even though we talk a lot about EV battery, if you think about it, there's still only so many EV cars that are out there in the world. But it's an area of growth, and it's still a lot of opportunity to grow. Energy transition comes up a lot for a lot of reasons. Big opportunity to grow in that space. Semiconductor's coming up and I'm sure we'll talk about it, but there is shoring and a lot of other areas that are there. So overall, I mean, most customers and partners are pretty optimistic, I think.

Is there any delineation you would make amongst the solution set in terms of where they're prioritizing around is it productivity? Maybe a sustainability or, like you said, cyber's bubbled up as a higher demand area? Just where you see the priorities are residing right now?

Yes. Look, digital transformation comes up a lot, but to be honest with you, that's a big term and not every customer's definition of that term is always the same. But really, what it's about is simplification, right? How do I simplify my environment and the better productivity across the board? And for every customer, that's a little different, but that comes up a lot. I think another area of sustainability comes up almost in every conversation I have with customers, and of course, cyber comes up a lot from that perspective. So those three areas come up a lot. And for us, it's interesting. I mentioned through one of our acquisitions was Kalypso, One of the things Kalypso really gives us this capability on it. Kalypso was an almost like a mini [ SI ] company that we acquired, and it really allows us to go in and have bigger conversations with our customers and really broadens that conversation at the C-level that -- we were having some of those conversations before, but they really come in and be able to let us go in and be a lot more strategic than we've ever been before. And so we're getting a lot of conversations and views in the areas that maybe we didn't have before.

The -- we talk a lot about orders. Rockwell has been giving a little more visibility on orders and historically, it's been the case. And this last quarter, stretched out maybe some projections at least over the next 6 months. So I'm just curious, as it relates to your organization, what tools maybe does Rockwell have at its disposal to provide more order visibility than historically maybe we've spoken to?

That's a great question. I mean we've always had, what I would call, good tools for visibility of orders. I think the thing that's changed the most for us is because supply chain has been problematic for the last few years, it's really forced a discussion with our customers and our partners to talk about a longer view of what the projects are that are going out. In a typical pre-pandemic, maybe we saw 3 or 4 months, maybe 6 months would be long. But today, when you look at it, it's not unusual for us to have a view of 12, 18, maybe even 24 months of big projects that are going on in our customer base. And so that's really given us a really good view to be able to go in and have a different conversation, maybe even a lot more strategic conversation because we're getting that view. Someone asked me recently, do I think that will change as lead times start shrinking? I don't. I actually think customers have seen the value of being able to have those conversations with us. And to be fair, we have -- get a lot of value out of it from a supply chain point of view. So I wouldn't say that we have necessarily new tools. I think the tools we have are good. But I do think that the conversations we're having with our customers has given us a lot more visibility about orders and the projects that they're working on.

Is there an argument to be made that your business is becoming more disconnected to some of the macro indicators that historically, very PMI or industrial production-oriented around your business? Are we making -- can we make that argument?

Yes. I think the answer is yes. We do think that, that's starting to disconnect. I think it's for some of the reasons we mentioned earlier, but one is we're in a lot more opportunities and spaces than we probably have traditionally been, which I think gets tied to that. I also think when you look at from a -- just a point of view of some of the companies we've acquired and the opportunity base that we can go after. So I think the answer is yes. And we do see that, and we do think that's going to continue down that path. Do you want to add anything to --

Yes. I mean, I think Scott mentioned it earlier, just the sheer amount of new capacity build-out that's happening in North America, incrementally and predominantly, but across many different industries, shoring or localization of supply chains. One of the things that we also hear a lot from our customers regardless of which vertical they're in is resilience, redundancy. Redundancy of supply chains, of production lines, additional source of suppliers. It's something that we, as a company, are investing in ourselves, and we see a lot of our customers prioritizing that as well. We do see that continuing. Labor shortage, labor scarcity and wage inflation, we think it's structural and it's going to be a tailwind for quite some time. So a combination of all those things. And of course, we talked about EV and battery semiconductor, life sciences, and a lot of the things that are being driven either by security and making sure that you can be close to the domestic end market here or end users. That's something we continue to see really elongating the cycle. And it's very tough to see what's short cycle, what's long cycle at this point because if you look at EV and battery, to get to production at scale is going to take many many years. And so we are still in very early stage there.

Is there a way to put into perspective the percent of your funnel, so to speak, that's more greenfield today than versus brownfield versus what historically would have been the case?

No, we haven't parsed it out. Historically, we've talked about 2/3 of our business being driven by CapEx, which had both greenfield and brownfield. Clearly, the percentage of brownfield investments is so much higher today as part of our business. But for us, with our technology set, we play both in brownfield and in greenfield. So it's a combination of our digital consulting, digital twin software, our, of course, hardware, services, software, well positioned for either one. But we see a lot of investments today especially in greenfield in the U.S. where, of course, Rockwell with our ecosystem and our market share and our market access, and we are an outsized beneficiary.

So the migration of more manufacturing to the U.S. that comes in the form of domestic producers producing domestically, but also foreign producers establishing footprints in the U.S. historically, they didn't have. How do you go about -- or what's your strategies to go about penetrating those foreign producers in the U.S. where maybe you didn't have the foray into those footprints in their local countries?

Yes, I think it's a good question. First of all, as we just mentioned, I mean, we think when it comes to shoring specifically, because of our market presence inside of North America, we have a huge advantage not only because of who we are and people know who we are and our installed base and our referenceable base, but we also have a huge partner ecosystem that requires distribution and OEMs and SIs. And when you go into a customer and you said, hey, I want to remove somebody out in North America specifically for us, you're probably going to -- we're going to be the dominant player in that sense. So I think that's going to be really important. I think the other thing too is when you talk about that slide I put up where you talked about all those companies we acquired and the solutions that it's allowing us to go after, it used to be that Rockwell used to go in and maybe talk about this much, right, whatever the solution was. Those new technologies, either between acquisitions or new development that we've done in hardware, software and services, has really allowed us to go after a lot bigger market space than we've ever had before. And it's not unusual for us sometimes to -- where we used to maybe go in and say, hey, here's our hardware solution set, let's go buy it. Today, we also can go in and say, hey, we know you're struggling with cyber. We have a cyber answer. Can we come in and talk to you? We go into customers today, some of them where we have absolutely no installed base or hardware, and talk to them about our cyber solution and we won. We've -- and the advantage for us in that scenario is that that might be a way we break in, when you think about it. But if you're having a cyber discussion for manufacturing-only environment, that elevates us up to have a conversation with a C-level person because cyber gets that C-level view. And as you can appreciate in that conversation, that gives us now an audience and a conversation to say, hey, in addition to the fact that you like our cyber and we're doing a good job, have you thought about the software solutions? Have you thought of this hardware platform? And we're starting to be able to have different conversations. So for us, we're really able now to break into customers' competitive environment, not necessarily head-to-head from a hardware to hardware point of view. It can be different areas, from a software solution point of view, that we didn't necessarily have maybe 10 years ago or 5 or 6 years ago. And so -- and I think that's really been a key important area for us. And then as I mentioned, the Kalypso conversation to be able to go at a C-level and have a bigger, more strategic conversation has really allowed us to be able to also be able to show value that maybe we weren't doing before.

Now just to sit on Kalypso just a moment. Just for people in the room maybe less familiar, like you said, it was more of a systems integrator consultant firm that you acquired. Did they have any particular vertical expertise that was incremental to Rockwell? Or how have you been able to broaden that domain expertise out that they brought with them originally?

I mean, yes, not only were they focused in our space. Kalypso still is one of PTC's largest integrators also, so from that perspective. But they also did Oracle stuff, did ERP stuff. I mean, they've got a pretty broad perspective across the board in addition to what we [ core ] do. So I think one, gives them a lot of credibility and be able to go in and go after and be able to do some things. When we bought Plex in addition to the fact that we talk a lot about the MES solution there, there is an ERP solution as part of Plex that now, Kalypso can help us potentially go into more of a mid-market space and have those conversations with senior executives across the board. So they bring a lot of that.

I'll just add Kalypso, yes, it's a digital consulting, digital thread implementation business, so they can actually connect a lot of those ERP type of level software packages like PLM, product life cycle management, and CAD, but also integrated with other parts of it where needed for the customer to provide that total digital thread. They do have a lot of different expertise, whether it's sustainability. I think over 20% of their solutions are sustainability solutions. There is cybersecurity, and a lot of other end market expertise. We just -- I think, as Scott showed, recently acquired another company called Knowledge Lens, and it's really amplifying our Kalypso organization. I think we've got over 600 additional digital consultants and data scientists and AI engineers who are focused on the digital implementation. So having those conversations with a C-suite much earlier in the design phase of the customer's automation life cycle is giving us, one, visibility into their multiyear road maps, but two, as importantly but more importantly, an opportunity to play and attach our offer. So it's been really a great acquisition for us.

Yes. I was going to say most of our conversations around digital transformation with customers, digital twins, those areas, Kalypso's almost always involved.

Okay. You mentioned as well earlier, you -- just the expansion of your partner network, your go-to-market partner network with more ISVs, software bars. Can you just talk about what stage that -- when you began a larger push on that? Where are you in terms of getting that established? And what you've been -- what it's contributed to date?

Yes. We've -- so we've spent a lot of time over the last couple of years, two areas. One is to take our current ecosystem and train, rollout and drive that. I think that's been very important, and we've had some good success there. The other thing that we've really focused on is recruiting new partners. Predominantly more system integrators, those types of people who really can go in and help do implementation and help with maybe partnering with the distribution partners in those particular areas because the distributors obviously have good relationships with our customers. And if these people come in with that, I'll call it software, some of the key ARR services expertise, they came together to go after that. So that's been a big focus area for us. We've recruited quite a bit of SIs globally around the world. The other thing that's important for us is that I think, clearly, we're also training our sales organization through that process.

So it sounds like solutions are becoming more and more complex as well and [indiscernible]. How do you help customers manage that? Your manufacturing customers historically are more risk averse when it comes to adopting technology. How do you help move them past kind of the paralysis of, like you said, knowing where to start? What's the first bite, so to speak, that they need to take to really have some digital transformation momentum...

I think it's a couple of areas. I mean, obviously, if it's a greenfield opportunity, new technology comes into the picture pretty quickly, right? We talked about it earlier, labor shortage in the workforce is a big issue right now for a lot of our customers, and a lot of the newer technology really helps them in those particular areas. I don't want to keep emphasizing the Kalypso side, but once again, that's an area where we come in and have a bigger conversation with a customer and really be able to map it out on blueprint. It's not like someone comes in and says, Hey, I'm going to do a gigantic order. They blueprint it out and they say, this is where you want to start. Because you can imagine going into a customer and having a conversation with them, it can be overwhelming when you think about the size of the opportunity of things that they might have to go do to support some of these key initiatives we talked about. And so being able to not only blueprint it out, but to be able to say you start here, you take your first step, you go here, you take your next step. So for us, when you look at some of this, we'll go in and have a conversation with a customer and talk to them about where are they at in their journey? What are they trying to do? That's typically a services-oriented motion for us. Probably Kalypso, could be other people in our organization. And then from there, we get into kind of "Hey, this is where you should start. It's an easy ROI for you to get started here, and then you start laying it out and mapping it out across the board. From a revenue point of view it's great because you get some services and software upfront. There could be a digital twin implementation to help you map it all out, and then you go into a hardware mode. And then there's an ARR run rate, obviously, across the board, too.

I'll just add for simplification for customers. At the end of the day, it's can you deploy something faster with less risk? Can you get it up and running? Can you optimize it? And can you upgrade and renew it in an easier way? We do it with a combination of our cloud-native software, which is optimized for companies that don't want a huge IT staff to monitor it, right? So we can actually -- it's quicker to deploy. It's very modular. You can choose, do you want a quality solution? Do you want an MAS module? Do you want a small ERP module? Depending on what you're trying to drive, you can deploy it in a few months, you get the ROI much faster, so being able to be much more agile and decide. We know our customers and we know what their biggest pain points are and the opportunities for productivity. So guiding them through that and giving them the right solution, whether it's on-prem, whether it's in the cloud, maybe it's a hybrid of both, but that's kind of where that domain expertise together with technology get them to their outcome much faster.

I think COVID also has pushed people out of their comfort zone, where maybe it was almost like you had to do this type of stuff. You didn't have a choice. You didn't have the workforce to do it or the expertise. So where I agree with you that there might have more been a tendency to say, I'm not sure I want to do this or I'll get to it later, has really forced people to say, you know what, we got to go implement, we got to go and we've got to go fast. And so that's creating a different sense of urgency to utilize some of the newer technology and tools that might not have been there. And also it showed that people could do it because they didn't have a choice.

You made the mention of ARR a couple of times in the conversation. Just talk -- and that is a clear objective of Rockwell as a corporate organization, as a target, and maybe that plays into some of the disconnect we're also seeing with some of the macro factors in terms of revenue. But just -- can you speak to maybe some select areas where ARR -- Plex, your acquisition of Plex, maybe created some step function in ARR contribution. But what are some other areas where they're contributing significantly to that bucket of revenue?

ARR, there's software and obviously, there's services, you know what I mean, that go kind of in those buckets. Potentially not all of our services, but we have ARR that is service related. Obviously, Plex has been a big growth area for us and has been a good acquisition. We also acquired another company called Fiix, and through that acquisition, that also has helped with the ARR side. Cybersecurity, a lot of the managed service stuff we do around cyber, it's been a big growth area for us. Just so I'm clear, when I talk about cyber, I'm talking about us in the manufacturing side, not in the whole corporation side. And we're doing that not only from technology that we have but also through some partnerships of cyber companies that are more on the IT side, you know what I mean? So a company might have [ somebody ] a relationship here, but we're working together to make sure we do that. But those have been big growth areas across the board.

Okay. Growth investments is something that Rockwell speaks about every year. There's an upward bias to those every year as well. Where are those -- and they've increased as this year has unfolded as the revenue outlook has increased. Where are those growth investments touching your organization directly?

For us, I mean, we talk a lot about expertise in these new areas. So you talk about software expertise, which we've spent a lot of time talking about, but also industry expertise. When you go into a customer and you want to have a conversation that you're solving a business problem for them, having somebody who understands that industry and their talk has been extremely important for us across the board. So for me, a lot of it has been around people skill sets in those areas. And then as I mentioned, also recruiting new partners and doing some of that stuff to augment it.

And how have you seen the market opportunity for talent availability evolve maybe over the last 6, 9 months?

It's actually been -- it's been pretty good, I mean, from that perspective. Now we get talent in two different ways. One is through acquisitions. So the guy who is our Chief Revenue Officer for Plex now reports to me and runs our software sales organization globally, right? So we're getting some through acquisition. And then the other one is natural through recruitment. And look, I think when we sit in a room and have a conversation with people, people get excited about the opportunity. The market is always a little tight, but we think we have a good story.

Very good. We're out of time, so we'll break there. There is a breakout session in the Astor A suite. So thanks, Scott, Aijana.

Thank you. Appreciate it.

Thank you.