Rockwell Automation, Inc.

Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's 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. I would now like to turn the call over to Jessica Karakos, Head of Investor Relations. Ms. Karakos, please go ahead.

Good morning and thank you for joining us for Rockwell Automation's third quarter fiscal 2020 earnings release conference call. With me today is Blake Morett, our Chairman and CEO, and Patrick Gorris, 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-GAP measures. Both the press release and charts include reconciliations of these non-GAP measures. A webcast of this call will be available at that website for replay for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. 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 details 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 we begin discussing our results and outlook, I'd like to make just a few opening remarks. While we as a company are managing well in this environment, we are highly sensitive to the toll this is taking on our employees during this time. Beyond the fear of a loved one getting sick, racial injustice is on our minds as we develop actions as a company and as individuals that will help put a permanent end to the denial of fundamental human rights. Additionally, thousands of our employees continue to work under very difficult conditions, including the temporary pay cuts we implemented in May. These pay cuts were necessary to better align our costs, the current business conditions while preserving jobs, but there is a limit to how long they can remain in place. I hope we'd be in a position to announce a firm end date to the temporary pay reductions by now, since our goal has always been to reverse them as soon as possible. However, business conditions remain weak and the recent surge of COVID-19 infections has worded all of us. And nobody can predict with accuracy when a combination of social distancing practices, therapeutic medicines, and eventual vaccines will turn the tide. We do intend to reverse the temporary pay reductions by the end of December and hopefully sooner. In addition, this quarter, we will make another special payment to our manufacturing associates worldwide who are on the front lines of maintaining our essential operations. There are many reasons to be optimistic and I am immensely proud of all of our employees and the great work they are doing. Our environmental health and safety team is working around the clock to keep employees safe. And our technology is crucial to projects that are increasing mask and respirator production to far higher levels than four months ago. Candidate therapeutics and vaccines are being produced and packaged with the help of our innovation and expertise around the world. In short, our employees are having a direct impact on protecting the health of millions of people around the world and I want to thank them all for their dedication. Turning now to our results on slide three. While business conditions remain difficult and results in Q3 were down year over year, earnings were higher than we expected for the quarter, primarily driven by better organic sales. Total sales declined by 16% versus the prior year, including a three-point contribution from inorganic investments. Organic sales were down about .5% and better than the 20% decline we were expecting heading into the quarter. Product sales outperformed our expectations and were driven by better performance in logics, motion, and network and security infrastructure. We also had a number of new strategic wins and process applications against major process competitors. These wins span several industries this quarter, including life sciences, food and beverage, and oil and gas. One of the more notable wins was with Companhia Casique de Cafe Soliveiro, the largest exporter of instant coffee in Brazil and one of the largest in the world. They are building a new technologically advanced coffee plant to expand production capacity. This was a highly competitive greenfield win and we beat our biggest competitors based on our technology and track record with the customer. This win includes a broad suite of rockwell technology, factory talk innovation suite software, rise, connected services, as well as newly released process control technology within logics that enhances our differentiation against traditional DCS systems. Turning to information solutions and connected services, sales were down slightly, partly due to travel restrictions and limited access to customer sites. However, ISCS orders grew double digits over the prior year and showed strong growth in both software as well as connected services. Turning now to earnings, adjusted EPS was $1.27 and our strong cash flow performance further reinforces our already strong balance sheet and liquidity position. Let's now turn to slide four where I will provide a few highlights of our Q3 organic end market performance. A discrete market segment declined approximately 20% with automotive performing better than we projected in April based on the factory closures at that time. Semiconductors saw positive growth in the quarter of mid-single digits and continues to benefit from secular tailwinds in 5G, data centers and the Internet of Things. We also see e-commerce as an important emerging driver of our discrete business due to the excellent fit of our technology with fulfillment center applications. Our hybrid market segment declined about 10% with food and beverage and life sciences performing in line with our expectations. Food and beverage customers continue to experience extremely high demand and as a result we are helping them focus their resources on maximizing production. These customers continue to show strong interest in digital transformation solutions that will improve their resiliency and flexibility. Although timing around these projects has been delayed as a result of the pandemic, we would expect food and beverage to begin to improve over the coming months. One meaningful indicator for the food and beverage vertical continues to come from packaging OEMs which show positive growth in the quarter. Starting with life sciences, we continue to expect life sciences to have a strong finish to the year due to the industry's strong focus on digital transformation as well as our involvement with the leading companies making significant investments in COVID-related vaccines and treatments. Process markets were down approximately 25% with oil and gas a little weaker. In general, process markets are more solutions-based and require more hands-on interaction both at the front end of a new project as well as at the back end for final commissioning and delivery. We saw physical restrictions and continuing lack of access to plants due to COVID having a more significant impact on these industries. Turning now to slide five in our organic regional sales performance in the quarter. North America declined by 20% with weaker process industries partly offset by better resiliency and discrete and hybrid industry segments. In this region, product sales performed better than our solutions and services. EMEA sales outperformed our expectations and benefited from PPE production and double-digit growth in information solutions and connected services. Asia Pacific sales declined 10% with -over-year positive growth in automotive and semiconductor. China sales declined mid-single digits but saw orders return to positive growth in the quarter. Broad-based Latin America declines were led by very weak automotive performance. Turning now to our outlook on slide six. Last quarter we forecasted that our fiscal third quarter sales would be down approximately 20% followed by sequential improvement in the fourth quarter. We came in slightly better than that in Q3 and our mix of product was also more favorable. However, the rate of recovery in our solutions and services business is slower than we anticipated due to the continued restricted movement of people. In addition, the COVID-19 pandemic and global efforts to respond to it are rapidly evolving. Our projections assume that a gradual recovery continues with no increase in pandemic-related facility closures or disruptions to the supply chain. Based on all the information we have available at this time, we expect organic sales to decline approximately 8% for the fiscal year. No change from our prior full-year guidance midpoint. We expect inorganic investments to contribute about four points of growth to the year and adjusted EPS to reach $7.50 at the midpoint. That's up from the guidance midpoint of $7.30 we said in April. We continue to target free cash flow conversion at over 100%. With that, let me now turn it over to Patrick who will elaborate on our third quarter financial performance and fiscal 2020 outlook in his remarks.

Patrick. Thank you, Blake. And good morning, everyone. I'll start on slide eight. Third quarter key financial information. For the third quarter, organic sales were down .6% compared to last year and acquisitions contributed just over 3% to total growth. Currency translation was a larger headwind than expected due to a stronger U.S. dollar and decreased sales by 1.9 points. Orders performed better than sales and were down mid-teens year over year. Overall company backlog increased year over year to the quarter. Segment operating margin was 16.5%, down 730 basis points compared to last year's record high, primarily due to lower sales. General corporate net expense is up slightly compared to last year, mainly as a result of unfavorable market adjustments related to our deferred and non-qualified compensation plan. Adjusted EPS of $1.27 was better than expected. During April's call, I mentioned that we expected adjusted EPS to be a bit over $1 based on an organic sales decline of about 20%. Organic sales performance at minus .6% was better than expected, as was product mix and discrete tax items were about a 5-cent benefit to our results in the quarter. Our results include about $15 million, or 10 cents of adjusted EPS, of restructuring charges, which are offset by a gain on an asset sale. From an operating earnings perspective, both items are evenly split between the two segments. On the Statement of Operations on page 10 of our press release, the gain on sale is included in other income, and the restructuring charges are included in SG&A. You will note that SG&A is up about $9 million year over year, reflecting not only the restructuring charges, but also the incremental SG&A from acquisitions made this fiscal year. The combined impact of these two items is a year over year increase of over $30 million in SG&A expense. I'll cover a year over year adjusted EPS switch on a later slide. The adjusted effective tax rate for the third quarter of .5% was lower than we expected due to a benefit from option exercises. Pre-cash flow in the quarter of $311 million was a strong result in this environment, with over 200% conversion on adjusted income, further enhancing our liquidity. Slide 9 provides the sales and margin performance overview of our operating segments. I will just point out that the main driver of segment margin reduction is lower sales. The book to bill for our solutions and services businesses was 1.05 for Q3, with continued project delays impacting these businesses rather than project cancellation. The next slide, 10, provides the adjusted EPS walk from Q3 fiscal 19 to Q3 fiscal 20. As you can see, core performance was down significantly on the large organic revenue decline in the core. Our temporary cost reduction actions and the lower tax rate partially mitigated the impact of the large sales decline. The restructuring charge and the gain on the asset sales pretty much offset each other. The adjusted EPS impact of acquisitions was about five cents diluted, including intangible amortization. Core earnings conversion in the quarter, that is excluding the effect of acquisitions and currency, was about 50%, roughly in line with the outlook comments that I shared with you in April. Before I move on, I want to mention that we continue to be in a strong position regarding our capital structure and liquidity. At June 30, cash on the balance sheet was over $900 million, and our total debt was about $2.4 billion. You can find a current update of our balance sheet and liquidity slide in the appendix. Moving to slide 11, product order trends. This slide shows our global daily order trends for our product businesses. Our product businesses represent about two-thirds of our overall sales and include our shorter cycle book and bill business. Within the quarter, daily product orders crossed in April, followed by sequential improvement in May, June, and continuing into July through Friday of last week. Our updated guidance assumes this improving trend continues at a gradual pace. Moving to slide 12, I'll provide a brief update on a few things that we discussed in our last earnings call with respect to COVID-19. Our first priority remains employee and customer safety. Access to customer sites improves throughout the third quarter, but remains a challenge for our solutions and services businesses. This affects not only our utilization rates and creates associated inefficiencies, but also project timing. We continue to experience project delays in our solutions and services businesses, and the rate of improvement is slower than we expected in April. We are, however, not seeing a pick-up in cancellations, just project push-ups. Regarding our own manufacturing operations and supply chain, our plans continue to be operational and meet current demand. Supply chain disruptions have generally been mitigated, but we continue to incur higher pre-cost and inefficiencies in our operations as we focus on the safety and well-being of our employees. During the quarter, we approved incremental investments to increase the resiliency of our supply chain and operations. For example, we're in the process of making investments to provide us more flexibility to produce products in multiple locations around the world. This includes capital investments in some of our U.S. facilities. Finally, the temporary cost actions we implemented during Q3 remain in place. The temporary cost actions and absence of a bonus earned are tailwinds for us in fiscal 2020 compared to fiscal 2019. As these items are reversed, they will present a headwind of fiscal 2021. We intend to neutralize that headwind through the structural cost actions we have taken this year, additional cost savings identified, and by maintaining lower levels of discretionary spend. Let's move on to the next slide, 13, updated guidance. We now expect full-year fiscal 2020 reported sales to be down about 5.5%. We continue to project organic sales to be down about 8% compared to last year. Second margin is still expected to be about 19.5%. The lower adjusted effective tax rate mainly reflects the discrete items we benefited from in the third quarter. Our updated adjusted EPS guidance range is $7.40 to $7.60. At the midpoint, this is a 20-cent higher EPS than prior guidance, reflecting our third quarter performance and the lower tax rate for the full year. On a -over-year basis, our guidance at the midpoint assumes full-year core earnings conversion, which excludes the impact of currency and acquisitions of about 35%. General corporate net is still expected to be about $95 million. Purchase accounting amortization expense for the full year is expected to be about $40 million. Net interest expense for fiscal 2020 is still expected to amount to about $100 million. We expect non-controlling interest to be slightly positive given lower earnings at Pentea. We expect continued strong free cash flow performance with free cash flow conversion of over 100% of adjusted income. Finally, with respect to repurchases, we spent about $50 million in the third quarter. Our guidance does not assume any additional share repurchases for the remainder of fiscal 2020. Average fully diluted share count is now expected to be $116.6 million for fiscal 2020. Our capital deployment priorities remain the same. Our first priority is organic growth. After that, we focus capital deployment on inorganic activities. Then we focus on capital returns to share owners who are dividend and then share repurchases. With that, I'll turn it back over to you, Blake, for some additional remarks before we start Q&A.

Thanks, Patrick. Let's turn now to slide 14. While the pandemic has disrupted our normal course of business in the short term, we believe it is also accelerating the need for industrial automation and digital transformation solutions that address manufacturing safety as well as operational flexibility and resiliency. Better align us with the evolving needs of our customers, we're very excited to announce our new operating segments, simplifying our structure around essential offerings, leveraging our sharpened industry focus and adding software talent which will play a larger role in our future value. This is the next step towards accelerating the profitable growth strategy that we discussed last year at investor day. There's also no coincidence that these operating segments map very closely to how our customers think about technology. If you recall, this is a similar technology stack to the one we reviewed at investor day last November. To begin with, the products included in our intelligent devices segment are every bit as important as they have always been. Intelligent devices are the inputs and outputs for industrial processes and they're where the data is born. Moving up, control is at the heart of automation and customers continue to demand high reliability and safety in their processes. We also see the growing role software can play to increase flexibility and insight across global customer operations. We're focusing on these crucial integrated capabilities and adding additional talent in our new software and control segment. And finally, the domain expertise provided by our lifecycle services ensures the positive business outcomes that give our customers a faster return on their automation investment. The three segments will continue to share a common sales organization and supply chain. Having a single sales force knowledgeable in their customers' applications simplifies the way customers interact with us. This is just one way where simplification delivers efficiencies for both us and our customers. Our leadership will continue to blend experienced Rockwell leaders with fresh perspectives. Fran Widarzik will lead the intelligent devices segment. Frank Kulaszewicz will lead the lifecycle services segment and we will begin an external search for the leader of software and control. In the interim, Chris Nardecchia, our current senior vice president of information technology and chief information officer, will serve as the leader for that segment. In addition to accelerate the evolution of our culture, Becky House has become chief administrative and legal officer, which includes leadership of our talent, legal, ethics and compliance, and environmental health and safety teams. Our culture is the foundation for accelerated growth under this new structure. It reflects a willingness to compare ourselves to the best alternatives our stakeholders have, a focus on increasing the speed of decision making, ensuring we have a steady stream of fresh ideas, and of course, a strong culture of integrity and inclusion. A more detailed view of what is included in each segment can be found on slide 15. Turning to slide 16, these segments create clear focus for each of these essential offerings and they all have plenty of room to gain share and profitably accelerate our growth in expanding markets. This new structure positions as well to deliver value to customers in what is being called the new normal. Turning to slide 17, I'll make some additional comments on the secular changes we're seeing in our market. As you may recall, last quarter we talked about the increasing need for customers to build resiliency and flexibility in their operations and supply chains. That includes the need for life sciences companies to increase their local manufacturing capability for medicines and medical devices in the US and the need for innovative technologies to drive higher levels of productivity, flexibility, sustainability, traceability, and safety. In the last three months, we've seen examples of all these trends. Many life sciences companies recently announced they are in the process of expanding their North American manufacturing footprints and supply chains and other companies in discrete industries are planning to do the same. In the quarter, we also won business with Johnson & Johnson to deliver technology for their new universal machine, which represents the epitome of flexible manufacturing. The universal machine is a collaborative mobile robot that will be deployed in response to the COVID-19 crisis and can be purpose to do machine loading and unloading, end of line packaging and inspection activities, or warehouse material handling activities where social distancing is needed. We think many companies will be interested in adding this type of flexible automation technology to the manufacturing environments in the future. And evidence continues to build for the need for more remote capabilities. In the quarter, we had a key win in EMEA with a major oil company that is making investments in Sensia technology to significantly increase their remote monitoring capabilities. In addition to our remote monitoring capabilities, the value of our automated reality operating with PTC is very compelling to customers as they increasingly look for alternative ways to operate their plants efficiently and safely and to reskill their workers as quickly as possible. These trends are unfolding now, and as you can see from many of the offerings on this slide, we are well aligned to customers' needs as they manage through this new normal. Nobody is better positioned to bring information technology and industrial operational technology together than Rockwell and our partners. Our customers' efforts to increase resilience and agility have the potential to provide meaningful tailwinds for years to come. With that, let me pass the baton back to Jessica to begin the Q&A session.

Before we start the Q&A, I just want to say that we would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up. Thank you. Lisa, let's take our first question.

Thank you. Our first question comes from the line of Scott Davis from Alias. Your line is open.

Hey, good morning, guys. I'm Jessica. Good morning. I like these new segments. This seems simpler, but anyways, can you help us understand the margin, maybe perhaps the margin differences between the three?

Yes, Scott. Good morning. Patrick here. We're still fine-tuning this a little bit and operationalizing the changes, of course, but preliminary estimates based on fiscal 19 results, and the numbers I'm going to give you is give or take a few points in each direction. Think of intelligent devices as being about 20%. Software and control, about 30%. And life cycle services, about 15%. And so roughly, these are based on fiscal 19, the segment margins. And I would add to that, Scott, that may be very helpful for you guys is we do not intend to change our definition of segment operating earnings.

Super helpful. Okay. And just as a follow-on, I can't remember you guys doing an external search for an operating role before. Did I hear you correctly, Blake? You're doing an external search for software and control? Maybe some following around what you're looking for there.

Sure. I mean, we've talked about our culture as involving a steady stream of new ideas. And bringing those new ideas into the organization comes from unlocking that innovation from our existing talent in the organization. It comes from acquisitions. And it comes from hiring at different levels of the organization as well. And we've got great existing leadership in the company, but there's always good ideas that we can incorporate from the outside. And so as we launch this new segment of software and control, we do expect to bring those perspectives in with the leader of that segment.

Okay. Good luck to you guys. Thank you.

Yeah.

Thanks, Scott. Thank you. Our next question comes from the line of John Inch from Gordon Haskett. Your line is open.

Thank you. Good morning, everybody. I'm wondering if we could talk about the sales or credit risks with, say, smaller oil and gas operators or EV startups. And in that context, could you also talk about your auto industry project outlook?

Yeah. John, good morning. I have here from a receivable risk or credit collection risk. We would actually say that in the last quarter overall, our overall, call it the current, the single percent actually slightly improved. And so I'd say that doesn't mean that there are some onesies, twosies where we may have some just we always have that. But I'd say our overall portfolio has actually improved in the last quarter.

Yeah. I would also add to that, John, and, you know, from an EV standpoint, we watch closely, we recognize that, you know, the rush to add electric vehicle portfolios from big and small companies is new. And not all of those startups are going to survive. So we have to manage that closely. I should also add because so much of our business goes through distribution, we're keeping very close to our distributors during this time so that we're in constant communication to make sure that we understand what they're going through. And so that's an important part of our -to-day operational activities, both in terms of the direct project business as well as the flow business through distribution.

Right. And then the auto industry project outlook, how are you guys thinking about that heading into sort of second half of this year and next year?

Yeah, you know, with parts of EV,

even parts of EV versus traditional, whatever you like.

Sure. I think from an electric vehicle standpoint, a lot of these companies, whether they're big established companies that have divisions devoted to EV or their startups, they have to bring a portfolio of vehicles to market to get a return on all that investment. And while those projects in some cases have been delayed, we've seen very little in the way of cancellations there. And I think that's probably a general view of the automotive industry in that we did see MRO a little bit better than our expectations in the quarter. It was low, but it was better than we feared. And projects continue to move, although at a slower pace.

That's helpful. And then just lastly, could we put a frame around the restructuring and cost out actions? So I think to go back to last quarter, there was 150 million. I think you said the phraseology was mostly temporary. How much did you get out of the quarter? And I apologize if you said that. How much more is to come? And then I saw there were some restructuring charges. Maybe you could talk about kind of what those actions do for you in 2020 and what the setup is kind of on that basis for 2021. And, you know, obviously, are you contemplating even more restructuring or footprint realignment or stuff that could be more of a permanent nature? I think like you did mention, or maybe Patrick, you mentioned you were going to try and offset the temporary actions with other sort of measures. Maybe we could just sort of flesh that out a little bit. Thank you.

Yes, John. So in April, we mentioned that we implemented cost reductions that would yield over 150 million dollars in -over-year savings. That included a significant amount from temporary actions related to not having a bonus this year, but also some of the temporary pay cuts we implemented. We are achieving the savings we targeted. The temporary actions remain in place. As we undo those temporary actions in fiscal 2021, they provide a headwind. That headwind, based on, as Blake mentioned in his comments, undoing the pay cuts at the end of the calendar year, that headwind is a little north of 130 million dollars. We intend to neutralize that through one, structural cost actions we've taken in September last year with some carryover, but also the cost actions that we've announced today. Those combined are expected to yield over 40 million dollars of incremental savings in fiscal 2021. We've identified additional cost savings that are a little over 50 million dollars. And then finally, we expect to maintain lower levels of discretionary spend going forward. Maybe a little bit more color on the additional cost savings that I talked about. That includes permanent elimination of some open positions. In fiscal 2020, we have some one-time costs and inefficiencies related to the pandemic, or even acquisitions. And we're in the process of reducing our real estate footprint globally. And so, a lot of moving pieces there, but it is our intention to neutralize the reversal of temporary actions in fiscal 2021 through these cost actions.

Got it. Very helpful. Thanks, everyone. Good luck. Thank you,

John.

And our next question comes from the line of Julian Mitchell from Barclays. Your line is open.

Hi, good morning. Hey, maybe just a first question on the top line point. If you could clarify what these solutions and services orders did year on year, sorry if I missed that. And also, if the cadence of those incoming orders has broadly matched the slide improvement you're seeing month on month on the product side, or whether the order intake is lagging what you're seeing on the product improvement.

Yeah. So, on the solutions and services year over year, I would just say that our book to bill was 1.05, and that we built backlog in the quarter. And then our backlog is up year over year for our solutions and services as well. And I think that provides you some indication there. In terms of timing of orders for solutions and services, I think looking at that by week or by month is not always as helpful as it is for our flow business, our product businesses. And so, I don't think that providing that by month would be very helpful. What we have seen is some project pushouts, but as more and more customers have opened up, we've seen our services folks being called back into customer locations, and we've seen our solutions people being able to enter some of our customer facilities as well. And so, there is an improvement sequentially there.

I would also add, Julian, that the solutions and services orders and shipments are probably a more subject to calendarization within the quarter to our products. And that orders tend to come in later in the month, and the last month of the quarter for both orders and shipments is typically the strongest. So, it's a little more sensitive to which month you're in than the product flow.

Thank you. And then my second question on the margins, just wanted to clarify that the segment margin guide for the year, that does embed a narrower, decremental margin in the fourth quarter than what you saw in Q3. Maybe just help us understand what drives that. And also, if you could clarify the investment spend, what that is doing in the second half of the year. Thank you.

Yes, so investment spend for the second half of the year is about down about 6% year over year. Basically the same as what I shared with you last quarter. In terms of Q4 decrementals, they will be better. And so, we expect our core decrementals to be in the mid-20s in Q4. And the main reason for that is that we get a bigger benefit from the temporary cost actions. We get three months rather than two months. And in the fourth quarter compared to the year, we have about a $30 million benefit as well from lower incentive compensation expense. So, higher run rates of the cost actions we have taken and also a bigger tailwind from lower incentive compensation in the fourth quarter.

Great, thank you.

Thank

you, Julian. And our next question comes from the line of Jeff Spray. Sorry, Jeff Spray from Vertical Research. Your line is open. Jeff Spray, your line is open.

I'm sorry. Good day, everyone. Just a little more color if we could on kind of the trajectory here as we exited the quarter. This progression you showed on slide 11, can you just give us some sense on June and July versus kind of prior year levels, what those order trends look like?

Oh, the order trends were still down significantly versus the prior year for both June and July. And so, the worst performance year over year from an order perspective was in April. We've improved sequentially since, but they're still down in the mid-teens for both June. And we're, I would say, gradually improving sequentially and as well as the year over year, Delta is becoming smaller.

So, you said the quarter was down mid-teens, June was also down mid-teens basically, sounds like. Can we take a little

further? April was the worst from a year over year perspective and the subsequent months were a little bit better from a year over year perspective on the order intake.

Great. Thanks for that clarification. On the food and beverage side, can you elaborate a little bit more what you're seeing? You know, we've seen, you know, a reduction in SKUs and things like this as, retailers try to push stuff out and more going through e-commerce and the like. It sounds like that is at least a temporary headwind on the business. How do you see that playing out?

Yeah, a couple things. And let me just circle back, Jeff, to put a finer point on Patrick's comments. The order development that we've seen over the last few months is consistent with that idea of a gradual recovery. So, as we look at that year over year and sequentially, a gradual recovery is what we continue to see through a month to date in July. From a food and beverage standpoint, you know, the basic issue is that these companies, given our weighting more heavily towards prepackaged food, food that goes to the grocery store or directly to the home, they're running full out. And so, most of our efforts and theirs are, you know, devoted to maintaining production at really high levels. We're seeing a continued demand for flexibility. In this case, you know, the food producers are moving quickly to be able to change their packaging formats, to be able to meet what's being bought today. And in many cases, people who are eating at home, you know, much more than they ever have. We think that long term, the trend towards, you know, additional flexibility will only become greater. People are going to continue to want a variety of packaging formats. And we really haven't seen an overall skew reduction, you know, across the industry. The mantra of the packaging machine OEMs driven by the end user demand is getting to zero change over time. You go from one packaging format to the next, and we haven't seen any reduction in the focus in that area, which requires a lot of automation.

Great. Thank you for that. I'll pass. Thanks,

Jeff.

Our next question comes from the line of Andy Kapowitz from City Group. Your line is open.

Good morning, guys. Good morning. Blake, you just talked about the pandemic potentially accelerating the need for resilience and flexibility of your customers, especially in life sciences. Can you give us more color or at all quantify maybe what you would call the pandemic response orders you're seeing to help avoid single points of failure and increase resiliency and stepping Do you think your primary markets can recover even in a capex constrained environment as customers focus on productivity through automation, or is it really still too early to

tell? Well, I think our primary industries and the areas within those industries that we're putting particular focus do have good long-term growth prospects. When you talk, you mentioned life sciences, and people are going to continue. Even after we get past this current environment, people are going to want to live longer, healthier lives. Life sciences is going to be a continued area of focus for us. Food and beverage, for obvious reasons, it's going to continue to be important. I think the trend towards electric vehicles increasing. Even in the worst of the lockdowns, the world was still consuming 60 or 70 million barrels of oil a day. And so the desire to produce that oil as efficiently as possible is in line with what we're doing. In terms of the quantification on our results, it's going to be varied by industry. I've talked before about how I think we're going to see the movement, probably most pronounced in the discrete and the hybrid industries, where you're not as tied to the resource itself sitting in the ground, whether it's mining or oil and gas or what have you. So far, the orders that we've seen that I would call are incremental come from machinery builders in Europe, comes from life sciences companies in the US. We've talked a little bit about that. And so I think it's going to be gradual, but these are longer term trends. And we also look at ourselves and what investments we're making to increase resiliency. And as Patrick said, we are making some capital investments in the US to increase resiliency. In our case, it's to build some of our high value products in more than one place. And I think when we have those ideas and a lot of our customers are thinking about it like us, it's fair to assume that they've got similar plans.

Blake, just a follow up on that. So discrete has historically been a very sick little part of your business, especially during recession, but it may be down only mid-signal digits in F420 as you talked about, despite auto markets globally being very difficult. So we know it's combination of your new technology helping you in auto focus on EV, Semicon has held up. But do you see this level of discrete outperformance and sort of market share gains continuing or even accelerating going into 2021?

Well, we certainly intend to continue to gain share. I think it's not only picking the applications such as EV within the broader verticals, but it's also the mix of what we're offering as well. And we've talked a lot about growth and recurring revenue in terms of software and high value services, and then a better balance across the industries as well. So we talked before about how this year automotive will be less than 10% of our business. It's very valuable. And we expect that business to grow profitably for us over time. But I like that we're serving a host of industries that have great long-term prospects. And so we do intend to gain share across a broad front.

Thanks, Blake.

Yeah, thanks, Andy.

Our next question comes from the line of Josh Pachrzewski from Morgan Stanley. Your line is open.

Hi. Good morning, all. Hey, Josh. Good morning. Just a first question, I guess for Patrick. You know, appreciate the color on your kind of offsetting or neutralizing some of the push and pull on the cost front for next year. Presumably, there's a growth level which that starts to tip more toward investment. You know, any historical context that you could give us around, hey, once we get past mid-single digit growth, you know, we really start to feed the machine, or any way we should think about, you know, kind of that sensitivity of being able to restrain investment.

Yeah, I think the way you can think about it, Josh, is that going back to our framework of our objective to deliver mid-single digits of organic growth, 30 to 35 percent earnings conversion. And so the level of growth will determine how much more we intend to invest, but I can't give you a certain percent that says this will be a trigger to invest more than we otherwise would. But that long-term framework of 30 to 35 percent earnings conversion mid-single digits, it's something that over a longer period of time we intend to adhere to.

Yeah, Josh, I can add to that. You know, even with the restructuring that we announced, a significant portion of that frees up resource for reinvestment. It's not just about the cost savings year over year, but it's to focus resources well in the areas that we think are going to be particularly important. And in the organizational changes, the primary purpose of that is to accelerate profitable growth. We're looking for efficiencies, and we expect we'll find some, but the primary purpose is to accelerate profitable growth.

Got it. That's helpful. And then just to follow up, and, Blake, I appreciate all the commentary on, you know, growth opportunities with near-shoring. I guess another market that's to catch fire here is the warehouse automation market. And I know you have some content there, some exposure. It's fairly small. Is there either a product or a channel or a partner barrier there where that's not been larger? Because I think you've seen some pretty, you know, frothy order numbers from folks in that space. You know, it doesn't seem to have been a historical needle-mover for you guys. So any commentary there on either investment or, you know, legacy barriers that have kept that from being bigger? Thanks.

Yeah. It's a great part of the market for us. You know, traditionally, for a long time, we've had very good fit with the products when you think about the material handling and the sortation. I think we've added some products that have, you know, spurred some of the recent opportunities and wins that we've seen. Independent cart is one area, so, you know, very high precision motion control is needed even more than ever. The traceability that's used in their software systems. And so I don't see it as, you know, being constrained by the products for the automation or channel. We're close to a lot of the key suppliers in the area. But we are, to your point, looking at ways as to how we can develop that even more, because that's one of those long-term trends that we continue to expect to benefit from. Great. Thanks, Blake. Be well. Yeah. Thank you.

Our next question comes from the line of Nigel Koh from Wolf Research. Your line is open.

Yeah. Thanks, guys. Good morning. Maybe just asking Josh's question, first question in a slightly different way. You mentioned, I think, Blake, you know, that you hope to maybe roll back some of these temporary cost measures, you know, before December. I guess, what would the catalyst be to do that? You know, do we need to see, I don't know, sales stabilizing or sales, you know, on a clear path back towards growth? I mean, what are you looking for to kind of ease back on those salary and benefit reductions?

Yeah, I think, you know, we continue to expect a gradual recovery in orders and sales. But at the heart of it is the infection rates. And to look at how, you know, the countries in which we operate in get the spread of infection under control. I think that's really the fundamental pacing item as that improves. Then we, you know, have a much more positive outlook. I would also say that, as I did say in my earlier remarks, there's a limit to how long we can keep those temporary reductions in place. And at some point, we would have to substitute more structural reductions for the pay reductions because we can't go on past a certain amount of time with those temporary reductions affecting our entire workforce.

Great. Thanks, Blake. That's great. And then, you know, the problem given more disclosure is there's a demand for even more disclosure. On the monthly product orders, July versus June, normally I'd expect July to be weaker than June sequentially, and obviously July slightly better than June. How does this, you know, how does that look for Rockwell from a normal seasonal pattern? Would you normally see July versus June similar, or would there be a slight step back? And I recognize that your sales are normally stronger in four key fiscal versus three key fiscal, but I'm just wondering how normally that order pattern would look in a normal year, recognizing that there aren't too many normal years.

Yeah, Nigel Patrick here. So actually, for our product order intake, July tends to be somewhat similar as June historically. And so, what we're seeing now is somewhat typical. On the sales side, normally the first month after the quarter is a little bit weaker than the prior. So I would say that we're now. Go ahead, Nigel.

I feel like we're coupling back to some some of the normal seasonality into July at this point.

It is still early in July, but what we've seen so far is not untypical. And of course, our guidance assumes that we'll see continued improving trend sequentially.

Okay. Thanks, Patrick. Thanks, Blake.

Thank you,

Nigel. Thanks.

Our next question comes from the line of Andrew Open from Bank of America. Your line is open. Andrew Open, your line is open.

Operator, we have time for one more question.

Our final question will come from the line of Joe Ritchie from Goldman Sachs. Your line is open.

Great. Thank you. Good morning, everyone. Morning, Joe. Hey, Blake, when we caught up into quarter, you had referenced those life-line customers. And again, made reference to the fact that it seems like things are moving forward in that regard. Can you give us a sense on timing on when they'll actually make a decision to really, you know, to basically improve their supply chains? Any thoughts around timing around those awards? Joe, you're talking specifically about

life sciences customers?

Yes, specifically around the life sciences customers.

Yes, I mean, we're seeing plans, particularly for those who are developing, you know, therapeutics and vaccine candidates, we're seeing them either directly or through their contract manufacturers in the middle of plans to ramp that up now. Now, that's not the entire market. But what is common across the entire life sciences market is the accelerated interest in digital transformation. They know that they're not going to be able to get to scale without the basic automation and the ability to schedule, you know, product manufacturing and so on driven by software. So we're definitely seeing those plans increase. They've got a little bit of a situation that food and beverage does in that, you know, many of them are already, you know, just trying to ramp up production with their assets. But I think we're going to see that over time. I don't expect it to be a step change, but we're definitely seeing the slope of the curve increase with respect to life sciences customers.

That's helpful

to hear. I guess maybe my one follow up in just the flip side to that question is, you guys called out the process business, you know, basically your guidance being worse now versus where it was in April. And I don't think that probably comes as much of a surprise to many people. But I'm just curious as you kind of think about the process in this longer term, given where, you know, where oil prices are today, and also the investments that you've made with Incentio, like, how are you thinking about this business, you know, with respect to the portfolio, just from a longer term growth perspective, and how, you know, how long is it going to take to get back to some decent growth in the business?

Yeah, you know, there's no question that the oil and gas business is under a lot of pressure right now. But Sensei is positioned exactly where I would want it to be positioned. And that is focused on operational efficiencies and decreasing the break even point to produce a barrel of oil. And I think, you know, there's some evidence that is where the market is investing in that orders for Incentio, we're actually a little bit better than our expectations in the quarter. So tough spot for oil and gas, but helping them produce more efficiently is right where I want to be.

That's an interesting comment on the order side. Thank you for getting me in. Yeah, thanks, Joe.

Great. Thank you very much, everyone. I'll turn it back to Blake for a few final comments.

Thanks, Jessica. To summarize, we remain focused on the well-being of our employees. We're managing prudently through a gradual recovery, and we're taking steps to accelerate long-term profitable growth. Nobody's better positioned to bring information technology and industrial operational technology together than Rockwell and our partners. We wish you all good health and thank you for your interest and support.

That concludes today's call. Thank you all for joining us.

Thank

you

for joining us. This concludes today's conference call. At this time, you may disconnect. Thank you.