Rockwell Automation Q2 2024 Earnings Call Transcript

Sure. Andy, I'll start, and then Nick may have some additional comments. We're expecting mid-single digits sequential growth in Q3 on orders. This is after low double-digit sequential order growth that we saw in Q2. And then we expect high teens sequential orders growth in Q4. And that's based on our analysis of the levels of existing inventory in distribution as well as in the machine builders. For distribution, we expect that largely to clear by the end of the third quarter in most regions. China is probably an outlier that goes a little bit longer, but we're tracking those inventory levels and that's consistent with the direct feedback from those distributors. As we go out to the OEMs and have specific discussions with the largest OEMs, particularly in Europe and in North America, we're expecting that inventory to be largely cleared at the machine builders in Q4. This is imperfect because we have some of those machine builders that are buying direct from us, and then we have a lot that are going through distribution. So that's still evolving. But we have much better view today than we did at the beginning of the year, and that's the primary reason for the reduced guidance for the year.

Andy, one thing I'll just add on that. What we've seen in April orders is completely consistent with that our guide of an expectation of order growth of 5% sequential order growth.

Sure. So we are confident that those growth ranges are reasonable as we look through the cycle. It's based on our offering. It's based on the higher growth that we see in North America, which, of course, is our home market, where most of our sales are and it's our portfolio that we've built that's winning today in the market. So we see that through the individual projects that are competitive the growing impact of mega projects. I and my team are directly involved with versus our toughest competitors around the world with a good win rate of those projects. We also see in the industries, the win rates looking good. And when I talk about market share gains, obviously, Logix controllers is one of the key areas and we do see those gains, both when we look at the U.S. and when we look around the world in terms of the reports on that important product line, and there's some other areas as well, motor control centers, for instance, as we get those reports for our offering in North America, but also with the new Cubic offering, which is a space that was virtually unserved by us previously.

And then with the autonomous mobile robots, you heard several examples of those wins in the production logistics space from our ClearPath acquisition, that's already a $5 billion or $6 billion market growing much faster than the general automation market. And so that gives us a lot of confidence with these new sources of value as well as the products that make up the majority of our business, we're confident about these long-term targets.

And again, it's not just about the above-market growth. I think you've heard the tone on this call and in the last few months, putting that together with the margin expansion is absolutely fundamental to our plans going forward.

Yes. Nigel, in terms of what you're backing into from an order rate in Q3, that's complete -- that's consistent with how we're seeing this, too. In terms of EPS, the one nuance I will point out from a quarterization on our tax rate, we expect our Q3 tax rate to be lower than the average and our Q4 tax rate to be higher than the average. That's just based on discrete items that are expected in the second half of the year and the timing that's the only other nuance I'd say on this. But otherwise, I'd say your modeling is matching pretty closely what we're estimating.

Let me start with some general comments, and then Nick can add some detail to that. The $100 million of savings that I mentioned for the second half of the year is totally separate from anything with the incentive comp. So that's additional savings that's totally separate from that. Embedded in that is a reduction in force of approximately 3%. So those are not temporary savings and that will provide additional incremental benefit into next year. There's also some of the temporary actions that Nick talked about, but there's a meaningful reduction in force that's structural and is the front end of the additional structural actions that I alluded to and that we'll provide more detail on the next call.

And Nigel, part of what we were talking about there is the $100 million we're expecting in the second half of this year. Those actions, we expect to have a tail into fiscal year '25 of an additional $120 million. And I'm saying that in reference to your comment about temporary, some of it is temporary, but the majority of it is sustainable and carried makes that tailwind impact benefit into fiscal year '25.

A couple of points, Julian. First of all, we certainly intend that the incentive compensation does reverse in fiscal year '25. But the productivity actions that we're doing with the structural cost savings, we do not expect the majority of that investment spend that I noted on that slide to reverse. And that's why we're talking about the $120 million of carryforward benefit into fiscal year '25. So 2 different answers. The incentive comp absolutely does reverse but investment spend does not. And again, investment spend in total for next year will be dependent on the opportunities we're seeing. We haven't set what that number is. But the benefits of what we're doing here, we are confident that will create this $120 million tailwind benefit into next year?

Yes. Just at a high level, the actions that we're taking now with their benefit this year than the incremental benefit next year, when you add that to the more structural actions that we're beginning a more comprehensive program that I mentioned, we expect that to more than offset the headwinds from return incentive comp investment and so on as we go into fiscal year '25.

Yes. So as of the end of the second quarter, Julian, our product backlog is essentially back to normal. We've had good success working through with our supply chain, and we've brought our backlog back to normal. So going forward, our we expect to be operating what we were like pre pandemic, where orders in a particular quarter are very much like what our sales are in a particular quarter. In our second quarter, we were still benefiting from drawing down some of that backlog. We brought down our backlog in high single digits in the second quarter. And that's why our sales in second quarter were higher than our orders. That phenomenon will end going into the second half of the year. And that's why even though we expect orders to be up sequentially, we expect revenue to be down sequentially.

Sure. No, I'll make some comments, and Nick may have some additional ones. Most of the reduction in force that we're looking at is affecting SG&A and that does include sales and marketing and headquarter functions. I think as we look at guiding principles, we're directing the spend to the highest value activities that's both geographically and from a product portfolio standpoint going through and taking a look at what is generating the best returns in those areas. We're also integrating recent acquisitions with existing Rockwell resources and looking for the cost synergies there. So we're getting good performance out of our acquisitions. And as we look at ways to get the efficiencies and as I said, knit together what we've built and bought the actions we're taking are consistent with that. And then there's opportunities, as always, for back-office efficiencies by leveraging technology. And we see that in SG&A.

We see it in our development activities as well. There is some reductions in cost of sales, including some in manufacturing operations as we're tuning our capacity to match what we're expecting near term in terms of output. And that's product-specific, right? Some of our lines are growing very well. year-over-year, and they're expected to continue. Others as we've gotten back to full safety stock we can tune that to reduce some of the variances in those operations. So that's the current list of actions that we're doing. As we look at the more comprehensive program, we'll be focusing on areas like sourcing is a big opportunity for us with the spend of direct material and other items. And then there's also additional opportunities manufacturing efficiencies as we look at our portfolio and the wide range of SKUs that we offer. Nick?

Yes. The one piece I'd add to that. Many of these costs are in organizations or functions that support multiple of our reporting segments. Given the way we allocate these costs across segments, intelligent devices and software control will see the greatest impact from these actions that we're doing.

Yes. So there's a few things impacting our margin progression as we go through the second half of the year. And you are correct, and we expect Q4 to be, by far, our highest margin quarter of the 4 quarters. We -- the biggest contributor to that is going to be volume that is positively impacting the margin, particularly in software and control -- that's followed by the structural and temporary cost savings that we're doing. And then the third is we will be having a more favorable mix of revenue that will be benefiting margins. So it's volume is the largest and then followed by the cost savings and then the mix, all contributing to that sequential improvement in margin in Q4.

Yes. Steve, R&D as a percent of revenue is going to be pretty consistent at 6% of revenue as a percent of revenue, it's not really changing from last year.

Yes. Steve, this is Blake. As Nick said, our development expense remains at 6%. We continue to invest robustly in areas like new product introduction, which is actually increasing over the last few years in terms of what we're delivering to the market, both in terms of the hardware products as well as new software as well. And so I think it would be incorrect to talk about whiplashing that piece of it. We're looking for efficiencies that are taking cost out that had built up over the last few years of volatility as we've gone from pandemic to supply-chain shortages and making sure that we're tuned for growth going forward with that. The incentive comp philosophy hasn't changed there and that we operate in a pay-for-performance culture -- we had great payouts last year because we performed really well with high teens top line growth and even better EPS, this is a year that is below expectations, and we're not paying a bonus, but it's going to come back and that's the way we've operated for as long as I've been in the business. So in no way it implies some sort of short-term activity to manage results at the expense of the long-term value that we continue to provide.

Steve, the sales dynamic is the single biggest contributor to the increase in EPS from Q3 to Q4. Second, followed second by on a smaller scale to cost actions. The total cost actions that we're projecting in the second half of the year, we expect about 1/3 of that to be impacting Q3 and about 2/3 of that to be impacting Q4. So there -- that is part of it, but it's still a smaller number compared to the reliance on revenue growth occurring in fourth quarter.

There's a few elements of what informs that guidance, Rob. But the first is a significant reduction in packaging machine builder inventory. So within the OEM inventory packaging machinery has been particularly affected by that. And the feedback we're receiving from the conversations directly with them indicates that, that reduces significantly as we go through the third quarter and into the fourth quarter. the distributor inventory actually is expected to clear again in regions outside of China before that. And so those 2 factors are an important part of it. We also see the normal seasonality in our engineered to order and Lifecycle services shipments. There's always a higher shipment amount at the end of the year there, and that would include Sensia as well. And then we see the growing impact of mega projects. And we do have a line of sight to some of those projects that are expected to come in with ordering and shipments beginning in the fourth quarter. We're seeing some of that now. Think of that as kind of a drumbeat that increases through the year and again into next year.

Yes. I mean in this volatility that we've been operating in, in the last 4 years, I'm going to reserve a view. But I think we're setting up the foundation that we have an attractive cost base regardless of what orders do next year.

Yes. So I mentioned that we're seeing some push out on EV, but we are not seeing cancellations in those projects. And it doesn't mean that they've all gone away. EV is still about 1/3, a little bit more than 1/3 of our total automotive business. So there's still some of those projects, EV projects that we're winning and getting business for now. If we look at some of the other areas of mega projects, the facilities management and control systems or semiconductor fabs. We've got great capabilities there. and are playing a major role in a lot of the fabs that have been announced and are currently under construction in the U.S., but around the world, that's been a good business for us in Asia for over a decade. So it's not a new application for us. Renewables is another area that we're seeing a good investment playing in solar. We're we are seeing meaningful business in solar as well as wind, particularly with our Cubic acquisition.

And then another area that is, we think, has bottomed, and we're seeing an impressive funnel building is in the area of warehouse automation and really the overall space of production logistics. And again, I'll go back to the capabilities that we have that's somewhat unique with AMRs, the mobile robots, combined with the fixed automation that we've always had we're tracking some major projects there, and we've had some wins, and I talked about some of them on the call. But to give you an example about how those are playing out.

There are a couple of customers that we've talked to in the last couple of months that have come off of discussions with labor and have made it clear that they want to complement their people with technology to a greater extent over the next few years. And those have resulted in multimillion dollar wins for Rockwell as a result of moving more aggressively and to adding technology to complement their scarce resources. And so those are the kinds of examples of mega projects that are starting to come in.

Joe, you got it all right, except for the last one, our normal bonus expenses in the $160 million to $170 million range.

Julian will take one more question.

Yes. Actually -- so if you think about those verticals and that's about the size of the overall verticals there, about 60% of our business covered mainly by those 2 verticals is the OEMs, the machine builders. So that's the way you can kind of do the calculus of how much of that business has been suppressed by the higher inventory levels, and we're expecting that to be dissipating over the coming quarters.

Yes. When you strip out things like incentive compensation and what we're showing there from investment spend because those things would normally be part of what we talk about in terms of our incrementals and decrementals, but we stripped out those 2 details to give you more detail of the underlying moving parts in there. But there are many parts of our portfolio where incrementals and decrementals like that in that 60% range are certainly normal. They're normally offset by some degree of incentive compensation or investment spend though.

Yes. I think -- but directionally, I think you're right in that logic, we've seen the biggest correction based on the really tough comps with the huge growth from last year. And as that comes back in, that hardware does have high incrementals and high decrementals. We've put a lot around it with annual recurring revenue and so on. which does help us and continues to grow. But there's no getting around that Logix is very profitable. We have high incrementals and high decrementals there.

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