Q2 2021 Rockwell Automation Inc Earnings Call
Thank you for holding and welcome to Rockwell automation and quarterly conference call I need to remind everyone for today's conference call is being recorded.
Later in the call we will open up the lines for questions.
You have a question at that time, Please press star one.
At this time I would like to turn the call over to Jessica Caracas.
Head of Investor Relations. Please go walk US. Please go ahead.
Thank you Tania and good morning.
And thank you for joining us for Rockwell automation and second quarter fiscal 2021 earnings release Conference call with me today is Blake Moret, our chairman and CEO.
CFO and Steve Etzel, our senior Vice President of Finance. Our results were released earlier this morning, and the press release and charts have been posted to our website.
Press release and charts include and our call today will reference non-GAAP measures on the press release and charts include reconciliations of these non-GAAP measures.
Cash on this call will be available and that website for replay for the next 30 day.
Convenient a transcript of our prepared remarks will also be available on our website at the conclusion of today's call.
Couple of months for information related to our new business segments can be found.
Excellent.
Right.
Sorry, I need to remind you that our comments will include.
Statements related to <unk>.
And our company.
Keith.
Actual results may differ materially from our projections due to a one.
Range of risks and uncertainties and are described in our earnings release and detailed and all of our SEC filings, so with that I'll hand, the call over to Blake.
Jessica and good morning, everyone.
Thank you for joining us on the call today.
Slide three.
Strong orders momentum, we saw last quarter celebrated and broadened verticals and fiscal Q2.
Surpassed $2 billion, which is a new record.
And as orders grew double digits from last year's orders.
As you May recall, COVID-19 did not significantly impact our business until the June quarter of last year.
Total reported sales grew 6%.
And a two point contribution from recent acquisitions, including Awesome Calypso and fix.
<unk>.
Organic sales grew a little over 1% versus prior year, despite significant supply chain constraints.
And your fracturing supply chain continues to be stressed by sharply increased demand.
Bruce.
And surround.
And have reduced our food and narrowed freight lanes.
James navigate these challenges and the coming months.
For us to continue increasing our supply chain and resiliency.
I will now comment on our top line performance by business segment.
Told you devices organic sales increased 6% and.
And by strong broad based demand for our automation products.
And our motion control offering continues to shine John doubled.
Double digits CPG companies continue to add packaging flexibility.
Software and control organic sales also grew 6%.
Strong demand across this segment.
So our growth and logics control visualization hardware and software.
At work and security infrastructure and across the balance of our factory talk software portfolio.
Net sales growth over 12% for this segment and the core.
Orders for the intelligent devices and software and control business segments.
Strong double digits year over year and sequentially.
Moving to lifecycle services and.
Net sales declined 11% versus the prior year.
Primarily impacted by weaker performance and oil and gas on.
And on a sequential basis revenue and orders from mid single digits.
And that continued sequential sales improvement and this segment.
Elements of the year.
Information solutions and connected services and another strong.
<unk> quarter.
And sales and orders.
Digits on.
<unk> across a variety of end markets.
This quarter's orders also included a number of meaningful software and infrastructure as a service multiyear wins for some of the world's largest food and beverage manufacturers.
This included Kraft Heinz where we actively monitor for industrial network and cyber security environments.
These wins also contribute to <unk>, which grew double digits year over year.
Total backlog grew strong double digits on an organic basis.
Year over year and sequentially.
Turning to profitability segment operating margin of 22%.
And adjusted EPS of $2 41.
Were above expectations and overcame headwinds from the reinstatement of the bonus and higher costs related to supply chain constraints.
Stronger volume favorable business mix and timing of spending all contributed to our strong profit performance and the quarter.
And we continue to increase our business resiliency.
Let's now turn to slide four where I'll provide a few highlights of our Q2 and market performance.
And use our organic sales.
You had a very good growth on the discrete industries segment.
High single digit sales growth significantly above our expectations.
Within this industry segment automotive sales were in line with expectations declining mid single digits versus a strong prior year period, when auto grew by over 20%.
We continue to estimate 10% organic sales growth for the year and this vertical zoom.
<unk> continues to grow and as an increasing number of capital projects are expected to launch and the second half of the year.
Despite chip shortages impacting automotive production, we are not seeing related delays and capital for operational spending for our products.
The semiconductor vertical significantly outflow outperformed our expectations this quarter.
Growing about 15%.
We believe strong secular tailwind.
Increasing capital spend.
Auditing share of wallet with customers are all driving our growth and share gains and this vertical.
As a result, we are raising our semiconductor growth outlook approximately 15% for the year up.
Up from our original November guidance of mid single digit growth.
Another highlight within discrete was our performance and e-commerce with sales growing over 70% versus prior year.
Once again, our differentiated offering featuring our independent cart technology is enabling e-commerce applications at a growing number of from our key accounts.
This vertical has significant sales secular tailwind of course and has become a bigger growth driver for our overall discrete industry segment.
Turning now to our hybrid industry segment. These verticals also had a terrific quarter.
Food and beverage grew over 10% as our strong product portfolio, which enables these customers to efficiently add skus as they seek to differentiate their offering and maximize their growth.
And increased capital spending by food and beverage customers in the quarter.
Not surprisingly packaging Oems are also very busy.
Tribute and another quarter of double digit growth versus the prior year.
Life Sciences grew about 15% and Q2 led by strong demand in North America and Asia Pacific.
One important mes project during.
During the quarter.
Opening the door on Aes <unk> pharmaceutical company.
Based on the challenge of exporting products that need to comply with FDA regulations.
Don.
And expecting production efficiency and quality.
<unk> improved by going paperless and their choice of Rockwell <unk> pharma suite and the yes.
Based on the broad based increase and life sciences demand and the.
Share gains we are seeing and this market.
We're raising our view on life Sciences, and expected to grow about 20% and fiscal 'twenty one.
Process markets were down approximately 10%.
Weaker than expected led by larger declines in oil and gas.
Process verticals typically lag our discrete business by about half of the year.
That said <unk>.
For a sequential improvement again, North America oil and gas during Q2.
Finding customers are also becoming more active.
So on low single digit growth and the quarter.
Turning now to slide five and our Q2 organic regional sales performance.
North America organic sales grew by 2% versus the prior year, primarily due to strong growth and food and beverage E Commerce and life Sciences.
<unk> sales declined 7% driven.
Driven by oil and gas metals, and auto partially offset by strength in food and beverage.
Sales and the Asia Pacific region grew 16%.
Broad based growth led by semiconductor chemicals and life Sciences.
Asia Pacific backlog reached another record high and the quarter, we expect strong sales growth and the region.
The upcoming quarter and full year.
In China, we saw over 30% organic growth driven by strong growth and all three industry segments, including particular strength and EV and semiconductor in discrete.
Higher life Sciences, and food and beverage and hybrid.
And mining and chemical and process.
And we expect growth in China will exceed the company average for the year.
As our longer cycle businesses kick in.
Let's now turn to slide six.
Highlights for the full year outlook.
Orders momentum and the first half of the year.
Back to drive strong sales growth and the balance of the year.
Especially as we enter a period of easier comps.
Our topline guidance is driven by improvements during the quarter, our discrete and hybrid industry segments and <unk>.
More than offset incremental declines and process.
Our new outlook for total reported sales is over 10% year over year growth at the midpoint.
Moving 7% organic growth.
For automation is not the only driver of growth. This year as we also expect double digit sales growth and information solutions and connected services.
We're seeing good contribution from both organic and inorganic sources.
Also we expect double digit <unk>.
Growth in fiscal 'twenty one.
And I expect margins to stay relatively flat with last year. Despite the reinstatement of our bonus and the incremental one time investments, we spoke about last quarter and will largely impact the second half.
Our new adjusted EPS target.
And of $9 15 at the midpoint of the range represents over 16% growth compared to the prior year.
For detailed view into our outlook by end market as found on slide seven.
And I won't go into the details on this slide but as you can see we continue to expect broad based organic sales growth this year with oil and gas lagging or.
And our diversification across higher growth end markets is one aspect of the increasing business resilience and we talked about during investor day in November.
With that let me now turn it over to Nick will elaborate on our second quarter performance and updated financial outlook fiscal 'twenty one.
Thank you Blake and good morning, everyone.
Slide eight second quarter.
Sure.
Second quarter reported sales were up five 6% year over year.
Organic sales were up one 3% slightly better than our expectations.
Acquisitions contributed one nine points of growth.
And currency translation increased sales by two four points.
Segment operating margin was 22% flat compared to Q2 of last year.
This represents strong underlying improvement considering a $60 million headwind from the year on year change in the bonus.
Corporate and other expense of $30 million was $12 million higher than last year.
Merely due to mark to market adjustments related to our deferred.
Updated effective tax rate for the second quarter was 16, 7%.
Last year's rate benefited from several larger discrete items.
Second quarter adjusted EPS from $2 41.
And our expectation.
On the rate year over year adjusted EPS Bridge for Q2 on a on later slides.
Keith.
And.
Free cash flow.
Okay.
And the final.
No.
On slide.
And.
For the year, we are on track to our full year net.
March 31 $674 million remain available.
And the authorization.
Slide nine provides the sales and margin performance overview of our three operating segments.
Intelligent devices segment had organic sales growth of five 8% and the quarter.
Segment margin was 23, 8% 80 basis points higher than last year, mainly due to higher sales and lower spend partially offset by the reinstatement of incentive compensation.
As Blake highlighted earlier, we once again had strong orders performance in the quarter, particularly in our products businesses.
<unk> devices orders grew approximately 20% both year over year and sequentially.
Software and control segment organic sales grew five 6% and the quarter.
Acquisitions contributed four points to growth.
Segment margin was 29.
Okay.
Seven.
Rob.
Margin benefit.
And from higher sales was offset by the reinstatement of incentive compensation.
Software and control orders also grew mid teens, both year over year and sequentially.
Organic sales of the lifecycle services segment declined 11% year over year.
And the recovery and this segment continues at a slower pace and our.
And <unk> businesses.
Acquisitions contributed.
Okay.
Operating margin for this segment declined 310 basis points to 9% versus 12, 1% a year ago.
Primarily due to lower sales and the reinstatement of incentive compensation.
Partially offset by favorable mix and cost savings from actions taken and the prior year.
Second quarter book to Bill performance for the lifecycle services segment was 109.
The next slide and provides the adjusted EPS walk from.
And.
For 2020.
Starting on the left.
For the first one.
And the positive impact of approximately.
Sam.
Okay.
Okay.
Yes.
Yes.
Okay.
Okay.
Good day.
Okay.
Hello.
Thanks for that.
Okay.
Sure.
Okay.
Yes.
John.
Yes.
Slide 11.
Our net order trends.
Slide shows our average daily order trends for our products.
Sure.
So for bulk sales.
Order intake for products.
Q2 product order levels grew year on year as well as sequentially.
And they are at an all time high.
Literally strong areas, where and ocean.
Utilization and logic.
Orders for the lifecycle services segment also improved in the quarter sequentially.
At a slower pace and our product order growth.
The overall strong order performance resulted in record company backlog.
Growing over 30% year over year double digit sequentially.
This takes us to slide 12 updated guidance.
We are increasing our organic sales growth outlook by one point across the range.
The new range is five 5% to eight 5% with a midpoint of 7%.
We expect currency translation to now contribute about 2% to growth.
We still expect acquisitions to contribute one 5%.
And total the mid point of our reported sales guidance range is 10, 5% for about $7 billion.
We've also updated the adjusted EPS guidance to a new range of $8 95 to $9 and 35.
I'll review the bridge from the prior guidance midpoint to the new $9 from 15 midpoint on the next slide.
Segment operating margin is expected to be approximately 19, 5%.
This is unchanged from prior guidance and primarily reflects strong Q2 margin performance and the higher sales guidance on.
Offset by higher <unk> higher supply chain costs bonus expense and less favorable currency.
As a reminder, second half includes higher spend as well as the incremental one time software development and sustainability investments that we discussed on last quarter's call for.
And the onetime investments will primarily affect the software and controls segment.
Our adjusted effective tax rate is still expected to be about 14%.
And as prior guidance.
As previously mentioned this includes a 300 basis point benefit related to discrete items, which we expect to realized late in the fiscal year.
We continue to project free cash flow conversion to be approximately 100% of adjusted income.
Additional comments on fiscal 'twenty one guidance.
Corporate and other expense is expected to be about $110 million.
Total purchase accounting amortization expense for the full year is expected to be about $50 million.
Net interest expense for fiscal 'twenty, one is still expected to be between 90 and $95 million.
And finally, we are still assuming average diluted shares outstanding of 117 million shares.
This takes us to slide 13.
This slide bridges, the midpoint of our January adjusted EPS guidance range to the midpoint of our new guidance.
Starting on the left and.
There is a higher contribution from core operating performance, primarily due to the higher organic sales guidance and favorable mix, partially offset by higher supply chain costs.
Contribution from currency is now expected to be 10, lower average of prior guidance.
Given the increase in guidance there is about a 15 and impact from higher bonus expense.
Which brings the new midpoint of the guidance range to $9 and 15.
And finally quick comment regarding the second half.
And second half year over year organic sales growth of about 20%.
With that I'll hand, it back to Blake for some additional comments thanks, Nick with the solid first half under our belt look at the remainder of fiscal 'twenty, one with optimism.
On order trends and record backlog and underpin our robust topline outlook, we have confidence and our team's ability to navigate the supply chain challenges.
Looking to our future.
And to invest and software capabilities moving development sales resources and infrastructure. These.
These investments support strong growth and our software business and our fiscal 'twenty two and beyond.
Momentum would not be possible without the tremendous efforts of our employees I'd like to thank everyone at Rockwell and particularly our integrated supply chain organization, which has done a great job managing pandemic challenges and now mitigating our sourcing and logistics constraints.
We're leveraging our own manufacturing expertise to help customers be more resilient and agile and sustainable.
Nobody is better positioned to help our customers deal with these increasingly complex manufacturing challenges and opportunities and Rockwell and our ecosystem of best in class partners.
With that let me make some remarks about Steve Etzel. Please.
Who's participating and his final earnings call.
Steve stepped up during a critical period for us as we pivoted into the early stages of this recovery and accelerated our transformation.
And experience dedication hearing for fellow employees.
Actually what we need it.
Nick and I joined thousands of employees and wishing Steve and Michelle all the best.
Happy retirement of adventure.
And.
I'll pass the baton and back to Jessica and.
A Q&A session.
Thanks Blake.
For Q&A I, just want to say that we would like to get to as many of you as possible. So please.
Limit yourself for one question and a quick follow up and for those of you who that have some trouble on hearing us on the call and we'll make sure to have the prepared remarks available on our Investor Relations website immediately after the call with that let me pass it on to tie out to start the Q&A.
And as a reminder to ask a question you will need to press star one on your telephone to withdraw your question Mr. Powell, our husky. Please standby, while we compile the Q&A roster.
Your first question is from Scott Davis with Melius.
Okay.
Good good morning, everybody and congrats Steve on retirement.
Thank you.
Good to hear your voice Nick.
Anyways.
Blake. This is about the most excited I've heard you on an earnings call and awhile.
<unk>.
When you think about these big new giant and semi projects that have been announced when do you start.
Submitting rfps for those and.
And do you envision that being kind of 2022 or 2023 business I assume none of that is in the new projects are and your your increase and forecast in 2021.
Scott.
We are seeing and some increased business and.
And semi.
And I don't know guidance going into the U S. Fabs that have been announced but with some of these customers were already seeing some significant orders, which contributed to semi and helping to power the growth in Asia. So yes.
It's not just the big Fabs going into the U S. Its activity and other parts of the world and we're starting to see that now as far as the U S. Fabs go I think Youre right I think that's more of a story for next year and beyond but John.
Everybody and that industry is making investments and <unk> and we're working on it working hard to maximize our our share of wallet and that each of those customers.
Good and and just a quick follow up on the incentive comp is that as the run rate guide for <unk>, what we should expect and each of the quarters. This year.
Scott the run rate that we've been out for the first half is what we should expect for for the for the second half as well.
A little higher in the the actual run rate and the second quarter, because it was a little bit of catch up given our added performance, but the run rate. We're at through the first half is exactly what we expect to have and the second half.
Okay. Thank you good luck guys. Thanks.
Thanks Scott.
Your next question is from Andrew <unk> with Bank of America.
Yes.
Good morning, just a question.
Sort of longer term question.
And what kind of conversations are you, having with your customers, who I know that short term things are getting better.
You guys are excited about longer term prospects for U S. Capex, but are you starting to have these discussions with your customers about sort of longer run capex growth in North America.
Andrew.
I do believe that this is the beginning of a sustained period.
<unk> expansion and the North American manufacturing economy.
Breath of the orders that we're seeing the mix of.
And I was supplied for existing operations plus expansions and then the occasional greenfield.
<unk> gives us a lot of confidence that we are seeing a sustained period of growth and we're having those discussions across various industries.
And you look at EV.
There's no chance of that slowing down if you look at semiconductor for the obvious reasons as they are increasing capacity e-commerce.
With the secular tailwind there life sciences food and beverage.
The return and for oil and gas.
All of those are areas that we have significant exposure to and we expect that that's going to sustain for a period of time.
And just a follow up question, how do you adjust your own supply chain and manufacturing footprint.
To be able to service this which seems to be a structural increase for a while.
And you look at increasing single points of failure and.
And the supply chain.
On both on the part of our suppliers as well as and our own internal operations and some cases thats.
John and supply and other cases, it's John.
Redundant lines within our own operations when it comes to areas, where there is engineering required for.
And specific projects more work in terms of remote operations to be able to go deeper and the commissioning process remotely final acceptance testing.
Does it require the same degree of travel that it once did.
And looking carefully at.
All right sizing, our operations and inserting the agility, including our own automation.
And to be able to maximize and number of different products that can come off a single line. So you look at the same kind of packaging flexibility that's driving the strong double digit growth packaging Oems, we're incorporating a lot of those same concepts and our own operations.
And including our manufacturing just down the hall from where we are right now and Milwaukee.
Thank you.
Thanks, Andrew.
Your next question is from John inch with Gordon Haskett.
Alright, Thank you and good morning, everybody.
I'd like to start on taxes Rockwell carries I think the lowest tax rate and multi industry are very close to that.
<unk> drive to raise U S corporate taxes succeeds or their tax leavers Rockwell can pull to offset what would appear to be possibly a disproportionately negative impact for your company.
And John as far as levers, we would call. It is still a little early to say exactly what we would be doing but we continue to look at how we would best optimize our supply chain and servicing our customers and what that would mean for our for ultimately for our taxes.
But in terms of other levers I think we're just waiting to see what how this materializes as far as the impact it will have like we've shared in the past and our 10 10-K the components.
This.
And of our current tax.
Tax rate.
And certainly a higher tax rate would impact us, but also components like SDI and guilty and relative to the provisions were really waiting to see more specifics on what it ends up looking like to.
And to really know how this will impact us and total and whether there are any additional levers we can go after.
Well, Nick based on your understanding of what's being proposed because it's all there on the thought there on the web right.
Rockwell success, and having lowered its tax rate, presumably through international your international operations and the way you're structured.
Is any of that prospectively more at risk versus simply you being in the same boat and your U S taxes will rise along with everyone else I don't think anyone's that concerned if Rockwell U S taxes about the same as everybody else's because it is what it is it's more to the question of the opportunity to maintain.
Fortunately lower tax rate based on your success is having achieved this are there provisions that you understand that could be sort of tackling those areas and can you do something about that type of thing.
Yes, so yes, youre exactly right John Yes, there is a increase and the tax rate that will impact us as I presume it will impact others fairly proportionately, what we see and what's been written and that has an impact on what we have and as an advantage in.
And relatively low guilty right.
And a and some benefits from SDI.
We're still waiting for any kind of information out there is replacing FTIR. If theres any incentives that are going to be put in place to be encouraging U S based manufacturing, which Rockwell does have a significant base of U S manufacturing.
And then in the and John just making a bit broader macro.
Changes to U S tax policy that ultimately do encourage.
On more U S based manufacturing.
And that ultimately benefiting our underlying business as well given our strong presence that we have and the U S.
Yes, no I agree with that.
Just then lastly, Nick in the short time, you've been at Rockwell and I'm wondering if you could talk about best practices or accomplishments you'd like to say bring over or see adopted based on your many years at three a M.
Hey, John Thanks for that question.
Let me just describe it this way what are we seen as priorities and then what on what I'm observing and the company first from a priority standpoint.
A high degree of priority in my early days here on execution.
Lot of moving parts in the World and in this company and making sure that our company delivers.
From an execution perspective, that's a high priority and then.
Rockwell has some very sound strategies about how would you be continuing to increase our importance on on our customers.
As the world of automation changes and industrial automation changes and my focus is going to be how and how do we best realize those strategies and make those happen now John and part of your question just early observations.
A great company.
And one of the things I find very refreshing and.
Positive. This is a company full of engineers engineers focused on productivity and that kind of productivity and enables.
Opportunity for investment so I find it very healthy balance here of what are we doing to drive productivity, but also how do we invest it for future growth.
Got it thanks, Nick Thanks Blake Thanks.
Thanks, John.
Your next question is from Julian Mitchell with Barclays.
Okay.
Just wanted to.
Highlight maybe on the segment margin outlook.
And it looks like and the second half Youre, implying a segment margin.
<unk> slightly year on year.
And despite the very high organic growth of 20% so on.
Understand what's going on with incentive comp, but maybe just on investment spend.
Remind us sort of the scale of that investment and the second half.
And if there's any specific weighting between the two quarters that are less.
And whether there's any sort of carryover investment spend into next year as an increase.
And as far as the year over year margin. So comparing the second half of 'twenty 'twenty two the second half of 2021.
And those margins are going on as you just said aren't going to be pretty similar and some of the things that will be improving that margin year over year is the growth, which we just mentioned.
Some added price.
And also we will be benefiting from some of the action and structural actions that we've taken over the last 18 months.
Well it will be depressing that are bringing that margin back down to two year on year more or less flat is this bonus impact, which we've talked about.
Some rising input costs and then the investments that day.
I think the really the heart of your question and the investments spending that we're doing and I'll put it and perspective for you for the first on.
For the second quarter, our investment spending was down a couple percentage points from the second quarter last year for the full year, we expect them to be up two five percentage points versus full year 2020.
And those are coming from the investments that we've talked about with you already some of it. The one time accelerated software development expenses that we're funding and thats going to be happening fairly evenly in the in the last two quarters of the year, but we're also investing in.
And added growth platform and Thats been part of the plan.
Some of that involves hiring and projects and just as a little bit of color. We did see a $5 million to $10 million shift of spending from the that we intended to have and the second quarter shifting into the second half of the year, primarily due to higher a bit higher.
Net.
Delay and hiring as well as some project delays.
Not changing our overall spending plan, but but.
But shifting a little for that and the second half of the year. So overall, we're expecting.
On a noticeable uptick and investments in the second half of the year as.
As far as the run rate into next year some of that will be trailing off we have been very careful about some of these incremental investments, particularly the ones, we talked about last quarter that they will.
And our temporary one time and will not be carrying forward into 'twenty two.
And thanks for.
And into our second half EPS assumption, which more or less is unchanged from what we were saying a quarter ago.
Thank you Nick and maybe.
And just a follow up question around lifecycle services trends per se.
And those were down low double digits last quarter.
Book to Bill of almost one point too.
So maybe characterize for us what kind of recovery.
We could see and lifecycle services from here.
Yes, let me just make good.
A general comment and then Nick and add additional color, but lifecycle services backlog.
And is up year over year and sequentially and so we are expecting on us.
Sequential improvements through through Q3 and Q4.
Yes.
Yes, Blake just said we continue to expect it to get better we do expect for the full year it will not be growing as fast as our other two segments.
Great. Thanks, very much and I wish Steve all the best Thank you.
Thank you Julien.
Your next question is from Steve and Jeff Sprague with vertical research.
Hi, Thank you and good morning, everyone.
Yeah, Hey.
And just maybe two from me.
First on supply disruptions and I'm, sorry, if I missed that you were cutting out a lot at the beginning but.
Can you just elaborate a little bit.
What you saw in the quarter and we did pick up some things on our survey that suggested you were having some problems delivering plc's and other things.
Can you just give us a little bit of color on where you are whether that's accurate where youre at on kind of untangling that.
And was there any kind of discernible negative top line impact.
From supply disruptions, either in the quarter or and your outlook for the back half.
Yes, Jeff we factor.
On supply chain constraints into our outlook.
So there is an impact and I.
It's the things that you're hearing about throughout the industry that are affecting us like other manufacturer. So certainly electronic components, including chips are in short supply.
Seeing other mechanical.
Products and materials.
<unk> John.
Strength with resins that are used and a variety of manufacturing processes based on some of the bad weather.
A little shorter term then and some of these other issues.
Fran lines continue to be narrow and so.
James Constricted.
And transport products would be another area.
On a nice job of.
And having the necessary labor.
So we really kept.
And to an absolute minimum.
And fracturing operations.
<unk> hired more and we've added several hundred people.
And the last quarter and so that part is.
But we're going to continue to be.
Okay very good.
And <unk> situation based on sharply increased demand.
And as well as others and we're working with customers to minimize the disruption.
Yes.
Okay.
And just on the investment spend.
I understand there is some identifiable things youre doing that might be a little bit larger than a typical project, but it doesn't strike me that a two 5% increase and investment spend for the year is unusual, but you're you're kind of suggesting it is as part of this margin construe.
And so.
Perhaps I have that wrong, but two 5% growth and investment spend I think we'd be about 50 million bucks and that kind of dovetails to the 35, you talked about and the back half on the on the software deals as there is there something else and that equation.
And maybe you could just frame the kind of the normal trajectory of investment spend yes.
Yes, Jeff I think I think the.
Part of that and I just wanted to make sure. It is.
Is clear is that that increase and mix and investment spend is all second half in fact more than all and the second half because year on year and the first half it was down so just as we look sequentially first half the second half, we're seeing that sequentially going up brings the full year or two that.
And $50 million.
I think you were talking about of the year on year change and.
And all of that change is coming in the second half.
Got it thank you understood.
Okay.
Your next question is from Andy Kaplowitz with Citi.
Hey, good morning, guys.
Andy Andy and Steve Congrats and welcome Nick.
So you mentioned the Big March order, you had and your order trends, which makes two out of the last three quarters that you've called out larger orders. So given your focus for instance on independent cart, which does tend to attract large orders and increased focus on ecommerce at what point are these larger orders for the rule and the exception and then could you talk about.
And the cadence of your Q2 orders ex the large order and March did you see a continued pickup in orders throughout the quarter.
Andy Let me start by saying I hope Youre right and I hope.
We're seeing these large orders.
For across different industries and they are for.
And offerings becomes the rule rather than the exception.
We are happy to see it and.
The most recent one as you said was in e-commerce.
And traditionally havent called out and as much specificity.
On the orders development from month to month for quarter to quarter, we thought during the pandemic. It makes sense to give you that additional visibility and.
And it does show.
Helping dynamic of having some of these large orders.
John.
Industries and in some cases non traditional offerings.
It gives us more ways to win.
So we're looking at that we have seen a little bit of an uptick and large orders in general that began in Q2.
And we would expect that to continue as our lifecycle services segment kicks in.
And that is where.
Fairly good proportion are bigger traditional projects are home route. So we do expect more of that to come.
R&D of our business continues to be.
For run rate and we used to say $3 million to $5 million was pretty big project for us, but now were seeing and increasing frequency of our bigger ones.
Blake that's helpful. And then you hired several new leaders, including that go a few months ago, We know Scott and Brian have different roles, but both seem focused on improving and improving and accelerating Rok software sales annual recurring revenue. So maybe it's early days, but could you talk about the impact they are having so far on that side of the business.
And we just focus on software and controls and obviously has easy comparisons and the second half of your fiscal year, but it's already growing 12% in Q2. So is the expectation at this point for the segment could be a double digit grower.
And through maybe 'twenty two.
I won't comment specifically on 'twenty, two but I really like the idea that our highest margin segment is also fastest growing so that's a nice place to be.
I've been very happy with the new perspectives that are newer Jackson's brought to the organization and the way that the organization has embraced them.
That's not easy to do is to bring people and at the senior position and do very well established company with a long culture.
A strong culture, but I've been very happy with the way that we brought in those new perspectives into the organization, Brian and focused on increasing the frequency and the impact of new product introductions, particularly around software and Scott's focused on doing the things to focus our sales force on <unk>.
<unk> outcomes to customers and increasing our annual recurring revenue.
Great experience that he brings and high credibility as he works with our sales force and obviously as Nick said earlier.
And that the financial organization.
<unk> the execution of this strategy are all good things.
Thanks Blake.
Your next question is from Steve Tusa with Jpmorgan.
Hey, good morning.
Hey, Steve and Steve Thanks for all the details.
<unk> is very straightforward and a lot of.
Very informative so.
Is it to digest. Thank you for that I appreciate it.
The $2 billion and orders I think.
And that's like the total absolute number for the quarter correct and.
I mean thats a relatively.
Obviously, a big number.
How do you see that kind of playing out over the course of the next couple of quarters, given it's such a solid kind of book to Bill If you will.
Yes.
And we wanted to call that out because this was really before lifecycle services is kicking in and full so we're expecting a nice run.
And that magnitude of orders for the company over the next over the next few quarters and.
This is primarily driven at this point with products, but again as as the project business ramps up which is our expectation.
And actually doing that could deliver some continued nice results there.
Okay.
And as far as this investment spend is concerned is going back to Jeff's question.
So I think youre, saying that some of the uptick and investments this year.
And it goes away, but does that mean that number is actually down next year or it's just growing less off of the higher base next year, because usually you guys do have.
And anywhere from I don't know of 45 to 50 to even $80 million a year over year headwind and gone back to like 2010 from kind of investment is growing faster than sales.
Is.
And what can you just kind of refine the messaging on on that account and where it goes next year sure. Thanks, and thanks, Steve and I believe it's a little early to get anything to declare give on 22. However, just to clarify this increase and investment spend is approximately $30 million of that that we are seeing is temporary.
Rest of it is part of our normal increase and investment spend and and and the other way to think about it. Steve is we also expect a 30% to 35% until their core conversion and that's that's the way we've operated and Thats. The way we continue to expect to operate.
Right and Thats <unk>.
30% to 35% would be again like on all in kind of number for the segments, including whatever happens with this investment bucket for next year correct.
And when we say that 30% to 35 that Inc.
The investment spend.
However, our holding ourselves to a higher bar and not giving ourselves that credit for that $30 million of incremental spend when we think about that for conversion next year.
Yeah.
Okay.
That makes sense I appreciate the color. Thanks.
Thanks, Steve.
Your next question is from Josh Vogel Winski from Morgan Stanley.
Hi, good morning, guys.
Hey, Josh.
So I just wanted to ask about software for a minute and maybe what youre seeing out there.
Are you running into competitors.
When you win some of these orders is it more of a non competitive a process, where you're just sort of attaching on two and installed base.
And then maybe talk about what product lines Youre seeing strength and I think Honeywell talked about cyber security I know you have and offering there as well so maybe just sort of a landscape of what youre seeing and the software side.
Sure.
And so.
Parts of the software business are still somewhat fragmented where youre largely competing against.
Doing nothing on the part of our customer or.
A homegrown solution and we still see a lot of that within say Iot applications and MBS, it's a little bit more let's say and mature and you are typically youre competing with.
A fairly well known competitors, sometimes our traditional full scope automation competitors, sometimes niche competitors and.
And at visualization and I would say is similar to that which is a big part of our software offering.
Again, a little bit more stratified.
But there is the new application, so Iot analytics and things like that it's still a fairly.
Let's say competitive landscape.
Customers are looking for the outcomes and.
You're also having to dovetail into and installed base, that's a big part of it because a lot of your challenges.
And the interfaces with existing.
Installations, and that's why we've taken that open approach to.
Spect.
And that these customers already have software and hardware in place and don't want to rip It all out with respect to cyber security.
Even apart from the hardware got a cyber security business, that's over $100 million in terms of the services and grew double digits very strong we're seeing good contribution from recent acquisitions of avnet and or low and that's an area that I'm, particularly proud of because.
It's an area that when we introduced it wasn't one that.
Customers necessarily thought of Rockwell first for but.
And we're having a great impact on customers and we're working with a whole new set of decision makers, including the CIO and his or her team.
Really big companies, so very happy with the.
Development of that part of our business.
Got it that's helpful. And then just a follow up question on on the orders, maybe taking a step back I guess at that $2 billion $2 billion of orders really only covers about two thirds of the business.
And so on that longer cycle, but cyclically seasonally I don't know if you would necessarily go backwards from here does that suggest that Rockwell is and $8 billion company over the next couple of years like what why wouldn't the $2 billion get multiplied by something near for and.
You have a bit of a fudge factor for lifecycle services like what what kind of weeks out of that equation, because it seems like a pretty big number pretty early in the cycle.
And we're happy with it and that's why that's why we've called it out and I want to make sure.
And as Josh that 2 billion as a company number but we're not in that figure even before lifecycle services really kicks in.
And like we expect it to over the next couple of quarters, but yes, we're expecting that as we've created more ways to win.
Our strategy is to accelerate profitable growth, that's what we've been talking about for the last two years.
And by growing at a higher multiple of industrial production and our core continued double digits and information solutions and connected services and make an acquisition. So is that are going to again give us more ways to win.
Okay perfect. Thanks for that best of luck guys.
Thanks, Josh.
Your next question is from Nigel Coe with Wolfe research.
Thanks, Good morning.
And Nick it's great to hear your voice, we couldnt hear that well that's great.
And Steve Congratulations on your retirement.
And I hate to go back and investments and again, but on a little bit bamboozled by open moving pieces here, but when you talk about the increased and the full year, 10% mentioned $50 million in Q2.
Okay with it and is that the second half increase over that $50 million for the full year.
And the second half is more than that to that number just kind of on that basis.
Yeah and Nigel.
Happy to clarify that we were down.
And investment spend in the first half of the year and.
And we were down.
Approximately between 40 and $50 million, we now expect the full year to be up approximately 50 or $55 million that means that day.
<unk>.
90, 90 to 100 million higher investment spend in the second half Standalone.
Okay. That's clear and then on that might be 200 about 30 of temporary and most of the way you're correct exactly.
Okay got it okay.
Thank you Crystal.
And then.
Moving on to SME I know, it's relatively small.
And a portion of your.
Revenues, but.
And very excited about the.
And investment spend that we're seeing and committed in the U S can.
Can you just remind us where do you come to play, but what is Rockwell coming to play in the fab on.
And what opportunities you see to maybe increase the scope going forward.
Sure Nigel and the primary applications are around facilities management. So it's Blake.
Ensure that the environment is clean and not devry temperature and the Reits humidity and so on and it's a fairly complex automation project.
And that's our traditional area lately, we've had some success and increasing the scope even within that facilities management, including things like cyber security and other related services and networking.
And we see additional opportunity and the materials handling and also given that we are.
And.
Good size user of electronic components and use circuit boards and so on and we've developed some artificial intelligence applications that have helped us be more productive and we're working with some customers to acquaint them with our capabilities there as well so theres a lot of additional room spa.
<unk> and from that from that base.
Thanks, Blake that's very helpful. Thanks.
Your final question is from Noah Kaye with Oppenheimer.
Good morning, and thanks.
You commented earlier about.
The process of continuing to increase your importance for the customers and.
Blake you know some of the supply issues you've cited on this call around freight narrowing and the chip shortage and just materials bell, but in general I mean, obviously.
Huge portion of your customer base and it's all going through that at the same time and.
So I'm curious if you can talk to us a little bit about.
And how youre seeing the customers use some of your software offerings like factory.
And others to deal with the supply chain issues and how that is advancing your dialogue with them and your opportunity set.
Well one of the ways just for an example, looking at our own Mes software and.
When we added that into our operations over the last decade.
There were a couple of ways that that increased our efficiency and decreased work and process and it also.
It helped us with error proofing to be able to have a defined work flow.
And as our customers are having to bring new talent on that.
And maybe new to these types of operations that workforce development is a big deal and it's sometimes sits right on the critical path of getting new capacity up and running so whether it's the mes software that we've been offering augmented reality offerings that we have with PTC.
<unk> got some great solutions as well as the training that we provide.
To help with these.
New hires at our customers come on come on line just as fast as possible I also believe that the flexibility and.
We are adding and our own operations and I mentioned earlier and our own contact on facility here in Milwaukee is giving us insight that we can in part to our customers to help them be more agile to produce a wider variety of skus on a single line I saw and.
<unk> recently.
Beverage company, that's able to make.
A very wide range of packaging formats.
For beverages, using our independent cart technology and.
It's a whole different game.
10 years ago in terms of different types of Skus that these companies can create to maximize their shelf space and retail outlets.
Yeah, and and you <unk>.
Mentioned EMEA as being able to reduce work in progress.
But we're hearing about for example, and auto suppliers.
Trying to reach two and three layers deeper into their supply chain and.
And trying to go through software and do better tracking.
Just not walking away from just in time, but really trying to evolve and get better visualization of the entire supply base is that that's something that Rockwell can play a role and and then how it works out.
Yes, absolutely being able to take those real time production.
Signals and to be able to look upstream into that supply base and just as you said going deeper and before it's not a nice to have anymore and said, it's a requirement to be able to look at those suppliers and to be able to marry that with your real time.
Duction requirements, particularly when youre looking at increasingly multiple potential sources of supply for.
And for those components or those materials that you need so we see a lot of activity going forward and you talk to customers nothing gets them more interested and when you talk about the role that we can play and a connected supply chain theres huge amounts of additional productivity that we can hedge.
And with there and our ecosystem.
And Thats an area that ecosystem is going to play a very large role.
Makes sense. Thanks, so much.
Yes, Thanks Noah.
Operator, now I'll turn it back to Blake for final comments.
Thanks, Jessica in summary, we're very pleased with our strong performance and the quarter.
Covering and manufacturing is accelerating at a much faster pace than we initially expected Rockwell.
Rockwell is extremely well positioned and this recovery.
Especially excited about the new product introductions and services and we will bring to market over the next couple of years.
It's an exciting time to be a part of the Rockwell journey. We thank you for your interest and ongoing support.
That concludes.
Today's conference call at this time you may now disconnect.
Okay.