The operator welcomes listeners to Rockwell Automation's quarterly conference call and introduces Aijana Zellner, Head of Investor Relations and Market Strategy. Zellner discusses the company's second quarter results and mentions that the call will reference non-GAAP measures. She also reminds listeners that the comments made will include forward-looking statements and that the actual results may differ due to various risks and uncertainties. CEO Blake Moret then shares his initial thoughts on the quarter, stating that while the performance was good, he is not satisfied with the reduced guidance for the full year due to high inventory levels at machine builders.

In the second quarter, Rockwell expects orders to return to year-over-year growth in Q3 and continue to increase throughout the year, but at a slower pace. To align with this revised outlook, they are accelerating actions to reduce costs and save $100 million in the second half of the year. They also expect to see incremental savings of $120 million next year from these actions and additional savings from a comprehensive program targeting sourcing, manufacturing, and SG&A. They are improving their forecasting and remain optimistic about their position when they exit fiscal year '24 due to their unmatched portfolio, expected growth in the North American market, and focus on margin expansion. In the second quarter, they had good operational performance with organic sales and adjusted EPS above expectations.

In the second quarter, sales of products, configured order offerings, software, and life cycle services were all in line with or exceeded expectations. Orders were converted at a higher rate than in the previous quarter and there is now enough safety stock to meet current and future demand. Sales were up sequentially, with North America showing the highest increase. Year-over-year, sales were down due to organic sales decline and acquisition growth. The Intelligent Devices segment saw a decline in organic sales, but the recent acquisition of Clearpath contributed positively. One notable win for Clearpath was with The Hershey Company. Software and control sales were down as expected, with difficult year-over-year comparisons.

Despite a temporary correction, the company is gaining Logix share and winning new business. They have recently launched organic products and formed partnerships with Microsoft and NVIDIA to utilize artificial intelligence in manufacturing processes. The Lifecycle Services segment saw strong growth in organic sales, driven by strong process end markets and high value services such as cybersecurity. The company is working to expand the segment's margin. Total ARR increased by 20% and Rockwell segment margin was 19%. Adjusted EPS was above expectations, even after adjusting for a bonus accrual reversal. The following slide will review key highlights of the Q2 industry segment performance.

Sales in the Discrete Industries segment of the company were down high teens compared to the previous year. This was mainly due to excess product inventory in the channel, particularly in automotive, e-commerce, and warehouse automation sales. The automotive industry was specifically impacted, with a 20% decline in sales. While there have been no project cancellations, there have been delays in EV investments. However, the company remains well-positioned with its strong installed base and expanded portfolio. Semiconductor sales also declined due to geopolitical pressures and oversupply of legacy chips. E-commerce and warehouse automation sales saw an improvement in sequential growth and the company has a strong pipeline in this area. Hybrid sales were down mid-teens, with food and beverage and home and personal care being the weakest industries. Food and beverage sales were particularly impacted by slower activity at packaging OEMs dealing with excess inventory.

The end user CapEx spend is showing signs of slowing down, particularly in the food and beverage industry where there are delays in projects in China. However, there are still wins in emerging markets and modernization projects. In the life sciences industry, there was a decline due to project delays in China, but there are still opportunities for growth in other regions. In the process industry, there was a high-single-digit growth, driven by oil and gas and mining projects, particularly in energy transition. Overall, the Americas had the strongest performance, while EMEA and Asia Pacific saw declines, mainly due to high inventory and weaker market conditions.

The author discusses the current state of orders for Rockwell, stating that they have not yet seen the expected increase due to excess inventory at distributors and machine builders. They have revised their full year 2024 financial results to track closer to the low end of their growth and EPS range. The company is still expected to see growth in orders in the third quarter and the full year, but at a slower pace than previously anticipated. They also mention their strong performance in North America and expect to see growth in customer mega projects. However, they have revised their full year orders to be down low-single-digits compared to the previous year. As a result, they have also revised their fiscal '24 sales guidance range, with organic sales projected to decline 7% at the midpoint. Acquisitions are still expected to contribute 1.5% of growth, and ARR is expected to grow about 15%.

In the second quarter, the company's segment margin is expected to decline by 20%, but still increase in the second half and specifically in fiscal Q4 due to higher volume and cost cutting measures. Adjusted EPS is expected to decrease by 13% at the midpoint. The company plans to increase share repurchases and expects a free cash flow conversion of 80%. The company is focused on reducing costs and reinvesting in future growth. The CFO is retiring and a search for a successor is underway. In the second quarter, reported sales were down 6.6%, with organic sales down 8.1% and acquisitions contributing 140 basis points to total growth.

In the second quarter, sales increased due to currency translation and price increases, but operating margin decreased. Adjusted EPS was higher than expected due to better conversion of incoming orders. The adjusted effective tax rate was lower, resulting in lower free cash flow. The company also repurchased shares and has remaining authorization. The three operating segments all had decreased margins compared to the previous year.

In the second quarter of fiscal year 2024, the company's lower margin was driven by lower sales volume, but partially offset by lower incentive compensation, positive price cost, and favorable mix due to higher software sales. The Lifecycle Services margin significantly increased compared to the previous year, driven by lower incentive compensation, higher sales, and higher margins in Sensia. The adjusted EPS for the quarter was down due to lower volume and unfavorable mix, but partially offset by positive price cost and lower incentive compensation. The company has lowered its guidance for fiscal year 2024, expecting a decline in reported and organic sales, but with acquisitions and currency contributing to growth. The adjusted EPS guidance has also been lowered.

The company has lowered their expectations for free cash flow conversion in fiscal year 2024 due to the delay in receiving annual incentive compensation. They also expect a decrease in inventory days and sequential order growth in Q3 and Q4. Q3 sales and segment margin will be lower than Q2, but Q4 is expected to be the highest revenue and margin quarter. Margins in Q3 are expected to be lower due to the non-repeat of a bonus accrual reversal and lower volume and mix. Spending levels have been adjusted for the fiscal year and are expected to be down compared to the previous year.

In the second half of fiscal year '24, the company plans to reduce spending by approximately $100 million through a combination of temporary and structural cost-cutting measures. This will protect margins in the current fiscal year and set the foundation for future profitability. The company also expects to incur $60 million in restructuring charges related to headcount reductions. They are focused on improving productivity and profitability, and have adjusted their guidance for fiscal year '24 to reflect these changes. The company plans to prioritize returning cash to shareholders through share repurchases rather than acquisitions. The Q&A session will now begin.

The speaker is responding to a question about the company's order trajectory and how they are managing excess inventory. They expect mid-single-digit growth in Q3 and high-teen growth in Q4, based on analysis of inventory levels in distribution and machine builders. They anticipate inventory to be largely cleared by the end of Q4, with China being an exception. They also mention direct feedback from distributors and discussions with large OEMs.

Rockwell's primary reason for reducing their guidance for the year is due to the evolving market conditions. However, they are still confident in achieving their long-term growth targets of 5-8% organic growth. They attribute this confidence to their strong portfolio and success in winning projects and gaining market share, particularly in the Logix Controllers product line. April orders are in line with their expectation of 5% sequential order growth.

The speaker discusses various areas of growth, including motor control centers and autonomous mobile robots, and expresses confidence in meeting long-term targets. They also provide more information about the third quarter, including a potential EPS of $2 and a mid-single-digit increase in order rates. The tax rate is expected to be lower in Q3 and higher in Q4 due to discrete items.

During the earnings call, Nigel Coe asked about the $100 million cost savings in the second half of the year and whether it included any bonus accrual reversals or investment spending pullback. CEO Blake Moret clarified that the savings were separate from any incentive compensation and included a 3% reduction in force, which is part of the larger structural cost savings plan that will be detailed in the next call. CFO Nick Gangestad added that the savings will also have a tail into fiscal year '25 and that while some of it is temporary, the majority is sustainable. Analyst Julian Mitchell asked for more clarification on the EPS walk and the three main cost buckets discussed during the call.

Incentive compensation, investment spend, and fixed cost reductions are expected to provide a $2 EPS tailwind in 2024, but the majority of these benefits will not reverse in 2025. The company is confident that their actions will create a $120 million tailwind benefit into next year. Despite potential headwinds from return incentive comp investment, the company expects to see overall growth in fiscal year '25 thanks to their comprehensive program and actions taken. The company is also closely monitoring their revenues and customer inventories.

The company has experienced a dip in sales in the third quarter, but they expect it to return to normal levels in the future. They have successfully reduced their backlog and are now operating at pre-pandemic levels. They are making choices to reduce investments in certain areas, particularly in sales and marketing and headquarter functions.

The company is focused on directing their spending towards the most profitable activities and integrating recent acquisitions with existing resources. They are also looking for opportunities for back office efficiencies and reducing costs of sales and manufacturing operations. In the future, they plan to focus on areas such as sourcing and manufacturing efficiencies. These actions will have a greater impact on the intelligent devices and software control segments. The company also provided a walk on orders and commented on margins for the third quarter.

Nick Gangestad, the CFO of 3M, discusses the company's expected margin progression for the fourth quarter and the factors contributing to it, including volume, cost savings, and a more favorable revenue mix. He also explains that R&D as a percentage of revenue will remain consistent at 6%. Steve Tusa from JPMorgan asks about the trend in R&D and the company's investment strategy in relation to their focus on intellectual property.

Blake Moret and Nick Gangestad address concerns about the company's long-term stability and assure investors that they are continuing to invest in new products and software while also looking for cost efficiencies. They also mention that their incentive compensation philosophy remains the same and that they are not sacrificing long-term value for short-term results. They also mention that sales will be a major factor in increasing EPS in the fourth quarter.

The company is projecting a third of their expected costs to impact Q3 and two-thirds to impact Q4. They anticipate a significant reduction in packaging machine builder inventory and a clearing of distributor inventory outside of China, which will contribute to a high-teens growth in orders in Q4. Additionally, there is expected to be a normal seasonal increase in shipments for engineered to order and life cycle services, as well as a growing impact of mega projects in the fourth quarter. This drumbeat of projects is expected to continue into next year.

During a Q&A session, Rockwell Automation CEO Blake Moret discusses the company's fourth quarter order level as a solid starting point for 2025. He also addresses the volatility of the past four years and the company's efforts to maintain an attractive cost base. Moret mentions that while there has been some pushback on electric vehicle projects, there have been no cancellations and the company is still winning business in this area. He also highlights the company's involvement in other mega projects such as semiconductor fabs, facilities management and control systems, and renewables.

The paragraph discusses a positive trend in the area of warehouse automation and production logistics, particularly with the use of mobile robots and fixed automation. The company has seen significant wins in this area and expects more mega projects to come in the future. The speaker also clarifies the expected cost savings for next year and the impact of incentive compensation on the company's expenses.

Blake Moret and Nick Gangestad discuss the impact of the consumer packaged goods industry on their company's revenue, noting that about 60% of their business in this sector is from OEMs. They also mention a $3.75 EPS impact and the potential for better incrementals as headwinds dissipate. They clarify that the Logix sector has seen the biggest correction with high incrementals and decrementals.

The speaker discusses the profitability of Logix and its growth through annual recurring revenue. They also mention high incrementals and decrementals, and then the conference call concludes.

This summary was generated with AI and may contain some inaccuracies.