Rockwell Automation, Inc. (ROK) Q1 2021 Earnings Report, Transcript and Summary

Thank you for holding and welcome to Rockwell 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. [Operator Instructions] At this time, I would like to turn the call over to Jessica Kourakos, Head of Investor Relations. Ms. Kourakos, please go ahead.

Good morning and thank you for joining us, for Rockwell Automation's First Quarter Fiscal 2021 Earnings Release Conference Call. With me today is Blake Moret, our Chairman and CEO; and Steve Etzel, 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 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 of our SEC filings. So with that, I'll hand the call over to Blake.

Thanks, Jessica, and good morning, everyone. Thank you for joining us on the call today. Before we begin discussing our results and outlook, I'd like to make a few opening remarks. On the leadership front, we have 2 exciting announcements today. First, we have hired Scott Genereux as our new Chief Revenue Officer. Scott built strong executive-level customer relationships and has spent most of his career leading global sales forces at major enterprise software and hardware companies. These include Oracle, and most recently, Veritas. And we're thrilled to bring him onboard in this newly created role. Scott will be responsible for all our worldwide sales and marketing efforts, leading our global go-to market strategies and accelerating Rockwell's growth, including software sales and annual recurring revenue. The second important announcement is that Brian Shepherd has been hired as the new leader of our Software & Control business segment. Brian has extensive experience in the industrial software space and joins Scott in bringing proven knowledge about ways to drive faster recurring revenue growth in our business. Prior to joining us, Brian was President of Production Software and Smart Factory Solutions, for Hexagon AB. And before that, was a long-time executive at PTC, where he led strategy and operations for their Enterprise Software segments. He has strong technical expertise across the design, operate and maintain phases of the customer journey and how industrial software can maximize customer value. We're excited to have them on board. Both Scott and Brian began on February 1. Finally, I'm happy to report we are well along in our CFO search and expect to make that announcement shortly. It's been a busy few months, but I'm very pleased with the new talent and fresh perspectives we're adding to our leadership team. In other news this quarter, we had very important win on the legal front. In Q1, Radwell International was found liable for trademark infringement and false advertising relating to its resale of Rockwell products. This latest legal victory underscores our commitment to protecting our intellectual property, as well as our authorized distribution network. We're using a portion of the gain that resulted from this ruling to make additional investments this year. This includes investments to pull forward software product launches that will increase recurring revenue in fiscal 2022 and beyond, as well as sustainability related investments to drive our ESG goals. With that, let me now turn to our Q1 results on Slide 3. In Q1, total reported sales declined 7%. Organic sales were down 10% versus prior year. Total sales included a 2 point positive contribution from our ASEM and Kalypso acquisitions. Note that Sensia is now included in our organic results. During the quarter, we saw a sharp acceleration in order intake, especially for our products. Total orders were back above pre-pandemic levels. The increased demand was broad based and well above our expectations and the higher order rates will benefit sales for the balance of the year. More on that in a moment. I'll now comment on our new business segments. Intelligent Devices' organic sales declined 8%. In the quarter, we saw positive year-over-year growth in Motion, where we believe we are gaining market share. Orders in this segment returned to positive growth a quarter ahead of our expectations. Software & Control organic sales declined 6%. In the quarter, we saw year-over-year growth in network and security infrastructure. Lifecycle Services' organic sales decline of 16% was led by continued weakness in oil and gas. We did see a 25% sequential uptick in Lifecycle Services orders in the quarter, which will drive sequential sales improvement through the balance of the year. In Information Solutions and Connected Services, organic sales were down slightly in the quarter, primarily due to COVID related project delays. However, we saw double-digit organic orders growth in IS as well as strong demand in the cybersecurity portion of Connected Services. IS/CS built backlog by about 30% versus prior year and we expect IS/CS to have a great year overall, growing double digits in fiscal 2021 with organic sales exceeding $500 million. Total backlog grew strong double digits on an organic basis both year-over-year and sequentially. Lifecycle Services book-to-bill reached a record of 1.18, reflecting a significant improvement both sequentially and year-over-year. Turning to profitability, segment operating margin performance of 20% in the quarter was roughly flat with last year on lower sales, a testament to our increasing business resilience. Adjusted EPS grew 11% versus prior year, including the legal settlement gain. Excluding the gain, adjusted EPS came in above our expectations for the quarter. Let's now turn to Slide 4, where I'll provide a few highlights of our Q1 end-market performance. Figures are for organic sales. Our discrete market segment sales declined by approximately 5%. However, we saw strong broad order momentum in the quarter, particularly in North America that should benefit sales performance for the remainder of the year. Automotive sales declined approximately 10% versus prior year with mid-single-digits growth in EMEA offset by tough comparisons in other regions. Our EV business significantly outperformed the rest of automotive and included key wins from a major auto brand-owner in Europe that is building a new line for EV battery manufacturing. We also won at a European Tier 1 OEM, who chose our Independent Cart Technology for the precision motion control necessary to build new electric vehicles. These were both hard-fought wins, where our strong customer support and technology differentiation were important factors in our success. Semiconductor grew low-single-digits in the quarter and is expected to improve significantly over the balance of the year. Strong secular tailwinds in this vertical are prompting some of our largest Semiconductor customers to increase their CapEx spend this year. As a result, we are raising our semiconductor outlook to high-single-digit growth for the year, up from our original guidance of mid-single-digit growth. Another highlight within Discrete was our performance in e-Commerce, with sales growing approximately 40% versus prior year. This is obviously another industry with secular tailwinds, and we are well-positioned to provide value that will continue to support its tremendous future growth. Our Independent Cart Technology is a long-term differentiator here, as it is in battery assembly and the packaging of consumer products. Turning now to our Hybrid market segment. This segment grew by low-single-digits and accounted for 45% of revenue this quarter. Food & Beverage grew low-single-digits. In addition, packaging OEMs delivered another quarter of double-digit growth versus the prior year. Life Sciences grew about 10% in Q1, well above our expectation for the quarter, led by strong broad-based demand in North America. Thermo Fisher is an important part of the vaccine ecosystem, and we were very proud this quarter to be awarded a significant multi-year enterprise software order to supply software and professional services to enable their Pharma 4.0 initiative and drive their COVID readiness and response. They chose Rockwell's FactoryTalk Innovation Suite which uniquely integrates MES, IIoT, Analytics and Augmented Reality in a single software solution to drive productivity. FTIS, in combination with strong pharma industry expertise, full lifecycle services, and best in breed digital partner ecosystem were key factors in why Thermo Fisher selected Rockwell. While there is a lot of focus on our role in vaccine formulation, we are also working with the broader vaccine ecosystem to support packaging and distribution requirements. For every one pallet of vaccines being shipped, 20 to 30 additional pallets of vaccine accessories are required. Based on the broad-based increase in life sciences demand, we are now expecting Life Sciences to grow mid-teens in fiscal 2021. Process markets were down approximately 25% and weaker than we expected, led by larger declines in Oil & Gas. Process verticals typically lag our discrete business by about half a year. Turning now to Slide 5, into our organic regional sales performance in the quarter. North America organic sales declined by 11% versus the prior year, primarily due to sales declines in Oil & Gas and Automotive. Business conditions improved significantly through the quarter and were reflected in strong product orders. EMEA sales declined 8%, led by Oil & Gas. Sales from Food & Beverage and Water customers were strong in the quarter. Sales in the Asia Pacific region declined 7%, largely due to declines in Process industries that were partially offset by growth in Mass Transit and Semiconductor. Asia Pacific backlog reached a record high in the quarter and we do expect strong sales growth in the region for both the upcoming quarter and full year. In China, we saw growth in auto with some important greenfield EV battery wins. Sequential orders growth in Q1 and double-digit year-over-year growth in backlog support our full-year sales growth outlook in China to be above the company average. Latin America declines were led by Oil & Gas and Mining. In the region, we saw good growth in Food & Beverage and Tire. Let's now turn to Slide 6 to review highlights for the full year outlook. Orders momentum in the first quarter is expected to drive strong growth in the balance of the year. The higher top-line guidance is primarily related to improvements in the outlook for Life Sciences and e-Commerce in North America, as well as in our global outlook for semiconductor growth. Our new reported sales outlook assumes 10% year-over-year growth at the midpoint, including 6% organic growth. We expect our new software offerings and expanded services will drive double-digit ARR growth in fiscal 2021. Our new hires will be focused on this objective. Our new Adjusted EPS target of $8.90 at the midpoint of the range represents 13% growth over the prior year. A more detailed view into our outlook by end market is found on Slide 7. I won't go into the details on this slide, but as you can see, we expect positive organic sales growth in all of our key end markets this year with the exception of Oil & Gas. A marked uptick in orders for Sensia in the latter part of Q1 sets the stage for improving sales later in the fiscal year. With that, let me now turn it over to Steve who will elaborate on our first quarter performance and updated financial outlook for fiscal 2021. Steve?

Thank you, Blake, and good morning, everyone. I'll start on Slide 8, first quarter key financial information. First quarter reported sales were down 7.1% year-over-year. Organic sales were down 9.7%. Acquisitions contributed 1.8 points of growth, and currency translation increased sales by 0.8 points. Segment operating margin was 19.8%, slightly below Q1 of last year. This is the second quarter in a row that segment margin was about flat year-over-year despite lower sales, so a good result. Corporate and other expense of $28 million was down about $5 million compared to last year. Last year's amount included transaction fees related to the formation of the Sensia joint venture. Note that previously we referred to this line item as general corporate-net. The adjusted effective tax rate for the first quarter was 15.4% compared to 8.3% last year. The increase in the tax rate is primarily due to a large discrete tax benefit recorded in Q1 last year related to the formation of Sensia and other discrete items. Moving on to EPS. As a reminder, beginning with this quarter we changed the definition of Adjusted EPS to also exclude the impact of purchase accounting depreciation and amortization expense. First quarter adjusted EPS was $2.38. As Blake mentioned earlier, this result includes $0.45 related to a favorable legal settlement. Adjusted EPS excluding the legal settlement was $1.93, identical to last quarter, and better than we expected. We are pleased with this result, since compared to last quarter, we were able to overcome a $0.30 headwind from the reinstatement of incentive compensation and the reversal of temporary cost actions as of the end of November. I'll cover a year-over-year Adjusted EPS bridge for Q1 on a later slide. Free cash flow was $319 million in the quarter, including the $70 million legal settlement. Free cash flow conversion was 115% of adjusted income. One additional item not shown on the slide, we repurchased 356,000 shares in the quarter at a cost of about $88 million. This is in line with our full year placeholder of about $350 million. At December 31, $766 million remained available under our repurchase authorization. Slide 9 provides the sales and margin performance overview of our operating segments. As a reminder, this is the first quarter we're reporting under our new 3 segment structure. The Intelligent Devices segment had an organic sales decline of 7.9% in the quarter. Segment margin was 19.4%, 130 basis points lower than last year, mainly due to lower sales, partially offset by temporary and structural cost savings. As Blake highlighted earlier, we had strong orders performance in the quarter, particularly in our products businesses. Intelligent Devices orders grew low single digits year-over-year, and high-single-digits sequentially. Software & Control segment organic sales declined 6.2% in the quarter. Acquisitions contributed 2.7% to growth and segment margin was 30.2%, which was 80 basis points lower than last year's strong margin performance, mainly due to lower sales, partially offset by temporary and structural cost savings. Software & Control orders also grew low-single-digits year-over-year and high-single-digits sequentially. Organic sales of the Lifecycle Services segment declined 16.3% year-over-year, as the recovery in this segment's offerings tends to lag our products businesses. Acquisitions contributed 3.9% to growth. Operating margin for this segment increased 50 basis points to 8.9% versus 8.4% a year ago, despite lower sales. Contributing to the lower year-over-year margin improvement - I'm sorry, contributing to the year-over-year margin improvement were temporary and structural cost savings, and the absence of Sensia onetime items recognized in the first quarter of fiscal 2020. First quarter book-to-bill performance for the Lifecycle Services segment was 1.18, a strong start to the year. The next Slide, 10, provides the Adjusted EPS walk from Q1 fiscal 2020 to Q1 fiscal 2021. Starting on the left, core performance had a negative impact of about $0.25 driven by lower organic sales. Temporary cost actions partially offset the sales impact by $0.20. These were the salary reductions and 401(k) match suspension that we implemented in Q3 of fiscal 2020, which remained in effect through the end of November 2020. Incentive compensation was a year-over-year headwind of about $0.10. Tax was a headwind of about $0.10, primarily due to the Sensia-related tax benefit recorded last year and other discrete items. Acquisitions contributed about $0.05. This represents the positive contribution from acquisitions that we completed in 2020 and so far in 2021. As a reminder, Sensia is now reported in core. Finally, as mentioned earlier, the legal settlement contributed $0.45 to Adjusted EPS. Moving to Slide 11, monthly product order trends. This slide shows our order - daily order trends for our Software & Control and Intelligent Devices segments, excluding the longer lead time configured-to-order offerings. The trends shown here account for about two-thirds of our overall sales. Order intake for products improved again this quarter, as the recovery continued. As you can see, there was a sharp acceleration in demand in November and December. Orders for the Lifecycle Services segment also improved in the quarter, but are recovering slower than product orders. The strong order performance resulted in record total company backlog, growing over 20% year-over-year and double digits sequentially. Our quarterly product order trends are shown on Slide 12. This is the same data as the prior slide, summarized by quarter. Our order levels in the first quarter are now clearly above pre-pandemic levels, both for products and the total company. This takes us to Slide 13, updated guidance. We are increasing our organic sales growth outlook by 1 point. The new range is 4.5% to 7.5%, with a mid-point of 6%. Given the weaker U.S. dollar, we now expect currency translation to contribute about 2.5% to growth. We expect acquisitions to contribute about 1.5%. In total, the midpoint of our reported sales guidance range is 10%. We have also updated the adjusted EPS guidance range to $8.70 to $9.10. I'll review the bridge from the prior guidance midpoint to the new $8.90 midpoint on the next slide. Segment operating margins is now expected to be about 19.5%. The lower margin compared to prior guidance reflects the software investments that Blake mentioned earlier and the impact of the Fiix acquisition. These will primarily affect the Software & Control segment and will be weighted toward the third and fourth quarters. Our adjusted effective tax rate is expected to be about 14%, the same as prior guidance. As mentioned last quarter, 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 of about 100% of adjusted income. A few additional comments on the fiscal 2021 guidance. Corporate and other expenses is expected to be between $105 million and $110 million. Purchase accounting amortization expense for the full year is expected to be about $50 million. Net interest expense for fiscal 2021 is still expected to be between $90 million and $95 million. Finally, we're still assuming average diluted shares outstanding of about 117 million shares. This takes us to Slide 14. This slide bridges the midpoint of our November adjusted EPS guidance range to the midpoint of our new guidance. Starting on the left. There is a higher contribution from core operating performance, primarily due to the higher organic sales guidance. Currency is projected to add about $0.05 compared to prior guidance. Next, given the increase in guidance, there is about a $0.10 impact from higher bonus expense. Finally, there is the $0.45 contribution from the Q1 legal settlement, partially offset by about $0.35 for the incremental investments and the impact of the Fiix acquisition. The new midpoint of the guidance range is $8.90. Finally, a couple of quick comments regarding fiscal Q2. Given our strong order performance in Q1, we expect Q2 sales to grow sequentially, and to be about flat year-over-year. We expect second half year-over-year organic sales growth in the mid to high teens. As a reminder, as we mentioned on the last earnings call, Q2 will have the largest year-over-year headwind from the reinstatement of the bonus in the range of $50 million. With that, I'll hand it back to Blake for some additional comments.

Thanks, Steve. Historically, the pace of recovering demand for our products after a recession has come faster than we predicted when we were still in the downturn. This recovery is looking similar so far. And we will see Q2 sales and earnings begin to reflect the torrent of orders we received in November and December, with significant double-digit year-over-year growth expected in the second half of the year. The rate of infections in each region around the world has had a direct impact on the timing and rate of their respective economic recoveries. The Americas were last in and seem to be the last to recover with our sales most highly correlated to this geography, given our revenue there. We are working overtime to meet this demand and staying close to our components suppliers around the world. We're actively hiring and additional capacity for Logix is coming online this month. The new Milwaukee Manufacturing Center is working 2 shifts a day to keep pace with this increased level of orders activity. Turning to Slide 15, we're also investing in software development to drive our future growth. Last November at our Investor Day, we talked about how we will be releasing Software-as-a-Service within our FactoryTalk portfolio to add value in the design, operate and maintenance phases of the customers' investment lifecycle. The recent legal settlement gained will allow us to advance these deliverables. Recent acquisitions are playing an important role in these offerings as well, with Fiix software central to FactoryTalk Maintenance Hub within the Software & Control business segment. Fiix is already showing great momentum and just booked their first $1 million dollar annual recurring revenue contract. Their leadership is already a part of the larger plans for accelerating our SaaS offerings. It all begins with great people. And I continue to be immensely proud of our employees in all parts of the organization and around the world. We continue to hire top talent. And the 2 new members of the team we announced today will add to an already great leadership team. With that, let me pass the baton back to Jessica to begin the Q&A session.

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 the quick follow-up. Thanks. Michelle, let's take our first question.

Okay. [Operator Instructions] Your first question comes from John Inch from Gordon Haskett. Your line is open.

Hi, good morning, everyone. It's Karen Lau dialing in for John. Good morning.

Hey, Karen.

Hey. I was wondering, are there - have you guys seen any signs of maybe the order or sales conversions slowing down given the renewed flare-up in COVID cases around the world in Europe, China, and U.S. obviously? Have you seen any moderation in sales conversion? Understanding the order trends has been very strong, but curious, if there's any underlying moderation beneath maybe some sort of budget slash in the year and if you can comment on that?

Yeah, so a couple of pieces of that, first of all orders continued strong in the early part of January. So we don't see significant causal for what we saw through last quarter tailing off because of any sort of budget flush. So we see those trends continue. We do, obviously, continue to see challenges, particularly with our longer cycle solutions business due to continued mobility challenges, as infections have stayed high around the world. But we haven't seen any new obstacles placed with increased infections.

Okay, that's great to hear. And then my other question is on e-commerce. I don't recall you guys in the past calling out this end-market in particular. Obviously, it has been a very strong market for some time. So curious, if your positioning or anything has changed over there and maybe a comment - if you can comment on how big it is and what's like - how is your positioning and the potential and so forth?

Yes, so our role in distribution or fulfillment centers has always been good. We've always had a strong presence in the core automation there in terms of conveyors and sortation. It was a great fit for our core technology. What's changed and why we're talking more about it is, first, the explosive growth of the end-market itself, which I don't think shows much sign of slowing down. And 2, we do have even improved offerings to be able to serve that market. Independent Cart Technology is an example, where we really differentiate. We talked about that last quarter with respect to that Navy, when it differentiates us in e-commerce as well. And some of the potential opportunities there make the Navy order look small with respect to Independent Cart Technology as a form of precision motion control. So it's really a combination of the market expanding, as well as our readiness to serve going even higher. It's still a relatively small part of our total business. But we expect that to increase as a percentage of our total sales in the quarters and years to come.

That sounds great. Thanks for the color.

Your next question comes from Julian Mitchell from Barclays. Your line is open.

Hey, good morning. This is Trish on for Julian. So maybe just a couple questions on the extra $0.35 of investments spent, maybe a little bit more color on the timing, of how we should expect that throughout the year? And then if this is a new run rate of investment spend or that should set down in 2022? And then just more broadly on margins, apart from the temporary cost reversals, is there anything abnormal to call out?

So I'll make a couple of comments. And then, Steve will add. The investment spend is expected to pull forward some of the development programs that we've been working on in our software area, and specifically, with an eye towards increasing the contribution of Software-as-a-Service to our annual recurring revenue next year. But it's expected to be onetime investments that we can make to accelerate it, not that automatically go into a run rate. And so the investments were selected specifically for that reason, to increase revenue beginning as soon as next year, but without going into an ongoing run rate.

And as it relates to the $0.35, think of about $0.10 or so of that related to the Fiix acquisition, the dilution from that and the remainder to the software investments that Blake just described. And as it relates to the timing, you can think of it mostly affecting the third and fourth quarter of both items, and as well it's all in the Software & Control segment.

That's very helpful. Thank you. And then maybe switching gears, in Asia sales down 7% seem to underperform factory automation, pure company. Can you just talk more about what's going on in that region and maybe what the business is specifically in China?

Sure. So, in general, our position in China is really strong with later cycle businesses. We've talked before about the higher percentage relatively towards longer lead time solutions, targeted at end users, as opposed to earlier cycle business that would be centered on indigenous machine builders. And I think you're seeing some of that play out with respect to China. Now, in China, we still see great opportunities, and we've had some exciting wins recently in EV, mass transit, water, wastewater, our software is a differentiator there. So I like our position there. But we're going to pick up the pace, so as we go after that market, with new opportunities, new go-to-market strategies to complement what we're already doing there.

Got it. Thanks.

Thank you.

Your next question comes from Steve Tusa from J.P. Morgan. Your line is open.

Hey, guys, good morning.

Hey, good morning.

Hi, Steve.

Can you just remind us of - on the kind of the product order trends? What's kind of the cycle time on those orders turning into sales?

So, those are typically characterized as weeks. In those trends, we excluded the longer lead time, configured to order lineups of Power Control. So when you look at those trends, those are typically turnarounds that are measured in weeks in average. A lot of that, of course, sits on our distributor shelf. So when an end customer places an order for it, then it can be fulfilled within hours or a few days.

Right. So are you confident that this isn't - if that's the case, are you confident this isn't like a restock?

We are, because we have good visibility into our distributors' inventory management practices. And their buys are based on underlying end customer demand. So they'll be buying on us based on what they see from end users and integrators and panel builders. And the other point is that we saw continued strong orders into the first part of January. So we're not seeing any evidence that there's a large portion of this due to distributor restock, due to our visibility into their inventory management practices.

Got it. And then, just one last one, it's kind of the raise of the organic guidance and the cut to the margin. You may have mentioned this earlier, but just curious as to what's driving that kind of lower leverage, if you will?

So some of it now, I'll ask Steve to top this up. But some of that is due to the investments we decided to make from a portion of the gain from that legal settlement we mentioned. So we made a decision to make investments that would be one-time investments in fiscal 2021 to pull forward the recurring revenue that we can get from certain strategic software development projects. So we expect to be releasing Software-as-a-Service for automation software, for information management through the next year and we expect that to impact our revenue next year. But importantly, this does not go into the run rate? So those increased investments were due to accelerate that, but they're not necessary as a part of a recurring spend base.

Yeah, Steve, the other thing as well, the segment P&L that the subtle end game is outside of segment operating earnings, whereas these incremental investments, and the fixed impact are in segment operating earnings. So they're saying basically, the one side effect comes through the margin.

Great. All right. Thanks for the color. I appreciate it.

Yeah.

Your next question will come from Andrew Kaplowitz from Citi. Your line is open.

Hey, good morning, guys.

Hey, Andy.

Blake, it's not really a surprise that you took up your discrete and hybrid organic sales expectations and maybe took down process a little bit, but you did mention that you saw pickup at Sensia through the end of Q1. And obviously, we've seen a spike in commodity prices. So have you seen the stabilization now, overall process related bookings and have you seen any bigger uptick, especially on the mining side?

So the fundamentals for mining, particularly copper are encouraging given the price per pound of copper well above $3, while that presents a little bit of pressure on price for our materials. We don't use a lot of raw materials like that. So the potential benefit of new projects by the miners outweighs of any near-term cost pressure on us. I think, there are some big projects out there that we're looking at I know of a few that we're tracking in Latin America, we haven't seen it yet in terms of mining. But I would say we're more optimistic about that than in terms of a quick oil and gas recovery. On oil and gas, I did mention that we saw some good orders in Sensia towards the back half or of Q1. So the latter part of Q1, we did see some orders that will support the sequential sales improvement through the balance of the year for oil and gas.

It's helpful, Blake. And then, just stepping back obviously you talked about orders picking up maybe faster than you expected. Could you talk about how much of the pickup you think is just sort of normal cyclical recovery versus the secular trends we've been talking about here, reshoring, step-ups and resilience to improve single source of failure? You talked about e-commerce a little bit, but also focused on ESG and energy transition, how much is all this stuff sort of helping with order recovery?

I think it fortifies the strength of the recovery. We have more ways to win. So it's not just the recovery of the general core automation and MRO spend having a larger software portfolio services; cybersecurity services that's in the neighborhood of $100 million for this year. These are offerings that we didn't really have in past downturns. And so I think we can participate more fully, as customers try to accelerate out of the curve, in terms of their digital transformation plans.

Thanks, Blake.

Thank you.

And your next question will come from Rick Eastman from Baird. Your line is open.

Yes, good morning and thank you.

Hi, Rick.

Blake, could you maybe speak to for a minute or 2? We've seen some fairly aggressive kind of EV expectations for the number of models here over the next 3 years. And I'm curious, your perspective there around the investments in bringing those models to market around EVs. How do you view that as - is that more than a zero-sum game versus investment in trailing ICE models? So maybe that's my first question. And then, just to follow on with that, are you starting to see some order growth around this significant EV model build forecast? Where does that spend kind of in a pipeline, if you will?

So we've always said that our auto business in general is based more on model changes, new models, new cockpit designs and things like that then the raw [SAR] [ph] count. And if you think of these EV launches as new models, then that's positive. And I think it is above a zero-sum game. So I think the opportunities are higher than just ICE going down, EV going up at the same amount. These are new projects, as we've also talked about, we can participate in all the traditional ways of that automation is needed to build a vehicle in terms of body and paint and stamping, and so on. But we also have a higher readiness to serve in the drive train with our capabilities in terms of battery assembly and so on. So there's a mix opportunity and a customer share opportunity there as well as the increased reliance on software to schedule the units in these EV plants. The MES offering that we have is being looked at as more market serving as opposed to a nice to have, it's being looked at is somewhat of an essential part of a modern automobile factory. So those were all very positive things. For us, I would also say if the focus on made in America pertains to fleets being made in the U.S., that's obviously a good thing for us as well, if given our strong position within that geography and within many of the EV brand owners.

Very good. And then just as a follow-up around Life Sciences, again, we saw the strength in the book-to-bill there, and just maybe a thought, Blake, around - is our content greater within the life sciences marketplace? Or are we seeing just the accelerated spend kind of the pandemic, if you will, defensive spend that we're seeing across the board? Or is our content also greater there, as well?

Yeah, I think, it is expanded customer share as well as the market for automation and information expanding, you think about the things that we're providing to these companies. So it certainly includes the core automation and our capabilities in terms of formulation as well as packaging, track and trace. But then when you look at additional offerings that we can provide the software that we're providing, and again, in this face, it's not just on top of our core automation, it's on top of competitive control platforms. So it's another way to win. Augmented Reality that we have through our relationship with PTC is being used in many of these facilities. And then cybersecurity service is a very fast-growing part of our offering is something that's critically important to these life sciences' customers now more than ever.

That's it. Great, thank you.

Thank you.

Your next question comes from Joe Giordano from Cowen. Your line is open.

Hey, guys, good morning.

Good morning, Joe.

Hey, just curious on auto, obviously, you have a big ramp in the rest of the year. With the shortage going on in semiconductors, obviously, you're not on the production vehicle side of things. But what's the risk that if that drags on longer that it delayed some of the investments then in putting the equipment in place?

I think, particularly on the EV side, these companies know they need to get units out in the market and an offering to begin to get revenue there. So I think it's given them a lot of headaches. But I still see a pretty dramatic uptake in the size of the project funnel that we're looking at in automotive. So when you look at that funnel of CapEx projects with an auto, our folks are telling us that they're really seeing a pretty market increase in that funnel. I think that, again, the semiconductor shortages that they're fighting with are going to be a hassle for them, but I don't see it causing them to add significant additional delays to these major projects, because they know they have to get their brands out there in the EV market.

Okay, great. And then just last for me, the temporary savings was a benefit this quarter does that flip to a give back starting next quarter?

So year-over-year the temporary savings should now be a net-zero basically for Q2, we've restored the salaries and the 401(k) match, so that's basically a net-zero year-over-year. Now we have talked about the bonus, which is a big year-over-year headwind in Q2, it's about $50 million. Last year, we've reversed all of our bonus accruals in the second quarter due to the downturn, and this year, we're accruing a little above target now.

Okay. Thanks, guys.

Thank you.

And our final question for today will come from Noah Kaye from Oppenheimer. Your line is open.

Good morning. Thanks for taking the question. It was really just on the software accelerated investment here, I'm trying to understand kind of combining this with you're bringing in a Chief Revenue Officer. And then, how much of that spend is really for actual product development versus a go-to market change or an investment in the selling infrastructure? Do you feel you have the rights to put sales infrastructure in place to accelerate the adoption of Software-as-a-Service? Any kind of changes you think you need to make in sort of the selling strategy or the business model there? If you can talk about that, that'd be helpful.

Sure. The vast majority of the additional spend that we're making is in the development of the software. So it's in Software-as-a-Service that will be start to release in the coming months and over the next year or so. And it's our automation software. So this is right at the core of what we do, interfacing with our intelligent devices and leveraging that home-field advantage that we have really right at that convergence of IT and operational technology. So it's mostly going into the software development. Because as I said, it's mainly a onetime investment, that doesn't go into our ongoing run rate. We've previously talked about doubling the number of our software specialist, assisting our general account managers, that's not a onetime cost. That's an investment that we've previously talked about and that is increasing. Our approach is really twofold with respect to selling more software. We have a large and growing number of software specialists, as well as technical consultants to assist with those sales. And then, we've got our general account managers who more and more are coming in with inherent software understanding as well. They've got big portfolios to sell to our customers. But I like that, I like having a single account manager that can draw on these various resources, because it simplifies how our customers interact with us and it also puts an emphasis on solutions, because we sell our software, but it is part of a collection of offerings that provide outcomes to those customers. So it typically involves hardware. And it involves software, it involves services. And sometimes we're actually integrating the project ourself. One of the things that Scott brings into the CRO role is a really good understanding of how all those things come together, and how it is provided to the customer as a solution, and how to describe that to increasingly senior levels of our customers, because it's not just selling to plant engineers, plant managers and design engineers. We're a bigger part of our customers' digital transformation with this expanded portfolio. And so, we're talking to people higher up in the company.

That makes a lot of sense. And thank you for the color. And then I wanted to just touch the last. So you mentioned there is a portion of the investment you talked that is for ESG spend. And I was curious if you could give us just a little bit of details on that. I don't know you could care to quantify it. But in general, what is that spend driving towards?

Sure. Just so a couple of things, I mean, we announced our carbon-neutral goals during investor day. And so, that's what we're doing within our own facilities. And so, we are spending sizable amount of money, I mean, in the millions of dollars to make sure that we are going at a fast pace in terms of advancing those ESG goals in our own shop. But maybe even more important as an overall impact is what we can do for customers. We've always had a big impact on their energy efficiency in their plants. But there are other areas like recycling and our role in the circular economy, renewables, those are things that we're looking at new offerings in to be able to help our customers meet their own ESG goals.

Okay. Thank you very much. I appreciate it.

Thank you.

This brings us to the end of our Q&A session. I turn the call back over to the presenters for closing remarks.

Thanks, Michelle. I'll now turn it back to Blake for a few final comments.

Thanks, Jessica. In summary, we are very pleased with our very strong orders performance in the quarter. The recovery in manufacturing is clearly happening at a much faster pace than we were anticipating. And we expect that to result in strong revenue growth for the balance of the fiscal year. We're very excited about the new software product launches that we have lined up over the next 12 to 24 months, and the new talent we are bringing on board with Fiix and Oylo as well as our new leadership additions that will accelerate our growth and drive higher recurring revenue in the future. Nobody is better positioned than Rockwell and our partners to bring Information Technology and Industrial Operational Technology together. It is an exciting time to be aligned with Rockwell. And we thank you for your interest and ongoing support. Be well.