ROCKWELL AUTOMATION, INC Q4 2025 earnings call

Thank you, Joanne. Good morning, and thank you for joining us for Rockwell Automation's fourth quarter fiscal 2025 earnings release conference call. With me today is Blake Moret, our Chairman and CEO, and Christian Rothe, 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. With that, I'll hand it over to Blake.

Thanks, Aijana, and good morning, everyone. I'll make a couple of initial comments before we turn to our fourth quarter results. When we introduced guidance for fiscal year 2025 last November, amid a mixed set of headwinds and tailwinds for growth, much of the discussion centered on additional detail around the cost reduction and margin expansion actions we initiated in 2024. With the top-line guidance range that included limited growth, we knew it would be a challenge to both absorb higher costs and expand margins. With the very busy 12 months of fiscal year 25 in the books, I'm proud of the team's execution as we have returned to top-line growth and continued to reduce costs. Rockwell is well positioned for sustained market-beating growth and profitability as we build on this success for fiscal 2026 and beyond.

We close the year with another strong quarter of outperformance versus our expectations, including double-digit year-over-year growth in both sales and operating earnings. Our differentiated portfolio, price discipline, and continued focus on productivity all contributed to this great finish to the year. Free cash flow was also very good in the quarter and for the year. As we will discuss, we're taking further steps to streamline the organization and increase efficiency in the service of customer value and expanded margins. Uncertainty remains, but it's clear that countries around the world are more aware than ever of the strategic importance of investing in advanced manufacturing capabilities and capacity. Nowhere is this more apparent than in the U.S., our home market. Let's now turn to our fourth quarter results on slide three. Both reported and organic Q4 sales were up double digits versus prior year.

While we did have favorable comps from a year-over-year standpoint, Q4 sales grew high single digits sequentially, which was better than we expected. Organic year-over-year sales growth of 13% was led by continued strength in our product businesses. Similar to the last two quarters, CapEx activity in longer cycle businesses remained muted, with customers holding off on larger investments. On our last earnings call, we flagged the potential for Q4 pull-ins into Q3. Based on our analysis of daily orders and sales trends, inventory levels in our channel, and machine builder surveys, pull-in orders were less than expected in Q3 and not evident in Q4. Annual recurring revenue was up 8% in the quarter. While some customers continued to delay discretionary services spending, we did have a number of large software and services wins around the world in Q4.

One notable win was with Stanley Electric, a Japanese tier-one automotive supplier who will deploy our cloud-native Plex platform across 25 global sites. We also secured a key cybersecurity win in life sciences, with GSK selecting our Verve platform as their new standard for asset vulnerability management to be deployed across 33 sites over the next five years. In our intelligent devices segment, organic sales were up 14% versus prior year and up low double digits sequentially. Strong sequential growth in the quarter was driven by our power control business, where a combination of our existing business and our CUBIC acquisition is helping us win competitive projects around the world. A good example of this was our win with Ferry Systems, a Spanish system integrator who will be providing our flexible and compact motor control system for Africa's largest desalination plant.

I'll share some additional power control wins later on the call. We also had a good quarter in our Clearpath business with double-digit year-over-year growth in our OTTO Autonomous Mobile Robot business. I'm pleased with how this acquisition continues to add new ways to win and expand our customer base. Our AMR business grew double digits in fiscal 2025, and we are optimistic about fiscal 2026 as we plan for Clearpath to turn profitable in the year. Software and control organic sales in the quarter grew 30% year-over-year, led by continued momentum in our Logix business, both versus prior year and sequentially. On the software front, Plex and FiiX continue to add new logos as we augment our existing sales force with new go-to-market partners. One of our Plex software wins in Q4 was with THG, a U.K.-based global e-commerce leader in beauty and nutrition.

This customer chose our cloud-native MES and quality management solution to eliminate manual processes and drive further operational efficiency. Organic sales and lifecycle services were down 4% versus prior year, slightly below our expectations. Book-to-bill in this segment was 0.9, consistent with our historical Q4 seasonality. We have continued to see project delays across both our core business and Sensia as customers wait for more clarity and stability around the impact of trade and policy on their operations. Regarding our Sensia joint venture with SLB, following a strategic review, both parent companies have decided to pursue an orderly dissolution. Rockwell will assume 100% ownership of the process automation business that we initially contributed to the joint venture. SLB will again fully own the parts that they contributed. After the expected close of the transaction in the first half of this year, fiscal 2026.

Rockwell will realize lower revenue but higher operating margin going forward due to the deconsolidation. Rockwell's resulting sales into the Oil and Gas vertical will be about 10%, with a simplified go-to-market motion. That go-to-market approach continues to include SLB as an important partner with deeper relationships than the two companies had six years ago. I want to be clear that Sensia did not meet our long-term expectations. That is why SLB and Rockwell have jointly agreed to make this change. However, the changes we are making demonstrate our continued commitment to the Oil and Gas market. We are well positioned to grow in this space. Our portfolio has expanded since the JV was launched, with new Process I/O and process safety capabilities for Logix, an industry-leading portfolio of cloud-native software applications, and deeper domain expertise.

Importantly, we have taken this step in order to grow in this vertical with improved profitability going forward. Christian will add more detail on the financial impact in the quarter and the benefits going forward later on the call. Turning back to our fourth quarter, Rockwell's overall segment margin of 22.5% and adjusted EPS of $3.34 were well above our expectations, driven by higher volume and strong productivity. We ended this fiscal year with over $325 million of structural productivity savings, exceeding our original target of $250 million. Similar to last quarter, tariffs did not have a meaningful impact on our results in Q4. Christian will talk more about tariffs and the expected fiscal 2026 impact in a few moments. Moving to slide four to review key highlights of our Q4 industry performance.

Sales in discrete were up 20% year-over-year, with strong growth in e-commerce and warehouse automation and good performance in automotive. Automotive sales exceeded our expectations in the quarter, with low double-digit growth versus prior year. The industry continues to shift from an EV focus to a mix of traditional ICE, hybrid, and electric vehicle offerings. Rockwell has good technical solutions and expertise for all of these types of vehicles. E-commerce and warehouse automation delivered another stand-out quarter, with sales growing over 70% year-over-year. This quarter, Rockwell secured a significant European win with another global logistics and parcel handling company. The customer selected our FactoryTalk Optix platform and digital services to digitize and expand operations across 28 sorting facilities. While our data center business is still relatively small, we continue to see strong double-digit growth with multiple wins across the globe.

This quarter, Rockwell won a project with Alternative Heat Limited to supply modular cooling panels for large data centers in Europe. The rise of AI data centers is driving demand for faster deployment, advanced cooling solutions, and secure industrial-grade control platforms. Our Logix control platform and modular power distribution technology are well positioned to meet these needs. We'll share more about our differentiation and growth in the data center space at our investor day later this month. Turning to our hybrid industries, we saw double-digit growth across food and beverage, home and personal care, and life sciences. In food and beverage, our customers are prioritizing productivity and operational efficiency in existing facilities. The industry is going through a period of consolidation, restructuring, and evolving consumer preferences.

While this dynamic might delay some of the larger CapEx investments near term, we continue to build a strong pipeline of new capacity projects, both globally and in the U.S. In the quarter, Electrolit Manufacturing selected Rockwell as a key automation and digital partner for their state-of-the-art beverage blending and bottling facility in Waco, Texas. This is Electrolit's first greenfield in the U.S. Sales growth in our life sciences vertical was also strong in Q4 and exceeded our expectations. We continue to see growth in our software and cybersecurity services across the product lifecycle. We're also seeing increased automation adoption in the medical device segment. One of the important wins here this quarter was with Haumiller, where our independent cart technology is helping accelerate and optimize production of a high-speed auto injector line for the obesity drug market. Moving to process.

Sales in this segment grew 10% with year-over-year growth across all industries. Similar to last quarter, process customers are focusing on driving efficiency and profitability in their existing facilities as they continue to grapple with weaker demand and low commodity prices. Rockwell's technology is well suited for both greenfield and brownfield investments, as demonstrated by several large wins in the quarter in energy, mining, and metals. A good example of this was our win with Vale Base Metals, where our arc-resistant power control systems are modernizing their Sudbury mill to significantly enhance safety and operational efficiency. This win positions Rockwell as a key automation partner in one of Canada's most critical mining operations. Turning to slide five in our Q4 organic regional sales, North America had a strong finish to the year and was once again our best-performing region in the quarter.

Thank you, Blake. Good morning, everyone. Before I get into our strong fourth quarter results, I want to spend a few minutes highlighting some of our one-time items unique to Q4 so you understand how they flow through the P&L and where adjustments were made. At a high level, all these changes are outlined on slide eight. For additional financial details, please also refer to slides 21 and 22. First, starting in Q4, we're introducing a new engineering and development expense line in our statement of operations.

This aligns with the SEC's expanded segment disclosure rules and enhances visibility into key metrics that inform management decisions, particularly total innovation spend. Engineering and development includes what you typically think of as R&D, which has been about 6% of sales historically, and our sustaining engineering spend, which maintains existing technology and has been about 2% of sales. Reclassifying these costs from cost of sales to operating expenses increases gross margin by about 8 percentage points, with no impact to the total P&L. This change is applied consistently across historical periods, as shown in the Q4 earnings slide deck appendix, page 21. Importantly, this move improves visibility into Rockwell Automation's total development spend, aligns our reporting with industrial and tech peers, and provides a more meaningful view of gross margin performance.

Second, we're making a change to how we treat certain costs related to our legacy asbestos exposure, which is unrelated to our ongoing operations. Historically, we expense the defense costs for these claims as they were incurred. In Q4, we changed our accounting policy to a full horizon accrual for defense costs, consistent with how we account for indemnity. All told, inclusive of the indemnity and the defense cost accrual update, the result was a one-time pre-tax charge of $136 million, or $0.91 per share, in the fourth quarter. This is the accrual portion of the changes. Because these costs are not tied to current operations, we are also updating our definition of adjusted income and adjusted EPS to exclude legacy asbestos and environmental charges. In Q4, this change excluded $141 million in pre-tax charges, or $0.94 per share, from adjusted earnings.

That includes the $136 million accrual, as well as $5 million of normal asbestos and environmental spend we incurred in the fourth quarter. The EPS impact is $0.91 from the accrual and $0.03 from the normal spend, both now excluded. For full year fiscal 2025, the definition change increased adjusted EPS by $1.03, with $0.91 from the Q4 accrual update and $0.12 from excluding legacy asbestos and environmental costs that we incurred for the full year. Without the definition change to adjusted EPS and excluding other one-time items in the quarter, Q4 adjusted earnings would have grown 34% compared to the 32% under the new definition. For the full year, EPS growth was unchanged under the new definition. When compared to our previous guide, the Q4 change, excluding one-times, was a net benefit of $0.03. For the full year, the net benefit was $0.12.

Moving to the third item on the slide, we recorded an impairment in our Sensia business following the decision to dissolve the JV, which Blake discussed. The net result is a non-cash impairment charge of $110 million, or $0.97 per share, net of tax and the NCI adjustment. For reference, the approximate annualized impact from the planned dissolution will be a $250 million revenue reduction and virtually no impact on operating earnings. The approximate margin benefit to Rockwell on an annualized basis will be an increase of about 50 basis points. Finally, in Q4, we made a voluntary $70 million contribution to our U.S. pension plan. As Blake mentioned earlier, we delivered 114% free cash flow conversion for the year, inclusive of that contribution.

Excluding the contribution, our conversion was 119%, with free cash flow reaching a record $1.4 billion and reflective of strong operational execution and solid performance across the P&L. All financials reported in our earnings release, conference call presentation, and in our 10-K, which will be filed next week, reflect these changes. Turning to our financial results, let's go on to slide nine, fourth quarter key financial information. Fourth quarter reported sales were up 14% versus prior year, exceeding our expectations and closing 2025 on a strong note. About one point of growth came from currency. About four points of our organic growth came from price, with about one point of that coming from tariff-based pricing. Price cost was favorable in the quarter. Company gross margins under our new reporting methodology expanded 290 basis points year-over-year, and segment operating margin increased 240 basis points.

While tariffs had a neutral impact on EPS, they did cause a slight margin dilution in the quarter. Adjusted EPS of $3.34 was above our expectations, primarily due to outperformance on revenue, better segment mix, and favorable price. The adjusted effective tax rate for the fourth quarter was about 18%, up from about 15% last year, driven by higher discrete benefits in the prior year. For the full year fiscal 2025, our adjusted ETR was 17%. Free cash flow in Q4 was $405 million and was $38 million higher than the prior year. Slide 10 provides the sales and margin performance overview of our three operating segments. Intelligent devices' margin of 19.8% decreased 90 basis points year-over-year due to a tough comparison with last year's Clearpath earnout reversal and higher compensation this year, resulting in the incrementals in the teens.

Excluding the earnout reversal, incrementals would have been about 30%. Software and control margin of 31.2% was up 880 basis points versus prior year, driven by outstanding 30% organic sales growth and good price realization. The segment saw year-over-year incrementals in the high 50s. Lifecycle services margin of 17.5% was up 30 basis points year-over-year. A mid-single digit organic sales decline and higher comp would normally have driven segment margin lower year-over-year. However, the team continued to deliver strong project execution and higher productivity. Overall, for Rockwell, the incremental margin on the year-over-year sales growth was about 40% in Q4. I want to take out a moment to point out the sequential movement we saw in each of our segments. Intelligent devices had sequential incrementals in the high 20s on low double-digit sales growth, reflecting seasonal shipments of configured order, which created a sequential negative mix.

Software and control sequential incrementals were in the low 20s, with modest sequential sales growth after a very strong Q3. Lifecycle services saw similar sequential dollar growth in both sales and segment earnings, yielding 100% conversion on strong project execution. Overall, for Rockwell, the incremental margin on the sequential sales growth was in the high 30s. Let's move to the next slide, 11, for the adjusted EPS walk from Q4 fiscal 2024 to Q4 fiscal 2025. Year-over-year, core performance had a $1.45 impact in Q4. Software and control was the primary driver of both sales and earnings growth in the quarter. The largest driver in our core was volume, followed by structural productivity and price. Compensation had a $0.45 impact in Q4, compared to our prior expectation of about $0.30 of impact, driven by our outperformance in the quarter.

Full-year compensation expense, which includes merit and bonus, ended the year at $255 million. As I mentioned earlier, we are lapping the prior-year benefit from a Clearpath earnout reversal this quarter. With some other one-time items, this resulted in a $0.15 headwind. Slide 12 provides full year 2025 key financial information. Reported and organic sales increased 1% to $8.3 billion, 200 basis points better than our original guidance midpoint for the year. Currency was neutral. Full-year segment margin of 20.4% increased 110 basis points from last year and was 140 basis points better than our original guide. The increase was due to our margin expansion and cost reduction actions, price, and favorable mix. This was partially offset by higher compensation and unfavorable net currency. Adjusted EPS of $10.53 was up 7% and well over $1 better than the midpoint of our initial guide for the year.

For the year, we deployed about $1 billion of capital towards dividends and share repurchases, while we continued to pause on our inorganic investments. Our capital structure and liquidity remained strong. Moving on to the next slide, 13, to discuss our guidance for the full year. Our organic sales growth guidance is 2%-6%, or 4% at the midpoint. We expect about 100 basis points of currency benefit, so our reported revenue growth is expected to be 5% at the midpoint. Our guidance does not include the anticipated impact from the Sensia dissolution. Once the JV is dissolved, we'll update our FY 2026 guide for the remainder of the year. As we mentioned, this will reduce reported revenue and increase margin percentage, but have no significant impact on EPS. Our segment operating margin guidance is 21.5%, more than 100 basis points higher than year-over-year.

Our adjusted EPS guidance is a range of $11.20-$12.20, or $11.70 at the midpoint. We expect a couple of points of price for fiscal 2026. 1% on underlying price and 1% from tariff price. From this growth, we expect our FY 2026 incremental margin to exceed 40%, inclusive of tariff-based pricing. Looking ahead to 2026 capital expenditures, we plan to increase investments in plant and digital infrastructure, with targeted CapEx spending of about 3% of sales. In terms of the calendarization, as Blake mentioned, we expect a sequential decline in Q1, followed by a gradual sequential improvement in subsequent quarters. This is true for both sales and margins as we progress through the year. Now, let me share some additional color on our first quarter.

Thanks, Christian. This year's Automation Fair and Investor Day at McCormick Place in Chicago is the best venue to see what's special about Rockwell. We're looking forward to showcasing the best solutions and partner network in the business.

Including software-defined automation and AI-enabled technology from sensor to software, integrated intelligent devices, robotics, and digital services. You will hear from customers about our differentiated value and from management as we review progress on our goals, details of our internal investments, and inorganic priorities. I'm looking forward to seeing you there. Aijana will now begin the Q&A session.