Rockwell Automation, Inc. (ROK) Q1 FY2026 Earnings Call Transcript & Summary

Thank you for holding, and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. [Operator Instructions]. At this time, I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Aijana, please go ahead.

Thank you, Julienne. Good morning, and thank you for joining us for Rockwell Automation's First Quarter Fiscal 2026 Earnings Release Conference Call. With me today is Blake Moret, our Chairman and CEO; and Christian Rothe, our CFO. Our results were released earlier this morning, and the press release and charts are available on our website. These materials as well as our remarks today will reference non-GAAP measures. Reconciliations of these non-GAAP measures are included in both the press release and charts. A replay of today's webcast and a transcript of our prepared remarks will be available on our website at the conclusion of today's call. Before we begin, please note that our comments today include forward-looking statements regarding the expected future results of our company. Our actual results may differ materially due to a wide range of risks and uncertainties described in our earnings release and SEC filings. So with that, I'll hand it over to Blake.

Thanks, Aijana, and good morning, everyone. Before we get into the specific results, I'll start with a few opening comments. We entered fiscal 2026 with a focus on delivering solid top line performance while continuing to increase productivity and expand margins. This quarter reflects additional progress on these fundamental objectives with sales, margin and earnings all exceeding our expectations. Demand across our core offerings and verticals remained healthy in the first quarter, and our teams executed well. We had double-digit sales growth and sustained momentum in our key product and software businesses. At the same time, we continue to advance structural productivity actions. These efforts span projects in commercial spend, direct material and supply chain efficiency with broad adoption of AI providing additional opportunities. We are well positioned to expand margins as the year progresses. The macro environment remains fluid with heightened geopolitical uncertainty around trade, regional conflict and supply chain risk. While these factors add complexity, they reinforce the importance of the disciplined, execution-focused mindset our teams bring every day. And the long-term trends driving automation and digital transformation remains strong. Rockwell is well positioned to lead as customers accelerate their factory of the future initiatives and move toward more autonomous operations. The strong growth of orders related specifically to projects adding new U.S. production capacity gives us confidence that the combination of our traditional sources of value with digital services, edge computing and cloud-native software is differentiated. We are the most used technology in American manufacturing. Let's now turn to our first quarter results on Slide 3. Our Q1 sales came in slightly better than expected with double-digit year-over-year growth in both reported and organic sales. While large CapEx investments are still on hold for many customers, demand for our products portfolio remains strong, particularly in logics and motion. Customers continue to modernize their operations even as they look for more stable market signals. Annual recurring revenue grew 7% in the quarter and was in line with our expectations with strong performance in our recurring software across automotive, life sciences and energy verticals. Plex delivered its strongest quarter yet with several significant customer wins. One notable win was with RH Shepherd, a U.S.-based Tier 1 commercial vehicle supplier who will use our cloud-native Plex platform to drive greater operational control, continuous process improvement and scalable future expansion. Another standout win in our recurring services was with Hindalco Industries, a global leader in aluminum and copper production. Hindalco has chosen to partner with Rockwell to implement OT cybersecurity across 6 plants in India. Moving to our business segment performance for the quarter. Intelligent Devices delivered another solid quarter with organic sales up 16% year-over-year and in line with our expectations. Growth was broad-based with especially strong performance in drives and Motion. Within Motion, we secured several strategic wins across food and beverage, CPG and entertainment. A standout Q1 win here was with PFM Group, a leading Italian packaging OEM. supporting a large food and beverage customer's CapEx expansion. The customer selected our independent cart technology to deliver high-speed, flexible production at scale across multiple key facilities. Another example of our differentiated production logistics offering is our win with ATS. This customer is deploying our OTTO AMRs to deliver an autonomous material movement solution for an end user in the U.S. Margins also continued to improve year-over-year in the Intelligent Devices segment. In Software & Control, organic sales grew 17% versus prior year, ahead of our expectations. Logix continued its strong momentum with North American sales up over 25% year-over-year. Our new L9 controller is off to a great start with early adopters seeing clear benefits from higher performance, simplified architecture and faster data throughput. Beyond hardware, we are seeing growing adoption of our next-generation software offerings. Customers continue to expand their use of Emulate3D to create digital twins, and we are seeing building momentum with the copilot functionality of our FactoryTalk Design Studio. This quarter, Thermo Fisher selected Rockwell to deliver an AI-enabled troubleshooting agent to accelerate issue resolution and reduce downtime, a great proof point of how our AI strategy is delivering real customer value. You heard directly at Investor Day in November about how Rockwell is broadly contributing to this important customer success. Lifecycle Services organic sales declined 6% versus prior year, largely in line with expectations. Book-to-bill in this segment was 1.16. As in prior quarters, customers continue to delay and narrow the scope of larger projects until there is more clarity on potential trade policy impacts. Our plans to end the Sensia joint venture are on track for an April 1 close with the return of the profitable process automation business to full Rockwell control. We continue to work well with SLB through this transition, and we look forward to updating you once the transaction is complete. Total company segment margin was 20.7% and adjusted EPS was $2.75. These both exceeded our expectations and were driven by higher volume, favorable mix and strong productivity. Tariffs did not have a meaningful impact on our total company earnings in Q1. Christian will talk more about tariffs and the fiscal '26 impact in a few moments. Turning to Slide 4 for key highlights of our Q1 industry performance. Our discrete sales were up low double digits year-over-year, led by continued strength in e-commerce and warehouse automation. Within discrete, automotive sales grew mid-single digits, consistent with our outlook. Although the CapEx environment remains subdued, brand owners and Tier 1s are continuing to advance MES, digital twin and AI-enabled modernization across their global manufacturing footprints. E-commerce and warehouse automation sales grew over 60% in the quarter, led by strong year-over-year growth in North America. Customer investment continues to be driven by labor shortages, network modernization needs and increasing focus on sustainability and cybersecurity. Business related to data centers again contributed strong double-digit growth in the quarter. AI-driven power constraints are accelerating hyperscaler and colo adoption of gas-powered microgrids, driving increased demand for our industrial-grade controls in power and advanced cooling. This is deepening our engagement with leading power and process OEMs and driving continued momentum in this end market. Moving to hybrid. Sales in this industry segment were up high single digits, led by double-digit growth in food and beverage and home and personal care. Consistent with what we saw last quarter, customers in food and beverage and the broader CPG sector continue to focus on operational efficiency. While the majority of our business here is driven by brownfield modernizations and productivity, we did see some greenfield projects across the U.S., Eastern Europe, Southeast Asia and India. One example of orders resulting from new capacity being built in the U.S. is our Q1 win with Cama, an Italian packaging OEM that selected Rockwell's advanced motion platform to run complex high-speed operations with emerging sustainable materials. This gives Cama a clear advantage in throughput, reliability and flexible changeovers as the industry accelerated its shift towards sustainable and highly robotized packaging. Sales in Life Sciences declined low single digits year-over-year, driven by several project delays in North America. Despite these temporary pushouts, our pipeline continues to expand across strategic areas, including GLP-1, radiopharma and med devices. We continue to expect growth in Life Sciences for the full year. Turning to Process Industries. Sales in this segment were up 10% versus prior year with strong growth in chemicals, water and energy. Our chemicals business is in the specialty chemicals sector, which remains relatively resilient. We also continue to gain share at key customers with our PlantPAx control platform. This quarter, Corteva AgriScience completed the modernization of its iPARC infrastructure using our process control and networking capabilities to improve operator visibility and reduce downtime across critical chemical utilities. Within energy, we saw good activity in oil and gas, power and renewables, supported by an important greenfield win with FS Bioenergia, a leading Brazilian corn ethanol producer with strategic emphasis on carbon capture and decarbonization. The customer will be deploying our full suite of automation offerings to build their next facility in Brazil and for their carbon capture and storage project. Let's move to Slide 5 and our Q1 organic regional sales. As expected, North America remains our strongest region. At our Automation Fair in November, we announced plans for our new manufacturing facility in Southeastern Wisconsin, and I'm pleased to share that this factory of the future will be located in New Berlin. Additionally, as we have completed the purchase of our Mequon, Wisconsin facility, which we previously leased. These 2 projects are aligned with our announced investments in our plants, talent and digital infrastructure and underscore our commitment to and confidence in the U.S. market. Let's move to Slide 6 to review our fiscal 2026 outlook. We are maintaining our organic sales growth outlook of 2% to 6%, with the midpoint assuming a gradual sequential improvement through the year. We will need to see some additional evidence of accelerating capital spend across additional verticals to move higher in our full year outlook. Additional recurring revenue remains on track for high single-digit growth. We continue to expect full year segment margin expansion of over 100 basis points. Given some discrete tax benefits in Q1, we are increasing the midpoint of our adjusted EPS to $11.80. Christian will cover this in more detail in a few moments. Free cash flow conversion is still expected to be approximately 100%. I'll now turn it over to Christian for more detail on our Q1 results and our fiscal '26 outlook. Christian?

Thank you, Blake, and good morning, everyone. Turning to our financial results. Let's go to Slide 7, first quarter key financial information. First quarter reported sales were up 12% versus prior year. About 2 points of growth came from currency. 3 points of organic growth came from price with about half coming from underlying price realization and half from tariff-based pricing. Some of the details I'll reference are not shown on this slide and can be found on Page 9 of our press release. Gross margins expanded year-over-year, driven by positive price cost and productivity and favorable mix. SG&A spend was flat year-over-year in the first quarter, reflecting strong cost discipline and productivity across our global teams. Engineering development spend, a new metric we started sharing last quarter, was up 10% year-over-year and in line with our organic sales growth, keeping our innovation spend at about 8% of sales. Our gross margin expansion and SG&A leverage drove solid flow-through, resulting in 360 basis points of segment margin expansion. As Blake mentioned earlier, the impact of tariffs on our first quarter earnings was neutral, but it was a drag of about 30 basis points on segment margins year-over-year. While this quarter represents our easiest comparable of the year, I'm pleased with the strong performance up and down the P&L and across our segments. Q1 adjusted EPS of $2.75 was above our expectations. As Blake mentioned, we also got some help from our tax rate in the quarter. The adjusted effective tax rate for the first quarter was about 17%, slightly lower than last year. The first quarter tax rate was lower than the 20% we expected due to discrete tax items, primarily the tax benefit of stock option exercises. This contributed to about $0.09 of our adjusted EPS compared to our Q1 guide. With the tax rate coming in lower than expected in Q1, we now anticipate an ETR of about 19.5% for the full year, better than our prior guide of 20%. Free cash flow in Q1 of $170 million was generally in line with our expectations. It was $123 million lower than the prior year, primarily due to changes in working capital and incentive comp payments in Q1 of fiscal 2026. We had 0 incentive comp payments last year. Slide 8 provides the sales and margin performance overview of our 3 operating segments. Intelligent Devices margin of 17.3% increased by 240 basis points year-over-year due to higher sales and price cost and productivity with a slight offset from FX and compensation, resulting in incrementals in the low 30s. Software & Control margin of 31.2% was up 610 basis points versus prior year and higher than our expectations, driven by strong sales volume, particularly in Logix, partially offset by compensation. The segment saw year-over-year incrementals in the low 60s. Lifecycle Services margin of 14.1% was up 160 basis points year-over-year, better than our expectations as the team executed well against their projects and continue to drive productivity. This was despite a revenue decline year-over-year. Overall, for Rockwell, the incremental margin on the year-over-year sales growth was about 50% in Q1, a solid start to the year. A couple of other data points regarding Q1. First, our balance sheet as of December 31 does reflect some Sensia dissolution items. We have now classified certain Sensia assets and liabilities as held for sale. These are assets and liabilities that will go to SLB in the final closing. There's also a tax gain on the GAAP P&L related to the Sensia dissolution, stemming from a recapture of tax losses that will be usable to Rockwell post dissolution. Like all nonoperating adjustments related to the dissolution of Sensia, these are removed from our adjusted EPS for reporting purposes. Second, Blake mentioned that we purchased our facility in Mequon, Wisconsin. That transaction closed in the second quarter at a value of about $60 million. Because it is recorded on our December balance sheet as a finance lease, the transaction will be accounted for in financing cash flows and is excluded from our operating CapEx. Let's move to the next slide, 9, for the adjusted EPS walk from Q1 fiscal 2025 to Q1 fiscal 2026. This is a more streamlined waterfall than what we have shown in the past as we transition our cost reduction and margin expansion actions into our ongoing productivity now embedded within core. Year-over-year, core performance had a $1 impact on Q1. Volume drove about half of that impact with Intelligent Devices and Software & Control sales up mid- to high teens year-over-year. Productivity was the next largest driver. Price and mix were also solid contributors, but we did see some inflationary costs partially offset these benefits. Our strong Q1 performance resulted in $0.10 of year-over-year increase in compensation spend. All other items had a neutral impact on adjusted EPS. Moving on to the next slide, 10, to discuss our guidance for the full year. Blake mentioned ongoing uncertainties in the broader environment. Between that and being only 1 quarter into the year, we aren't seeing enough to change our sales and margin guide right now. We are updating our adjusted EPS guidance by raising the lower end of the range to $11.40, which increases the midpoint by $0.10 to $11.80. This reflects discrete tax benefits that came in better than expected in Q1, and we are rolling that outperformance into our full year adjusted EPS. As a reminder, our guidance does not include the impact from the anticipated Sensia dissolution, which we expect to close on April 1. We still expect no significant impact on adjusted EPS, an annualized reduction in sales of approximately $250 million and an annualized improvement of approximately 50 basis points for total company segment margin. We will provide an update once the transaction closes. We continue to expect 2 points of total price for fiscal 2026 with 1 point coming from underlying price and 1 point from tariff-based price. We continue to expect our full year 2026 incremental margins to be about 40%, inclusive of tariff-based pricing. And for your models, CapEx for fiscal 2026 remains targeted at about 3% of sales. Now let me share some additional color on our outlook for the second quarter. In Q2, we expect overall company sales to be slightly up sequentially. From a total segment operating margin perspective, we are also looking for modest sequential improvement each quarter this year. Given the solid start to the year, that sequential margin expansion is going to be in the tens of basis points, not the hundreds of basis points. On a year-over-year basis, this implies mid-single-digit sales growth in the second quarter with margin expansion of less than 100 basis points. At the total company level, we expect second quarter adjusted EPS to grow low single digits sequentially. That outlook includes about $0.10 of sequential headwind from the tax rate as we move from about 17% in Q1 to approximately 20% in Q2. Our outlook by segment included in our full year guide for fiscal 2026 remains unchanged. A few additional comments on the fiscal 2026 guidance for your models. Corporate and other expense is expected to be about $105 million. Net interest expense for fiscal 2026 is expected to be about $115 million. We're assuming average diluted shares outstanding of about 112.7 million shares, and we are targeting approximately $500 million of shares repurchased during the year. With that, I'll turn it back to Blake for some closing remarks before we start Q&A. Blake?

Thanks, Christian. As we've said, trade volatility and geopolitical tensions continue to suppress some capital spending. I've been very proud of Team Rockwell's resilience and agility as we navigate this environment, including the efforts of our employees and partners around the world. It's a lot of work on the part of thousands of people, but the success of our efforts was on full display at our automation fair in November. I've been do a lot of these, but the breadth of our portfolio and the enthusiasm of our people has never been more vibrant. We're building on this strength to grow share and expand margins near term and for years to come. Aijana will now begin the Q&A session.

Thanks, Blake. We would like to get through as many of you as possible, so please limit yourselves to one question and a quick follow-up. Julienne, let's take our first question.

[Operator Instructions] Our first question comes from Scott Davis from Melius Research.

Blake, I just wanted to kind of reconcile your kind of more cautious comments with perhaps what we're seeing across the S&P is CapEx budgets being inched a little higher, not lower, but you're a little closer to the customer. So just maybe a little bit more detail. Do you think people will underspend their budgets? Or are they just pushing back to the back half of the year? I mean kind of just a little more color there would be helpful.

Sure, Scott. I think the overarching term would be prudent here. We are seeing some optimism in different areas, including the ones that contributed to really good performance in Q1 as well as good discussions and discussion about plans, including CapEx plans in other verticals that are important to us. But we haven't seen that turn into the broad-based release of orders that we need to see before we start centering more on the higher end of that guide. So there's optimism out there. Certainly, there's some short-term indicators. We're very aware of PMI, industrial production, which were most highly correlated to. We look at our own behavior in terms of our own investment in automation, but we just need to see a little bit more given that it's the first quarter of the year.

Understood. And how do you -- what about your distributors? I mean, I assume you're talking about the actual customer that's spending the money, not the distributor. But are distributors still a little bit cautious and not restocking yet?

So stock levels are really back to normal. So the dialogue that was front and center in 2024 and into the beginning of 2025, we're done. Inventory levels around the world are back to normal levels at distribution and at the machine builders. Distributors are optimistic. When we've gone out and we've talked to them, obviously, we spent lots of time with them at Automation Fair in person. But even in the couple of months since then, there is optimism, but we're all taking a prudent approach.

Our next question comes from Julian Mitchell from Barclays.

Maybe just wondered if you could flesh out a little bit how you see the margin drivers playing out across the segments for that second quarter commentary. As you said, you're trying to sort of keep a lid on people's expectations of the sequential margin development. Maybe help us understand kind of mix impacts and anything you see with price cost from here with memory chips.

Sure, absolutely. I'll deal with the memory chip item glass. But when we're talking about the progression from Q1 to Q2 for the segments, we are, again, looking for slight sequential improvement on the sales side. That's across all the segments. From the margin expansion side, we're looking for some modest margin expansion, both for Intelligent Devices and Software & Control. When we're talking about the Lifecycle Services business, Lifecycle had a better Q1 than what we were expecting. As you know, this is a lumpy business. Project execution and productivity is really important. And so keeping that at that 14% or just around 14% if we're able to hold at that level, I feel pretty good about that. I think we all feel pretty good about that. Importantly, we do have merit that comes into play in the second quarter. So that is going to be a factor that when you're thinking about those sequentials, we have to take into account. Importantly, when we talk about that year-over-year, and I mentioned this in my prepared comments, we are talking about mid-single-digit growth year-over-year on the top line, we're talking about 100 basis points or a little less than 100 basis points in segment margin expansion year-over-year for the total company. And that's a flow-through in the neighborhood of the 35% that we've always talked about and we signed up for as an organization. Keeping in mind, we just did a 50% in Q1. So all in, we're talking about a Q2 number that's in the neighborhood of about $2.85. Again, you'll have to do your own modeling around that, but that's what we're targeting. When you bring up the chips factor, yes, there are some inflationary costs that come into play. Chips are one of those factors. The organization, the supply chain team has done a really good job in positioning around that. That has impacted our inventory levels a little bit. There's some cost inflation there. We're talking single-digit millions of dollars though, in both regards. So it's not a huge impact for us. Again, the team is navigating it well. I feel really strongly that they've been right on top of these issues.

That's helpful. And maybe just clarify for us on Logix, kind of where you see us standing on the volume cycle perspective. How much of a decent recovery you think is left on the Logix front? And maybe tied to that, you had exceptional growth in process -- sorry, in hybrid industries in first quarter. Do you see some of that persisting through the balance of the year?

Sure. So in terms of Logix, Logix continues to be a great part of our product line. is benefiting from good demand for existing offerings, but we also have a really robust new product introduction that's having an impact as well, both in the IO, especially in process IO as well as the new L9 processor, where we're seeing great adoption around the world for that. And even some of the elements of the software-defined automation, things like Emulate3D, FactoryTalk Design Studio that we highlighted with Thermo Fisher -- those have been great for us in traditional verticals as well as some that you haven't thought about Rockwell as closely in association with like data centers as more customers, hyperscalers and colo owners are looking at industrial logic, i.e., logics to replace their traditional direct digital control systems, their DDC control systems. So we're seeing Logix. We saw really good growth in the first quarter, and we expect that to continue to be a nice spot for us top line as well as, of course, the financial benefits of that. In terms of volume, so we expect for the full year to be at or slightly above the units that we saw pre-pandemic. Obviously, with the compounded price increases that we've seen over the last half dozen years, the volume level in dollars is considerably higher, but we do expect units to get back to for the full year, the units that we saw pre-pandemic. The other question that you had was regarding hybrid. And of course, food and beverage, double-digit growth in the first quarter. It's our biggest vertical. And so good things happen when you see double-digit growth in food and beverage. It's a mix of traditional offerings, the logics, the input devices, the drives, the motion. A lot of that is packaging, and we saw good development at the European packaging and material handling OEMs, including those in Germany and Italy. Life Sciences was down a little bit in the quarter, but we expect that to improve through the course of the year. We're having great success at the biggest life science customers that you know and it's across the line. It's the hardware, it's the software, it's the high-value services. So I think we'll see continued benefit for food and beverage, life sciences, home and personal care as well. We saw some really nice orders in the first quarter in home and personal care. And importantly, across all of those, we're seeing a lot of interest in those auto autonomous mobile robots. So that whole idea of production and logistics that we've talked about is really capturing the imagination of customers as we integrate those technologies, AMRs, independent car technology, along with the fixed automation that Rockwell has been known for, for a long time.

Our next question comes from Andy Kaplowitz from Citigroup.

Christian, so obviously, we know it's early in the year, as you said, but you did say that Q1 incrementals were up over 50%, which I think was better than you expected. You reiterated the greater than 40%. But if Logix does stay strong, as Blake kind of mentioned, it was pretty strong in Q1, could incrementals creep up for the year? And maybe you can update us on some of your programs like Rock on Rock and how you're doing with dynamic pricing.

Sure. So when -- obviously, Logix does have some really good flow-through profitability. If that changes in the mix from where we were -- where we started the year and planned for in the guide, of course, that can change the flow-through -- there's no doubt. But we have a number of other product categories that also have really strong flow-through as well. Importantly, we don't -- we're not just going to rely on -- and this kind of goes to the second part of your question. We're not just going to rely on the volume side of it in certain product lines, right? We want to have a really broad base. We want to build a really broad base around the business. And we also want to make sure that we're doing the right things inside of our own organization to ensure that we get great flow-through profitability, which goes to the productivity side of it. And yes, the team continues to perform really well on our productivity initiatives, which we previously discussed as cost reduction and margin expansion. went into a fair bit of detail during Automation Fair in our Investor Day around those initiatives. But again, direct material costs and really driving out some of those costs and keeping inflation in check in the COGS area specifically. I can't underscore enough that we had good expansion on the gross margin line in Q4. We had good gross margin expansion again in Q1. I mean that's really where you're seeing -- you see it up and down the P&L. But when we're talking about what's going on in the factories, what's happening with supply chain, you're seeing it in the gross margin, which is outstanding. So feel good about that. Again, we can certainly go into a lot of detail around the different initiatives. We've done that before, and I'm happy to do that. But just know that this organization has built a really good muscle strength around this. We're leaning into that muscle memory as we go through this year and we go on and operationalize the work that we've done over the last 21 months.

Yes. And just to add, you asked about Rock on Rock. I mean, we talked at Investor Day in November about what we're seeing in terms of benefits labor efficiency, time to competency, reduced energy usage at our Singapore facility. And we're actively taking those learnings and best practices and rolling those into other existing facilities around the world, especially Twinsburg, which is a pretty important plant for us. So while a lot has been made of the new greenfield that we're building here in Southeastern Wisconsin, we're working already to make the investments in talent and digital infrastructure, technology in our existing facilities to be able to take advantage of those efficiencies that will come out of those improved workflows. And that's really the essence of that Rock on Rock. Yes, there's going to be a lot of Rockwell technology in there, but it's about our partners. It's about the overall ecosystem contributing to the benefits that we've already seen in Singapore.

Great. That's helpful. And then you spoke about hybrid in answering a previous question, but maybe on discrete, Semiconductors were still down in Q1, but it does seem like across industrial semiconductors are getting better. So maybe update us on your opportunities there. And then in general, you guys have been focusing on sort of bigger solutions for customers. Can that sort of help you in addition to improved product environment in the discrete market going forward?

Sure. So starting specifically with semi, let me start by saying Q1 had a tough comp. We had a unusually strong quarter a year ago. And so that was a little bit of what contributed to the down in the quarter. As kind of a refresher, we participate in semiconductor with some of the key tooling providers, the equipment manufacturers. Also wafer transport is a relatively new application that we address with independent cart technology, and that continues to be a good source of benefit for us. Software and implementing artificial intelligence as part of solutions to help with energy management is an application that we highlighted at Automation Fair amid some pretty tough competition, we stood out there. Cybersecurity would be another area. And then the traditional strengths of providing the environmental controls for building management for the clean room. A lot of the CapEx right now in semiconductors is concentrated on the people who are participating in the AI build-out. So I wouldn't say that it's up and down the cast of players in semiconductor. To be sure, around the world, I think of Taiwan, for instance, we see some very strong investment there, as you would expect, and we're winning. But it's still a volatile environment for semiconductor, as you know, and hence, our outlook for the full year.

Our next question comes from Chris Snyder from Morgan Stanley. .

I wanted to ask about market demand trends. Are you still seeing -- continuing to see positive momentum on more of the shorter cycle kind of products business that you talked to in the back half of '25. And it sounds like the bigger project business remains soft. But I believe at the Investor Day, you guys talked to strong double-digit '26 order expectations for the new capacity adds piece of the business. So just are you starting to see those orders come through and they're just deliver at a slower rate because they're so long cycle? Or do you kind of still think that big project order ramp is on the horizon?

Sure, Chris. And this will allow me to pick up a little bit of Andy's question just previously as well. We do continue to see good demand for modernizations and investment in brownfields that are probably heavier on the product side. And you see that in our results, really strong growth for our product-centric businesses and a little more subdued on the life cycle side. In the first quarter, we did see good development and very good year-over-year growth in new capacity. What I would hasten to mention is that new capacity business is relatively evenly split across all of the business units. So we think of new capacity as big engineered solutions coming out of life cycle. And while there's some of that, there's also a lot of product business, a lot of logics, a lot of drives, a lot of motion that's going to engineering firms or integrators or machine builders that's still contributing to the build-out of new capacity in the U.S. So that obviously has good implications for profitability of that business and the development across all of the business areas. We're seeing it in certain verticals. So we're seeing it in e-commerce and warehouse automation, of course. We've talked about a few greenfields here and there in some of the hybrid areas. We do expect that the build-out of Life Sciences to contribute to positive growth for the year. But we haven't seen people letting those orders at the speed and at the breadth that would cause us to raise the organic guide for the full year. A lot of positive signals. We just need to see it come through in orders.

I really appreciate that. And then maybe for one to Christian on margins. So obviously, the company has done an incredible job taking out costs and driving margins higher over the last year plus. When I look at the rest of the year guide, does it include any incremental cost-out opportunity? It did seem like there was still more room to run there from the Investor Day. And I just ask because it seems like the rest of the year is calling for even at the high end, maybe like a 35% kind of incremental, which a good number, but that feels like more normalized and not maybe seeing some of the benefits of incremental cost out.

Yes. Thanks, Chris. I appreciate that. For sure, productivity remains right in the center of our plans. We've got a lot of activity that's happening around that. As I mentioned, we saw a really good performance in Q1 on the productivity side of it, which came through in that core number. Yes, volume was the biggest driver of that core, but the second place item was productivity. And that is absolutely in our plans through the remainder of this year. Regarding the flow-through incrementals, it's important to note, I mean, we're still talking about a -- we're getting a lot of tariff-based price, tariff-based cost comes through that, of course, when you're looking at incrementals year-over-year, that is going to dampen down that number. We're still -- for the full year, we're looking at a 40% number even with that headwind in there. So I think we feel pretty good about that. And ultimately, we're talking about a guide at this point and let's -- and we're 1 quarter in. It's a really good way to start. We want to make sure we're prudent and we're being rational about how this is going to perform through the remainder of the year. Let's get another quarter under our belt, and let's see where we're sitting after that.

Our next question comes from Steve Tusa from JPMorgan.

Can we get a little bit of a bridge on this S&C margin, pretty strong. What was the trend in like the software-related business there in that context?

Yes. Actually, in Software & Control, it was pretty broad-based that it was not just -- I know we'd like to talk about Logix and Logix is important, but we actually saw it kind of throughout all the categories of the business. The software side had really good performance as well. ASEM, which is the product side of the business had really strong performance year-over-year. The network side came through nicely, too. So Blake, I don't know if you want to add any more commentary around that?

Well, just -- I don't know that we mentioned it before, but we talked about the 7% overall ARR for the company split between software and then related services, the software ARR, particularly with Plex was actually higher than the average. And so we saw good growth, and that's, of course, a good profitable business for us. And as Christian said, it complements nicely the hardware portions of Software and Control. ASEM is the open compute platforms. It's also FactoryTalk Optics. So we have very competitive hardware and software offerings from that acquisition, and we're expecting a good year from them.

Okay. And then just a follow-up. Can you just reconcile the pretty strong earnings growth and margin expansion with the cash, which was down year-over-year? Is there like some noncash license earnings or something like that?

Yes. I mean from a cash flow conversion perspective, we were always expecting free cash flow conversion to be at about this number in Q1. Two primary factors, one that was absolutely known was the incentive payouts from fiscal '25 performance happens in the first quarter of the following year. So that happened in this quarter. So it's an outsized number on that, which is a good thing. The other portion is that when we look at the year-over-year in particular, working capital was a source of cash in the first quarter of '25. In the first quarter of '26, working capital was a slight use of cash, both from the payables and the inventory perspective. So that drove a portion of the delta there. But all in all, we feel like we're tracking just fine there. Sorry, just to make sure -- just a follow-up on that. The -- we did not have any incentive payouts that happened in the first quarter of last year. So that's why the delta year-over-year, again, incentive payouts happened this year, but last year, there was nothing. So that goes into that year-over-year delta. Sorry about that.

Our next question comes from Nigel Coe from Wolfe Research.

So we've talked about hybrids, talked about discrete. Let's complete the loop with process. But you are looking for, I think, low single-digit growth in process markets for the full year, 10% in the quarter, I think plus 40% in chemicals. And we have heard stronger project orders from LNG, power gen, et cetera. So just curious, do you see enough bias to that outlook for process, number one. And then secondly, chemical strength, where you're seeing it? And how do you feel that plays out?

Yes. So process performed nicely for us in the first quarter. As you mentioned, energy is the single biggest part of that. Oil and gas remains important to us, about 10% of our business even after the dissolution of the Sensia joint venture. In this quarter, we actually saw meaningful contribution of midstream. So pipeline type of activity that we participate in, not just with the control systems, but also the services, network monitoring is a good application for us. And then the power, which is a differentiator versus some of our competitors there as well. You certainly see contribution from chemical, a really strong quarter and a little bit contrary to the general dialogue around chemical, but our exposure is primarily in specialty chemical, which has been a bit more resilient than the bulk side of things. We also had in the quarter, a nice set of competitive conversions. We've got a good combination of the technology as well as the expertise, and we're taking some business there. We talked about a win with Corteva in the chemical side. And it is more of a project business. So it's a bit lumpy, but it was a good start, and we're looking forward to continuing that momentum. On the opposite side, of course, oil prices are still fairly low. And so people are being ever mindful of being good stewards of their capital. And so they're paying a lot of attention to capital in the oil and gas side there. We've got some exposure to LNG, but probably not as much as in the actual liquids side with oil.

Right. Yes. My follow-on, you made it very clear that you're seeing encouraging signs out there, but you want to remain cautious, which is obviously the right MO. I'm just wondering though, have you seen any change in behavior? Obviously, we don't necessarily flip the calendar and everything is different. But it does feel like we're seeing good momentum in IP, durable goods orders. ISM had a big month in January. I'm just curious, if you think about your sort of macro barometer, Blake, is it ticking higher here relative to the last time we spoke? And I guess my real question is, are we seeing any sort of signs of inflection in orders?

Yes. I think sentiment is similar to maybe slightly up. We're most correlated over a longer period of time with industrial production. So while the purchasing managers index going up, PMI is encouraging. We don't bank on that. There's still a lot of volatility out there. There's new headlines every day that can affect this. Tariffs remain still not as stable as I think we would like them to be. So IP is generally constructive, but it's a little bit of a longer-term metric. We know that in the rearview mirror, it won't be the exact number that's being forecast now. So I think there's good sentiment. But again, we'd like to see the orders as more objective proof before we would move higher on the guide.

Okay, so it sounds like orders are fairly stable. Okay, thanks. Thanks, Blake.

Yes. I guess the one additional point is that the start to the second quarter is aligned with the guidance that we provided.

Our next question comes from Andrew Buscaglia from BNP Paribas.

So kind of one of the great earnings this quarter is you guys had a big beat on the software side, whereas like rest of the software line is getting sort of crushed by AI concerns. So my question is twofold. Are you -- I know you get this question quite a bit, but it seems as if AI is kind of at our doorstep a little bit sooner than some people anticipated. Maybe are your customers -- are you hearing anything regarding new competition from AI creeping in? And secondly, like some of these AI features you're introducing, it sounds exciting. I think you talked about one in process. Are they potentially more impactful to your numbers sooner than later than maybe you would have thought 6 months ago?

Yes. Great question. Look, we have artificial intelligence implemented at all levels of our architecture. We've had -- we've helped customers get value from machine learning for quite some time. And while a lot of the discussion of recent is copilots, generative AI, Agentic AI, which we're using for internal productivity already in our own operations. Our focus is on the impact and the efficiency and the simplification that we can provide to customers. So we're not looking at a general language model that is a sandbox for customers to play with. We want to be able to apply it for specific applications with specific productivity in mind or specific ways that we can simplify their workflows. And so you see it with the implementations of Vision AI to help enable pattern recognition and high-speed packaging, for instance. We see it with Logix AI. That's a complement to the traditional control loop of interpreting inputs and changing the state of outputs to give more efficiency with AI so that the systems actually become more performant over time. And then we see it embedded in Plex, for instance, in the demand planning module to give more accurate insight. So we're not looking to create these large nebulous models rather than to take LLMs and SLMs to be able to provide real value for real-world problems at customers where the application understanding is still really important. And we are seeing some benefits already with that. We certainly see it in our own operations in Twinsburg, in Singapore, for instance, and we're helping to apply these things for customers as well. I don't see a huge uplift in brand-new offerings being the most significant part of the benefit to Rockwell from successfully applying this in the production environment. I see the simplification of automation and digital transformation on the plant floor being the real prize that's going to help us grow share. And really importantly, we're not going in and saying, "Hey, rip everything that you have currently making your products out and put something new in." It fortifies and complements the existing system. So it's much less disruptive, much less risky to be able to add this new capability, but with familiar products and familiar workflows.

Yes. Very interesting. Okay. And maybe just one other one. Food and beverage doing quite well, one of your biggest markets. Same with automotive. I'm wondering, you're not really seeing the same trends with other companies talking about those markets. I mean it's very mixed. Are we talking about just easy comps for you guys? Or are you guys just an early indicator of improvement in those markets? What are you seeing that maybe some other companies are in those 2 markets?

Yes. Traditionally, our participation and our strength in auto is historically kind of at the leading edge of the cycle. Food and beverage has elements of that in the packaging side. It also has elements of process on the upstream side that's typically a little bit later cycle historically. Yes, I think there was some help from comps in the first quarter to be sure. As we've said, greenfields and automotive still a little bit suppressed as they're taking the temperature of their customers to understand what's the optimal mix of EV versus hybrid versus internal combustion engines. And they're also really importantly, trying to get a good fix on their cost base for projects based on tariffs. But all that being said, we do have differentiated technology. Our major competitors don't have mobile robots and they don't have the ability, even the competitors that have mobile robots don't have the huge capabilities in fixed automation and to bring that together has really captured the imagination of those customers, both the brand owners as well as the tier suppliers. And then our software tools, Emulate3D Logix Echo, FactoryTalk Design Studio are second to none in terms of being able to help these customers bring together the worlds of traditional automation with digital transformation. And that's true for both automotive as well as food and beverage. So yes, I think those tend to be a little bit earlier cycle for us, but we've got differentiated offerings there, and we're winning.

Julienne, we'll take one more question.

Our last question will come from Tommy Moll from Stephens.

I wanted to follow up on auto. Just one data point to reference. GM made some pretty bullish comments a week or so ago on their near-term spending plans in North America. And granted, that's just one of many data points. But specifically in North America, does it feel like anything has maybe ticked a little bit higher? I'm not talking about orders even, just conversations or the level of visibility. I mean last quarter, you were talking about it had stabilized at a low level. Has anything changed since?

Look, I mean, I'm happy to see a positive number in the first quarter for automotive and an outlook for the full year positive in auto because we went through a period of time where that wasn't the case. We've talked about some of the nice wins that we've had over the last couple of years that are continuing to perform for us. We talked about Hyundai, for instance, and a number of others. But they're still quite concerned about the tariff environment. They've made some commitments to increase North America. They are investing in modernization for their lines. We're winning some nice EV work. We talked about Lucid in November. But tariffs are still jumping around a little bit. And I think we would just like to see, again, that positive sentiment turn into actual orders before we know it's there.

Thank you. That concludes today's conference call. Thank you for joining us today. .

At this time, you may disconnect. Thank you.