Yahoo Finance Rockwell Automation Inc (ROK) (Q2 2024) Earnings Call Transcript Highlights: Navigating ...
Reported Sales: Down 6.6% compared to last year.
Organic Sales: Decreased by 8.1%.
Acquisitions: Contributed 140 basis points to total growth.
Segment Operating Margin: 19%, down from 21.3% a year ago.
Adjusted EPS: $2.50, higher than expectations.
Free Cash Flow: $69 million, compared to $156 million in the prior year.
ARR Growth: Up 20% this quarter.
Full Year Sales Guidance: Organic sales projected to decline 7% at the midpoint.
Full Year EPS Guidance: Adjusted EPS expected to decrease 13% year-over-year at the midpoint.
Share Repurchases: Planned to roughly double the original plan for the year.
Free Cash Flow Conversion: Expected to be 80%, a reduction from prior guidance.
Release Date: May 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
Rockwell Automation Inc (NYSE:ROK) reported good operational performance in Q2 with organic sales and adjusted EPS above expectations.
The company has built a strong portfolio to meet the growing need for smart manufacturing, particularly in North America, which is expected to grow faster than the global market.
Rockwell Automation Inc (NYSE:ROK) is winning major new business with both traditional offerings and new sources of value across various industries.
The company is taking accelerated actions to align costs with the revised outlook, expecting to save $100 million in the second half of this year.
Lifecycle Services organic sales grew over 12% year-over-year, driven by strong process end markets and high-value services such as cybersecurity.
Negative Points
Rockwell Automation Inc (NYSE:ROK) expressed dissatisfaction with the reduced guidance for the full year due to higher than expected inventory levels at machine builders.
Organic sales declined by 8% year-over-year, with total sales down 6.5% in the quarter.
Software & Control organic sales were down 23% versus the prior year, significantly impacted by high product inventory levels at machine builders.
The company has revised its fiscal 2024 sales guidance range, projecting organic sales to decline 7% at the midpoint.
Adjusted EPS is expected to decrease 13% year-over-year at the midpoint, reflecting challenges in ramping up orders and managing inventory levels.
Q & A Highlights
Q: 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? A: (Blake D. Moret - Rockwell Automation, Inc. - President, Chairman & CEO) 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.
Q: 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? A: (Blake D. Moret - Rockwell Automation, Inc. - President, Chairman & CEO) 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.
Q: 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. A: (Nicholas C. Gangestad - Rockwell Automation, Inc. - Senior VP & CFO) 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.
Q: 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? A: (Blake D. Moret - Rockwell Automation, Inc. - President, Chairman & CEO) 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.
Q: 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? A: (Nicholas C. Gangestad - Rockwell Automation, Inc. - Senior VP & CFO) 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.
Q: 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? A: (Blake D. Moret - Rockwell Automation, Inc. - President, Chairman & CEO) 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.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.
