Rockwell Automation, Inc. ($ROK)

Great. We'll get started. Again, very pleased to welcome Rockwell Automation to the stage, and Christian Rothe, CFO; Matt Fordenwalt, SVP of Lifestyle Services; and Aijana from Investor Relations as well.

So Christian, I thought maybe open it up with just top level -- top-of-mind issues for you and perhaps we can get into Q&A.

Yes, absolutely. We can -- so top-of-mind issues for us, really strong Q2. Frankly, we felt good going into the quarter. I think the quarter itself outperformed what we were expecting and it outperformed really across the board. All of our segments came in quite nicely on the top line. Lifecycle was probably closer to what we had expected on the top line, but actually outperformed our expectations on the bottom line. So the result was a really strong flow-through profitability, great performance on the EPS side, incremental margins that were really strong for Rockwell and allowed us to have more confidence since we raised our guide. So the raise of our guide, if it was full 3 points on the organic sales line. So it went from a midpoint of 4% to a midpoint of 7%, and we took our EPS number up by a full dollar at the midpoint. So feel pretty good about how the first half shaped up. We obviously got a full second half that we have to go get, but feel like the setup is good.

Great. That's artifact way to set up. I do want to come back to the trading conditions and the way you see in the world. But I thought it would be a good step back and just kind of focus on what you've done and the changes underway in the 2 years -- more or less 2 years, you've been a CFO, I think you came in with a mission to really try and operationalize some of the way the Rockwell goes to market and some of the products pricing, cost structure. So maybe just talk about what you accomplished, what needs to be accomplished?

Yes. So I think the thing about Rockwell is that the organization, we started with -- the company has got over 100 years of history. Our technology is arguably the most ubiquitous technology in the industrial manufacturing world in the United States, in particular. Really strong loyal customer base, a really good margin profile at its core with our technologies. And so to take that and say, you know what, we've got a next level that we can do as an organization. And all the different levers that are available to be able to do that, they're really all there for Rockwell. That is we have pricing power. We have a really strong channel that can even do more for us. We have a really good relationship with machine builders and system integrators, but there can be more there. we're finding areas and applications for our technology that we knew were there, but the market is starting to adopt more in things like data center, then operational excellence was we have more that we can do in our factories in our own operations. to bring more automation and ultimately, autonomy to our operations. And so we're on that journey now, too. And we're seeing that with good expansion on gross margin. At the same time, we just went through -- in 2024, went through a fairly large cost reduction process, which included some headcount reductions. So we were starting at a really solid base from our spend levels. And -- but we feel like we're in a position to hold that in check. So we're getting really good leverage on the P&L. So it really -- it's a lot of different factors that are all coming together. It starts with having an amazing product and really good relationships with customers and then taking that and building off of it to drive really great profitability.

If you had to think about what the 1 or 2 single biggest drivers of further improvements, what would those be?

Yes. For me, it's always volume. Volume solves everything, right? So to the extent we can get volume, that's the #1 driver. The #2 one for us, I think we've shown over the last couple of years that we're pretty good at the productivity play now, and we're continuing to enhance those activities. So maybe I'll set that 1 aside and just say that I do think to take our business to the next level, it's about making the right investments that have a long-term ROI to position us for kind of that next stage of not just top line growth but also next stage profitability.

Okay. That's great. And when I first picked up Rockwell, ago...

I heard 21 years ago, was that right?

21 years ago.

21 years ago. That's great.

It is literally a lifetime. Certainly a good career for the fall. Rockwell is always a first quartile margin company. And certainly during sort of the peer runover in supply chain, a lot of companies really kind of stepped up on margins? And you guys Maybe just talk about what happens? And does that mean there's a lot more catch-up potential for Rockwell potentially?

Yes, there were a couple of factors that happened during that time frame for -- we did a number of transactions. Those transactions were of the collection of businesses that we really love. They're great. They are new ways for us to win. It gives some real strength to our product offering, our overall offering with our customers and especially in the production environment. But a lot of those businesses were earlier stage than what you would normally want. That is the profitability level was not strong. And so collection of transactions were somewhat dilutive to our margins. That held our margin in check during that time frame. On top of that, we also were adding more headcount. We were spending more. We're positioning ourselves for a automation renaissance, if you would, and that didn't materialize. There was a lot of stock up that happened in the channel during that time frame. And of course, the destock hurts. It hurts for everybody when that happens. And so that allowed us to think about the rightsizing of our organization and our spend levels. And so yes, we do recognize that there is a -- the margin profile for Rockwell over that kind of decade, and we've talked about this, but that decade time frame, margins were relatively flat, whereas the rest of the industrial world, there were -- there was some pretty good expansion. And so we see an opportunity for us to definitely expand those margins over the long term.

Okay. That's right. And then before we get into sort of the guidance increase, et cetera, and cycle and all that good stuff, you did sort of talk about tease-out this sort of automation cycle and accelerating growth, et cetera. We do get these bouts of around automation, agent workforce, productivity, et cetera. What's kind of the current setup? How is Rockwell positioned for the next 3, 5 years? Are you expecting 6% to 9% growth, 5% to 7% organic, 1 point from acquisitions? Or do you think it's going to be better than that? I mean how are you positioned right now for that?

Yes. So we have a growth algorithm that we have put in place in 2023. It talks about kind of 5% to 8% organic growth with another point added on from acquisitions, and that's made up of everything from what's happening with the general macro environment as well as market share gains, continued growth with ARR. We're signed up for that. And so -- and again, that's a CAGR of multiyear kind of mid-cycle to mid-cycle. We started off a little bit in the hole, so we've got some room to make up there. Q2, Q1 were a good start towards that. But we've got some more space to go there. So as far as what's going to happen over the next 3 to 5 years, I think we'll have to wait and see about it, but we like the momentum we're bringing right now.

Okay. That's great. So you mentioned volumes is the biggest single driver of improved margins and performance. So it does feel like you're starting to see that volume pick up right now. And obviously, the second half of last year, we saw very attractive growth, but much more by easy comps. And now it feels like we're getting some real growth if the last story to for you to put it. You've got -- you've earned a reputation as a pretty conservative CFO, I think, rightly. To raise guidance by 3 points in 1 single quarter is quite something. So just maybe talk about what happens, what gave you the confidence that's what we're not -- what we're seeing is not a flash in the pan that this is more durable?

Yes. So our initial guide for the year at that 4% midpoint that was really taking what we saw in the second half of last year and saying, okay, well, we know we've got some easier comps maybe in the first half, but acknowledging that we weren't fully seeing a really good ramp. And so that's where the 4% came from. We started to see a really nice sequential ramp as we kind of exited Q4 and went into Q1 and then into Q2. And there was pretty good conversion on that. On top of that, that happened with more on the product side of the business, which allows us to convert a lot more quickly. So some of that had to do with just the performance that we had in the first half gave us -- there was already an amount that we had to build in because we had already outperformed. And then the remainder was saying, look, what we saw in development in Q2 and the very early part of Q3 and would say we feel like there's still another movement up that's happening, so we did build it in. But I don't take offense to being, call it conservative, prudent, anything like that where it is a badge honor.

No, high complement, actually. And obviously, you've got really good visibility on channel inventory sell-in versus sell-through not so much on the machine tool builder side, but maybe just talk about that. Are we seeing a restocking cycle here or inventory is still quite balanced?

Yes. I think we feel like things are really balanced right now that is if you go back before the supply chain crisis, so you have to go back to the 2019 time frame and really the 50 years before that, Rockwell hadn't seen a destock/restock cycle before in our business at all. And so we feel like inventory levels in our channel can be relatively stable over a long period of time and that doesn't have to be a restock. So right now, what we're spending a lot of time on is trying to make sure that there is not a restock happening. And my team can attest to the fact that I'm fairly belligerent when it comes to if we see something that looks like it's -- there's a stock up that's happening. We want to make sure we're aggressive about it because we don't -- we don't need to see it. Now that doesn't mean that we don't have project activity that people have to put stock in place to get ready for those projects and stage. That's okay. But yes, we're looking at those data points as far as overall inventory level, especially price adjusted going back to 2019 levels, we're fine there. Distributor demand that turns into demand on Rockwell, we want that to be 1:1. We're in that ballpark, too. So we feel good about that. As you mentioned, machine builder side is harder, but we do have a lot of interaction with them. We do survey them. Feels like their stocking levels are in a good spot too. So that is we -- especially compared to where they were in '23, we feel like we're okay there. And so as opposed to maybe some others at this conference that you talk about the restock cycle, we're trying to keep it in check.

Okay. That's great. Matt, I do want to come to you in a second, touch on your business. Coming back to the machine tool side. We're seeing really strong order growth for the Japanese machine tool builders where we have really good data. Are we seeing a similar trend for the European machine tool builders?

Yes. We've had growth coming out of the Italy in particular, Germany was a little bit behind, but I think we're at 5 quarters now having year-over-year growth with those customers, and you're seeing it in our European numbers, for example, were 9% growth organically in Q2 year-over-year. That was up against an easier comp, but at the same time, a lot of that is being driven by what's happening with those machine builders. So yes, it's good to see that. And recognize that it's a sale for us into Europe, but that doesn't necessarily mean that's where the machine is destined.

And that would be more plc centric sales?

There's attachment as well, but...

No, it's an entire offering. So you have on machine intelligent devices, you have plc of our Edge software ptics, MLA 3D simulation, emulation. So it's really -- it's pretty broad.

Matt, your business is a bit longer cycle, more product-oriented. So maybe talk about what you're seeing from customers in terms of CapEx intentions, product pipelines, et cetera?

Sure. Across most industries we serve, we see a little bit of, obviously, geopolitical instability and some uncertainty associated with trade. So we're seeing capital projects being delayed or broken up a little bit. So the project sizes tend to be a little bit smaller in the short term. I think there's a balancing that's happening that we've seen in the bigger buckets what we call shoring, which would be mega greenfield, national greenfield, semicon, data center, life science are really starting to percolate. A business doesn't participate directly a labor standpoint on the data center side or the semicon side. So we're really focused on the food and bev auto, things of that nature. So from a capital standpoint, a little constrained, and that's when we talked about earnings a little bit as we're seeing green shoots across; good product demand, but that capital hasn't been going on a full release cycle. But our funnels are very healthy and project quoting activity is very healthy. It's just a delayed decision-making process that we're faced with.

And we think unlocks that uncertainty. I mean it feels like we're in a bit more stability than we were last year, but that's not so much. Do you think we need even more stability here or...

Listen, everyone who is an industry leader in a liter eventually has to make a decision about their business. Investment has to unlock at some point because otherwise, you competitive pressures, the pursuit of improving yield, improving quality, it's a competitive marketplace. So more stability, I think, in trade. I think some of the geopolitical things need to resolve as well just because people need to understand the cost basis of the projects.

Okay. Your segment is called Lifecycle Services. And we don't normally associate Rockwell with services. So maybe just talk about kind of how the model is evolving in services and what -- how that can play out?

So Lifecycle Services is a full life cycle business, meaning. We meet customers where they're at. It could be designing a new plant, a new production lines. So we engage them early with consulting resources about how to create an autonomous operation. We can design, build, help them operate and maintain that facility, that line, that machine. So our services are architected for be it our higher-end consulting to engage earlier in the entire cycle, it could be on our project engineering through our partner network as well to scale out a rollout. But a large part of the business also is on that operate and maintaining side, where we are selling service contracts to help our customers be more secure, more resilient and more productive. So you think about the mixture of projects and contracts, that's really what this business is about, either creating installed base in the market through that professional services and engineered services or expanding the entire value proposition of why our customers invested in automation in the first place with our service contracts.

Obviously, growth has been moving up to the right nicely. ARR has been decelerating a little bit here. I think 6% was the number last quarter. Maybe just talk about what's been caused that deceleration and confidence in getting back to that 10% level?

Yes. Overall, AR was a little bit above 6% last quarter. We're not satisfied with that. Our software offerings were in the high single digits, which was right along what we thought it would be. On the service contract side, it was more a little bit around mid-single digits. Couple of factors out there. OpEx is constrained in the markets. But the real indicator of success for us is we are getting more and more customers under contract. So our customer contract base is expanding. Maybe on a pure dollar standpoint, we've had a little bit of headwind there some OpEx optimization as again, customers are faced with input cost challenges, OpEx look constrained, productivity challenges as they're looking. But our algorithm hasn't changed. Our goal is to get every customer in our installed base under contract. We then work with them to move them to a managed service environment, which allows us to deliver more value to them. It's actually more accretive margin for us. Or use our digital insights, our AI capabilities to address that cyber, that resiliency, that productivity, which is a lot easier for us to renew. So I'm pretty confident, given the contract base is continue to expand, the algorithm will kick in and allow us to continue to do that upward momentum of growth.

Great. Any questions from the audience for the team? So can you hand up? Okay. Great. Maybe Christian, back to you. Rockwell tends not to provide intra-quarter commentary. And can give me the BDI here. But I thought I'd give you the opportunity to any color in terms of what you're seeing right now, and you talk about the sequential ramp through the first half of the year? And anything to say?

Yes, you're right. We don't -- we tend not to give any commentary. And we're only a couple of years -- or a couple a couple of weeks removed from our Q2 call. And so as far as the cadence goes, it's no different than what we had talked about on the earnings call. And I just want to see if we're going to break some headlines here.

Don't know exactly right.

Or break something.

On the end markets, I've been quite pleasantly surprised by the continued strength in warehouse and e-commerce. I know there's a bit of a data center in but maybe just talk about that specifically and the sustainability of that trend

Yes, e-comm and warehouse automation has been a great market for us. It's been growing strong double digits for many, many quarters now. And it's really -- it's a compilation of different businesses within that, right? And all of them are actually firing on a lot of cylinders. So one part is the e-commerce part. So the e-commerce player and the ecosystem that reports a player, we have a really good business there, a combination of some new fulfillment centers and optimization of brownfields. You have also then parcel companies. As you know, they are investing in automation and productivity, a lot of outdated warehouses and sortation facilities, lots of labor cost issues and labor union negotiations. And so there's a lot of drive to automate. And we're nowhere near done. There's a lot of -- the network is outdated and they need to upgrade. And then you have this another set of customers, basically, traditional retailers, grocery stores, any company that has warehouses, and they need to automate that, too. And so there's a lot out there that can be retrofitted, and it's a great business for us. And then finally, we do have a piece of our data center business that falls into that e-com and warehouse automation business, and that's really through our power distribution business through our Cubic acquisition. And so all of them have been growing nicely. We are -- we did increase our outlook for the full year, guiding to 20% growth now. We think there is durable demand. I mean if you look at the consumer preferences, the need more flexibility, they need more automation and also the labor scarcity part, we think we're in a good position there. Certainly, data center part is a great business for us. We talked about it. It's a combination of our power distribution business, but also our controllers, our logic PLC. And with a lot of the need with the AI workloads and the need for a lot more robust, resilient and secure data centers, that's where there's this market shift and customer need shift from commercial controls DDC to industrial grade controls. And this is where Logix controller is a perfect fit and that's been contributing to our Logix growth as well, including in Q2. And so we get to play opportunistically in this great market with our offerings, and we see that business growing strong double digits.

Okay. That's great. And then we met with your team at MODEX, the house show. And 1 of the themes, not just from Rockwell, but from other companies was AI tools, so are actually helping to accelerate investments, raising ROIs lower in time to decision. Is that something you're seeing more broadly across the portfolio?

We do. And we see it through the entire life cycle. Clearly, we talked about on the design phase, how it improves your productivity, you get to market much faster, we can design a system or align or manufacturing sell much faster. With our proprietary GenAI, a lot less coding, much more natural language instruction. That's great. And then you get to the run time, the actual production where the majority of the life cycle of our customers is. You get to produce, you don't want any unplanned downtime. And that's where AI is fantastic for that continues in process optimization. And so we have offerings Logix AI, Guardian AI, Vision AI. So we help our customers use their existing installed base of our offerings, overlay these AI applications and drive outcomes. And so that run time to help them continue to optimize. And then at some point, we then need to migrate, upgrade how do you do it seamlessly. And of course, we all know that there's this whole change from predictive maintenance to prescriptive maintenance and AI is all over that. So our approach is very practical, very pragmatic. It's at every layer of the tech stack, and we help our customers utilize their existing installed base as much as they can to drive that benefit. At some point, they will need to upgrade to newer offerings to be able to handle more compute power and more security. But we think we're very well positioned, and we're using it internally for our development -- software development for our functional capabilities as well.

That's great. Disruption. Let's talk about kind of how the market is evolving and you touched on that, Aijana. But there's -- again, as long as I've covered Rockwell, there's always been these concerns of disruption, technology disruption. And now you've got potential AI start-ups. You got Besos' how raising $100 billion to Accelerate 4.0 and humanoid romping around the factory floors, et cetera. I mean -- how do you think about how this market evolves next 5, 10 years?

We take a lot of our competitors very seriously. And we do look at all of the technology and the potential disruptive technology that could be there, and we look at what could enable us, what could disrupt us and where do we need to partner, acquire, develop. So we look at that really decade out. When you look at what's been happening more recently with AI and SaaS or some of the other dislocations, if you understand the system and where Rockwell plays, the majority of our software is very much embedded and tightly integrated with the physical systems, physical mechanical systems that are moving things, that are closing the loop, that are interacting with the actual process. The rest of our software sits in very mission-critical applications where regulated industries, whether you're interacting with people, safety is paramount. You don't have any -- you can't have any latency or any hallucination or anything like that or deviation from the deterministic path. So we have a really good moat. We have hardware, software and services that are greatly integrated. We look at AI and what's happening there as an enabler. And we use a lot of foundational models and a lot of areas there, and we actually add our IP to drive our offerings and help our customers. So now we feel good about it. And in fact, when you look at the type of data that's flowing through our controllers, the billions of transactions that go through our MES software that's the most valuable kind of data because it's going through the logic. It's actually -- it has the most context. It has the most information that's so valuable for training, and that data is not available for the public domain, right? It's not available for training for others. And so we feel good about where we are, but we don't -- not complacent, and we continue to innovate -- in fact, we are launching more and more offerings, including AI-enabled offerings and the pace of innovation and NPI has only been accelerating.

Okay. That's great. Got 5 minutes left. So there's more talks I want to touch on. Matt, back to you. The unwinding of the Sensor JV with Schlumberger or SLB what's called now. Number one, how does that reposition your business? And then second, maybe just give us a bit of color in terms of what you're seeing in North America and right now?

Sure. So April 1, we dissolved the venture with SLB, amicable dissolution. We both took the aspects of the contributed businesses back in. So within Rockwell, our process automation expertise, domain experts in oil and gas, primarily upstream/midstream, rejoined my organization. So think about project deployment capabilities across the globe in North America, Middle East, Asia, Latin America. So we're really excited to have that project capability back in-house. We've made advancements in our product portfolio be it in process safety applications, which this domain expertise and project delivery capability allows us to approach every major producer across the world with modernization of their oil platforms as well as in this current energy-challenging situation, be able to respond to our customers' demands across the globe. So really excited to bring that back in-house. Also, it really aligns well with our broader energy technologies initiatives. So alternative sources of energy, not just oil and gas. This expertise is really great to have in and to make -- allow Rockwell to fully serve that market to the best of our capabilities.

Any color on the market environment?

Yes, obviously, the Middle East is one of the more challenging situations. We have a considerable resource there. To Rockwell, it's not a material impact. Most of the impact will be seen within my segment. But really assessing damage currently, evaluating opportunities. But even without -- with the sensor resources coming back inside, we're looking at opportunities across the globe as people have to evaluate their options.

Christian, back to you for the last 2. Capital deployment [Audio Gap]

[Audio Gap] that we put in place around that. Again, we talked about the dilution that we saw from transactions that were completed over the last half decade. And again, right deals, great ways to win, really good offerings, but profitability maybe wasn't quite there. That's one of the criteria that we'd like to tick that box on the next set of transactions as we'd like them to bring profitability with them. And so that's one aspect. From a focus area, definitely looking for market access. So that is giving us access to the European and Asian markets that we have a lower amount of sales today. Anything that gives us opportunities to add to our portfolio that we can actually push back through our legacy channel is another opportunity in industrial AI is another area for us. Now all that being said, share buybacks, we're not opposed to doing those. It's really more about we want to be in the market every day. And then if there's a moment of dislocation like we saw in Q2, we've got an opportunistic overlay that will step in and pick up more shares. And so happy about taking advantage of that, too.

Great. And then I just want to tap up on November, Rockwell Day...

Yes. Probably one of the few organizations that do an Investor Day every year.

I know. It's great. It's great to see. But you're going to be pretty darn close to your margin target, [indiscernible], old money terms, [indiscernible] second margin target right now, real time. So I'm guessing 2027 might be out ahead of that. So just wondering how you think about that margin target?

Yes. So we definitely -- the margin targets we put out there are really for our investors and it's a way to frame discussions like this. The way we think about it internally, absolutely yes, we want to have kind of medium, long-term targets, and we do have those today that maybe are -- again, get beyond where we are right now. And I mentioned this earlier, we see it, where we can see the way to get to the prior number of 23.5% current -- the way we're measuring it changed a little bit, and we put in corporate and other expense into that equation. So on an apples-to-apples, it's 22% in the new enterprise operating margin metric. But we can see that. And we've got the ability to execute against that today. Now we're focused on that next level of investment in our organization to take us to numbers that are going to be beyond that and an appropriate time for us to do it, it would be at a year-end so let's go execute. Let's see if we can get there this year or get darn close this year. And I'm not saying that we're going to put new targets in place this year or next year, but hopefully, it's right around the corner.

Thanks Christian. Thanks, Matt. Thanks, Aijana. .

Thank you.

Thank you.

Thanks.

Great seeing you. Thanks for having us.