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spk05: Automation quarterly conference call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. If you have a question at that time, please press star 1. At this time, I would like to turn the call over to Jessica Caracas, head of Amistad Relations. Ms. Caracas, please go ahead.
spk04: Thank you, Tanya. Good morning, and thank you for joining us for Rockwell Automation's second quarter fiscal 2021 earnings release conference call. With me today is Blake Moretz, our chairman and CEO, Nick Gangstad, our CFO, and Steve Edsel, our senior vice president of finance. Our results were released earlier this morning, and the press release and charts have been posted to our website. Both the press release and charts include, and our calls 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 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. Supplemental information related to our new business segments can be found in the Investor Relations section of our corporate website. To get started, I need to remind you that our comments will include statements related to the expected future results of our company. 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.
spk01: Thanks, Jessica, and good morning, everyone. Thank you for joining us on the call today. Slide three. Strong orders momentum we saw last quarter accelerated and broadened across verticals in fiscal Q2. Surpassed $2 billion, which is a new record. Panic orders grew double digits from last year's orders. As you may recall, COVID did not significantly impact our business until the June quarter of last year. Total reported sales grew 6%, including a two-point contribution from recent acquisitions, including Awesome, Ellipso, and Fix. Organic sales grew a little over 1% versus prior year, despite significant supply chain constraints. Manufacturing supply chain continues to be stressed by sharply increased demand, along with various well-publicized events around the world that have reduced output and narrowed freight lanes. We'll continue to navigate these challenges in the coming months to take measures to continue increasing supply chain resiliency. I'll now comment on our top line performance by business segment. Intelligent devices organic sales increased 6% by strong broad-based demand for our automation products. Our motion control offering continues to shine double digits. CPG companies continue to add packaging flexibility. Software and control organic sales also grew 6% by strong demand across this segment. We saw growth in logics control, visualization hardware and software, network and security infrastructure, across the balance of our factory-taught software portfolio. Product sales growth is over 12% for this segment. Works for the intelligent devices and software and control business segments both strong double digits year-over-year and sequentially. Turning to lifecycle services, panic sales declined 11% versus the prior year. primarily impacted by weaker performance in oil and gas. On a sequential basis, revenue and orders through mid-single digits expect continued sequential sales improvement in this segment, balance of the year. Information Solutions and Connected Services had another strong quarter, organic sales and orders from double digits, contribution across a variety of end markets. This quarter's orders also included a number of meaningful software and infrastructure-as-a-service open-year wins for some of the world's largest food and beverage manufacturers. This included Kraft Heinz, where we actively monitor their industrial network and cybersecurity environments. These wins also contribute to ARR, which grew double digits year over year. Total backlog. through strong double digits on an organic basis, both year-over-year and sequentially. Turning to profitability, segment operating margin of 22% and adjusted EPS of $2.41 were above expectations and overcame headwinds from the reinstatement of the bonus and higher costs related to supply chain constraints. Stronger volume, favorable business mix, timing of spending all contributed to our strong profit performance in the quarter as we continue to increase our business resiliency. Let's now turn to slide four, where I'll provide a few highlights of our Q2 and market performance. Figures are for organic sales. We had a very good growth in our discrete industry segment. High single-digit sales growth significantly above our expectations. Within this industry segment, automotive sales were in line with expectations, climbing mid-single digits versus a strong prior year period when auto grew by over 20%. We continue to estimate 10% organic sales growth for the year in this vertical as MRO continues to grow and as an increasing number of capital projects are expected to launch in the second half of the year. Despite chip shortages impacting automotive production, we are not seeing related delays in capital or operational spending for our products. The semiconductor vertical significantly outperformed our expectations this quarter, growing about 15%. We believe strong secular tailwinds increasing capital spend, broadening share of wallet with customers are all driving our growth and share gains in this vertical. As a result, we are raising our semiconductor growth outlook approximately 15% for the year, up from our original November guidance of mid-single-digit growth. Another highlight within discrete was our performance in e-commerce, with sales growing over 70% versus prior year. Once again, our differentiated offering, featuring our independent cart technology, is enabling e-commerce applications at a growing number of marquee accounts. This vertical has significant secular tailwinds, of course, and has become a bigger growth driver for our overall discrete industry segment. Turning now to our hybrid industry segment, These verticals also had a terrific quarter. Food and beverage grew over 10% as our strong product portfolio enables these customers to efficiently add SKUs as they seek to differentiate their offering and maximize their growth. We saw increased capital spending by food and beverage customers in the quarter. Not surprisingly, packaging OEMs are also very They contributed another quarter of double-digit growth versus the prior year. Life Sciences grew about 15% in Q2, led by strong demand in North America and Asia Pacific. One important MES project during the quarter, helping the Don AST pharmaceutical company face the challenge of exporting products that need to comply with FDA regulations Don AST is expecting production efficiency and quality to improve by going paperless with their choice of Rockwell's PharmaSuite MES. Based on the broad-based increase in life sciences demand, the share gains we are seeing in this market, we are raising our view on life sciences and expect it to grow about 20% in fiscal 21. Process markets were down approximately 10% and were weaker than expected, led by larger declines in oil and gas. Process verticals typically lag our discrete business by about half a year. That said, we saw sequential improvement again in North America for oil and gas during Q2. Mining customers are also becoming more active. We saw low single-digit growth in the quarters. Turning now to slide five in our Q2 organic regional sales performance. North America organic sales grew by 2% versus the prior year, primarily due to strong growth in food and beverage, e-commerce, and life sciences. Indian sales declined 7%, driven by oil and gas, metals, and auto, partially offset by strength in food and beverage. Sales in the Asia-Pacific region grew 16%, broad-based growth led by semiconductor, chemicals, and life sciences. Asia-Pacific backlog reached another record high in the quarter. We expect strong sales growth in the region both the upcoming quarter and full year. In China, we saw over 30% organic growth driven by strong growth in all three industry segments including particular strength in EV and semiconductor in discrete, tire, life sciences, and food and beverage in hybrid, and mining and chemical in process. We expect growth in China will exceed the company average for the year as our longer cycle businesses kick in. Let's now turn to slide six, highlights for the full year outlook. Quarter's momentum in the first half of the year is expected to drive strong sales growth in the balance of the year, especially as we enter a period of easier comps. Higher top-line guidance is driven by improvements during the quarter in our discrete and hybrid industry segments that more than offset incremental declines in process. A new outlook for total reported sales is over 10% year-over-year growth at the midpoint including 7% organic growth. Foreign automation is not the only driver of growth this year, as we also expect double-digit sales growth in information solutions and connected services. We're seeing good contribution from both organic and inorganic sources, and we also expect double-digit ARR growth in fiscal 21. We expect margins to stay relatively flat with last year, despite the reinstatement of our bonus and the incremental one-time investments we spoke about last quarter that will largely impact the second half. Our new adjusted EPS target, $9.15 at the midpoint of the range, represents over 16 percent growth compared to the prior year. A more detailed view into our outlook by end market is found on slide seven. I won't go into the details on this slide, but as you can see, we continue to expect broad-based organic sales growth this year with oil and gas lagging. Our diversification across higher growth and markets is one aspect of the increasing business resilience that we talked about during Investor Day in November. With that, let me now turn it over to Nick, who will elaborate on our second quarter performance and updated financial outlook fiscal 21.
spk09: Thank you, Blake, and good morning, everyone. Slide 8, second quarter financial information. Second quarter reported sales were up 5.6% year over year. Organic sales were up 1.3%, slightly better than our expectations. Acquisitions contributed 1.9 points of growth, and currency translation increased sales by 2.4 points. Segment's operating margin was 22%, flat compared to Q2 of last year. This represents strong underlying improvement considering a $60 million headwind from the year-on-year change in the bonus. Corporate and other expense of $30 million was $12 million higher than last year. primarily due to mark-to-market adjustments related to our deferred. The adjusted effective tax rate for the second quarter was 16.7%. Last year's rate benefited from several larger discrete items. The second quarter adjusted VPS was $2.41, well above our expectations. Covering year-over-year adjusted EPS bridge for Q2 on a later slide. Free cash flow . Free cash flow . For the first half of the year, we are on track to our full year . March 31st, $674 million remain available authorization. Slide nine provides the sales and margin performance overview of our three operating segments. The intelligent devices segment had organic sales growth of 5.8% in the quarter. Segment margin was 23.8%, 80 basis points higher than last year, mainly due to higher sales and lower spend, partially offset by the reinstatement of incentive compensation. As Blake highlighted earlier, we once again had strong orders performance in the quarter. particularly in our products businesses. Intelligent devices orders grew approximately 20% both year-over-year and sequentially. Software and control segments organic sales grew 5.6% in the quarter. Acquisitions contributed four points to growth. Segment margin was 29%. Margin benefit from higher sales was offset by the reinstatement of incentive compensation. Software and control orders also grew mid-teens both year-over-year and sequentially. Organic sales of the lifecycle services segment climbed 11% year-over-year, as the recovery in this segment continues at a slower pace than our products businesses. Acquisitions contributed Operating margins for this segment declined 310 basis points to 9% versus 12.1% a year ago, primarily due to lower sales and the reinstatement of incentive compensation, partially offset by favorable mix and cost savings from actions taken in the prior year. Second quarter book-to-bill performance for the lifecycle services segment The next slide, 10, provides the adjusted GPS block from Q2 2020 to Q3 2020. Starting on the left, 4% positive impact of approximately . Slide 11, product order trends. This slide shows our average daily order trends for our products. Trends shown here. Order intake for products. Due to product order levels grew year-on-year as well as sequentially, they're at an all-time high. particularly strong areas were in motion, visualization, and logic. Orders for the lifecycle services segment also improved in the quarter sequentially, though at a slower pace than our product order growth. The overall strong order performance resulted in record company backlogs, growing over 30% year-over-year, double-digit sequentially. This takes us to slide 12, updated guidance. We are increasing our organic sales growth outlook by one point across the range. The new range is 5.5% to 8.5%, with a midpoint of 7%. We expect currency translation to now contribute about 2% to growth. We still expect acquisitions to contribute 1.5%. In total, The midpoint of our recorded sales guidance range is 10.5% or about $7 billion. We've also updated the adjusted EPS guidance to a new range of $8.95 to $9.35. I'll review the bridge from the prior guidance midpoint to the new $9.15 midpoint on the next slide. Segment operating margin is expected to be approximately 19.5%. This is unchanged from prior guidance and primarily reflects strong Q2 margin performance in the higher sales guidance, offset by higher supply chain costs, bonus expense, and less favorable currency. As a reminder, the second half includes higher spend as well as the incremental one-time software development and sustainability investments that we discussed on last quarter's call. The one-time investments will primarily affect the software and control segment. Our adjusted effective tax rate is still expected to be about 14%, the same as prior guidance. As previously mentioned, this includes a 300 basis point benefit related to discrete items which we expect to realize late in the fiscal year. We continue to project free cash flow conversion to be approximately 100% of adjusted income. A few additional comments on fiscal 21 guidance. Corporate and other expense is expected to be about $110 million. Total purchase accounting amortization expense for the full year is expected to be about $50 million. Net interest expense for fiscal 21 is still expected to be between $90 and $95 million. And finally, we're still assuming average diluted shares outstanding of about 117 million shares. This takes us to slide 13. This slide bridges the midpoint of our January adjusted EPS guidance range to the midpoint of our new guidance, starting on the left. There's a higher contribution from core operating performance, primarily due to the higher organic sales guidance and favorable mix, partially offset by higher supply chain costs. Contribution from currency is now expected to be 10 cents lower compared to prior guidance. Next, given the increase in guidance, there's about a 15 cent impact from higher bonus expense. which brings the new midpoint of the guidance range to $9.15. Finally, a quick comment regarding the second half. We expect second half year-over-year organic sales growth of about 20%. With that, I'll hand it back to Blake for some additional comments.
spk01: Thanks, Nick. With the solid first half under our belt, look at the remainder of fiscal 21 with optimism. Strong order trends and record backlog underpin a robust top-line outlook. We have confidence in our team's ability to navigate the supply chain challenges. Looking to our future, we continue to invest in software capabilities, including development, sales resources, and infrastructure. These investments support strong growth in our software business and ARR, fiscal 22 and beyond. Our momentum would not be possible without the tremendous efforts of our employees. I'd like to thank everyone at Rockwell and particularly our integrated supply chain organization, which has done a great job managing pandemic challenges and now mitigating our sourcing and logistics constraints. We're leveraging our own manufacturing expertise to help customers be more resilient, agile, and sustainable. Nobody is better positioned to help our customers deal with these increasingly complex manufacturing challenges and opportunities than Rockwell and our ecosystem of best-in-class partners. With that, let me make some remarks about Steve Etzel, who's participating in this final earnings call. Steve stepped up during a critical period for us as we pivoted into the early stages of this recovery and accelerated our transformation. Experience, dedication, caring for fellow employees, exactly what we needed. Nick and I joined thousands of employees in wishing Steve and Michelle all the best. Happy retirement, full of adventure. I'll pass the baton back to Jessica in the Q&A session.
spk04: Thanks, Blake. 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. And for those of you that have some trouble hearing us on the call, we'll make sure to have the prepared remarks available on our Investor Relations website immediately after the call. With that, let me pass it on to Tanya to start the Q&A. Tanya?
spk05: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question is from Scott Davis with Milius.
spk11: Good morning, everybody, and congrats, Steve, on retirement. Good to hear your voice, Nick. Anyways, Blake, this is about the most excited I've heard you on an earnings call in a while. When you think about these big new giant semi-projects that have been announced, when do you start submitting RFPs for those? And do you envision that being in a 2022 or 2023 business? I assume none of that is in the new projects or in your increase in forecast in 2021.
spk01: Scott, we are seeing some increased business in Semi. I don't know that it's going into the U.S. fabs that have been announced, but with some of these customers, we're already seeing some significant orders, which contributed to Semi helping to power the growth in Asia. So it's not just the big fabs going into the U.S. It's activity in other parts of the world, and we're starting to see that now. As far as the U.S. fabs go, I think you're right. I think that's more of a story for next year and beyond. But everybody in that industry is making investments, and we're working hard to maximize our share of wallet at each of those customers.
spk11: Good. And just a quick follow-up. On the incentive comp, is the run rate guide for 2Q what we should expect in each of the quarters this year?
spk09: Scott, the run rate that we've been at for the first half is what we should expect for the second half as well. It's a little higher in the actual run rate in the second quarter because there's a little bit of catch-up given our added performance. But the run rate we're at through the first half is exactly what we expect to have in the second half.
spk11: Okay. Thank you. Good luck, guys.
spk05: Thanks, Scott. Your next question is from Andrew Oben with Bank of America.
spk00: Yes. Good morning. Just a question, sort of longer-term question. What kind of conversations are you having with your customers? We know that short-term things are getting better. You know, you guys are excited about longer-term prospects for U.S. CapEx. But are you starting to have these discussions with your customers about sort of longer-run CapEx growth in North America?
spk01: Andrew, you know, I do believe that this is the beginning of a sustained period of expansion in the North American manufacturing economy. The breadth of the orders that we're seeing, the mix of – supply for existing operations plus expansions and then the occasional greenfield gives us a lot of confidence that we are seeing a sustained period of growth. And we're having those discussions across various industries. You look at EV. There's no chance of that slowing down. You look at semiconductor for the obvious reasons as they're increasing capacity. e-commerce with the secular tailwinds there, life sciences, food and beverage, the return of oil and gas. All of those are areas that we have significant exposure to, and we expect that that's going to sustain for a period of time.
spk00: And just a follow-up question, how do you adjust your own supply chain and manufacturing footprint to be able to service this, which seems to be a structural increase for a while?
spk01: Well, you look at increasing single points of failure in the supply chain, both on the part of our suppliers as well as in our own internal operations. In some cases, that's redundant supply, in other cases it's redundant lines within our own operations. When it comes to areas where there's engineering required for specific projects, more work in terms of remote operations to be able to go deeper in the commissioning process remotely, final acceptance testing doesn't require the same degree of travel that it once did. and looking carefully at sizing our operations and inserting the agility, including our own automation, to be able to maximize the number of different products that can come off a single line. So you look at the same kind of packaging flexibility that's driving the strong double-digit growth packaging OEMs, we're incorporating a lot of those same concepts in our own operations, including our manufacturing just down the hall from where we are right now in Milwaukee.
spk00: Thank you. Thanks, Andrew.
spk05: Your next question is from John Itch with Gordon Haskett.
spk14: Thank you. Good morning, everybody. I'd like to start on taxes. rockwell carries i think the lowest tax rate in multi-industry or very close to that um if biden's drive to raise u.s corporate taxes succeeds are there tax leavers rockwell can pull to offset what would appear to be possibly a disproportionately negative impact for your company um john as far as levers we would pull i mean it is still a little early to say exactly what we would be doing
spk09: But we continue to look at how we would best optimize our supply chain in servicing our customers and what that would mean ultimately for our taxes. But in terms of other levers, I think we're just waiting to see how this materializes. As far as the impact it will have, we've shared in the past in our 10-K the components of our current tax. tax rate and certainly a higher tax rate would impact us, but also components like FDII and GILTI. And those are the provisions we're really waiting to see more specifics of what it ends up looking like to really know how this will impact us in total and whether there are any additional levers we can go after.
spk14: Well, Nick, based on your understanding of what's being proposed, because it's all there on the web, right? Rocco's success in having lowered its tax rate, presumably through your international operations and the way you're structured, is any of that prospectively more at risk versus simply you being in the same boat and your U.S. taxes will rise along with everyone else. I don't think anyone's that concerned if Rockwell's U.S. taxes buck the same as everybody else's because it is what it is. It's more to the question of, you know, the opportunity to maintain a disproportionately lower tax rate based on your success at having achieved this or the provisions that you understand that could be sort of tackling those areas and can you do something about that type of thing.
spk09: Yeah, so yeah, you're exactly right, John. If there's an increase in the tax rate, that will impact us, as I presume it will impact others fairly proportionately. What we see in what's been written, that has an impact on what we have as an advantage in relatively low guilty rate and some benefits from FDII. We're still waiting for any kind of information of there's replacing FDII if there's any incentives that are going to be put in place to be encouraging U.S.-based manufacturing, which Rockwell does have a significant base of U.S. manufacturing. And then in the end, John, just making a bit broader macro, changes to U.S. tax policy that ultimately do encourage more U.S.-based manufacturing. that's ultimately benefiting our underlying business as well, given our strong presence that we have in the U.S.
spk14: Yep. No, I agree with that. Just then, lastly, Nick, in the short time you've been at Rockwell, I'm wondering if you could talk about best practices or accomplishments you'd like to, say, bring over or see adopted based on your many years at 3M.
spk09: Hey, John, thanks for that question. So let me just describe it this way. What am I seeing as priorities? And then what I'm observing in the company. First, from a priority standpoint, a high degree of priority in my early days here on execution. There's a lot of moving parts in the world and in this company and making sure that our company delivers from an execution perspective. That's a high priority. And then Rockwell has some very sound strategies about how to be continuing to increase our importance on our customers as the world of automation changes, industrial automation changes. And my focus is going to be how do we best realize those strategies and make those happen. Now, John, part of your question, just early observations. It's a great company. And one of the things I find very refreshing and positive is This is a company full of engineers, engineers focused on productivity, and that kind of productivity enables opportunity for investment. So I find a very healthy balance here of what are we doing to drive productivity, but also how do we invest it for future growth.
spk14: Got it. Thanks, Blake.
spk05: Thanks, John. Your next question is from Julia Mitchell with Barclays.
spk07: Just wanted to highlight maybe on the segment margin outlook. So it looks like in the second half, you're implying a segment margin down slightly year on year, despite the very high organic growth of 20%. So understand what's going on with incentive comp. But maybe just on investment spend, remind us sort of the scale of that investment in the second half. if there's any specific weighting between the two quarters that are left, and whether there's any sort of carryover investment spend into next year as an increase.
spk09: Yeah, as far as the year-over-year margins, so comparing the second half of 2020 to the second half of 2021, those margins, as you just said, are going to be pretty similar. And some of the things that will be improving that margin year over year is the growth, which you just mentioned, some added price, and also we'll be benefiting from some of the structural actions that we've taken over the last 18 months. What will be depressing that or bringing that margin back down to year on year more or less flat is this bonus impact, which we've talked about, some rising input costs, and then the investments. That was, I think, really the heart of your question. And the investments spending that we're doing, and I'll put it in perspective for you. For the second quarter, our investment spending was down a couple percentage points from the second quarter last year. For the full year, we expect them to be up 2.5 percentage points versus full year 2020. And those are coming from the investments that we've talked about with you already. Some of it, the one-time accelerated software development expenses that we're funding. And that's going to be happening fairly evenly in the last two quarters of the year. But we're also investing in added growth platforms. That's been part of the plan. Some of that involves hiring and projects. And just as a little bit of color, we did see a $5 million to $10 million shift of spending that we intended to have in the second quarter shifting into the second half of the year, primarily due to a bit of delay in hiring as well as some project delays, not changing our overall spending plan, but shifting a little of that into the second half of the year. So overall, we're expecting... a noticeable uptick in investments in the second half of the year. As far as the run rate into next year, some of that will be trailing off. We've been very careful about some of these incremental investments, particularly the ones we talked about last quarter, that they are temporary one-time and will not be carrying forward into 2022. And all of that is... into our second half EPS assumption, which more or less is unchanged from what we were saying a quarter ago.
spk07: Thank you, Nick. And maybe just a follow-up question around lifecycle services trends. The sales were down, I think, no double digit last quarter, but it booked a bill of almost 1.2. So maybe characterize for us what kind of recovery
spk01: um slope we could see in life cycle services from here yeah let me just make a general comment and then nick can add additional color but life cycle services backlog uh is up year over year and sequentially and so we are expecting uh sequential improvements uh through uh through q3 and q4 yeah and yeah as blake just said it'll we continue to expect it to get better
spk09: We do expect for the full year it will not be growing as fast as our other two segments.
spk07: Great. Thanks very much, and I wish Steve all the best. Thank you.
spk05: Thank you, Julian. Your next question is from Jeff Bragg with Vertical Research.
spk03: Hey, thank you. Good morning, everyone. Good morning, Jeff. Hey, just maybe two from me. First on supply disruption, and I'm sorry if I missed it. You were cutting out a lot at the beginning. But can you just elaborate a little bit what you saw in the quarter? And we did pick up some things in our survey that suggested you were having some problems delivering PLCs and other things. Can you just give us a little bit of color on whether that's accurate, where you're at on kind of untangling that, And, you know, was there any kind of discernible negative top line impact from supply disruptions, either in the quarter or in your outlook for the back half?
spk01: Yeah, Jeff, we factored supply chain constraints into our outlook. So there is an impact. And I think it's the things that you're hearing about throughout the industry that are affecting us like other manufacturers. So certainly, you know, Electronic components, including chips, are in short supply. Seeing other mechanical products and materials, sized strains with resins that are used in a variety of manufacturing processes based on some of the bad weather. A little shorter term than some of these other issues. Freight lanes continue to be narrow, and so seeing constricted transport products would be another area. We've done a nice job of having the necessary labor. We really kept to an absolute minimum in our manufacturing operations We've still hired more. We've added several hundred people in the last quarter. And so that part is great. But we're going to continue to be a very dynamic situation based on sharply increased demand as well as others. And we're working with customers to minimize the disruption.
spk03: Okay. And just on the investment spend, I understand there's some identifiable things you're doing that might be a little bit larger than the typical project, but it doesn't strike me that a 2.5% increase in investment spend for the year is unusual, but you're kind of suggesting it is as part of this margin construct. So, you know, perhaps I have that wrong, but 2.5% growth in investment spend, I think would be about $50 million. That kind of dovetails to the $0.35 you talked about in the back half on the software deals. Is there something else in that equation? Maybe you could just frame kind of the normal trajectory of investment spend.
spk09: Yeah, Jeff, I think the part of that that I just want to make sure is clear is that that increase in investment spend is all second half. In fact, more than all in the second half because year-on-year in the first half it was down. So just as we look sequentially first half to second half, we're seeing that sequentially going up. It brings the full year to that $50 million that you're talking about of the year-on-year change, but more than all of that change is coming in the second half.
spk03: Got it. Thank you. Understood.
spk05: Your next question is from Andy Kaplowitz with Citi.
spk08: Hey, good morning, guys. Hey, Andy. Hey, Andy. Steve, congrats. Welcome, Nick. So you mentioned the big March order you had in your order trends, which makes two out of the last three quarters that you've called out larger orders. So given your focus, for instance, on independent cart, which does tend to attract larger orders, and increased focus on e-commerce, at what point are these larger orders more the rule than the exception? And then could you talk about the cadence of your Q2 orders, X, the large order in March? Did you see a continued pickup in orders throughout the quarter?
spk01: Andy, let me start by saying I hope you're right, and I hope seeing these large orders from across different industries and different offerings becomes the rule rather than the exception. We are happy to see it, and the most recent one, as you said, was in e-commerce. traditionally haven't called out in as much specificity the orders development from month to month or quarter to quarter. We thought during the pandemic it made sense to give you that additional visibility. And, you know, it does show a developing dynamic of having some of these large orders, industries, and in some cases non-traditional offerings. It gives us more ways to win. So we're looking at that. We have seen a little bit of an uptick in large orders in general that began in Q2, and we would expect that to continue as our lifecycle services segment kicks in, and that is where a fairly good proportion of our bigger traditional projects are homeroomed. So we do expect more of that to come. Already our business continues to be more run rate. We used to say, you know, $3 million to $5 million was a pretty big project for us, but now we're seeing an increasing frequency of bigger ones.
spk08: Blake, that's helpful. And then, you know, you hired several new leaders, including Nick, a few months ago. We know Scott and Brian have different roles, but both seem focused on improving and accelerating Rock software sales. annual recurring revenue. So maybe, you know, it's early days, but could you talk about the impact they're having so far on that side of business? And we just focus on software and controls. It obviously has easy comparisons in the second half of your fiscal year, but it's already growing 12% in Q2. So is the expectation at this point that this segment could be a double-digit grower, you know, through maybe 2022?
spk01: I won't comment specifically on 22, but I really like the idea that our highest margin segment is also fastest growing. So that's a nice place to be. I've been very happy with the new perspectives that our new execs have brought to the organization and the way that the organization has embraced them. That's not easy to do is to bring people in at a senior position into a well-established company with a long culture. a strong culture, but I've been very happy with the way that we've brought in those new perspectives into the organization. Brian's focused on increasing the frequency and the impact of new product introductions, particularly around software. Scott's focused on doing the things to focus our sales force on delivering outcomes to customers and increasing our annual recurring revenue. It's a great experience that he brings and high credibility. He works with our sales force. And obviously, as Nick said earlier, that the financial organization analyzed the execution of this strategy are all good things.
spk08: Thanks, Blake.
spk05: Your next question is from Steve Tunsil with J.P. Morgan.
spk10: Hey, good morning. Hey, Steve. Good morning, Steve. Thanks for all the details. The slide deck is very straightforward and very informative, so easy to digest. Thank you for that. Appreciate it. The $2 billion in orders, I think that's like the total absolute number for the quarter, correct? I mean, that's a relatively, you know, obviously a big number. How do you see that kind of playing out over the course of the next – couple of quarters, given it's such a solid kind of book-to-bill, if you will.
spk01: Yeah, well, and we wanted to call that out because this is really before, you know, lifecycle services is kicking in in full. So we're expecting a nice run of, you know, that magnitude of orders for the company over the next few quarters. And this is primarily driven at this point. products. But again, as the project business ramps up, which is our expectation, we've been able to deliver some continued nice results there.
spk10: Okay. And as far as this investment spend is concerned, just going back to Jeff's question, so I think you're saying that some of the uptick in investments this year are It goes away, but does that mean that number is actually down next year, or it's just growing less off of the higher base next year? Because usually you guys do have, you know, anywhere from, I don't know, a $45 to $50 to even $80 million year-over-year headwind. I mean, going back to, like, 2010. from kind of investments growing faster than sales. Can you just kind of refine the messaging on that account and where it goes next year?
spk09: Sure. Thanks, Steve. I believe it's a little early to get anything too declarative on 22. However, just to clarify, of this increase in investment spent, there's approximately $30 million of that that we are saying is temporary. The rest of it is part of our normal increase in investment spend. And then the other way to think about it, Steve, is we also expect a 30% to 35% core conversion. And that's the way we've operated, and that's the way we continue to expect to operate.
spk10: Right, and that 30% to 35% would be, again, like an all-in kind of number for the segments, including whatever happens with this investment bucket for next year, correct?
spk09: Yes, when we say that 30% to 35%, that includes the investment spent. We, however, are holding ourselves to a higher bar and not giving ourselves that credit for that $30 million of incremental spend when we think about that core conversion. next year.
spk10: Yeah. Okay. That makes sense. I appreciate the color. Thanks.
spk02: Thanks, Steve.
spk05: Your next question is from Josh from Morgan Stanley.
spk02: Hi. Good morning, guys. Hey, Josh. So, Blake, I just want to talk about software for a minute and maybe what you're seeing out there. are you running into competitors when you win some of these orders? Is it more of a non-competitive process where you're just sort of attaching onto an installed base? And then, you know, maybe talk about what product lines you're seeing strengthened. I think Honeywell talked about cybersecurity. I know you have an offering there as well. So, you know, maybe just sort of a landscape of what you're seeing in the software side.
spk01: Sure. So, yeah, You know, parts of the software business are still somewhat fragmented where you're largely competing against doing nothing on the part of our customer or a homegrown solution. And we still see a lot of that within, say, IoT applications. In MES, it's a little bit more, let's say, mature, and you are typically competing with, you know, a fairly well-known company. sometimes our traditional full-scope automation competitors, sometimes niche competitors. And that visualization, I would say, is similar to that, which is a big part of our software offering. Again, a little bit more stratified. But there's, you know, the new applications, IoT, analytics, things like that. It's still a fairly diffuse, let's say, competitor landscape. Customers are looking for the outcomes, and you're also having to dovetail into an installed base. That's a big part of it because a lot of your challenges come in the interfaces with existing installations, and that's why we've taken that open approach to respect that these customers already have software and hardware in place and don't want to rip it all out. With respect to cybersecurity, Even apart from the hardware, we've got a cybersecurity business that's over $100 million in terms of the services. It grew double digits, very strong. We're seeing good contribution from recent acquisitions of Avnet and Orlo. And that's an area that I'm particularly proud of because it's an area that when we introduced it, it wasn't one that customers necessarily thought of Rockwell first for. But we're having a great impact on customers, and we're working with a whole new set of decision makers, including the CIO and his or her team. It's a really big company, so very happy with the development of that part of our business.
spk02: Got it. That's helpful. And then just a follow-up question on orders. Maybe taking a step back, I get that that $2 billion of orders really only covers about two-thirds of the business. It's a much longer cycle, but cyclically, seasonally, I don't know if you would necessarily go backward from here. Does that suggest that Rockwell is an $8 billion company over the next couple of years? Why wouldn't the $2 billion get multiplied by something near four and you have a bit of a fudge factor for lifecycle services? What kind of leaks out of that equation? Because it seems like a pretty big number pretty early in the cycle.
spk01: Well, we're happy with it. That's why we've called it out. I want to make sure, and you know this, Josh, that $2 billion is a company number, but we're notching that figure even before lifecycle services really kicks in like we expect it to over the next couple of quarters. But, yeah, we're expecting that as we've created more ways to win, our strategy is to accelerate profitable growth. That's what we've been talking about the last two years, doing it by growing us a higher multiple of industrial production in our core, continue double digits in information solutions and connected services, and making acquisitions that are going to, again, give us more ways to win.
spk02: Okay, perfect. Thanks for that. Best of luck, guys. Thanks, Josh.
spk05: Your next question is from Nigel Cole with Wharf Research.
spk12: Thanks. Good morning. Nick, it's great to hear your voice. We couldn't hear that well, but it's great to hear you. And Steve, congratulations on your retirement. I hate to go back over in-depth with them again, but I'm a little bit bamboozled by all three of these pieces here. But when you talk about the increase in the four years, I mentioned $50 million, which you do. Is that the second half increase, or was that $50 million for the full year, and the second half is more than that for that number? I just want to clarify that, please.
spk09: Yeah, Nigel, happy to clarify that. We were down in investment spend in the first half of the year. We were down approximately between $40 and $50 million. We now expect the full year to be up approximately $50 or $55 million. That means the delta of $90 to $100 million higher investment spend in the second half stand alone.
spk12: Okay, that's clear. And then of that $90 to $100, about $30 is temporary and washes away next year, correct?
spk09: Exactly.
spk12: Okay, got it. Okay. And then moving on to semi, I know it's a relatively small portion of your revenues, but obviously I've been very excited about the investment spend that we're seeing committed in the U.S. Can you just remind us, where do you currently play? Where does Rockwell currently play in the FAB? And what opportunities do you see to maybe increase the scope going forward?
spk01: Sure. Nigel, the primary applications are around facilities management. So it's, you know, making sure that the environment is clean and at the right temperature and the right humidity and so on. It's a fairly complex automation project, and that's our traditional area. Lately, we've had some success in increasing the scope even within that facilities management, including things like cybersecurity applications. and other related services and networking, we see additional opportunity in the materials handling. And also, you know, given that we are a good-sized user of electronic components and use, you know, circuit boards and so on, we've developed some artificial intelligence applications that have helped us be more productive, and we're working with some customers to acquaint them with our capabilities there as well. So there's a lot of additional room expansion from that base. Thanks, Blake.
spk12: That's very helpful. Thanks.
spk05: Your final question is from Noah Kay with Oppenheimer.
spk13: Good morning and thanks. You know, you commented earlier about, you know, the process of continuing to increase your importance to the customers. And Blake, you know, some of the supply issues you've cited on this call around, you know, freight narrowing and a chip shortage and just materials availability in general. And obviously, you know, a huge portion of your customer base is all going through that at the same time. And so I'm curious if you can talk to us a little bit about how you're seeing the customers use some of your software offerings like Factory Talk and others to deal with these supply chain issues and how that is advancing your dialogue with them and your opportunity set.
spk01: One of the ways, just for an example, looking at our own MES software, when we added that into our operations over the last decade, there were a couple of ways that that increased our efficiency. It decreased work in process, and it also helped us with error-proofing, to be able to have a defined workflow. So as our customers are having to bring new talent on that may be new to these types of operations, that workforce development is a big deal, and it sometimes sits right on the critical path of getting new capacity up and running. So whether it's the MES software that we've been offering, augmented reality offerings that we have with PTC, we've got some great solutions as well as the training that we provide to help with these new hires that our customers come online just as fast as possible. I also believe that the flexibility that the are adding in our own operations, and I mentioned earlier in our own contact facility here in Milwaukee, is giving us insight that we can impart to our customers to help them be more agile to produce a wider variety of SKUs on a single line. I saw an application recently with a beverage company that's able to make a very wide range of packaging formats for beverages using our independent car technology. And it's a whole different game than it was 10 years ago in terms of different types of SKUs that these companies can create to maximize their shelf space in retail outlets.
spk13: Yeah. And you mentioned, you know, MES being able to reduce work-in-progress costs. But we're hearing about, for example, in auto, suppliers trying to reach two and three layers deeper into their supply chain and trying to, through software, do better tracking, not walking away from just in time, but really trying to evolve and get a better visualization of the entire supply base. Is that something that Rockwell can play a role in and how?
spk01: Yeah, absolutely. Being able to take... those real-time production signals and to be able to look upstream into that supply base. And just as you said, going deeper and before, it's not a nice-to-have anymore. It's a requirement to be able to look at those suppliers and to be able to marry that with your real-time production requirements, particularly when you're looking at increasingly multiple potential sources of supply, you know, for those components or those materials that you need. So we see a lot of activity going forward. And if you talk to customers, nothing gets them more interested than when you talk about the role that we can play in a connected supply chain. There's huge amounts of additional productivity that we can help with there in our ecosystems. because that's an area that ecosystem is going to play a very large role.
spk13: Makes sense. Thanks so much.
spk01: Yeah, thanks, Noah.
spk04: Operator, now I'll turn it back to Blake for a few final comments.
spk01: Thanks, Jessica. In summary, we're very pleased with our strong performance in the quarters. The recovery in manufacturing is accelerating at a much faster pace than we initially expected. Rockwell is extremely well positioned in this recovery, and we're especially excited about the new product introductions and services that we will bring to market over the next couple of years. It's an exciting time to be a part of the Rockwell journey. We thank you for your interest and ongoing support.
spk05: That concludes today's conference call. At this time you may now disconnect.
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