All right, rolling along here with Rockwell. Very happy to have CFO Nick Gangestad. Nick's gonna open up with a few comments, and then we'll go right to Q&A. Nick.
Great. Thanks, Steve. I will just take a few minutes to give a overview of Rockwell Automation and share a few of the things that may set the stage for part of the conversation Steve and I will be having, and you in a few minutes. First of all, Rockwell Automation, a company with... Steve, can you help me go backwards?
No. Oh.
Yes, you can. Thank you, Steve. Rockwell Automation, a company that we're dedicated to taking manufacturing to a whole new level. Part of our focus has been, in today's world, our customers are wanting to figure out how to become more resilient, more agile, more sustainable. We believe what we are bringing to the table for our customers helps in that regard. We're a company that's been around for over 120 years. We are predominantly, our biggest share is in North America. About 60% of our total revenue is in North America. I'll say a little bit on the next slide about the different industries we serve. There's different ways we service our customers. We show them as segments.
It would be wrong to think about them as distinct businesses within Rockwell because they're all facets of the value we deliver to the same customer. We have an Intelligent Devices business, which is much of the hardware that we bring to our customers. Most of it smart, chip-enabled devices that talk to one another. It's close to half of our total revenue. We have a Software & Control business. It's a little over 25% of our total. It is software that we provide, as well as the controller Programmable Logic Control that is often the orchestration of what's going on a factory floor.
A number of our customers, like Rockwell to help them from a service perspective, sometimes helping them up front with a project, the way a certain piece of equipment is or a factory is being implemented and designed, all the way to after it's operating, the way we can monitor what's going on and be helping optimize the performance. That's part of our LifecycleIQ Services businesses. All of them, they don't operate independently. They're all part of one face that we provide to our customers. Different industries that we compete in. Part of the strength of Rockwell has historically been in discrete automation, of automation that involves doing something one at a time.
On the opposite end of the spectrum is a process automation, often where there's a flow going on, sometimes involving bigger, more complex control systems. There's hybrid in between that is always a combination of both discrete and process. A good example of that would be food and beverage industry, where there's a flow occurring at one part of the manufacturing process and then later discrete items that are packaged. Part of what Rockwell does is works to have the same architecture across all of the industries that it serves, and that's what we consider unique to Rockwell. Whereas other people competing in this space will have different types of controllers that are involved in process versus discrete.
Rockwell's architecture is the same across the board, and that creates some advantages of simplification for our customer. Our technology stack, what do we do, and how are we growing this technology stack? I'm just gonna start in the middle. Rockwell has a strong product platform of some of the products and software that we deliver to our customers. We are taking that and building that with our digital platform. We have an integrated architecture, we have an open architecture as part of our approach to how we approach automation. And we see in the future of the world there will be expanding need for working in a hybrid space, where years ago, many things were just on-prem in the factory with OT systems just in that factory.
More and more, our customers are interested in the edge or what can be done in the cloud, and that's part of what we're building in our digital platform and some of the new offerings we have. Then finally, taking those product platforms and building industry-specific solutions. We compete in a wide range of industries, as I talked about a little on the previous page, and we're increasingly putting our focus on how to have solutions that are customized, specific to a particular industry to deliver a particular outcome. We're trying to accelerate the way we're going to market to accelerate our pace of growth. Part of that is included what we're acquiring, new technologies we're acquiring, new consulting services we're acquiring.
We recently acquired Knowledge Lens to complement the success we're seeing with our Kalypso Consulting acquisition of a few years ago. Two more significant software acquisitions, both in cloud native, Software as a Service with Plex and Fiix. We also have a strong partner network. I'd say that is one we feel one of the hallmarks of our company, of our strong partnership, whether they be technology partners or channel partners, that we rely on our partnerships for part of our success. Part of it is our talent ourselves, the way we go to market with increasingly capable talent to be accelerating our paths for growth. We have done a number of acquisitions in the past six years. There are three places we focus on acquisitions.
One is information solutions and connected services, so some of that consulting and some of the software acquisitions that we've talked about. We also are interested in acquisitions that improve our market access in Europe or Asia. Finally, acquisitions that improve our capability around advanced material handling. It's a place that we feel is important. It's a place we feel we have some competitive edge, and we wanna continue to build on that competitive edge. Our current outlook for the full year, we're expecting between 11% and 15% organic growth. We do expect currency to hold that back by a couple points for all-in sales growth of 10%-14%.
Except we expect our margins to be approximately 21%, which is a little over 100 basis points higher than what it was in fiscal year 2022. EPS ranging from $10.70- $11.50, and a free cash flow conversion of 95%. We did update that. That is an update from how we started the year with our guidance. We, based on the strength we saw in the first quarter, we raised our full year organic growth guidance, both the top and bottom of the range by a couple points. We also raised our margin expectation by 50 basis points, and that's led to the guidance that I just shared there. The way we see it, we have been systematically adding more ways for Rockwell to win.
We believe we're set up to continue this, our pathway for accelerated profitable growth. We believe we have the right technologies, the right people, the right ecosystem to help our customers take manufacturing to a whole new level. Steve, let's get into our question and answer.
I'm gonna start with a highly unique question, but.
Highly?
Yeah, highly unique. I thought about this one a lot. Can you just talk about the various range of outcomes on a backlog and orders as we move through the year, you know, where you expect to be at year-end? You guys have made some comments on that. You know, just to kinda level set the conversation on those trends, given that you don't update intra-quarter.
Steve, I'm not sure if I'd call that a highly unique question. I'm just challenging that premise a little bit. At our last earnings call, one of the things we said is that we expect that our backlog at the end of this year to be substantially above the normal level that we operate. We typically operate pre-pandemic with backlog levels south of $2 billion. We ended last year with backlog, a total backlog of just over $5 billion. We expect it to be substantially higher. There's a number of scenarios we think about and plan about, the short answer is we don't actually know the pace at which this is going to happen.
For example, if our lead times improve noticeably in the coming quarters, we expect that can have some impact on the timing at which customers place orders. That they could, rather than placing them several months in advance, be placing them more real time. That would create a negative impact in the short term on orders and have a negative impact on backlog. At the same time, we could be seeing continued strength that we're seeing in places like North America, where we're seeing customer interest in resiliency and in some cases redundancy in their supply chain and some of the investments. Some of the things that the government has done with the CHIPS Act or IRA to stimulate even more investment in North America. We could see orders continuing at a pretty robust pace.
I think the short and most honest answer is we don't know exactly where that could end up. We think it will be quite elevated from where it was pre-pandemic. Whether it's equal to the $5 billion that we were at the beginning of the year or slightly lower than that, we just don't know how to call that yet.
Right. It could be a combination of, you know, lead times getting better, and then like you said, as lead times get better, not only are you liquidating backlog, but guys will feel more comfortable placing their orders later. It could be that kind of compounding situation, that would kind of get you to a more normalized trend line.
Even in that type of world, we still see ourselves exiting 2023 with a noticeably higher.
Substantially better than what you were at.
Substantially higher backlog than what we were at before. So much so, Steve, I'd go so far as to say, as we think about our revenue projections in the second, third and fourth quarter for us. They still are very heavily driven by our view of what happens with supply chain versus what happens with demand. Now, that will start to flip with some parts of our portfolio, but for the next three quarters, it's still going to largely be driven by what happens with supply chain.
Is there a scenario where this plays out and you know, supply chain loosens and you have some nice backlog liquidation, the second half is significantly better than expected, you're getting back to this more hand-to-mouth type business model. There's no really way to manage that, right? Is that hard to manage?
I mean, if part of the question is, if we actually get even better access, would we hold back on some of our orders and not ship them to customers? Heck, no. We would be we have customers that really want their product, and we will be shipping that them out to them. That's the part we don't know. It's going to be driven by the pace of what happens with supply chain.
Is there any update on how much of the orders or backlog are, you know, pre-orders? Have you done any kind of additional scraping after the new policy was put in place, maybe take another look at the backlog and try and figure that out? There's some companies that have said it's 10%. Most companies say they don't really know.
I think the policy
Nobody thinks it's real double ordering.
I think the policy you're talking about is in January, we instituted a policy that for orders that are placed for some of our normally make-to-stock type products, that it's an order for that is canceled, and we are doing our part of fulfilling our promise that we hold the right to assess a cancellation fee. That's the policy that I believe you're talking about. To the best of our understanding and engagement with channel partners, engagement with end customers, we really are not seeing that as a very significant influence by on our customers' order pattern. We really instituted that. I think Blake said that back in November.
We really see it as good hygiene, that we just wanted to make sure that we're not inadvertently creating incentives for people to place more orders than they should be because there's no consequence. Part of our rationale is we are placing orders with some of our suppliers that are firm orders that we're being held accountable to, and we want to make sure that we have a good integrity in what we see as what we will have as orders we'll be shipping to our customer. We wanna make sure there's high integrity there. In terms of what we see in that, in that, in our backlog, I don't think there's anything new to add.
There is a portion of it, and I don't know how to tell you what portion of it is, where customers are doing what they should be doing. When we have a longer lead time on something, we expect them to place something further in advance to ensure their proper place in the queue. That's been going there. I will echo what I think you've said other people are saying. We really see little or no evidence of double ordering, of ordering twice as much or duplicating what they really want.
If you take a look back at the first quarter, and that the order rate that you put up in the first quarter, was that roughly what you would have expected? Was it holding up better than you would have expected in, let's say, end of October? You know, or end of September? What, you know, it's more of a, again, more of a backward-looking.
I don't know if I've said it this way before, but I will say it since you directly asked the question. The first quarter orders were slightly better than what we had in our original projections.
Okay.
If you looked at orders by quarter.
Got it. It looks like the lead times are starting to come down a bit, on, you know, the website that you guys provide some of that info around. Most companies at this conference are saying it's getting better, but it's slow, and it's still choppy and certainly not, you know, accelerating. Maybe it's just kind of a steady progression. How do you characterize the supply environment?
I think the words we've been using, I think, for six months now, we expect gradual improvement, I think is still the best way to describe it. That, we don't see a fast acceleration that all of a sudden, many of the constraints are gonna be gone. We do from month to month, quarter to quarter, see a gradual improvement in our supply chain. That said, we certainly still, every week will deal with bad news type calls, where a supplier will call us and say, "Do you know what you were planning on next month and the month after that? We're not gonna be able to ship all of that to you." Why I say gradual improvement is the proportion of those types of calls have been going down over time.
They're still there, but they're not going away.
That's mostly still on chips and boards and things like that? Is there anything?
Chips and other electronic components. That is the majority of the constraints that we're talking about.
Does that suggest that things that are a little bit more, I guess. Well, I mean, everything you do has some degree of electronics in it, so it's pretty much across the board. There's not anything that, you know, really wouldn't have that constraint. Are there any products that are, where it's more severe than others?
Not more severe, but what I'll say is we have some places where it's getting closer back to normal. In our industrial components-
Mm-hmm.
Part of our business where a classic example is a push button. Many of our SKUs in our industrial components are getting much closer back to normal than, I'll say, the more sophisticated parts of our portfolio.
Right. Right.
Even those industrial components, as I said earlier, many of them are smart or enabled with chips in them as well. It's not like they're dumb push buttons that have no logic in them.
Right. Well, the actual push button itself is probably the plastic.
It's connected to some smarts. I don't think that's a technical term, by the way.
In terms of the backlog normalizing, do you think that at this pace we will be normalized by, I don't know, middle of next year?
Yeah. We haven't put a time frame on it. We feel pretty confident it won't be in 2023.
Right.
To say middle of 2024, I certainly could see a scenario like that. I could see a scenario where it's later than that.
Right. Okay. Thinking about the verticals a little bit, you know, obviously everybody talks about EVs and semis. I think that's, you know, pretty well vetted. There's a lot of activity going on there, at least long term. Some of the more nuanced areas like consumer and packaging, I mean, Emerson was in here. They are definitely a more marginal supplier to the packaging machine tool guys. You guys have such an incredible franchise there. They talked about a little bit of weakness in Europe on that front. Anything you guys are seeing on the just starting with kind of the packaging vertical on the OEM side that, you know, any signs of weakness there or slowing or any of that?
You know, nothing. I really don't have any kind of material, any kind of direction of industry by industry of something turning what we would call slightly or more significantly moderately negative. We still are seeing pretty strong growth across all of our verticals. I think the one that I've called out, we've called out multiple times, is in the e-commerce warehousing space. That is a place where we have been and continue to see slowdown in orders or requests from our customers to be pushing out orders.
You guys had talked about that re-accelerating or something in the second half, I thought, in your guidance.
In our view is we see that changing in the second half of the year in our guidance around revenue. I don't think we've made a comment about it from an order perspective turning.
Got it. Okay.
Again, Steve, that is a little bit of the dynamics of, you know, I think it's very helpful what Rockwell shares every quarter, not just to understand what we're seeing, but also to give a glimpse of what we're seeing by industry. I think that's a helpful thing for multiple reasons. I would just caution people, right now what that's seeing is not a representation of demand. It's a representation of what we're seeing with our shipments out. There can be nuances where demand might be really quite strong in a particular industry, but because of the components that we need for that industry, you might see anemic growth. Just means our backlog has grown bigger in that particular industry.
Right. It's interesting that when you mention warehouse and you see weakness in the revenue side, given what others are seeing out there and the way Amazon is talking, obviously, to say that it's, you know, the demand is still strong, that's definitely a disconnect relative to others that play in that industry, whether it's Honeywell or KION or some of their customers. That's why that one is interesting to kind of dig into a little bit. On the oil and gas side, what or just process in general, what are you guys seeing there? Where are you winning on that front? Is that a, you know, an important part of the demand growth and the order growth that you're seeing out there?
In the oil and gas business, you know, part of how we go to market in oil and gas is through our joint venture with Schlumberger or SLB. We have been seeing pretty healthy, nice healthy growth there from an order perspective. That is growing nicely. That joint venture has the same type of supply chain constraints that we're seeing in our core Rockwell business. That's. We see a growing backlog, I'd say proportionally maybe even just a little more severe than what we have in Rockwell as a whole. We're seeing growth in our Sensia business, but even more significant of growing backlog in our Sensia oil and gas business. Process in general, we're continuing to see it's doing well from a growth perspective.
I'd say the orders that we're seeing are also keeping pace with what we expected.
Is that, like, the traditional process stuff? Is there some new metals and mining?
Mm-hmm.
You know, growth that's coming on the back of electrification or anything like that? I mean, what's, what are the key drivers outside of the Sensia JV?
Part of what we've been doing, and some of you maybe saw it in November in our, at Automation Fair or Investor Day, there was quite a bit of new product launches that we've been developing specific for the process industry. Those fill what we felt were some of the gaps in our process portfolio that we think create a even more competitive process line. I know there are other things, but that is one of the things that we think is behind some of the success we're seeing in 2023 in our process industries.
Who do you think, you know, what types of other suppliers do you think you're taking share from? Is it mostly the control systems guys? Is it on the product side? Like, where would you...
You know, I would only be speculating if I said that. I'd just as soon not try to speculate where we think we're taking share there.
I guess if you remind me just where the new products are, like what types of products are those?
Oh.
Drives or?
Those would be within our Software & Control business-
Okay. Yeah.
where a number of those work.
Got it. Shifting over to the discrete side, and auto, you know, both growing, obviously Ice is less the future, but there's still activity going on there. Just talk about your exposure to starting with EVs and where you have kind of the richest content there, and then what you're seeing on the Ice side of the house.
We, we publish to the nearest 5% what is our, what we see as our industry exposure by industry. Automotive right now rounds up to 10%. Of that total of rounding up to 10%, about 1/3 of that is what we would call directly aligned with EV. By EV, we also include battery as part of that, as part of the ecosystem servicing EV. We still have 2/3 on the other side serving the internal combustion side of it, you know, some of it MRO, some of it CapEx on that side. The EV part is the faster-growing part. We see that strong growth there continuing of the orders we're taking.
Some of the things that we see as some of our differentiators, if I just go for a moment to the battery side. Technologies like Independent Cart we see as a significant competitive advantage to us, that it helps solve some problems in the assembly of that battery cell. That coupled with our ControlLogix platform, and even as we get down into the tiers, software that we've acquired such as Plex, that's one of the places where Plex has a good penetration is into the automotive tiers that solves a lot of the problems and it's useful, and that has some specific solutions for that industry. That's another part of where we're seeing wins there.
I'll go further, like, sometimes some of these greenfield EV battery places that are being set up, they just wanna do the whole thing right. Even at the very beginning, we're getting involved in some cybersecurity services where from day one, they wanna make sure their factory is as hardened as it can be from cyberattacks. Those are some of the things where we're seeing wins on the EV side.
How should we think about the Ice exposure? I mean, is that 10% of the company gonna move up because EV's grown and Ice is stable?
I think there's gonna be some kind of displacement-
Yep.
between the EV side and the Ice side. Our view, you've heard me say this before, but I'll repeat it for everyone here. Our exposure into Ice we see as less of a negative than our upside on EV. One of the reasons I say it is we have very little we do today on the Ice side around the engine itself. That's often a CNC machining where we just don't have a lot that we do there. As that part of the drivetrain is being replaced with battery, we feel that's a net win for us.
Net positive. Got it. EV, 1/3 of the 10%, then on the semi side, how big is your exposure there, and how do we think about that globally and what's going on out there now, which is a bit of a pullback perhaps in global spending, but then obviously a lot of investment here in the U.S.
I think there's a couple of dynamics to keep in mind for our semiconductor exposure. If you and I were sitting here a few years ago talking about it, I would have told you most of our semiconductor exposure is in Asia, and it's primarily around the way we manage the building environment. We would have little, very little content involved in the actual manufacturing process in the fab. It would be we're managing the climate and other parts of what happens in the facility. Now, as there's more diversity in semiconductor fab manufacturing, and right here in the United States, that in itself is creating some upside for us where it's going into the United States, where we have naturally a higher share penetration in, for instance, a PLC in a programmable logic controller environment.
We've also been working on diversifying the capability, expanding the capabilities of what we have available. As an example, I talked earlier in batteries around Independent Cart Technology. We're also finding a relevance there where that is helpful in some of the semiconductor, new fabs going up as part of how the wafer is moved through the facility, and that our Independent Cart Technology helps solve some problems there. Just as I said earlier about cybersecurity is something that we are seeing more penetration in semiconductor space. All in, even if the global CapEx has come down from what was earlier, we see it as better positioned, playing to where Rockwell's strengths are.
That one you list is around 5% of sales for semis, I think.
Yes.
Is that?
Yep.
Does that round either way or is that?
I don't actually know if that one's rounding up or down, Steve.
Okay.
You got me on that one.
Got it. Got it. All right, only took 30 minutes to get you on one, so. When thinking about the margins.
Yep.
Should we think about this 35% incremental as, you know, you'll kind of manage to that in any given year? Is there any kind of You've listed the bridge pretty well. Any kind of mix dynamics there that we have to keep an eye on?
Well, first of all, I wouldn't say that we per se manage year to year to a 30%-35% core conversion. That's, I think of that as over time. Now, certainly even at, in a, in a year period, it's something we look at and think about, but I'm gonna put some perspective on it. We are not going to, in years where it looks like we're overshooting the 35%, like, "Oh, let's find some more spending to bring it down to 35%." Conversely, "If we have some good investments that we know are gonna create good value, it'll move us short of the 30%, let's not do it." We don't manage that way.
Over time, we see it as the right framework to think about where we're going in terms of our margin and in terms of the discipline we have about how we'll grow too. Then in terms of our bridge for this particular year, you know, with a 11%-15% organic growth, that would normally. In normal circumstances, they'd be saying, "Oh, I would expect your core conversion to be at the high end or higher than your 30%-35%." I think the only two things I'd point out is two more significant things. We have currency with the stronger U.S. dollar. I'm not taking into account any moves in the dollar in the last two days when I say that.
The stronger U.S. dollar, because enough of our spending base and cost base is U.S. dollar denominated. For instance, almost all electronic components, wherever you buy them in the world, are U.S. dollar denominated in what you pay. There's enough of a U.S. dollar base that the stronger U.S. dollar versus last year is hurting our margin. The second is variable comp. Rockwell company has a pretty noticeable amount of variable compensation. Meaning last year where we were falling short of our expectations, we were paying far less variable compensation. This year, based on our latest guidance, we'll be paying more for variable compensation. That also is having a pretty noticeable effect year-on-year on our margin expansion.
How should we think about the investments and that level going forward? Will that be management in the realm of sales growth?
Total investment spend, there's different places of what we're spending in. First of all, some of our support functions, it's part of our DNA to manage that for productivity. Just year after year, what do we do in productive? Our investment spend that we see as most directly tied to growth, what we're investing in development of new products, what we're investing in accelerating our go-to-market, our sales. This year, they're actually growing, they're not growing as fast as sales, but the year before, they grew faster than our revenue. Where we see opportunities, those could grow as fast as sales, if not faster, if we have enough productivity.
I'll also point out in our supply chain, as in the next year or two, as we hope there will be more predictability on continuity of supply, we think that will also be enabling some productivity enhancements in our manufacturing supply chain itself. It's difficult to run a manufacturing operation when you have to very quickly adjust of, "Oh, this planned shipment didn't come in. I now got to regroup this and start assembling this instead." As it gets more predictable, that will, in addition to revenue benefit, will also help our productivity in our factories.
Got it. Any questions out there? Yeah, right here.
Hi. I know Congress is a little bit of a but there's a point where you have some broader-based investments going down outside of the end of the last quarter. In terms of you raised your guidance on this, can you take your thoughts on, you know, what might be the distinction?
Again, when we raised our guidance, that has almost nothing to do with demand.
Okay.
Yeah. Our guidance for revenue is, I'm gonna say, is 99% a function of what our view is of what supply chain is gonna deliver. It's largely driven by that, starting the year with that just over $5 billion of backlog versus something that's south of $2 billion. That's. I'm just trying to explain the raise in our guidance in that regards. In terms of what another company's seeing, it could be some geographic differences, though I'm not sure why that would see a geographic difference there. It's just not something we are seeing.
Think over here.
If you could add one thing to your business right now that would make it even better, what would it be?
The three things that I listed from an acquisition targeting standpoint, as an example, something that increases our market access in Europe and Asia, that would be something I would do if I could do it on a cost-effective basis. That would be the one I'd very quickly point out.
I mean, Would that be a Kalypso type of thing?
Doesn't have to be. I mean, I think a good example-
Integrator?
A good example on a smaller basis is the acquisition we did a few months ago of CUBIC in Denmark. It. We had some products in that space where our biggest share is for things that are designed for the North America market, and we had a similar version designed for the European and Asian market. We just were not seeing as much market penetration as we felt we should be getting. By acquiring CUBIC and their capabilities, we felt it was the right product, a better product for us to be going to market with for the, for the standards in Europe. Plus, it gave us market access in Europe that we just didn't have organically. I'd call that a small example of what I'm talking about there.
Can you maybe just talk about your current most up-to-date thoughts on PTC?
PTC.
The relationship there.
Very pleased with the relationship there. I believe PTC is very pleased, too. We've been an important partner, where we've been actively selling part of their portfolio, and that's helped our selling process as well, because we have a bigger, more integrated set of solutions that we can go to our customers with. On a commercial regard, we see that as a positive and are pleased with that relationship. At the same time we created a commercial agreement a few years ago, we also created a ownership agreement. At the time we did that, we owned 9% of their outstanding shares. Over the last year to year and a half, we have been moving down that stake slightly. I believe we're...
At the end of the last quarter, we were somewhere between 6% and 7% ownership of their total outstanding shares. We've been liquidating some of that, partly to help fund the acquisition we did of Plex as part of our commitment to delever over the next two years and get our debt-to-equity leverage levels back to the more traditional 2x debt to EBITDA.
Is there some sort of floor to your ownership there? I mean, like, you know, Blake wants to stay on the board, I would assume.
There's no floor. If you read the agreement, as long as we own, 5% or more, we are entitled to one board seat of which Blake currently is sitting.
Right. Okay. Any other questions? Great. Nick, thanks a lot. Really appreciate it.
Thank you so much, Steve.