Well, thank you, everyone. You know, super excited to have Rockwell Automation up here with us today. We have, Blake Moret, the President and CEO, Christian Rothe, CFO, who just recently joined. Actually, the first, you know, fireside chat or conference that the two have done together, so, you know, looking forward to this. You know, I guess, you know, maybe starting off, you know, at a high level, you know, we're seeing a lot of positive drivers of U.S. manufacturing investment. You know, construction is up 5X versus 2019.
You know, mega project starts, you know, holding firm. But we really, you know, maybe yet to see that drive a huge uplift in demand for, you know, a lot of equipment that goes into those facilities, including, you know, automation equipment. You know, when do you think that could come, you know, and what's your kind of outlook on the demand environment?
Sure, well, first of all, thanks for your interest today. Looking forward to this discussion. You know, when we talk about the reshoring or shoring, as I like to call it, in America, and the increased investment we are seeing, business that is a result of that. We saw more this year than we saw last year, and we expect to see still more next year. The problem this year is that it's been masked by the even larger impact of the overstock or destocking situation at distribution and at machine builders. We're seeing that business. It's broad-based, and we continue to track a lot of projects that give us continued confidence that we are still in the fairly early innings of investment in the U.S. You know, there's certainly uncertainty around policy, interest rates, and so on, but we're seeing those projects take a pause and not be canceled.
I guess when you kind of see, you know, we see still generally, I would say, soft trends in the market today, you know, is that still, you know, the aftereffects of the destock, or is it just now, you know, end market demand's not kind of soft because of the project pushouts?
Yeah, there's a little bit of both. We're nearing the end of the destock being the predominant factor. It was the biggest factor early in the year. We're getting close to the end, particularly in North America distribution, where, you know, inventory levels continue to steadily decline. But if you think about it, the two are related in that the faster, the stronger the end market demand is, the more you're relieving that excess inventory. And so, as demand softens, and we've talked about this in Q2 and then in Q3, as that end demand softens, projects take a pause, it reduces the velocity of that destock a little bit. Unfortunately, we're dealing with a little bit of both now, which caused us, in the last earnings call, to say, "Look, we're now expecting to see a more gradual period of recovery into next year.
You know, the theme of these big projects moving slow is very consistent. We've pretty much heard that from, you know, every company today and yesterday. Why do you think that is? You know, is it because the demand for the products they're selling is not strong right now? Uncertainty, any sort of labor constraints on the build-out?
Yeah, I think uncertainty is a big enough factor that we've called that out. Certainly, if people are borrowing money, they're looking for a little cheaper money with interest rate cuts. They're looking for a little more certainty in terms of policy. In some cases, some of the stimulus incentives have been allocated, but there's a question about how long is it gonna take to get through all the regulatory hurdles there. Certainly, there's some vertical specific color in each one. EV is taking a pause. We're not gonna see, you know, EV become a dominant part of the American road as quickly as people might have thought. They're still gonna add capacity, but at a slower pace.
In consumers, you know, the impact of inflation has caused consumers to be a little bit more discerning about what they're buying and sometimes go down brand, which is having some impact on, you know, food and beverage suppliers and maybe home and personal care. Energy remains strong. Oil and gas, we've seen a good year. Our Lifecycle Services segment is overweight in process applications like energy and mining, and so it's no coincidence that that business is having a really great year.
Yeah. You know, I guess, you know, when we've seen some recent peer commentary on the market, you know, I would say it still generally seems like the trends out there are soft or sluggish. You know, are you seeing any rate of change in the market, or is it kind of sideways?
Yeah, so we, in the earnings call, we talked about, some of the areas that I just mentioned that are a little bit softer. If we look at areas where we think the trend arrow is up, e-commerce and warehouse automation. And so we're seeing, you know, growth of some new fulfillment center activity. But maybe even more importantly than that is what some of our other customers, particularly in consumer packaged goods, are doing and parcel handling to get at the production logistics, to get at the business of bringing material to and from the production line, and then taking finished product, moving it to the loading dock or into the warehouse. And so we're seeing some pretty good, green shoots of growth there.
We see obviously the impact of, you know, GLP-1 drugs in life sciences to kind of replace the COVID lull that a lot of pharma companies were heavily involved with over the last few years, and then I, I've talked about oil and gas, you know, continued, you know, they're having strong years, financially, and so there's continuing to be a pretty good amount of investment there.
Now, appreciate that. You know, kind of maybe, you know, tying in Christian over here, but I guess maybe starting with you again, Blake, why was it important for Rockwell to bring in an outsider as CFO, and then specifically someone that, you know, has CFO experience, but also has a, you know, a big operational background?
Well, so if you, if you go back to, let's take two steps back. I've been in this role for a little over eight years now, and when I came in, I knew we needed to move faster with adding more ways to win. And so we moved faster in building software capacity, building and buying, adding high-value services capability in areas like cybersecurity, digital services, creation of digital twins, simulation tools, competency and artificial intelligence, things like that. And I'm really happy with the assets that we've built and bought. Beginning in November last year, we said, "Okay, now we're gonna take some time, pause a little bit on new acquisitions, and digest what we've brought in." We've had lots of challenges to our workforce with COVID and supply chain over the last few years.
We need to integrate all the parts for a more complete result, drive some of the inefficiencies that have inevitably built up, and combine the market-leading growth that we've seen, along with the margin expansion and the greater efficiency, and Christian, you know, with the chops from, you know, working with kind of a best-in-class operating margin company as CFO and then running one of their businesses, was a really great choice.
Yeah. Thanks for that. And then that actually was from a decision for me in coming to Rockwell. It started really from the first discussion with Blake around the fact that we were very much aligned on trying to drive both sales and earnings growth, and the desire of Blake, the board, and the entire organization to really bring somebody in from the outside on the CFO that also has really strong operational experience. That, for me, was a really great opportunity to say, "You know, this is drawing on all my background and allowing me to come in and make an impact in the organization.
Yeah. I'll also say more generally, you know, Rockwell has always prided itself on having a lot of great talent, you know, moving up through the organizations, and lifers like me, you know, who've spent their entire careers in the company. And while that's a bit of a rare thing nowadays, we still have a strong commitment, as does Christian, you know, in his role, for building that talent up through the various parts of the organization.
But there were certain things that we didn't have as much of an inherent knowledge of, in the company. Software, you know, development and sales being one of them, so we needed to bring some talent in from the outside. Some of the expertise, having, you know, financial talent steeped in operational excellence concepts, was another area that, you know, we thought we needed to get some outside help on and some fresh perspectives.
Yeah, I mean, I guess maybe, maybe to Christian, you know, I guess, you know, it seemed like you had a pretty good thing going at Graco. Like, what drew you to this opportunity? And I know it's only been, I guess, like a month.
Yeah.
But, you know, early impressions, you know, where do you think you can add value? Any, you know, places where you see productivity opportunity?
Yeah. So, what drew me to the company, I mean, first of all, as I think it's probably obvious to most folks, it's a larger organization, which is a great opportunity for me to just grow personally and professionally, to have this new opportunity. That was one part of it. The other part is that very familiar with Rockwell from for a very long period of time, right? The organization I was with, we're a customer, and knew from a number of different perspectives how important Rockwell and the Allen-Bradley brand is inside the factory floor.
And having discussions with the electrical engineers and the software development folks that were in my own organization and understanding exactly what a great domain expertise the Rockwell organization has in this universe, it's great. And so that was where that started for me. And then the conversations with Blake and members of the board of directors and members of the management team, and understanding the direction the organization wanted to go, it just felt like a great fit.
Yeah. You know, I always get a little bit cautious when, you know, there's a new CFO coming in and inheriting someone else's restructuring program. You know, have you had time to, you know, kind of get your arms around or, or think about, you know, what's already been announced? Because there's timelines attached, there's savings targets attached, and, and what do you think about that?
Yeah, that actually was one of my first priorities walking in the door, was to spend time with that team, both the inside folks, as well as some of the folks that we're using on the outside, to get my arms around, "Okay, what are the details around this?" It's great to have, you know, a beautiful slide that has some good numbers on it, but in the end, right, we have to deliver that.
And so, and I guess inheriting it, but at the same time, also wanting to make it my own and make sure I have ownership of it. And so, you know, still working through all the details, 'cause there are a lot, and that's exactly what I wanted to see walking in the door, was to see that there were a lot of details there. There's a lot of planning that's been done, and on top of that, there's execution and early wins that we've seen as well.
I really look at this as a living thing. You know, this cost-down program, you know, we needed an initial catalyst, and certainly, a year like this has given us, you know, that sense of urgency. But this is gonna be a living thing that moves into an ongoing continuous improvement program that's more robust even than we had in the past. And so when I started talking to Christian, I said: "Look, we got this program. I can't wait. We got to get going with it, but you're gonna bring, with your fresh eyes, you know, additional opportunities and ways to maximize the impact of this and to add new categories that may not have been a part of the original effort.
Yeah, very focused on fiscal 2025 at this moment, 'cause we want to make sure we are showing great progress against that. But there's also a big effort going on around what's the runway beyond that, and importantly, it's as Blake just said, how do we turn this into a continuous improvement program that we can build off of for, you know, many, many years to come?
You know, maybe, you know, kind of turning over to price, you know, Rockwell has historically been a pretty low pricer. It was one... You know, when I was learning about the company a few years ago, I was kind of surprised, you know, prices in that 1%-1.5% range, maybe on average, which felt low relative to the, you know, the technology and just the importance of automation equipment. You know, Graco has a history of very regular, steady price increases. You know, how do you guys feel about price looking forward and the realization of what's the list pricing, I guess?
We both feel like there's big opportunity to, you know, get price in places that we might not have looked at as regularly in the past. To be sure, over the last few years, we've gotten a lot higher price than, you know, the traditional numbers that you mentioned. It's a part of the overall productivity programs, looking at the long tail of our SKUs. Certainly, the growing impact of recurring revenue brings a new dynamic in and Christian's gonna have some new tricks based on his experience that we're looking forward to learning more about.
Yeah, and you know, importantly, the organization has a lot of the fundamentals that are there right now. I mean, the first one, from my perspective, is an annual cadence. Let's make sure that we're executing against a price increase every year, and that cadence is there. That's a great place to start. But now it's about trying to bridge that gap and narrow the delta between the list price and what we get for realized price. And again, there are a number of levers to pull around that.
Yeah, I mean, I think at least our math would say that the payback or the ROI on automation equipment today is probably better than it's ever been, you know, given the wage inflation over the last five years. You know, does the fact that the customer, the value add to the customer is better, does that is that part of what's supporting your optimism around price?
I think it's that. I think we have additional opportunities to further improve that return on investment and to do it in a uniquely Rockwell way by reducing the complexity, and therefore, the risk of those projects as well. When you think about, you know, the theoretical ROI that you get from an automation project, if you didn't do a complete job of planning for the integration and the commissioning, and you lose three months, you know, with vertical startup, then that's a big part of your return, you know, that is gonna be a real headwind.
And so by bringing all the pieces together, the hardware, the software, the consulting, by doing a better job of integrating the pieces, which is what I said our focus is over the next couple of years, I think we can be stronger than any other company in the world at reducing the risk of these automation projects, increasing the ROI that'll compound, you know, with the capabilities of the new technology, artificial intelligence, and so on.
Yeah, absolutely. Maybe moving to competition. You know, I think the biggest concern, you know, investors have, I think, is around competitive positioning. You know, there are people in the marketplace talking about taking share in the U.S. You know, when you guys look at the awards and the bidding, do you feel like the company is still winning its fair share or the same rate that it was five, ten years ago?
Yeah. I'll give you a few points of data that support our thesis that we're gaining modest share. So if you think about the U.S., the most authoritative market share report is the National Electrical Manufacturers Association, and that shows us taking modest share over the last couple of years. There's some ups and downs. We've taken big share in certain areas, losing a little bit in others, but on balance, it shows us taking share. If you compare the like for like parts of our competitors' businesses, the conglomerates that we compete against, and you match those up, and you strip out the software that we don't compete with and look at just the automation, again, we show faster growth than that average over quite some period of time.
Then when you go further and you look at the special reports, looking at particular classes of products, programmable controllers, drives, things like that, again, it's a positive picture. Now, we're in a tough neighborhood, and the North American market is coveted because of the relative weakness, you know, in other areas. But we have by far the highest share, we have the biggest installed base, we have the deepest relationships and the best channel, and those are big, those are nice cards to hold, and we're going on offense in other parts of the world with acquisitions like ASEM in Italy, with the buildup of resources in India, which is our second largest country by employment after the U.S. And so I like the hand that we have.
I guess, you know, on the competitive positioning and the share, you know, you mentioned the installed base, and I would think that that's very supportive to the brownfields. But when you look at these big greenfield projects that are coming in-
Right.
You know, are you comfortable with the win rates and the share gains that you're seeing there, or the share sustaining?
We're looking at that closely and, of course, you know, the dynamic is that with the greenfield, you've got the machinery builders and the engineering firms from all over the world. In some places where we're not their first standard for the automation equipment. On the other hand, a lot of these companies are looking for better penetration into North America, and they know we have great relationships with those end users in automotive and consumer packaged goods. And we've heard explicitly from a lot of those machine builders that they want to develop a better relationship with us.
They want to work with us to reduce the price gap in their offering between, you know, their European standard and what they would like to develop with us, so that they can do more so that they know that they have our support as they seek to move into end users in the U.S., given, you know, uncertain conditions in markets that they've been, you know, focused on in China, in Europe, and in other places. So it's both. It's a worldwide gain to, you know, to, maintain and grow the U.S. market share, but I'm confident that we're doing a nice job of that.
And, you know, I guess on software, the company has made a lot of investments into software. You know, I guess, one, do you feel like the software stack is in a place now where you can compete against, you know, the European competitors and all those competitors in the market? And also, is it in a place where you feel confident that no more substantial M&A is needed?
I'm really happy with the progress that we've made, despite all the headwinds of COVID and supply chain, to build a really strong software capability, and it's not just what we have bought with, you know, assets like Plex and Fiix and the software portion of ASEM, Knowledge Lens. Those are all great, but we've also built organically a capability that is, you know, adding new functionality at an increasing rate, with internally developed applications like FactoryTalk Design Studio. We made a decision. I worked with our previous CTO on this and said, you know, years ago, you know, that we needed to have the inherent capability built ourselves to develop really great software capability, not just firmware, but application software at the edge and in the cloud for the control processes, 'cause that was so central to what we did.
We were not gonna be able to do that at the same time of building from the ground up the information management side of software, and so we were gonna have to make some more acquisitions there. Six years, seven years later, we've got that. FactoryTalk Design Studio with a Copilot front end using GenAI, cloud native, running in Azure. You know, that was built from the ground up, and I'm very proud of that, and then we've got Plex and Fiix and other software running in the cloud as a landing spot for the data that comes off those control processes.
And so I'm very happy with the assets that we have, and as I said, the task now over the next, say, twenty-four months, is to really tightly integrate these together, you know, with open APIs, being able to take the data from the plant floor devices more easily than anybody else into an integrated system that reduces that complexity.
You know, the process of building out the software portfolio, you know, that seemed to have been a margin headwind, or at least a headwind on incremental margins for sure. You know, as you kind of go from the building stage to maybe the harvesting stage, you know, what does that mean for margins of the company going forward?
Yeah. So I'll make some comments, and Christian will have some early thoughts as well. But in November last year, even before we ran into the volatility of this year, we set certain expectations for margin expansion in each of our business segments, and a part of the way that we get there is, you know, as you said, focusing more on harvesting and integrating acquisitions we've already made, as opposed to making a bunch of new ones. Because to be sure, you have certain initial dilutive costs when you acquire someone, you know, bringing sales forces together, benefits harmonization, you know, lots of different things.
While I think we're making good progress on the acquisitions that we have made, including Clearpath, you know, the biggest recent one, then it's gonna help our margins, our ROIC, a lot of good things financially by focusing on doing a great job of integrating those, which, by the way, is what customers are looking for as well: common look and feel, easy exchange of data between applications, software and hardware. You know, those are all things that we're putting a lot of cycles into.
Yeah, and I think just to build off of that, yes, there's no doubt there was some dilution that happened with the transactions. That was intended. We understood that, and now it's about trying to use the power of Rockwell to use that larger base of business that we have and the ways to win, as Blake says, and go ahead and just continue to leverage that up and up and up, and it'll drive long-term performance.
Yeah. You know, I guess maybe turning back to market demand, you know, you guys have talked about, you know, kind of maybe steady, low- to mid-single-digit sequential improvement on orders. But I guess at this point, orders, you know, are kind of really reflective of demand. as you know, things have kind of settled back into balance. You know, is that still, you know, kind of a fair expectation, and that, like, sequential improvement, is that just a fiscal 2024 expectation, or is that something we should expect into fiscal 2025?
You know, we'll give our guidance for our new fiscal year in early November. But what we said during the last earnings call was gradual recovery into next year. And I think you know that is not a bad way to think about that. Certainly there are catalysts that could provide for acceleration, and we're out there, you know, fighting for every bit of business that is available. But it's too... You know, it's premature to talk about what we expect in terms of calendarization or things like that. And again, there's gonna be a certain vertical specific component of that, where you have to kind of get into the details of individual manufacturing segments.
Yeah. No, appreciate that. Maybe moving away from the equipment and on Lifecycle Services. You know, it's been a great growth driver for the company. You know, high, low double-digit kind of growth we've seen over the last two, three years. You know, I guess, what is the outlook for Lifecycle Services? You know, is that. Do you expect that business to sustain momentum, you know, while maybe the equipment categories cycle down? And then also, the margins there have been quite impressive. You know, what's the outlook for margins?
Very proud of the progress, even more rapid than we originally expected in Lifecycle Services. You know, I think we had a quarter here recently where we were a thousand basis points better year-over-year, you know, in terms of the margin, which of course makes you wanna grow that business all the more, to see it test high teens of operating margins, and the growth, to some extent, is due to the overweight exposure to process applications. You know, process markets, oil and gas, mining, chemical, they generally, because they're running continuously, they want the engineering to be done by the same company that's doing the hardware supply, and so because process is relatively strong right now, you're seeing that manifested with good growth rates and Lifecycle, but that's not the whole story.
The other piece is the way that, you know, Matt and his team have kind of transformed that business to focus on digital services, cybersecurity, moving away from some of the lower value activities that characterized our, you know, services and solutions businesses in the past, and to make their mission more coincident with the technologies that we're offering, you know, in our other business segments. So there's a really nice tie-in to bring Lifecycle Services as an even more intrinsic part of Rockwell's basic value proposition.
I appreciate that. You know, if we look at, you know, U.S. manufacturing, you know, construction today is being driven by electrical equipment and electronic components, you know, maybe 60%-70% of ongoing construction. You know, but those verticals are relatively low percentage of production today maybe high single digits or around 10%. So as you know, the U.S., you know, the CapEx cycle is different from the production cycle. What does that mix mean for Rockwell? You know, as the projects that are coming here are maybe different than they've been in the past, is there any constraint, you know, issues or headwinds that that creates for the business?
So if we look at the hundreds, even thousands of projects that we're tracking that are CapEx focused on new U.S. capacity, it's split roughly evenly between businesses that we have that, you know, lower traditional share in, and I'll include semiconductor in that, with higher share verticals like food and beverage and automotive. So, you know, and this is representing hundreds of billions dollars or even, you know, over a trillion dollars of tracked capital investment that we're looking at, and so there's a lot in both categories.
We certainly expect to grow our position and our share of wallet in semiconductor, with applications like wafer transport and, you know, panel building capabilities for some of the tooling suppliers, sub-fab, facilities management, control systems. So we're not a stranger to the semiconductor industry, but we also like that there's a lot of projects and spaces that we've had decades and decades of really strong exposure to, like energy, automotive, food and beverage, consumer packaged goods.
Yeah. You know, we've seen obviously this big wave of U.S. manufacturing CapEx come through. You know, a lot of those projects are still in the early days. They generally seem to be moving slow. You know, and I know it's you know, hard to call a timeline, but do you feel like the opportunity from those projects is still out in front of Rockwell in terms of automation demand? Or do you think some of that was why 2021 and 2022, 2023 were so strong?
No, I think that we're still in the relatively early innings of getting the benefit at Rockwell of that investment in the U.S. And you know, I characterize it as being around the third inning. It's been a long third inning with some of the pauses of, you know, investment in these areas. But we had a lot more success, a lot more orders this year than last year, and we fully expect it to be greater than next year. And we've been told explicitly by some of our biggest customers that they do expect to spend more capital next year than this year. So that's a positive.
Oh, absolutely. Well, we're up on the 30 minutes.
Yeah.
Thank you both for the time. Loved the conversation.
Yeah. Thank you so much.