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    ROK
    Earnings call· Dec 2024(Q1 FY25)

    ROCKWELL AUTOMATION, INC ROK

    Feb 10, 2025 Source

    Executive summary

    Rockwell Automation Q1 FY25 — Strong Order Performance and Cost Discipline Drive Beat

    Rockwell Automation delivered better-than-expected Q1 FY25 results, driven by strong order performance and effective cost management. The company saw sequential order growth across all regions and segments, with destocking largely behind them in most markets. Despite currency headwinds and challenging year-over-year sales comparisons, Rockwell reaffirmed its full-year adjusted EPS guidance, leveraging productivity benefits and temporary cost measures to offset external pressures.

    Highlights

    5

    • Q1 orders grew 10% versus prior year and mid-single digits sequentially, exceeding expectations.

    • Book-to-bill ratio was greater than 1 for the first time in 7 quarters, indicating demand recovery.

    • Adjusted EPS of $1.83 was well above expectations, driven by strong execution on cost controls and margin expansion.

    • Free cash flow of $293 million, with a conversion rate of 140%, significantly higher than prior year.

    • E-commerce and warehouse automation sales grew over 30% year-over-year, with fiscal '25 growth now expected in high single digits.

    Concerns

    5

    • Reported sales declined 8.5% year-over-year, with organic sales down 8% due to difficult prior-year comparisons.

    • Negative currency translation created a 1.5-point headwind to reported sales and a $0.35 headwind to EPS for FY25.

    • Intelligent Devices organic sales declined 12% year-over-year, impacted by automotive and semiconductor delays.

    • EMEA sales were down 14% year-over-year, with particular weakness in Germany and France.

    • Asia Pacific sales declined 9%, led by a double-digit decline in China, expected to be the weakest region in FY25.

    Guidance & targets

    20
    CategoryTargetConfidence
    Organic sales growth
    Negative 4% to positive 2%
    high materiality
    High
    Reported sales midpoint
    $8.1 billion
    high materiality
    High
    Annual Recurring Revenue (ARR) growth
    About 10%
    medium materiality
    High
    Segment margin
    19% range
    high materiality
    High
    Adjusted EPS midpoint
    $9.20
    high materiality
    High
    Free cash flow conversion
    100%
    medium materiality
    High
    Adjusted effective tax rate
    17%
    low materiality
    High
    Price contribution to growth
    About 1 point
    low materiality
    High
    Intelligent Devices sales growth
    Down mid-single digits
    medium materiality
    Medium
    Software & Control sales growth
    Approximately flat
    medium materiality
    Medium
    Lifecycle Services sales growth
    Approximately flat
    medium materiality
    Medium
    Intelligent Devices margin
    Down year-over-year
    medium materiality
    Medium
    Software & Control margins
    Expand year-over-year
    medium materiality
    Medium
    Lifecycle Services margin
    Flat to slightly down year-over-year
    medium materiality
    Medium
    E-commerce and warehouse automation sales growth
    High single digits
    medium materiality
    High
    Corporate and other expense
    Around $145 million
    low materiality
    High
    Net interest expense
    About $140 million
    low materiality
    High
    Average diluted shares outstanding
    113.4 million shares
    low materiality
    High
    Share repurchases
    $300 million
    medium materiality
    High
    Productivity benefits
    $250 million
    high materiality
    High

    Segment performance

    9
    SegmentRevenueYoYQoQMargin
    Intelligent Devices
    Organic sales were in line with expectations. Margin decreased by 130 basis points year-over-year. Decrementals were in the 20s year-over-year, reflecting strong cost execution against sales decline.
    Cubic and Clearpath sales growth: Double-digit year-over-year
    		—Down 12%—14.9%
    Software & Control
    Organic sales were above expectations. Margin was flat year-over-year. Decremental margins were in the 20s, performing above expectations due to strong cost execution and price/cost performance.
    Logix orders and sales: Up double digits versus prior quarterR&D spend as percentage of sales: Low teens
    		—Down 12%—25.1%
    Lifecycle Services
    Organic sales were up year-over-year. Margin decreased 190 basis points year-over-year and was slightly below expectations, mostly driven by Sensia shipments. Incrementals were solid year-over-year.
    Book-to-bill: 1.05Recurring services growth: Good
    		—Up 5%—12.5%
    EMEA
    Weakness across most of the region, particularly in Germany and France, with some early signs of stabilization at Italian machine builders.
    		—Down 14%——
    Asia Pacific
    Led by a double-digit year-over-year decline in China. Expected to be the weakest region in fiscal '25.
    		—Down 9%——
    China
    Expected to stabilize later in 2025, but remains a small part of the business.
    Share of total revenue: A little bit less than 5%
    		—Double-digit decline——
    Discrete Industries
    Declines in automotive and semiconductor, partially offset by strong growth in e-commerce and warehouse automation.
    		—Down mid-single digits——
    E-commerce and Warehouse Automation
    Significant uptick in customer activity, especially in North America and Europe, driven by facility modernization and optimization.
    		—Up over 30%——
    Process Industries
    Due to difficult prior year comps, especially in the energy market where oil and gas grew over 25% in Q1 last year. Energy overall is about 15% of total revenue.
    		—Down high single digits——

    Operational metrics

    29
    Segment operating margin
    17.1%vs 17.3% Q1 FY24
    Q1 FY25

    Lower sales volume mostly offset by benefits from cost reduction and margin expansion actions.

    Adjusted effective tax rate
    17.5%Below 17.9% Q1 FY24
    Q1 FY25

    Below prior year rate.

    Free cash flow conversion
    140%
    Q1 FY25

    Reflective of continued working capital management and zero incentive payouts on FY24 performance.

    Shares repurchased
    400,000 shares
    Q1 FY25

    Executed during the quarter.

    Remaining share repurchase authorization
    $1.2 billion
    As of December 31

    Amount remaining under repurchase authorizations.

    Return on invested capital (ROIC)
    14.5%Down 400 bps YoY
    Q1 FY25

    Primarily driven by lower pretax income.

    Intelligent Devices decremental conversion
    20sYear-over-year
    Q1 FY25

    Reflects strong execution on cost-out programs against double-digit organic sales decline.

    Software & Control decremental margins
    20sYear-over-year
    Q1 FY25

    Kept in the 20s despite typically high decrementals, due to strong cost execution and good price/cost performance.

    Software & Control R&D spend
    Low teens
    Q1 FY25

    Reflecting continued focus on new product introductions and long-term growth.

    Adjusted EPS core performance impact
    - $0.55YoY
    Q1 FY25

    Due to 8% organic sales decrease, primarily in higher-margin products in Intelligent Devices and Software & Control. Temporary cost measures helped keep decremental flow-through at this level.

    Adjusted EPS cost reduction and margin expansion benefit
    + $0.50YoY
    Q1 FY25

    Reflects structural productivity, slightly above expectations, primarily from manufacturing efficiencies and effective sourcing.

    Adjusted EPS compensation impact
    - $0.20YoY
    Q1 FY25

    Reflects merit increases and higher incentive compensation versus prior year.

    Adjusted EPS other items impact
    + $0.04YoY
    Q1 FY25

    Net benefit from all other items.

    Compensation and inflation headwind
    $190 millionvs FY24
    FY25

    Full year guide for compensation and inflation.

    Compensation headwind (remaining quarters)
    $0.90
    Q2-Q4 FY25

    Expected for the remaining three quarters of the year, spread about equally.

    FX headwind on sales
    1.5 points
    FY25

    Expected negative contribution to reported sales for the full year.

    FX headwind on EPS
    $0.35
    FY25

    Expected for the full year, split evenly across Q2, Q3, and Q4.

    Segment operating margin expansion
    100 bpsSequentially
    Q2 FY25

    Expected sequentially from Q1 to Q2 on incremental sales volume.

    Q2 EPS expectation
    Around $2
    Q2 FY25

    Resulting from sales and margin expectations for the quarter.

    Productivity benefits (EPS impact)
    $1.85
    FY25

    Expected full-year benefit from cost reduction and margin expansion activities.

    SKUs rationalized
    21,000
    Q1 FY25

    Part of efforts to simplify operations and improve customer experience. Another 39,000 SKUs are currently being reviewed.

    Yellow Belt training completions
    1,300
    Q1 FY25

    Part of building the foundation to sustain cost-out initiatives and drive margin expansion.

    Cost of finished goods imported from Mexico, Canada, China
    Less than 10%
    FY24

    Total exposure to potential tariffs.

    Direct imports into U.S. from Mexico
    Approximately $350 million
    FY24

    From third parties and own manufacturing facilities.

    Direct imports into U.S. from Canada
    Approximately $100 million
    FY24

    From third parties and own manufacturing facilities.

    Direct imports into U.S. from China
    Approximately $100 million
    FY24

    From third parties and own manufacturing facilities.

    Total ARR growth
    11%
    Q1 FY25

    Led by strong growth in software offerings.

    Organic sales growth
    -8%YoY
    Q1 FY25

    Slightly better than expected, but offset by currency headwind.

    Price contribution to organic growth
    1 point
    Q1 FY25

    Price/cost was favorable.

    Industry KPIs

    6
    MetricValueDetails
    Book to bill ratioGreater than 1
    Orders bookings growth10%%
    M a acquisition contributionDouble-digit year-over-year growth%
    Backlog by segment end market—
    Data center exposure pipelineGrowing really fast
    Incremental flow through margin—

    Orderbook & backlog

    3
    Total ordersOver $2 billionQ1 FY25

    Up 10% YoY, mid-single digits sequentially

    Includes large customer projects slated to convert to sales over coming quarters.

    Book-to-bill ratioGreater than 1Q1 FY25

    First time in 7 quarters

    Indicates orders exceeded shipments, adding to backlog.

    Lifecycle Services book-to-bill1.05Q1 FY25

    Led by strong orders in solutions business and tied to larger multiyear project wins.

    Product announcements

    3
    ProductTypeDetails
    Optix platformupdate
    Plex softwareupdate
    OTTO autonomous mobile robotsupdate

    Deals & partnerships

    5
    CONVERGIX Automation SolutionsPartnering to help a German end user build their first U.S. greenfield plant, utilizing Rockwell's Optix platform.

    CONVERGIX, a leading global machine builder, chose Rockwell's cloud-enabled Optix platform for its hardware-agnostic nature and data aggregation capabilities, reducing integration time, risk, and cost.

    MirakaMiraka chose Rockwell's cloud-native Plex software to enhance product traceability, improve quality, and reduce cost at their dairy factory.

    Miraka's dairy factory is powered by renewable geothermal energy and has one of the lowest manufacturing carbon footprints in the industry.

    Thermo FisherThermo Fisher selected Rockwell's OTTO autonomous mobile robots to optimize their warehouses and address workforce challenges.

    OTTO's AI-enabled path determination and movement flexibility free up labor for more value-adding tasks.

    EPIC IndustrialRockwell and EPIC Industrial were chosen by one of the world's largest oil and gas producers to help achieve net-zero emissions by 2050.

    EPIC Industrial is a leading EPC company in the energy and chemical space.

    ValeVale selected Rockwell to increase production and reduce water consumption at their new processing plant in Brazil.

    Rockwell was chosen as a single partner for integrated hardware, software, and services for this greenfield project in the mining vertical.

    Risks & headwinds

    7
    Macroeconomic and policy uncertaintyNear-term

    Weighing on customers' CapEx plans

    Mitigation: Rockwell is a net beneficiary of policies that increase U.S. manufacturing; winning multi-million dollar strategic orders.

    Negative currency translationFY25

    1.5 points negative contribution to reported sales for FY25; $0.35 EPS headwind for FY25

    Mitigation: Taking additional temporary cost measures on spending to offset the impact.

    TariffsNear-term

    Cost of finished goods imported from Mexico, Canada, and China less than 10% of U.S. revenue in FY24; Direct imports from Mexico ~$350M, Canada ~$100M, China ~$100M in FY24.

    Mitigation: Implemented price changes for China tariffs; intend to reprice backlog for Canada/Mexico tariffs; moving production locations; leveraging U.S. manufacturing footprint. Do not expect material impact on full-year profitability.

    Difficult year-over-year sales comparisonsH1 FY25

    Q1 FY25 reported sales down 8.5% YoY; Q1 FY24 still supported by sizable product backlog.

    Mitigation: Expect to return to year-over-year sales growth in the back half of the year.

    Weakness in EMEA region

    EMEA sales down 14% YoY, particularly in Germany and France.

    Mitigation: Early signs of stabilization at Italian machine builders; expect recovery in Europe as machine builder inventories normalize.

    Weakness in Asia Pacific, especially ChinaFY25

    Asia Pacific sales declined 9% YoY, led by double-digit decline in China. China revenue less than 5% of total.

    Mitigation: Automation market in region expected to stabilize later in 2025, but slow recovery due to structural challenges and mild deflation.

    Automotive and semiconductor industry delays

    Discrete sales down mid-single digits, impacted by these industries.

    Mitigation: Customers focusing on operational efficiencies and profitability amidst uncertainty.

    What to watch in Q2 FY25

    5

    Sequential sales growth

    Next quarter (Q2 FY25)
    CurrentLow to mid-single digits expected Q1 to Q2
    TargetConfirmation of low to mid-single digit sequential growth

    Why it matters

    Verifies the company's expectation of gradual sequential improvement and recovery from difficult prior-year comparisons.

    Our expectation is for reported sales to grow low to mid-single digits sequentially from Q1 to Q2.

    Q&A highlights

    7

    How does the rationalization of 21,000 SKUs impact 2025, particularly on top-line and margins, and is there a positive bias to the organic growth guidance given strong orders?

    The 21,000 SKUs rationalized are primarily low-hanging fruit (no-sales/low-sales) and will not have a material impact on the top line or margins in 2025, but rather streamline operations. Management acknowledged a good start to the year with better-than-expected orders, which reduces the ramp needed for sequential improvement, but did not explicitly state a positive bias to the guidance.

    “But from an impact perspective within the year, you should be thinking about it as any impact at all or no significance of impact. It's really, again, trying to help us streamline those operations.”

    asked by Scott Davis · answered by Christian Rothe

    2 min read6 chapters

    Detailed Narrative

    01

    Operational Excellence and Cost Discipline

    Rockwell Automation is seeing early benefits from its renewed focus on operational excellence and cost discipline, aiming for $250 million in productivity benefits for fiscal '25. This includes cost reductions in SG&A, reduced cost of direct and indirect purchases, manufacturing efficiency, and additional price actions. The company rationalized over 21,000 SKUs in Q1, primarily low-sales items, to streamline operations and improve customer experience, with another 39,000 under review. These efforts are intended to drive long-term growth and margin expansion.

    02

    Demand Trends and Order Performance

    The company experienced better-than-expected order performance in Q1, with mid-single-digit sequential growth across all regions and business segments. Orders exceeded shipments, leading to an increased backlog. This outperformance is attributed to broad geographic strength, a balanced mix of hardware, software, and solutions orders, and a significant reduction in distributor and machine builder inventories. New demand placed on distributors is now flowing through at historical levels, suggesting the destocking cycle is largely complete outside of China.

    03

    Industry Segment Performance Highlights

    Discrete sales were down mid-single digits, with automotive and semiconductor facing delays, but e-commerce and warehouse automation grew over 30% year-over-year. Hybrid industries saw modest improvement, led by food and beverage and home and personal care. Life sciences had strategic wins, including GLP-1 related investments and a FactoryTalk MES software deal. Process industries were down high single digits due to difficult prior-year comps in energy, though mining showed optimism and a major oil and gas sustainability project was secured.

    04

    Regional Sales Dynamics

    The Americas continued to outperform other regions. EMEA sales declined 14%, with weakness in Germany and France, though early signs of stabilization were noted in Italian machine builders. Asia Pacific sales were down 9%, with a double-digit decline in China, which is expected to be the weakest region for fiscal '25. China's total revenue now represents less than 5% of the company's total revenue.

    05

    Tariff Mitigation Strategy

    Rockwell has a multifaceted plan to mitigate potential tariff impact🌐s, including immediate price increases for China tariffs enacted on February 4. The company plans to reprice backlog for impacted products if Canada and Mexico tariffs occur. Leveraging its substantial U.S. manufacturing footprint and supply chain resiliency, Rockwell is moving production locations and swapping product destinations to avoid tariffs, aiming for no material impact on full-year profitability. The cost of finished goods imported from Mexico, Canada, and China was less than 10% of U.S. revenue in FY24.

    06

    Megaprojects and Market Optimism

    Megaprojects are expected to be a meaningful tailwind for the next few years, contributing to growth in FY25 and beyond. These multi-year, multi-industry projects, including sustainability initiatives in energy, are proceeding based on their ROI. There is a general optimism in the market, with U.S. PMI above 50, indicating companies are eager to increase efficiency and transform operations, fearing loss of share if they delay.

    AI-generated summary of the company’s earnings call. Not investment advice.