On Wednesday, 19 March 2025, Rockwell Automation (NYSE: ROK) presented at the Bank of America Global Industrials Conference 2025, outlining a robust strategy for growth amidst challenging market dynamics. The company highlighted its ambitious organic growth targets and cost-saving initiatives, while also addressing tariff impacts and competitive pressures. Despite a slight dip in stock performance, Rockwell remains focused on long-term margin expansion and operational excellence.
Key Takeaways
- Rockwell targets 5-8% organic growth CAGR and an additional 1% from acquisitions.
- Over $2 billion in Q1 orders, with expectations for continued order growth.
- Aims for a long-term operating margin of 23% through cost savings and operational improvements.
- Focus on mitigating tariff impacts through price adjustments and increased domestic production.
- Strong presence in North America with significant market share and channel partnerships.
Financial Results
- Rockwell targets a core earnings conversion of 35% and free cash flow conversion exceeding 100%.
- Q1 orders surpassed $2 billion, marking the first time in seven quarters above this threshold.
- The company expects a gradual increase in order intake and sales growth throughout the year.
- Annual recurring revenue constitutes approximately 10% of sales, growing at a double-digit rate.
Operational Updates
- Achieved $110 million in cost-out savings in fiscal year 2024, with an additional $250 million anticipated in 2025.
- Cost savings through direct material spend renegotiation, logistics optimization, and indirect spend reduction.
- Implementation of the Rockwell Operating Model, focusing on lean and continuous improvement for sustained margin expansion.
Future Outlook
- Growth opportunities in e-commerce, warehouse automation, automotive, life sciences, food and beverage, and energy and mining.
- Exploring regional opportunities in China and Europe, targeting higher-end market segments.
- Plans to enhance portfolio with new software and hardware solutions, including digital twin technology.
Q&A Highlights
- Rockwell reaffirmed guidance for the year, expecting to recover tariff costs and see a gradual increase in order intake.
- Competitive dynamics discussed, with Rockwell and Siemens accounting for less than 25% of the total addressable market.
- Emphasis on strong installed base in the US and leading technology portfolio as key competitive advantages.
For further details, readers are encouraged to refer to the full transcript below.
Full transcript - Bank of America Global Industrials Conference 2025:
Andrew Oben, US Multi Industrial Analyst, Bank of America: Good morning. Welcome to day two of Global Industrial Conference. To kick things off today, I’m Andrew Oben, Bank of America, US multi industrial analyst. To kick things off, we have Christian Raffi, senior vice president and chief financial officer of Rockwell, and we have Ayanna Zeltner, vice president of investor relations and market strategy. I think Christian is gonna kick it off with a presentation, and, then we’re gonna go to fireside chat.
Thanks so much for being here.
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Thanks, Andrew. Appreciate that. So, figured we were gonna take a a few minutes and just give a quick overview of Rockwell for those of you that aren’t familiar with the story. Of course, we have our safe harbor statement. Rockwell Automation, based in Milwaukee, Wisconsin.
We are a global industrial automation company. That’s our focus, and we are a pure play. I’ll talk about that here in the next slide. But we are a diversified industrial in the sense that we have really good diversification across geographies, but we also have a really good diversification on the end markets that we serve. When you think about Rockwell, you should be thinking about an organization that serves a lot of verticals across a lot of, the industrial universe.
So 40% of our sales in the process space, 25% in discrete, and 35% in hybrid markets. We have three reportable segments. You can see our split in the upper right hand corner there, 3,800,000,000.0 in the intelligent devices segment. Lifecycle services is 2,300,000,000.0 and 2,200,000,000.0 in software and control. We are the world’s largest pure play industrial automation company.
Again, a lot of different verticals that we serve. Some examples of those are on the the lower part of this slide. Importantly for us, we serve those customers in three different ways. We have hardware, we have software, and then we also have solutions. And all of those come together for a really nice broad offering for our customer base.
About a year and a half ago in November 2023, we, we, gave the world our view of what we think the strategic growth framework for our organization is gonna be over the long term. When you think about this, think about it from a mid cycle to mid cycle, and this would be the CAGR. So about 5% to 8% organic growth is our target with another one point coming from acquisitions. That 5% to 8% organic is broken into kind of three different areas. The first one is is that just the addressable markets that we have, we believe are gonna give faster secular growth.
That’s because not only
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: are those others are those markets growing, but we also believe those markets are going to continue to adopt a higher and higher level
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: of automation. On top of that, we continue to expand the markets that we serve. We do that through new product development. We do that through, adding to our software portfolio via acquisitions that are going to give us a higher level of growth. And, of course, we do that, just from continued innovation and and driving more and more through the markets that we have and the and the sales organization that we have.
Lastly, again, on the organic side, ARR, software and services. So annual recurring revenue for us is about 10% of sales. That’s growing at a nice clip. It’s been growing at double digits for the last several years. We expect that to continue.
And, again, acquisitions, although we’re taking a pause on acquisitions today, we expect acquisitions in that growth framework are gonna add about one point, again, on that CAGR. On the right hand side, you can see some of the key metrics that we look at when we think about that financial framework. So on the left hand side, it’s really about top line. On the right hand side, it’s about the other metrics. Core earnings conversion of about 35%.
That’s the flow through profitability. EPS growth and getting leverage on the p and l off of that sales growth. Free cash flow conversion better than a %. ROIC greater than 20%. That’s those are targets.
And then two times leverage. North America is our home market. North America is where we have the highest market share. We have the largest installed base, in the competitive world for, for our products, and we have the deepest relationships and really strong channel partners. So as we we talk about and I’m sure we’re gonna have a discussion this morning about, about shoring opportunities and what’s going on in, in North America.
For sure, it’s nice to be, in our home market for that. And lastly, we’re in the midst of a self help story. So last year, around this time, we announced that we were, going down the path of a margin expansion and productivity process. And so that was, the second half of last year. That was mostly headcount related.
As we turned the corner and went into 2025, our fiscal twenty twenty five, we’re focusing more on the the margin expansion aspect of that. So we’ve got a lot of product cost reductions that are underway. We’re working on indirect and, in supply chain optimization, and we’re also looking at our portfolio. Last year, in fiscal twenty four, we had about $110,000,000 of cost out savings. And this year, we’re expecting an incremental $250,000,000 of cost outs.
I’m sure we’ll get into that in, in some more detail here in a moment. So with that, Andrew, I think we’re ready for
Andrew Oben, US Multi Industrial Analyst, Bank of America: Excellent. Thank you.
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: The grilling. Right? Yeah.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: Day.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Thanks so much, Christian. So, I know that you have provided guidance, but maybe a big topic for investors here. Could you just give us a view on demand environment? And maybe both near term, what are you seeing? Because obviously, at top of everybody’s mind, but also obviously, what’s your longer term view?
How much visibility do you have on this potential CapEx resurgence in The US?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Sure. You you had a lot in there, but we’ll, we’ll go ahead and we’ll try to unpack that. The first part is is that, we are not giving, an interim update, since what we talked about at our q one conference call. So that was in early February of this year, where we, we we discussed the fact that we were having a, a pretty good uptick in our demand environment. That is, in the first quarter, we had orders that exceeded 2,000,000,000.
That was the first time in the last seven quarters that we had been over 2,000,000,000. We, we exceeded our own expectations, frankly, on that order intake, because we we were expecting more flattish orders from q four to q one. We actually were up mid single digits sequentially. As we go through the remainder of this year, we’re expecting that we’re gonna get a gradual increase in order intake and continued growth on the sales line. So that part’s good.
Yes. I fully need to acknowledge that, you know, there are a number of dynamics that are in the market right now, right, the, the tariff environment, which I’m sure we’ll talk about more here in a minute. And, there’s there’s some difficulties for our customers for thinking about the future. At the same time, we still believe very strongly that the the dynamics that lead towards a really good robust, industrial automation world, things like, labor availability, the cost of labor, are gonna continue to drive good demand for industrial automation from long term.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Excellent. So so maybe, yeah, you brought up the tariffs. Maybe we’ll jump to the tariffs, get that out of the way. So to what extent have you guys embedded the impact of tariffs in your FY ’twenty five guide and maybe remind us of your manufacturing and sourcing footprint in affected regions, how much capacity do you have to flex in The US and Sure. How much of your Mexican capacity is subject to USMCA so it would be exempt from tariffs?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Yeah. Absolutely. So our manufacturing footprint, you know, currently, what we import into The United States, of finished goods from Mexico is about $350,000,000. That’s both from our own manufacturing facilities as well as from other suppliers. And, in from Canada, it’s about a hundred million.
And from China, it’s about a hundred million. We are in a position with the current tariff environment and the way that it’s been enacted. Our expectation is that if we’re incurring the cost, we’re going to recover it. When it’s enacted immediately, which is what we’ve seen in in a lot of cases, then our expectation is that, really, the only the only lever we have to pull is do it via price. And so we have been running through price changes to reflect whatever the changes have been on tariffs, including rolling them back in cases where it was put on and taken off again.
So we now have a little bit different cadence where we’re doing it in a more gradual way, at least taking it kinda almost every week. We’re we’re taking a look at what’s happened with the tariff environment. Longer term, right, because that was the the other portion of your question, which is, well, what are what are we doing to mitigate it, And what opportunities do we have to bring that back into The United States or to change the production location? We do have some of those opportunities. You know, coming out of the supply chain crisis, I think Rockwall is not any different from a lot of our customers, which is we, we put in place a number of, initiatives around resiliency, to try to make sure that we were in a position to manufacture the same product in multiple locations, in some cases, closer to our customers, in other cases, trying to just ensure that we have a really strong backup in place.
And so that resiliency is allowing us to, we’re gonna take advantage of that and continue to ramp up, in areas where it makes financial sense, of course, to to bring some production back into The United States. Right now, at the moment, it’s really probably more about, leveraging the existing lines that we have and, and putting in third shifts for those, you know, for some of those products where we’re again, we’re making it in a couple different locations. So we’re we’re allowing, or we’re we’re using that resiliency to do that in The United States now.
Andrew Oben, US Multi Industrial Analyst, Bank of America: But just to just to go back to what you have embedded in f y twenty five, so the idea is April 2 tariffs go and you hit a button and it flows through the system. And would you be caught up by the end of the quarter effectively, or how long would it take? It it sounds like you expect that net net, you’re gonna be whole for the year. Yep. But how long would it take you to catch up, you know, from April 2?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Yeah. Net net, we do expect to be whole, for sure. There is nothing embedded in our guide around tariffs because our expectation is that we’re gonna be able to recover, and we should be able to recover fairly quickly. That is those priceless changes are happening, relatively fast right now. In addition to that, we do, expect in cases where we’re talking about larger projects and systems that we’re gonna be able to reprice the backlog.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Okay. Okay. So you will okay. Gotcha. Yep.
Okay. So that’s good. Okay. So maybe oh, you know, why don’t we do that right now? You know, let let let let
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let let
Andrew Oben, US Multi Industrial Analyst, Bank of America: let let let let let let let let let let let let let let let let What’s your perspective on market share in discrete in recent quarters? Right? You have a large competitor that’s, I guess, green, bluish green. What is the market dynamic in the whole market, in North American market?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Do you want to take that one?
Andrew Oben, US Multi Industrial Analyst, Bank of America: And basically, maybe what you can expand, because what we’ve been picking up is that because U. S. Is adding greenfield capacity, you know, it seems that because of, you know, the ecosystem in The US runs on red stuff, and, you know, if you’re actually really gonna make stuff for The US in larger quantities, is there an opportunity for European machine builders to sort of move towards Rockwell brand?
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: Sure. I can start with the first one.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Yep.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: The market share, the topic has come up quite a bit lately.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Yep.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: If if you look at, it would track market share in many ways. You have to look at at it over longer periods of time. Yep. Industrial automation, market share gains and losses move at very slow Yep. At a very slow speed.
With that said, we, we seem we’ve been pretty stable, if not slightly up in our overall market share. If you look at PLCs, our controllers, we actually have been gaining share Yep. Including in The US where we have by far the highest market share. I want to address one topic. You mentioned one of our competitors that we get compared to quite a bit Siemens.
If you take everything we sell and everything they sell into this addressable automation market, together, we make up less than 25% of the total addressable market.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Yep.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: It’s an important point. It’s not a zero sum game. There are lots of players there that are regional players, niche players, that we’re competing against, and we don’t have to
Andrew Oben, US Multi Industrial Analyst, Bank of America: But that’s a global 25% is the global.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: That’s right. And so we don’t have to take share from our biggest competitor or nearest competitor to grow. And I think it’s an important topic. In general, like I said, like, you look at whether it’s global market share data, if you look at, product specific offerings, if you look at just comparing us versus the automation business of our competitors. Right?
Not other software areas, not other areas that are not in our in our, sandbox. We’ve been outperforming our competitors for the last six or seven quarters.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: So there are
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: many ways we look at it. We feel good about our share. We’re not complacent. US is where a lot of new investments are happening, and it’s it’s our stronghold. And we are very much focused on on getting more than our fair share there.
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Yeah. The, the yes. About the the machine builder market and Yeah. And the Europeans and and opportunities there. So we do have a really strong position with a number of, European machine builders, in particular in areas like Italy, where they have a stronger food and beverage and life side life sciences base.
And so, those relationships have helped us to continue to grow in Europe, but also in Europe with those machine builders and, because they have a really strong interest in building a relationship with Rockwell because they want access to The US market. They know if they’re gonna be in The US market that they need to work with Rockwell, or at least they’re in a good position to work with Rockwell because we have a lot of those relationships with those customers. And just to build off of what Ayjana said and and one of the slides that I that I hit on, right, it is our home market. We do have the largest installed base. That does allow for an opportunity for us to build off of relationships that have been there for a long time.
And that’s not just, you know, for in market for market, but as you said and as we talked about, the European machine builders and machine builders from, frankly, around the globe are highly interested in working with Rockwell because of the access we have.
Andrew Oben, US Multi Industrial Analyst, Bank of America: And maybe we can talk just, just expand on it, just just generally talk about competitive dynamic because, you know, what our numbers show is that what’s gonna be different about The US market is that I think it’s been market for twenty years that was dominated by replacement capacity, right? And probably for the first time in twenty years, you have real sort of greenfield capacity coming online. So how do you think about competitive dynamic in this higher CapEx environment? Can you just explain how does the software because it’s not just people always think about the hardware part, but there is also the software ecosystem related, how we actually code the library that engineers use. Can you just maybe expand on that?
And maybe I’ll just add, my understanding there are also incentives in The U. S. For machine builders to use domestically sourced, just it’s sort of not quite CHIPS Act, but there is also even in an industry like Food and Bev, there are incentives in place for domestically manufactured equipment in The U. S. Maybe you can talk a little bit about that if that’s correct.
Thank you.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: Why don’t I start?
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: Go ahead.
Andrew Oben, US Multi Industrial Analyst, Bank of America: We’ll probably talk about it for half an hour.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: That’s right. And from a from a competitive dynamic in the technology portfolio, what Christian said earlier is is right. Us having the biggest installed base, the ecosystem, the the largest market share certainly is a big advantage. In addition to that, we have a leading technology portfolio. Customers really want both technical capabilities and that access and support and install base.
All of that works together. What we’ve done over the last several years is significantly enhanced our portfolio, both software and hardware and services. The way we talk about it, there are three or four main areas. So if you look at you mentioned programming and so so we look at production design and control. First of all, this is what Rockwell is is focused on, production automation, production environment.
And if you look at what we’ve done there with design, whether it’s simulation and digital twin with our Emily three d offering. In fact, we just recently announced an expanded partnership with NVIDIA where we are expanding it to factory, test. So simulating and virtually commissioning the entire factories for customers. That’s a huge advantage. We can get in earlier in the decision making of for our customers, and, we are continuing to innovate and lead there.
How you look at programming, what we’ve done with our factory talk design cloud native, programming environment is significantly simplifies the process for customers. PLC programming is very difficult, and what we’ve done is, by making it cloud native so people can collaborate, what we’ve done with Copilot, so what we’ve developed from our from our own development is making it easier using natural language models for these engineers to be able to quickly program and configure things and get lines up and running. So quicker time to value, and that’s been a differentiator. So that’s on the on the on the design side. The control side, we’ve been innovating.
We’re a leader in controllers, as we mentioned in The US. Logics, everyone knows logics. We are not resting on our laurels. We are developing that next generation which we talk about software defined automation. It’s broader than just Logics, but Logics is a big piece of it and that also separates us from our competition and helps us win at these large accounts.
If you look at production logistics, that’s a combination of hardware and software. So AMRs, autonomous mobile robots, what we’re doing there is different from our competition. It’s a combination of these mobile robots, but also how it plugs into the rest of the fixed automation we have, how it plugs into our factor talk software platform, how it interacts with Plex and fixed cloud native software, and no one else has that. And we see our customers across automotive, food and beverage, life sciences, investing in these, AMRs because it it certainly helps them with safety, optimization, and and costs, especially with scarce labor. And then finally, I would say SaaS.
So a lot of these edging cloud solutions we’ve developed organically and bought, like, Flex and Fix. They’re helping us. They’re compelling for us because they help us with our annual recurring revenue. It’s a resilient revenue stream because SaaS is a subscription. It’s a service.
But importantly, it’s a great benefit for our customers. It means lower cost of ownership, a quicker time to do quicker to deploy, easier to maintain. Customers don’t have to employ huge IT staff to have all that on prem. And so that’s kind of the modern way of doing business and what our customers are expecting, and we are leading in that portfolio as well.
Andrew Oben, US Multi Industrial Analyst, Bank of America: And and just understand in terms of PLC programming and, sort of the software defined architecture because, you know, I think there is a handful of these standards, you know, open standards. But it’s fair to understand that your ecosystem, right, the proprietary environment that Rocco provides is sort of compatible. And if you were trained, it sort of evolves great. I sort of think about Excel for Windows. And I you know, the way I sort of think about it, you know, yes.
You have Excel for Windows and you have Excel for Mac, and they’re very similar. And if you understand Excel for Windows, you can certainly use Excel for Mac. But, you know, if you really know how to sort of do macros with keystrokes and Excel for Windows, not that easy. That sort of the analogy I sort of think of, Rockwell versus competition, it’s the same, but it’s not. Is that a fair way of sort of think about it, or are there nuances there?
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: There are nuances, and we can talk about it for a long time. Basically, Rockwell has been has has been pushing for an open architecture for for as long as Right. I know. And, but so we can interoperate and we can work with a lot of different Yep. Vendors because that’s how industrial customers operate.
They they work with a lot of different players at at different levels of the technology stack. However, we get premier integration when we use our offerings together, and that’s what we continue driving for our customers. But at the same time, we wanna make sure we can our customers can can be agnostic in different levels because, it’s more practical for them.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Yeah. We’re just thinking more in terms of, you know, your support network. It’s just how many people are familiar with your environment versus how many people
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: are familiar with other environments. I think that’s what I was sort of Yeah.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: And in The US, by far, if you look at the engineering, maintenance staff at many of the, of our customers and system integrators, machine builders, they’re very familiar with our Right.
Andrew Oben, US Multi Industrial Analyst, Bank of America: That’s that’s what I
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: Exactly.
Andrew Oben, US Multi Industrial Analyst, Bank of America: That’s what I was about.
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: And as Ajana said, that the AI environment and, the the Copilot capabilities we’re continuing to add, just makes it more of a natural language model that allows, that to level the playing field and let letting new entrants in our space that is, you know, people that are in, like, the European machine builder market to be able to work with Rockwell technology and, you know, not necessarily need all that legacy knowledge.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Well, let’s sort of shift to operations. So what is the framework? And, Christian, I know that’s at the top of your mind, but what’s the framework to reach the 21.5% long term margin targets from, you know, the ’25 guide for 19%. What do you need to do to your operations to get there?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Sure. So, just to not not to correct you, but I guess I will. So 23.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Right. I think so. Yeah.
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: So 23 is where we’re looking to go in our long term framework framework. And, and we’ve got that broken out by segment. You can certainly see that in our slides in our, from our investor day back in November of this past year. But to get there, really, we it starts with the the cost out programs that, that I talked about and, that allows us to get a get a reset, which is good, and to put our operations at the right size for the, for the business that we’re in right now. We do need some revenue growth to happen.
We’re coming off of a period of, in 2024. We were down on sales this year. We’re guiding to organic at negative one. There’s a lot of destock that’s happened, which was really the the drag on our results. So we do need revenue growth to, to help us out a little bit.
But I think the the self help story, is a big driver of that. And, again, you know, we’re at 19% today. Expectation is to get to 23 and a half. That’s gonna be both on the gross margin line. We should get, expansion on the gross margin line, as well as from getting leverage on our SG and A.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Okay. And maybe from that perspective, sort of the cost out, you had $250,000,000 on your slides. So how much of it is structural versus what’s tied to sort of the current slowdown in growth?
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: And
Andrew Oben, US Multi Industrial Analyst, Bank of America: I guess what I’m getting at the spirit of the question is, do you need to add costs back when you return to growth?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Yeah. So that entire program is built on the, making sure that we’re doing structural activities to, to to get those costs out and to keep them out. There will be some direct labor, obviously, we have to add back, as we, as volume returns. Obviously, that’s built into our standards. That should be just fine.
We should be able to get some better efficiency out of our factories based on some of the activities that we put in place today. So that, from an add back of cost perspective, you know, we’re, we’re looking at r and d that’s in the 6% range as a percentage of sales. That percentage is probably gonna stay the same, so there will be some additional spend, but it should not have an impact on the leverage side of it.
Andrew Oben, US Multi Industrial Analyst, Bank of America: And, you had a slide, that sort of listed various sort of cost saving initiatives. Yep. I guess the same slide. So what inning are you in terms of addressing the cost savings? And maybe what investment I think are looking for?
What progress have you initiated and that are benefiting margins this quarter and this year? And what sort of down the line 26 and beyond from the list that you provided? How should we think about it?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: So, I like your inning analogy. I’m gonna build off of that a little bit. Yeah. Of course. Honestly, I feel like we’re in pre season.
That is, you know, we’re we’re still in a position where we’re preparing and getting ready for, going into the, going into the regular season, getting into the game. That is we’re, you know, we’re we’re getting the fitness level, to the right spot. We’re getting the organization to a position where we’re working really strongly as a team, and we’re we’re gonna be ready to start that regular season. You know, so and and the reason why I say that is that, I I do feel like what we’re doing and what we’ve done, in those programs is more about, getting a reset for the organization and giving us a chance to build off build off of that. And so, you know, the the the second half of last year, it was really more focused on headcount, and that that’s what gave us a hundred and 10,000,000 of yield, which, of course, will annualize this year.
It was about a hundred and 20,000,000 of benefit in in fiscal twenty five. The remainder of that 250,000,000 is gonna come from, from more cost of goods sold and indirect spending. And, those to to get into some more detail because, like, you that was part of your question, which was, okay, what what do we have really going on there? Direct material spend is a a big portion of that. That is renegotiation with suppliers, changing out suppliers, doing a better job buying.
And that has a lot to do with the fact that, during the supply chain crisis, we were in a position where, we were just trying to get product in the door, convert it, and get it back out the door as quickly as possible. In in a lot of cases, we had to buy components at prices that we were, not necessarily happy with, but, again, we needed to get it done to to get our customers served. So now we’re in a position where we’re going back, and we’re taking another look at those, those costs and that spend and taking, taking actions to to either resource or to renegotiate, things like logistics. Again, and when we’re trying to get things, in the door and out the door again as quickly as possible, we did a lot of things via air freight. And now we’re, we’re transitioning that more either to, closer suppliers or we’re trying to, take it via ocean.
And, so that’s that’s pretty well long for us right now. Indirect spend, going back and looking at our indirect spend overall, and do we need everything that we’re we’re spending our money on. So those are being taken care of. And, again, that’s built into that, that 250,000,000 for the year. But all those items are really they’re just the start, because what’s important is to take this reset and don’t miss the opportunity to really build off, but for the long term for the organization.
So what we’re doing in the background underneath, all those initiatives is we’re putting in, the Rockwell operating model. So we’ve had lean and continuous improvement, models in place for Rockwell for quite some time. But during the supply chain crisis, productivity was not necessarily our number one objective. We need to find a way to get back to that. The Rockwell operating model is gonna help us with that, via an operational excellence program, bringing in a lot of different tools, for the organization to try to turn this into a flywheel.
Right, building off the, the really strong culture we have, building off the learnings from this cost out, and continue to drive that margin expansion over the long term.
Andrew Oben, US Multi Industrial Analyst, Bank of America: And, you know, just sort of, just to think about this as an incremental margin question. So historically, in an upcycle, you have delivered very high incremental margins, particularly in software and control, right, given your position in LOGICS. Do you still think you can deliver these incrementals north of 50% in an environment where sales are growing double digits? Or, you know, if you actually I mean, this goes back to where we started. Right?
Yep. So, you were in a low growth environment. Yes. And does the math change if, you go into structurally high growth environment in North America?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Yeah. I mean, obviously, the math does change. Any for any organization, hopefully, the answer is that, you know, when you’re in a higher growth environment, you should be able to get some, some pretty good, flow through profitability. There’s no doubt, what we’ve signed up for, what we’re talking about, you know, as part of our overall message is the, the conversion. When you think about conversion for Rockwell mid cycle to mid cycle, that we’re at that 35% rate.
I definitely understand and recognize that there are gonna be times where, you know, from quarter to quarter, we’re gonna have some outperform. Maybe we’re gonna have some underperform at the average. We’re expecting to be at that 35 rate. You know, hopefully, that when we get to the point where we feel like, okay, it’s time to you know, once we hit that 23.5% segment operating margin where we go back and revisit it, and we could talk about something that could potentially be different. But 35 is what we’re signing up for.
Andrew Oben, US Multi Industrial Analyst, Bank of America: And and and just, so I appreciate 35 is what you signed up for. Yep. But, anything structurally, do you have to put in more costs if the growth accelerates, particularly given that you do have all the costs? I understand what the answer is. The answer is 35, and I appreciate it.
I do not expect you to give me a different answer. But, I’m also trying to understand, you know, as I said historically, when things go up, particularly early on, incrementals can be 50 to 60. And, you know, perhaps in this environment, you have to sort of commit more costs to meet higher volumes. But at the same time, it seems the company is a lot more serious about cost takeout. Yep.
You know, could I be considering these things today?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: I I do think that the organization is serious about the, trying to make sure our costs are kept in check. Yep. And so, obviously, it depends on the mix of what’s happening, where that growth is occurring. We do have, some capacity that’s available for, for a number of our product lines, again, based on that resiliency that we’ve been putting in place. So there has been spend, and that spend has been mostly built into our base already.
So we’re in a pretty good spot. I will tell you though that, you know, philosophically, I do believe there are opportunities for us to do even more when we think about things like vertical integration, continuing to invest in our own facilities, bringing more, Rockwell technology for our own automation into our own facilities. I think there’s a there’s a pretty good runway around that. So do I see us potentially continuing to invest or even investing more? Yeah.
It’ll probably look more like CapEx, though, as opposed to OpEx. And the end result should be additional margin expansion because that should have really strong ROI for us.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Gotcha. And maybe orders, as you pointed out, I think orders came in above expectations in Q1. How should we think over $2,000,000,000 and up 10% year over year, how should we think about the cadence of the orders through the rest of the year given the first quarter outperformance? And specifically not asking you for
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: Yep.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Update on macro, but was there a pull forward, in orders for the in the quarter?
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Yeah. So let’s talk about the pull forward first. Yeah. And then, so or the lack of pull forward
Andrew Oben, US Multi Industrial Analyst, Bank of America: Yeah.
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Is probably the better way to put it. So when we looked at the outperform on orders in q one, certainly, that was top of mind for us. Is there any pull forward, and how do we think about that? And when we looked at the outperform, it was actually pretty broad based. When I say broad based, it was broad based across product categories or it was broad based across geographies and and customer segments.
So that broad based, you know, to to think about it a different way, You know, when when you think about software, well, there’s probably not gonna be a pre buy on software. When you think about, you know, a, an outperform in EMEA and Asia Pacific, well, those are not the natural customers you would be thinking about as far as those that would try to get ahead of some sort of pricing change due to tariffs. When you think about the the solution side of it, well, these are projects that have been in place for quite a long time that we’ve been working on, and so, those really didn’t feel like there there was a prebuy around them. So I I think, generally, we felt like, the no. This was truly a broad based, demand environment, slight but uptick.
Yep. And then, you know, looking at the remainder of the year, our expectation to be quite frank, right, we, you know, we’re we’re talking about a negative 1% of the top line. Yes. And it’s a it’s a tale of, kind of two different halves of the year when when we look at our comparables. In the prior year, you know, in 2024, we were shipping out a backlog for the first half.
The demand environment weakened in the second half. So we did see it kind of enhance again in the in, as we went into q one, but we’re getting some pretty tough comps. Yep. And so, as we get into the second half of this year, some of those comps are gonna get a little bit easier from that perspective. We are really just sequentially looking for a gradual sequential kind of quarter over quarter increase, both in the demand environment as well as in our shipments.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Great. That’s a great answer. So maybe just near term and longer term, what verticals is Rockwell most excited about? And as I said, if you can give sort of both near term answer but also long term. And what are the key market verticals and adjacencies that you are targeting over the next several years?
You want to take that one?
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: Sure. Before I talk about some of the growthier verticals, I just want to remind people that our technology largely is horizontal, meaning what we our controllers, our software, our drives, what we do, what we provide for automotive Yep. Is the same for life science. It’s the same for Yep. Food and beverage and for energy, mining, etcetera.
And it’s an important point because what that means is we are able to, focus and toggle between different industries and maybe add more commercial resources and focus or develop some application, software for particular customers. But broadly, it’s a it’s a very scalable portfolio. With that said, we talked about four or five areas that are really focused industries for us where we have great share, great technology differentiation, great access, and we think they’re gonna outgrow the average.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Yep.
Ayanna Zeltner, Vice President of Investor Relations and Market Strategy, Rockwell Automation: So right now, near term, we talk about ecommerce and warehouse automation as a bucket. Another two items there. There’s the ecomm market, and you see this we see this, build out of new fulfillment centers, and we are very well positioned to serve that market and the machine builders and system integrators that serve that space. And we’re seeing that broader warehouse automation space. It’s more of an application because it goes across many industries.
A lot of customers in CPG and and logistics, they are looking to upgrade, modernize their existing facilities. They they need to do that, and to to offset labor costs, to get ahead of their competition, to catch up with their competition, and this is where we see a lot of differentiation. So there’s we’ve we’ve seen that actually grow even last year. So e commerce and warehouse automation is the only end market where we’ll see actually tougher comps as the year progresses, yet we still expect to grow high single digits for the full year. And we expect this to to continue for some time.
If you look at longer term, we’re still very well positioned in automotive. Longer term model changeovers account for half of our business in automotive. So model changeovers and MRO. And it will continue whether it’s traditional ICE, whether it’s hybrid, whether it’s EV. Customers will continue to innovate, and we have a very strong presence there.
Near term is challenged, of course, trade and policy uncertainty, and and general consumer, confidence in environment. But longer term, it’s still an important market for us. If you look at life sciences, we do think we’re well positioned today and longer term. We, we’re bullish on that end market. We have a very strong portfolio of software and services, and it’s a higher content of software services and provide to that end market.
And whether it’s personalized medicine, cell engine therapy, GLP one, you know, obesity drugs, whatever that is, we are we we’re working with leading customers in that space, and we’re well positioned on the control side given it’s a hybrid end market. Food and beverage is important. There are parts of food and beverage that are gonna be growth faster growth than others. We’ll as Christian mentioned, we’re working with leading machine builders who are innovating. We’re working together on their next generation machines, next generation platforms.
And, so so we see growth there. And, energy and mining, it’s something we’re very interested in. We’re very, focused on. And we have the right technology, because it’s modular and it’s open, and especially with a lot of the renewables and decarbonization efforts. And this is where you need something modular from an architecture standpoint versus large monolithic DCS control systems that you usually use.
So those are some of them, but like I said, we are prepared to serve many industries, just given our portfolio and footprint.
Andrew Oben, US Multi Industrial Analyst, Bank of America: And, you know, I guess we are in Europe. Folks are excited about Europe. You sort of highlighted the fact that EMEA and Asia pack orders surprised to the upside. What are your thoughts as to what you are seeing in Europe? And also, there’s sort of similar to this nascent recovery in China.
And your exposure in China is different. Like, it’s tires, it’s aggregates. It’s I I I get it. Yep. But, just maybe a commentary on China and Europe as we finish up.
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Sure. So, you know, from a China perspective, as you said, you know, it’s less than 5% of our sales today. So it hasn’t been a huge factor for us, either to the upside or downside in the, in the more recent past. Overall, though, we are well positioned with, the the customers we wanna serve there, which is really the higher end portion of the market. We feel like we have a really strong competitive offering, which allows us to to be really well differentiated, and and especially with, the multinationals that are that are there, and also with machine builders that are serving the global market.
It’s a little bit of a similar story when we talk about Europe. Right? There’s, there are opportunities for for growth here, where we think we’re strongest, again, is more on the machine builder portion of the market. And there’s, there’s been some really good activity. We’re seeing some nice green shoots.
You know, I I mentioned Italy, you know, with food and beverage space, life sciences space. So, you know, we’re we’re feeling pretty good about overall positioning in this market. I don’t know if you have any. Okay.
Andrew Oben, US Multi Industrial Analyst, Bank of America: Great. Right on time. Alright. Perfect. Pleasure.
Christian Raffi, Senior Vice President and Chief Financial Officer, Rockwell Automation: Yeah. Andrew, thank you very much. Yeah.
Andrew Oben, US Multi Industrial Analyst, Bank of America: No. Thanks a lot.
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