Welcome, everyone, and thank you for joining us for the webcast portion of Rockwell Automation's Annual Investor Day. Earlier today, you heard from Thorsten Turling, CEO of Syntegon, about how their partnership with Rockwell has played a key role in their growth and operational excellence. Later today, you'll hear of other customers who are using our full suite of offerings to help transform their operations as well. We'll start our day with Blake Moret, our CEO. Last year, we introduced our new strategic framework focused on accelerating profitable growth, expanding our market share, and continuing to strengthen our offerings. Today, Blake will share our progress on that journey and show how a combination of our internal innovation and our recent acquisitions has created a leading portfolio in production automation.
You'll then hear from some of our key business and technology leaders as they walk you through Rockwell's differentiated technology and solutions to help accelerate the future of industrial operations in four key areas: production design and control, production logistics, edge and cloud solutions, and manufacturing lifecycle management. After that, Blake and our CFO, Christian Rothe, will talk about our operating model and our focus on operational excellence to help drive sustained growth, resilience, and margin expansion. Christian will stay on to talk about some key tenets of our financial framework, drivers for long-term margin expansion, and areas where we are prioritizing our R&D investments. We will then open up the floor for a live Q&A session. With that, please join me in welcoming our chairman and CEO, Blake Moret.
Thanks, everybody. Looking forward to spending some time, as Aijana said, giving you an update on progress that we've made towards some of the concepts we've announced over the last year and what's in store as we go forward. You know, I like our position as a pure play devoted to industrial automation and digital transformation. I like our regional orientation. The strongest market in the world is home field for us. A little over half of our business is in North America. I like our industry orientation in that we have great market access today in discrete, hybrid, and process industry verticals. And in fact, with the continued investment in energy, process is actually 40% of our total business. Think about that if you've been following the name for quite some time.
And when we look at the alignment of our businesses, three businesses, one sales force, all coming together to serve the needs of individual customers, that pure play differentiation really comes into play. And I can tell you, again, having seen a lot of management teams, I like the team that we have and the amount of alignment we have as we go forward. When we look at the end markets that we serve, we take common building blocks, the Allen-Bradley hardware products, the FactoryTalk software, LifecycleIQ Services, and we knit those together to meet specific needs of customers across, again, discrete, hybrid, and process industry verticals.
So when we work with UPS, for instance, as they digitize their operations and use simulation tools to complement the traditional sources of value we're providing and help make matches with companies like NVIDIA to further add value to the overall relationship, we're using a lot of the same technologies that we're then using to work with Cytiva as they use our technology in their bioreactors in the hybrid space. And in process, as we work with companies like Occidental and their Oxy, their 1PointFive initiative for direct air capture. And so that ability to harness our technology across multiple industries and with great market access in each one, I think, sets us apart. So let's take a look at the growth algorithm that we introduced last November and give a little bit of a recap and then progress made over the last year.
To start with, faster secular growth in industrial automation and digital transformation focused on production. I think that's an important point. That's our space is in the production environment, and we see the drivers of faster growth than traditional coming from workforce. You heard Thorsten this morning from Syntegon talk about workforce challenges in the market and the needs to address the volatility of the last few years with greater resilience, greater agility, and greater sustainability, and those are all areas that we have strong value propositions for. When we look at share growth and expanded market, again, a lot of investment has taken place in North America. That's where we have great market share, and so we're an outsized beneficiary of that, and if the math works, then you see the opportunity for us to continue to gain share.
It's also about expanding our served market with offerings like mobile robots as we infuse artificial intelligence into the technology that we have with tools like Vision AI, Logi AI, putting AI into Plex and Fiix. Then it's an opportunity to grow share there and add additional value. ARR, you know, some of you remember when we launched this concept of ISCS back in 2018, Information Solutions and Connected Services, and we said we're going to grow double digits, well, we have. We've done it in an unbroken streak of years since 2018. We're talking about the more traditional ARR measurement now. I'm very happy with the way that's working in terms of adding value to our customers, adding intimacy into their operations with recurring revenue. Of course, the financial results of double-digit growth of profitable businesses still is a bet worth making. Then acquisitions.
I'm very happy with both the strategic fit of the acquisitions that we've made as well as the expanding profitability. We talked about, in previous calls, the focus now is to integrate what we've built and what we bought from a technical and employee basis to be able to provide greater value in terms of ease of use between the different technologies to simplify what we're doing there, but also to drive cost out. As we get further away from the initial integration costs, to be able to use that to help us expand margins as well. More on that later. If we look at some of the specific areas of progress that we've made: continued double-digit growth in cybersecurity, that's something that has been a real success story for us. It's grown. It's scaled very well.
With the acquisition of Verve, we have an anchor, if you will, of a software asset to be able to build around. We continue to work with partners, but we have great methodologies to be able to go in, assess, remediate, and maintain these applications as we convert more and more of them to managed services. And you'll hear more about that from Matt in the near future. Growth in process. We had some major releases over the last year in technology targeted specifically at process applications. A new form of Logix that's great for solving process safety requirements. High availability I/O for the process space, all on display on the show floor. And energy, both traditional oil and gas as well as renewables, is really fueling the growth in terms of process as a percentage of our overall business.
Of course, we've been talking about that for a long time. When we look at share growth and expanded markets that we're serving, you know, continued full capabilities and integrated control and information. We talked for years about integrated automation, integrated architecture, and adding the information to that is something we've worked hard on through organic development as well as through acquisitions because we needed to move faster in the software space, and we have, and it's working for us. And in North America, while the overstock situation in the channel over the last year kind of masked some of the progress in terms of new capacity expansion projects, we had some significant wins over the year, and we expect that number to be more visible and to grow as we go into this year and beyond.
We still think we're in the early innings of these so-called mega projects in the U.S., and just to talk a little bit more about the U.S., we're winning at a high rate. The projects that we're tracking, and there are thousands of those projects, and then as they move through the funnel, we get laser-focused on the most important nearest term ones, but there's a great mix of both industries that we haven't traditionally talked about as much, like semiconductor, as well as our, let's say, core verticals of automotive, food and beverage, oil and gas, renewables. These are industries that we know well, and they make up roughly half of the overall number of projects that we're tracking, so we feel very good about our ability to continue to win at the high win rates that you would expect in the U.S.
Quite simply, we have the highest share. We have the best channel, the deepest relationships, the broadest installed base in this market. And we intend to put those to work for us. So when we look at ARR, we've made acquisitions in the software space, but we've also built a lot of capabilities that are going to contribute even more to our recurring revenue going forward. When we launched our process to move faster in software, we made a decision that we were going to address the control layer largely with organic resources because it's so close to the heart of what we do that we needed to have that capability, you know, pervasive throughout the organization, not just in Software and Control , but in Intelligent Devices as well. And so we worked hard to build that capability.
And one of the early manifestations of that is FactoryTalk Design Studio, a cloud-native industry-first programming tool for Logix. And that's a big deal because that gives us bridges to the future. And you'll hear a lot more about that as we go forward. And you can see it on, you probably saw it on the floor yesterday as well. At the information space, to make sure that we took a practical approach to what we could do well, but not spreading our resources too thin, we bought a lot of the capabilities on the information side with Plex and Fiix. And as it turns out, some really great software capabilities with ASEM as well. That's formed the basis for our FactoryTalk Optix Edge Information Management application, as well as really the backbone of our operator interface. And so now we have those resources.
And when I talk about knitting together everything that we built and bought, we're making great progress in looking at common underlying architectures, common looks and feels, user experience, regardless of what application a customer is working in. And this all contributes to continued good ARR growth. And then acquisitions. Again, as I said, I'm happy with the strategic fit of the acquisitions we've done. And our focus now is to take these, knitting them together, driving cost out, getting further away from those extra acquisition integration expenses so that they can contribute to the margin expansion. That's a fundamental part of our objectives as well. And so to go a little bit deeper in what's under the hood in terms of our offerings that contribute to differentiated growth, I'm going to call up Matheus and Cyril and Jordan to talk a little bit further about that.
Hello everyone. Great to be here. With me on stage, Matheus and Jordan. We are going to speak about production, design, and control. As Blake mentioned, how we are able to reinforce, expand our competitive advantage in this part of our portfolio that is so core and so key to Rockwell Automation. When we speak about transforming production, design, and control, and I will even say continue to reinvent production design and control as Rockwell Automation has done over the years, we will look at five important elements, what we consider as being the five elements that are our future, present, and future sustained differentiation and the area we focus on in terms of investment, innovation, and differentiation. The first one being the importance of modern workflows.
I think we have to acknowledge that the architectures that exist at the operation level of our customers is just a subset of the overall enterprise architecture. And these come with expectations. You know, the CIO is looking at it. The users want to have a modern experience that they can benefit from. So we will speak about this with Matheus Bulho and what are we doing and where do we bring this modern type of workflow experience in our production environment. We will speak in continuity of what Blake said about cloud-native managed solutions.
So not only how we have moved our software from traditionally being on-premise to being software that now are on-premise, on the cloud, and more generally in the context of a hybrid cloud architecture, but how we go beyond that by creating a new type of business model, new type of revenue model with managed solutions and recurring revenues. One of the very important elements of how Rockwell Automation has built control is the idea of multidiscipline, is the idea of having a single platform that integrates all the different disciplines that are necessary to run production, motion, safety, network management, and others. What does that become in the future? How do we expand this competitive advantage? The architecture and the architecture principles that are behind all this software-defined automation.
We will speak about why it's much beyond just virtualizing a PLC and why it's important in our overall strategy. And finally, we will look at where in all those different pieces AI plays a role and how do we intend to differentiate with AI, not by creating new fancy objects, but by super boosting our portfolio, putting our portfolio on steroids with AI. So Matheus, let's start with production design. So the elements that our customers are using not to design a product, but to really design a process, machines, how machines are integrated together, and how they are programmed to be automated.
Yeah, thanks, Cyril. You know, we talk a lot about IT and OT convergence. And one of the areas where we've seen significant convergence has to do with how software, how software is built, you know, including the automation application. So you know, picture this.
Many systems today, the way they're designed goes more or less like this. You know, you have large projects where the engineering component of the investment is a significant part of the cost of that project, where you have multiple people contributing to that application that are working independently. Then they come together at the very end of that project when the equipment is supposed to be up and running, making product, making money. Then they find all kinds of integration problems that not only inflate the cost of the engineering that's involved in that particular investment, but also significantly delay the time to value for the production assets.
So this idea of continuously integrating content from multiple people, making it easier for people to collaborate, pushing it through a single pipeline of content that's always tested in the virtual environment, always green, always ready for deployment is something that has significant value for our customers. And there are many technologies that are involved in making that happen. But I'll submit to you there are two that are quite significant for Rockwell where we have a privileged position. The first is this full stack of simulation and virtual design capabilities. You know, with FactoryTalk Logix Echo, you have a high-fidelity virtual representation of Logix, which is the automation platform. That FactoryTalk Logix Echo is connected to Emulate3D, which has a virtual representation of the devices that are being controlled by the automation platform and the machine that those devices are interacting with.
And now with our partnership with NVIDIA, we're taking that to a whole other scale because now you can integrate multiple models of Emulate3D machines into an entire line and benefit from the full suite of capabilities across virtual design and commissioning. The second thing is it does help when your design environment is cloud-native, as Blake talked about. We are in a position to provide people with Office 365-like experiences. We make it much easier for people to kind of consume and integrate content from multiple sources. So those two are significant advantages and opportunities that we have to continue to deliver value to our customers.
So now if we look at cloud-native and managed solutions, how do those things evolve and where do you think is our current and future competitive advantage?
Yeah. So if you think about it, just like we saw in many other industries and parallels like IT, HR, banking, this transition from on-prem perpetual type of software where you have to deal with not only the deployment cost, but the lifecycle management of that application is transitioning to software that's delivered as a service and it's managed by the vendor that's out there. So the benefits are tremendous and the transition is inevitable.
I know that we're speaking about design here today, but if you look at across the entire stack of the applications that are used in the production environment, from maintenance with what we've done with Fiix, from MES with what we've done with Plex, for visualization with what we're doing with FactoryTalk Optix, for control with what we're doing with FactoryTalk Design Studio, for data with what we're doing with FactoryTalk DataMosaix, no one is better positioned than Rockwell to kind of help customers benefit from that transition.
So we have spoken about modern DevOps and the relationship with IT. We have spoken about some of the strategic choices we have made on the cloud and how now we are able to articulate or offer on-premise, at the edge, in the cloud, and the hybrid of all this.
I guess we should ask ourselves, what does AI play as a role in this? Because I think everybody in the environment is hearing a lot of things that relate to design with AI, you know, like making pictures, generating codes, a lot of very exciting things. But what does it mean in reality for Rockwell? How have we used AI to change the experience of designing an automation system for a customer?
Yeah, absolutely. I mean, if we think about the business thesis behind this, right? So one of the most difficult and time-consuming and expensive activities that our customers go through is PLC programming. And there's similarities to the software engineering industry as well. You know, you have to learn a domain-specific language for automation. You have to write a program. You go through several iterations of programming and testing and validation.
And it takes a lot of time, adds a lot of complexity. So our FactoryTalk Design Studio Copilot capability simplifies this process dramatically, right? Rather than manually programming a PLC system, our users simply have to issue a prompt or a set of instructions in a natural language format, and it automatically generates the code for you, right? And if you think about the level of productivity enhancement that this offers to customers, you'll realize how important it is that we are the first to the cloud in our design environment, like our integrated design development environment, FactoryTalk Design Studio. Because what the cloud offers is that our customers will be using our cloud-based platform to program their automation environments. That code will give us an opportunity to fine-tune and continuously improve our models, leading to higher levels of performance.
That performance can attract users to not only Design Studio, but really be the basis for making purchasing decisions about which automation vendor to use in the first place, right? If one automation vendor is dramatically easier to program and configure, and I can get to production faster, I may choose that automation vendor over an alternative, right? So that's why it's so important that we made the investments to be the first to the cloud so that we have access to this sort of flywheel competitive advantage. But it doesn't stop at just programming. So once you've generated code, you now have to validate that code for functional correctness and safety and things like that. This is what Logix Echo provides us. Logix Echo is a virtual software-native PLC emulation system.
So any of the code that our Copilot generates, you can test and validate with Echo to ensure that it's correct and it's safe and it's valid, right? This becomes even more exciting when you realize that you can link these Echo emulators into our Emulate3D digital twin experience, right? So if I ask Copilot to generate code that automates my production line, I can actually see that production line come to life in a virtual representation of the physical environment, right? I can see what that code does to my machines and my assets and my process flow and my overall production process, right?
So that allows me to design and validate much faster, but even more, if Emulate3D tells us that there's maybe some edge cases that that generated code didn't pick up on and it needs to be tweaked or kind of fine-tuned, it can provide feedback to our model for continuous improvement, right? So when Blake talks about the investments we're making to integrate all this great technology together, this is a really great example. And this gives us a capability that you can't just get using widely available foundation models from some of the major cloud hyperscalers. This requires dedicated integration of industrial systems that are very domain-specific, right? Last thing I'll mention, we've talked a little bit about how it aids in the design experience.
Now we have to think about how it aids in the design of the human experience in the interface that an operator is going to have to the machine, right? So we recently announced a co-innovation partnership with Microsoft where we're exploring the use of small language models that are small enough to deploy on a low compute surface like our awesome industrial PCs. And this means that we can embed language model technology in our HMI and visualization portfolio so that operators, you know, millions of operators worldwide that are standing in front of machines and looking at HMIs have access to language model experiences to explain alarms and events and ask questions and get answers, right? So these are just some of the ways that we're creating value in the design phase of the lifecycle.
I'll give a great example of one of the customers that's gaining value from our digital twin offering. So Novo Nordisk. Novo Nordisk is one of the largest pharmaceutical manufacturers headquartered in Western Europe. They're accelerating dramatically on the basis of demand increases for GLP-1 drugs like Ozempic. And you know, the business algorithm for Novo is I need to be able to upgrade my existing production capacity as quickly as possible to increase throughput, but I need to be able to add new capacity as well. And what's standing in the way of adding that new capacity are all the design and engineering decisions that I have to make to ensure that my production systems work, right? So what speeds that up is being able to design and validate and experiment in a digital world, right? And that's what the Emulate 3D digital twin offers us.
You know, this is so important to Novo that they're even asking some of their OEM partners, like machine builders that provide things like bioreactors and packaging and processing equipment, to offer not only just the machine, but a digital twin of the machine that comes with the physical machine. And they can import that into their overarching digital twin and simulate and validate that that machine is configured properly and then get to the point where they're actually running production faster, bringing supply to equilibrate their demand and achieving top-line growth in the process.
Before we move to production control, if we recap the design part, so we look at those three parts, which is how we are able to use different technologies so that we can create a unique IT-like experience with modern DevSecOps, how we have made strategic choices with the cloud that give us full optionality today on how we deploy software for our customers on-premise, at the edge, in the cloud, the combination of all this. We looked about how with AI, we are able to create a new level of productivity for our customers.
What I want to add to this is that it's not only important for end users, but it's very important for all our channel partners to be able to have this competitive, unique, modern design environment and set of tools because when OEMs are more competitive, or system integrators are more competitive, or EPCs are more competitive, then this makes the Rockwell brand and products more attractive for end users at the end. So it has an impact on all our value chain. So now I'm going to turn back again to Matheus to speak about control, you know, the real-time runtime part, the machine operating in the factory. What are those three unique things that we are doing to reinvent production control?
Yeah. So you know, you said it and Blake said it. You know, if you think about Logix, the beauty of Logix is the fact that it accounts for multiple disciplines of control. Disciplines of control, you can think about it as these are capabilities you need in a production system. So it's often that we walk into a piece of equipment and you see multiple systems being deployed because one of the systems is not capable of coping or managing the entirety of the needs of that particular process. So with Logix, you have one thing to worry about. You have one thing to learn, one thing to engineer, one thing to deploy, one thing to maintain, one thing to spare part. And if you think about a production system or any type of process, just a few years ago and today, the number of disciplines continues to grow.
We continue to build on that very same value proposition that sustained Logix as one of the most valuable control systems on Earth. Blake referenced a few of the most recent ones with process safety, but also autonomous control capabilities with, for example, Logix AI. Regardless of the form factor for how Logix is consumed, a lot of the value and a lot of the benefits that Logix brings to market comes because of this capability that's out there. When we talk about software defined, and you pointed out, you know, here at Rockwell, we do not think about software defined purely from the narrow point of view of a form factor for a controller. That's just one piece.
Frankly, we have been doing software-defined systems for a very long time, you know, from the very first controller that did not have any real relationship to physical I/O, you know, hard code and memory I/O that's mapped to the control system, a tech-based infrastructure where you can design your entirety of the application without knowing where it's physically connected. Then later, you would bind that application to hardware. With FactoryTalk Design Studio, where you can design the application in an object-oriented way and frankly later decide where to bind to the execution, one or many controllers where you want to distribute that execution. As Blake pointed out, one of our process I/O products, FLEX 5000, even our hardware is software-defined.
You know, what type of physical layer, what type of signal you end up using in each one of those I/O points is defined in software. Could be an analog input or an analog output or digital input or digital output is the same hardware. Optix, our visualization system, one visualization runtime where you deploy to whatever makes the most sense to you, be it our hardware where we manage the dependencies secure or be it any glass, you know, including your cell phone. So and the same idea applies to Logix. You know, we fully expect that people will continue to love our hardware. It has the safety integrity. It has the real-time performance capabilities. It has the security. It has the environmental robustness. It has the longevity, but we're not constrained. And we'll see Logix continue to evolve all the way up to a data center.
So, and I think to close on the software-defined automation topic, I think what we spoke before about on the design environment is also very important and very related to software-defined because you need to have the right type of absolutely modern software-oriented development environment to be able to address the basic complexity of a completely virtualized and distributed architecture, mapping the different parts and everything. So we do have this design environment. So we have the design environment that goes with the runtime part of SDA as well. And we have the runtime part at the same time. So it's really important to look at both at the same time. So same as we were having in design, when we look at control, there are a lot of applications of AI for control, but they are different in nature. They are unique.
We believe that there is a unique intersection between traditional control that Rockwell Automation knows very, very well. Our control is reinvented with AI. There is a bridge between those two that makes us very logical and very natural pioneer innovator on that space with a strong foundation and a strong legitimacy. So tell us more about this, Jordan.
Yeah, absolutely. You know, I think as production automation systems become more complex and there's greater degrees of demand for enhanced levels of automation, like automating things that you could never automate before, what we sort of learn is that some of the traditional paradigms for control where you're just providing explicit instructions that the PLC follows, that's unsuitable for really, really complex, like multi-variable control problems, right?
There's a reason that things like self-driving cars and AMRs require this seamless integration between machine learning systems and control systems, right? And so we realize that as the market for control systems and PLCs evolves, we need to be making investments now to incorporate machine learning features natively into our control systems like Logix. So this is what we've been investing in for several years with the Logix AI product. So we have millions of PLCs in the field. What Logix AI essentially means is that anybody that uses a ControlLogix PLC can embed native machine learning features directly into that PLC experience, right?
So the Logix architecture that the majority of the automation market already understands how to program and configure and use now has machine learning features at their fingertips to be able to make predictions and be able to optimize complex control scenarios that they wouldn't be able to do before, right? And then, you know, if Logix is like the brain of the manufacturing operation, FactoryTalk Analytics VisionA I is like the visual cortex that we can now attach to that brain, right? So what this does is it brings eyes into the manufacturing process. And there's a lot of amazing things that you can do with machine vision solutions that are enabled with AI. For example, you can get better sensory awareness of the status of your environment, your assets, your process, and your product quality with like a higher dimensional signal from vision systems.
You don't, for things like quality inspection, rather than having to program rules that specify what a good product quality looks like and what a bad product quality looks like, you could just provide historical examples of what good and bad looks like, and the system learns to identify defects. This is even more valuable when we can do this in closed loop, integrating our vision systems with Logix so that you're not only inspecting and identifying defects, but your control system can address those defects. It can take action to eliminate them, right? One of the reasons we're able to do this effectively is that PLCs and automation systems are incredible data aggregators, right? So machine sensor data is one of the largest and fastest growing categories of data in the universe, right? It's on par with social media information volumes and financial transactions.
It turns out that one of the greatest aggregators of machine sensor data is the programmable logic controller. It's the system that takes in data inputs, and it's the system that makes decisions with that data, right? It actuates commands and manipulates processes and makes decisions to improve control. So when you think about the fact that we have this tremendous market share of PLCs in North America, over 70% in a growing market share worldwide, we're really well positioned to benefit from this overarching trend of AI adoption in the industrial space. I'll give you a really good example of some of the customers that are actually using this type of technology. When you think about things like filling operations, like this is something that CPG companies do, food and beverage companies do, pharmaceutical companies do, just filling canisters or vials or jars with like liquid viscous material.
This ends up being a very difficult control problem that's really hard to operate with just explicit instructions because there's so much variability in the environment. There's variability with your product ingredients, the viscosity changes, the heat and humidity changes in the plant. And it's difficult to do these types of things without learning and adaptation features in your control system, right? So what we were able to do with Unilever, who has to deal with filling operations for mayonnaise and their mayonnaise canisters, they have to fill it to this exact volume. If it's too low, they're going to be out of compliance with FDA standards. And so what they generally do is they purposely overfill it, right? Because they don't want to be out of compliance. But that overfill is waste.
That's giveaway product that could have gone into another jar of mayonnaise and made them another unit of product. So what we were able to do by integrating LogixAI into the ControlLogix architecture is make predictions, look at the state of the environment, and make predictions about what the next fill volume will be. And if we predict that it's too high or too low, we can proactively issue an adjustment to the process to keep it on target. By doing this, we were actually able to reduce that variation or that excess fill by 50%, which is a significant value proposition for customers like Unilever, but also has applicability widely into their entire industry space and other adjacent industries as well, right?
This is why we think our base of installation of control systems gives us a really good deployment opportunity for AI capabilities that our customers are going to need.
To wrap up this conversation, I think one point I want to add to what you said, Jordan, is all what we say is considering also an upgrade path from what our customers have today and the future. We are not building solutions, and we are not building all these that we describe with the expectations that customers are going to replace what they have by something that is net new. We know that it's important in our industry to provide an upgrade path. When we create Logix AI, we create a module that goes in the rack of the PLC. So you take any install base of the PLC, and then you create an AI PLC.
Or, when we do GuardianAI, which is for condition monitoring on drives, you take any existing drives, you add GuardianAI, and you get the benefits of AI. So it's very important to look at this, that it's addressed both every greenfield that we do, but also brownfield. So we believe we are really uniquely positioned to transform and reinvent production design system and control. We have the core portfolio and the core capabilities. We are augmenting them with modern IT technology, modern software technology with AI.
And we are really focused on those five sustain develop competitive advantage around modern DevOps practice or cloud architecture, multidiscipline controls, the discipline we have today, the custom discipline we can create in our verticals, the customization capabilities we can give to our customers, the software defined architectures that wrap up this in the right system architecture and is much more ambitious than just virtualizing a PLC and ultimately using AI where it matters for our customers to create a differentiated experience and also to create a new level of productivity from our system. So that's what we are looking to do, and that's why we believe we continue to build and develop a sustainable competitive advantage for production design and control. Thank you.
Thank you.
Thank you.
Thank you. And I know I want to welcome Tessa Myers on stage to speak about production logistics.
Okay, good morning. I'm going to do a few things today around production logistics. One, I'm going to share with you our vision for production logistics and what we're referring to when we say production logistics and do that in the backdrop of some of the biggest challenges that are facing our manufacturing customers. Secondly, I want to give you an update on our progress over the last year since the acquisition of Clearpath and OTTO Motors. And I'm going to give you a couple of examples of where we're working with customers, including our internal customer, Rockwell Zone Operations. So, you know, there's a number of challenges that manufacturing is facing post-COVID and with supply chain volatility. And top of that list is in terms of the workforce in manufacturing.
Labor shortages, along with an aging population, will continue to constrain the world's workforce over the next decade, and there are major shortages expected in the manufacturing sector. Deloitte forecasted that 3.8 million manufacturing jobs in the U.S. alone will go unfilled. And so manufacturing companies are really struggling to attract and retain the workforce that they need to run their operations. In addition, post-COVID and supply chain volatility, manufacturing companies are really focused on driving substantial cost productivity across their operations. And there continues to be a massive opportunity for productivity when we help our customers reimagine the way that material moves through their manufacturing operations, what we call production logistics, enabling them to handle the ever-increasing variety of product in their plants and do so with the least amount of labor and cost required.
Production logistics is our vision for transforming the orchestration involved in the manufacturing of production goods in a supply chain. It encompasses from the production planning to the organization of resources, the implementation and execution of the production plan, and the control of the flow of materials, resources, and information throughout all stages of the manufacturing lifecycle. When we optimize and orchestrate production, it enables our customers to achieve substantial reductions in manufacturing costs and operational efficiency. Today, Rockwell Automation is uniquely positioned with a unified solution for manufacturing, enabling really an end-to-end autonomous execution and optimization. And production logistics, our offering, our portfolio has really three key components, three key capabilities. The first is advanced material handling technologies. So we leverage integrated robotics with Logix, a capability that we built in Logix to control and integrate robotic arms and our independent cart technology.
That is helping our customers transform their equipment designs, allowing them to achieve higher throughput and greater quality. Autonomous mobile robots that came with the acquisition of ClearPath and OTTO Motors is really helping to deliver material movement to production lines and move finished goods into warehousing, lowering the production costs. Advanced material handling is an important part of the solution. Secondly, operations and fleet management software, which includes our FactoryTalk Optix for visualization and data integration, Plex, MES, and scheduling software, fleet management software from OTTO, and our emulation and simulation capabilities with Emulate3D helps us to enable our customers to design the material movement, validate their production line designs and performance, identify bottlenecks, plan, schedule, and execute their work orders.
This is all brought together by our production logistics and digital consulting and lifecycle services team to help our customers build the strategy for automation in their plants, to help them build the business case, identify the ideal workflows for automation, and implement that plan and strategy, helping them to uncover and achieve millions in potential cost reduction. These capabilities in total, it's really about bringing these together as one integrated offering is helping to deliver millions of productivity and lower cost, increasing the yield for our manufacturing customers, so I'll spend a few minutes talking about the progress that we've made over the last year since the acquisition of Autonox and really our introduction of our strategy around production logistics. The acquisition of ClearPath and Autonox is going well. As Blake said earlier, we're growing fast, more than doubling the Autonox business over this past year.
A key area of focus has been technology integration, bringing together our existing technology and what we've acquired into one unified solution. We're well on track with that effort. Our software applications work together today. We have the right APIs to seamlessly exchange data across those platforms. We're continuing to invest in other areas to extend the differentiation. One area is really building a Logix-based AMR control for our fleet of OTTO AMRs. You know, I think we've hit an ideal time for this set of capabilities coming together. This is really resonating with our customers. As I meet with companies all around the world, our vision, the capabilities that we're bringing to the market, and the value that they're delivering are lining up really well with the needs of our manufacturing customers and their expectations for where they will invest in their operations.
We've been winning large-scale strategic opportunities for end-to-end hardware, software, and services at Fortune 100 global manufacturing companies. We're winning with new customers, but we're also expanding the installed base and the work that we're doing with existing customers as well. And nearly all of the investments that we are engaged with customers are in existing manufacturing facilities. So there's a significant opportunity to really transform manufacturing operations that exist today. We've been expanding our partnerships and relationships with strategic robotic arm vendors for integrated robotics. Those include Comau, Autonox, Denso, Doosan, and Fanuc. And one of the key synergies that we saw in the acquisition of ClearPath and OTTO Motors was the ability to leverage Rockwell scale to continue to globalize the business and also expand the industry footprint.
We've been winning, accelerating the performance in North America and the growth in North America, but also winning in Europe and Asia. We're expanding beyond the traditional strong industry capabilities in automotive, and we're winning in food and beverage and consumer packaged goods. In total, production logistics all in is a high-growth and profitable business for Rockwell Automation, and ClearPath is on a path to profitability in fiscal year 2026. In our own operations and the transformation that we are driving within Rockwell, we're leveraging these capabilities in our own operations. We have for years leveraged advanced material handling, including integrated robotics, independent cart technology, and have deployed Rockwell Automation software across our plant network. Now we're adding to that and implementing autonomous mobile robots with the acquisition of OTTO.
The journey that we're on resembles that of our customers, where the first point in the process is understanding the business case for implementation of these systems, identifying the ideal workflows for automation, leveraging our consulting capabilities that we have at Rockwell Automation, and then moving to really emulating and simulating the flow of the production lines and validating the design. It's planning the fleet and the routing for the type of production that we're doing, and then deploying this automation in our plants. We plan to leverage this capability across our plant network to automate the material delivery within our own plants, and our first deployment in Twinsburg is up and running, and we're achieving payback. Like our customers, we're achieving payback on our investment in less than a year.
We continue to support and partner with companies like Procter & Gamble to leverage these advanced automation capabilities and digital capabilities to help them increase the performance of their plants, their equipment, and their people, supporting their goals for performance and efficiency. With that, I'm going to welcome to the stage Arvind Rao and Austin Locke, and they are going to talk to you more about our edge and cloud solutions. Thank you.
Thanks, Tessa, and good morning. Austin and I are going to spend a few minutes today talking about how we're solving real customer problems with our integrated edge and cloud offerings. Today, production systems are designed, operated, and maintained using methodologies that have been around for many years. Many of these systems are deployed on-premise and are expensive to deploy, manage, and upgrade.
They also do not leverage the data that's in these devices and systems, data that can enable transformative technologies like AI, machine learning, digital twins, and so much more. We believe that our approach, where we can provide critical production system capabilities as a service by leveraging the best of what the edge and cloud has to offer, is truly differentiated. As you heard from the other speakers, we are uniquely positioned at the edge. Our large global installed base of controllers and devices, especially our significant market share in North America, gives us the ability to turn that data into information that can drive operational insights and customer outcomes. By leveraging cloud technologies, we are really scaling this competitive advantage. This enables our customers to deploy and manage transformative capabilities and business models more efficiently, cost-effectively, and at scale.
Capabilities such as end-to-end closed-loop quality asset management can significantly improve quality levels and reduce asset downtime. We're seeing significant customer interest for these solutions as we integrate our edge and cloud-native offerings with our acquisitions like Plex and Fiix. We will discuss some examples of how these integrated edge and cloud solutions are enabling these outcomes. Improvement in quality was the number one driver for investments based on our recent smart manufacturing survey. We recently launched FactoryTalk Analytics VisionA I, which is an inline real-time system that uses advanced analytics and out-of-the-box machine learning models that can detect defects in real time and provide root cause analysis. This solution can deliver significant value in industries like food and beverage, CPG, and life sciences.
As you can see in this video, Vision AI leverages high-speed image and process data coming from the Logix platform right at the edge to identify defects and provide real-time corrective action. The integration with Logix allows this to happen in high-speed closed-loop corrective action right at the edge. These capabilities, when integrated with our Plex quality management system, also known as QMS, can help scale these capabilities to provide enterprise-wide audit management, corrective action, preventive action, and compliance, all of this running on a highly secure and available cloud. These solutions have shown that they can reduce waste and improve yield by 30%. Now I'm going to turn it over to Austin to talk about another high-value use case that leverages our edge and cloud solutions.
Thanks. So Arvind just gave a great example of how our portfolio helps manufacturers address their number one priority in product quality.
Another imperative that we're seeing from most of our customers is the ability to conduct asset performance management at a greater level of maturity, meaning the ability to monitor and improve the health of their equipment. Our GuardianAI and Fiix solutions exemplify how our edge and cloud portfolio is coming together to help manufacturers tackle this challenge effectively. GuardianAI is our predictive maintenance solution. It detects and responds to anomalous asset behavior and known failure modes. What really sets GuardianAI apart is its use of high-speed real-time data from our own drives, which are prevalent in manufacturing environments. This allows GuardianAI to learn and predict potential failures of the assets that it powers without customers needing to add additional vibration sensors or other sensory equipment. It's a really compelling value proposition for many of our customers.
And of course, at Rockwell, we're excited about the large installed base of drives that we have that are ripe to receive this subscription software. But we're also seeing that the capability is differentiating the hardware itself, and the customers are having increased demand for our Intelligent Devices because they're enabled with this type of capability. Complementing GuardianAI, Fiix offers cloud-native asset management capability. So it gives customers the ability to do things like asset performance monitoring, work order, and spare parts management. And recently, we've also incorporated some new AI functionality into Fiix to provide out-of-the-box solutions that let customers be more predictive or proactive, things like forecasting parts requirements or autonomously generating work orders. And so this combination of edge technology and our domain expertise coupled with our cloud investments really enables our customers to rapidly implement enterprise-wide scaled solutions for asset performance management.
By way of example, Oxy is a customer that we partnered with to build out an architecture from the edge to the cloud for process control and optimization. This is for their carbon capture business, and they're building carbon removal and sequestration units to help address the climate challenge. If you're not familiar with DAC as a technology, this is a. I'll give you a gross oversimplification, but think of a giant vacuum that sucks carbon out of the atmosphere and then sequesters it, and one of the challenges with this technology and one of the imperatives is to reduce the cost of capturing each unit of carbon. We've talked about lights out or autonomous factories. It's a similar concept here. By automating and making the process as autonomous as possible, we're able to remove costs from the operation and make the process commercially viable and economically scalable.
And so they partnered with us and are leveraging our edge and cloud solutions to operate these facilities, perform lifecycle upgrades centrally, and be able to leverage advanced analytics for optimization of the process, all of which helps build out this technology of direct air capture at scale. So with our edge and cloud solutions, we're really uniquely positioned to meet our customers where they are today and address their most immediate priorities with our solutions. This includes the things we've talked about today: quality, asset performance management, and scaling their digital capability. And our installed base advantages at the edge, when partnered up and coupled with our cloud investments and the entire integration of the offering, we really think differentiates Rockwell and creates a sustained advantage for us in the market. With that, thank you, and I'll hand it over to Matt Fordenwalt.
Good morning. Building upon the technology that we've covered today: production, design, and control, production logistics, edge and cloud, we'll now add the domain expertise, which makes the future of industrial operations possible now. Manufacturing lifecycle management integrates and includes all aspects of our technology and combines it with the right domain expertise to pragmatically move forward with speed and efficiency. As the industry's trusted advisor, we simplify the ways customers bring products to life by reimagining how work is done, how to best automate, connect, protect, and optimize their operations. This reimagination of the industrial workflow has been made possible through organic and inorganic activities to build out a services portfolio that helps speed the value for our customers by simplifying this orchestration of how they design, how they operate, how they maintain, all the way through the next generation upgrade.
Acquisitions such as Kalypso and Digital Consulting, Verve and Cyber have transformed the breadth and depth of our expertise to realize the future of industrial operations. Every single step the customer has taken along the lifecycle, that design, that operate, maintain, is changing. We saw these changes coming and invested to create secure digital operations. This integration of all of these acquisitions that we've made has created the industry's best consulting team focused on IT and OT convergence. No one's better positioned to automate, connect, protect, and optimize the future of industrial operations like Rockwell Automation. When we take these newly acquired capabilities and aggregate them together and combine it with the best of our automation experts, we've really created this full suite of professional management support services for our customers. Production automation, automating operations, is at the heart of digital transformation.
Whether a customer is building new or modernizing old, we can maximize their production. Digital operations, connecting processes, systems, assets, requires deep expertise to navigate complex technology landscapes, IT and OT. Our digital consulting capability can bring our state-of-the-art technology, deliver simplified solutions, then unlock transformative value for our customers. Industrial cybersecurity, protecting industrial applications and infrastructure is essential for creating resilience. Regardless of the automation platform, we have a reason to talk to every single industrial customer. Our vendor-neutral approach is designed to protect people, property, and information. Powered by Verve's service-enabled software platform and supported by our partners, we deliver resilient operations. Production optimization, optimizing the performance of assets, systems, applications, means people being empowered with the right information at the right time.
Whether building workforce competency, enabling with technology, or augmenting with our expert support, we're bringing data-driven insights to make better, faster decisions that deliver sustained value. Along with our best-in-class partner ecosystem, our professional services deliver simplified, open, safe solutions, which grow the installed base for Rockwell Automation technology. Our managed and support services protect and expand the value proposition. We've converged that organization to scale our managed and support service offerings that are available 24/7 in over 20 languages, both onsite and remote, across the IT and OT spectrum. These technical experts help thousands of customers get the most value out of a Rockwell technology investment. This organization has millions of customer interactions through AI-driven knowledge chat and online monitoring channels to aid customers in operating, maintaining, optimizing their production. Our maintainable, flexible, secure nature of our technology, combined with domain expertise, is delivering this value in real time.
Professional service itself allows us to co-innovate alongside industry leaders to solve their most difficult challenges and speed their time to value. Our consultative approach and ability to drive this co-innovation allows Rockwell to build a higher-level executive relationship earlier than ever before. This position transforms this relationship into a long-term partnership, as you heard this morning. We have well over 2,000 customers engaged in professional services today and over 5,000 concurrent projects at any one time. As we solve critical challenges by industry, we scale across that industry via our ecosystem, be it our systems integrators, our machine builders, our distribution channel, to cost-effectively orchestrate the acceleration of installed base creation. Our professional services organization is the tip of the spear that drives innovation and technology adoption across industries. We then scale through these partnerships to create that installed base.
The managed and support services today has well over 20,000 customers, over 40,000 contracts generating annual recurring revenue. We continue to see this grow at double-digit rates. Our professional services, coupled with our ecosystem, will power further growth. To give perspective on this opportunity, we only interact with a small percentage of our customers via professional services today, and about a quarter of our customers with managed and support services today. The future of industrial operations, driven by autonomous operations technology and manufacturing lifecycle management domain expertise, will be transformative across industries as they reimagine their workflows. We see a long way for growth. Shifting gears to the lifecycle services segment, which represents a portion of manufacturing lifecycle management, last year we put forth a margin improvement equation. We said we need to grow our annual recurring revenue double digits.
We're going to streamline our organization and deliver profitable growth with Sensia, our joint venture with SLB. This would drive a substantial margin improvement for the lifecycle services segment. I can stand here today and say we accomplished those objectives in fiscal 2024. We're now going to focus on how do we make our segment margins predictable through the long-term horizon. To do that, we're going to focus on taking that contractual annual recurring revenue and expanding that throughout our entire customer base. That will drive an improvement of our long-term mix. We're going to deploy AI-driven productivity to expand the margins in those contracts further. We're going to focus on reusable IP within our professional services that will enable headcount-neutral top-line growth. We're going to continue to diversify Sensia's revenue streams and manage their input costs.
Executing on these areas will make lifecycle services, the segment, a resilient and profitable part of the overall Rockwell value story. Thank you very much, and now I'd like to invite Blake back to the stage.
Thanks, Matt. So you can imagine that we're all pretty proud of what we've brought together here, integrating what we've built and what we bought across the businesses to really take our traditional value that remains very relevant, extremely relevant, but adding new ways to win to that. And the result is more value to our customers and to you as well. It also drives higher efficiency as we integrate these pieces together, higher efficiency for our customers, less waste, simplification, and also expanded margins. And so we're going to shift gears at this point, and we're going to talk a little bit more about operational excellence.
Some of you have heard me make reference over the last year to the concept of a Rockwell operating model. We're going to add a little bit more detail now as we talk about that operating model, which is intended to create a flywheel for operational excellence that isn't dependent on individuals. It's valid through the business cycle. I think it's going to provide tremendous value to the company, combining market-beating growth with expanding margins and a precision in our internal operations that's going to provide a more complete result. With that, I invite Christian to join me for a little bit of a dialogue about the operating model. Christian, right from the start, from probably our very first conversation, we talked about this concept. We talked about some of the obvious things that we'll touch on here in just a minute.
But the whole idea of an operating model that creates that long-term flywheel, I think, is important to me. It's important to the organization. And clearly, you have some experience with those concepts from your previous life as well.
Yeah, absolutely right. And importantly, to build off of that, Blake, one of the things that you and I talked about from a very early stage is that there's a lot going on in the organization right now. There's a bunch of cost-out activities going on. Obviously, there's a lot of new developments that are occurring from the commercial side of the business. And how do we, when all that is occurring, how do we make sure we build a foundation underneath that that we can allow us to kind of grow from there, giving this opportunity to reset, but then build for the long term?
Yeah, absolutely. This last year has really given us an opportunity to create a new baseline. And I think, importantly, this isn't just about adding brand new things. This is about integrating some pretty good practices that we already have, beginning with culture, the idea of having a culture that has four principles. This was introduced when I first came into the role, and I think it's as vibrant today as it was then in 2016. The idea of continuing to strengthen a culture of integrity and diversity and inclusion, being willing to compare ourselves against all other alternatives that a stakeholder might have, whether it's an employee or an investor or a customer or a partner. It's about increased speed of decision-making, and it's about a steady stream of new ideas that we invite from all over the organization.
A part of the operating model includes the accelerated top-line growth algorithm that we talked about earlier today, harnessing the secular tailwinds of automation writ large, but also with our unique position with respect to a favorable mix of geography as well as a dramatically expanded offering. It's about the acquisitions that we've made that have allowed us to move faster and, of course, annual recurring revenue, which continues to compound growth.
And we'd certainly heard about a number of those examples earlier today with my colleagues that were speaking, so outstanding momentum that's being built from that regard. Also, part of the operating model is margin expansion. I'll be hitting on that here a little bit later, but Blake, you and I, what we're going to be talking about next is really the operational excellence portion of this, that fourth pillar in our operating model.
So we're going to go through three things in more detail here: strong financial forecasting. On top of that, we're going to talk about supply chain agility, and then we're going to talk about continuous improvement. So let's start about talking about the financial forecasting aspect of it.
Well, that, as you can imagine, was one of the first things that Christian and I were talking about over 2024 as well. And as he has come into the organization with now a full three months under your belt.
Right, a whopping three months.
Three months, right? But clearly, there's a few aspects of this that are going to create a more forecastable business for us. One is better use of existing data.
We have a lot of data available to us in our internal processes as well as in our distribution channel, but we recognize that there's a lot more we can do to make better use of that to be able to forecast the results going forward because they're out in the field, and they're that touchpoint with our customers. We also have new channel data that's clearly important to us, and a good example of that is inventory at machine builders. Let's take that one. And while we don't have the direct pervasive electronic links to be able to see to the same level of granularity at machine builders that we can see inventory down to the SKU level at distributors, that's clearly an important thing that we have to institutionalize. We've started that, but there's additional maturity that'll be a part of this model.
Now, speaking of models, artificial intelligence is very well suited to improving forecast ability. And we have a model, but there's room to grow with that as we tune it, get more accuracy, and increase the breadth of the covering of that model. And then, for sure, talent is an important part of this, people who understand this area, the importance of it, and who are doing the things that we need to do with a sense of urgency.
Yeah, and maybe to build off of that, in all fairness, this has been a disruptive period of time. Forecasting, I think, for a lot of folks in the industrial universe has been difficult as we've gone through the supply chain crisis and destock. So having a moment where we're in a more stable environment is going to be very helpful as well, of course.
But as we think about it, it's those inflection points. And how do we try to get ahead of those inflection points, not just for forecasting for the outside world, but it's really also about thinking about our demand plans and how do we make sure our factories are ready for what the customers are needing from us. So maybe we'll talk a little bit more about the factory side. So the next data point, maybe just to level set everybody, the right-hand side of the slide are some of the key metrics we're looking at. These are examples of those metrics. There's a lot more that we're talking about, but we wanted to give you some really good examples here. So Blake, on the product and project costing side, do you want to talk about the project costing?
Yeah, I'll start with project costing. You just heard from Matt, who talked about lifecycle services and a pretty dramatic increase in profitability.
This could have been his victory lap moment, right? And he didn't quite do that, but that's okay. He says he's going to come back.
There's a little more race to be run. But when we look at the foundations underpinning margin improvement, project and product costing is a really important part of that. And particularly in a business as diverse as lifecycle services, project costing is important. The as sold and the as commissioned and reducing the error signal between those two states of a project is a really important part of the road to continued increases in margin expansion in project-based businesses. And I think that organization has done a great job of getting a handle on it. It starts with not taking bad jobs, right? It's pretty basic.
but also having the tools and the measurements and the ability to continue to monitor those projects, getting paid for change orders, things like that. And as we look at a scatterplot of those projects and the margin on it, we're getting a move up and to the right in terms of size and margin. That's pretty optimistic. There's more room to be done to happen there, but it's definitely moving in the right direction. Obviously, an even bigger part of our business is in products, products that often move through distribution. And being precise about the cost of that is something you have a lot of energy for.
I do have a lot of energy for it, Blake. The reason why is that in order to properly price, in order to properly think about the production side of the business, having accurate costs on our product is absolutely critical.
When you think about what's been happening over the last couple of years, supply chain crisis, a lot of inflationary increases, surcharges, those kinds of things. Now, as we move into the next phase of it, which is through cost initiatives, and the supply chain team is doing an amazing job right now driving towards that, having accurate costs and understanding what's going on with the dynamics of those costs, super critical. This group is, again, capturing that information.
Yeah, it's really going to help with the next topic, and that's the idea of tightening the margin range through the cycle. We introduced a corridor of margin performance that we expect by the different businesses last November.
But certainly, with the volatility of this year, we recognize that being able to manage the incrementals and the decrementals of products as well as the rest of the business is an important part of our mission going forward.
Yeah, that's for sure. And I'll hit on that again when we get into the margin expansion section. One of the other items that's important for us as we're thinking about that margin range is how we're investing in the business. And so that takes us to this next metric, which is key investment ROI against the risk-adjusted WACC. So I know that this organization has used a number of metrics over the years, things like free cash flow yield. And those are important metrics. For me personally, ROI is where it's at.
And ROI allows us to do some really good analytics, both sensitivity analysis, thinking about different volume environments and whatnot. But then we can use that to level set, again, creating that language within the organization that we're all talking the same way. And that is on everything that we're investing in. So that's OpEx, that's new product development spending, that's CapEx, that's acquisitions. And the way we look at it and the way we pull that ROI together, comparing against the risk-adjusted WACC. The overall plan on this, of course, is that we need great planning so we can be responsive to market conditions. But then we also have to make sure that we have a really agile supply chain too. Yeah, and that's really the next area. Yeah. So there's been discussion.
I know you brought it up before on conference calls and with investors, the SKU count of Rockwell. We're at 300,000 + today. And we've got a few. Maybe there's some opportunity there for us. Do you want to talk about that, Blake?
Well, look, in the long tail, that's inevitable with that kind of SKU count. You have a lot of opportunity for low and no-use SKUs. And to go back, and we're getting very detailed about looking at that and opportunities either to do something with the price of those or to discontinue certain products when it's not a fundamental part of a customer's bill of material. And we know there are opportunities there, and we're working through that. And in some cases, importantly, this can actually increase customer service for the items that matter.
So for the high-volume SKUs, which is a much smaller subset of this, by reducing the ones that are more of a distraction, quite frankly, then we have an opportunity to actually increase levels of customer service.
Yeah, and importantly, it's also adding in capabilities around mapping and taking people from more legacy products and driving them towards the newer products that we're offering out there. So again, it's a very nuanced process. And I'll talk about that here in a few minutes when we talk about margin expansion and some of the quick or early wins that we've gotten in that regard. Another area that we certainly spent a lot of time talking about, and I know that this organization, from an investor perspective, are interested in, is our resiliency. So you want to talk about that a little bit?
Yeah, sure. I mean, the high-value products is related to the previous topic in that if you're really getting very focused on the ones that matter, then you can do a deeper job of increasing the resiliency of those products as well. Over the last few years, that resiliency has been focused around how are we going to make sure that we have a certain supply of semiconductors in particular so that we can keep shipping the product. It's pretty basic, as we talked about with Syntegon this morning, and we continue to work that motion.
So even after the crisis is done and we've got good supply from our vendors as well as good safety stock that's been built up, we continue to work through this process of testing existing and new products under development against this resiliency index to make sure that we're working with vendors that we can trust, to make sure that we've got redundancy in manufacturing location where we can. And it's going to create less volatility when the next crisis hits, whether it's tariffs or whether it's some other disruption to the system, it increases our resilience. Y
Yeah, and I think that's actually, to build off of that, we don't know exactly where it's going to come from and how it's going to come, but we know it's going to be dynamic. And probably there's going to be dynamics that happen in fiscal 2025 for us.
So as we think about it, that resiliency and the fact that Rockwell has continued to invest in resiliency, even though the supply chain crisis is a little bit more in the rearview mirror, is putting us in a great spot to be able to capitalize on whatever dynamics occur out there.
Yeah, and we look at, as other areas of resiliency and efficiency, we look at the plants, right? And direct labor as a percentage of the overall COGS is an important area as we look at that part of the proce ss.
It is indeed. That's for sure. And importantly, similar to when we were talking about product costing, on the project side of the business, we've got, obviously, direct labor. Because it's solution-oriented, direct labor as a percentage of COGS is going to be a higher number.
The good news about that is that we can price it in. We can get paid for that. When we talk about the standard products, the things that are day in, day out running through our factories that are normal SKUs, the key is we have to continue to try to drive direct labor cost out of the COGS number. Today, we're pretty good. We're sub 10%, but we're Rockwell. We have automation solutions. We have the ability to bring our resources to bear and continue to move in the direction of taking that direct labor cost as a percentage of COGS down.
Yeah, and there's other things we can do to increase the efficiency of our direct labor manufacturing associates, making sure that we maximize the amount of cross-training we're doing so that multiple tasks can be performed by a single employee in a time of volatility, making sure that we reserve the ability to quickly ramp up shifts by having the people who are capable of supervising those shifts are still in the organization. And even though at the moment they might be working on first shift, they can move quickly and have the willingness and the capability to work more independently if we have to bring on additional shifts in a time of accelerating growth demand.
And I think, again, to build off of that, we talked about cost out in a number of different ways, right? It's been a topic for us for quite a long time. This is not an area where we are willing to try to take costs out for short-term gain because we know over the long term, this is going to be the right thing for us to do.
Yeah, absolutely right. Just as a commitment to quality and getting very detailed about all the places where non-conforming quality can affect us.
Yeah, absolutely. And when people talk quality, quite often, you think about warranty. And that's certainly a metric. But a warranty is an escape. That is, it left our four walls and it went to a customer. That's the worst form, of course. The good news is that Rockwell has a very low warranty expense. But non-conforming quality actually happens inside of our four walls as well. That happens in things like scrap, first-pass yield, rework.
So the objective is to try to drive down the total cost of non-conforming quality. Warranty is just one portion of that. And I think to build off of that, I mean, what we do, right, that is an area that is a great opportunity for continuous improvement, which really takes us to that next portion of this pillar.
Yeah, let's start with the human aspect of continuous improvement. And as we think about that culture principle of a steady stream of new ideas, we've embarked on a program to get a substantial number of our total workforce certified with Yellow Belt capabilities to give them the tools to look for opportunities to improve the efficiency. And it fits into an overall productivity model.
That's for sure. And just on those certified belts, and when we think about that, quite often, again, when folks hear that, they think manufacturing.
There's no doubt, our ISC organization, they're fantastic. They've got a really high percentage of their team that have those certifications. But that's not what we're just talking about, right? We're talking about the broader organization. There are sales folks here for Automation Fair that can also be included in this program. We make the training available for them. A number of them have already done it. There's going to be a lot more in fiscal 25 that do that. And that allows us, again, to find areas to improve, not just on the shop floor, but all throughout the Rockwell organization, which then does take us to productivity. We've talked about some big numbers, right? $110 million in savings in fiscal 24, another $250 million savings in fiscal 25. But those are big numbers, right? That's not actually the way this works.
I know we've got a number of questions where we want to get into the detail around that. I'll take a moment later to get into the detail around that. Those are projects that are happening. There are hundreds of them. There's a long list. And it's true execution because in productivity, the way you do it right is you do it by gaining basis points and tens of basis points. Hundreds of basis points happen from volume, but productivity drives those tens of basis points. All of that is absolutely critical to create, again, that strong foundation. And when you have that strong foundation, Blake, that drives other great things that can happen, right? Like customer loyalty.
Yeah, I mean, continuous improvement manifests itself in the commercial world as well. We had great strides taken forward as we were able to deliver product.
We saw our customer loyalty scores that come back from our annual survey dramatically increase over the last year. But we can continue to improve that by getting into the details and doing the Pareto and to look at the things that are going to move the needle as we've been doing for some time. And it matters. It means real results, just as getting into the details in the plant help with things like how much absorption are we seeing as a percentage of the overall expense.
Yeah, absolutely. And make no mistake about it. Rockwell, we have outstanding technologies. You heard a lot from the commercial team today, which is amazing, right? There's really good software solutions. There's a ton of work that's happening from the solutions and project side. But at our core, we're a manufacturer, right?
And so as a manufacturer, we want to make sure we're looking at the details around that. And ultimately, we want to manufacture at the lowest potential cost. That is going to be the mantra. It has been the mantra. We'll continue to build off of that. One of those metrics that we'll look at today is absorption to expense ratio and doing true variance analysis and getting in the details on the variances. Ultimately, we're going to continue to evolve this in the interest of continuous improvement to go ultimately for a total cost to produce. And again, trying to understand all the different dynamics that go into that cost to produce. So it's an exciting time.
It absolutely is. Christian and I, and really the whole organization, have the sense of urgency, especially with the events of the last year, to understand the time is now to put these things into sharper focus and to make really what we believe are substantial gains in this area as we look at the survey that we've just given you of operational excellence. And now to go still a little bit deeper into specific margin expansion, I'm going to turn it over to Christian to lead that discussion.
Great. Thank you, Blake. Appreciate it. So margin expansion is something that's near and dear to my heart. And at the same time, it's also, I'm going to be reiterating a number of things that you've already heard from this organization when we talk about what we discussed last year with the framework.
Blake earlier went through all the details about our strategic growth framework. Again, that's all the items that are on the left-hand side. I'm not going to unpack that again. Know that organically, we believe that we can grow through the cycle at a 5%-8% CAGR on an organic side, at about a point of acquisitions into the equation, and we're talking about 6%-9% on the top line. When we look at the right-hand side on that long-term financial framework, again, these are items that we talked about last year. 35% core earnings conversion. Core earnings conversion is on the organic portion of our sales growth, and we believe that we can achieve that. Again, reiterating that today, there's nothing new from what we've discussed before. Mathematically, the next data point really flows from that.
That is, when we're getting that kind of sales growth, if we're getting 35% core conversion, we should get nice leverage on the P&L, so EPS growth in excess of sales growth. Free cash flow conversion. Rockwell, as an organization, has a really long history of having 100% free cash flow conversion. It's been challenged in the recent past. I understand that part, but we have guided in fiscal 2025 that we are expecting 100% free cash flow conversion. And again, through the cycle, I believe very much that this organization can continue to execute at that 100% level. Another metric for us is ROIC. And we put here that we're looking to be greater than 20%. I view that as a floor level. We're below that today. That is more about the numerator than it is the denominator.
And when we get volume growth and we start to inflect upwards, that number is going to come back, and we'll get back above that 20% level. For me, I don't spend too much time, as long as we're above that floor level, really worrying about expansion of ROIC because that will happen naturally with the other metrics that we have here, right? That core earnings conversion. And then on the leverage side, again, through the cycle, we want to average about 2x leverage. We're somewhat above that today, certainly in a reasonable band. And I'll show you those data points here in a moment. But we're in a reasonable band. We are taking a pause on acquisitions. So you might see that number fall below the 2x level. That's okay.
You might also see it fall below the 2x level, because we're taking a pause on acquisitions, but also because hopefully the EBITDA number goes up. Building off of that framework and the targets that were put in place a year ago when we talked about the margin for each of the business units, again, they were established last year. Volume has not necessarily been our friend, but the model remains intact. Intelligent Devices, we're targeting 22%-24% segment operating margin. Software and Control, 31%-34% segment operating margin. Both of those businesses, it's really about the product side of the business right now. The product side of the business of both of those has been hit harder. And as that recovers, that will help drive up those margins. It certainly will be helped by some of our cost-out activities.
Lifecycle did achieve their target, and they got above the range of 13%-15%. Again, outstanding flow-through profitability, great leverage, 900 basis points margin expansion in fiscal 2024. That's outstanding. And we'll continue to drive towards a number that's in excess of this. But we are not updating our overall framework until we have a higher level of achievement on the other portions of the business. When you put all this together, it's about 23.5% segment operating margins. And you compare that against where we are in our forecast for fiscal 2025, which is about 19%. So we've got 4-500 basis points that we need to go get. And that is going to happen from a number of different ways, right? We need the top line to recover. There's no doubt about that. We need supply chain and our cost-out initiatives to happen.
We ultimately need that productivity to hit. I'm going to take a few minutes and go into that in a little bit more detail. This is a slide that we put out in our Q3 earnings call. It was talking about the cost-out initiatives that were underway at that moment. To level set this for everybody, the orange section are things that have occurred, and they did occur in fiscal 2024. Really focused on SG&A cost reduction and process efficiencies. That's how we got the $110 million in the second half of fiscal 2024. That, again, that orange, you can refer to the right-hand side in the bar charts. That takes us into fiscal 2025, which is the activities that we're doing around product cost reductions, indirect and supply chain optimization, as well as portfolio optimization.
Our expectation is to get another incremental $250 million in cost-out savings, again, coming from the annualization of the fiscal 2024 actions plus these new actions. Let's talk about those individual projects that are happening inside of there. Again, hundreds and hundreds of projects underpin our cost-out initiatives right now. So I want to give you examples of some quick wins that we've had or early wins that we've had. On the direct material sourcing side, we've got about $500 million of direct material spend that we do as an organization. And we're looking to reduce that spend. But again, that happens on a very granular level. So how do we do that? What we do is we take components, we take sub-assemblies, things we get from outside parties. We break them down into their individual components. We're talking about the metals, the plastics, all those things.
We're weighing them. We're working with the manufacturing team, the ops team, the engineering team to then look at what would the cost to convert be on that. And we look at that all in cost, which we call should cost, right? I shouldn't say we call it. It's called should cost. And then we compare it against what are we actually paying. That delta is our go get. And we do this product by product by product. And we look to bridge that gap and take that number down. It takes time, there's no doubt. And we enter into negotiations with those suppliers, and we look to drive those costs down. Importantly, we have to be willing to be able to change supplier if the negotiations don't work out.
That does elongate our time to getting the return, but at the same time, you have to be able to do that in order to get the negotiation to the proper solution. If we do have to resource and we have to go to a different supplier, we have to go through qualification, testing. That requires engineering resources, supply chain resources. But it's worth the effort. As an example, we've got some key materials that we've already gone out and got 30% savings on what we're spending. That is built into that $250 million. On the indirect sourcing side, this is not just a supply chain-driven opportunity. On indirect sourcing, we secure with a lot of parties. We're talking about everything from paper to subscription services to SaaS solutions, all those things. How do we do this then? We look at every contract individually. We look at the scope.
We look at the cost. We look at the duration and whether we're getting the value we need, the value we want. Are we getting exactly what the organization needs? And then after that evaluation, we go back and renegotiate. It might just be a price negotiation, but it also might be, let's reduce the scope or maybe hold them to a higher threshold on their performance. An example here is that we have cut subscription costs in certain cases by 15%. From the logistics perspective, and I think we've talked about this a little bit before, but I want to dig into it a touch more. So think about the supply chain crisis. We had issues with our suppliers, and we had customers, our customers that were waiting.
And so in order to try to contract that time as much as we possibly could, we changed a lot of our shipping methods from ocean to air. And it was the important thing and right thing to do in order to try to meet our customers' demands on the dates, but there's a real cost to that. If you go back a year and you think about what this Rockwell organization was looking like and doing at that time, we still had a fair bit of backlog that we had to ship. And so in fiscal 2024, we still had a fair bit of cost for air shipment in our base. We're now going back, and we're changing those modes of shipment. We're going back to ocean shipping. We started with the largest volumes first. So the first five modes have been transferred.
We've got a 50% cost reduction in that. And so it's a great start. We've got a lot more modes to work on. And then price optimization. Blake and I talked a little bit about the SKU count of the organization, right? 300,000 + SKUs. In order to do this right, in order to think about portfolio optimization right, it's not just about rationalizing SKUs, but it's also about optimizing the ones that are not going to be rationalized. In order to do it, we're analyzing tens of millions, and we have analyzed tens of millions of transactions, individual transactions with our customers, looking at the margin profile, the volume, whether there are newer options available, potentials for obsolescence. And then that drives a candidate list and putting things into buckets. So one of the buckets that was identified very early was about 2,000 low-margin SKUs. That's been actioned.
We've changed the pricing on them. That's active and live with our customers today, and again, it's a very small subset. There's a lot more to go. The next group of candidates that we're working on is about 60,000 SKUs, so it's an early win, but there's a lot more runway on this one. Again, we've talked about cost-outs. We've talked about thinking about our spend overall, and that's important, there's no doubt, but what's more important is let's make sure that we're still investing in the right areas, and for us, new product development is critical. We are not going to take our foot off the gas on that, so last year, we spent about 6% of sales, got plowed back in new product development for the overall corporation. This year, we're going to spend about 6% of sales getting plowed back in new product development.
Those of you that went on the tour yesterday, I think you saw we had a lot going on. There's some great new products that are available for our customers. There's a ton of excitement on the factory automation floor, sorry, the Automation Fair floor. This is the first time, I think, that we've actually broken down the spend that we have by segment on new product development. So for Intelligent Devices , that number is about mid-single digits, again, as a percentage of sales. If you think about Intelligent Devices , it's important to know that a lot of what they do is electromechanical. They also have a fairly large configured order portion of the business. Those product lines, those categories have a much lower burden when you think about the new product development spend that we have to be plowing into that.
The Software and Control side of the business is in the low teens. That is, a low teens % of our sales gets plowed back in new product development. But that's, again, really important about expanding our software offerings, continuing with really frequent updates to existing platforms, right? It's that upgrade mode and just a continuous flow of additional capabilities that give that ROI to that end user customer. So we're working hard to make sure that this R&D spend stays there. We are not going to take our foot off the gas. Our capital deployment framework generally stays intact. I don't think there's any surprises here. Maybe one of the items that changed slightly is on capital expenditures. Previously, we had a little bit lower range. We're taking that top end of the range up to 3% of sales.
That should be a signal to you all that we are willing to invest in ourselves if we can get an ROI and we can drive margin expansion. So we're allowing for that opportunity here. If you see it go up to that number, it's because we're making those kind of investments. More vertical integration inside of the business, for example, more automation solutions that we're bringing to bear to try to drive down that direct labor as a percentage of COGS. So not a huge change, but again, just a minor change, and I think a pretty healthy signal for how we're thinking about the long term. Again, the rest of the capital deployment framework remains intact. I'll just also say that even during this timeframe where we're pausing on acquisitions, we still are absolutely committed to returning excess cash to our shareholders.
That's not just via the dividend, but it's also via buybacks. One of the changes that you'll also see over time is that we have a standard buyback program, which has us in the market kind of day in, day out doing transactions. Beyond that, there will be an overlay that allows the program to be opportunistic. That is, there are moments, as we all know, where the market has a disruption of some sort. There's a little bit of dislocation. And so to have the ability to go into the market and buy some excess shares out during that timeframe is good, and returning that cash back to shareholders is a good thing. We initiated our guide for fiscal 2025 a couple of weeks ago on our earnings call. Nothing changed on this slide from what was in our deck, so I'm going to move on from that.
And then just broadly from a capital structure perspective, we are committed to keeping that A credit rating. You can see all the metrics there. Importantly, we are committed as an organization to having financial discipline. We're going to work really hard to push as many parties as possible out of our profit pool so we can get great margin expansion. Our P&L, our balance sheet is in a good spot. It will continue to put us in a better spot. We like that flexibility that our capital structure provides, and we're well positioned to perform well, particularly as the cycle improves. It's an exciting time to be at Rockwell, and I'm thrilled to be here. So with that, I'll ask Blake to come back up.
Thanks, Christian.
Thanks, Blake.
You know, in the last couple of hours, we have given you a lot of information. We've talked about how we are building on an enviable position in the market. We've talked about how our strategy continues to be vibrant and some of the progress that we've made over the last year. The additional work we're spending on our operational excellence, and then specifically, Christian's just talked about some of the things with margin expansion, and so, kind of as a summary of this, we are continuing to take share in this market, even amid the kind of volatility that we've seen, even as our competitors are coming after us in what is the best market in the world to be. We've got home field advantage, and we have every intention of defending and expanding that and taking the battle to our competitors around the world.
The diversification that we've undergone over the last half dozen years or so has helped us. And while it's hard to see in a year like fiscal year 2024, it has cushioned the blow. And we intend to continue to build on that through our reach into diverse end markets, the new offerings that we have, the increased annual recurring revenue, and of course, a re-baselining of our cost, which has addressed the current crisis, but also has created a very attractive foundation for good conversion as markets recover. And then finally, at the end of the day, there just simply is no one better positioned than us in this market. And so I thank you all for your attention and looking forward to now answering a few of your questions.
This is the fun part, right?
Yeah.
Thanks a lot. Oops, sorry. Julian Mitchell at Barclays. Maybe just two unrelated questions. First off, maybe for Blake, last year there was a big emphasis on kind of U.S. mega projects and the sort of $700 billion of capacity expansion. Maybe just update us on kind of where are we on that front in terms of how significant are the delays or cancellations on that sort of mega projects funnel and how is kind of Rockwell's share of those playing out? And then the second one would just be around the cost cutting. It seems like the headcount reduction phase is finished. The revenue per head at Rockwell is pretty static in recent years, I think, maybe $300,000 a head. Is that a relevant metric in your view or not really because of changes in business mix?
Sure, so starting with the mega projects, we did see significant wins over the last year, consistent with the kind of win rates you would expect for projects coming into our home market where we have high share in the U.S. And whether the order was actually entered in the U.S. or whether it was at an EPC or a series of machine builders, we were quite encouraged with the win rate, and it was a significant amount of business. Unfortunately, it was overshadowed by the even larger amount of overstock in the channel.
And so we expect to see now that the overstock situation is easing, that it'll be a more explicit contribution to our results, not only in fiscal year 2025, where we expect to have a higher amount of projects won, but in outlying years because we do believe we're in the early innings of this period of investment. Now, policy changes and with the administration change, we'll see there, but anything that spurs U.S. manufacturing is a good thing for us because we're the most prevalent technology in U.S. industry. With respect to the costs, yeah, I think while most of the headcount reductions are done, it's not like there's an all clear that's being sounded because a really important part of this process is the discipline to make sure that we're not just rebounding in kind as markets recover.
Again, it's an opportunity to re-baseline and take a look, in some cases, a zero-based approach of where you actually need those employees and making sure that we're deploying those resources into the areas of highest need. And there's a lot of attention on that. I continue to be heavily involved with those new requests, and that'll roll into a process that pays close attention to that, which, as again, markets recover and we grow, you'll see an improvement further in terms of the revenue per headcount. But as Christian talked a little bit about, there's an intense broad-based effort to go after other sources of costs, and whether it's the material or the indirects or the manufacturing efficiency.
Yeah, absolutely. And I would say that we're not necessarily very fixated on the revenue per employee metric. And in particular, if you think about as we get into a recovery process, hopefully soon, that we're going to be able to get some nice leverage on that. At the same time, a portion of that headcount is variable in nature. That is, there are direct labor folks that we're going to need for that volume.
Thanks, Blake, right here. So again, a couple of unrelated questions. First of all, you talked about the supply chain volatility, Christian, and you expect that to kind of come back over time. Maybe talk about how you're wargaming right now tariffs, potential tariffs, and how that's implications for Rockwell, but also for your customers as well. Maybe Blake talk about the customer implications of that. And then secondly, on the margin targets, it seems like Software and Control is more of a volume and product issue, whereas ID margins have never been in that range. So I'm just wondering what needs to happen to get ID into that range going forward.
Yeah. And I had a little bit of a hard time hearing, but so just stay close to the microphone in case I missed something. But one is on the tax rate and tax overall, I believe that's correct. Tariffs. Oh, tariffs. Sorry, tariffs. Tariffs. Got it. Yeah. So you want the tariff one or you want me to take the tariff one?
Sure. I'll just make some general comments. We saw this in the previous administration, and we were able to quickly address the higher input costs with corresponding changes to the final price of our products that included those components or subassemblies. So we're confident in our ability to address that from a financial standpoint. And further, and I alluded to this earlier, as we look at some of the redundancy we put in place to get caught up when the chips came in and we were able to ship out backlog, we've still got some of that redundancy. And so the ability to shift manufacturing from a non-U.S. location into a U.S. location will help us. It's not going to solve all the issues with really high tariffs, but we have that in place that wasn't necessarily there, let's say, 10 years ago.
Yeah, I think that's right. And again, that resiliency effort has a lot of different follow-on benefits, including that. Then the other question I believe was around Software and Control and where we are right now compared to where that framework is, and we're looking at it from a historical perspective. I mean, it is really about the product side of that business, and the product side of the business has been hit fairly hard. And so we have the ability to, again, as we think about that recovery, it will continue to get good leverage. So it will leverage up nicely when the product volume comes back.
Yeah. And I think also when you asked about Intelligent Devices , maybe there may be more going on besides the volume. In both cases, they are. And Matheus and Tessa are here and are both working on cost in their organizations beyond just waiting for volumes to recover. There's no question we've got very attractive incrementals in both of those businesses, but there's a host of these productivity projects, both in the operations and elsewhere, that are intended to expand the margins, not the least of which is new product innovation, right? Providing higher functionality at lower cost and getting paid for it. That's certainly a very important way that we expand our margins as well.
Thank you. It seems that there is more focus on operations. And clearly, the fact that the board had Christian sends a very strong message. As you think about it, how are you going to adjust the pay structure at the company for senior executives and also for operational leaders as well? Are you going to change the comp structure to go with more emphasis on execution operational excellence?
Yeah, I think that the structure of the company is responding well. I mean, not only the individual leaders, but also the way that we're organized are engendering the right amount of ownership and cooperation. So I don't feel a compulsion as we're working through this that we have to make big changes in that. We're getting the benefits there, and it's allowing us to focus on the task at hand, which is driving the cost out, as opposed to what could be a distraction by playing around with an organization structure that really was only implemented in 2020, right? So it hasn't been that long. I think it's serving us well. It did serve at that time to simplify like processes in grouped and similar businesses, Intelligent Devices, Software and Control, Lifecycle Services. Apparently, others think it's a pretty good model as well.
And so having that kind of grouping, I think, serves us right. The high amount of functionalization we have with a single sales force, functional other functions grouped together, I think is okay for what we're trying to do and certainly supports the mission and the end objectives in terms of margins and growth that we articulated.
Yeah. Just to build off of that, I think when we talk about the incentive structure overall, I think there's great alignment there, right? There's a pretty significant portion of short-term incentive that's related to EPS growth. And so these margin expansion opportunities and operational excellence, that aligns perfectly with it.
Hi, it's Joe O'Dea at Wells Fargo. Two questions for you. One, just in terms of as you talk about the margin expansion opportunity at Intelligent Devices and Software and Control, there's obviously what you can control, and then you're also talking about recovery. Can you just give some perspective on end markets and your view of where we are from a cycle perspective? Because I think with supply chain effects that we saw in both 2023 and 2024, it adds a tremendous amount of distortion. Obviously, inflation adds a tremendous amount of distortion. So just from a volume perspective, where are we? And then the other piece of it would be on productivity initiatives. And maybe this is related, but why now? These are presumably opportunities that you had in the past. Why is now the time to do them as opposed to having evaluated doing it earlier? Thanks.
Sure. Sure. So I'll make a couple of comments again and invite Christian's perspective. So end markets, Software and Control is going to react most positively to recovery in, as you would expect, product-intensive end markets where the majority of our value is delivered in products, particularly programmable controllers and operator interface. Automotive is an example of that. E-commerce and warehouse automation is a good example of that again in discrete. Of course, food and beverage, the biggest vertical market of all for us. Home and personal care, so toilet paper, soap, shampoo, things like that. So these consumer products and then the durable goods are the areas where, for the most part, we're serving that through predominantly products. We continue to get the steady drumbeat of expanding ARR, which a good portion of that is from the software and Software and Control .
But look for those verticals in discrete and in the hybrid industries that I talked about. When it comes to productivity, and we're talking a lot about it now, we haven't talked about it as much in past investor days, it's always been a part of the heartbeat of the company. We've had a vibrant continuous improvement process with targets that get rolled into our plans, but there's been a lot of volatility and a lot of defense that's had to have been played over the last four or five years. And so a revitalization of those processes and an expansion outside of operations, I think, is what has been the driving factor for that. And then, as we talked about, the Rockwell operating model institutionalizes that in a way that's broader than maybe the way that continuous improvement program was operationalized in past years.
Yeah. And one of the other reasons why now is a good time is because we have done a number of acquisitions in the recent past. And so it's a great opportunity to use this alongside of all the other integration work that we're doing to help stitch it all together as one Rockwell and, again, drive towards that continuous improvement for the long term.
Yeah, and I would also say while we introduced some of these productivity measures before Christian came on board, because we couldn't wait based on the urgency of the year and just the general need to get to that new baseline, we knew all along that Christian, with his background, was going to come with a perspective on this as well. And so being able to add additional facets of these programs is something that is a dynamic process and has yielded some meaningful new opportunities.
Thanks. UBS. Blake, I assume you spend a lot of time talking to customers. We're a couple of weeks past the election. Any shift in tone or outlook that you're picking up? Obviously, the tariffs, we're not clear of any uncertainty, but just there's a big difference between the end of the destock and the start of a restock. And I'd love to get your perspective on what you're hearing. And then just related, maybe a financial question for Christian. Can you talk about gross versus net cost savings? You've obviously got a big cost structure that's inflating every year. Can you talk about that? And when we met at the New York Stock Exchange, I think a couple of weeks ago or a couple of months ago, sorry, one of the first things you mentioned was kind of improving the forecasting reliability.
And then you had to put out a 2025 guide. A lot of the feedback, and I'm sure you've heard this and talked about it, but a lot of the feedback on the 2025 guide is it kind of embeds a big ramp as you progress through the year. So as you think about improving that forecasting, how do people get comfortable with that based on some of the processes you might be implementing? Thank you.
Sure. So I wouldn't say that every customer uniformly has said, "Okay, now we are releasing the capital based on a clear outcome in the election." But there is a general optimism, as I've talked to customers, about the time going forward. In the U.S., there is an element of, I guess, less uncertainty. We'll learn more, of course, as we go through the next couple of months and as the policy priorities and what's actually acted on become clearer in January and February and so on. But all of these companies are benefiting. The U.S. companies are benefiting from a recognition that manufacturing is important. And that was kind of a bipartisan thing. The parties were coming at it in different ways, dramatically different ways. But the recognition that U.S. manufacturing is really important and the U.S. government is going to do things that promote that, that's good.
And it is good for U.S. manufacturers, and it's good for us as we work with companies around the world who seek to be a part of value chains that ultimately end up in the U.S. I've had a lot of conversations, as you said, with customers. After the PACK Expo show, a number of machine builders from around the world came up to Milwaukee. It's not too far from Chicago. And we had the discussions. And I tested explicitly this idea that it's important for them to work with us as the leader in North America and as the holder of really strong relationships with our mutual end users. Was that spurring additional interest in using Rockwell more often? And they said yes. And they were under no compunction to do that. So I think that's been very positive. So it's not just the U.S. companies.
It's also companies seeking to do business here, and then I think your second question was gross versus net productivity, and we, in terms of our internal targets, have factored in the cost to implement. Obviously, there's a certain amount of that related to reductions in force. As we said, most of those are done. There is still an engineering burden associated with the sourcing waves that we're going through because you have to be ready to back it up to be able to put yourself, as Christian talked about earlier, in the strongest position to negotiate to a favorable outcome, but we think it's well worth the effort.
Yeah, absolutely. And so just to make sure from a data point perspective, yes, these are net numbers, both the fiscal 2024 and fiscal 2025, what we put up there are net numbers. In fiscal 2024, as Blake said, we did have some redundancy costs that went into the adjustment that went below the line in what we reported. And the expectation is that for the most part, that's behind us. Remaining execution cost is built into that $250. And so that is a net number. On the forecasting side, you're right. Two months ago, I knew, right? We met when I was in New York, and we had a good discussion around forecastability and how important forecasting is, not just, again, for the outside world, but also for how we think about our operations.
And then, getting into the guide process, it also coincided with our own annual plan process, right, our budget. We cast a pretty wide net. That is, we did it really from a bottoms-up and a top-down perspective. We got a lot of different data points. Mostly it's because I think the organization allowed me to do it because I'm new, and so I had to get a lay of the land on different viewpoints. But it was great, actually, to see the way the different business units thought about forecasting in their business, the metrics they use. And so that's good from a bottoms-up perspective.
But then we had to do it from the top down and say, "Okay, well, what's the sanity check around it?" And then we brought in additional data points like the AI models and what we see in the macro as good as you may or may not think the macro forecasts are and kind of put it all together. And that's what really drove the guide.
Thanks, Matt. Yeah, just a little bit of a conceptual question, but on AI, do you view it as more of a revenue driver and being able to widen your TAM or a productivity tool? And kind of where in the early use cases, it sounded like today a lot of the stuff was really the value was accruing to your customer as opposed to accruing to Rockwell, but perhaps that maybe allows the product cycle to shorten and replacement cycle to quicken up and things like that. So how do you think about the early use cases, at least? I know it's early innings here, but the revenue side versus productivity?
Yeah. Yeah, from an AI perspective, I do think that the use case is super important. I know it's not just a topic for us within our own business and with those customers. And of course, a lot of those discussions are happening at the factory automation floor right now. But it's also about how do we think about it from, again, the broader industry. So I think the key is that use case, and again, the group talked about it today around the ability to continue to drive really good efficiency in our customers in their production environment. I think that use case is definitely there.
Yeah, I think top of the list is the simplification of processes for our customers. And so as a revenue driver, not necessarily the incremental value that we can get from a unit product, but the increased share by doing it better than anybody else in the world of production. And I think we're off to a good head start. Suppliers who are working with our competitors tell us that we're really in front with the focus on production and working on real-life use cases with that expertise to make it matter. And so it's really on the revenue side that I think is the top manifestation of it.
We'll take one more question.
Okay.
Maybe I can ask too, Andy Kaplowitz of Citigroup. One quick one just to follow up. When you think about Christian, you came in three months ago. You've had a chance to look under the hood. It's still early. But is the $250, you think, the tip of the iceberg? I noticed you talked about 60,000 out of 300,000, but that's still only 20%, right? So can you use 20% , as I know you know how to do, to get a lot more out of it in the future?
That's a great question. And I'm glad you asked it because we didn't really necessarily talk about this. But when you go back to that bar chart and we show kind of the impact of the fiscal 2025 actions and what we're going to get for a benefit in fiscal 2025, that's ramping during the course of this year, right? In the first half of this year, we're really getting the annualized benefit of what happened in fiscal 2024. And so that's helping us. But as the year goes on, again, all those activities continue to ramp. And so as we exit the year, yes, we're driving towards $250,000 for the full year number, but the exit rate should be good. And we're going to get more benefit as we get into 2026 and 2027. And in particular, think about how we're doing this, right?
This is one of the things that has been the challenge for the organization, right? Full transparency is that the volume, it's really hard to do a lot of supply chain initiatives when volume is low. And so when volume comes back, we have the tools in our toolbox. We have new contracts that are negotiated, in certain cases, new suppliers. And those benefits are just going to continue to accrue as we get into later periods.
Maybe we're done.
Oh, there you go.
Just on Logix, one of the messages today is it's sort of this do-it-all automation control, right? What strikes me is it's still been pretty volatile. Each quarter, it's kind of all over the place. A lot of that we talked about is destocking. How do you convince customers that it's sort of a need to have versus a nice to have moving forward? Can you talk about better payback periods? How do you go about doing that?
Yeah. So I think to be sure, the majority of the recent volatility has been due to the impact of a dramatic buildup and backlog, able to ship that backlog out in a relatively short period of time. And then the realization that there had been over-ordering on the part of distributors and machine builders. But longer term, how do you reduce that volatility of such an important product? I think it is increasing the reach into additional industries. And as we expand to still more versatility of Logix into continued buildout of process functionality into industries like semiconductor and so on, then I think you have the opportunity to cushion kind of the ups and downs there a little bit.
And, as recurring revenue, either through the design time, FactoryTalk Design Studio, or through Logix Edge and a software-defined architecture contributes more recurring revenue, then, of course, you get some of the wonderful things that recurring revenue does for a business, as well as it's not just about the hardware, but it's also about recurring software streams. Those are a couple of opportunities that come to mind there. With that, thank you so much for your attention. I think we're going to conclude the webcast now. I want to thank you all here and online for your attention. Have a great day.