Rockwell Automation, Inc.

Thank you for holding, and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone, 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 1. At this time, I would like to turn the call over to Jessica Caracos, Head of Investor Relations. Ms. Caracos, please go ahead.

Thanks, Sharon. Good morning, and thank you for joining us for Rockwell Automation's second quarter fiscal 2020 earnings release conference call. With me today is Blake Moret, our Chairman and CEO, and Patrick Gores, 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. Both the press release and charts include reconciliations of these non-GAAP measures. A webcast of this call will be available at that website for reply 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. 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 the call over to Blake.

Thanks, Jessica, and good morning, everyone. Thank you for joining us on the call today. Before I begin, let me say to everyone listening on this call, thank you for your interest and support, and I hope that you and those close to you are safe and healthy. We're truly in unprecedented times, and our first priority is protecting employee health and safety. Our employees are doing outstanding work. keeping our customers' operations up, and running strong during this crisis. We are an essential business that supports critical infrastructure because our customers cannot build their products at scale without automation. So thank you to our employees, our suppliers, our distribution partners, and everyone else who has been working hard to serve our customers and communities. This pandemic will change how we live our lives and operate our businesses in the future. Rockwell's financial strength positions us well to overcome the current challenges and to be more valuable than ever as our customers learn to operate in this new environment. Let me now review the topics for today's call. I'll first offer some color on how our people and our customers are effectively managing through this crisis. then provide a brief overview of our Q2 performance, including a status report on our operations and supply chain, and then focus more time on what we are seeing today and our outlook. Please turn to page three of the slide deck. When I think about how our business is being conducted right now and how we are handling the current environment, I start with our employees and our customers. The safety of our employees is always our first priority. We closely follow U.S. CDC and World Health Organization guidelines. For our manufacturing workforce, we provide health screening, enhanced cleaning measures, and use of safety equipment, and have implemented social distancing between workstations across our facilities. Our non-manufacturing workforce has been exercising social distancing and working from home for over a month now, and we have restricted non-essential business travel. Where we can, we are using our own technologies and services to keep our people productive and support our customers. For example, we now have 2,500 seats of Vuforia augmented reality activated internally to conduct witness testing as well as customer support and training. Turning to our customers. This health crisis is bringing us even closer to our customers as everyone is rallying to help manufacture more necessary goods than ever before. For example, we have a strong partnership with 3M as they ramp up respirator production. And we recently collaborated with Hecheng Machinery a Chinese hygiene products machine builder, to increase the production capacity of their high-speed mask-making machine. Our solution, based on Logix and our next-generation motion controllers, increased their output from 150 to 500 masks per minute. We're also supporting Abbott Labs and other pharmaceutical companies to increase testing capacity and with GE Healthcare and others to ramp up their production of ventilators. We're also supporting companies like Roche and Cytiva who are working tirelessly to develop treatments and vaccines and are investing in manufacturing capabilities so that they are ready to scale up production as soon as possible. We're also helping companies who have repurposed manufacturing assets to now produce masks, ventilators, test kits, and other equipment our communities desperately need. For example, automotive and mining OEMs are now making ventilators, and food and beverage machine builders are now making masks. Even the Jameson Distillery, which is located near our offices in Ireland, has diverted some of their whiskey production lines to now produce alcohol sanitizing gels for hospitals and medical centers. These are just a few stories showcasing the innovation going on in these difficult times. Let's now turn to slide four for our Q2 performance and some key accomplishments in the quarter. Total sales grew slightly in the quarter, including a three-point contribution from inorganic investments primarily related to our Sensia joint venture. Organic sales were flat versus last year, and were in line with what we were expecting heading into the quarter, despite an 18% decline in China related to COVID-19. Our organic sales performance benefited from strong sales of Logix, which grew 8% versus the prior year, led by strength in North America, particularly in automotive and food and beverage. In addition to Logix, we continue to see strong growth in other core platforms like independent cart technology for motion control and network infrastructure. Both of these grew double digits in the quarter, and we think we're taking share. We also had a number of important strategic wins in automotive, food and beverage, life sciences, mining, and tire, where we were not the incumbent control platform. Information Solutions and Connected Services, or ISCS for short, was down slightly, largely due to a difficult comparison with major projects last year. That said, the pipeline for ISCS remains strong. We built strong backlog in the quarter, and we still expect ISCS sales to reach $400 million for the year. our IoT offering continues to differentiate itself in the marketplace. In the quarter, Rockwell was awarded the Industrial IoT Company of the Year by Compass Intelligence, which adds to our recent recognition in Gartner's annual Magic Quadrant survey as a leader in IoT software. We also saw very strong orders for Vuforia as we help customers expand their remote engineering capabilities during this pandemic. Turning now to Q2 earnings, adjusted EPS grew 19% and includes the release of our bonus accrual. And finally, free cash flow grew about 90% in the quarter, underscoring Rockwell's solid financial health and strong balance sheet position. Let's now turn to slide five, where I will provide a few highlights of our Q2 organic end market performance. Our discrete market segment grew high single digits, led by auto, which grew by over 20% year over year and grew double digits. We continue to see very good growth in electric vehicle programs. We also benefited from some traditional projects that we've been tracking. Our hybrid market segment was flat in Q2. Our largest segment, food and beverage, grew low single digits, including growth at packaging OEMs. Life sciences declined modestly due to the very tough comparison to last year. Many of our customers, particularly those in consumer-focused hybrid industries, have been running their operations 24-7 to meet very high demand and have had little opportunity to implement projects that divert resources from current production. Process markets were down mid-single digits, with oil and gas also down mid-single digits. We'll talk more about our outlook for oil and gas in just a few minutes. Turning now to slide six and our organic regional sales performance in the quarter, growth in North America and Latin America was offset by an 18% decline in China, which accounts for about 6% of our global revenue. We saw growth in Asia Pacific, excluding China, led by EV battery. EMEA was down low single digits, but with relative strength in automotive, food and beverage, life sciences, and semiconductor. Turning now to slide seven. Let me take a few minutes here to discuss how we're navigating the current environment. I first want to say that I'm very proud of the efforts we have taken to build resiliency in our operations and supply chain over the years. Our plants are operational and meeting current demand. And while the many actions we have taken to mitigate tariffs over the last couple of years reduced the impact from COVID-19 on our Chinese supply chain, Segments of our global supply chain are seeing some disruption. Among the biggest challenges have been reworking product flows to implement social distancing and managing shifts to limit the number of employees in a facility at one time. We are actively managing what is a very fluid situation. Patrick will have more details on our operations and supply chain. As part of our actions to mitigate risk in our business, and maintain our strong financial position, we announced earlier this month a series of temporary actions that better align our costs with a reduction in demand. The following principles are the foundation for our decision-making. Keep our customer focus. Protect employment as much as possible. Protect our most important initiatives and investments to drive long-term differentiation. and position our company for success over the long term. Balancing the near term with the long term is extremely important. This is why we have and we intend to maintain a strong balance sheet. Our capital deployment priorities remain in order, organic and inorganic investments, followed by dividends and repurchases. Turning to slide eight, the acquisitions we announced last quarter, Awesome and Calypso are expected to close in the next couple of weeks and we will continue to look for additional inorganic investment opportunities that advance our strategic objectives. We expect Awesome and Calypso to contribute about half a point of revenue growth this year and over a point of growth on a full year basis. Together with our other inorganic investments, we expect total inorganic sales to contribute about four to four and a half points of top line growth in fiscal 2020. Turning now to our outlook on slide nine, we're focused on delivering value to all of our stakeholders through these rapidly changing market conditions. The path of recovery is difficult to predict. As we put together our forecast, we looked at a variety of inputs. our recent performance in China and Italy, near-term industrial production forecasts, our daily sales and order intake through April, and what we are hearing from end customers and distributors. We expect that our fiscal third quarter sales will be down approximately 20% year over year, followed by sequential improvement in the fourth quarter. As a result, These are our expectations for the year. Organic sales down 8% at the midpoint. We continue to expect inorganic investments, now including Awesome and Calypso, to contribute about four to four and a half points of growth to the year. Adjusted EPS of $7.30 at the midpoint. And we're projecting free cash flow to convert at over 100%. As you can see, From our organic and market projections for the second half and full year on slide 10, the midpoint of our projections assumes both automotive and oil and gas will see particularly steep declines in the second half of the year. We are also modeling more modest declines in food and beverage and other industries. We expect most verticals, including auto, to bottom in Q3 gradually recover starting in Q4, with the exception of oil and gas that we think will take longer to recover. With that, let me now turn it over to Patrick, who will elaborate on our second quarter financial performance and fiscal 2020 outlook in his remarks. Patrick?