Great. Well, thanks, everyone for being here. It's my pleasure to have up next, Blake Moret, Chairman and CEO of Rockwell Automation. I think Blake will have some initial remarks, and then obviously we can move to other questions. Over to you, Blake, and thank you for being here.
Julian, thanks. It's great to be here. Appreciate everybody's interest this morning. I'll start with a little bit of a level set on Rockwell Automation. First of all, I've been in the role for about six and a half years. I'm a lifer with the company. Spent my whole career within Rockwell. For much of that career, we were known almost exclusively for our Allen-Bradley hardware. We may continue to make great hardware components for automation. But in the last few years, we've added more ways to win. We've added additional software that we've built or that we've bought. We've added additional high-value services like cybersecurity assessments and remediation, and so
It gives us more ways to add value as a customer, you know, proceeds on their journey to digitize their operations, to transform, you know, to a more agile organization. We're very happy with the results that that's yielded. With that, happy to answer questions.
Thank you, Blake. If we move sort of to the near term for a second, you know, I think one of your or your key peer, if you like, in traditional automation, Siemens, had a very positive update, you know, fairly recently. I think they talked about, you know, good orders and then on the supply side, component shortages getting better. Maybe some of your own lead time data on your website-
Mm-hmm.
Is consistent with that. Maybe just help us understand, are you kind of seeing what they're saying, as well on your side?
Sure. So You know, like some of our other competitors in this space, we're seeing a good market for automation, and we're seeing that from a couple of standpoints. First of all, industry specific. There's lots of objective evidence that electric vehicle manufacturers have historic high levels of spend with the attendant battery manufacturing that's needed as well. The good read for Rockwell, specifically, is that so much of this investment is going into the U.S., where we have the highest market share, the best channel, and relationships that go back for decades. You also see, you know, high levels of spend in semiconductor, for instance. More general, not specific to any one industry, brought on by workforce shortages, is a general recognition that advanced technology, advanced manufacturing principles are gonna be important to make the most of scarce labor.
You see cybersecurity assessments, even in brownfield operations. You see consulting services to help companies take those first steps towards digitizing their operations that we can provide help with through our Kalypso organization. You know, we would agree that, you know, even, apart from the specific effects of supply chain shortages and, you know, multi-month or year orders, there are undeniable high levels of investment that would be happening with or without supply chain shortages by important parts of our market. The second part of that supply chain shortages are easing. We're not out of the woods yet, but we're definitely seeing a return to pre-pandemic lead times by more and more of our product lines.
That's very helpful. Thank you Blake. You know, maybe on that point on a normalization of supply chain going on for you, gradually, not a, not a step change overnight. Is it a similar picture with how we should think about your own customers' behavior to you? I guess the easiest way to talk about that is through the lens of sort of backlog development, orders progression. How do we think about those things, I guess moderating, if you like, after an exceptional two-year period?
Yes. Well, if we look at it through the lens of our customers, and I think about the conversations that I'm having, you know, with a lot of our customers, first of all, they want their stuff now. You know, I'm not having conversations where customers are negotiating to delay existing orders.
Right.
They want their stuff now. If you're a European machine builder, and we have a lot of those who are our customers, they have backlog that they're trying to ship out, and in many cases, we're on that critical path for them to be able to ship out that machine. That's tough because we want to improve those levels of customer service, but it's also encouraging in that we are so important to their fundamental business. We're having a lot of those conversations at the highest level. You look at the end user side, the Forbes of the world, the Hyundais of the world, Intel, who is at once a supplier and a customer, it's very important for them to understand and to coordinate with us so that we can help them get their projects and their new capacity online.
A lot of these projects are at a higher level than, you know, you and I have seen, you know, and maybe ever. The number of greenfields is really a large percentage, you know, of the activity that's going on versus MRO or brownfield revitalization projects.
That's good to hear. You know, I say a lot of companies here, they have a different margin profile maybe of brownfield and greenfield or aftermarket versus OE. Does that matter much for Rockwell on mix, or it just depends more on the customer, industry, region, those kinds of factors, and you're fairly agnostic profit-wise around green or brownfield?
Yeah I think it depends most directly on the type of application that we're addressing.
Mm-hmm.
if we're doing a highly engineered system-
Yeah
In a mine, for instance, that involves a lot of our engineering content or in, you know, an oil field, the margins are going to be lower because it's a more people-intensive business. In an automobile, an EV application, the majority of what we're providing is still in the form of product because the engineering is being done by an EPC or an integrator or by the end user themselves. It shouldn't have a big impact on Rockwell's overall margin profile. I know, you know, you would otherwise think a big project that's gonna be pressure on margins, but it's really more a factor of whether it's an engineered system.
Mm-hmm
Whether it's product supply as part of that project. EV projects are product supply.
Yeah
versus engineered systems for us.
Got it. That's very helpful. you know, you mentioned orders, you know, cancellations, it sounds like a very low rate still in your, in your backlog.
Low single digits.
Low single digits. Have you seen any change in behavior since that product cancellation charge was put in?
No, a short answer is no.
Yeah.
We implemented a cancellation policy for orders, and I characterized that on a past earnings call as more hygiene. We didn't expect that to have a big impact on, you know, orders coming in or existing backlog, and that's played out as we expected. We do see, you know, some advance ordering every time that we announce a price increase. We had a price increase in December, and as expected, you know, we saw some increase in orders just ahead of that, but that's normal behavior.
Yeah.
That's not something that's changed here in the last year or two.
That's helpful. Operationally, you know, are there things that Rockwell will do differently in future, say, to manage supply-demand balances better in terms of changing the way you source chips, maybe carrying more inventory in general? Or you think not really, like the last couple of years are exceptional, no reason why you should be carrying more working capital indefinitely?
We've definitely learned some things over the last couple years that are gonna make us a more resilient company going forward. For starters, you know, every product that we have currently or that is currently under development will be run through a resiliency index to be able to assess, you know, are we at higher risk than we should be.
Yeah
sole source components, for instance.
Mm.
What are we gonna do to remediate that? That doesn't automatically mean we're gonna carry more inventory, and it's gonna be a eternal pressure on working capital. In some cases, we'll have additional inventory for certain components, but in a lot of cases, it's gonna mean that we're gonna do the upfront work to make sure that we have alternate suppliers.
Got it.
That we talk with the supplier to make sure that what we're asking of them is gonna be on their, you know, important products.
Mm-hmm.
For a long time, it's gonna be an important part of their business, model going forward. That assessment probably wasn't conducted with the same rigor that it will be going forward. I don't look at this as a negative read, you know, going forward for working capital or
engineering spend. There are gonna be some things that we do to be more resilient going forward, and we just plug that into the overall business model as a reality and not as something that was one and done, that happened for the last couple years, but that we don't have to worry about again. We'll always pay more attention to certain of these items based on the events and the reality of the last couple years.
That makes sense, and let me look at, you know, some of your customers' behavior, let's say by geography, you know, I think Rockwell has been very judicious at talking about, you know, reshoring as a concept rather than onshoring and
I think it's a very valid distinction. I suppose the good thing for you as we look ahead is, you know, if we look today or the last couple of years, your North America revenue growth rate is pretty similar to other regions.
Mm-hmm.
We haven't yet seen the reshoring in your numbers. I guess when you look at orders or backlog, do you see it in that yet? No, this is a tailwind that actually Rockwell hasn't even begun to see yet and will see it, you know, the next X years-
Mm-hmm
playing out? And also I guess on that point, Have your conversations with U.S. customers changed over the course of the last year or two as you've seen the legislative backdrop.
Mm-hmm.
The IRA and so on.
Yeah.
get fleshed out?
So Shoring is real for us. I use that term because it's not so much that, you know, factories are being shuttered in another part of the world. It's that the U.S. is an outsized beneficiary of new spend, that comes even ahead of, you know, recent legislation like the IRA. We're definitely seeing that behavior. It's a little bit hard to parse that out in terms of growth rates.
Yeah.
I wouldn't look at the U.S. growing faster than Asia or Europe as the sign to see. What I would look at more is the U.S. growing at a faster rate than it was traditionally. Because, you know.
Mm-hmm.
We don't know what's gonna happen in Asia. We don't know what's gonna happen in Europe. It's not that this growth in the U.S. is necessarily gonna be at the expense of other things.
Mm.
I would expect that as we get past the effects of supply chain shortages and larger orders by machine builders and things like that you will see faster growth rates in the U.S. than you did previously because of the additional amount of investment that's taking place in some of these critical industries to put manufacturing capacity onshore in the U.S., where Rockwell is in kind of home field advantage with, you know, the largest share, the best channel, and.
Yeah.
the strength of, you know, very durable relationships and ecosystem.
That's helpful. You know, you mentioned at the beginning sort of, you know, EV chain in investments, CHIPS Act.
Mm-hmm.
Got a lot of headlines as well. You know, beyond those two industries, kind of how is that discussion with customers around U.S. in investment kind of playing out?
Think about one success story that we have highlighted the last couple of investor days with First Solar, building photovoltaic cell panels. They have greenfields going on in the U.S. as well as in India. They built previously plants that we've been involved with in Vietnam and other places around the world. I think some of the most recent investment has been encouraged at a minimum by the IRA, and
Right.
As we look at the number of EV plants that are being built in the U.S., you know, that is influenced at least in some part by tax credits associated with electric vehicles that have, you know, that meet the requirements for U.S. content in the vehicle and in the battery. Those are all positive for us. Beyond that, you look at what companies are doing to accelerate their energy transition.
Yeah.
Those are good projects for us. When you look at a carbon capture and sequestration project, you know, those typically involve big pumps and fans, moving air or water or what have you. Variable speed drives are a necessary part of those projects, and we have, you know, great share in those technologies and good relationships with those customers.
That's helpful. I guess in, you know, in Europe, people have kept waiting for automation spend to come down with, you know, PMI and so on. Doesn't seem to have happened somehow yet. Any kind of perspectives on that. Then in China, you know, you've got some very good positions in the automotive sector there. You know, how do you see that pace of investment or sort of business confidence coming back in China now?
Well, you know, those remain good, applications for us in China.
Yeah.
In Korea, where you have a lot of the battery producers. You know, companies like CATL and BYD are certainly, you know, good customers of ours, not exclusively, but.
Yeah.
We participate heavily in those projects there as well because of the strength of our, of our solutions. In Europe, I think, you know, some of the resilience of the spend is probably due to, you know, a better than feared outcome with respect to natural gas.
Yeah.
Having a mild winter came at a opportune time, right, for Europe, for Europe that was concerned about possibly not being able to heat their homes. It's been better than feared, and I think that's contributed. Some of the same issues, workforce shortages, the recognition that automation can give the workers that you do have superpowers, if you will. I think has held the market up there as well.
You know, I think when you, when you look sort of structurally at the company, as you said, it's been about six and a half years as chief executive so far. You know, a big push the whole time has been get more top-line growth. I think it's fair to say organic and inorganic, that's been a big priority for you. You know, we can see in the growth rates this year and the guidance, it's playing out. Maybe help us understand kind of how satisfied you are with some of the broader initiatives around, you know, Information Solutions, Connected Services-
Mm-hmm.
-getting that software content in aggregate higher. Something else, you know, people used to point out you versus some of your other Western peers was. You know, too small in emerging markets in China.
Mm-hmm.
You know, some of those broader elements kind of were you more or less satisfied across those bigger drivers?
Sure. Well, when we introduced the framework, for, you know, describing what you as investors could expect from us back in 2019, we headlined it as accelerating profitable growth. To be sure, it was about growing faster, but it was about doing it profitably and within a well-understood framework for margins and capital deployment. I am very happy with the progress there. As we talked about in the most recent investor day in November in Chicago, you know, there were three main tiers of that program. It was to grow faster than traditionally in our core, as a, as a multiple of industrial production, and we've done that. It was to grow double-digit growth in areas of new value like Information Solutions, which is largely about software and Connected Services, things like cybersecurity services.
We have grown reliably double-digits in that area to the extent that it's now over $800 million of our business with a high element of annual recurring revenue. It was about using our balance sheet to help us grow faster in areas where it didn't make sense for us to try to build something on our own, and we've grown reliably at over one point a year from inorganic acquisitions. We remain fundamentally an organic growth story because that contributes to high margins and less risk. You know, there are times when making an acquisition makes sense, like a Kalypso, like a Plex and so on. We also had as guide rails, you know, to that growth, being able to convert incremental revenue at between 30% and 35% on incremental revenue.
This year, we're gonna test the upper end of that. We remain keenly aware of the commitments for profitability, and we fully expect that as we get past the unusual effects of supply chain shortages, as we get past the one-time integration expenses of some of the big recent acquisitions, that that's gonna give, you know, those are gonna be positive tailwinds going forward for our margins, which we continue to look closely at.
Is it fair to assume that, you know, as the business evolves, more software, more Information Solutions, more ARR, that the pressure on the operating leverage should be higher over time or not necessarily? Like if you get higher gross margin, you want it going into more R&D, let's say, to keep that churning.
Yeah. We're not gonna automatically spend away the additional margin.
Okay.
No question that we like not only the additional value that recurring software brings to customers, you know, software as a service. We like the financial dynamics of that as well. We're not seeking to become a software company.
Right.
We wanna be the company that's best known for producing positive outcomes for customers. That's gonna be through a combination of our traditional hardware, high margin hardware that continues to make up the majority of the company, the software that continues to grow as a percentage of what we do and is often the differentiator, including a growing component of cloud-native multi-tenant software applications. Then high value services, again, like cybersecurity services, like digital consulting coming from the Kalypso organization. All of that together, we think, produces a very favorable, margin mix, going forward.
You know, on the sort of capital deployment front, you know, in some of your industrial traditional peers, they've adopted different approaches to software M&A. Even the same management at the same company has sort of, you know, changed its mind in some cases, depending on the day of the week. You know, when you look at your approach to software, you know, PTC, there was a partnership and a stake, Plex, wholly owned. How do you think about the preferred route for Rockwell, if there is one or no, you're agnostic, and you take each company in partnership and transaction on its own merits?
Yeah. I don't think there's a one-size-fits-all approach. You have to determine when you go out and build or buy, should you be, you know, are you the best owner for that particular technology? Can you sustain differentiation? Software is never done, and I think it's silly to think that, you know, one company can, at any point in time, own all the software that might be important in a production environment. That's why we talk a lot about ecosystem and with strong partners, you know, like Microsoft.
Mm-hmm.
Working closely with a PTC, in other cases, making decisions that we do need to own and have the skills in certain technologies. That's why we undertook a significant project to develop internally cloud-native programming software for our flagship Logix product. The configuration software for our Logix programmable controller is now available in the cloud as well as on-premise. That's a big deal. It's a big deal for the industry, we're gonna build on that, and we felt we needed to do that ourselves. With Plex having a cloud version of MES and other critical business processes to complement our existing FactoryTalk ProductionCentre MES software, we felt we needed to own that rather than through a partnership.
I think you have to consider each of these in relation to the strategic direction of the company and also the financial, you know, implications of it. When you bring that together, you're gonna come up with different decisions about whether you buy, build, or partner for these different areas. The opportunity for synergy in a special value accretion is the ability to have these different applications working together to be able to do things efficiently, you know, in the database, you know, to be able to take input from the real-time programmable control from other software applications and to have it do useful things.
That's what we're spending a lot of time thinking about now, is how to get these all working together, common look and feel for customers, and that's when you're gonna start seeing efficiencies for the customer that's also gonna flush out in terms of value for investors.
That's helpful. You know, I suppose on that point on Plex and MES, you know, MES is one of the areas in software Rockwell, you know, has a very good position. You know, my understanding is that market is still largely sort of on-prem, done by customers one by one.
Mm-hmm.
Maybe, I guess, give us a broad update on, you know, where you sit in MES, your sort of market position, what kind of growth you're seeing, and also how is the Plex acquisition specifically? You know, it's been a while now since it got brought in. How is the integration playing out with Plex?
Yeah. MES is seen, increasingly as a need to have versus a luxury.
Mm-hmm.
a discretionary by more industries. The new EV facilities almost all have some form of MES for vehicle scheduling.
Yeah.
In regulated industries, FactoryTalk ProductionCentre, is somewhat of a standard for many of the biggest pharmaceutical companies in the world. And then when you look at adding Plex, we've been very happy with the performance of Plex. We're about 15 or 16 months post close.
Mm-hmm.
When we made the acquisition, 'cause it's the biggest one Rockwell had ever done.
Yeah.
We disclosed an unusual amount of information about our financial expectations in year one and year two and so on, and w e're happy to say that, you know, as we're in the second full year of the acquisition, we're hitting the financial targets that we had set forth. We're happy about the strategic fit as well as the financial performance, which swings to accretion this year, you know, and is only gonna grow from there.
Yeah. What sort of... You know, to the extent that is a standalone business still, you know, what kind of organic growth are you seeing or what should people expect at Plex?
Yeah. We haven't broken out the specific growth targets for that portion of Information Solutions and Connected Services, but we have said that that's double digit.
Yeah.
as is the ARR growth and.
Yeah.
Plex business is practically all annual recurring revenue. We see that as good double-digit growth this year.
That's helpful. Thank you very much, Blake. We'll now switch to the audience response survey. If we could get the first question up around do you currently own the stock? Mostly no or overweight. It's pretty polarized. The next question, what's your general bias towards it today? Positive, negative, or neutral? Fairly balanced. Thirdly, it's around the through cycle earnings growth. Again, peers here is I think a broad kind of U.S. industrial or U.S. multi-industry is probably the best peer set to think about. Should be generally above the peer set. The next question is around capital deployment, usage of excess cash. Here people want acquisitions, and I...
You know, bolt on one, which I think speaks to the success of things like Plex and Kalypso in recent years. The next question is around the valuation. Clearly, again, this question may read rather stale, but for the sake of consistency over time, that's what sets the valuation ranges inside it. Yeah. Basically, what, sort of 20 times, 20-30 times PE. The next question is around, you know, why do you not own Rockwell Automation or why do you own less of it instead of more of it? What's the biggest sort of issue or barrier to ownership? Core growth, surprising in a way. Lastly, does ESG play an active role in your investment decision relating to the company?
You definitely don't have to say yes if it's not the case. Generally, no. 60%, 70% no, which is consistent with some of the others. Great. Thanks everyone for the responses.
Yeah.
Thank you, Blake.
Thank you.
Much for that discussion.
Hey enjoyed it.
Thank you so much.