We're really excited to have Rockwell Automation with us. We're really excited to have Blake Moret, who is the Chairman and CEO. Blake became CEO in July of 2016, joined Rockwell as a sales trainee in 1985, so obviously come a long way, Blake. So I know Blake has some prepared remarks he wants to make, and then we'll go into Q&A.
Thanks, Andy. Thank you all for being here today. As Andy said, I'm going to make some remarks I think you'll find interesting, and then we'll get into questions. Rockwell's been on a transformation journey since 2016 because we needed to move faster to meet market needs for information software and high-value recurring services across the most attractive industrial verticals. Acquisitions such as Plex, Fiix, ASEM, and Kalypso have boosted our total annual growth to 9% between 2016 and 2023. However, our margins have been flattish during this period. To be sure, the shocks of pandemic and semiconductor shortages introduced inefficiencies, and our margins have averaged a respectable 21% during this time, but it's clear we have a big opportunity to deliver consistent margin expansion. Also, we are not satisfied with our Q1 results, and we are taking actions to address the issues that led to the miss.
Here's how we're expanding margins while continuing to grow faster than the market. On the heels of achieving our 2019 plan to $9 billion of profitable revenue, which we got to one or two years ahead of our original expectations, we introduced a new strategic framework for growth and performance last November at our investor day. Highlights of the new plan include 35% core earnings conversion on incremental revenue and 6%-9% annual growth through the cycle. We also outlined the expected margin range for each business segment. We've already touched some of these ranges in the last year based on very high sales growth, but our intention is to tune these businesses so that this performance is consistent and not dependent on supercharged growth or big swings in incentive compensation. Importantly, we're focused on getting the synergies and efficiencies from existing acquisitions versus making new acquisitions.
The portfolio of capabilities that we built and bought is second to none. The acquisitions we made between 2016 and 2023 will contribute $200 million of EBITDA this year, and that figure is expected to accelerate as we integrate technology and increase efficiency. We're well into actions in Lifecycle Services. I'm happy with the way we've started the year, with 520 basis points of year-over-year margin improvement on high single-digit organic growth, but we're just getting started. Key levers for full-year margin expansion in this segment are headcount reductions, spend, and restructuring actions expected together to account for about three points of year-over-year improvement. Sensia, which has swung to profitability and will contribute over a point of improvement. And price and volume together, which improve margin by about two points. We're taking structural actions within Intelligent Devices, including the ramp to profitability of Clearpath Robotics, our most recent acquisition.
Clearpath was originally expected to be about $0.25 dilutive to 2024 EPS. Now we're expecting the loss in fiscal year 2024 to narrow to $0.20 based on purchasing efficiencies with Rockwell, hiring discipline, and very strong orders growth. Other actions within Intelligent Devices target the return to operational excellence for this broad portfolio of products. Near term, we're building safety stock to smooth out volatility in the plants as we transition from shipments out of backlog to a shorter, more normal book-and-bill process. The headwinds from these inefficiencies will reduce in the second half of the year. We see opportunities to reduce the total number of SKUs in this portfolio while actually increasing customer service, and expect this work to have a fiscal year 2025 impact. In Software and Control, our recently announced leader, Matheus Bulho, is looking at the cost structures within the Plex and Fiix acquisitions.
Both are already on a good ramp of increased profitability and double-digit ARR growth, but we're working on additional opportunities. Through the year, we will also see the increased impact in the market of FactoryTalk Design Studio, a cloud-native Logix programming application that is industry-first technology we've been investing in for several years. We've made some organizational changes across Rockwell to support this focus, and that will continue. Company headcount is also expected to reduce by 1% or 2% from the beginning of fiscal 2024 and Q1 of 2025 as we execute our restructuring actions from Q4 of fiscal year 2023 and from this year. 80% of the increases in fiscal year 2023 headcount were due to acquisitions and manufacturing labor increases to support our growth. Across our total business, we see price cost of over 1 point this year and expect at least a point of price going forward.
The ongoing innovation of drives and motion products within Intelligent Devices and Logix within Software and Control will support continued price cost and share gains. Here are a few additional comments on Q1 results, Q2, and the full-year guide. For Q1, we had previously indicated margins would be down year-over-year and sequentially, but we're not happy with the results. Primary causes of the year-over-year reduction were an investment spend comparable that is most significant year-over-year in Q1, followed by lower supply chain utilization, unfavorable mix, and the recent Clearpath acquisition, which diluted margin by about 30 basis points, a little better than expected. Orders grew double-digit sequentially from the trough in Q4 of last year, with the strongest growth in North America. We expect revenue dollars and EPS to be similar to Q1 and Q2.
While operational issues are expected to subside through the quarter, we have less backlog entering Q2, so a growing amount of revenue is dependent on orders received in the quarter, especially in Intelligent Devices. Orders are expected to increase sequentially again in Q2. For fiscal year 2024, our primary dependency is the continued order ramp through the year. I am confident that the operational issues are being addressed, and if we have the orders, we'll hit the guide. Orders have started off well in the year, but they will have to continue to grow through Q2 in the second half. For fiscal year 2024, I'm sorry, this slide gives additional transparency on our view of business segment margins and their ramp through the year. Software and Control margins will be down year-over-year and sequentially in Q2.
In Q2 of last year, we had 42% growth in Software and Control. The Software and Control margin decline is expected to be offset by continued margin improvements in Lifecycle Services. Intelligent Devices margin is expected to be flat in Q2. Spend in Q2 for the company will be flat to Q1. Margin ramps through the year based on volume, flat spend, and the benefit of lower incentive comp plus restructuring. I'm confident that our renewed focus on margin expansion through cost discipline, operational excellence, and focus on organic growth will achieve the longer-range targets set out in the strategic framework introduced in November. Here's the outlook we gave on January 31st, and with that, happy to take your questions.
Thank you, Blake. So while you're walking over here, let me ask you a big-picture question first. At the investor day that you had last November, you talked about this 5%-8% organic annual growth, and you talked about all these megatrends that we always talk about. But then this presentation's really helpful in terms of giving us some more information, but I feel like all the noise is sort of clouding the environment, like de-stock and operational stuff. So do you still see this automation cycle as different? Is it more resilient? What are your customers saying about that too?
There's a lot of objective optimism in the automation market growth once we get past some of this volatility that, as you said, I think clouds some of the impact. Just a few areas to think about. The secular demand for automation is higher than it has been in the past. A lot of that is driven by workforce scarcity. In the U.S. alone, there's over 600,000 unfilled jobs. That's expected to go up to over 2 million unfilled manufacturing jobs in the next few years. We see across multiple industries customers saying, "I need to augment the labor I do have with additional automation." There's a lot of basic automation that's already been put in place, but new opportunities to help these companies be more efficient through applications like mobile robots, which was a big part of why we made the Clearpath acquisition.
We heard that from automotive, from semiconductor, from food and beverage, from consumer packaged goods. Being able to provide the components to the line when it's needed, take away the finished product and put it in the warehouse, or take it to the truck, those are opportunities that are very labor-intensive today. In addition, the U.S. is our home market. We have the largest share, the best channel, the deepest relationships, is doing more capital investment in manufacturing objectively than they have in many, many years, and so we're going to be an outsized beneficiary of that. And then some of our most important verticals are where that spend is taking place as well.
That's very helpful, Blake. So I just want to focus on orders for a minute. In the presentation, you mentioned you'll deliver what you say if you have the orders. So the short question is, do you have the orders? But if I sort of think about it, you've talked about Q2 up, double-digit sequentially. Are you on track for that? Obviously, there's still concern about industrial de-stock. There's some project postponements out there. So are you on track for what you see, and what are your key distributors saying about the order recovery?
Yeah. So in quarter one, we saw double-digit sequential growth in orders after the trough in Q4, ending the end of September. Quarter today in Q2, we're seeing the sequential ramp that is promising, but it's going to have to continue. It's going to have to continue through Q2 and through the year. The single biggest factor that we've been talking about is that distributor reduction in inventory. We have very good line of sight, and we're working closely with our distributors to see that. Inventories are coming down. In some cases, distributors have already got to that equilibrium point, and we expect most of them to get to that equilibrium point by the end of March, by the end of our Q2, where their underlying demand will be reflected in their orders to us. But we're watching it closely, and again, it's going to have to continue.
Blake, just stepping back, I know you do a quarterly survey now of your customers. What's going on with that survey? Has it changed at all as you looked at the Q4 survey versus the Q1 survey? Better, worse?
Yeah. So we don't necessarily do it at a fixed date each quarter, but the last time that we went out and talked to our distributors, and it's more or less on a continuous basis, we continue to see good underlying demand. As we're talking to our distributors, when they look at their incoming orders from a variety of industries, as we look at the inventory levels, which continue to come down, so that's positive. We're not relying, though, just on our distributors. We're talking to our end users, to our machine builders directly to see their plans as well.
And then you didn't change your view during the last quarter earnings around discrete, hybrid, or process markets in terms of sales trajectory 2024. But did you see anything discernible in any of those automation markets, different trends, anything that you saw?
So right now, process verticals are growing the most. We see that. Certainly, our competitors see that as well. Within that, those are verticals like oil and gas, mining, chemical. For us, it's mainly specialty chemical versus bulk chemical. So those are some of the strongest markets today. Some of the shortfalls in Q1 in some of the verticals like automotive and food and beverage were more due to our miss in shipments than any read on the underlying end demand, in that those are some of the more product-intensive verticals, and that's where we had the miss in shipments, is in products going to automotive, going to food and beverage, because we're expecting low single-digit growth in those verticals for the full year.
One more question on orders, Blake. So I thought it was interesting that Nick, in answering an earnings call question, suggested that Rock would end 2024 at the high end of a more normal backlog range of 30%-35%. And given Nick didn't change the sales forecast for the year, it seems like he's hinting that actually, Rock, at least when you reported Q1 results, you were more confident in your original order projections for FY 2024. Am I reading too much into that, or is that kind of what he said?
I think you may be reading too much into it. Like we say, we had an encouraging Q1, but I think it's too early to say what the exit point on backlog will be at the end of September. I think it's probably most useful to assume that by the end of this fiscal year, we're going to be back to more normal product backlog, which is to say orders and shipments are more or less right on top of each other. So an order received in a quarter for a product should show up in shipments, and at some point, hopefully, it won't be as interesting for us to have to talk about product orders separate from shipments.
It's helpful, Blake. And maybe give us a little more on the regions. I think you said sales in China were down high teens last quarter. Can you comment on your expectations for China for the rest of the year? And do you think China can turn positive at some point this year? You also mentioned Europe down a little bit. Are you seeing any signs of bottoming in Europe? And I'm going to ask you one more question. I'll repeat them for you because I've just asked you six in one question. But do you suffer a little bit from what you get advantaged of in the Americas, that you have the installed base here, you have the relationships? Is that hurting you at all in Europe and Asia because it's not your home turf?
So China, Europe, and the US. Let me start with China. I'm not betting on China recovery anytime soon. I think China has a fundamental supply and demand issue. You look at the output of factories in China is deflating. In other words, they're getting less for what they're shipping out because they have too much capacity. Real estate is oversold. You got the zombie apartments, just a lot of excess capacity there. And then you have really troubling high youth unemployment. You have more workers who either don't want to work or can't find jobs, which is all kind of a common theme of supply and demand that I think is going to take a little while to work out. Fortunately, China, for us in this case, China is only 6% of our total business, so we have less exposure than most of our competitors. It's still important.
It's the biggest manufacturing economy in the world, but I'm glad I don't have more exposure today in China. Europe, for us, is primarily machine builders that are servicing certainly Europe, but Asia and North America. I'd say that's somewhere in the middle of our expectations. And then North America is actually the strongest market for us, and obviously, that's helpful because we have some high share. But for the verticals, for the now emerging impact of stimulus, it's still early innings, but we are seeing a benefit there. And I think we have opportunities to grow share in other places. And I've talked directly with my peers at European machine builders who look at the U.S. as their strongest, most attractive market for the next few years.
They know we have the largest share, and whereas in the past, they might have used primarily products from their local European automation suppliers, they recognize that having an ally in us where we're already installed with a lot of the end users that they're hoping to court can be valuable to them.
Following up on that, Blake, what's driving the growth in North America most? Is it what you just said? Is it a couple of particular markets? How would you define where the growth is most coming from in North America?
I think you can take some different approaches. Before looking at specific verticals, look at just the need for resilience. The U.S. is the largest consumer market, and the largest economy. And so people want to be close to those end markets, and they're building in resilience into their networks. And it might be new capacity. It might be cybersecurity in existing facilities, adding additional efficiencies. The majority of our business remains brownfields. The greenfields attract a lot of attention, but the bread and butter are the brownfields, the MRO in those existing facilities, the line expansions, the addition of new technology on lines that are already there. And so I think that resilience is an important part of it.
Some of the new technology that adds agility, the Independent Cart Technology, the AMRs, it might be in a facility that's full of our traditional automation or our competitors' traditional automation, but we have more ways to win now. Certainly, stimulus is a piece of it. We're seeing new business directly as a result of stimulus. Still early innings, though. It's not a huge factor this year, but it starts to ramp additionally over the next few years. And then within the specific verticals that we all talk about, it's automotive, including EV. EV is a little more than a third of our automotive business, so it's significant, but it's not the whole thing. Semiconductor, there continue to be announcements like the recent GlobalFoundries announcement. Warehouse automation will recover at some point. We're talking next a little bit more about that.
Energy in terms of additional efficiency in existing facilities, decarbonization, even within the fossil fuel network, and then obviously renewables. So that's just kind of a survey of some of the things why I continue to be optimistic about manufacturing investment in the U.S.
It's helpful, Blake. I'm going to open up to questions a little bit, but let me ask you maybe just a postmortem question on fiscal Q1. You obviously gave us some good information on sort of what you're doing, but maybe if I could just step back. You kind of take two steps forward, and then you have a quarter that's sort of a step back. And I know you talked about how book-to-bill changed. You were coming out of backlog, and then it was more short-term. But I kind of feel like as a firm, you should have known that to some extent. So how do you get in front of the operational performance? Because as you know, it's a very short-cycle business, so you have to be in front. So what changes are you making to make sure you're in front of the situation now?
So I think I'll split it into three areas, and it's the ways that we talk about the needs of all manufacturers. And we are, of course, ourself a manufacturer. And so we think about how do we increase our resilience, our agility, and our sustainability? So on the resilience side, and you look at what went on in the Q1 and some of the misses in the past, adding the additional capacity with the IDC, the Indianapolis Distribution Center that we did last year, some of the additional lines that we've been putting in place over the last year or so have given us the capacity that today we estimate to be about $10.5 billion worth of overall capacity for the company. It's not going to stop there. We expect to continue to grow to and through that figure. So I think capacity is helpful in that resilience.
Adding the additional redundancy among multiple plants is something that we have added so that we can build a product in more than one place. And so again, I think that's part of the resiliency. From an agility standpoint, our systems in FP&A to be able to forecast are an important part of that. And to make that a whole company sport, because our manufacturing was kind of a just happened part of what we did, we took some of that for granted, and a run rate was sufficient. It's clear that to be able to deal with the kinds of volatility that we've seen over the last couple of years, better forecasting that involves sales and the product businesses and manufacturing is something, and that's underway, to make us more agile, to recognize that, okay, we had a year of 17% growth last year.
We got a year of much less growth this year. Let's make sure that we're properly considering all those pieces. And then I would say the final part of the sustainability, and that's to have the team that is able to deal with these kinds of disruptions to the system. And I think we're well along in fielding the team that's not dependent on any one person as we go forward. So broadly, those are the things that we're working on. There's obviously a lot of basics of driving the inefficiencies out. But I think to the question about how can we continue to move forward consistently, I think those are some of the major areas that I'm focusing on.
Great. And then, Blake, I noticed you said in your prepared remarks that you're focused now on existing acquisitions that you've already made versus new acquisitions. So maybe how does your role, you kind of alluded to it already, but how are you going to change as you go over the next 12 months to make sure that it's more predictable and all that kind of stuff?
Well, without putting new acquisitions on the heap, so to speak, it allows us to focus on getting the efficiencies out of what we've already built and bought. Just Andy personally, I did a lot of that in my previous job running what was the old control products and solutions segment, and we had quite a bit of margin growth during that time by focusing on the pieces. How do you best integrate them, driving the cost out? And I think we have a good line of sight for doing that in the individual industry segments. And to some extent, the team that we put in place on my staff are people who have demonstrated that they appreciate that, they have a passion for that, and have a good track record.
And then company-wide, what are the things that we can do, making sure that when we hire new people, for instance, that those are durable jobs. We're not pulling people in that are going to have to be stripped out shortly afterwards with some business dip. So I'm excited about the opportunity to take what we've done with spurring faster growth, pairing it with the margin expansion and the consistency, and to see what that does to our overall results. I'm looking forward to that. I think the next year or two, we're going to be able to see the benefits of putting all the pieces together.
Blake, that's helpful. And maybe just a follow-up, the chart you gave us now where you talked about the different segments and how the margins are going to go. So again, one of the things that I know you've gotten questions on is the sort of second-half ramp. So now that you've laid it out a little bit more, it makes sense. Lifecycle Services, you've made a lot of traction. You can get the margin expansion. We've seen it. But the other two segments, they need a pretty big jump in the second half. So besides the fact that we know orders need to come, but what else has to go right to sort of make that pretty big jump in Intelligent Devices and Software and Control?
A lot of it's under our control. We talk about the orders. We do expect higher volume. We expect investment spend to be flat sequentially from Q1 as we move through the year. We've got that, I think, under control. We continue to get further from the last acquisition that we made, which helps there. And then in this year, there is a benefit. There is a tailwind from reduced incentive compensation. Last year, we had a very good year. We paid out above 100%. This year, it's likely to be less. And so that helps. It's going to give us some impressive margins, but we're going to continue to work so that we see those kinds of margins without requiring supercharged growth or anything different with incentive comp.
Any questions from the audience? Anybody have a question? Let me follow up on Lifecycle Services because I don't want to take it for granted. You had a nice improvement over the last couple of quarters, but it was kind of sluggish for a while. You mentioned Sensia has turned around. You put in new management there. Can you talk about the visibility that you have to improve it? Do you have the projects in backlog you need? How much is under your control there to see that mid-teens margins?
Sensia is primarily a project-driven business. You do have meaningful backlog that will continue. There's a product portion of Sensia, but most of it is actually solutions. We do have the backlog. I think our management system is in a much better place now. You're right. We're not ever going to take it for granted, but the results were encouraging in Q1, and we expect that to continue.
Okay. And then maybe just talk about Rock's ability to price. You actually had a pretty big change in pricing if you go back, moving to fixed discounts. So what does that mean for Rock going forward? I think you had 3 points of price in Q1. You expect to be a positive contributor for growth over the year. But how do you look at price versus cost? And is the supply chain Q1 issues aside, is it still getting better for you guys?
Yeah, supply chain is definitely getting better. The majority of the issues with our miss in Q1 were that transition from shipping out a backlog to shipping incoming orders in the same quarter, not the lingering component shortages. We still deal with some of those issues, but it's the long, small tail of that at this point. I want to make that clear that we're mostly past that, and we've put resiliency measures in place so that 2 years or 5 years or 10 years, we're going to have processes that are much better able to deal with that volatility as we go through that.
On the pricing side, how has the new model worked out? Have you been able to be more nimble?
Absolutely. So when we moved to a fixed discount model in pricing, it meant that we could react much more quickly to changes in inputs. Again, in the past, working with our old way of dealing with pricing was okay because you didn't have as volatile an environment where inputs were skyrocketing like we saw back during the front end of the shortages. So with that fixed discount model, we don't have to wait till a pricing agreement expires with an end customer. We can make the changes as we need to based on input cost so that we can stay ahead of those sorts of things. That's been implemented. It was a major change, but I'm happy with the agility that that's brought us.
That'll yield results going forward in terms of our price-cost by being able to get a change when needed quickly into the system and see the benefits rather than to see it layered in over what could be as much as a year based on the term of that customer contract.
Blake, you alluded to Clearpath. Maybe let's talk about it a little bit. Down to $0.20 of dilution, I think you had guided originally when you announced the deal that it would be accretive to earnings in 2026. Can it be accretive earlier than that based on what you see? How is it doing so far?
I'm not going to make a prediction there, but it's on a favorable, better-than-expected ramp, both in terms of the overall integration. The orders, I said, have been very strong, and I mean very strong. I think the idea of bringing together mobile robotics with an automation supplier for fixed automation has captured the imagination of a lot of big customers who might have been hesitant to buy from a smaller company, but when they're already doing business with us or they recognize that we can bring it together, that ramp has been positive. The purchasing efficiencies, being able to leverage our procurement, the engineering integration with our software applications like Plex and Fiix, and a lot of that, I would point back to the cultural fit. That makes a difference, and it's real.
The willingness to work with us and for our team to have learned, "Here's how you best integrate a new acquisition," I think we're seeing that really positively. Early days, but it started off well with Clearpath.
I think it's a good time for me to ask about ARR. So it's continued to be a good growth driver for you. You're guiding to 15% for 2024, but maybe highlight the biggest drivers of ARR growth in 2024. I think you've mentioned already Plex and Fiix, but cybersecurity is starting to get bigger. So talk about the key drivers helping that business.
Well, you've mentioned a lot of them. I mean, annual recurring revenue is obviously attractive from a financial standpoint, but for customers to be able to have that information software, those high-value recurring services like remote monitoring and cybersecurity are really important. And strategically for Rockwell, they give us another way to win. For most of our history, our path to a customer's heart was through the programmable controller. And that remains a devastatingly effective way of adding value to customers and then adding the Intelligent Devices and so on. But these areas of value that come out in recurring revenue give us another way to win, to add value for customers, for Rockwell, for you. We'll see that as over 9% of our total business this year, and particularly in a year when overall company is low growth, but we're seeing annual recurring revenue growing profitably at 15% growth.
It makes a difference in the results, and we're very happy with that. And I think there's lots of room to run there.
Often you get compared to European and Asian competitors in the standpoint of they have software and all that kind of stuff. Do you have enough now, you think, to offer sort of a full solution? Because I know you talked about how you might slow down acquisitions so you could better integrate. Does that also mean you think you have enough or how?
I think we've got a great foundation, and it's not just what we bought. There's always something new that you could buy in software, but we needed to move faster. We did. I have never said that we're trying to become a software company. We're not. We're an outcome company. But you need the software, the hardware, and the services to bring that all together. And I'm very happy with the assets that we bought, what we built. FactoryTalk Design Studio is getting more and more performant, and that's a true disruptor in the core business of configuring automation systems. As we move to a more software-defined architecture in our basic Logix offering, I think we've got plenty of capability. The most important part of that, Andy, is that we have the internal capability now to sustain that.
That's why we needed to make some of these acquisitions is to kickstart that competency. Plex was really that software anchor. And it's not about getting to a certain dollar value or a certain percentage, but it's the capability that when we need to do something in software to knit together the system or to simplify it or to interface with the outside world, we've got plenty of capability within Rockwell today to do that.
I just want to hit free cash conversion quickly. We know you expect 100% conversion. It's dependent on inventory days coming down, 140-125. But as you know, Rock was always great at free cash conversion. Then over the last few years, it's been a little bit more, forgive me, rocky. So has anything changed, and do you expect more consistency going forward?
We're going to bring working capital down this year. It's going to take a while. Certainly, building the safety stock increases the finished goods a little bit in Q1, Q2, but we expect that we're going to see less WIP and raw in components through the year. So getting back again to that normal sequence, that's really the focus of it, is to reduce the overall inventory and to see the cash flow conversion, get back predictably and boringly to 100% or better every year.
Very nice. And I ask this question of all the companies. I've asked you this last year. So what are the top two or three innovations and structural changes affecting your company over the next five years? Are there any emerging industry trends that are perhaps being overlooked in the current discourse?
So in our strategic framework that we talk about internally, we talk about three areas of value that we provide. It's autonomous operations. It's the manufacturing lifecycle management, which is mainly the services. And then it's our ecosystem, which is second to none. In the first one, in autonomous operations, you know us for production, design, and control, but there's a lot to be done there. And I mentioned briefly software-defined architectures to give us more agility there. I encourage you. It's early, but come see us in Automation Fair in November to see what we're actually doing in that space. In production logistics, that's where we have a clear disruptive capability with mobile robots and the opportunity to bring that together into a cohesive system. And then there's the edge and the cloud-native information solutions. And again, I'm very happy with what we built.
I'll match it up with any of our competitors.
Awesome. Well, I think we should end it there, Blake. We very much appreciate the time.
Thanks, Andy.