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

Welcome to the 14th Annual Laguna Conference. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley representative. PAUSE I'm Toby Okwara, I'm part of the Morgan Stanley multi-industry research team. Happy to have Rockwell Automation here, Blake Moret, CEO; and Tessa Myers with intelligent devices.

So thank you guys for being here. Starting off, just looking generally with some of the longer-term trends impacting the company. How customer conversations kind of change now compared to last year with some of the progress around reshoring and bringing in the sense of manufacturing?

So I think the tone is generally optimistic. To be sure, there's a lot of tailwind. There's a lot of headwinds -- and I'm sure we'll talk about inflation and tariffs and so on. But the underlying tone from our customers is distinctly positive. Our home market, North America is the best place to be investing now to be sure. We're enjoying some of the growth from data center but in our traditional served end markets as well, we're seeing a generally positive demeanor. And within each of those industries, there's end market-specific activities going on as well. So as we move across discrete, hybrid and process end markets in discrete, we saw low double-digit growth the last quarter from automotive, which is about 10% of our total business. And we're still not seeing a wholesale release of CapEx, but we are seeing some major projects here and there, and then we're certainly seeing a lot of modernization. Discrete is where data center is found, e-commerce, warehouse automation, the parcel handling companies are spending a lot of money to get the right balance between labor and technology in hybrid, food and beverage. We're seeing decent growth, again, primarily centered around modernization. Home and Personal Care, high single-digit growth in the last quarter. Life Sciences, about 10% growth in Q3. And that is 1 of the areas that we're seeing some early examples of reshoring or shoring as I like to call it. And then energy markets. When oil prices are high, when oil prices are low, efficiency is still an important part of the agenda for the oil and gas companies. And then mining and chemical, I think, shows some signs of progress. Tessa?

Yes. Look, I think across the board, we're seeing good progress across industries. And operational efficiency and driving productivity in plants is always a top priority for the customers that we serve and that drives demand for the products and services that we have.

And as you think about the operational efficiency perspective, how have some of the labor constraints and broader inflation in the market affected the conversations and the prioritization of these automation investments?

Yes. I think about a year ago, there were some conversations. We heard from 2 different types of industrial companies, one in automotive and another one in parcel handling, where they had gotten through discussions with their labor unions and they immediately went to a place of how can we get additional automation, again, to strike the right balance there. So at 4.1%, 4.2% unemployment, a lot of key jobs in manufacturing are going unfilled. And so having the right amount of technology for the scarce resources that these manufacturers do have is really important to give them the superpowers to get as much productivity as possible per person who is working in these facilities. And that's been a consistent theme across really all of our served markets. I think in in data center, just to go there for a minute, time to value is so important, modularity. These things are looking like factories as people have said. And so our technology is being increasingly adopted there, and we're seeing some nice wins in an industry that previously was not as big a contributor.

I think a lot of the conversation is centered around modernization investments. But when we're thinking about the broader theme, it's been more so centered on greenfields and bigger project activity. What do you see as the main catalyst that would really unlock that larger project activity going forward?

Yes. I think a reduction in the uncertainty as there's a lot of active headline grabbing trade discussions going on. I was in Washington yesterday. And it is a very active moment, certainly for the U.S.'s most important trading partners here with Canada and Mexico and a reduction in the volatility there particularly in industries like automotive, where the supply chains are so integrated across those 3 countries, I think would release more capital.

And is there anything -- any data points or anything particular you track to keep a sense on the broader momentum in the market?

So we're most highly correlated over time to industrial production. We certainly look at the PMI rates and those have been positive for a while now, over 50 but industrial production is what Rockwell's business traditionally has been most highly correlated to. So I certainly look at that. I look at unemployment because I think with such low unemployment in our home market, demand remains intact. A little bit harder to quantify, but progress of let's say, USMCA 232, Section 232 are in some ways, even more important right now, but watching the progress of that. Those are some of the things I'm looking at particularly.

And to that policy perspective, we've seen different government initiatives, whether it be tariffs or like OBBA. How have these initiatives impacted the conversations and demand around restoring and policy do you think you'd want to see that could further spur it?

I'd like to see us take a pragmatic approach with the targeted application of tariffs, not the wholesale one-size-fits-all type of approach. Let's focus on the main issues, which is nonmarket behavior by non-market economies that are doing disruptive things with overcapacity, but not a broad-based approach that hurts friend and foe alike as well as U.S. manufacturers for whom they have a very hard time finding domestic sources of critical inputs. If the main prize is to increase the amount of final assembly in the U.S., providing a clearer path for being able to get relief on inputs that are important for that final assembly, I think is an important area of focus for policymakers.

And I guess, as you look at some of the movements in demand more recently and how customers have reacted to tariffs, how do you parse out shorter-term investments to mitigate tariffs versus investments that will build towards that longer-term strategy of capacity?

I think people are still getting on with their strategy, and I look at Rockwell's own behavior. We announced not too long ago a major new plant. That will be very close to our headquarters in Wisconsin. And while we won't see the first products coming out of that plant until 2028, we're taking a long view to what can lock the next level of customer service and margin expansion there. And so tariffs currently aren't helpful, but that should cause us to put an indefinite pause on the execution of things that are going to increase market share and expand margins. And I think a lot of customers looking like like it looking at their own strategy and their own road map in that way.

And then as we kind of dig into the verticals more Rockwell's closure is typically aligned more so what the U.S. traditionally produces a lot of exposure to food and beverage, for example. But when you look at the markets more prone to reshoring conversations, whether it be semis, pharma, battery, how transferable are Rockwell's products and solutions to those markets that have more often been produced overseas?

Yes. So I think there's a nice mix as we track new capacity projects. So major new capacity, whether it's reshoring or shoring or in some cases, it's growing like case of data center, where it's not moving from any other place. It's just -- there's a much greater demand here. I see a nice mix between industries that we're traditionally not as associated with Rockwell in industries that have been in our wheelhouse for a long time. So semiconductor and new fabs. We haven't talked as much about it in North America, but that's been one of the top 1 or 2 industries in Asia force a very long time, the facilities management and control systems. There are semiconductor facilities here in the U.S., you used to have one in your territory. That was one of the largest logic installations in the world. And so we're not a stranger to that and then some of our new offerings, some of the work we're doing with the chiller OEMs, for instance. I've talked before about what we're doing with Texas Instruments in one of their fabs to optimize their chillers using AI, wafer transport with independent car technology. So some capabilities that we have now that we didn't have 10 or 15 years ago, I think, are helpful. Data center, we can talk about the ways that we are penetrating the data center opportunities in a minute. And then we talk about life sciences with a lot of opportunities spanning software and digital services and hardware. So there's a nice mix there.

Yes. And I would say we have a global approach to working with customers and a long history of working with customers globally and supporting them as they make investments in other regions of the world and particularly in the U.S. And I think that's one of the benefits of our architecture and our product portfolio is that it does apply to a lot of industry verticals and applications. So the investment that we make in that technology, how we integrate it together can be leveraged across a lot of industry verticals.

And I think if I can add one thing, even though we're not talking a lot about reshoring for food and beverage companies because candy bars and beer have never traveled really well across the ocean, you generally want to you generally want to produce those things close to the consumer market. A really important part of food and beverage and home and personal care and pharmaceuticals is the end-of-line packaging. When you put it in a bag or a box or a peel bottle. And those OEMs, those machine builders, many of which are based in Europe, all have some capacity in North America, which with all the tariffs and the focus on North America as a growth market, they're all looking at increasing that. And the battle, of course, is are they going to be using more of their European standard? Or are they going to be using more Rockwell? They all have experience with Rockwell. And what we are seeing is that, especially with a lot of the new products that we're coming out with we're winning more than our fair share as those machine builders are increasing their presence North America. And many times, it's for commercial reasons because if they're competing at a big food U.S.-based food or beverage or home and personal care end user they prefer that we were working with them and not competing with them if they have made it clear that they would not use Rockwell. And so they'd rather have a friend and an ally as they try to sell their machines against their worldwide competitors then competing against us as well. We have to have a competitive product at the right price. But I think -- and you've been a part of a lot of those discussions, both here in the U.S. as well as in Europe, but I think we're making some great progress there.

And to that point, on winning your fair share, there's been conversation in the past, concerns that Rockwell maybe losing share in the market. How are you guys able to differentiate? And what -- how would you assess your competitive positioning?

Yes. Well, we look at it in a variety of ways. We certainly look at the market share reports. And while those are lagging indicators recently released reports look good and give us a lot of confidence in our comments that we're taking modest share in some really important places. We look at head-to-head marquee battles, where we're competing with our major competitors and making sure that we're seeing that the combination of our new offerings as well as our ability to have the right price, our support, our engineering when that's a part of the project. Those are all part -- the responsiveness of the organization, how I and my team are ready to jump into a battle at the point of attack when there's an opportunity to win. Those are all things that we've tried to instill as a fundamental part of the culture, making faster decisions, better empowerment. Now to some of the foundational pieces, I don't think our portfolio has ever been in better shape than it is. When I look at software and control and build-out of our software-defined automation. That's not just a virtual PLC. We have that. We'll be showing it to you Automation Fair in Boston in November. But it's a system-wide approach. So it includes the simulation tools. It includes the agents. It includes FactoryTalk Optix at the edge. And then we have a lot of new products coming out of Intelligent Devices as well.

Yes. We've had a number of really positive new product introductions where we're growing beyond our expectations in those areas. And what's really positive about that is we're not just seeing wins with existing customers. We're seeing wins with new customers, gaining new share and new customer conversions as a part of those new product launches. So I think the combination of the technology that we've built, things that we've added over the last few years through acquisition, have brought together a really nice overall system architecture capability that's really resonating with customers. And as we share with them and what you'll see at Investor Day an automation fair in November, the progress that we're making in innovation around how we bring that architecture together, how we help customers orchestrate the resources and the production processes in their plans and how we're applying artificial intelligence as an assist in a value-add to the systems that our customers have. We're getting really positive feedback from the market.