Rockwell Automation : Q2 2021 Earnings Call – Prepared Remarks

28 - April - 2021

Rockwell Automation, Inc. (ROK)

Q2 2021 Earnings Call - Prepared Remarks

Corporate Participants

Blake D. Moret, Chairman & Chief Executive Officer, Rockwell Automation, Inc.

Nicholas Gangestad, Senior Vice President & Chief Financial Officer, Rockwell Automation, Inc. Steven W. Etzel, Senior Vice President, Finance, Rockwell Automation, Inc.

Jessica Kourakos, Head of Investor Relations, Rockwell Automation, Inc.

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Operator

Thank you for holding and welcome to Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's call is being recorded. Later in the call, we will open up the lines for questions. If you have a question at that time, please press *1.

At this time I would like to turn the call over to Jessica Kourakos, Head of Investor Relations. Ms. Kourakos, please go ahead.

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Jessica Kourakos

Head of Investor Relations, Rockwell Automation, Inc.

Good morning and thank you for joining us for Rockwell Automation's second quarter fiscal 2021 Earnings Release Conference Call.

With me today is Blake Moret, our Chairman and CEO, Nick Gangestad, our CFO, and Steve Etzel, our Senior Vice President of Finance.

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 our SEC filings.

So, with that I'll hand the call over to Blake.

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Blake D. Moret

Chairman & Chief Executive Officer, Rockwell Automation, Inc.

Thanks, Jessica, and good morning everyone. Thank you for joining us on the call today. Let's begin by reviewing our results on slide 3.

The strong orders momentum we saw last quarter accelerated and broadened across verticals in fiscal Q2. Total orders surpassed $2 billon, which is a new record, and organic orders grew double digits from last year's orders. As you may recall, COVID did not significantly impact our business until the June quarter of last year.

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Total reported sales grew 6%, including a 2-point contribution from recent acquisitions, including ASEM, Kalypso and Fiix.

Organic sales grew a little over 1% versus prior year, despite significant supply chain constraints. The manufacturing supply chain continues to be stressed by sharply increased demand, along with various well- publicized events around the world that have reduced output and narrowed freight lanes. We will continue to navigate these challenges in the coming months and take measures to continue increasing our supply chain resiliency.

I'll now comment on our top line performance by business segment. Intelligent Devices organic sales increased 6%, led by strong, broad-based demand for our automation products. Our motion control offering continues to shine and was up double digits, as CPG companies continue to add packaging flexibility.

Software & Control organic sales also grew 6%, led by strong demand across the segment. We saw growth in Logix control, visualization hardware and software, network and security infrastructure, and across the balance of our FactoryTalk software portfolio. Reported sales growth was over 12% for the segment in the quarter. Orders for the Intelligent Devices and Software & Control business segments both grew strong double digits year-over-year and sequentially.

Turning to Lifecycle Services, organic sales declined 11% versus the prior year, primarily impacted by weaker performance in Oil & Gas. On a sequential basis, revenue and orders grew mid-single digits, and we expect continued sequential sales improvement in this segment through the balance of the year.

In Information Solutions and Connected Services, we had another strong quarter, with organic sales and orders growing double digits, with contribution across a variety of end markets. This quarter's orders also included a number of meaningful software and infrastructure-as-a-servicemulti-year wins with some of the world's largest Food & Beverage manufacturers. This included Kraft Heinz, where we actively monitor their industrial network and cybersecurity environments. These wins also contribute to ARR, which grew double digits year-over-year. Total backlog grew strong double digits on an organic basis, both year-over- year and sequentially.

Turning to profitability, segment operating margin of 22% and Adjusted EPS of $2.41 were above expectations and overcame headwinds from the reinstatement of the bonus and higher costs related to supply chain constraints. Stronger volume, favorable business mix, and the timing of spending all contributed to our strong profit performance in the quarter as we continue to increase our business resiliency.

Let's now turn to slide 4, where I'll provide a few highlights of our Q2 end-market performance. Figures are for organic sales. We had very good growth in our Discrete industry segment, with high-single-digits sales growth significantly above our expectations.

Within this industry segment, Automotive sales were in line with expectations, declining mid-single digits versus a strong prior-year period when auto grew by over 20%. We continue to estimate 10% organic sales growth for the year in this vertical, as MRO continues to grow and as an increasing number of capital projects

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are expected to launch in the second half of the year. Despite chip shortages impacting automotive production, we are not seeing related delays in capital or operational spending for our products.

The Semiconductor vertical significantly outperformed our expectations this quarter, growing about 15%. We believe strong secular tailwinds, increasing capital spend, and broadening share of wallet with customers are all driving our growth and share gains in this vertical. As a result, we are raising our Semiconductor growth outlook to approximately 15% for the year, up from our original November guidance of mid-single digit growth.

Another highlight within Discrete was our performance in eCommerce, with sales growing over 70% versus prior year. Once again, our differentiated offering, featuring our Independent Cart Technology, is enabling eCommerce applications at a growing number of marquis accounts. This vertical has significant secular tailwinds, of course, and has become a bigger growth driver for our overall Discrete industry segment.

Turning now to our Hybrid industry segment. These verticals also had a terrific quarter.

Food & Beverage grew over 10%, as our strong product portfolio enables these customers to efficiently add SKUs as they seek to differentiate their offering and maximize their growth. We saw increased capital spending by Food & Beverage customers in the quarter. Not surprisingly, packaging OEMs are also very busy, and they contributed another quarter of double-digit growth versus the prior year.

Life Sciences grew about 15% in Q2, led by strong demand in North America and Asia Pacific. We won an important MES project in Korea during the quarter, helping the Dong-A ST pharmaceutical company face the challenge of exporting products that need to comply with FDA regulations. Dong-A ST is expecting production efficiency and quality to improve by going paperless through their choice of Rockwell's PharmaSuite MES. Based on the broad-based increase in Life Sciences demand and the share gains we are seeing in this market, we are raising our view on Life Sciences and expect it to grow about 20% in fiscal 21.

Process markets were down approximately 10% and were weaker than expected, led by larger declines in Oil

• Gas. Process verticals typically lag our discrete business by about half a year. That said, we saw sequential improvement again in North America for Oil & Gas during Q2. Mining customers are also becoming more active, and we saw low-single-digit growth in the quarter.

Turning now to slide 5, and our Q2 organic regional sales performance.

North America organic sales grew by 2% versus the prior year, primarily due to strong growth in Food & Beverage, eCommerce, and Life Sciences.

EMEA sales declined 7%, driven by Oil & Gas, Metals and Auto, partially offset by strength in Food & Beverage.

Sales in the Asia Pacific region grew 16%, with broad-based growth led by Semiconductor, Chemicals, and Life Sciences. Asia Pacific backlog reached another record high in the quarter and we expect strong sales growth in the region for both the upcoming quarter and full year.

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