Q4 2024 Rockwell Automation Inc Earnings Call
Speaker Change: Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded.
Later in the call, we will open up the lines for questions. If you have a question at that time, please press star one. At this time, I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead.
Aijana Zellner: Thank you, Julianne. Good morning, and thank you for joining us for Rockwell Automation's fourth quarter fiscal 2024 earnings release conference call.
Aijana Zellner: With me today is Blake Moret, our Chairman and CEO, and Christian Rothi, our CFO. Our results were released earlier this morning, and the press release and charts have been posted to our website. Both the press release and charts include, and our call today will reference, non-GAAP measures.
Aijana Zellner: Both the presses and charts include reconciliations of these non-GAAP measures. A webcast of this call will be available on our 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. 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.
Aijana Zellner: Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all our SEC filings.
So with that I'll hand it over to Blake. Thanks Aijana and good morning everyone. Thank you for joining us today. I'll make a couple of comments before we turn to our fourth quarter results.
Speaker Change: With the U.S. federal election day now behind us, we're optimistic that the country will turn its focus to a smooth transition to newly elected leaders.
Speaker Change: We're pleased that policymakers recognize the essential role that U.S. manufacturing plays at the core of our economy.
Speaker Change: Rockwell is the clear leader in providing technology that helps U.S. manufacturers be more competitive, so we welcome policies that will benefit our most important market by spurring innovation, streamlining project approvals, and leveling the playing field.
Speaker Change: Orders continue to be soft in Q4, but we had solid execution on several fronts. Customer service levels and conversion of new orders to shipments are back to pre-pandemic levels across all businesses.
Speaker Change: We are growing profitable software and digital services lines of business, which help to partially mitigate the impact of excess product inventory in our channel. Annual recurring revenue grew double digits in the year and is now 10% of our total revenue.
For comparison, ARR was found 4% of our revenue in 2018.
Speaker Change: We've seen modest market share gains over the past few years based on US market share reports, product specific studies, and comparison to the automation businesses of our closest competitors.
Speaker Change: Our best results in fiscal year 24 were in North America, our home market, and China is now less than 5% of our revenue.
Speaker Change: We are broadening our cost savings activities, and Christian Rothi, our new CFO, has jumped into the effort with enthusiasm. He brings valuable new perspectives on additional opportunities.
Speaker Change: At the end of fiscal year 24, we were able to accelerate our savings to realize about $110 million of cost reductions in the second half of the year, $10 million above the target we first discussed in May.
Speaker Change: As of the end of October of 2024, our global headcount is down over 12% since Q2 of fiscal 24.
Speaker Change: Despite the headwind of lower volume, we are still confident in our ability to save $250 million in FY25 from the combination of all our productivity actions.
We continue to see positive impact from pricing actions.
Speaker Change: These have been difficult times, but I'm impressed by the resilience and sense of urgency of our teams as we position ourselves to deliver market-beating growth and profitability.
Speaker Change: Later on this call, Christian will cover our pricing, productivity, and margin expansion actions for next year.
Let's now turn to our Q4 results on slide 3.
Speaker Change: Our Q4 orders were down low single-digit sequentially compared to our expectations for low single-digit improvement.
Speaker Change: Similar to last quarter, the rate of reduction of lingering excess inventory at our distributors and machine builders was gated by slower end-user demand.
Speaker Change: Of note, we did see sequential orders growth in North America, with Asia contributing the largest sequential decline.
Speaker Change: Going forward, we expect our Q1 orders to be flat sequentially.
Speaker Change: We expect our Q1 sales to be down high single digits from last quarter, primarily due to typical seasonality in our configured-to-order and solutions businesses and slower orders in Q4 of fiscal 24.
Speaker Change: I'll talk more about our Fiscal 25 Outlook later on the call.
Speaker Change: Despite weaker than expected orders, our Q4 organic sales came in largely in line with expectations.
Speaker Change: As I mentioned earlier, we quickly converted incoming product orders to shipments.
Speaker Change: and Lifecycle Services capped off a year of improved performance with good execution in the quarter. Q4 sales for the company declined 21% versus prior year compared to 18% growth in Q4 of last year.
Speaker Change: The decline is due to the difficult year-over-year comparison, lingering channel destocking effects in our product businesses, and slower end-user demand.
Organic Sales and our Intelligent Devices segment
declined 20% year-over-year.
Products were down with configure-to-order offerings and acquisitions growing year-over-year.
Speaker Change: I'm pleased with how our recent acquisitions are expanding our market. In particular, we saw good growth in our cubic orders for data center power needs, where we continue to gain traction with leading hyperscalers and IT infrastructure providers.
Speaker Change: This quarter we secured a strategic win at NTT, a leading data center colo provider. Rockwell is helping this customer achieve significant footprint savings.
Speaker Change: In software and control, organic sales were down over 30% year-over-year. Within this segment, logic shipments were weaker due to slower end demand in product-centric end markets.
Speaker Change: Despite the continuing volatility in product shipments, our PLC market share is slightly up, helped by a geographic mix and continued innovation.
We recently introduced Logix SIS.
Speaker Change: a new process safety controller, building on Rockwell's established leadership in safety applications across discrete, hybrid, and process applications.
Speaker Change: and we're already helping key OEMs design significant upcoming Rockwell product releases into their new machine designs.
Speaker Change: Other launches extend the differentiation of our software offering. Last quarter, we launched our Vision AI solution.
Speaker Change: to help customers improve their quality and yield. In general, software was our best performing area this year with good revenue growth across Fix, Plex, and other factory talk offerings.
Speaker Change: The newest FactoryTalk Design Studio release features a co-pilot, which boosts automation system design productivity and is integrated in this cloud-native application, which is an industry first.
Speaker Change: You'll see many of these products at our Automation Fair in a few weeks.
Speaker Change: Life cycle services organic sales grew about 2% versus prior year. Book-to-bill in this segment was 0.9 and slightly below our historical average for Q4.
Speaker Change: We saw a couple of customer delay projects in our Sensia business this quarter. We continue to have a healthy pipeline of projects, which include both traditional and energy transition applications.
Speaker Change: and reflect a general shift towards autonomous operations to improve safety and operational performance.
Speaker Change: Energy and markets overall were over 15% of our total business in fiscal 24. On the services side, we continue to increase customer penetration through managed services, with a growing number of contracts generating recurring revenue.
Speaker Change: Total ARR for the company grew 16% in the quarter, with double-digit growth across our software and services offerings.
Segment margin was over 20% and adjusted EPS was $2.47.
Speaker Change: Turning to slide four to review key highlights of our Q4 industry segment performance. Similar to our overall top-line results in the quarter, our performance by industry reflects difficult year-over-year comparisons with Q4 of last year being a record quarter of shipments.
Speaker Change: Sales in our discrete industries were impacted by continued declines in auto and semi, partially offset by growth in e-commerce and warehouse automation.
Speaker Change: In automotive, we saw another quarter of EV project delays as brand owners and tier suppliers wait for more policy certainty and an overall improvement in consumer spending.
Speaker Change: Despite this pause in EV, there's still activity and we continue to win business across traditional ICE and hybrid programs.
Rockwell was selected by Ford Motor Company.
as the automation partner for their Louisville, Kentucky facility.
Speaker Change: Rockwell will be supplying a full portfolio of Logix controllers, drives, HMI, and industrial components for the body and final assembly shops.
Speaker Change: There is also additional content for their next generation truck programs.
Speaker Change: Moving to semiconductor, while the industry is dealing with oversupply and uncertainty around future stimulus support, we secured an important win with a global leader in semiconductor manufacturing to automate their R&D facilities here in the U.S.
Speaker Change: We also continue to gain traction with our production logistics offering for material transport.
Speaker Change: E-commerce and warehouse automation sales increased 25% versus prior year. In addition to continued investments in warehouse upgrades by both e-commerce and traditional retail players, we see the benefits of data center investment, particularly in our cubic business.
Speaker Change: Turning to our hybrid industry, sales in this segment were impacted by double-digit year-over-year declines in food and beverage and life sciences.
Speaker Change: In food and beverage, we continue to see muted capacity investments as end users are delaying projects and focusing on driving operational improvements across their existing facilities.
Speaker Change: With that said, we are working with leading food and beverage producers on their next greenfield plans.
Speaker Change: In the quarter, we had an important win with Kikkoman, the largest soy sauce manufacturer in the world.
Speaker Change: In partnership with the engineering firm CRB, we are delivering Rockwell's portfolio of Plex MES software and scalable plant-wide control, helping Chicoman build their factory of the future here in Jefferson, Wisconsin.
Speaker Change: Within our life sciences vertical, we're seeing the investment in GOP1 drugs as key pharma companies and their contract manufacturers aggressively add manufacturing capacity to support soaring consumer demand.
Speaker Change: Sales growth in our process industries was impacted by difficult comps with over 25% growth in Q4 of last year for this industry segment.
Speaker Change: Within oil and gas, similar to last quarter, we saw project pushouts in North America due to election uncertainty and potential policy changes given the impact they may have on funding of greenhouse gas related projects.
Speaker Change: Sensia did grow double digits in the quarter and continued to deliver improved profitability.
Speaker Change: In mining, customers are investing in the sustainability and safety of their operations.
Speaker Change: This quarter, Rockwell was chosen by Cerity New Denmark in South Africa to upgrade their environmental monitoring system from a competitive software offering to ensure effective monitoring of environmental conditions and respond to potential hazards.
Speaker Change: Let's turn to slide 5 in our Q4 Organic Regional Sales.
Speaker Change: In general, sales were down sharply year over year due to tough comparisons and the lingering impact of de-stocking.
Speaker Change: Orders were up sharply year over year due to the easy comparison with Q4 of FY23. Sequentially, orders were down low single digits and shipments were flattish.
Speaker Change: The Americas, our home market, continue to be our best performing region. As I mentioned, orders were up sequentially in North America.
Speaker Change: While we are happy with our strong presence in the Americas, we continue to expand our share of wallet with European machine builders as they serve their end users around the world.
Speaker Change: In the quarter, we won an important project with Gaya in India. Gaya is one of the world's largest system suppliers for the food, beverage, and pharmaceutical sectors.
Speaker Change: The GAIA portfolio includes machinery and plants, as well as advanced process technology, components and comprehensive services.
Speaker Change: The end-user will implement state-of-the-art technologies to ensure efficient water usage and replenishment.
Speaker Change: Let's move to slide 6 for key highlights of FISCO 2024.
Speaker Change: We finished the year with a 9% year-over-year decline in reported sales. Sales from our ClearPath and Verve acquisitions contributed about a point of growth as we expand our customer value in the production, logistics, and cybersecurity spaces.
Speaker Change: Total ARR grew 16% with strong performance across our recurring software and services portfolio and is now over 10% of our total business.
Speaker Change: The 200 basis point decrease in our segment margin on a high single-digit year-over-year sales decline would have been worse without our more diverse business mix.
Speaker Change: and the significant cost reduction actions we took earlier this year to align our cost structure with the current business environment. These actions also position us for expanded margins as markets recover.
Speaker Change: Sixty percent free cash flow conversion was in line with our prior forecast.
Speaker Change: Let's now move to slide 7 to review our fiscal 2025 outlook.
Speaker Change: Given the uncertainty in the macroeconomic environment and continued project delays across a number of our end markets, we're projecting sales growth in the range of positive 2% to negative 4%.
Speaker Change: After a sequential decline in Q1 shipments, primarily due to typical seasonality, we expect gradual sequential improvement and our top-line growth through the balance of FY25.
Speaker Change: Christian will cover the calendarization of our guidance in more detail later on this call.
We expect our annual recurring revenue to grow about 10%.
Speaker Change: Segment margin is projected to be down slightly versus prior year, and adjusted EPS is expected to be $9.20 at the midpoint.
Speaker Change: We expect free cash flow conversion to return to 100% in fiscal year 25.
Speaker Change: I'll now turn it over to Christian to provide more detail on our Q4 and full year performance and financial outlook for fiscal 25. Christian?
Christian Rothi: Thank you, Blake, and good morning, everyone. I'm excited to be here this morning and look forward to working with you all over the coming quarters and years.
I'll start on slide 8, fourth quarter key financial information.
Fourth quarter reported sales were down 21% versus prior year.
Speaker Change: The positive impact of acquisitions and the negative impact of currency roughly offset each other in the quarter.
About two points of organic growth came from price.
Speaker Change: The segment operating margin was 20.1% compared to 22.3% a year ago. The year-over-year decrease reflects lower sales volume and unfavorable mix, partially offset by our cost reduction actions and no incentive compensation.
Speaker Change: Adjust the DPS of $2.47 was above our expectations, primarily due to price and one-time items.
Speaker Change: Those one-time items included $22 million benefit from an adjustment to an earn-out accrual tied to achievement of the seller's revenue targets on our ClearPath acquisition.
Speaker Change: Adjusted effective tax rate for the fourth quarter was 14.9%, below the prior year rate of 17%, and about four points below our expectations for the quarter.
Speaker Change: I'll cover a year-over-year adjusted EPS bridge on a later slide. Free cash flow conversion, sorry, free cash flow of $367 million was $409 million below $1.5 million.
Speaker Change: Lower than the prior year, primarily due to lower pre-tax income.
Speaker Change: One additional item not shown on the slide, we repurchased approximately 450,000 shares in the quarter at a cost of $118 million.
Speaker Change: On September 30th, we had $1.3 billion remaining under our repurchase authorizations.
Speaker Change: Slide nine provides a sales and margin performance overview for our three operating segments.
Speaker Change: Intelligent devices margin of 20.6% decreased 70 basis points year-over-year due to lower sales volume and unfavorable mix.
Speaker Change: If you exclude the benefit from the ClearPath earn-out adjustment I mentioned earlier, segment margin in intelligent devices was 18.3%. Operationally, this was about a point below our expectations, as better-than-expected price cost was more than offset by lower volume and other costs.
including the impact of currency.
Speaker Change: Purely focusing on decremental conversion, after adjusting for the earn-out, the segment had decrementals in the mid-30s year-over-year in the fourth quarter, which reflects strong execution on cost-out programs against a 20% organic sales decline.
Speaker Change: Software control margin of 22.3% decreased about 1,100 basis points year-over-year due to lower sales volume.
Speaker Change: which is partially offset by cost reduction actions and no incentive compensation.
Speaker Change: Margins in this segment were below our expectations, mainly due to lower shipments of Logix controllers.
Speaker Change: Revenue from the software portion of Software and Control held up nicely year-over-year.
Speaker Change: The 39% sales decline in software and control was driven by the hardware portion of the business against the historically high shipments in Q4 of the prior year.
Speaker Change: The typically high decrementals for software and control were mitigated somewhat by our cost out actions.
Speaker Change: Life-cycle services margin of 17.4% increased 890 basis points year-over-year and was slightly above our expectations.
Speaker Change: The higher year-over-year segment margin life cycle was driven by no incentive compensation, strong project execution, and sincere margin improvement. As Blake said, this business performed well throughout fiscal 24, and the incrementals reflect that.
Speaker Change: The next slide, 10, provides the adjusted EPS walk from Q4 of fiscal 2023 to Q4 of fiscal 2024.
Speaker Change: Core performance was down $2.40 on a 21% organic sales decrease with unfavorable segment and product mix driving an outsized flow-through.
Speaker Change: As Blake mentioned, cost reduction actions provided a 70 million benefit in the quarter, exceeding our expectations and were a 50 cent tailwind.
Speaker Change: Incentive compensation was a 55 cent tailwind. This year-over-year Delta reflects no bonus payout this year versus an above-target payout last year.
The ClearPath Earn Out Benefit was 20 cents.
Speaker Change: The year-over-year impact from currency and acquisitions were a 5 cent headwind each, whereas tax was a 5 cent tailwind.
Speaker Change: Shares, interests, and other items taken together were a tailwind of three sets.
Speaker Change: I want to pause here to briefly discuss the sequential performance for Rockwell from Q3 to Q4.
Speaker Change: Although it's not in the slide, I think it's informative to discuss the progression, particularly when we later discuss the Fiscal 25 Guide.
Negative mix was the largest contributor to our decremental sequentially.
Speaker Change: While reported company-wide sales were down 15 million, declines in products in both intelligent devices and software and control, including Logix, were more than double that amount.
Speaker Change: On the other hand, we saw growth in lifecycle services and our configure-to-order products, which have less favorable margin profile.
Speaker Change: Further, as mentioned in our Q3 call, the Lifecycle Services segment had some high-margin projects ship in Q3 that did not occur in Q4. This negative impact of both volume and mix drove high sequential decremental margins.
Sequential currency and pension headwinds
Speaker Change: Moving on, slide 11 provides key financial information for the full fiscal year 2024.
Speaker Change: Reported sales declined 9% to 8.3 billion, including one point of growth coming from acquisitions. Currency was neutral. Organic sales were down 10%.
Speaker Change: Full year segment margin of 19.3% decreased 200 basis points from last year.
Speaker Change: The decrease was due to lower sales, and again, an unfavorable mix that skewed heavily toward products, partially offset by no incentive compensation, as well as the benefits from cost reduction actions and one-time items, including the earn-out adjustment.
Adjusted EPS was down 20%.
Speaker Change: A detailed year-over-year adjusted EPS block can be found in the appendix or your reference.
Speaker Change: Pre-cash flow conversion was in line with the updated expectations we shared last quarter at about 60% in fiscal 2024.
Speaker Change: Free cash flow decreased $575 million from fiscal 23. The decrease in free cash flow was driven by lower pre-tax income.
Speaker Change: Inventory and receivables were a source of cash in the fourth quarter as we reduced our balances in line with end demand.
Speaker Change: Return on invested capital was 15.2% for fiscal year 2024 and 570 basis points lower than the prior year, primarily driven by lower income.
Speaker Change: For the year, we deployed about $1.2 billion of capital toward dividends and share repurchases and made inorganic investments of $750 million at the beginning of the fiscal year for ClearPath and VRB. Our capital structure and liquidity remain strong.
Speaker Change: Let's now move on to the next slide, 12, to discuss guidance for fiscal 2025.
Speaker Change: We expect reported sales in a range from negative 4% to positive 2%, or slightly below $8.2 billion at the midpoint, with no impact from currency or acquisitions.
Speaker Change: At the midpoint of our sales guidance, which is negative 1%, we expect both intelligent devices and software and control to be down low single digits and lifecycle services to be up low single digits year over year.
Speaker Change: We expect price to contribute about a point of growth for the year and price cost to be favorable.
Speaker Change: Segment margin is expected to be just under 19% at the midpoint, down about 40 basis points from fiscal year 24.
Speaker Change: As Blake mentioned, we continue to expect $250 million in year-over-year benefit from our productivity and margin expansion projects in fiscal year 25. We look forward to covering more on our productivity and operational excellence journey with you at our upcoming Investor Day in Anaheim.
Speaker Change: We expect the full year adjusted effective tax rate to be around 17 percent.
Speaker Change: This is about two percentage points higher than Fiscal 24, which benefited from some discrete events that will not recur.
Speaker Change: Our adjusted EPS guidance ranges $8.60 to $9.80, with $9.20 at the midpoint.
Speaker Change: We expect full year fiscal 2025 free cash flow conversion of about 100% of adjusted income.
Speaker Change: Blake mentioned earlier that we expect first quarter sales to be down high single digits sequentially.
Speaker Change: From a margin standpoint, we expect our Q1 margins to be in the low to mid teens.
Speaker Change: Although we don't give quarterly guidance, we thought it would be helpful to give some additional color on how we expect the first quarter to shape up.
Speaker Change: Intelligent devices sales are expected to be down low keen sequentially, reflecting soft product demand and a seasonal low in configure-to-order products.
Speaker Change: Against this tough volume backdrop, intelligent devices will have compensation headwinds and the non-recurrence of the earn-out adjustment.
Speaker Change: As a result, we expect intelligent devices segment margins to be in the low teens.
Speaker Change: Software control margin is expected to be in the low 20s on flat, sequential sales growth.
Speaker Change: Life Cycle Services typically has a seasonal low in the first quarter and sales are expected to be down low single digits sequentially.
Speaker Change: We expect compensation headwinds and the volume impact to drive segment margins and life cycle to the low teens.
Speaker Change: As Blake mentioned, we expect gradual sequential improvement in our sales through the rest of the year.
We also expect a corresponding increase in our segment margins.
Speaker Change: Let's turn to slide 13 for our adjusted EPS block for the full year.
Speaker Change: Our core is expected to be negative 20 cents for the year, with more normalized conversion on the 1% sales line at the midpoint of our guide.
Speaker Change: Importantly, included in our core is R&D spending, the lifeblood of our future growth.
which we continue to target at about 6% of sales.
Speaker Change: Non-R&D investments planned for Fiscal 25 are expected to be a 25-cent headwind.
Speaker Change: These investments are structural in nature to position us for future growth.
Speaker Change: They include expansion of our cubic footprint to continue to capture the ongoing data center tailwind, especially in the U.S.
Speaker Change: a new Rockwell facility in India, and IT investments that will provide differentiated performance both inside and outside of Rockwell's walls.
Speaker Change: Continuing on to the waterfall, our productivity actions are expected to increase EPS by $1.85, reflecting the targeted $250 million cost out savings.
Speaker Change: Nearly offsetting those savings are compensation and inflation headwinds next year, which are expected to decrease EPS by $1.40 at the midpoint of guide.
Speaker Change: Adjustments to the clear path earn out in Q2 and Q4 of Fiscal 24 result in a 25 cent headwind in Fiscal 25.
We expect tax to be a 20 cent headwind.
Speaker Change: Shares, interest expense, and other items taken together are expected to be a six cent headwind.
Speaker Change: To break down the guide another way, our adjusted EPS in fiscal 24 included about 25 cents of benefit from our earn-out adjustments that added about 35 basis points to our segment margins for the year.
Speaker Change: Our guide of fiscal 25 segment margins of just under 19% reflects essentially a flat segment margins on this adjusted basis year over year. The headwinds of a 1% sales decline at the midpoint of our guide, as well as compensation and investment headwinds, are expected to be offset at the segment level by our cost out programs.
Speaker Change: A few additional comments on Fiscal 2025 guidance for your models. Corporate and other expenses is expected to be around $130 million. Net interest expense for Fiscal 2025 is expected to be about $145 million.
We're assuming.
Speaker Change: Average diluted share is outstanding of 113.1 million shares, and we are targeting $300 million of share repurchases during the year.
Speaker Change: With that, I'll turn it back over to Blake for some closing remarks before we start.
Q&A.
Blake Moret: Thanks, Christian. Despite project delays tied to policy uncertainty and the U.S. election, we won new capacity projects in the U.S. across a variety of verticals in the quarter and throughout the year.
Speaker Change: We saw a sequential ramp in these wins throughout the year, with Q4 being the best quarter.
Speaker Change: Projects came from a diverse set of end markets including renewable energy, tire, oil and gas, EV, and semiconductor.
Speaker Change: The funnel of these megaprojects is robust, and we expect an increase in these orders during FY 25.
Speaker Change: Fiscal year 25 will be a particularly strong year for new product introductions.
Speaker Change: including both hardware and software. We look forward to showcasing this innovation for customers during Automation Fair in two weeks and for you at our Investor Day during the show.
Speaker Change: Acquisitions made a year ago are expected to contribute about a point of organic growth in fiscal year 25. We do not anticipate major new acquisitions in the year.
Speaker Change: We have an unmatched portfolio that combines traditional sources of value with new ways to win. As we've said, we're now concentrating on integrating what we built and bought to drive simplification for our customers, expanded margins for investors, and focus for our employees.
Speaker Change: Our people remain the heart of our success, and I thank them for their dedication and resilience.
Speaker Change: My leadership team and I look forward to working shoulder-to-shoulder with our employees and partners around the world during the coming year as we tune our operations, add new innovation to our portfolio, and win at customers.
Aijana will now begin the Q&A session.
Aijana Zellner: We would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up. Julianne, let's take our first question.
Aijana Zellner: To ask a question, please press star followed by the number one on your telephone keypad. To withdraw any questions, press star one again. Our first question comes from Scott Davis from Melius Research. Please go ahead, your line is open.
Hey, good morning, Blake and Christian Aijana.
Hey, morning.
Speaker Change: Hey Blake, you implied that maybe the election caused some noise.
Do you see a restock happening?
That seems possible.
Speaker Change: Scott, we're really not counting on anything at the beginning of the year, particularly in Q1. As we've talked about before, we're nearing the end of the
Speaker Change: Drain of excess stock at distributors and machine builders. Some machine builders and distributors are already back to that equilibrium point, but we're just not counting on, you know, some rapid acceleration for them to put additional inventory back on their shelf.
Speaker Change: And just to follow up on that theme, you know, the last...
time we had tariffs come in, what were the customer
Speaker Change: What were the customer responses? Were they more likely to pre-buy?
Speaker Change: kind of build-up, in particular distributors' build-up inventory, were they more, you know, was there a change?
Speaker Change: in behaviors around that, and certainly, you know, there may be some concerns around tariffs.
So, I just...
Speaker Change: Just kind of curious to see what you guys saw last time and how that may inform this time.
Speaker Change: We really didn't see customer behavior change a lot with the tariffs. I'll tell you that, you know, that's an area that I'm proud of the agility that we showed as the tariffs...
Speaker Change: came through to get ahead of that to ensure a positive price cost.
Speaker Change: as things were coming in. And so I'm very confident, should we see additional tariffs, we'll be able to reflect that.
Speaker Change: in our pricing to customers, but unlike what occasionally will happen with, you know, regular price increases where you see a little bit of purchases brought forward, we really didn't see that with respect to the tariffs.
Speaker Change: Obviously, there's a lot of expectation that continues as investment increases in the U.S. to complement labor with technology, and of course, that's right down our sweet spot.
Speaker Change: Yeah, makes sense. Okay, thank you. Best of luck this year, guys. We'll see you in a few weeks.
Yeah, thanks, Scott.
Speaker Change: Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.
Hey, good morning everyone.
Speaker Change: Hey, Andy. Blake, maybe just trying to flesh out 25 a little bit more.
Blake Moret: When you look at 25, do you think we're any closer to a bottom in discrete? I know you mentioned some incremental capex delays, but is there any kind of visibility that's helping you, let's call it, talk about relative stability in hybrid and process markets in 25, given the forecast of down low, single digits, and flat, respectively?
Speaker Change: Yeah, so let's start with hybrid, food and beverage, we're still not seeing a lot of activity of people pulling the trigger on greenfield investment, although we're working with them and the associated EPCs on planning for expansion projects, and we're continuing to get business through digital services, modernizations, and things like that with their brownfield footprint.
Speaker Change: In life sciences, we do think that we may be coming off a little bit of a bottom with respect to life sciences, and we've talked about the optimism around, you know, GLP-1 capacity that we're engaged with and that we expect to continue in that area.
In discrete, you know, the biggest component of
Discrete is automotive, we talked about...
Speaker Change: a minute ago, the win at Ford. So customers are still investing, but it's not, you know, picked up to a point where we can sound the all clear, let's say. We do expect the SAR count to increase in fiscal 25.
Speaker Change: The other retailers, we're looking to modernize and make their operations more efficient. Semiconductor, a little bit more mixed, still expect that to recover. We talked about some activity there, but we're not expecting that to be a big contributor in the year.
Speaker Change: It's helpful. And then Blake, just kind of fleshing out the 25 guides, or maybe this for Christian, you know, orders down, most single digits in Q4, you talked about flat in Q1. I guess, you know, that puts you probably in the sevens in terms of run rate and sales. So maybe how much lift do you get in orders if destocking were to just end? And do you need orders to start picking up in Q2 to sort of make that midpoint of your guide?
We're really looking at very gradual, sequential growth.
a variety of points looking at the different industries.
Speaker Change: You know, we also look at lifecycle with its higher exposure to process, which continues to invest.
Speaker Change: and the relevance of backlog that they have in that segment contributing positive growth in the year. So we feel comfortable with that and then with the order of progression that I just described being the biggest impact, biggest influence on software and control.
Speaker Change: and Intelligent Devices through the year. Appreciate it. Look forward to seeing you in a couple of weeks.
Yeah, see you soon.
Speaker Change: Our next question comes from Andrew Obin from Bank of America. Please go ahead, your line is open.
Yes, good morning.
Hey Andrew!
Speaker Change: Just, you know, I'm going to go back to sort of trying to figure out who are things bottom. So as you look at your funnel, and then obviously funnel becomes orders, and then orders become shipments.
Speaker Change: So just trying to understand is the sort of this funnel converting into waters is just a budgeting
Speaker Change: at year end, and so we effectively need budgets to be set for calendar 25, and that's what we're going to see, orders. And then once you get an order, what do you think, because not just for you, I know that you guys can probably ship your stuff within one to two weeks.
Speaker Change: But as you put the product together, what's the right way of thinking from order converting into shipment that you book? Is it three months? Is it six months? If you could just outline this timeline if and when things actually start inflecting. Thank you
Speaker Change: Sure. So, Andrew, let me describe a little bit of the overall process.
Andrew Obin: And if I missed something, then ask me to touch that up.
You know, the funnel is tracked.
Speaker Change: Probably a little bit differently for pure products that go into MRO versus the big greenfield projects that we look at that we described last year in terms of, you know, the typical calendarization of like a big EV project, for instance. And of course, we have both in our business.
Speaker Change: We track, you know, intensely the project work, in some cases, you know, a year or two before orders are left there, with CAPEX across the different industries, and that's where our lighthouse...
Speaker Change: project group has really shown this year, and as I said, we expect even more activity in the coming year. That funnel looks good and certainly supports
Speaker Change: The guide with respect to lifecycle services, we have a good funnel in ClearPath, for instance, Qubic, and so on.
Speaker Change: Between the time that something comes out of the funnel and is won and ordered and shipped, you know, that could be months or in some cases a year or more, depending on the amount of engineering in that project. When it comes to the products,
Speaker Change: in that funnel. When those come out as an order to us, as you said, you know, we're back to turning those around at a very high rate. The majority of those get serviced within a period of days off our distributor's shelf.
Speaker Change: But even when we have to build it, we can rely on the safety stock that we built up, built back up during the year, or building in the plants. That's converting at a very high rate.
Speaker Change: So, I think to your question, you know, from time to get an order to the shipment, what's the overall time, it literally is a period of weeks.
Speaker Change: for those products, a little bit longer for the configure-to-order products that we have in intelligent devices, and again, you get into the months. I think average lead time in lifecycle services is probably about five or six months, but it certainly varies between digital services and fully engineered systems.
Speaker Change: So hopefully that touches on some of what you were looking for.
Speaker Change: Yeah, no, absolutely. Thanks so much. And then, Justin, I apologize if you have sort of talked about it, but, you know, you were sort of
machine builders in Europe was a pinch point.
Speaker Change: I think one of your competitors sort of has come out and said that that is being pushed out three to six months. What is happening with machine builders in Europe, just a little bit more granular view there.
Yeah, well let me let me start with a...
subjective comment, and that is
Speaker Change: I'm seeing a lot of machine builders from Europe in our facility now and we'll see a lot of them at Automation Fair in a couple of weeks. The Pack Expo show down in Chicago, you know, is close enough to where we're seeing a lot of those machine builders come up and talk to us about.
Speaker Change: They're plans going forward, super encouraging. These are big names and they're already decent-sized customers, but with lots of opportunities to grow share of their spend, given that
Speaker Change: you know, a lot of their end users are investing in the U.S. and they want to be working with the U.S. leader. That's fact. We're definitely hearing that directly from those machine builders, and you'll hear from some more of them at Automation Fair as well. In fiscal year 25, coming off of
Speaker Change: you know, a year where the overstock condition that European machine builders contributed to big declines, we expect Europe to be
Speaker Change: decent performing after the Americas. So Americas will be the best performing region in the world in 25, followed by Europe, followed by Asia, as those
Speaker Change: Overstock conditions completely dissipate and they get back to normal order patterns.
Thanks so much. Really appreciate it.
Speaker Change: Our next question comes from Nigel Ko from Wolf Research. Please go ahead, your line is open.
Oh thanks, good morning everyone.
Speaker Change: Hey, good morning. Thanks for the OneCue color and all the additional...
Speaker Change: Guidance points. So Kristen, I just want to make sure that we've got the message on 1Q.
Speaker Change: We're sort of getting, you know, just to map it back to the four-year guide, you know, down a 6-7% type organic year-over-year for 1Q, and it's just based on the...
Speaker Change: I don't know, based on the margins, it seems like maybe a bit more pressure perhaps on EPS, so maybe down to like 180 or so, what would that be?
sort of consistent with your thinking?
Yeah, so just to kind of add to that,
Speaker Change: To frame it a little bit, when we talk about the sequential side of it for kind of the overall organization,
Speaker Change: We have, you know, if you bridge from Q4 into Q1, we've got headwinds. Of course, the air knot adjustment is not going to recur. We've got headwinds from the perspective of the...
Speaker Change: And then, on top of that, of course, there's the volume reduction, all of which are going to contribute to... And then, on top of that, of course, there's the volume reduction, all of which are going
Speaker Change: We're going to contribute to some real decrementals as we go into Q1. So you mentioned a number on the EPS, we're not going to actually get into real detail on exactly what that number is, but it will be significantly below $2.
Speaker Change: Yeah, okay, that's helpful. And then just based on the normal, I mean, normal, quote-unquote, normal sequential through the year.
It seems like...
Speaker Change: 2Q would be down in the similar level year-over-year, and then you start getting the real benefit from the easy comps in the back half of the year. But I do struggle to understand what gets us to plus 2% given the start of the year. So just to be curious, you know, what sort of assumptions you're making at that plus 2, and maybe just frame it in terms of what you'd expect to see, you know, in the order numbers.
Speaker Change: Yeah, so the plus two would be a little bit better sequential improvement, either a little bit more pronounced ramp up or a little bit earlier development.
Thank you.
Speaker Change: of the recovery and the end markets that would flip intelligent devices and software and control products to positive shipments for the year. So.
Speaker Change: If you get a little bit higher growth than expected earlier in the year, and we continue to build sequentially off of that, that's where you would see the pickup.
Speaker Change: The life cycle services, the longer lead time items, again, given the
Speaker Change: exposure to process markets and the amount in backlog, I don't see that changing as dramatically. It's really going to be the products that will be the swing votes in this.
Okay. Thanks, Blake. See you in two weeks.
Yes, see you soon.
Speaker Change: Our next question comes from Chris Snyder from Morgan Stanley. Please go ahead. Your line is open.
Thank you. I wanted to talk about America's
Speaker Change: Market and Order Trends. So I think you guys said that those were up low single digits sequentially.
Speaker Change: or just up sequentially, so any color on maybe the magnitude of increase. And when you guys talk about orders flat sequentially into Q1 on seasonality, is the expectation that America continues to get better? And then just more broadly on America, is there anything you could comment around the competitive environment and specifically how you think the company is doing on share of new wins and new awards? Thank you.
Sure. Yeah, as we said, America's was the best-performing region
Speaker Change: in 24, and we expect in 25 it will continue to be the best performing.
Speaker Change: region. We obviously have, you know, by far the largest share in the Americas. We've got the best channel. We've got the largest installed base and the deepest relationship. So there's a pretty good hand in that case. And we're seeing, as I mentioned before, modest share gains.
Speaker Change: engineering firms around the world, as well as continuing to provide, you know, unmatched, very differentiated support for the users here, as well. Releasing new products, you know, it's the whole equations, and it's all hands on deck for that.
Speaker Change: In terms of the sequentials, I did mention that we saw sequential improvement in orders in Q4 in North America. And we haven't characterized just where we see the sequentials through the year.
Speaker Change: By region and by products or solutions, but again, we expect America's to be the best And I did say that we expect in the so-called mega projects that we expect more orders
Speaker Change: to come from that activity in 2005 than we saw in 2004, and that will become a more and more significant number, you know, as we finally get past the overstock effects of products in the channel.
Speaker Change: Appreciate that. And then maybe just following up on that American, you know, manufacturing CapEx investment, which is obviously tilting much more towards electronic components like chips and even, you know, bigger electrical equipment, maybe things like transformers.
Speaker Change: So, you know, as the CapEx shifts into different end markets, you know, is there anything that investors should be aware of on just the content, you know, is the content on those products, not just for you, but just for the automation industry?
Speaker Change: may be lower than more traditional verticals like food and beverage. And then just the fact that some of these verticals are a bit new to the United States, how is Rockwell positioned to compete on those? Thank you. Yeah.
Speaker Change: Yeah, Chris, great question. The opportunities we're tracking, and literally there are thousands.
Speaker Change: Projects that we're looking at and then getting laser focused on the
Speaker Change: We don't have as much penetration in that we haven't talked as much about historically, things like semiconductor.
balanced by industries that we have
Speaker Change: Great sharing, we've talked about it forever, we have, you know...
extremely high readiness to serve light food and beverage.
Speaker Change: like automotive, like life sciences. So we went through and characterized that entire basket of projects and it's split roughly equal, and each side of that represents hundreds of billions of dollars of capex, you know, and very substantial amounts of opportunity for us. And as I've said before, I think we're still in the reasonably early innings.
Speaker Change: of those being awarded. So you're seeing awards for things like.
Data Centers for Projects Now, and while we have...
some exposure in data centers. It's obviously not.
Speaker Change: The bulk of our business, people are placing orders for very long lead time items. I think Transformers, in some cases, are still out two years and so on. And we'll see some content from that, but I think the biggest amount of those projects is still to come over the next few years.
Thank you.
Yeah. Thanks, Chris.
Speaker Change: Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.
Hi, good morning.
Speaker Change: Maybe one question for you, Blake, just thinking back to the Investor Day a year ago. So you talked about that sort of mid-to-high single-digit organic sales CAGR entitlement. You know, when we take 24 in the guide for 25, you're running at a sort of negative mid-single-digit CAGR. So just trying to understand, you know, for you to sort of get the nose up and move back towards the mid-to-high.
positive growth.
Speaker Change: You know, how much more do you need to put in in terms of reinvestment? Because I understand short-term, you're sort of cutting spending and headcount because of the near-term top line. But, you know, are you confident you can get back to that mid-single-digit-plus growth trend without sort of heavier investment taking place in the next couple of years?
Yeah, thanks for the question, Julian.
Speaker Change: So in terms of the investment, we've taken a lot of care, even through the last tough year.
to preserve spending in areas like customer-facing resources.
as well as R&D.
for New Product Introductions. And you'll see the continuing.
Speaker Change: to market. In fact, in software and control, R&D as a percentage of sales is actually double digits. So we continue to preserve that going forward.
Speaker Change: After we get past the reset, you know, the very high...
growth in 23, 17% top-line growth, obviously.
Speaker Change: the decline last year, and then the guide for this year. We still hold, and we'll talk more about this in a couple weeks, but we still hold to that framework, both in terms of top line, as well as margin expectations. And so.
while we made some cuts.
Speaker Change: that are to align the cost structure of the business with current.
Speaker Change: business conditions and incoming orders, some of what we're doing is structural for that long-term as well. We talked about the structural capacity investments that we're making.
I just mentioned the continued investment in R&D.
Speaker Change: So, I don't see a, you know, a sharp snapback because we've been pretty surgical about the cuts that we've made to make sure that we're not cutting the lifeline to future acceleration back to the growth that we talked about at Investor Day last year.
Blake Moret: That's very helpful. Thanks, Blake. And maybe just a shorter term second question for the 2025.
guidance so just
Blake Moret: On the segment margin point, it's 19% for the year. Just wanted to check, was the low to mid-teens margin comment for QArm, was that a segment margin comment? And so you sort of...
Blake Moret: You know, and off that Q1 margin starting point, do we assume you sort of take the margin up to 200 or 300 basis points sequentially each quarter to get to 19% for the year? Is that the right framework?
Christian Rothi: Maybe in that context, Christian, just to clarify, I know you don't want to talk quarterly earnings, but have it a different way, maybe first half, let's say. I think first half is often 45% of EPS in recent years. Is it maybe sort of 40% or so this year?
Speaker Change: Yeah, Jillian, thanks for the question. So, as we think about that sequential as we go through the year, it should continue to improve. That was segment margins that we talked about in the first quarter. So, yes, that.
Thank you.
Speaker Change: The Low to Mid-Teens number that I discussed was about the segment margin side, and yes, we do expect that that should ramp as the year goes on in order to get to that 19%. I'm not really going to talk too much about first half, second half, but I do understand the math that you're doing there.
Great. Thank you.
Thank you.
Speaker Change: Our next question comes from Joe O'Day from Wells Fargo. Please go ahead, your line is open.
Hi, good morning. Thanks for taking my questions.
Speaker Change: Hi, I wanted to start on intelligent devices and the outlook for the first quarter. We've actually seen revenue on a quarterly trend in 24 in a pretty stable range.
Speaker Change: And it looks like what you're outlining is that sequentially from 4Q to 1Q would be down like $120 million, so much larger than what we've seen over the course of 2024 swings.
Speaker Change: Can you just kind of elaborate on on what you're seeing there, de-stock and market regions, just to understand the drivers of that step down a little more?
Yeah, so that step-down...
Yeah.
Speaker Change: In 2024, each quarter there was some shipment of backlog that was happening, so the shipments were outstripping the incoming order rate during that period of time. And on top of that, we do have some seasonal lows that are happening in the first quarter, so that's a headwind for us in the first quarter, and the configured order business is going to be off somewhat well in the first quarter.
Speaker Change: Got it. That's helpful. And then just in terms of any color around end markets versus channel effects, when we think about inventory management over the course of 2024 in the channel, I think when we look at the combination of
Speaker Change: Just high-level, any context on kind of end market versus D-stock contributions to that? Can we think about it as roughly a third of it could have been channel management versus end market trends? Anything there would be helpful.
Speaker Change: Yeah, I don't know that I can quantify the relative split because they're interrelated because the velocity...
Speaker Change: But the first part of last year, of 24, the effects of just that overstock were more pronounced. The underlying end-user demand was actually positive, we think.
Speaker Change: And then, towards the end of the year, as we talked about in the last couple of calls,
Speaker Change: some weakening spread in those end demands. And we're at a point where...
I think it's really most informative.
Speaker Change: to talk about the end-user demand. Again, they're linked. There's a little bit of stock left in the channel, but it goes as end-user demand goes.
Speaker Change: And so that's really going to be the biggest item as we look at the development in the year.
be yonder.
Speaker Change: food and beverage, where packaging is actually, you know, a very large percentage of the total business going into food and beverage, and that's a product type
Speaker Change: go to market in those cases. So that's where you see the most of it, as opposed to, for instance, an oil and gas or life sciences, where you have a higher percentage that comes from digital services and engineered solutions.
I appreciate the color. Thank you.
Julian, we will take one more question.
Speaker Change: Certainly, our last question today will come from Noah Kay from Oppenheimer. Please go ahead. Your line is open.
Speaker Change: Thanks. Just a clarification on the guide, you called out some of the non-R&D investments, but the nature of those sounded more like facility expansions. So just give us a bit more color on these investments.
You know why they're OPEX versus CAPEX?
Speaker Change: Yeah, it's a mix, and in some of these there's a mix of OpEx and CapEx.
Speaker Change: As you said, some of it is facilities, expanding cubic to be able to manage the really strong growth.
Speaker Change: We do have a new facility in India that's providing some additional resilience in the Asian region for us.
and then digital infrastructure within IT.
as we, you know, make sure that for internal
Productivity, as well as external productivity with our partners.
Speaker Change: We've got a business system and digital services that is world class. So those are some of the investments that we're making. We talked about them on the waterfall because of the OPEX portion, but there's a little bit of CAPEX for those as well.
Speaker Change: That's helpful. Thanks, Blake. See you in a couple weeks. Yeah, thank you.
Thank you. Thank you.
Speaker Change: I will now turn the call back over to Ms. Zellner for closing remarks.
Aijana Zellner: Thank you for joining us today. That concludes today's conference call.
At this time, you may disconnect. Thank you.