Rockwell Automation, Inc. (ROK) Earnings Call Transcript & Summary

All right. Good morning. Thanks, everybody, for being here. Welcome to the session for Rockwell Automation. I'm Quinn Fredrickson senior research analyst at Baird covering Advanced Industrial Technology. Most of you probably are aware, Rockwell Automation is the largest pure-play industrial automation and digital transformation company, specializing in automation control systems, software components and services for automating factories, processes and machines. With us today to discuss the company, we have Blake Moret, who's Rockwell's Chairman and CEO; and then Matheus Bulho, the SVP of the Software and Control segment. So Blake is going to open up with some opening comments, and then we'll come back for Q&A.

Great. Well, thanks, Quinn. Pleasure to be with you today. Just for -- especially for those of you who might be a little bit newer to the name, as Quinn said, we're pure-play devoted to industrial automation and digital transformation. We're the most used technology in American manufacturing, we're Milwaukee, Wisconsin headquartered company, we go to business with three business units, the software and control business unit that Matheus runs, intelligent devices and life cycle services. And we cover manufacturing and production across the whole spectrum of vertical industries. So you'll hear us talk about discrete industries, which includes automotive data center, semiconductor, e-commerce, warehouse automation, hybrid applications, which include consumer packaged goods, which include food and beverage, home and personal care, pharmaceuticals and process industries, including energy, chemicals, mining and so on. We put together a nice combination of above-market growth. and significant margin expansion, and we're looking forward to talking about all of that here in the next few minutes.

Great. And for the audience, any questions, you can submit to session2@rwbaird.com, and we'll field them up here. Blake, I think just to start off, it'd be helpful to recap a little bit of what you saw in fiscal year '26. Began the year with 2% to 6% organic growth as your outlook by August, it had changed the 7.5% to 9.5%, still without a broad release of larger project capital what has changed the most in your assessment of the underlying automation market as we move now into fiscal year '27?

Well, I think that's a great context that we started last year, '26 with a prudent guide. We were happy to beat and exceed that through the year. And we're starting this year with a prudent guide as well. Industries that exceeded our expectations in the last year included data center and semiconductor automotive, which is one of Rockwell's most traditional businesses, about 10% of our total revenue exceeded expectations, particularly in the latter part of the year, and we see continuing strength there. Life cycle -- I'm sorry, life sciences with pharmaceuticals, GLP-1 certainly driving a certain amount of that demand, but really broad-based. And I would say in both life sciences as well as automotive some additional competitive wins where we were in strong competition, but some of our new capabilities, things that Matheus will talk about shortly allowed us to win. And then data center continues strong adoption of our hardware, including logic, and we can certainly talk about some of the underlying strength that we expect to continue there.

So if we think about your guide initially for 27%, the 6% to 9% organic growth, any way to frame up what the industrial economy or industrial production would look like at the upper and lower bounds of the outlook?

Yes. So I think industrial production, we're seeing favorable trends. And over time, we're probably most closely correlated to rates. Traditionally, we saw a gearing of about 2x IP. I think it's too early to say we've totally recoupled back into that, but it's a good starting point. And when you think about our growth algorithm, we talk about the underlying market growth, and you can use factors like IP and PMI to get some directional sense of that. But on top of that, we're encouraged by higher than traditional price as well, which goes into that. So we guided to 3 points of price in fiscal year '27 and that is before including the impact of some of our price increases that will come in '27. For instance, we are going to have a price increase in December that is not included in the guide for the year. Add to that additional served market and share growth. We've talked about continued growth in share with programmable controllers with Logix, with IO, with variable speed drives and then new served market contributing to growth and mobile robots is a good example of that with our auto mobile robots. Add to that, ARR, which is about $1 billion, a very profitable business for us. and then additional inorganic contribution. And I do expect in the coming year, we'll see the return of inorganic growth, and we can talk about what we have in mind there as well.

Mentioned share gains as a driver. What areas can you point to that you've seen some clear market share gains since COVID?

Yes. So as we've talked about a number of times, we triangulate and look at share from a variety of sources. So we can look at it from the quarter-to-quarter performance versus the relevant parts of our competitors. So the automation portion of Siemens digital industries, which we've got a nice streak of outperformance against -- if you look at the automation portion of Schneider, Emerson and so on. So it's not a whole company versus whole company because they're doing things that we're not in, but we look at that. We look at the industry reports. And in some cases, we'll look at the reports that are geographic-centric, you bring all that together and you don't jump at something in one single quarter or another, but we think we've had durable gains in programmable controllers with logic with the associated IO variable speed drives. And then certainly, in the U.S., it appears that we're continuing to gain share on top of what is already by far the leading position in certain of these products.

I mentioned earlier that throughout this year, you hadn't seen that broader project release. How do we think about what's built in for larger project spend in greenfield recovery? And just how does the pipeline look for those projects looking versus a year ago or even 6 months ago?

So last year, we -- and we've formally tracked and pursued new capacity, whether you want to call it reshoring or shoring or new capacity, but it's a significant part of the business. Last year is by far the highest in terms of orders that we had seen to date in terms of new capacity for U.S. physical plant. Now the orders coming from all over the world because you've got machine builders in Europe and you've got engineering firms in Asia that are contributing -- but when at the end of the day, it's new capacity in the U.S., we saw far higher orders in '26, and we see an even higher funnel than we did at the beginning of as we enter 27. So I think the backdrop is good for that. In Q4, our orders were mid-teens, and Q1 has started off just fine.

Last question just tied to the outlook would be how to think about any supply constraints like memory or other components, how that influences your view. And I don't know if signs of PC weakness out there in any way it could help you in terms of memory supply. But yes, it would just be good to get your thoughts on the supply chain.

Yes. And a lot of the memory is certainly something that Matheus and his team are looking at closely because we use a lot of memory and software and control. So far in the specific case of memory, it's been probably the single largest contributor to the inflation that we're offsetting with the price, but not as much in terms of the supply shortages. It's a lot of work, but we're keeping ahead of it at this point. There are other components, other electronic components that we're watching, but it's not as broad-based as the industry-wide issues that we saw in '21 and '22.

Yes. Maybe the only place where we did see is in our life cycle services where we deliver services that involve IT infrastructure, like network monitoring services and industrial data centers. that's been an issue in terms of suppressing some demand. But in terms of business continuity, no significant concern.

Diving a little bit more specifically into your segment, software and control. Investors are also very focused on software defined control, soft PLCs and its impact on Rockwell. Can you just take a step back and talk about how Rockwell is addressing software-defined automation at a higher level and who captures the economics and whether the proportions change from the way automation was historically delivered?

Yes. So I get this question quite often. And the reason we're doing software-defined automation is actually to drive demand, more demand for automation for our scope. And I think the easiest parallel you can think about is, for example, a software-defined vehicle. The reason software-defined vehicles exist is because there is an interest in delivering increased capability at a rate that's much greater than what we've been able to do before. So specifically in control, we've had an annual cadence of updating our firmware, which is the run time that's deployed to the hardware that allowed people to get more capability without necessarily having to update the hardware. What software-defined automation is doing for us now, it is indeed allowing us to update that even more frequently, so delivering even more value to the assets that they've already procured from us. The other piece of software-defined automation is that it does allow us to penetrate spaces where Logix has not traditionally been present before. I'll give you one proxy for that, which is in our own business. We're integrating Logix inside our mobile robots, which is a form factor that you typically would not have seen and we'll continue to deploy logic in more different parts of the automation stack. The other last thing I would say is when people think about our controller, most of the time, the picture that comes to mind is a piece of hard work. But in reality, the controller is the actual run time that's part of the hardware, you can think about more or less as the operating system where production runs. So we will monetize that regardless of the form factor where it's deployed. So that's kind of how we think. And we're doing that not just for control. Our approach is to do it across the entire stack the technology stack that's needed for people to run production. So it's control, it's the system that allows operators to support decisions. It's MES in how orders get executed, and it's also maintenance and how the systems get maintained over time. So it's been nothing but a nice tailwind to the demand across the system there.

And specific to the controls business, what percentage do you think could conceivably migrate the business today to a software-defined platform over time?

Yes. software-defined platform does not mean that we are also not supplying the hardware, just like when you think about a software-defined vehicle doesn't mean that they're not supplying the vehicle. So we expect that the run time variant that allows for this more frequent iterations of new value creation would be pervasive. It is also true to say that we expect that the majority of the form factors will continue to be in the traditional robust industrial form factor that we supply today. It's hardware that delivers real-time control capability. It's hardware that has the right level of safety integrity is the hardware that has the right degree of security is the hardware that has the longevity, the environmental robustness and many, many, many things that customers, the industrial environments value very much. But we won't be constrained to that, so the opportunities are even greater.

And how do we think about how you monetize in a software-defined world? I mean is it based on run time, design tools, orchestration, life cycle support or something else.

It's really the combination of all of those. So one of the most exciting things we're going to be showing next week at Automation Fairs, factory talk conductor, which uses agents basically to speed the integration and the operation of control systems, but using our existing software applications and hardware. So think about the recurring revenue that's new streams of revenue from the conductor itself. But then you're also driving higher demand, and we expect higher share from the logic from the design studio software that programs logic from the Factory Talk optics that's the operator interface from the Emulate3D simulation software. So it's going to drive higher demand for existing revenue streams, but it's also introducing a brand-new one with factory talk conductor as well.

And what type of customers are pursuing this most aggressively and which customers would have inhibition from adopting and why?

Yes. I mean the way you can think about this particular example that Blake talked about is we spent the last couple of years having our products use AI, and that's made our technology stack even more valuable. But what conductor is about is actually AI now using our products. So the degree of productivity gain. It's quite significant. So people are able to design systems significantly faster and get to value earlier people are able to run systems more efficiently and people are able to maintain them more predictively. So we expect the adoption to be quite broad. And you can think about that as in the past, we only had people driving demand for a technology stack. Now you have people and agents driving demand for what it takes to run production. So we're quite optimistic. And on the topic of AI, I think it often gets asked by investors in the context of some of your software exposure, which has grown, but it's still less than 10% of your business. But can you just give us your response to why Rockwell is an AI winner and where your value really manifests in a debate like this?