Great. Well, thanks, everyone for being here. It's my pleasure to have up next, Rockwell Automation. We've got Blake Moret, Chairman and CEO, and also, Matheus Bulho, SVP of the Software and Control segment. So obviously a very topical point of discussion around software right now. So appreciate you both being here.
Mm-hmm.
Blake, I think you had a couple of prepared remarks first.
Yeah. Great, thanks. Thanks, Julian. So, I know a lot of you have followed the name for a long time. Appreciate the interest this morning. Wanted to make a couple of comments to kind of frame the questions and answers. To start with, Rockwell's become a considerably more resilient company here in the last few years. If you look at the distribution of verticals that we serve, you know, you may be surprised to see that process is actually the single largest served vertical, and that certainly helps with, you know, value through the cycle. We've also added annual recurring revenue, a mix of software and high-value services continues to grow well. It's profitable for the overall company and a little greater than 10%, that combination of the software and the services.
And then finally, really a redoubling of the focus on operational excellence, and you've seen that manifest itself, certainly in terms of continual expanding margins here over the last year or so, and we have every intention of continuing that. We have a great mix of offerings for verticals across discrete, hybrid, and process end markets. What we're aiming for is to be able to provide the best solutions in the production environment. In fact, today, we are the most used technology in American manufacturing.
We introduced this growth algorithm in November 2023 to reflect the strong secular attraction of automation and digital transformation, our confidence that we can gain share and add new served market, as well as the contributions from annual recurring revenue and a modest contribution from acquisitions as well. We're taking a prudent approach to our guide this year, but there's a very good chance that we're gonna be able to get into that 5%-8% organic growth range as we move through the year. We take an intentional approach to the end markets that we serve. Some of the areas that we're proud of our growth in that weren't traditional Rockwell strongholds would include things like data center.
A still small, but fast-growing served market for us that I'm sure we'll talk about in a minute. Other aspects of e-commerce and warehouse automation, life sciences, as you know, people, I think, are gonna continue to want to live longer, healthier lives, and we have a very good offering in that area of high investment as well. We have some important enabling technologies, software-defined automation, the pervasive use of artificial intelligence, as well as integrating robotics into a complete automation system, and obviously, all guided by the domain expertise. The understanding of manufacturing in these specific applications still matters, even with all the new tools. We also introduced margin expectations by segment, and we're making good progress there. We're already in the corridor for lifecycle services.
We've seen, we've seen that point reached with Software and Control , Matheus's business. We still have a little bit of ways to go in Intelligent Devices , but with some very specific plans to continue that journey in all of these businesses. And you should certainly not look at, you know, the upper end of those corridors of margin performance, you know, as an absolute ceiling. We have plans to go to and through these figures. And we're going on offense. We've announced that we're gonna be spending at a little higher level. Still, you know, I think it still keeps us in the asset-light category, but deploying capital in the service of increased market share and expanding margins, we believe, is a good bet to make. The primary areas are plants, talent, and digital infrastructure.
We're happy to talk a little bit more about that, but that's already started with our existing facilities, modernizing them, applying the same technologies that we sell to customers, and it's yielded some pretty, pretty impressive results in those, of our own factories so far. And then, just to, recap our full year outlook. Guide currently sits at 4% organic growth at the midpoint, but as I just said, I think, there's a good chance, that, there can be some upward pressure on that. mid-single-digit top-line growth, double-digit growth in earnings, and, we are intentionally focused on both. So with that, we can get into the Q&A.
... Fantastic. Thanks very much, Blake, for that. And maybe just to follow up on, you know, where you led off and concluded there. So you have the two to 6% organic sales growth guide for this year. You have that five to eight medium-term goal, which you said there's a good chance of hitting this year. So maybe help us understand, you know, what explains that confidence at the upper end of that growth guide for this year looks more likely?
Sure. So, the sentiment on the part of our customers is positive. What we are looking to see is that sentiment turn into actual orders across a little broader swath of our served verticals. So we certainly see it in some areas: e-commerce, warehouse automation. We saw it in chemical, actually, in the Q1. Our traditional markets were in growth, which is good: automotive, food and beverage, oil and gas. But a lot of that activity still is in modernizations of existing facilities.
Customers are still holding off on some of their larger capital projects, and while we're working closely with them on those quotations, you know, looking at the impact of new technology to, in some cases, add to, you know, the original scope of supply, I'd like to see that show up in the orders a little bit more. So that's kind of what we're looking at. Obviously, we have home field advantage, where so much of this investment is taking place in the U.S., with, by far, the largest installed base, the deepest relationships, the best channel, and so on.
If you focus on the U.S. in particular, yeah, I think a lot of investors are wondering kind of U.S. short cycle industrial recovery, is it happening now after a lot of anticipation for 2+ years? You know, so what's your perspective on that? How are you seeing CapEx intentions among your U.S. customer base?
So as we've talked about the last couple of investor days in November, there's a lot of CapEx that's been announced. And it's a nice split between some of the industries that are a little bit newer to us, like data center, but... And also traditional industries that we have, you know, a long history of serving in the U.S., food and beverage, energy, pharmaceutical, and so on. So, you know, I think, you know, it's a little bit early to sound the starting gun and to say, "It's here, the dam has burst." But, our Q1 demonstrated that we are seeing a higher amount of orders for new capacity in the U.S. than we saw last year, for instance.
It contributed to North America, you know, having the highest year-over-year growth. We do expect, you know, strong double digits for orders in that new capacity for the full year, but, you know, it was against high expectations as well.
Got it. And when you think about those, customer sort of appetites on the double-digit new capacity growth, is that fairly broad-based, that double-digit orders growth, or it's concentrated in a couple of industries?
I think it's fairly broad-based, what we've seen.
Then, if we think about away from the product side on lifecycle services, you know, the backlog's been under some pressure, you know, on and off in recent quarters. How do you see the demand outlook there?
Yeah. So Lifecycle Services, actually, we see the comparables get easier through the year. We did start out with a strong Book-to-Bill Ratio of 1.16 in Lifecycle Services. But, that's where you see, you know, my earlier comment about, you know, customers are still holding back on some of that, on some of that, capital. Now, I should hasten to add, you shouldn't equate new capacity as just, orders in Lifecycle Services. A lot of that new capacity will manifest itself in terms of Matheus shipping more-
Mm-hmm
... Logix processors to a machinery builder who's serving, you know, one of the big end users, or an EPC, an engineering firm, you know, that is going to be sourcing that equipment and then supplying it to a system integrator. So, the margin profile of that new capacity business is actually pretty good. Don't assume that it's all in the, you know, lower margin Lifecycle Services
Great. And maybe ,Matheus , sort of-
Yeah
... flesh out where we are in that PLC, you know, the more sort of control side of your segment. You know, there was a big restock, then a destock, then a restock again in PLCs.
Mm-hmm.
Where do you think we are in that product category versus kind of trend growth if we try and zoom out from the de- and restock-
Yeah
- ups and downs?
Yeah. So you saw in our Q1, we had a fairly good quarter for Logix. You know, 20+% year-over-year growth globally. In particular, North America, even higher, you know, 25+% year-over-year.
... We expect Logix to continue to improve. We're looking at Q2 sequentially in the low single digits, and for the full year, very much in line with the segment. To your question on destocking, I think as you saw us comment on that during the call, that's behind us. You know, we have very strong visibility into distributor inventory. We know what distributor shipments are, and we can compute the terms fairly easy, and it's been quite stable there. So I think that's a non-event at this point.
Got it. And what do you think the sort of growth entitlement is for Logix from here and, you know, medium-term? And should this year's growth rate kind of line up with that medium-term trend expectation?
Yeah. So we have enough indication to conclude that we've been able to manage through this cycle from pre-pandemic to now and achieve, you know, share gains across the globe, frankly.
Yeah.
We're continuing to invest in R&D. At a company level, we allocate around 8%, but as you would expect for Software and Control , it's higher. We have a good start point with new product introductions being adopted. This year, in particular, Logix has a new platform that's off to a great start, even though it's smaller numbers at the early stages.
Mm-hmm.
A fairly healthy, you know, pipeline of innovations, as we discussed at Automation Fair and Investor Day. We'll see additions to the Logix portfolio, not just last year, but this year and the year after that. We're bullish about what Logix can continue to do for us.
Got it
. So even though we've had that restock behind us now, the growth outlook still looks pretty good for Logix and the Software and Control segment?
Yeah, the comparables get harder throughout the balance of the year, just like the most of the company. Prudent optimism.
Yeah, and this is value, you know, across the served vertical. So certainly in our traditional served verticals like automobile manufacturing, food and beverage, pharmaceutical. But in the newer verticals like data center, one of the real engines of our growth there is the conversion from traditional direct digital control in the building management systems to Logix, where people like the high availability, the safety, you know, the ability to standardize on a single control platform for multiple applications. So that's been strong growth for us. And obviously, where a lot of the investment in data centers are is in the U.S., where we have, by far, the largest share.
Great. And is there a way to sort of size, I don't know, the orders you've seen in the data center vertical or, you know, what, what proportion of revenue or orders data center could be exiting this fiscal year?
I'm not gonna pin a specific time on it. We've talked about low single digits, but-
Mm-hmm
... you know, data center continues to invest. It's not unrealistic to think of data centers as 5% of our business, you know-
Yeah
... in a, you know, not too distant future.
Yeah. I think that, you know, you had extraordinary growth in the first fiscal quarter in some areas like food and beverage, and home and personal care, that people might normally think of as being steadier industries, at least the revenue growth of the customers. Why is their spending, why did it have that bounce in the Q1? Any sort of specific comp tailwinds that helped, or they should be set for pretty good growth for the year?
Yeah. So, food and beverage is our largest served vertical. A lot of that activity is still in modernizations, and quite frankly, it's applying areas of new value that we've acquired or built in the last half dozen years in installations that may already have our control, you know, our traditional sources of value. So cybersecurity rollouts and contracts there, being able to add, you know, supervisory control that's tightly aligned with the hardware, where again, we have the, you know, the knowledge and the intimacy of those actual applications. Home and personal care, you know, you think about tissue and diapers and things like that. Actually, that was against a fairly difficult comp, because-
Mm
... home and personal care was growing last year. But we have a great readiness to serve, and again, there, some of the big orders we've received recently had large amounts of product from the so-called production logistics area, so a large amount of mobile robots, for instance. Whereas the project in the past would've been PLCs and drives-
Mm-hmm
... and motion, and that's all great, and we love it. We do. But, being able to add, you know, the new value from mobile robots as those customers also, you know, share that vision of being able to integrate these multiple, you know, parts of modern manufacturing together in a, in a single, architecture.
Great. And then maybe away from the cycle, you know, a lot of questions around the pure, let's say, software business at Rockwell that's not embedded in hardware-
Mm-hmm
... but sold straight to customers. Maybe kind of size that-
Mm-hmm
... business and, where to begin? I, broad thoughts on-
Is it resilient?
Yes.
Yeah, sure. So, look, our Annual Recurring Revenue is a little bit over 10% of Rockwell's total revenue, and that's roughly split between software and high-value services, things like cybersecurity contracts-
Mm-hmm
and so on. Our total software business, just software, is less than 10% of our business, you know, even when you add in the part of software that's sold as a perpetual license. We see no indication whatsoever that that's at risk, you know, and in fact, we see opportunities for us to be a winner, you know, by incorporating artificial intelligence in that software, and there's a few reasons for that. I'll mention some, and then Matheus can add some additional detail to it. But first of all, the software that we provide is closely integrated with the hardware in a runtime system.
Second, you look at the importance of that software in mission-critical applications, often in highly regulated environments, where it has to be performed, the logic has to be solved in exactly the same way over and over, which is a little bit different than the way, you know, an AI-only system would be based. It's highly deterministic. You're closing a control loop, you know, in milliseconds of time. We continue to test our assumptions there, but when you look at our ability, you know, to continue to expand our software, and even grow the value through pricing and, you know, upselling and so on, we feel very comfortable with, you know, Net Dollar Retention rates, you know, of over 100% for large parts of that business.
Yeah, I think it was quite, quite good there. I mean, there's strong network effects beyond what's embedded, you know, computer software. There is a tremendous amount of criticality to the execution, and these are runtime systems. These are not seats on design environments. And there is a fair amount of context that's specific to the industry that creates, I think, a fairly strong moats for us. I would only say that, you know, the cost of software is well beyond the development of the product. It has a lot more to do with managing it through the life cycle and operating the software, which is where we add a lot of value and domain knowledge.
Yeah. Domain expertise still counts for a lot in these sorts of applications, and that's what we have always said, is that it's the combination of the technology with the expertise that sets Rockwell apart and, you know, and creates that moat.
Is the... You know, in terms of the type of software-
Mm-hmm
-product, you know, is it mainly manufacturing execution systems, or MES, that's the lion's share of the pure software?
There's-
Revenue.
Well, I think that's a big piece of it, but you also have the programming tools as well-
Yeah
-that are closely aligned with the specific, runtime of Logix-
Yeah
In particular, where you're actually configuring Logix, you know, to be able to interpret inputs from a wide variety of very specific devices, as well as change the state of the outputs of these other specific devices. So that integration with the hardware is not just the compute surface, but it's also the very diverse universe of I/O, you know, that that system has to be programmed to interact with as well.
That's helpful. You know, I think maybe switching tack towards kind of the cost side of things, and you know, you're one of the more semiconductor-intensive companies at this event in terms of per... Well, selling into the industry, but also purchasing-
Mm-hmm
chips. You know, Matheus, your segment, probably the lion's share-
Mm-hmm
-of that buy across Rockwell. How comfortable do you feel about kind of chip availability in volume, and then also the cost side of it and managing that?
Yeah, we haven't seen an issue. We learned a lot, obviously.
Mm-hmm
during the supply chain crisis back a few years ago.
Yeah.
Memory's getting a lot of attention now. In some cases, we've actually increased our inventory of those memory chips.
Yeah. Yeah, absolutely, we have a lot of learnings from the recent supply chain set of concerns. Specific to memory, our usage is primarily on DDR3, not the DDR4, DDR5, but regardless, we're interested in improving our inventory position so we can service the customer. That's our, by far, our priority, is ensuring service levels there.
Great, and you know, the cost of a lot of things, you mentioned memory chip prices going up. How is Rockwell's pricing strategy playing out? I know that's been a big, kind of, renewed push the last 18 months or so.
Mm-hmm.
You know, what kind of pricing are you pushing through on the hardware side? And, you know, do you need to go and do another round of it just because of inflation of things like chips?... costs at present?
Yeah, we do expect, you know, that we'll be able to continue to get high realization on price. Two broad categories are the annual price increases to cover things like general inflation and, you know, just to capture the value of our products. When we talk about, you know, a point of price, two points of price, we're typically referring to what we're getting on the hardware, you know, part of our business. We're getting price as well in, you know, the engineered solutions. We're getting price in software, but we're not talking about that in the same way as, as-
Mm-hmm.
-the products. And, so there's that piece, and then there's the tariff-related pricing. We've chosen, you know, an approach, to make sure that we remain EPS neutral in terms of whatever, you know, tariffs are thrown at us and our customers, and, to be able to manage that with a high degree of transparency with our channel, with our customers. So if, you know, a tariff was removed, you know, we would be able to do that and still have the same conversation with our customers as we're having with investors, you know, to say that's coming out. But whether it's going in or coming out, it's EPS neutral for us, and so I feel good about that. We continue to look for opportunities to increase the amount of annual price that we can get, on products, with a more surgical approach.
We made a lot of strides, you know, I'd say seven or eight years ago, with more analytics, but there's still plenty more to be done. It's a great data set, very rich data from around the world by customer, by region, and so on, and we expect to continue to focus there as well.
On the margin front, you know, company-wide, you mentioned the kind of to and through view to get kind of to that low mid-twenties, you know, 23%-24% operating margin and then push through it. You know, when you roll together the sort of price initiatives, a pretty good volume growth outlook, you know, what kind of incremental margins, you know, should we be expecting in the medium term?
Yeah. I mean, this year we talked about 40. You know, we still haven't changed the guide, you know, the kind of medium range guide of you should expect 35%. That was up from-
Yeah
... 30%-35%, you know, not too many years ago. I'd kind of like to have a little more wholesale changes in what you should expect midterm, rather than dribbling out, you know, margin a little bit higher in this business segment versus another, incrementals a little higher.
Yeah
... and so on. But we continue to look at that, and I want to make sure that we have a firm line of sight and achieve, you know, the current set of goals. And you know, in due time, we'll talk about the next set of goals. We're not done by any stretch of the imagination. I'd say we're a lot closer to, you know, just getting started, really.
And then lastly, maybe, you know, there has been more interest in kind of, you know, humanoid robots...
Mm-hmm
... on the plant floor, and there's a broad debate around the use case for that. But wondered sort of your perspectives, you know, how is Rockwell positioned for that, if we really see a uptake in that approach?
Well, I'm happy that we got into the robot business directly with the acquisition of Clearpath, and OTTO Motors, AMRs. There's also a Clearpath Research, which does, you know, some of the more, let's say, exotic forms of robots. I don't see, you know, a near-term pervasive use of humanoids. I think there's some good technical reasons for that.
Okay
One is you just don't need that many degrees of freedom for a lot of the tasks in manufacturing. AMRs are, you know, seeing widespread adoption. You're also seeing, you know, the technique of mounting an arm on top of an AMR as a mobile manipulator, and as complex as that equipment is, it's still far less complex than, you know, figuring out the individual, you know, finger dexterity of a of a humanoid. And wheels, in many manufacturing environments, are actually a pretty efficient way of moving things around-
Yeah
... as opposed to a humanoid, which you have to worry about, you know, stability and a rest state, battery life. There are just some other things that...
Mm-hmm
... I don't, I don't wanna say never, of course, and I think humanoids will have application in other, you know, aspects of our everyday life, but, I don't see it as a, as a near-term threat in, in manufacturing.
Great. And with that, we'll turn to the audience, response survey, please. So the first question is around sort of current ownership of Rockwell. So about three-quarters, not yet.
Mm-hmm.
Second question is kind of general attitude to the stock today. That's a pretty balanced... Third question is around earnings growth for Rockwell versus the sort of multi-industry average. So in the middle of the pack. Next question is on uses of excess cash. So buybacks, the biggest portion there. Next question is on valuation multiple, just sort of year one, PE. So around kind of 20-ish x . And last question, kind of what's the biggest anchor on the valuation or reason not to own shares right now?
Mm-hmm.
So organic growth, the biggest question. So we'll see. Well, with that, thanks so much, Blake-
Yeah.
And also Matheus, for being here.
Yeah. Thank you.
Good to be here.
Thanks a lot, Matheus.