You for holding, and welcome to Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions.
At this time, I would like to
turn the call over to Jessica Kourakos, Head of Investor Relations. Ms. Kourakos, please go ahead.
Thanks, Amy. Good morning, and thank you for joining us for Rockwell Automation's Q4 fiscal 2020 earnings release conference call. With me today is Blake Moret, our Chairman and CEO Patrick Goras, our CFO and Steve Edsall, our CFO elect. Our results were released earlier this morning, and the press release and charts have been posted to our website. Both the press release and charts include and our call will reference non GAAP measures.
Both the press release and charts include reconciliations of these non GAAP measures. A webcast of this call will be available at that website for replay for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. In addition, we filed an 8 ks and have posted supplemental information on our website related to our new business segments and adjusted earnings definition. Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward looking statements.
Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. So with that, I'll hand the call over to Blake.
Thanks, Jessica, and good morning, everyone. Thank you for joining us on the call today. Before we begin discussing our results and outlook, I'd like to make a few opening remarks. I first want to address Patrick's recent announcement that he will be leaving Rockwell to start a new chapter in his career. In his 14 years with us, the company has continued its long legacy of financial discipline and delivering superior shareowner returns, and we wish him well in his next pursuit.
Many of you know Steve Edsall, who will be stepping in as CFO on an interim basis. Steve has been with us for over 30 years. And over these years has run Investor Relations, Treasury and Corporate FP and A. The Board and I have full confidence we will reinforce our strong financial framework and continued commitment to superior shareowner returns. Patrick and Steve are ensuring a very smooth transition, while we consider internal and external candidates for a permanent successor.
I also want to send my deepest thanks to the thousands of employees who have been working under very difficult conditions, including the temporary pay cuts we implemented in May, to help us preserve jobs and to serve our customers during the pandemic. These cost actions enabled us to protect our company's financial strength and allowed us to continue making important targeted investments to drive our future growth. Now with business conditions gradually improving, we will reverse the temporary pain reductions by the end of November, 1 month earlier than expected. In addition, our guidance for next year assumes a return to a fully funded bonus plan. Because of our employees' hard work and dedication, we have never been so well positioned for what lies ahead.
This is another testament to the type of culture we have at Rockwell, and I couldn't be prouder. Turning now to our Q4 results on Slide 3. While business conditions remain difficult relative to a year ago, we are pleased with the steady improvement we're seeing. In Q4, total reported sales declined by 9% versus the prior year. Organic sales were down about 12% versus prior year, but grew 10% sequentially.
Product sales outperformed our expectations and were driven by better than expected results in drives and motion. Motion performance was led by our independent cart technology, where we received the largest single order in Rockwell Automation's history. We won this multiyear project from the U. S. Navy based on a need for precise, highly responsive motion control not available with traditional systems and on Rockwell's long track record as a dependable U.
S. Supplier. Independent cart provides a new way for us to add value and drive growth. You'll be hearing more about it and other innovative technologies at our upcoming Investor Day on November 17. Turning to Information Solutions and Connected Services.
Organic sales were up low single digits versus prior year. ISCS orders grew double digits over the prior year in both software and connected services. ISCS sales reached approximately 400,000,000 dollars in fiscal 2020 on an organic basis and were well in excess of that when including all of our recent inorganic investments. Demand for software sold as a result of our PTC partnership is also increasing rapidly as we enter the new fiscal year, and we're very happy with the recent extension and expansion of this relationship. Together with PTC, we added over 200 new customer logos in fiscal 2020 and deal sizes in our information solutions software business continue to grow.
The synergies of our combined offering are very evident to customers. In Connected Services, our recent Calypso acquisition is doing particularly well and is helping us further differentiate. Calypso was already contributing to some large competitive wins and they just had the best orders quarter in their history. Total sales include a 3 point positive contribution from inorganic investments, led by our Sensia joint venture along with the Calypso and Apsum acquisitions. Total backlog in the quarter grew double digits versus the prior year and grew high single digits on an organic basis.
Our Q4 Solutions and Services book to bill was 0.87 and full year book to bill was over 1. This Solutions and Services book to bill does not include the large independent card order we received from the U. S. Navy. Turning to profitability.
Strong segment operating margin performance of over 20% in the quarter was flat with last year on lower sales underscoring our increasing business resilience. Free cash flow was also very strong, reinforcing our solid balance sheet and liquidity position. Let's now turn to Slide 4, where I will provide a few highlights of our Q4 organic end market performance. Our Discrete Markets segment declined approximately 10% with Automotive performing better than we expected, driven by stronger MRO and project sales. Among the more notable projects in the quarter was a significant OT cybersecurity win in Europe with 1 of the major German car companies.
And in electric vehicles, we saw momentum continue in the industry with battery manufacturers and brand owners. We're excited by recent announcements from both new and established automakers as they focus on production of compelling new EV offerings. In semiconductor, we had another very strong quarter and grew high single digits versus the prior year. This vertical is benefiting from a variety of secular tailwinds, such as the rise of smart devices and the resulting Internet of Things, along with the need for faster data centers and the adoption of 5 gs wireless technology. In addition to facilities management, which has been a strong foundation for us, we see an opportunity for our material handling technology as well as our software.
In e Commerce, we had a significant expansion win at Kloostermanns, one of the largest and most important suppliers to the global ecommerce industry. This is another industry with long term secular tailwinds that will continue to invest in automation and industrial software to support its tremendous future growth. Turning now to our Hybrid Market segment. This segment declined a little less than 5% and outperformed the Discrete and Process Industry segments. Food and Beverage and Life Sciences each declined low single digits for both the quarter and for the year.
Packaging OEMs had another strong quarter and delivered double digit growth versus the prior year. We believe these markets will outperform in fiscal 2021. Deco Industrial outperformed other industries in the quarter, driven by growth in water, where we continue to benefit from a differentiated offering that integrates control, power and industrial software. Tire and Rubber was down double digits but performed in line with our expectations. In the quarter, we had key wins on important strategic accounts, including Cooper Tire, continues to strengthen its global track and trace capabilities to support the company's long term growth plans.
They chose factory talk software because of our strong MES and analytics capabilities and our differentiated ability to connect to both Rockwell and non Rockwell control platforms. Once again, a strong software portfolio, our ecosystem of best of breed partners and our expertise in connecting diverse manufacturing environments were all important reasons Rockwell won this very competitive project with Cooper Tire. Process markets were down approximately 20%. Oil and Gas was a little weaker than we expected, but that was partially offset by better than expected performance in most other process markets like mining and pulp and paper. Sensia held up fairly well during the quarter and continues to demonstrate their competitive differentiation.
Turning now to Slide 5 and our organic regional sales performance in the quarter. North America organic sales declined by 12% versus the prior year. Business conditions improved through the quarter, particularly in products, where orders significantly exceeded our expectations. While our large independent cart win was part of that result, we also saw great software orders within Information Solutions that more than doubled versus the prior year, creating strong momentum entering the new fiscal year. In EMEA, sales declined 12%, largely due to CapEx delays.
These were partially offset by strong growth in Water. We also saw growth in Life Sciences and PPE related machine builder business. Sales in the Asia Pacific region declined 9%, largely due to declines in end user business within automotive and mass transit. Double digit growth in Mining and Life Sciences partially offset those declines. China sales declined, but orders grew mid single digits year over year in the quarter.
Latin America declines were led by mining and oil and gas. Let's now turn to Slide 6 to review highlights for the full year. It's an understatement to say that fiscal 2020 turned down very different than the plans we discussed together at a great Investor Day during an incredible automation fair in Chicago last November. The shadow of the pandemic soon created unique challenges, but I'm proud of our ability to respond while taking big steps forward in the execution of our strategic vision. We kept the safety of our employees at the top of our list and continue to provide dedicated service to our customers, many of whom are producing the food, water, protective gear and medicine that keep us going.
The pandemic has focused us all on what's truly important. We took thoughtful actions to manage costs through this pandemic, but at the same time protect strategic investments, including some very big internal development projects. And you can see those investments drive the performance of our software business, which reached over $500,000,000 in revenue in fiscal 2020 and was one of the best performing areas of our business in both orders and sales this year. We deployed over $500,000,000 for inorganic investments that contributed almost 4 points to our top line growth, and we deployed over $700,000,000 in cash for dividends and repurchases enabled by our strong free cash flow. I'm tremendously proud of what we've accomplished in fiscal 2020, and I'm excited about the resulting momentum as we enter fiscal 2021.
Turning now to our outlook on Slide 7. As I said earlier, we saw strong sequential momentum exiting the year. Industrial production is projected to grow in the second half of our fiscal year. So it may take a couple of quarters for us to climb back to year over year sales growth from the Q3 trough in fiscal 'twenty. We expect double digit year over year growth during our 3rd and 4th quarters.
Of course, we're all closely monitoring global infection levels related to this pandemic, but we are not assuming a widespread shutdown of customer manufacturing operations. We expect reported sales to grow about 7.5% at the midpoint of the guidance range, including 5% of organic growth and over 1 point of growth from our fiscal 2020 fiscal 2021 acquisitions to date. In addition, we are adopting annual recurring revenue as an important metric for the company and have added ARR as a performance metric in our incentive compensation framework beginning this year. ARR is expected to grow double digits in fiscal 2021 after showing over 6% growth in fiscal 2020. This is further evidence of our ability to build an even more resilient business model.
Adjusted EPS is expected to reach $8.65 at the midpoint, which is up 10% from last year's fiscal 2020 results. We're targeting free cash flow conversion of 100%. A more detailed view into our outlook by end market is found on Slide 8. I won't go into the details on this slide, but as you can see, we expect positive organic sales growth in all of our key end markets next year with the exception of oil and gas. With that, let me now turn it over to Patrick, who will elaborate on our Q4 fiscal year 2020 financial performance.
We'll then have Steve discuss our fiscal 20 21 outlook in his remarks. Patrick?
Thank you, Blake, and good morning, everyone. I'll start on Slide 9, 4th quarter key financial information. Sales, segment margin, adjusted EPS and free cash flow were all better than expected in the and were up 10% sequentially versus Q3. And were up 10% sequentially versus Q3. Compared to last year, Q4 organic sales were down 12% and acquisitions contributed just over 3% to total growth.
Currency translation was a smaller headwind than expected and decreased sales by 0.3 points. Overall, company backlog increased year over year in the quarter. Backlog for our short cycle products was up double digits from a year over year and sequential perspective, even excluding the very large independent card order Blake referred to earlier. Segment operating margin was 20.2%, the same as last year. The negative impact of lower sales was partially offset by a combination of temporary and structural cost actions.
4th quarter results included about $10,000,000 of restructuring charges, which are expected to yield over $15,000,000 in additional annualized structural cost savings. Most of these savings will be realized in fiscal 2021. General corporate net expense was 22,000,000 dollars pretty much in line with what we expected. As I mentioned earlier, adjusted EPS of $1.87 was better than expected, mainly as a result of better organic sales, productivity and a slightly lower tax rate. I'll cover a year over year adjusted EPS bridge on a later slide.
The expected due to a slightly different geographic mix of our pretax income. Free cash flow performance remains strong. We generated over $300,000,000 of free cash flow in the quarter, well over 100% conversion on adjusted income. Note that this result includes a voluntary $50,000,000 pretax contribution made to the U. S.
Pension plan. This voluntary pension contribution was not reflected in our prior guidance. Slide 10 provides the sales and margin performance overview of our operating segments. Organic sales of both segments improved significantly compared to last quarter. Both segments were up about 10% on an organic basis compared to Q3, though organic sales remained lower compared to last year.
Segment margin of both segments increased over 300 basis points compared to Q3, mainly due to higher organic sales, but also as a result of cost control, including a full quarter benefit of our cost reduction actions and generally improving operating efficiencies. Compared to last year, Architectural and Software margins were up 100 basis points despite the impact of lower sales, mainly as a result of our cost actions, including lower incentive compensation. Segment margins for the Control Products and Solutions segment declined 60 basis points compared to last year with cost actions offsetting most of the impact of lower organic sales. The next Slide 11 provides the adjusted EPS walk from Q4 fiscal 2019 to Q4 fiscal 2020. As you can see, core performance was down about $0.15 on a 12% organic sales decline.
This implies core earnings conversion that is excluding the effects of acquisitions and currency of a little below 20%, which is a bit better than the outlook I shared with you in July. A positive adjusted EPS contribution from acquisitions is offset by unfavorable currency impacts. Slide 12 provides key financial information for full year fiscal 2020. After a good start to the fiscal year, we experienced significant year over year sales declines in the second half as a result of the COVID-nineteen pandemic. Organic sales declined 8% for the fiscal year.
Our cost reduction actions protected key investments and helped to partially mitigate the impact of lower sales. We selectively increased investments in some of our highest priority areas. R and D expense was about flat compared to fiscal 2019, and R and D as a percent of sales increased further to 5.9% of sales in fiscal 2020. Full year segment margin remained at about 20% compared to record 22% segment margins last year, and adjusted EPS was down 11%. Free cash flow performance remained strong and excluding the $50,000,000 voluntary pension contribution in fiscal 2020 was flat compared to last year.
Free cash flow conversion was over 110% of adjusted income. And finally, return on invested capital remained well above our target of over 20%. Before I turn it over to Steve, I want to mention that we deployed about $1,300,000,000 of capital towards acquisitions, dividends and share repurchases in fiscal 2020. Our capital structure and liquidity remained very strong. At September 30, our fiscal year end, cash on the balance sheet was over $700,000,000 and our total debt was about $2,000,000,000 During the Q4, we paid off the $400,000,000 term loan that we executed earlier in the year and our net debt to EBITDA ratio at September 30 was 1.0.
With that, Steve? Thank you, Patrick.
Moving to Slide 13, product order trends. This slide shows our daily order trends for our products, which account for about 2 thirds of our overall sales and represent our shorter cycle businesses. As we expected, order intake for products continued to improve during the quarter. Our guidance for fiscal 2021 assumes this trend will continue. Daily product order performance through October continued to improve on a year over year basis, down low single digits.
Solutions orders are recovering slower than product orders. Let's move on to the next slide, 14, guidance for fiscal 2021. As Blake mentioned, we are expecting sales of about $6,800,000,000 in fiscal 2021, up about 7.5% at the midpoint of the range. We expect organic sales growth to be in the range of 3.5% to 6.5% and about 5% at the midpoint of our range. From a calendarization viewpoint, we expect first half organic sales to be down compared to fiscal 2020, followed by a stronger second half with organic sales up mid to high teens.
As a reminder, first half fiscal twenty twenty organic sales were about flat, followed by double digit declines in the second half. We therefore expect easier comps starting in Q3 of fiscal 2021. We expect segment operating margin to be between 20% 20.5%, probably at the higher end of that range. At the midpoint, our guidance assumes full year core earnings conversion, which excludes the impacts of currency and acquisitions of between 30% 35%. As we mentioned last quarter, we expect to offset $150,000,000 year over year headwind related to fully funding our incentive compensation and reversing fiscal 2020 temporary cost reduction actions with additional productivity.
We expect the full year adjusted effective tax rate will be about 14%. This includes a 300 basis point benefit related to discrete items, which we expect to realize late in the fiscal year. Our underlying adjusted effective tax rate is expected to be 17% to 18%. As disclosed in our earnings release, we are modifying our definition of adjusted EPS beginning in fiscal 2021. Under the new definition, we are now also excluding purchase accounting depreciation and amortization expense from adjusted EPS.
This has the effect of increasing adjusted EPS by approximately $0.20 on a full year basis. Please note that we filed an 8 ks this morning that provides historical information reflecting the new definition of adjusted EPS as well as recast historical information for our new operating segments that we announced previously. Our adjusted EPS guidance range on a new basis is $8.45 to 8.85 This compares to fiscal 2020 adjusted EPS of $7.87 on a new basis. On an apples to apples basis, at the midpoint of the range, this represents 10% adjusted EPS growth on about 5% higher organic sales. We expect adjusted EPS to improve throughout the year and anticipate Q1 fiscal 2021 adjusted EPS to be lower than our fiscal 2020 Q4 performance, primarily as a result of a 0 point 3 zero dollars sequential headwind related to increased incentive compensation expense and the reversal of our temporary cost actions as of the end of November.
Finally, we expect full year 2021 free cash flow conversion of about 100% on adjusted income. This assumes $150,000,000 of capital expenditures and a $50,000,000 voluntary pretax U. S. Pension contribution. A few additional comments on fiscal 2021 guidance.
Corporate and other expense, which we previously referred to as general corporate net expense, is expected to be around $105,000,000 Net interest expense for fiscal 2021 is expected to be between $90,000,000 95,000,000 dollars a little lower than fiscal 2020. Finally, we're assuming average diluted shares outstanding of about 117,000,000 shares. The next slide, 15, provides the adjusted EPS walk from fiscal 2020 to the fiscal 2021 guidance midpoint. Moving from left to right, fiscal 2020 adjusted EPS was $7.68 on the old definition. Next, you see the $0.19 impact of the new definition of adjusted EPS.
So fiscal 2020 adjusted EPS on the new basis was $7.87 Core performance is expected to contribute about $1.90 This includes the benefit of higher organic sales as well as the benefit of our cost reduction actions. Reinstatement of the bonus and reversal of the temporary cost actions together will be a headwind of about $1.15 As mentioned last quarter, we expect these headwinds to be offset by productivity, which is in core. Currency forecasts project a weaker U. S. Dollar compared to fiscal 2020, which should contribute about $0.10 to EPS.
The higher tax rate is expected to be about a $0.15 headwind. Acquisitions made during fiscal 2020 and so far this year expected to add about $0.10 Note that Sensient is now in core as October 1 was the 1 year anniversary of the formation of that joint venture. As mentioned at the midpoint of our guidance range, adjusted EPS is $8.65 Moving on to the next slide 16, I'll make a few comments on our capital deployment framework. You may recognize this slide from our last Investor Day. Our capital deployment priorities remain the same.
Our first priority is organic growth. After that, we focus capital deployment on inorganic activities. Then we focus capital returns to shareowners through our dividend and then repurchases. Our capital deployment plans for fiscal 2021 include dividends of about $500,000,000 As a reminder, we announced a 5% dividend increase last week. Consistent with our past track record, we expect our remaining capital deployment to include a balance of inorganic investments and share repurchases.
We resumed share repurchases on October 1, the beginning of our fiscal year. In summary, our guidance assumes a continued sequential improvement in organic sales performance. Cost actions are expected to offset the significant headwind of reinstating incentive compensation and reversing temporary cost actions. And we expect about 10% adjusted EPS growth and continued strong free cash flow conversion. Turning to Slide 17, I'll finish with a comment about our new segment structure, which is effective for fiscal 2021.
As a reminder, our Q1 fiscal 2021 results
will be reported in the
new three segment format as shown here. With that, I'll turn it back over to Blake for some closing remarks before we start Q and A.
Thanks, Steve. We continue to see our customers take steps to increase their resilience, agility and sustainability. Resilience includes investments to reduce single points of failure with the growing list of companies announcing plans to build or expand North American operations. Our strong market share in the U. S, Mexico and Canada make us a natural beneficiary of these plans.
Other measures to increase resilience include increased automation, traceability and remote monitoring, which are all Rockwell's strengths. We're making investments in our own operations, which we'll showcase during next week's Investor Day. Our contribution to operations agility is demonstrated by our great results in consumer and life sciences packaging equipment and the growth of our software to manage the increasingly dynamic SKUs offered by our customers. The pandemic has prompted new food and beverage packaging formats, along with quantities of testing kits, therapeutic drugs and hopefully very soon doses of vaccines. Quite simply, these cannot be manufactured at the necessary scale, safety and quality without automation.
We're proud of the role our innovation is playing at Pfizer, Roche and many other companies as we help the world recover. The sustainability of industrial processes is only increasing. Clean drinking water is one of the reasons our eco industrial focus is so important for the future, along with electric vehicles and the everyday ways our products reduce energy consumption in every industry. This expanded value gives us optimism for the coming years. In fiscal 2021, we are guiding to high single digit reported growth, paced by our highest margin segment.
This results in guidance that also includes double digit EPS growth. I'm looking forward to telling you more about our plans next week with the help of great customers, partners and a very talented Rockwell leadership team. With that, let me pass the baton back to Jessica to begin the Q and A session.
Thanks, Blake. Before we start the Q and A, I just want to say that we would like to get to as many of you as possible. So please limit yourself to one question and a quick Thank you. Amy, let's take our first question.
Thank you. Your first question comes from the line of Scott Davis with Neulis Research. Scott, your line is open.
Hey, good morning, guys.
Good morning. Good morning.
And congrats, Patrick. Good luck. You'll be missed. I'm sure.
Thank you, Scott.
This contract with the Navy is interesting. I mean, I haven't heard you about independent card in a while. What is the U. S. Navy doing with the technology?
Scott, we can't talk in specifics about the particular application, but I can tell you that independent card in general allows for more precise motion control than some of the traditional methods of servo amps and other types of technology. So with the kind of acceleration and deceleration profiles that are needed for some of these high performance applications, independent card was really a differentiated solution. It also has to operate in, as you can imagine, very difficult environments. The final point is that while we don't talk as much about our government business, Rockwell has been a trusted U. S.
Supplier to the government for a long time. And so some of these premium high performance applications were a natural fit.
Okay. Makes sense. And then you mentioned, Blake, PTC helping you add 200 new customer logos. What I know that it might be a little bit varied, is there any general theme around what type of new customers you're able to bring in? Any particular end markets, geographies, that type of thing that
you could point to?
Scott, one of the things that we've really been proud of our partnership with PTC is the diversity of customers and geographies that we've been able to penetrate with the combined offering. So while food and beverage and consumer facing industries, as they are large for Rockwell's overall business are the source of a lot of the applications. It goes across automotive and mining as well as many of the other industries that we talk about all the time. It gives us new ways to win in these. And some of the things that we're most excited about that we've talked about before that it's not just on top of Rockwell control systems.
About half of these applications are going on top of competitive control systems. So it's a new way to add value and to be meaningful in those customers' digital transformations. It's really across the various industries and across the geographies. We have wins in every geography we serve.
Okay.
Very helpful. Thanks and good luck guys. Thanks Scott.
Your next question comes from the line of John Inch with Gordon Haskett. John, your line is open.
Thank you very much. Good morning, everybody, and congratulations, Patrick.
Good morning, John. Thank you.
Welcome. Do you guys expect the cadence of the 10% core sequential sales to be sustained throughout the year? I realize I'm aware of your mid single digit core year over year, but if you talk to me about just sort of the sequential cadence and do you expect that to sustain itself or if not even perhaps accelerate over the balance of fiscal 2021 as part of your guide?
Hi, John. This is Steve. We expect a gradual sequential recovery throughout the year, including into the Q1. And as we said on the call, that implies a first half decline year over year and then a second half year over year growth rate of mid to high teens.
Yes. What I would also add, John, is that we did see good orders in October in terms of improvement. So particularly on the products, that was an encouraging sign as we entered the year. We have to say that Services and Solutions and Order Recovery is lagging behind those product orders, but products are really the leading indicator that we look at.
Right. So right. I understand year over year, but does that translate into like how does that translate in terms of your expectations in terms of sequential improvement? Like we did 10% this quarter, do you expect that to slow in the December March quarters and then pick back up? Or just a little bit more color on how you think of this sequential trend?
Yes, John. I think it's best to think of it as a mid single digit quarter to quarter sequential growth in fiscal 2021.
Okay, good. No, that's helpful. And then just as a follow-up, on your Page 15 on your EPS walk, where did the structural actions fall? I think you said in core, I just want to confirm that there's no structural actions that are sort of offsetting the temporary return like you've split it. And maybe I remember Patrick last quarter you talked about you're going to take out some redundant facilities, maybe some sales offices and stuff.
Is there a way to quantify the carryover of the structural impact in EPS? So I see the $1.15 headwind, What is that mapped against in terms of the structural takeout that is in response to the pandemic, right? Like would have been
John, the $1.15 headwind that you see there on the walk is this is a bonus reversal sorry, bonus reinstatement and the temporary cost reversal. That bonus is about $115,000,000 in and of itself for the full year. I will point out by
the way as it relates
to the bonus, it's obviously a full year headwind. The biggest headwinds we'll see on that year over year bonus is in the second I'm sorry, yes, Q2, but each quarter will have some headwind. In terms of some of the structural savings and so on, that on that bridge that's all in core. We have about $60,000,000 of structural savings, which relate to restructurings that we've taken over the last several quarters, including in Q4. And then there's some other cost reduction actions through cost improvement, if you will, through increased efficiencies in our plants and so on as volume increases.
Great. No, that's quite helpful. Thanks very much everyone.
Appreciate it.
Thank you, John. Thanks.
Your next question comes from the line of Julian Mitchell with Barclays. Julian, your line is open.
Hi, good morning and thanks Patrick for all the help and look forward to working with you again Steve. Perhaps the first question just around the top line again. Understand that I think you called out good orders and good backlog trends in the short cycle business and products. I wanted perhaps to focus on that solutions and service and process piece. I think the process sales were down 20% or so in Q4.
You're guiding for low single digit growth in the year ahead. Maybe help us understand how quickly do you get to that return to growth in fiscal 2021? And when we could start to see that solutions and service book to bill look a bit healthy? I think it was down year on year, the book to bill in Q4.
That's right, Julien. And typically, the book to bill is down for Solutions and Services in Q4 as we see normal seasonality increase the amount of shipments in the quarter. That being said, we are expecting orders to pick up in the first half of the year. Oil and Gas is probably the most subdued. And as we talked about in some other areas like mining and pulp and paper, the activity is a little bit more vigorous.
We continue to focus on the OpEx expenditures in oil and gas through Sensia. I would also say if we look at the typical performance of our various businesses as we come out of a downturn like this, products are almost always going to lead the solutions and services orders. We've seen that repeated over many years in multiple cycles. So we're not surprised by this. But at the end of the day, you have to compete and win for each order that's up.
There's still business out there. We are confident that, that activity is going to increase, but we have to be on the winning side as that business comes up. And that's what we're focused on, not only with our traditional resources, but with some of the new acquisitions that are really helping in that space. And I mentioned Calypso, but there are other unsung heroes. So when we look at some of the acquisitions in OT cybersecurity with Avnet and Orlo, when we look at MES Tech and the ability to quote even more competitively for the delivery of software based projects, those are all going to help us recover just as fast as possible as those projects increase in frequency.
Thank you. And then maybe, Blake, just a more strategic one and perhaps we'll hear more about this at the Investor Day, but it did seem as if the broadening of that strategic alliance with PTC was quite substantive that you talked about a couple of weeks ago. Maybe give us some background as to why the relationship now includes PLM and SaaS and maybe how your own perspectives on the benefits of co offering PLM may have shifted, if at all?
Sure. Julien, a couple of aspects of the expanded relationship. The starting point is that we have a great foundation. The pace of competitive wins is picking up. I mentioned before that it seems to be catalyzing the increased size of all of our software wins, not just what we're doing directly with PTC, but on the MES side as well, for instance, and in our own FactoryTalk Analytics offering, another specific example of the way that the partnership is evolving is that we're focused on annual recurring revenue now.
So it's not just about the new annual contract value of wins, but it's also about the total value of the business, including the renewals. And of course, that's absolutely essential for us to be on the same side of the table as we're both focused on increasing that recurring base. Specifically with respect to PLM and Onshape and some of their offerings, we see the opportunity to help pull through PTC in some of these digital thread opportunities. We preserve an open approach and respect customers' installed base. But having the ability when a customer is looking at PTC, the ability to include that in the Digital Threat offering is proving to be very valuable.
And with the recent acquisition of Calypso, we have formidable capabilities with respect to digital thread. So this is just another tool that we have at our disposal and we continue to look for meaningful ways to integrate PTC technology with our own offering, not just on the software side, but also really importantly on the way that data is pulled from the control and brought up to that information layer.
Great. Thank you.
You're welcome.
Your next question comes from the line of Jeff Sprague with Vertical Research. Jeff, your line is open.
2 from me. First, just
kind of on the software and control side. Thanks for the timely restates. Kind of interesting, right? Software and control kind of in the 2 worst quarters of the pandemic, basically performed in line with intelligent devices. I wonder if you could just speak to your view of kind of resiliency in that business over time.
And as part of that, if we're going to talk ARR, can you baseline us on what it is for the fiscal year 2020 so we are kind of level set here?
Yes. Jeff, I'll make a couple of comments and then Patrick and Steve may add to that. I mean software and control includes the essential heart of a control system. The control function, whether it's based in hardware or software or a combination of the 2, is processing the inputs and changing the states of outputs. And that's going to remain a persistent part of control systems in all of the industries that we serve.
We see some evidence of that, as we talked about the great performance in packaging OEMs, CompactLogic really performed quite well relative to the rest of the control during the last couple of quarters. So we think that that's an essential functionality. And regardless of where the execution point moves from hardware and firmware to pure software or back, depending on customer preferences, we're confident that we can continue to perform very well there. On the software side, the pure software side, we are increasing the focus on ARR. It's a little bit over 5% of sales currently.
And as we talked about last Investor Day and as we talk about again next week, the goal is to bring it to 10% and more in the next few years, and we think we're on a good path to do that. I should add, it takes all hands on deck to make that happen. It starts with great software, either that we're developing ourselves or that we're buying. It also includes increasing our selling capabilities and a significant part of our recent investments is adding sales who have a specific focus on software and also the infrastructure within the company to make sure we do a great job of processing those orders and that we're decreasing churn rates and so on. So it's really the full company on board in an integrated effort to grow that.
And then separately, just on the decision to go ex Amort, just interested in the philosophical decision there. I mean we've seen it happen at other companies, so certainly you're not alone. Most of the places that happened, there was kind of an investor push for it because amortization was quite high relative to GAAP EPS and there was a clear disconnect here. What should we, if anything, glean from making this adjustment, right? It's kind of 2% of earnings.
I guess my read would be we've got a much more active M and A pipeline coming at us, but any color there would be greatly appreciated. Thank you.
Sure. This is Steve. Yes, we did a lot of benchmarking. As you said, we did get a lot of investor input as it relates to this. We obviously have been on a path doing more acquisitions than perhaps in our history.
We have a goal of growing top line more than a point per year from acquisitions and we have been doing more. And we thought now was the right time to make the change and come more in line with a lot of other companies that we compare ourselves to. To. Thank you.
Your next question comes from the line of Steve Tusa with JPMorgan. Steve, your line is open.
Hey, good morning. Good morning, Steve. So just
thinking about kind of the sequential or I guess
the
year over year performance maybe a little bit better because John kind of got you on the sequential side. 2Q last year, you guys outperformed almost everybody by a lot. Anything you guys want to kind of highlight as far as the project comps there at all in the Q2 that we should take down of in our models?
Steve, I think we're in a period of time in general where things are going to be highly variable by geographies and by end markets and by end user OEM split. So if we're looking at top line there, you're correct that in Q2, it looks like our performance last year outpaced pretty much all of our competitors. And during this time, relative position and amount of business in different parts of the world, I think, are going to have a big impact on the results. In general, the theme is, of course, towards recovery. And as we said, as we pull out from the Q3 trough, we expect gradually recovering conditions and a return to strong year over year growth in Q3 as industrial production returns to growth and as we have easier comps.
The other point I would make regarding Q2 that you mentioned of fiscal 2020, it was broad based. Automotive, I think, was a bit of a positive surprise, but it wasn't just automotive. There were a number of industries that were positive in the quarter.
Okay. And then just yes, go ahead, sorry.
I'm just going to elaborate a little bit on what I mentioned earlier since you brought up Q2, but of our bonus headwind of $115,000,000 for the full year, the headwind is going to play out by quarter something like $10,000,000 headwind in Q1, dollars 45,000,000 to $50,000,000 in Q2 and approaching $30,000,000 per quarter in Q3 and Q4.
Okay, great. Thanks for the color. And then just lastly on these new segment breakouts, on the software and control side, I mean, I think the majority of those sales are kind of logics and the PLCs. Those margins in, I think, 2019 at the peak were 30% for that segment. Given that the vast majority of that segment is the hardware, can I assume that that hardware sale is pretty high margin for you guys?
Well, yes, no question that Logic's Hardware is good margin for us. If you do the math and you look at what we provided on fiscal 2020 breakout by segment, about $1,700,000,000 in software and control, and all of the software is in this segment. So that, we said, is over $500,000,000 in fiscal 2020 of the Pure Software. And then I should also mention that this is the segment that is currently attracting the majority of our investments. So whether it's in logics or it's in the software development, as a percentage of sales, this segment would have the highest investment.
Right. And then PTC related sales that come through there, I think you said, will flow through at your kind of normal incremental margin. So you're basically booking similar margins on those PTC sales,
if you will? Steve, the way you can think about it, if we package PTC in offering to one of our customers, we probably achieve between 30% 40% incremental margins there. So in line with overall company average, more of course than if it would be our own controllers or our own software.
Your next question comes from the line of Andy Kaplowitz with Citigroup. Andy, your line is open.
Good morning, guys. Patrick, congrats. Steve, looking forward to working with you again.
Thank you, Andy.
Blake, I know you spoke about this a bit in your prepared remarks, but can you give us a little more color into what you're seeing in terms of your customers either reshoring or investing to avoid single points of failure? We know you've talked about in the past, life sciences, semiconductors. Are you seeing investment continuing to increase in these sectors or actually increasing outside of these sectors? And when you think about the order uptick you've seen, would you characterize a significant amount of orders as related to this type of investment? Yes.
As we've talked about before, Andy, Life Sciences is probably the area where we have the longest list of customers that have announced plans to do things in the U. S. Some of these have been public about what they're doing. You think about what Becton Dickinson is doing, Sanofi and so on and other customers that we're working with, but they haven't yet disclosed that publicly, and so we respect that. We've also seen some high profile semiconductor announcements.
We've talked in the past about Taiwan Semi and the work that we're doing with them. And there's some others out there in other industries, consumer electronics, consumer tools. I'd say it's a steady cadence, and we have, let's say, get started kits, if you will, to work with customers who are considering doing these sorts of things that our salespeople are familiar with. It's really a part of the overall attempts for resilience. So we're not seeing an avalanche of that reshoring.
We see it as steady. But the business that's coming out of it, it's meaningful. It's certainly in the 1,000,000 of dollars that we're seeing there.
Thanks for that, Blake. And then can you give us more color into what you're seeing in the automotive markets? You mentioned it was better than you expected, but down 20% in Q4, as you know, was only modestly better than Q3's decline and auto builds did improve materially globally. So we know you're dying to automotive being up 10% in FY 'twenty one. Was there anything that kind of held you back in Q4 versus builds?
And maybe update us on sort of the EV transition we're seeing, it seems to be accelerating a bit. That should help you, I think, as
you go into
2021? Yes. We did see, as with almost all our industries, good sequential. It was double digit sequential increase in automotive, so up 20%. Gives us optimism.
And as we talk about fiscal year 2021 getting to around 10% growth in automotive, We think we have a line of sight on the projects and the improving MRO to substantiate that. And obviously, within there, areas like electric vehicle that we think are particularly good for us as we see higher win rates in EV than across the general portfolio for Automotive.
Thanks for that Blake.
Thanks Andy. Welcome.
Your next question comes from the line Andrew Obin with Bank of America. Andrew, your line is open.
Hi, guys. Good morning.
Hey. Good morning, Andrew.
So Patrick, congratulations. And Steve, look forward to working with you again as everybody has mentioned. Yes. Thank you. Maybe Patrick, I'll ask you a question about Mexican FX.
Just a couple of questions. So first, you also announced in addition to PTC partnership, you also announced the expansion of your partnership with Microsoft. And I was just wondering because Microsoft is aligned with PTC, but yet they're trying to do their own thing in industrial vertical. Can you just talk a little bit more what it is you are doing more with Microsoft? Because clearly you guys have been aligned for a long time, but is there anything new there?
Is there more focus on SaaS, more focus on cloud? So that's my first question.
Sure. The primary focus and we'll be demonstrating some of our new capabilities that are already well along in the areas of design as well as information and using a SaaS approach for new capabilities. So these really complement our existing capabilities and are kind of a forerunner of a significant amount of new functionality, both on prem and in the cloud that customers will see over the next year or so. So it's really it's focused on combining forces, using their expertise with Azure and our OT expertise to provide new design tools for customers and we're very excited about it. I'm excited not only about the functionality, the specific functionality that's going to bring, but it's the pace with which we were able to join forces, assemble teams and to come together to create new value.
From the first meeting really that we talked about this with Microsoft to now, it's been less than a year. And that's a great foreshadowing of things to come.
And do you need to reconfigure your sales force or add sales to sort of do more of these SaaS Azure sales?
We're certainly going to be adding additional talent and learning new motions within our sales force. But it's really a microcosm of the overall convergence of IT and OT. Our home field advantage is our understanding of these customers and operational technologies and what happens on the plant floor and how they make money or avoid downtime and complementing that with perspectives of people who understand the software selling motion is what we're right in the middle of now. We're making significant investments in new talent, training, enablement for our overall sales force. And so it's bringing that talent up together, the existing plus the new.
And just a follow-up question. With the new administration, frankly, we're hearing from a lot of investors that new administration maybe means less focus on reshoring because tariffs will go away. What kind of conversations have you had with your customers about sort of contingency plans and their longer term strategy on capacity in the U. S. And globally in light of the election results?
Thank you.
We're encouraged in that The Biden campaign and the Biden administration has talked about the importance of U. S. Manufacturing. And so that is the single most important issue for us. And we're optimistic that they recognize the importance that manufacturing in this country plays as a part of the vital core of the American economy.
And so we're looking forward to working with them through professional organizations and so on to find ways to increase the manufacturing in the U. S. Along with the attendant issue of workforce development, which is a crucial issue for us as well.
Very much.
Your next question comes from the line of Nigel Coe with Wolfe Research. Nigel, your line is open.
Thanks. Good morning, everyone. Thanks for taking my time here. So just want to go back to John's question on sequential sales. Did you say 1Q up 5%?
I'm not sure if that was what you indicated. Just normally 1Q is below 4Q, so I just want to make sure I got that right.
Yes. So we are seeing some momentum as I described in the product side, but it's typical for Q1 for solutions to be down. So my general comment was roughly mid single digit sequential growth. It could be a little slower than that in Q1. And that's part of the reason why we've mentioned that Q1 EPS could be down sequentially expected to be down sequentially from Q4 of that as well as the sequential headwind from the temporary actions being reversed and bonus being reinstated.
Right. But the point is that there's enough momentum in products that could offset the seasonal down take in solutions.
Yes. I think directionally, Ed, that's probably the case.
Okay, great. That's helpful. And then the expansion of the relationship with PDC, one of your big competitors has taken a very strong view on the PLM, PLC integration. And I think historically, Rockwell has been a bit more skeptical about that. I'm just wondering, has there been a change in your view of sort of integration amongst those layers?
And then sort of within that, have you done all of the investment required to offer an integrated solution with PTC or is there still some investment spending to be done around that?
Yes. Our view is that our customers are going to have multiple applications to create their version of the digital thread and that's going to vary by different industries. So what you're looking for in terms of the digital thread in oil and gas is going to be different than what you're looking for in automotive typically. That said, we are selectively looking at integration between interesting parts of the PTC portfolio. One of the specific areas that Jim Heppelmann highlighted during LiveWorx this past summer was Onshape in our Emulate3D simulation capabilities.
And so that's one area that's very interesting.
And we have differentiated value. We're using
it in our own facilities. But that But that doesn't mean that we have to have that capability in every instance in house. So an open approach and respecting the investment that customers already have made in terms of training and installation, different vendors, application software in industry is an important tenant of our approach in the market. And so we don't necessarily need to own everything, but where we pick particularly interesting use cases like the one I just mentioned between Onshape and emulate 3D, that's an example where we will go deeper and we will provide additional integration tools to add that value.
Great. Well, thanks Blake. Thanks Steve and Patrick good luck.
Thank you Nigel.
This concludes our question and answer session. Will now turn the call back over to Jessica Caracos for closing remarks.
Thank you. And thank you, Amy. I'll turn it back to Blake for a few final comments.
Thanks, Jessica. Nobody is better positioned than Rockwell and our partners to bring information technology and industrial operational technology together. We remain focused on the well-being of our employees and we continue to manage thoughtfully through a gradual recovery. At the same time, we're happy to see the positive results of steps being taken to accelerate profitable growth. I also want to wish Patrick all the best.
Patrick, you played a big role in our success and you'll be missed. We wish you all good health and thank you for your interest and support.