Q3 2020 Rockwell Automation Inc Earnings Call
Thank you for holding and welcome to Rockwell Automations quarterly conference call I need to remind everyone that today's call is being recorded later in the call. We will open up the lines for questions. If you have a question at that time. Please press star one.
I would now like to turn the call over Ted Jessica Caracas head of Investor Relations Ms. crocodiles. Please go ahead.
Good morning, and thank you for joining us for Rockwell automation third quarter fiscal 2020 earnings release Conference call with me today as Blake Moret, our chairman CEO and Patrick Goris, our CFO.
Our results were released earlier this morning, and the press release and charts have been posted to our website <unk>.
The press release and charts include and our call today, we'll reference non-GAAP measures. Both the press release in 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, we'll also be available on our website at the conclusion of today's call 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 there for forward looking statements. Our actual results may differ material.
Our projections due to a wide range of risks and uncertainties that are described in our earnings release and detail in all our SEC filings.
So with that I'll hand, the call over to Blake. Thanks.
Thanks Jessica.
Good morning, everyone.
Thank you for joining us all Nicole today.
Well, we begin discussing all results and outlook I want to making you opening remarks.
Well, we as a company or managing well in this environment.
We will highly sensitive to the told this is taking on our employees during this time.
Yes, your loved ones get sick.
Racial injustices owner volumes as we develop actions.
Company and as individuals will help permanent and to the.
Fundamental human rights.
Additionally, thousands of all employees continue to work under very difficult conditions, including the telephone question you implemented.
You should pay cuts would necessary federal law and of course to current business conditions, while absorbing jobs, but there is a limit to how long they keep a buddy players.
I hope.
In addition to announce it from and good to the temporary pay reductions by now.
So our goal has always been reversing as soon as possible.
However, this is conditions remain weak.
The recent surgeon Koby 19, abrupt change as well all of us and nobody can predict with accuracy when a combination of social distancing practices therapeutic medicines and eventual vaccines were trying to talk.
We do intend to reverse the temporary reductions by the end of December and hopefully sooner.
In addition, this quarter, we will make another special payment to our manufacturing associates worldwide.
We're on the front lines and maintaining our central operations.
There are many reasons to be optimistic and I'm immensely proud of all of our employees and the great work they are good.
Our environmental health and safety team is working around the clock to keep them for you said.
And our technology is crucial to projects that are increasing mascot respirator production before higher levels and four months ago.
Candidates therapeutics and vaccines are being producing package with the health of our innovation and expertise around the world.
In short our employees are having a direct impact on protecting to help millions of people around the world and I want to thank them all for their dedication.
Turning now to our results on slide three.
While business conditions remain difficult and results in Q3 were down year over year earnings were harder than we expected for the quarter, primarily driven by better organic sales.
Total sales declined by 16% versus the prior year, including a three point contribution from inorganic investments.
Organic sales were down about 17.5% and better than the 20% decline we were expecting heading into the quarter.
Product sales outperformed our expectations and were driven by better performance and logics motion and networking security infrastructure.
We also had a number of new strategic wins in process applications against major process competitors. These wins span several industries this quarter, including life Sciences, food beverage and oil and gas.
One of the more notable wins was with Compendia 'cause seagate the cap rate so though.
Largest exporter of instant coffee in Brazil, and one of the largest in the world.
They are building a new technologically advanced coffee plan.
To expand production capacity.
This was a highly competitive greenfield win and we beat our biggest competitors based on our technology and track record with the customer.
This win includes a broad suite of Rockwell technology.
Factory talk innovation suite software drives connected services as well as newly released crosses control technology within logics that enhances our differentiation against traditional Tcs systems.
Turning to information solutions and connected services.
Sales were down slightly partly due to travel restrictions and limited access to customer sites.
However, I see us orders grew double digits over the prior year and showed strong growth in both software as wells connected services.
Turning now to earnings adjusted EPS was $1.27 centers.
And our strong cash flow performance further reinforces our already strong balance sheet and liquidity position.
Let's now turn to slide four where I will provide a few highlights of our Q3 organic end market performance.
Discrete market segment declined approximately 20%.
With automotive performing better than we projected in April based on the factory closures at that time.
Semiconductor saw positive growth in the quarter up mid single digits and continues to benefit from secular tailwinds in fiveg data centers and the internet of things.
We also see E commerce as an important emerging driver of our discrete business due to the excellent fit our technology with fulfillment center applications.
Our hybrid market segment declined about 10% with food and beverage and life Sciences performing in line with our expectations.
Good and beverage customers continue to experience extremely high demand and as a result, we are helping to focus the resources on maximizing production.
These customers continued to show strong interest in digital transformation solutions that will improve their resiliency and flexibility.
Although timing around these projects has been delayed as a result at the pandemic, we wouldn't expect food and beverage to begin to improve over the coming months.
One meaningful indicator for the food and beverage vertical continues to come from packaging Oems, which showed positive growth in the quarter.
Turning to life Sciences, we continue to expect life sciences to have a strong finish to the year due to the industry strong focus on digital transformation as well as our involvement with the leading companies, making significant investments in coated related vaccines and treatments.
Process markets were down approximately 25% with oil and gas so getting weaker.
In general process market, some more solution space and require more hands on interaction both at the front end of a new project as well as at the backend final commissioning a delivery.
We saw physical restrictions and continuing life with access to plant suited kogut, having a more significant impact on these industries.
Turning now to slide spy and our organic regional sales performance in the quarter.
North America declined by 20% with weaker process industries, partly offset by better resiliency and discrete and hybrid industry segments.
In this region product sales performed better than our solutions and services.
EMEA sales outperformed our expectations and benefited from PDP production and double digit growth in information solutions and connected services.
Asia Pacific sales declined 10% with year over year positive growth in automotive and semiconductor.
China sales declined mid single digits, but saw orders returned to positive growth in the quarter.
Broad based Latin America declines were led by very weak automotive performance.
Turning now to our outlook on slide six.
Last quarter, we forecasted that our fiscal third quarter sales would be down approximately 20% followed by sequential improvement in the fourth quarter.
We came in slightly better than that in Q3, and our mix of product was also more favorable.
However, the rate recovery in our solutions and services business is slower than we anticipated due to the continued restricting movement of people.
In addition, the cobot 19 pandemic and local efforts to respond to our rapidly evolving.
Our projections assume that a gradual recovery continues with no increase in pandemic related facility closures or disruptions to the supply chain.
Based on all the information we have available at this time, we expect organic sales to decline approximately 8% for the fiscal year.
No change from our prior full year guidance midpoint.
We expect inorganic investments to contribute about four points of growth to the year.
And adjusted EPS to reach $7.50 at the midpoint.
That's up from the guidance midpoint of $7.30, we said in April.
And we continue to target free cash flow conversion at over 100%.
With that let me now turn it over to Patrick who will elaborate on our third quarter financial performance in fiscal 2020 outlook in his remarks, Patrick Thank you Blake and good morning, everyone.
I'll start on slide eight third quarter key financial information.
For the third quarter organic sales were down 17.6% compared to last year.
And acquisitions contributed just over 3% to total growth.
Currency translation was the larger headwind than expected you to a stronger us dollar.
And decreased sales by 1.9 points.
Orders performed better than sales and were down mid teens year over year.
Overall company backlog increased year over year for the quarter.
Segment operating margin was 16.5%.
Down 730 basis points compared to last year's record high.
Primarily due to lower sales.
General corporate net expense is up slightly compared to last year, mainly as a result, the unfavorable mark to market adjustments related to our deferred and nonqualified compensation plan.
Adjusted EPS of $1.27 was better than expected.
During April is call I mentioned that we expected adjusted EPS to be a bit over one dollar.
Based on an organic sales decline of about 20%.
Organic sales performance at minus 17.6% was better than expected.
It was product mix and discrete tax items were about five cents benefit to our results in the quarter.
Our results include about $15 million or 10 cents of adjusted EPS of restructuring charges, which are offset by a gain on an asset sale.
From an operating earnings perspective, both items are evenly split between the two segments.
On the statement of operations on page 10 of our press release.
The gain on sale is included in other income.
And the restructuring charges are included in SGN eight.
You will note that SGN eight is up about $9 million year over year.
Reflecting not only the restructuring charges, but also the incremental Este DNA from acquisitions made this fiscal year.
The combined impact of these two items is a year over year increase of over $30 million in us DNA expense.
I'll cover a year over year adjusted EPS goods on the leader slight.
The adjusted effective tax rate for the third quarter of 13.5% was lower than we expected.
Due to a benefits from option exercise.
Free cash flow in the quarter of $211 million was a strong results in this environment with over 200% conversion on adjusted income.
Further enhancing our liquidity.
Slide nine provides the sales and margin performance overview of our operating segments.
I will just point out that the main driver of segment margin reduction is lower sales.
The book to Bill for solutions and services businesses was 1.05 of Q3 with continued project delays impacting these businesses rather than project cancellations.
The next slide 10.
Provides the adjusted EPS walk from Q3 fiscal 19 to Q3 fiscal 20.
As you can see core performance was down significantly on the large organic revenue declined in the quarter.
Our temporary cost reduction actions and the lift and the lower tax rate, partially mitigated the impact of the large sales decline.
The restructuring charge and the gain on the asset sale pretty much offset each other.
The adjusted EPS impact of acquisitions was about five cents diluted including intangible amortization.
Core earnings conversion in the quarter.
That is excluding the effect of acquisitions and currency was about 50%.
Roughly in line with the outlook comments that I shared with you in April.
Before I move on I want to mentioned that we continued to be in a strong position regarding our capital structure and liquidity.
At June 30, cash on the balance sheet with over $900 million and our total debt was about 2.4 billion.
You can find the current update of our balance sheet and liquidity slide in the appendix.
Moving to slide 11 product order trends.
This slide shows our global daily order trends for our product business, our product businesses represent about two thirds of our overall sales and include our shorter cycle book and Bill business.
Within the quarter.
Really product orders Trust in April followed by sequential improvement in May June and continuing into July through Friday of last week.
Our updated guidance assumes this improving trends continues at a gradual pace.
Moving to slide 12.
Ill provide a brief update on a few things that we discussed in our last earnings call with respect to covert nine feet.
Our first priority remains employee and customer seat.
Access to customer site improves throughout the third quarter, but remains a challenge for our solutions and services businesses.
As effects not only our utilization rates and creates associated inefficiencies, but also project timing.
We continue to experience project delays in our solutions and services businesses and the rate of improvement is slower than we expected in April.
We are however, not seeing a pickup in cancellations.
Project push up.
Regarding our own manufacturing operations and supply chain, our plants continue to be operational and meet current demand.
Supply chain disruptions have generally been mitigated, but we continue to incur higher freight costs and inefficiencies in our operations as we focus on the safety and well being of our employees.
During the quarter, we approved incremental investments to increase the resiliency of our supply chain and operations.
For example.
During the process of making investments to provide us more flexibility to produce products in multiple locations around the world.
This includes capital investments in some of our us facilities.
Finally, the temporary cost actions, we implemented during Q3 remained in place.
The temporary cost actions, an absence of a bonus earned our tailwinds for us in fiscal 2000 compared to fiscal 19.
As these items are reverse they will present a headwind for fiscal 21.
We intend to neutralize that headwind.
Through the structural cost actions, we've taken this year.
Additional cost savings identified and by maintaining lower levels of discretionary spend.
Let's move onto the next slide 13 updated guidance.
We now expect full year fiscal 2000 reported sales to be down about 5.5%. We continued to predict organic sales to be down about 8% compared to last year.
Segment margin is still expected to be about 19.5%.
The lower adjusted effective tax rate, mainly reflects the discrete items, we benefited from in the third quarter.
Our updated adjusted EPS guidance range $7.40 to 7660 cents at the midpoint. This is a 20 cents higher EPS than prior guidance, reflecting our third quarter performance and the lower tax rate for the full year.
On a year over year basis, our guidance at the midpoint assumes full year core earnings conversion, which excludes the impact of currency in acquisitions.
35%.
Daryl corporates net is still expected to be about 95 million, though.
Purchase accounting amortization expense for the full year is expected to be about $40 million.
Net interest expense for fiscal 2020 is still expected to amount to about $100 million.
We expect non controlling interest to be slightly positive given lower earnings Cynthia.
We expect continued strong free cash flow performance with free cash flow conversion over 100% of adjusted income.
Finally, with respect to be purchases, we spent about $50 million than the third quarter. Our guidance does not assume any additional share repurchases for the remainder of fiscal 20.
Average fully diluted share count is now expected to be hundred 60.6 million for fiscal 2000.
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 on capital returns to shareholders through our dividends and then share repurchases.
With that I'll turn it back over to you Blake for some additional remarks before we start QNX. Thanks, Patrick Let's turn now to slide 14.
Well the pandemic has disrupted our normal course business in the short term. We believe it is also accelerating the need for industrial automation and digital transformation solutions that address manufacturing safety as well as operational flexibility and resiliency.
Better aligns us with the evolving needs of our customers. We're very excited to announce our three new operating segments simplifying our structure around essential offerings, leveraging our sharpened industry focus and adding software talent, which will play a larger role in our future value.
This is the next step towards accelerating profitable growth strategy that we discussed last year at Investor Day.
It is also no coincidence that these operating segments, Matt very closely to how our customers think about technology.
If you recall this is a similar technology stack to the one we reviewed at Investor Day last November.
To begin with the products included in our intelligent devices segment are every bit as important as they have always been.
Intelligent devices or the inputs and outputs for industrial processes and they're also with the data is for.
Moving up control is at the heart of automation and customers continue to demand high reliability and safety in their processes. We also see the gross role software can play to increase flexibility and insights across global customer operations, we're focusing on these crews.
Actual integrated capabilities and adding additional talent in our new software and control segment.
And finally, the domain expertise provided by our lifecycle services ensures the positive business outcomes, but give our customers faster return on the automation investment.
The three segments will continue to share a common sales organization and supply chain.
Having a single Salesforce knowledgeable in their customers applications simplifies the way customers interact with US. This is just one way in which simplification delivers efficiencies for both us and our customers.
Our leadership will continue to blend experienced rockwell leaders with fresh perspectives.
Brand with ours. It will lead the intelligent devices segment, Frank who is shaped which will lead the lifecycle services segment and we will begin an external search for the leader of software in control.
In the interim Chris nor Dhekelia, our current senior Vice President of information Technology, and Chief Information Officer will serve as the leader for that segment.
In addition to accelerate the evolution of our culture, Becky House has become chief administrative and legal officer, which includes leadership of our talent legal ethics, and compliance and environmental health and safety teams.
Our culture is the foundation for accelerated growth one to this new structure.
It reflects a willingness to compare ourselves to the best alternatives our stakeholders have.
A focus on increasing the speed of decision making.
Ensuring we have a steady stream of fresh ideas and of course, our strong culture of integrity and inclusion.
A more detailed view of what is included in each segment can be found on slide 15.
Turning to slide 16, these segments create clear focus for each of these essential offerings and they all have plenty of room to gain share and profitably accelerate our growth in expanding markets.
This new structure positions us well to deliver value to customers in what is being called the new normal.
Turning to slide 17, I'll make some additional comments on the secular changes we're seeing in our market.
As you May recall last quarter, we talked about increasing need for customers to build resiliency and flexibility in their operations and supply chains.
That includes the need for life Sciences companies increase of local manufacturing capability for medicines and medical devices into us.
And the need for innovative technologies to drive higher levels of productivity flexibility sustainability trace ability and safety.
In the last three months, we've seen examples of all these trends.
Many life Sciences companies recently announced earlier in the process of expanding their north American manufacturing footprints and supply chains and other companies in discrete industries are planning to do the same.
In the quarter. We also won business with Johnson and Johnson to deliver technology for their new Universal machine, which represents the epitome of flexible manufacturing.
The Universal machining is a collaborative mobile robot that will be deployed in response to the cobot 19 crisis. It can be re purpose to do machine loading and unloading and applying packaging and inspection activities or warehouse material handling activities were social distancing as needed we.
Many companies will be interested in adding this type of flexible automation technology shouldn't manufacturing environments in the future.
And evidence continues to build for the need for more remote capabilities in the quarter. We had a key win in EMEA with a major oil company that is making investments in sense, yet technology to significantly increase their remote monitoring capabilities.
In addition to our remote monitoring capabilities the value of our augmented reality offerings with PTC is very compelling to customers as a increasingly look for alternative ways to operate their plants efficiently and safely and re skilled workers as quickly as possible.
These trends are unfolding now as you can see for many of the offerings on this slide we are well aligned to customers needs as they manage through this new model.
Nobody is better positioned to bring information technology and industrial operational technology together than brockwell in our partners.
Customers efforts to increase resilience and agility as a potential that provide meaningful tailwinds for years to cover.
With that let me pass the baton back to Jessica to begin to QNX session.
Before we start to Q and 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 on a quick follow up. Thank you Lisa let's take our first question.
Thank you. Our first question comes from the line of Scott Davis from Maria Your line is open.
Hey, good morning, guys.
And just I wanted to start good morning.
I like to segments. This assumes.
Simpler.
Hey, guys can it can help us understand the margin maybe perhaps some margin differences between the three.
Yes got good morning, Patrick here, we are.
We're still fine tuning this little bit up and Operationalizing. The changes of course, but preliminary estimates based on fiscal 19 results.
And then it was I'm going to give you is give or take a few points in each the retching direction.
Think of intelligent devices being about 20%.
Soft drink control about 30%.
And lifecycle services about 15% and so roughly these are based on fiscal 19 to segment margins.
And I would add to that Scott and May be very helpful. For you guys is we do not intend to change our definition of segment operating earnings.
Super helpful. Okay.
And just as a follow on I can't remember you guys doing an external search for operating roll before did I hear you correctly, you're doing external search for software control, maybe some color on what you're looking for their.
Sure I mean, we've talked about our culture as involving a steady stream of new ideas and.
Bringing those new ideas into the organization comes from unlocking that innovation from our existing talent in the organization. It comes from acquisitions and it comes from hiring.
And at different levels of the organization as well and we've got great existing leadership in the company, but theres always good ideas that we can.
Incorporate from the outside and so as we launch this new segment of software and control, we do expect to bring those perspectives in with the leader of that segment.
Okay.
Good luck you guys. Thank you.
Thanks, Scott Thank you.
Our next question comes from the line of John inch from Gordon Haskett. Your line is open.
Thank you good morning, everybody.
Okay.
I'm wondering if we could talk about the sales or credit risks, let's say smaller oil and gas operators or EDI startups and in that context could you also talked about your auto industry project outlook.
Okay.
Yes, John Good morning, Pedicure from a.
Probably a receivable risk.
I think collection risk, we would actually say that in the last quarter overall, our overall call at the current receivable percent actually slightly improved.
And so I'd say that doesn't mean that there are some onesies twosies, where we may have some challenges we always have that but I'd say, our overall portfolio has actually improved in the last quarter.
Yeah, I would also add to that John and from an NPV standpoint.
We watch closely we recognize that.
Good.
Rush to add electric vehicle portfolios from a big and small companies is new and Doug not all of those startups are going to survive. So we manage that closely I should also add because so much of our business goes through distribution, we're keeping very close to our distributors. During this time so.
That we're in constant communication to make sure that we understand what they're going through and so that's an important part of our day to day operational activities. Both in terms of the direct project business as well as the flow business through distribution.
Right and then the auto industry hubs project that look how are you guys thinking about that heading into sort of second half of this year in next year.
Yes.
Good evening, even part D V versus traditional whether whatever you like.
Sure I think from an electric vehicle standpoint, a lot of these companies, whether they're bigger established companies that have divisions.
Devoted to E V or their startups they have to bring a.
Portfolio of vehicles to market.
To get a return on all that investment and while those projects in some cases have been delayed.
We've seen very little in the way of cancellations, there and I think that's that's probably a general view of the automotive industry in that we did see MRO, a little bit better than our expectations in the quarter. It was low but it was better than we can we feared and.
Projects continue to move although at a slower pace.
That's helpful. And then just lastly could we put a a frame around the restructuring and cost out actions. So I think we go back to last quarter. There was 150 million I think you said the phraseology was mostly temporary most of you get out of the quarter and I apologize. If you said that how much more us to come and then.
There were some restructuring charges, maybe you could talk about kind of what those actions do for you in 2020 and what the set up is kind of on that basis. For 2021. Then obviously are you contemplating even more restructuring or footprint realignment or stuff that could be a more of a permanent nature. I think like you did mention or maybe Patrick you mentioned, you were going to try and offset.
Right the temporary reactions with other sort of measures, maybe we could just sort of flesh that out.
Thank you John so.
In April we mentioned that we implemented cost reductions that would yield over $150 million in year over year savings that included a significant amount from temporary actions related to.
Not having a bonus this year, but also some of the temporary pay cuts we.
Implemented we are achieving the savings we targeted.
The temporary actions remain in place.
As we undo dose temporary reactions in fiscal 2001, they provide the headwind.
On that headwind based on us as Blake mentioned in his comments on doing the pay cuts at the end of the calendar year that headwind this a little north of $130 million.
We intend to neutralize that through one structural cost actions, we've taken in September last year with some carryover, but also the cost actions that we've announced today.
Those combined are expected yield over $40 million of incremental savings in fiscal 21.
Weve.
Identified additional cost savings that are little over $50 million and then finally, we're we expect to maintain lower levels of discretionary spend going forward.
Maybe a little bit more color colour on the additional cost savings that I talked about.
That includes.
Permanent elimination of some open positions.
In fiscal 20, we had some onetime costs than inefficiencies related to the pandemic or even acquisitions and we're in the process of reducing our real estate footprint globally.
And so a lot of moving pieces there, but it is our intension to.
Neutralize the reversal of temporary actions in fiscal 21 to these cost actions.
Got it very helpful. Thanks, everyone. Good luck.
Thanks, John.
And our next question comes from the line of Julian Mitchell from Barclays. Your line is open.
Hi, good morning.
Thank you are saying Hey, maybe just the first question on the.
Topline point, if you could clarify what these solutions and services or does did year on year, sorry, if I missed that.
And also if the cadence of those incoming orders.
Broadly matched.
The slight improvement seen month on month on the product side.
Whether the order intake.
He is lagging what you're seeing on the product improvement.
Yeah. So on the solutions and services you don't Reorders I would just say that.
Our book to Bill was 1.05 and that we built backlog in the quarter.
And then our backlog is up year over year.
Solutions and services as well, making to provide you some indication there in terms of timing of orders for solutions and services I think looking at that buying weaker by month is not always as a helpful that as of this for our flow business or our product businesses and so I don't think that providing that by month would be very helpful.
What we have seen is.
Some project push outs, but as more and more customers have opened up we've seen our services folks being called back into customer locations and we've seen our solutions people being able to enter some of our customer facilities as well and so that is an improvement sequentially. There I would also add Julian that.
There's solutions and services orders and shipments of probably a little more subjective calendarization within the quarter to our products in that.
Orders tend to come in later in the bonds and the last month of the quarter for both orders and shipments is typically the strong there. So it's a little more sensitive to which month year end than the product flow.
Thank you and then my second question I'm on the margins I'm just wanted to clarify the the segment margin guide for the year.
Does embeds, a narrower decremental margin in the fourth quarter than what you saw in Q3, maybe just help us understand what what drives that and also if you could clarify the investments span.
What's that what that is doing in the second half of the year. Thank you.
Yes, so and investment spend for the second half of the year is about down about 6% year over year.
Basically the same as what I shared with you last quarter.
In terms of Q4, Decrementals, they will be better and so we expect our tour core decrementals to be in the mid twenties in Q4 and the main reason for that is is that we get a bigger benefit from the temporary cost actions, we get three months rather than two months.
And in the fourth quarter compared to the last year, we haven't thought of $30 million benefit as well from lower incentive compensation expense.
So higher run rate of the cost actions, we have taken and also a bigger.
We'll win for lower incentive compensation in the fourth quarter.
Great. Thank you.
I can tell you.
And our next question comes from the line of Jeff Sprague, Sorry, Jeff Sprague from vertical research. Your line is open.
Jeff Sprague your line is open.
I'm sorry, good day everyone.
Just a little more color we could on.
Kind of the trajectory here as we exited the quarter.
This this progression you showed on slide 11 can you just give us some sense on on June and July versus kind of prior year levels, what those order trends look like.
Oh, but.
They were still down significantly versus the prior year both June and.
In July and so we.
The worst performance year over year from an order perspective was in April.
Weve improves.
Quench sleep since but there's still down in the in the mid teens for both.
June and we're.
I would say gradually improving sequentially in as well as the year over year Delta is becoming smaller.
So you said the quarter was down mid teens June was also down mid teens basically sounds like.
Could we take a little further into April.
Worse April was the worst from a year over year perspective, and the subsequent months were little bit better from a year over year perspective on the ordered in date.
Great. Thanks for that clarification.
On the food and beverage side can you elaborate a little bit more what you're saying you know we've seen.
You know a reduction in skews and things like this as you know retailers try to push stuff out and more going through E commerce and the like.
It sounds like that as a at least a temporary headwind on the business how do you see that playing out.
Yeah, a couple of things and let me just circle back Jeff.
To put a finer point on Patrick's comments, the the order development.
That we've seen over the last few months is consistent with that I that idea of a gradual recovery. So as we look at that year over year and.
Sequentially, a gradual recovery is what we continue to see through.
Month to date in July from a from a food and beverage standpoint.
The basic issue is that these companies given our weighted more heavily towards.
Pre packaged food food that goes to the grocery store or directly to the home.
They're running full out and so most of our efforts and theirs are.
Devoted to maintaining production at really high levels.
We're seeing.
Okay.
Continued demand for flexibility.
In this case you know the food producers are moving quickly to be able to change their packaging formats to be able to meet a what's being bought today and in many cases people who are eating at home.
Much more than they ever have we think that long term the trend towards you know additional flexibility will only become greater people are going to continue to watch a variety of packaging formats, and we really haven't seen an overall skew reduction you know across across the industry.
The mantra of the packaging machine Oems driven by the end user demand is getting to zero change over time to go from one packaging format to the next we havent seen any reduction in the focus in that area, which requires a lot of automation.
Great. Thank you for that I'll pass thanks, Jeff.
Jeff.
Our next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.
Good morning, guys.
Good morning.
But can you just talked about the pandemic potentially accelerating the need for resilience and flexibility to your customers, especially in life Sciences can you give us more color at where it all quantify maybe what you would call. The pandemic response cylinders, you're seeing to help avoid single point, the failure and increase resiliency in stepping.
Do you think you primary markets can recover even in a capex constrained environment as customers focus on productivity through automation or is it really still too early to tell.
Well I I think I think our primary industries and the areas within those industries that we're putting particular focus.
Do have a good long term growth product prospects.
When you talk to you mentioned life Sciences and people are going to continue.
You know even after we get past. This current environment people are going to want to live longer healthier lives and so life sciences is going to be.
A continued area of focus force food and beverage for obvious reasons are going to continue its going to continue to be important I think the trend towards electric vehicles.
Increasing and even in the.
The worst.
Of the of the Lockdowns. The World was still consuming 60, or 70 million barrels of oil a day and showed that desire to produce that oil as efficiently as possible is inline with what we're doing in terms of the quantification on our results.
It's going to be varied by industry and I've talked before about how I think we're going to see.
The movement, probably most pronounced in the discrete and the hybrid industries, where you're not is tied to the resource itself sitting in the ground whether its mining.
Or oil and gas or or what have you. So far the orders that we've seen that I would call income our incremental come from machinery builders in Europe comes from life Sciences companies.
In the US we've talked a little bit about that and so I think it's going to be gradual but things are longer term trends and we also look at ourselves and what investments, we're making to increase resiliency and as Patrick said, we are making some capital investments in the U.S. to increase.
Resiliency in our case, it's to build some of our high value products and more than one place and I think when we have those ideas and a lot of our customers are thinking about at like us and it's fair to assume that they've got similar plans.
But just a follow up on that so discrete has historically been a very cyclical part of your business, especially during recession, but maybe down only mentioned on digits unemployed 20, as you talked about despite auto markets globally being very difficult. So we know what the combination of unique technology, helping you in auto focus on TV Semicon has held up the DC.
It's leveled discrete outperformance in sort of market share gains continuing we've been accelerating going into 2021.
Well, we certainly intend to continue to gain share I think it's not only picking the applications such as the V. within you know the broader verticals, but it's also the mix of what we're offering as well and we talked a lot about you know growing recurring revenue in terms.
Software and high value services.
And then a better balance across the industries as well so we talked before about how this year automotive will be less than 10% of our business, it's very valuable and we expect that to business to grow profitably.
For us over time, but I like that we're serving a host of industries that have great long term prospects and so we do intend to gain share across a broad front.
Thanks Blake.
Yeah. Thanks Ryan.
Our next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Your line is open.
Hi, good morning.
Hi, good morning.
Just first question I guess for Patrick I appreciate the color on your kind of offsetting or neutralizing some of the push and pull on the cost front for off for next year.
Presumably there is a growth level, which that start to start to tip more toward investment any any historical context that you could give us around hey, once we get past mid single digit growth, we really start to feed the machine or any way, we should think about kind of that sensitivity of of being able to risk.
Rain investment.
Yes, I think the where you can think about it.
Josh is that.
Going back to our framework of.
Our objective to deliver mid single mid single digits of organic growth, 30% to 35% earnings convert.
And so that the level of growth will determine how much more we.
Intend to invest but I can't give you a certain percentage. So this will be a trigger to to invest more.
Than we otherwise with but but that long term framework of 30% to 35% earnings convert mid single digits, it's something that over a longer period of time, we've been through it here.
Yes, Josh I can add to that you know even with the restructuring that that we announced a significant portion of that.
Frees up resource for reinvestment or it's not just about about the cost savings.
Year over year, but it's too focused resources well in the areas that we think are going to be particularly important and in the organizational changes. The primary purpose of that is to accelerate profitable growth.
Looking for efficiencies and we expect we'll find some but the primary purpose is to accelerate profitable growth.
Got it that's helpful. And then just a follow up and Blake I. Appreciate all the the commentary on growth opportunities with near shoring I guess, another market that seeming to catch fire here as the the warehouse automation market and I know you have some content there some exposure it's fairly small is there either.
A product or a channel or a partner barrier, there, where that's not been largely because I think you've seen some some pretty.
Frothy order numbers from folks in that space.
Yeah. It doesn't seem to have been a historical needle mover for you guys. So any commentary there on either investment or legacy barriers that have kept that from being beggar. Thanks.
Yeah.
It's a it's a great part of the market for US you know traditionally out for a long time with had very good fit with the products. When you think about the material handling and that sortation I think we've added some products that have but you know suffered.
Some of the recent opportunities and wins that we've seen independent card is one area. So.
Very high precision motion control is needed even more than ever the trace ability on.
That's used in their their software systems, and so I don't see it as.
Being constrained by products for the automation or channel, we're close to a lot of the key suppliers in the in the area, but we are to your point looking at ways as to how we can develop that even more because that's one of those long term trends that.
We continue to expect to benefit from.
Great. Thanks, Blake you up.
Yes. Thank you.
Our next question comes from the line of Nigel Coe from Wolfe Research. Your line is open.
Yes, thanks, guys good morning.
Maybe just a asking just question first question and a five different way you mentioned I think Blake.
Hope you hope to maybe roll back some of these temporary cost measures.
Before December I guess, what would be the countless free to do that.
Do we need to see how dunno fail stabilizing will fail.
On a clear path back towards growth I mean, what are you looking for two to kind of he's back on the salary and benefit reductions.
Yeah, I think we continue to expect a gradual recovery in orders and sales, but at the heart of it.
Is the infection rates and to look at how you know the countries in which we operate in.
Get the spread of infection under control I think that's really the fundamental pacing item.
That improves.
Then.
We.
Have a much more positive outlook I would also say that.
As I get say my earlier remarks, there's a limit to how long weekend.
Keith Cozza temporary reductions in place and at some point, we would have to substitute more structural reductions.
For the for the pay reductions because we can't go on.
Just a certain amount of time with the with those temporary reductions affecting.
Our entire workforce.
Great. Thanks, Blake Thats, good and then the problem of given more disclosure this as the demand for even more disclosure on them on the multi protocol of July versus June normally I would expect July to be weaker than June sequentially, and obviously July slightly better than June.
How does this how does not look for for Rockwell from a normal seasonal pattern would you normally see July versus June similar or would that be if I step back.
I recognize that you've failed and normally stronger in full keep the scope of the three fiscal but just wondering how normally that would have happened with look in and when will you recognized in the upcoming only is.
Yes, Nigel Patrick here, so actually for our product order intake July tends to be somewhat similar as of June historically, and so what we're seeing now it's somewhat typical on the sales side normally the first months after the end of the quarter's a little bit weaker than the prior.
So I was played it looked like.
Great Nigel.
So I feel like we have a compelling back to some some some of them known what seasonality into July at this point.
It is still early in July, but what we've seen so far is not untypical and of course, our our guidance assumes that we'll see continued improving trend sequentially.
Okay. Thanks, Patrick Thanks Bye.
Hi, guys. Thanks.
Our next question comes from line up Andrew Open from Bank of America. Your line is open.
Andrew Obin your line is open.
Operator, we have time for one more question.
Final question will come from the line of kill Ritchie from Goldman Sachs. Your line is open.
Great. Thank you good morning, everyone.
Good morning.
Hey, Hey, Blake when we when we caught up inter quarter, you had referenced the lifeline customers and again made reference to the fact that seems like things are moving forward in that regard can you give us a sense on timing on when no actually make a decision to really.
In print, whether it's reassuring or capital investment to.
Basically improve their supply chain, just any any thoughts around timing around that that are those awards.
Joe you're talking specifically about life sciences customers.
Yes, specifically around the lifetime of customers.
We're seeing plans, particularly for those who were developing.
You know therapeutics and vaccine candidates, we're seeing them, but either directly or through our their contract manufacturers.
In the middle of plans to to ramp that up now now that's that's not the entire market, but what is common across the entire life sciences market is accelerated interest in digital transformation. They know that they're not going be able to get to scale without the basic.
Automation and the ability to schedule.
Product manufacturing and so on driven by software. So what we're definitely seeing those plans to increase they've got a little bit of the situation that food beverage doesn't that you know many of them are already you know just trying to ramp up production with their existing assets, but I think we're going to see that overall.
Hi, but don't expect it to be a step change, but we're definitely seeing the slope with the curve increase with respect to life Sciences customers.
Well that's a that's helpful. The here I guess maybe.
One follow up and just that the flip side that to that question is is you guys called out the process business you know I'm basically your guidance being worse now versus where it was an April and I don't think that probably comes as much of a surprise to the many people, but I'm just curious as you kind of think about the process business longer term.
And given where you know where oil prices are today.
And also the investments that you've made with incentives like how are you thinking about this business you know with respect to the portfolio.
From a longer term growth perspective, and how you know how long is it going to take to kind of get back to fit some decent growth in the business.
Yeah, you know, there's no question that the oil and gas businesses.
Under a lot of pressure right now, but essentially is positioned exactly where I would want it to be position. Then that is focused on operational efficiencies and decreasing the breakeven point to produce a barrel of oil and I think you know there's some evidence that that is where the market is indeed.
Staying in that orders for sense, yet, we're actually a little bit better than our expectations in the quarter. So.
Tough spot for oil and gas, but helping them produce more efficiently as right, where I want to be.
Oh, that's interesting comment on the on the order side. Thank you for a fit me and.
Yeah. Thanks, Joe.
Okay great.
Thank you very much everyone I'll turn it back to Blake you final comment thanks, Jessica to summarize we remain focused on the well being of our employees, we're managing prudently through a gradual recovery and we're taking steps to accelerate long term profitable growth.
Nobody is better positioned to bring information technology, and industrial operational technology, together and rock on our partners. We wish you all good health and thank you for your interest and support.
That concludes today's call. Thank you all for joining us.
Thank you for joining this concludes today's conference call. At this time you may disconnect. Thank you.
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