Q4 2020 Rockwell Automation Inc Earnings 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. If you have a question at that time. Please press star one at this time I would like to turn the call over to Jessica Crackers head of Investor Relations Mr. <unk>. Please go ahead.
Thanks, Amy good morning, and thank you for joining us for Rockwell Automations fourth quarter fiscal 2020, <unk> earnings release Conference call with me today is Blake Moret, our chairman and CEO, Patrick Goris, our CFO and Steve I tell our CFO elect.
Results were released earlier this morning, and the press release and charts happened posted to our website. Both the press release and charts include an on call today, we'll <unk> well.
Our friends non-GAAP measures.
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-K 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.
Actual results may differ materially from our projections due to a wide range of risks and uncertainties 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.
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 <unk> recent announcement, but he will be leaving Rockwell to start a new chapter in his career.
His 14 years with the company has continued its long legacy financial discipline, and delivering superior shareowner returns and we wish him well in his next pursuit.
Many of you know Steve.
It will be stepping in as CFO on an interim basis sales.
He has been with appropriate 30 years and over these years has run investor relations Treasury and corporate espionage.
Gordon I have full confidence you will reinforce our strong financial framework.
<unk> commitment to superior Shareowner returns.
Petroken, Steve or ensuring a very smooth transition, while we consider internal and external candidates for 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.
<unk> 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 or future growth.
Now with business conditions gradually improving we will reverse the temporary pay reductions by the end of November one 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 haven't Rockwell and I couldn't be prouder.
Turning now to our Q4 results on slide three.
Business conditions remain difficult relative to a year ago, we're 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 were driven by better than expected results and drives a motion most.
Moshe <unk> performance was led by our independent card technology, where we received the largest single order and Rockwell Automations 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.
Well as long track record as a dependable U.S. supplier.
Independent card 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.
Oh, yes, yes orders grew double digits over the prior year and both software and connected services.
Yes, see sales reached approximately $400 million fiscal 20 on an organic basis.
Well in excess of bad when including all of our recent inorganic investments.
Demand for software sold as a result of our PTC partnerships.
He 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.
The other would PTC, we added over 200, new customer logos in fiscal 2020 and deal sizes aren't information solutions software business continue to grow.
The synergies of our combined offerings are very evident to customers.
In connected services, a recent calypso acquisition is doing particularly well and is helping us further differentiate.
So it was already contributing to some large competitive wins and they just had the best orders quarter in their history.
[noise] tolling sales include a three point positive contribution from inorganic investments led by our sense your joint venture along with the Calypso an awesome 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 one.
This solutions and services book to Bill does not include the large independent Court 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 four.
I will provide a few highlights of our Q4 organic end market performance.
Our discrete market segment declined approximately 10% with automotive performing better than we expected driven by stronger in tomorrow and project sales.
Among the more notable projects in the quarter was a significant OTN cyber security win in Europe with one of the major German car companies.
And in electric vehicles, we saw momentum continue in the industry, we battery manufacturers and brand owners.
Were excited by recent announcements from both new and established automakers as a focus on production of compelling new E B offerings.
And 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 Fiveg 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 when a key instruments one of the largest and most important suppliers to the global E Commerce industry. This.
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.
Segment declined a little less than 5% and outperformed the discrete and process industry segments.
Beverage and life Sciences, each declined low single digits for both.
For 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 21.
Eco 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.
Harlan 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, which continues to strengthen its global track and trace capabilities to support the company's long term growth plans.
They chose factory talked software because of our strong Mds and analytics capabilities and our differentiated ability to connect to both Rockwell and non Rockwell control platforms.
Once again, our strong software portfolio our ecosystem.
Best of breed partners and our expertise in connecting diverse manufacturing environments. We're all important reasons Rockwell one is very competitive project with Cooper tire.
Process markets were down approximately 20%.
Oil and gas was a little weaker than we expected that was partially offset by better than expected performance in most other process markets like mining and pulp and paper.
Since he held up fairly well during the quarter and continues to demonstrate their competitive differentiation.
[music].
Turning now to slide five.
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 orders significantly exceeded our expectations.
While our large independent court win was part of that result, we also saw a 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.
Sales declined 12% largely due to capex delays these were partially offset by strong growth in water we.
We also saw growth in life Sciences, and PE 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 six to review highlights for the full year.
It's an understatement to say that fiscal 20 turned out very differently than the plans. We discussed together at a great Investor day during an incredible automation fair in Chicago last November.
Shadow of the pandemic soon created unique challenges, but I'm proud of our ability to respond well, 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, but keep us going.
Pandemic is focused us all on what's truly important.
We took a thoughtful actions to manage costs through this pandemic well 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 million in revenue in fiscal 20, and it was one of the best performing areas of our business and both orders and sales this year.
We deployed over $500 million for inorganic investments that contributed almost four points to our topline growth.
We deployed over $700 million in cash toward dividends and repurchases enabled by our strong free cash flow.
I'm tremendously proud of what we've accomplished in fiscal 20, and I'm excited about the resulting momentum as we enter fiscal 21.
Turning now to our outlook on slide seven.
As I said earlier, we saw strong sequential momentum exiting the year.
Just real production is projected to grow in the second half of our fiscal year. So it may take a couple of quarters Strs declined back to year over year sales growth from the Q3 trough in fiscal 20.
We expect double digit year over year growth during our third and fourth quarters.
Of course, we're all closely monitoring global infection levels related to this pandemic, but we're 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 a point of growth from our fiscal 20 in fiscal 21 acquisitions to date.
In addition, we are adopting annual recurring revenue as an important metric for the company and have added a R.R. as a performance metric in our incentive compensation framework beginning this year.
Hey, art is expected to grow double digits in fiscal 21, after showing over 6% growth in fiscal 20. This.
This is further evidence of our ability to build and 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 20 results.
We're targeting free cash flow conversion of 100%.
A more detailed view into our outlook by end market is found on slide eight.
I won't go into 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 fourth quarter and fiscal year 2020 financial performance.
Ben have Steve discuss our fiscal 2021 outlook in his remarks.
Sure.
Thank you Blake and good morning, everyone I'll start on slide nine fourth quarter key financial information.
Sales and segment margin adjusted EPS and free cash flow were all better than expected in the fourth quarter, mainly as a result of better organic sales growth and productivity.
Organic sales improved as the quarter progressed and were up 10% sequentially versus Q3.
Compared to last year Q4, organic sales were down 12% and acquisitions contributed just over 3% 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 the card order at least referred to earlier.
Segment operating margin was 20.2% as same as last year the negative impact of lower sales was partially offset by a combination of temporary and structural cost actions.
Fourth quarter results included about $10 million of restructuring charges, which are expected to yield over $50 million in additional annualized structural cost savings.
Most of these savings will be realized in fiscal 21.
General corporate net expense was 22 million.
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 adjusted effective tax rate for the quarter was 15% a bit lower than we expected due to a slightly different geographic mix of our pre tax income.
Free cash flow performance remains strong we generated over $300 million of free cash flow in the quarter well over 100% conversion on adjusted income.
Note that this result includes a voluntary 50 million dollar pre tax contribution made to the U.S. pension plan.
This voluntary pension contribution was not reflected in our prior guidance.
Slide 10 provides a sales and margin performance overview of our operating segments.
Organic sales of both segments improved significantly compared to last quarter both.
Both segments were up about 10% on an organic basis compared to Q3 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 architecture, 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 19 to Q4 fiscal 2000.
As you can see more performance was down about 15 cents on a 12% organic sales decline.
This implies core earnings conversion that is excluding the effects of acquisitions and currency.
The 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 2000.
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-19 pandemic.
Organic sales declined 8% for the fiscal year.
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&D expense was about flat compared to fiscal 19, and R&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 a record 22% segment margins last year and adjusted EPS was down 11%.
Free cash flow performance remains strong and excluding the $50 million voluntary pension contribution in fiscal 20 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 $1.3 billion of capital towards acquisitions dividends and share repurchases in fiscal 2020.
Our capital structure and liquidity remained very strong.
September 30, our fiscal year end cash on the balance sheet was over $700 million and our total debt was about $2 billion.
During the fourth quarter, we paid off the $400 million 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 two 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.
We are expecting sales of about $6.8 billion 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 color on 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 2020 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% and 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% and 35%.
As we mentioned last quarter, we expect to offset a $150 million a 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 20 cents on a full year basis.
Please note that we filed an 8-K. 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 the new basis is $8.45 to $80.85. This.
This compares to fiscal 2020, adjusted EPS of $7, an 87 cents on the new bases.
On an apples to apples basis at the midpoint of the range. This represents 10% adjusted EPS growth at about 5% higher organic sales.
We expect adjusted EPS to improve throughout the year and anticipate first quarter fiscal 2021, adjusted EPS to be lower than our fiscal 2024th quarter performance Prime.
Primarily as a result of a 30 cents 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 a 100% on adjusted income.
This assumes $150 million capital expenditures and a $50 million of voluntary pre tax us 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 million.
Net interest expense for fiscal 2021 is expected to be between 90 and 95 million.
A little lower than fiscal 2020.
Finally, we are assuming average diluted shares outstanding of about 117 million shares.
The next slide 15 provides the adjusted EPS walk from fiscal 2022, 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 19 cents impact of the new definition of adjusted EPS. So.
So fiscal 2020 adjusted EPS on the new basis was $7.87.
Core performance is expected to contribute about $1.90 cents. This.
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 cents.
As mentioned last quarter, we expect these headwinds to be offset by productivity, which is in court.
Currency forecast project, a weaker us dollar compared to fiscal 2020, which should contribute about 10 cents EPS.
The higher tax rate is expected to be about a 15 cents headwind.
Acquisitions made during fiscal 2000, Twentys and so far this year are expected to add about 10 cents.
Note that since it is now in core as October one was the one 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.
After that we focused capital deployment on inorganic activities, then we focus capital returns to shareholders.
Through our dividend and then repurchase.
Our capital deployment plans for fiscal 2021 include dividends of about $500 million.
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 one 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 will finish with a comment about our new segment structure, which is effective for fiscal 2021.
As a reminder, our first quarter fiscal 2021 results will be reported in the new three segment format as shown here.
With that I will turn it back over to Blake for some closing remarks before we start to it.
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 Us, Mexico, and Canada make us a natural beneficiary of these plans.
Other measures to increase resilience include increased automation trace ability and remote monitoring which are all rockwell strengths.
We're making investments in our own operations, which will showcase during next weeks Investor day.
Our contribution to operations agility as demonstrated by our great results in consumer and life Sciences packaging equipment and the growth of our software to manage the increasingly dynamic skews offered by our customers.
The pandemic is 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 automaker.
Yes.
We're proud of the role our innovation is playing at Pfizer Roche and many other companies as we help the world recover.
The need to increase the sustainability of industrial processes is only increasing.
Clean drinking water is one of the reasons our eco industrial focus is so important to 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 21, 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.
Im 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, Mike before we start the Q1 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 follow up. Thank you Amy lets take our first question.
Thank you. Your first question comes from the line of Scott Davis with Munis Research. Your line is open.
Hey, good morning, guys.
Good morning.
And congrats Patrick good luck there'll be messed compare.
Thank you Scott.
This contract with the Navy is interesting I haven't heard you talk about independent carton, a while what what does 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 that that some of the traditional methods of Serbo amps and other types of technology.
Yes.
So with the kind of acceleration and deceleration profiles that are needed for some of these high performance applications independent card was really a a differentiated solution. It also has to operate and as you can imagine very difficult environments.
Final point to is that while we don't talk as much about our government business now Rockwell spend a trusted us supplier to the government for a long time and so some of these premium high performance applications, where a natural fit.
Okay makes sense and then.
You mentioned like PTC, helping you add 200, new customer logos what what.
I know that it might be a little bit varied, but sort of a general theme around what type of new customers, you're able to bring in on any particular end markets geographies that type of thing that you could point to.
Yes, Scott one of the things that we've really been proud of our our partnership with PTC is good diversity of customers and geographies that we've been able to penetrate with the combined offering so well in food and beverage and consumer facing industries.
As they are large 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 these and some of the things that we're most.
Got excited about that we've talked about before are that it's not just on top of Rockwell control systems about half of these applications are going on top of competitive control system. 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.
Oh, 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 that im aware of your mid single digit core year over year, but do you talk to me about to sort of the sequential cadence and do you expect that.
To sustain itself.
Not even perhaps accelerate over the balance of fiscal 21 as part of your guide.
Hi, John This is Steve.
We expect a gradual sequential recovery.
Throughout the year, including into the first quarter and.
As we said on the call that that implies a first half decline.
Decline year over year, and then a second half year over year growth rate of mid to high teens.
Yes, 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 that was an encouraging sign as we entered the year.
I have to say that.
Services and solutions order recovery is is lagging behind those product orders, but products are really the leading indicator that we look at.
Right. So right now I understand the 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 and March quarters, and then pick back up or I, just just a little bit more color on how you think that the 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 21.
Okay. No thats helpful. And then just as a follow up on the page 15 on your EPS walk where did the structural actions fall I think you said that 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 ever 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 EPS. So I see the dollar 15 headwind what does that mapped against in terms of the structural takeout that is in response to the pandemic right like would have.
Sure.
Good afternoon John.
John the.
The dollar 15 headwind that you see there on the on the walk is.
This is a bonus reversal I'm, sorry, the bonus reinstatement and the temporary cost reversal.
That bonus is.
About a $115 million in enough 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, the second quarter.
But but each quarter, we'll 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 million of structural savings.
Which related to recent 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 and as volume increases.
Right no. That's that's quite helpful. Thanks, very much everyone. Appreciate it thanks.
Thank you John Thanks.
Your next question comes from the line of Julian Mitchell with Barclays. Your line is open.
Hi, good morning, and thanks, Patrick for all the help.
Look forward to working with you again, Steve.
Perhaps.
The first question just around the the topline again I understand that I think you called out good orders and good backlog trends in the short cycle business and product.
Wanted perhaps to focus on that solutions and service and process piece I think the process sales were down.
20, percents will start in Q4.
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 21, and when we could start to see that solutions and service book to Bill I look a bit healthy I think it was down year on year the book to Bill in Q4.
That's right Julien.
Typically the 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 as we talked about in some other areas like mining.
And pulp and paper.
The activity is a little bit more vigorous we we continue to focus on the opex expenditures in oil and gas through sense CEA.
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 ended the day you have to compete and win for each order Thats up Theres 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 Thats what were focused on not only with our traditional resources, but with some.
The new acquisition, so I've got a 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 OTI cyber security with Avnet, an already low when we look at Mds 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 isos projects increase in frequency.
Thank you and then maybe.
Maybe Blake just a more strategic one and perhaps we'll hear more about this at the Investor day, but it didn't seem as if the broadening of that strategic alliance with PTC was quite substantial sales, but you talked about a couple of weeks ago.
Maybe give us some background as to why the relationship now includes PLM and sat and maybe how your own perspectives on the benefits of co offering PLM may have shifted this at all.
Sure well Julien I know 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 are doing directly with PTC, but on the EPS side as well for instance, and then our own factory talk analytics offerings.
Another Rob.
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.
Just to be on the same side of the table as we're both focused on increasing that recurring base, specifically with respect to to PLM and on shape in 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 in respect to customers installed base, but having the ability when a customer is looking at PTC be above.
Guilty to include that into digital thread 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.
TC technology with our own offering not just on the software side, but also really importantly, all the way that data is pulled from the control and brought up to that information layer.
Great. Thank you.
Youre welcome.
Your next question comes from the line of Jeff Sprague with vertical research John Your line is open.
Thank you good morning, everyone.
Yeah good morning.
Two for me first just kind of on the software and controls side.
Thanks for the time, we re states.
Kind of interesting right software control kind of in the two worst quarters of the pandemic basically.
Performed in line with intelligent devices Wonder if you could just speak to your view of kind of resiliency in that business overtime and.
As part of that if we're going to talk.
Our our can you baseline us on on what it is for the fiscal year 2020. So we are kind of level set here.
Yes, Jeff ill make a couple of comments and then.
Patrick and Steve May may add to that I mean, so if we're in 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 two 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.
We see some evidence of that as we talked about the grade.
Performance in packaging go we end compact logics really performed quite well relative to what.
The rest of the control during guidance 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 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 a our art, it's a little bit over a 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.
In the next few years and we think we're on a good path to do that I should add you know it takes all hands on deck to make that happen. It starts with great software either.
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 processing, those orders and that we are 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 X and more.
Kind of interested in the philosophical decision there I mean, we've seen that happen that other companies. So certainly you're not alone most of the places that happened there was kind of a 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 gleaned from making this adjustment right, it's kind of a 2% of earnings.
I guess my read would be.
No we've got a much more active M&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 to doing more acquisitions than perhaps in our history, we have a goal of growing.
Growing top line more than a point per year from from acquisitions, and we have been doing more and we thought that was the right time to make the change and come more in line with a lot of other companies that we compare ourselves.
Thank you.
Your next question comes from the line of Steve Tusa with Jpmorgan. Your line is open.
Hi, good morning.
Morning.
So just thinking about kind of the sequential or I guess the year over year performance, maybe a little bit better Kaz, because John kind of got you on the sequential side.
Two q. last year, you guys outperformed almost everybody by a lot and anything you guys want to kind of highlight as far as the the project comps there at all.
In the second quarter that we should take it take counted in our models.
Yes, Steve I think we're in a period of time in general where things are going to be highly.
Highly variable.
By geography, and by end markets and by end user OEM splits so for looking at top line there.
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 on the results in general the theme is of course towards towards recovery and as we said as we as we pull out from the Q3 trough we.
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 the other point I would make regarding Q2 that you mentioned to fiscal 20. 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 to two but all of our bonus headwind of $115 million for the full year.
Headwind is going to play out by quarter, something like 10 million headwind in Q1.
$45 million to $50 million in Q2.
And approaching 30 million per quarter in Q3 and Q4 okay.
Okay, great. Thanks for the color and then just lastly on these new these new segment breakout.
On the software and controls side I mean, I think the majority of those sales are.
Kind of logics and and the the plc is.
Does margins and I think 19 at that the peak or 30 per cent for that segment.
Given that the vast majority of that segment is the is a hardware.
I can assume that that that that hardware sale is pretty high margin for you guys.
Well, yes, no question that.
To a large its hardware is good margin for us.
If you if you do the math and you look at what we provided on fiscal 20 breakout by segment about 1.7 mid 1.7 billion in software and control and all of the software.
As in is in this segment.
So that we said is over $500 million in fiscal 20 of the pure software and then Doug.
I should also mentioned that this is Doug segment that is currently attracting the majority of our investments whether it's in logics or its in the software development.
As a percentage of the sales side. This this segment would have the highest investment right and then PTC related sales that come through there I think you've 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 if we package PTC an offering to one of our customers, we probably achieve between 30 and 40% incremental margins. There. So in line with the overall company average lower of course than if it would be our own controllers are our own software.
Yep, great. Thanks, a lot for the color I appreciate it thank.
Thank you Steve.
Your next question comes from the line of Andy Kaplowitz with Citigroup, Andrew Your line is open.
Good morning, guys, Patrick Congrats Steve looking for to working with you again.
Thank you again.
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 re shoring or investing to avoid single point of failure. We know you've talked about in the past life Sciences semiconductors are you seeing investment continued to increase in these sectors, we're 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 it related to this type of investment.
Yes.
As we've talked about before Andy Life Sciences is probably the area, where we had the longest list of customers that.
I have announced plans to do things in the us.
Some of these.
I've been public about what they're doing you think about what.
Becton Dickinson is due and Sanofi and so on and other customers. So 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 Doug.
The work that we're doing with them and Theres, some others out there and other industries, our consumer electronics consumer tools.
I'd say, it's a steady cadence on 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 re shoring, we see it as steady, but the business thats coming out of it it's meaningful.
Certainly in the millions 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 guiding to automotive being up 10% in that slide 20 on was there anything that kind of holds.
Back in Q4 versus build and maybe update us on sort of the transition were seeing it seems to be accelerating a bit that should help you I think as you go into 21.
Yeah, we did see as with almost all our industry. So good sequential it was so strong.
Double digit sequential increase in automotive so up 20% gives us optimism and as we talk about fiscal year 21 getting to around 10% growth in automotive.
We think we have a line of sight on the projects.
And the improving your 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 E.
Across the general.
The general portfolio for automotive.
Thanks for that Blake.
Thanks and welcome.
Your next question comes from the line of Andrew Obin with Bank of America, Andrew Your line is open.
Yes, good morning.
Hey, good morning, Andrew.
So Patrick congratulations.
Steve look forward to working with you again to everybody has mentioned.
Let's hope maybe Patrick I'll ask your question about Opex going FX, if my right now.
Right.
If you could.
Hi, Jeff.
Couple of questions. So first.
Also announced in addition to PTC partnership.
We also announced the expansion of your partnership with Microsoft and I was just wondering because Microsoft is aligned with PTC, but yet they are trying to do their own thing and industrial vertical can you just talk a little bit more what as 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 are more focused on hsas more focus on cloud. So that's my first question.
Sure.
The primary focus of this new expansion of work with Microsoft is targeted at Azure infrastructure in the cloud and so we're working with Microsoft and Doug will be demonstrating.
Some of our new capabilities that are already well along in the areas of design.
As well as information and using a SAS approach for new capabilities. So these really compliment our existing capabilities and are kind of a four runner 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.
In our OTI 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 thats 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 the sales force or else sales to sort of do more of the Saf is your sales.
It you were certainly going to be adding additional talent and learning new motions within our sales force, but you know, it's really a microcosm of the overall convergence of ITC and OTI. Our Homefield advantage is our understanding of these customers and the operational technologies and what happens on the ERP.
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.
Just a follow up question going on with the New administration.
Frank are we hearing from a lot of investors that.
Near administration, maybe means less focused on re shoring because parents will go away what kind of conversations have you had with your customers.
How about sort of contingency plans and our longer term strategy.
On capacity in the U.S. them globally in light of the election results. Thank you.
You know we're encouraged in that.
The.
Biden campaign, and the Biden administration has talked about the importance of us manufacturing and so.
That is the single most important issue for us and where we are optimistic that they recognize the importance that manufacturing in this country plays as a part of the final 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 us along with the attendant issue of workforce development, which is.
Crucial crucial issue for us as well.
Very much.
Your next question comes from the line of Nigel Coe with Wolfe Research. Your line is open.
Thanks, Good morning, everyone. Thanks for fitting me in here.
So just just want to go back to John's question on sequential sales.
The one queue up 5% and I'm not sure if that was what you indicated just normally one Q is below full Keith I just wanted to show I got that right.
Yes. So we are seeing some momentum as I described in the in the product side, but 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 thats part of the reason why we mentioned that Q1, EPS could be down sequentially expected to be down sequentially from.
From Q4 that as well as the sequential headwind from the.
The temporary actions.
Being reversed and bonus being reduced.
But the point is that there is enough momentum in products that that could offset the seasonal downtick in solutions.
Yes, I think directionally, that's probably the case.
Okay, Great. That's that's that's helpful. And then the you know the expansion of the relationship with PTC.
One of your competitors.
Ticket very strong view on the PLM plc integration and I think historically your books being a bit more Scott.
Skeptical about that I'm, just wondering as they've been a change in your view of the integration.
Amongst those live and then within that have you done all of the investment required to offer a.
Good solution.
With with PTC are there still some investment spending to be done around that.
Yes, I wrote our view is that a customer is going to have multiple applications to create their version of the digital thread and thats going to vary by different industries. So what you're looking for in terms of a digital thread in oil and gas is going to.
The different than what you were 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 live work.
Thanks.
This past summer was on shape and our emulate three D.
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 and it's helped us win competitively and other in other areas, but that doesn't mean that we have to have that capability. In every instance in house.
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 tenet of our approach to the market and so we don't necessarily need to own everything, but where we pick up but.
It's really interesting use cases like the one I just mentioned between on shape and emulate greedy. That's an example, where we will go deeper and we will provide additional integration tools to add value.
Great well, thanks, Blake, Thanks, Steve and Patrick Good luck.
Thank you Nigel.
This concludes our question and answer session I will now turn the call back over to Jessica crackers for closing remarks.
Thank you. Thank you Amy I'll turn it back to Blake for a few final comments. Thanks, Jessica Nobody is better positioned than rock want 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 want to wish Patrick all the best Patrick you played a big role in our success and you will be missed.
Wish you all good health and thank you for your interest and support.
Okay.
This concludes today's conference call at this time you may just disconnect. Thank you.
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