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. [Operator Instructions] At this time, I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead.

Thank you, Julianne. Good morning, and thank you for joining us for Rockwell Automation's Second Quarter Fiscal 2024 Earnings Release Conference Call. With me today is Blake Moret, our Chairman and CEO; and Nick Gangestad, 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 on our 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. 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 it over to Blake.

Thanks, Aijana, and good morning, everyone. Thank you for joining us today. Before we turn to our second quarter results on Slide 3, I'll make some initial comments. At a high level, our performance in Q2 was good, but I am not happy with the reduced guidance for the full year. The impact of high inventory levels at machine builders is larger than we expected. Orders are still expected to return to year-over-year growth in Q3 and continued to increase during the year, but the slower ramp is impacting shipments for the second half. Consequently, here's what we are doing. We are accelerating actions to bring costs in line with the revised outlook on current year orders, aligned with the more comprehensive program to expand margins introduced during our Investor Day in November. We will save $100 million in the second half of this year from accelerated actions being taken now, creating a beneficial starting point for fiscal year '25. We will see incremental savings of $120 million next year from these actions alone plus a larger amount of additional savings from the more comprehensive program targeting sourcing, manufacturing and SG&A. And we will provide a more detailed view of this program on our next earnings call. We are improving our forecasting with new perspectives on the team, processes that include a deeper analysis of channel information and better decision support technology. I'm optimistic about our position when we exit fiscal year '24, regardless of next year's growth for several reasons. Rockwell has built an unmatched portfolio to meet the world's growing need for smart manufacturing. Our home market, North America is expected to grow faster than the worldwide PAM. We are winning major new business today with both our traditional offerings and new sources of value across discrete, hybrid…

Thank you, Blake, and good morning, everyone. Although my family and I are excited about what comes next in retirement, my continued focus is on delivering our plans for this year and ensuring a smooth, seamless transition to a new CFO. I I'll start on Slide 7, second quarter key financial information. Second quarter reported sales were down 6.6% compared to last year. Q2 organic sales were down 8.1%, and acquisitions contributed 140 basis points to total growth. Currency translation increased sales by 10 basis points and about 150 basis points of our organic growth came from price, in line with our projections. Segment operating margin was 19% compared to 21.3% a year ago. This 230 basis point decrease reflects lower sales volume, partially offset by lower incentive compensation. Adjusted EPS of $2.50 was higher than expectations. Given our lowered outlook for fiscal '24, we did not accrue any bonus expense in Q2, and we reversed the prior quarter bonus accrual. This resulted in a total adjusted EPS benefit of approximately $0.30 in the quarter. Even without the bonus impact, our Q2 adjusted EPS was ahead of our expectation due to better-than-expected conversion of incoming orders into sales. I'll cover a year-over-year adjusted EPS bridge on a later slide. Adjusted effective tax rate for the second quarter was 14.8% below the prior year rate. Free cash flow was $69 million compared to $156 million in the prior year. Our lower year-over-year free cash flow generation in the quarter was driven by lower pretax income and higher tax payments, partially offset by decreases in working capital. The increased tax payments relate to our gain on our sale of PTC shares in fiscal year '23 and our payments on the 2018 TCJA transition tax. One additional item not shown on the slide,…

Thanks, Nick. We are focused on getting synergies and efficiencies throughout the entire organization. The portfolio of capabilities that we have built and bought is second to none and now is the time to knit all these pieces together. This will help us drive more customer value, efficiency and cost savings, which in turn will yield higher margins and funds for reinvestment. Aijana will now begin the Q&A session.

Thanks, Blake. We would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up. Julianne, let's take our first question.

[Operator Instructions] Our first question comes from Andy Kaplowitz from Citigroup.

Nick, congrats, and thanks for all your help. So Blake or Nick, could you give us more color into what's now embedded in terms of order trajectory in your $10 to $11 of guidance? Have you seen continued positive improvement in orders here to start Q3 because obviously, you still need a pretty big order step-up especially in Q4, as you said, given your guidance. And it's been difficult to tell for you, I think, how much excess inventory has been out there, especially with machine builders. So what are you doing to try and get better visibility into when they may bottom with their inventory and ultimately, you won't have to lower EPS again?

Sure. Andy, I'll start, and then Nick may have some additional comments. We're expecting mid-single digits sequential growth in Q3 on orders. This is after low double-digit sequential order growth that we saw in Q2. And then we expect high teens sequential orders growth in Q4. And that's based on our analysis of the levels of existing inventory in distribution as well as in the machine builders. For distribution, we expect that largely to clear by the end of the third quarter in most regions. China is probably an outlier that goes a little bit longer, but we're tracking those inventory levels and that's consistent with the direct feedback from those distributors. As we go out to the OEMs and have specific discussions with the largest OEMs, particularly in Europe and in North America, we're expecting that inventory to be largely cleared at the machine builders in Q4. This is imperfect because we have some of those machine builders that are buying direct from us, and then we have a lot better going through distribution. So that's still evolving. But we have much better view today than we did at the beginning of the year, and that's the primary reason for the reduced guidance for the year.

Andy, one thing I'll just add on that. What we've seen in April orders is completely consistent with that. Our guide of an expectation of order growth of 5% sequential order growth.

Helpful, guys. And then, Blake, maybe just trying to step back and separate out the channel noise you've been seeing from the CapEx weakness you mentioned, for instance, in food and beverage. I know you mentioned you will achieve the long-term targets you said in November, but could you talk about your conviction at this point that Rock can resume that sort of 5% to 8% organic growth trajectory, ex acquisitions, sooner versus later. Can you give more color into the market share gains you mentioned North America, and which core end markets would you think would drive that back to that improved growth?

Sure. So we are confident that those growth ranges are reasonable as we look through the cycle. It's based on our offering. It's based on the higher growth that we see in North America, which, of course, is our home market, where most of our sales are, and it's our portfolio that we've built that's winning today in the market. So we see that through the individual projects that are competitive, the growing impact of mega projects. I and my team are directly involved with versus our toughest competitors around the world with a good win rate of those projects. We also see in the industries, the win rates looking good. And when I talk about market share gains, obviously, Logix controllers is one of the key areas, and we do see those gains, both when we look at the U.S. and when we look around the world in terms of the reports on that important product line, and there's some other areas as well, motor control centers, for instance, as we get those reports for our offering in North America, but also with the new Cubic offering, which is a space that was virtually unserved by us previously. And then with the autonomous mobile robots, you heard several examples of those wins in the production logistics space from our Clearpath acquisition, that's already a $5 billion or $6 billion market growing much faster than the general automation market. And so that gives us a lot of confidence with these new sources of value as well as the products that make up the majority of our business, we're confident about these long-term targets. And again, it's not just about the above-market growth. I think you've heard the tone on this call and in the last few months, putting that together with the margin expansion is absolutely fundamental to our plans going forward.

Our next question comes from Nigel Coe from Wolfe Research.

Nick, enjoy your retirement. So I'm just wondering if maybe you can get a bit more color on the kind of the third quarter color you provided. So the -- I mean I'm backing into an EPS close to the $2 per share for the third quarter. So I just want to make sure that aligns with your model. And then in terms of the order rates that you're pointing to mid-single-digit percentage increase sequentially, is that sort of back into like a $2 billion order number? Just trying to get a bit more quantification there, that would be great.

Yes. Nigel, in terms of what you're backing into from an order rate in Q3, that's complete -- that's consistent with how we're seeing this, too. In terms of EPS, the one nuance I will point out from a quarterization on our tax rate, we expect our Q3 tax rate to be lower than the average and our Q4 tax rate to be higher than the average. That's just based on discrete items that are expected in the second half of the year and the timing. That's the only other nuance I'd say on this. But otherwise, I'd say your modeling is matching pretty closely what we're estimating.

Okay. That's helpful. And then on the cost savings, just on the $100 million of cost savings in the second half of this year, just want to make sure that, that doesn't include any of the bonus accrual reversals or the investment spending pullback. That's all sort of additional cost savings. It feels like it's mainly temporary costs in the back half of this year and then we have more structural costs coming in, in 2025. Is that the right way to think about it?

Let me start with some general comments, and then Nick can add some detail to that. The $100 million of savings that I mentioned for the second half of the year is totally separate from anything with the incentive comp. So that's additional savings that's totally separate from that. Embedded in that is a reduction in force of approximately 3%. So those are not temporary savings and that will provide additional incremental benefit into next year. There's also some of the temporary actions that Nick talked about, but there's a meaningful reduction in force that's structural and is the front end of the additional structural actions that I alluded to, and that we'll provide more detail on the next call.

And Nigel, part of what we were talking about there is the $100 million we're expecting in the second half of this year. Those actions, we expect to have a tail into fiscal year '25 of an additional $120 million. So -- and I'm saying that in reference to your comment about temporary, some of it is temporary, but the majority of it is sustainable and carried makes that tailwind impact benefit into fiscal year '25.

Our next question comes from Julian Mitchell from Barclays.

Wish you all the best, Nick. Thank you for the help. Just maybe circling back on the sort of EPS walk. So you've got that very helpful, Slide 11, for example. But if I think about sort of 3 big buckets of costs you've talked about this morning, you've got incentive compensation, you've got investment spend, and you've got these fixed cost reductions relating to head count cuts. So it looks like for 2024, you've got about a $2 EPS tailwind year-on-year from incentive comp and investment spend combined. Is the right way to think about it that a lot of that reverses in 2025? And then on the other hand, you've got these savings that may be are worth about $1 of EPS from head count cuts in 2025. Just trying to understand of the incentive comp and investment spend, kind of how does that reverse in a substantial way kind of in the following year naturally?

A couple of points, Julian. First of all, we certainly intend that the incentive compensation does reverse in fiscal year '25. But the productivity actions that we're doing with the structural cost savings, we do not expect the majority of that investment spend that I noted on that slide to reverse. And that's why we're talking about the $120 million of carryforward benefit into fiscal year '25. So 2 different answers. The incentive comp absolutely does reverse, but investment spend does not. And again, investment spend in total for next year will be dependent on the opportunities we're seeing. We haven't set what that number is. But the benefits of what we're doing here, we are confident that will create this $120 million tailwind benefit into next year?

Yes. Just at a high level, the actions that we're taking now with their benefit this year and then the incremental benefit next year, when you add that to the more structural actions that we're beginning a more comprehensive program that I mentioned, we expect that to more than offset the headwinds from returned incentive comp investment and so on as we go into fiscal year '25.

That's really helpful. And then just my follow-up would be trying to circle back to that point on sort of your revenues and your inventories and your customer inventory. So it sounds like you have this Q3 sales dip, I think, sequentially, Nick, you'd mentioned. Maybe help us understand why that's happening if orders are up sequentially in the second quarter finished and the third quarter that we're in now. And your own inventories on your balance sheet have been stuck at sort of the same dollar number for a year now. How are you so sure that your customers' inventories are coming down when your own are very stable?

Yes. So as of the end of the second quarter, Julian, our product backlog is essentially back to normal. We've had good success working through with our supply chain, and we've brought our backlog back to normal. So going forward, our -- we expect to be operating what we were like pre pandemic, where orders in a particular quarter are very much like what our sales are in a particular quarter. In our second quarter, we were still benefiting from drawing down some of that backlog. We brought down our backlog in high single digits in the second quarter. And that's why our sales in second quarter were higher than our orders. That phenomenon will end going into the second half of the year. And that's why even though we expect orders to be up sequentially, we expect revenue to be down sequentially.

Our next question comes from Noah Kaye from Oppenheimer.

Maybe talk about some of the choices you're making around where to reduce investments in the business. I would love any color. You made a lot of acquisitions. I'm not sure if it's related to that. Maybe you can talk about it if possible on the segment level or by protocol?

Sure. No, I'll make some comments, and Nick may have some additional ones. Most of the reduction in force that we're looking at is affecting SG&A and that does include sales and marketing and headquarter functions. I think as we look at guiding principles, we're directing the spend to the highest value activities that's both geographically and from a product portfolio standpoint going through and taking a look at what is generating the best returns in those areas. We're also integrating recent acquisitions with existing Rockwell resources and looking for the cost synergies there. So we're getting good performance out of our acquisitions. And as we look at ways to get the efficiencies and as I said, knit together what we've built and bought, the actions we're taking are consistent with that. And then there's opportunities, as always, for back-office efficiencies by leveraging technology. And we see that in SG&A. We see it in our development activities as well. There is some reductions in cost of sales, including some in manufacturing operations, as we're tuning our capacity to match what we're expecting near term in terms of output. And that's product-specific, right? Some of our lines are growing very well year-over-year, and they're expected to continue. Others as we've gotten back to full safety stock, we can tune that to reduce some of the variances in those operations. So that's the current list of actions that we're doing. As we look at the more comprehensive program, we'll be focusing on areas like sourcing is a big opportunity for us with the spend of direct material and other items. And then there's also additional opportunities for manufacturing efficiencies as we look at our portfolio and the wide range of SKUs that we offer. Nick?

Yes. The one piece I'd add to that. Many of these costs are in organizations or functions that support multiple of our reporting segments. Given the way we allocate these costs across segments, Intelligent Devices and Software & Control will see the greatest impact from these actions that we're doing.

Right. Makes sense. And then very helpful on the walk sequentially on orders and your commentary around margins for 3Q, that does seem to imply. Again, we're doing math here on the fly, a pretty big step-up sequentially in margin for 4Q. I'm getting to something like 6 points here. Maybe just talk to the margin math around how you see exiting the year and what, apart from the cost reductions you've announced, would help that step up?

Yes. So there's a few things impacting our margin progression as we go through the second half of the year. And you are correct, and we expect Q4 to be, by far, our highest margin quarter of the 4 quarters. We -- the biggest contributor to that is going to be volume that is positively impacting the margin, particularly in Software & Control. That's followed by the structural and temporary cost savings that we're doing. And then the third is we will be having a more favorable mix of revenue that will be benefiting margins. So it's volume is the largest and then followed by the cost savings and then the mix, all contributing to that sequential improvement in margin in Q4.

Our next question comes from Steve Tusa from JPMorgan.

When you talk about these investments, what's the trend on R&D this year relative to last year as a percentage of sales or on an absolute basis?

Yes. Steve, R&D as a percent of revenue is going to be pretty consistent at 6% of revenue. As a percent of revenue, it's not really changing from last year.

Okay. And then I guess just more philosophically, thinking about the story, and I know you guys have talked about your business being more of an intellectual property business over time, certainly a part of the story at least. And I just -- what I struggle with a little bit higher level is whipping bonus accruals around basically altering investments based on near-term sales. I guess, that just seems juxtaposed with kind of an IP-type business. How do we have confidence that you're not rocking the boat with a lot of that core, where the technology comes from, that would be kind of my biggest concern longer term. How are you guys managing that?

Yes. Steve, this is Blake. As Nick said, our development expense remains at 6%. We continue to invest robustly in areas, like new product introduction, which is actually increasing over the last few years in terms of what we're delivering to the market, both in terms of the hardware products as well as new software as well. And so I think it would be incorrect to talk about whiplashing that piece of it. We're looking for efficiencies that are taking cost out that had built up over the last few years of volatility as we've gone from pandemic to supply chain shortages and making sure that we're tuned for growth going forward with that. The incentive comp philosophy hasn't changed there and that we operate in a pay-for-performance culture. We had great payouts last year because we performed really well with high teens top line growth and even better EPS. This is a year that is below expectations, and we're not paying a bonus, but it's going to come back, and that's the way we've operated for as long as I've been in the business. So in no way it implies some sort of short-term activity to manage results at the expense of the long-term value that we continue to provide.

And then just one last one on the 3Q to the 4Q. I know that the second half of this year was dependent on obviously the sales being there. I mean, how dependent are we from -- going from the 2-ish to 4 from 3Q to 4Q on sales actually being there? Is it the same kind of dynamic as we've been seeing -- we're seeing in 3Q, similar to the comments you made last quarter.

Steve, the sales dynamic is the single biggest contributor to the increase in EPS from Q3 to Q4. Second -- followed second by on a smaller scale to cost actions. The total cost actions that we're projecting in the second half of the year, we expect about 1/3 of that to be impacting Q3 and about 2/3 of that to be impacting Q4. So there -- that is part of it, but it's still a smaller number compared to the reliance on revenue growth occurring in fourth quarter.

Our next question comes from Rob Mason from Baird.

I wanted to see if you could provide a little more color around the step-up in orders that you're expecting -- sequential up in orders that you're expecting in the fourth quarter? I know you mentioned distributor channel inventories normalizing at that point. But is that the entirety of the high teens growth? Or are you expecting some shift in -- more positive shift in demand as well?

There's a few elements of what informs that guidance, Rob. But the first is a significant reduction in packaging machine builder inventory. So within the OEM inventory, packaging machinery has been particularly affected by that. And the feedback we're receiving from the conversations directly with them indicates that, that reduces significantly as we go through the third quarter and into the fourth quarter. The distributor inventory actually is expected to clear again in regions outside of China before that. And so those 2 factors are an important part of it. We also see the normal seasonality in our engineered-to-order and Lifecycle Services shipments. There's always a higher shipment amount at the end of the year there, and that would include Sensia as well. And then we see the growing impact of mega projects. And we do have a line of sight to some of those projects that are expected to come in with ordering and shipments beginning in the fourth quarter. We're seeing some of that now. Think of that as kind of a drumbeat that increases through the year and again into next year.

Should we think about the fourth quarter order level as a solid jumping off point as we go into 2025 now, absent the engineered-to-order, normal seasonality there?

Yes. I mean in this volatility that we've been operating in, in the last 4 years, I'm going to reserve a view. But I think we're setting up the foundation so that we have an attractive cost base regardless of what orders do next year.

Our next question comes from Joe Ritchie from Goldman Sachs.

Nick, I wish you the best in retirement and then we're back and forth. Yes, so maybe -- can I just maybe just start on that last comment on mega project spending specifically. I'm trying to square the comments around EVs earlier and some pushouts. And if I think about where we're seeing the biggest kind of like expectation for mega project pickup would probably be in semi-fab CapEx? And then also on the like EV/battery plants. And so Help me just kind of square the comments on EV pushing out and where you're actually starting to see some kind of some good green shoots on the mega project side.

Yes. So I mentioned that we're seeing some push out on EV, but we are not seeing cancellations in those projects. And it doesn't mean that they've all gone away. EV is still about 1/3 -- a little bit more than 1/3 of our total automotive business. So there's still some of those projects -- EV projects that we're winning and getting business for now. If we look at some of the other areas of mega projects, the facilities management and control systems or semiconductor fabs. We've got great capabilities there and are playing a major role in a lot of the fabs that have been announced and are currently under construction in the U.S., but around the world, that's been a good business for us in Asia for over a decade. So it's not a new application for us. Renewables is another area that we're seeing a good investment playing in solar. We are seeing meaningful business in solar as well as wind, particularly with our Cubic acquisition. And then another area that is, we think, has bottomed, and we're seeing an impressive funnel building is in the area of warehouse automation and really the overall space of production logistics. And again, I'll go back to the capabilities that we have that's somewhat unique with AMRs, the mobile robots, combined with the fixed automation that we've always had, we're tracking some major projects there, and we've had some wins, and I talked about some of them on the call. But to give you an example about how those are playing out. There are a couple of customers that we've talked to in the last couple of months that have come off of discussions with labor and have made it clear that they want to complement their people with technology to a greater extent over the next few years. And those have resulted in multimillion dollar wins for Rockwell as a result of moving more aggressively and to adding technology to complement their scarce resources. And so those are the kinds of examples of mega projects that are starting to come in.

That's super helpful, Blake. And then -- and if I can maybe just make sure that I've got it totally squared for next year on the buckets of cost savings. So you mentioned $120 million for next year. We're going to get something more on the structural side. And then incentive comp goes to 0 this year. And so in a normal year, that would be like roughly basically about $120 million, $130 million headwind in a normal year. So is that just baselining it? Is that the right way to think about it?

Joe, you got it all right, except for the last one, our normal bonus expenses in the $160 million to $170 million range.

Julianne, we'll take one more question.

Certainly. Our last question will come from Joe O'Dea from Wells Fargo.

Blake, when you talk about packaging, delivering better order activity from Q3 to Q4, just want to level set on to what -- how that kind of sizes overall for the business. And so you're talking food and beverage and household and personal care, and we should be thinking about 25% of revenue that would be seeing that pick up?

Yes. Actually -- so if you think about those verticals and that's about the size of the overall verticals there, about 60% of our business in consumer packaged goods covered mainly by those 2 verticals is the OEMs, the machine builders. So that's the way you can kind of do the calculus of how much of that business has been suppressed by the higher inventory levels, and we're expecting that to be dissipating over the coming quarters.

Got it. And then the bridge on sort of prior guide to revised guide and the core piece in the $3.75 sort of EPS impact on core, it looks like that could be something like a 60% to 70% decremental. And if that's the case, and we think about the flip side, do you think about sort of a reversal of these headwinds is translating to better incrementals than what you would traditionally think about sort of through a cycle, absent some of the temporary structural cost actions that are underway?

Yes. When you strip out things like incentive compensation and what we're showing there from investment spend because those things would normally be part of what we talk about in terms of our incrementals and decrementals, but we stripped out those 2 details to give you more detail of the underlying moving parts in there. But there are many parts of our portfolio where incrementals and decrementals like that in that 60% range are certainly normal. They're normally offset by some degree of incentive compensation or investment spend though.

Yes. I think -- but directionally, I think you're right in that Logix, we've seen the biggest correction based on the really tough comps with the huge growth from last year. And as that comes back in, that hardware does have high incrementals and high decrementals. We've put a lot around it with annual recurring revenue and so on, which does help us and continues to grow. But there's no getting around that Logix is very profitable. We have high incrementals and high decrementals there.

Thank you, everyone, for joining us today. That concludes today's conference call.

At this time, you may now disconnect. Thank you.