Thanks, everyone for being here. It's my pleasure to have up next, Rockwell Automation, Blake Moret, Chairman and Chief Executive. Blake has a couple of slides to go through first, and then we'll do Q&A. Thank you, Blake.
Thanks, Julian.
Well, thanks, Julian. 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 industry verticals. Acquisitions such as Plex, Fiix, 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're not satisfied with our first quarter results, and we're 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, 1-2 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 focusing 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 that 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 Life cycle 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 business segment are headcount reductions, spend, and restructuring actions expected to account for about 3 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 2 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 $0.25 dilutive to fiscal year 2024 EPS.
Now we're expecting the loss in 2024 to narrow to $0.20 based on purchasing efficiencies now that they're 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-build 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%-2% between the beginning of fiscal 2024 and Q1 of 2025 as we execute our restructuring actions that began in Q4 of last year and that continue into 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 one point this year, and I expect at least a point going forward. The ongoing innovation of drives and motion products within Intelligent Devices and logix within software 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 bps, 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.
That was very positive. As we said on our Q1 earnings call, we expect revenue dollars and EPS to be similar to Q1 in Q2. While operational issues are expected to subside through the quarter, we have less backlog entering Q2, so growing the 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, and they will have to continue to grow through Q2 and the second half.
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 benefits 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 that we gave on January 31st, and with that, I am happy to take your questions.
Thank you, Blake. Maybe, first off, as you said, it's sort of, you know, flat earnings sequentially in, in Q2. The ramp in the second half, so sort of first half, you have about $4 of EPS. Second half is $8-$9, roughly, to get to that guide. So the sort of, you know, how, how much do we see that step up this year, you know, second to third to fourth quarter? Is it sort of fairly steady? Is there a disproportionate amount lumped into Q4, or it just depends on kind of how the orders come in month to month?
Yeah. Julian, increasingly, it's dependent on the order ramp as we have less product backlog. We continue to have a nice base of backlog in our longer cycle business, life cycle services, configure -to- order, and so on. But, you know, as we talked about, we saw the trough of orders for products in Q4 of last year, so the quarter ended in September. We saw double-digit sequential growth in Q1, and that was very positive. Orders to date in Q2, we've seen orders support that ramp, you know, and we expect the orders to continue to ramp through the year.
That's contributing to, you know, the significant increase from Q1 to Q2 as the backlog of products just subsides and that more and more of the business is expected to be that more normal book-and-ship, you know, that we saw pre-COVID and we expect to get back to by the end of the year.
That's helpful. Thank you. And when you look at that Book-and-Ship portion, you know, when you're sort of gauging customer demand, you know, it seems the signals are quite mixed. You know, the good thing is your orders are up double-digit sequentially. That's a big plus. You know, when we listen to some of your peers in the industrial automation world, whether in Europe or Japan, you know, they're more cautious, it seems. They talk about the stocking aspects in certain industries. You know, partly that's because I think they have a lot more exposure to China and electronics, so there's some mixed headwinds hurting them. But yeah, so how would you characterize that demand environment? Because it sounds worse if I listen to some of those overseas peers.
Yeah.
Very good if I look at your own orders sequentially.
This is a good time to have North America and, in particular, the U.S. as your strongest market. I mean, we have by far the largest share in the U.S., and, you know, China's probably at the bottom end of, you know, attractive spots right now in terms of growth. Europe is somewhere in the middle. That's where most of our competitors are. And so having the strongest base in the U.S., you know, is playing out, you know, in the numbers, in that we saw the strongest growth in Q1 in North America, and we expect that to continue. I think China continues to have a supply and demand problem. They have more supply than demand in terms of factory output, you know, in terms of, you know, housing, real estate, in terms of, people, you know, employment. You see a rising unemployment.
You know, it's a fundamental issue of having more supply than is needed.
Yeah.
I think that's going to take a while to settle out. For reference, about 6% of our business is in China, a similar amount of COGS, as well. That's well below our major competitors.
Got it. So most of what you see in the U.S., very strong demand at least. That picture hasn't changed.
We're still seeing good demand. I mean, a lot's been made of the EV delays. You know, EVs are going to continue to become a larger part of the U.S. market. They were about 7.5% last year. They'll grow to over 10% of the U.S. market this year. But whether, you know, General Motors or Honda or whoever builds an EV or a hybrid or a gas guzzler, then we have good readiness to serve those applications. And then, you know, I do think that we see continued strong demand in process industries. That's probably the one that's already, you know, at a good level of growth year-over-year, in particular, energy.
Perfect. And I think that, you know, there's a couple of things that held the sales back, if you like, recent months. You know, one was the capacity constraints, and the second sort of related one that's slightly separate was that shift in business mix from backlog to Book-and-Ship. So maybe just on that first point, capacity constraints, some inefficiencies there, maybe flesh out, you know, is there any kind of particular product categories or end-market verticals and kind of where are we on resolving some of those issues from Q1?
Yeah. We're, we're well on the way to, getting past the issues that led to the shipment miss in the first quarter. The biggest single issue for that was the transition from a period that we had been in for really over a year of shipping out of backlog where in any given quarter during fiscal year 2023, it really didn't matter what the incoming orders were for the performance in the quarter because we had such massive backlog. Q1 was the first quarter that we actually had a portion of our shipments dependent on taking an order in the quarter and converting it in the same quarter. And what we didn't have in place adequately was safety stock to cover that new demand. For reference, you know, again, we, we had shipped over $2.5 billion in Q4.
It was the highest quarter we had ever had, and we didn't have the additional capacity on top of that while shipping out that record revenue. We grew, I think, 18% in the quarter. That was on 20% the year earlier in Q4 to, in addition to that, build the safety stock. That's largely complete, and we're pretty much, you know, in a good place where we have the safety stock in place, as we go through the second quarter. So that's not another question. You didn't ask it, but I get asked it. You know, was that lost business, in Q1? No, we get that business in Q2, so it's a part of the shipments we see in Q2.
That's interesting. Okay. And when you look at your, you know, some investors have mentioned, well, the inventory level in the balance sheet looks pretty high. That would suggest sufficient capacity. Is it more just like a type of inventory that didn't exactly line up with the customer demand in the quarter?
Yeah. There's a fair bit of raw and component inventory in the system. You know, last year, we saw after, you know, screaming for semiconductors, you know, for a couple of years, they came in, and it was hard to tell a particular supplier where we need, you know, only these few, but don't ship us all the others that we had previously ordered, but that, you know, we've got plenty of now. And so there's a little bit of a, a overage in, in, components. And we'll see the finished goods inventory increase a bit as we complete that build of safety stock, but we do expect the inventory of raw and component to go down, through the year, you know, allowing us to get to that 100% free cash flow conversion.
I really want us, you know, now that we're past this period of volatility, to be boring again in terms of just printing 100% free cash flow conversion every quarter. That is absolutely our, our objective.
Perfect. When we're thinking about the sort of Book-and-Ship business, maybe just remind us kind of, and it's a little bit tricky because there's been some portfolio additions. But for kind of base Rockwell, let's say, you know, how much of your business or your revenue was Book-and-Ship pre-COVID? You know, kind of where are we today? How soon are we getting to the pre-COVID world?
Yeah. Well, over half of our business is product that moves through a distributor that is, you know, almost entirely book-and-ship in that you get an order for it in the quarter, and you ship it out in the same quarter with a conversion rate of all orders, you know, converting at well over 80%, you know, and sometimes closer to 90%, you know, shipping in that same quarter. That was the pre-COVID paradigm, and we expect by the end of the fiscal year to be back to that paradigm for products.
We'll have more dollar value of backlog because we're a much bigger company and because, you know, businesses like Life Cycle Services have grown, but nothing fundamentally has changed, you know, in the market, you know, expectations that when you enter an order for a logic processor, either your distributor has it on the shelf or we've got it sitting in safety stock and can ship it out within a few days.
So in that sense, it seems like you feel pretty comfortable with what's happening on inventory and the safety stock. It's more a question of do those orders from the customers come in at the right pace?
Yeah. That they do continue. That's right. The year started off well, and it just needs to continue.
When you think about that, sort of a customer conversations, you know, there is some inventory out there at different businesses. But is your impression that they kind of spent 18 months normalizing those inventories if they were too high? And so from here, it is largely a question just of final demand, and that should lead to good order speed.
Yeah. With distributors, we expect their inventory, some of their inventories because we've got good visibility into it, some of their inventories have already reached that equilibrium point where the underlying demand is now being reflected in the orders to us. In other words, they're not just absorbing that new demand, you know, by reducing their inventory. And we expect most of the rest to be there by the end of Q2. Within the customers, one place that customers have, you know, some higher inventories is in machine builders. So you have, you know, these customers making machines. They can't ship it out without our products. They enter very large orders during 2022 when we had over $10 billion worth of orders, and in some cases, they're having to bleed that down.
You know, we think that that happens roughly the same time as the distributor inventories normalize, although it's variable from OEM to OEM.
Yeah. Perfect. And so the point would be, I guess, the balance of this year, you know, you're sort of book-to-bill, you know, close to one-ish times. Is that in the second half at least? Is that sort of the estimate?
Yeah. I don't know the precise figure of book-to-bill, but we certainly see those conversion rates of orders received in the quarter continuing to ramp up through the year, as we go through. So we really get back to, you know, a more normal, you know, kind of process where product orders come in, we ship them out, and you care much less about order figures separate from shipment figures, right? We've talked a lot about orders over the last few years because there was such a disconnect between the two. But I think we get away from that as we go into fiscal 2025. We'll continue to talk about, you know, book-to-bill ratios for Life Cycle Services because that's going to remain a longer, you know, lead-time business with backlogs that remain meaningful.
That's helpful. And it's well, as we see these sales sort of ramp back up in sync with orders, and the easing capacity constraints, I know you have that sort of 35% operating leverage goal medium term, but I assume that in this initial phase of the sales recovery, you'll get much higher leverage. Is that fair? And that's kind of what, what's embedded in the guide in a way in the process.
Yeah. It is. I mean, the algorithm for, you know, the very good, you know, expansion of margin is certainly the volume. It's holding investment spend flat sequentially through the quarters of this year. It is, you know, no new acquisitions getting thrown on the heap. And it is lower incentive comp, as well, that helps this year. And then it's the growing impact of the more structural issues that we're doing to be able to get to those, you know, ranges of margins, for the different business segments that aren't dependent on supercharged, you know, huge double-digit growth or doing, you know, unusual things with incentive comp.
So, you know, there's a current year, you know, set of priorities, but you're also putting in place the longer-term actions to refocus the company on good old productivity and margin expansion now that we've assembled this portfolio of assets. And that's really, you know, the rallying cry for the next couple of years is to put these together. We got the higher the high growth, you know, the better-than-market growth, and now adding to that good market expansion and expansion of ROIC.
Yeah. It's quite a big change. It sounds like sort of next couple of years, you know, free cash conversion around 100%, not much new M&A, operating leverage probably over 35% because there's a big focus on extracting better margins from acquisitions and the base business. and.
Yeah. If you heard that shift, then you heard it correctly.
Operating leverage, is it sort of what it's like around the gross margin is what we should expect operating leverage for the near term?
I think we got lots of pieces to work on. I think with some of the refresh and products, you know, we can come out with products at a lower cost base where some of that gets given back to the market and some of that goes into the margin. We've got SG&A opportunities. We've got manufacturing efficiency. There's a long list. You know, each business will have a slightly different, you know, area of the biggest pools of opportunity. Lifec ycle Services is well into it, Intelligent Devices. And now we've got, you know, especially with some of the recent changes in Software and Control, you know, opportunities there as well, as well as on a company-wide basis. I mentioned before, you know, slowing hiring, you know, expecting hiring to be down.
Last year, we had a significant amount of hiring, but over 80% of that was through acquisitions and manufacturing labor. We do expect, you know, through this year to be down in terms of headcount by one or two%.
I guess the point would be the demand is really good. It's just you want to sort of maximize what Rockwell itself is and shareholders are getting from that good demand.
Yeah. I think our value I mean, we, we have, great value today. The opportunity to expand our value even more for shareholders is to take that growth and put it together with the margin expansion, 100% free cash flow conversion, you know, the, you know, world-beating ROIC. You know, I think those opportunities are there, and now we're going to do it.
Okay. And when you think about kind of some of the, you know, the ARR portion of the company, I think it's way over 10% of total. Within that, software is a big part of it. You know, for Rockwell to kind of hold its own or keep taking care of those businesses, you're confident you can do that even with more of a measured approach to hiring and investment?
Absolutely. Absolutely. I mean, those businesses, Plex, Fiix, you know, capturing share, you know, each of them growing, you know, double digits, super high NDR, you know, customer satisfaction. And so, you know, we just have to be strategic. And the things that we add in terms of functionality with a real focus on knitting together those assets with other pieces. I've talked before about the recent ClearPath acquisition for mobile robots, huge sales growth in that business, even greater opportunity as we take the data and land that, you know, in these software applications. So it's a lot of opportunity again to technically integrate all the pieces because that simplifies the overall system. And when you simplify the automation system, you're going to grow faster because that's the single biggest impediment to growth in the market, is just the complexity of automation.
We have an opportunity, I think, that's second to none in simplifying the whole thing.
Perfect. So with that, I think we have to switch to the audience response survey questions, please. If you can bring up the first question around you telling the others this stock, and you can use those gray devices. So generally, no. So a lot of opportunity there. Number two would be around kind of general disposition towards the stock right now. And neutral to to negative. The third question is around, I think through cycle, earnings growth for Rockwell versus the multi-industry kind of average. So generally in line with peers. Fourth question is around what to do with excess cash. So I'm not sure if there'll be a lot of people saying large M&A and likely more comments just now, Blake, but let's see. So share buybacks now.
Not surprising.
Half. Yes, and then number 5, what multiple or PE multiple, let's say, should Rockwell trade at? So generally sort of around a market multiple. And the last question is kind of what's the biggest headwind or reason you don't own more shares of Rockwell? So a mishmash. Capital deployment, definitely not one of them, but yeah, it's fairly even on the other three. So with that, thanks, everyone. And thank you so much, Blake.
Okay. Thanks, Julian.
Thank you.