Rockwell Automation, Inc.

Thank you for holding and welcome to Rockwell's Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. If you have a question at that time, please press star 1. At this time, I would now like to turn the call over to Jessica Caracos, Head of Investor Relations. Ms. Caracos, please go ahead.

Thanks, Rain. Good morning and thank you for joining us for Rockwell Automation's third quarter fiscal 2021 earnings release conference call. With me today is Blake Morett, our chairman and CEO, and Nick Gangstad, our CFO. Our results were released earlier this morning and the press release and charts have been posted to our website. Both the press release and charts include, and our call today will reference, non-GAAP measures. Both the press release and charts include reconciliations of these non-GAAP measures. A webcast of this call will be available at that website for 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 also found in the investor relations section of our corporate website. Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all our SEC filings. So with that, I'll hand the call over to Blake.

Thanks, Jessica, and good morning, everyone. Thank you for joining us today. Before I begin, let me first congratulate our Milwaukee Bucs for such an incredible season. Go Bucs. Let me now take a moment to talk about a couple of key highlights in the quarter. First of all, I'm pleased to welcome Cyril Pertikot as our new Chief Technology Officer. He succeeds Sujit Chand, who is retiring later this year after a long and very impactful career at Rockwell. And I'll talk more about his legacy in November. Cyril brings a wealth of automation and digital transformation experience to the role with great global experience and a passion for helping customers. His mindset and additional perspective will help drive even more value from the combination of our core automation, software, and managed services offerings to provide positive outcomes for customers. We also announced the signing of a definitive agreement to acquire Plex Systems, which we expect to close in Q4 of this year. Plex is the leading cloud-native smart manufacturing platform operating at scale, and it will be a big part of our factory-taught software-as-a-service offering. We look forward to showcasing its unique capabilities and integration into a complete production system at Investor Day during our November Automation Fair in Houston. Now, let's turn to our quarterly results on slide three. We saw another quarter of exceptional demand across our product portfolio. Total orders surpassed $2 billion, reflecting a very strong demand pipeline. Total revenue of over $1.8 billion hit a new record and grew 33%, including a one-point contribution from recent acquisitions, including Awesome, Calypso, and Fix. Organic sales grew 26% versus prior year, despite significant supply chain challenges. The manufacturing supply chain continues to remain constrained due to increased levels of demand and persistent electronic component shortages. It's a dynamic situation that we are monitoring closely. Our global supply chain organization continues to navigate these challenges and is taking a variety of measures, investing in both short and long-term strategies to increase our supply chain resiliency. I'll now comment on our top-line performance by business segment. Intelligent devices organic sales increased 29%, led by strong broad-based demand for our automation products. From an orders perspective, this is the third consecutive quarter of record order intake in this segment. Once again, strong order growth in motion was driven by our independent cart technology offering. which saw over 100% orders growth in the quarter. Independent cart orders growth was broad-based and included strong wins in e-commerce and warehouse automation, including Intralots, an important North American material handling OEM partner whose machines are supporting some of the largest e-commerce applications in the world. Intralux is leveraging our independent cart technology in a high bottleneck area of their process and was able to realize a 30% increase in sortation throughput. Software and control organic sales grew 32%, led by strong demand across the segment. Logic sales grew over 40% versus the prior year and was our strongest major product family. Orders for the software and control business segment grew over 55% year-over-year, showing strong momentum. In lifecycle services, organic sales increased 17% versus the prior year and increased 8% sequentially. Book to build for the segment at 1.18 is expected to drive continued sequential sales improvement in the segment through the fourth quarter. Total company backlog grew by over 50% year over year. Turning to profitability, segment operating margin of 20% increased by 340 basis points versus the prior year, primarily due to higher sales. Adjusted EPS of $2.31 grew 75% and was above our expectations. Stronger sales and favorable mix all contributed to our strong profit performance in the quarter as we continue to increase our business resiliency and make technology and people investments that set us up for a strong future. Turning to information solutions and connected services, which represent many of Rockwell's newest digital revenue streams, we had another great quarter. Organic sales and orders grew strong double digits with contributions across a variety of end markets. Recent orders also include a number of meaningful software and infrastructure as a service wins with some of the world's most important food and beverage and life sciences manufacturers. For example, Cinevac, one of the largest pharmaceutical manufacturers in China, recently chose our PharmaSuite MES to help bolster production of their vaccines. We also had a great win with GE Renewable Energy on a greenfield project to develop a major power plant in Africa. Once operational, this hydro plant is expected to provide 30% of the country's energy demand while reducing annual power generation costs by $100 million. In addition to using our core automation products, our capabilities in industrial cybersecurity helped us win even greater share of this greenfield project. Calypso also continues to play a very important role within our connected services offerings. and last week received PTC's Systems Integrator Partner of the Year Award. This is in addition to Rockwell receiving PTC's overall Partner of the Year Award, as we continue to see good synergies across the PTC Rockwell portfolio. Turning to slide four. At last year's Investor Day, we talked about how we are bringing our FactoryTalk software offering to the cloud with SaaS offerings in three key areas, FactoryTalk Design Hub, FactoryTalk Operations Hub, and our FactoryTalk Maintenance Hub. The organic development of our FactoryTalk Design Hub is well underway and complements our best-in-class Studio 5000 software. With the addition of Plex, we will have a world-class, full-scale factory talk operations hub. Flex's smart manufacturing platform includes one of the most advanced cloud-native MES offerings available, as well as cloud-native quality and supply chain management solutions. Capabilities like inventory management, supply chain optimization, and track and trace are more critical than ever, and we will have unmatched on-premise and cloud-native solutions. Last week, we also announced our partnership with Kessler, a leading provider of cloud-based traceability software that will be a great complement to both our on-prem and cloud-native supply chain offerings. The foundation of our factory-taught maintenance hub comes from last year's acquisition of FITS, an AI-enabled maintenance management platform. with a cloud-native offering that has sold 100% on a subscription basis. Since the acquisition, we've seen accelerated growth at FIX, including the addition of their first two customers with contributions of over $1 million of annual recurring revenue each. This quarter, FIX revenue grew by over 40% both year-over-year and sequentially, and they've added, on average, over 50 new logos per month since they've joined Rockwell. FIX and PLEX applications are highly complementary, with many opportunities for customers to further improve manufacturing productivity, product quality, and asset utilization. In addition, we believe that FIX's high-velocity, go-to-market model will provide additional revenue synergies in the years ahead. As we mentioned on the call to announce the Plex deal, we're moving fast because manufacturers are picking up the pace of innovation and we have the opportunity to leap ahead with new value from highly scalable, easy to use, and well integrated information solutions that build on our rock solid heritage born in the world of real time data. Let's now turn to slide five where I'll provide a few highlights of our Q3 end market performance. Figures are for organic sales. We had great performance in our discrete industry segment, with roughly 40% sales growth. Within this industry segment, automotive sales grew at about 50%, led by an increase in capital project activity. We estimate two-thirds of the capital projects we are winning are related to EV projects taking flight, For example, we had another win at the Indian automotive supplier Wipro Pari, where our core automation technology will be used in an EV battery pack assembly line for one of North America's largest automotive brand owners. In semiconductor, we grew about 35%. We believe strong secular tailwinds, increasing capital spend, and broadening share of wallet with customers are all driving our growth. we are raising our semiconductor growth outlook once again to high teens for the year. Another highlight within discrete was our performance in e-commerce, with sales growing approximately 65% versus prior year. This vertical has significant secular tailwinds with pure play e-commerce players as well as traditional retailers that are transforming their warehouses through automation. Turning now to our hybrid industry segment, these verticals also had a terrific quarter. Food and beverage grew over 30% and had the most significant outperformance relative to our expectations as customers prioritized investing in technologies that helped them differentiate their offerings and maximize their growth. We believe we are taking share in this market and that our technical and commercial strength is reaping dividends that should carry through into fiscal 22. Life Sciences grew over 40% in Q3 and was another great performer in the quarter. Life Sciences was our fourth largest industry in the quarter, not far behind automotive, and we continue to believe we are taking share in this fast-growing vertical. Key wins included a highly competitive win for a large greenfield project with Butantan to fast track their COVID-19 vaccine production in Brazil. Here our PlantPAX control system, factory-taught batch, and PharmaSuite MES will enable a best-in-class paperless system that will fully integrate with batch control and other equipment on the factory floor. Our fastest-growing vertical in the hybrid segment was tire, which was up about 60% in the quarter. Key wins included Toyo Tire Group in Japan. Morocco was chosen as the automation standard for their plant in Serbia. Our core automation technology, our IoT-ready architecture, and strong MES capability were all critical factors in securing this key win. Tire has always been a strong industry vertical for Rockwell, and our technologies are actively supporting our customers' increasing investments in innovation and production capacity. Process markets were up approximately 15% and were better than expected. This was the first quarter where we saw all of our major process industry verticals return to positive growth, including oil and gas, which grew low single digits versus the prior year and grew high single digits sequentially. Turning now to slide six in our Q3 organic regional sales performance, North America organic sales grew by 29% versus the prior year, with strong double-digit growth across all three industry segments. EMEA sales increased 21%, driven by strength in food and beverage and tire. Sales in the Asia-Pacific region grew 23%, with broad-based growth led by semiconductor, life sciences, and tire. In China, we saw double-digit growth, driven by strength in tire, life sciences, and EV. We continue to expect growth in China will exceed the company average for the year as our longer cycle businesses kick in. Latin America growth of 26% was led by food and beverage and automotive. Let's now turn to slide seven to review highlights for the full year outlook. Orders momentum and backlog are expected to drive strong sales growth in the balance of the year and into fiscal 2022. Our higher top-line guidance is driven by improvements in our hybrid and process industry segments. A new outlook for total reported sales growth is up 12%, including 8% organic growth versus the prior year. We're seeing strong growth in both core automation as well as information solutions and connected services. Acquisitions are contributing over a point of profitable growth. We are increasing our margin expectation to 20%. A new adjusted EPS target of $9.20 at the midpoint of the range represents 17% growth compared to the prior year. This also includes $0.15 from transaction fees related to our pending acquisition of Plex. I should add that we expect double-digit annual recurring revenue growth in fiscal 21, with the plus acquisition expected to add over $175 million to our ARR totals next fiscal year. A more detailed view into our outlook by end market is found on slide 8. 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 that, let me now turn it over to Nick, who will elaborate on our third quarter performance and updated financial outlook for fiscal 21. Nick?