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 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. So 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. So 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-leading growth and profitability as we build on this success for fiscal '26 and beyond. We closed 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 3. 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,…

Thank you, Blake, and good morning, everyone. Before I get into our strong fourth quarter results, I want to spend a few minutes highlighting some of our onetime 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 8. 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 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'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 expensed the defense cost 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 onetime pretax charge of $136 million or $0.91…

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, we'll 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 Scott Davis from Melius Research.

Lots of questions -- I'm sure you're going to get lots of questions on the guide, but I just would want to start with Sensia. And just what's the postmortem like -- it just doesn't feel like that ever really got traction the way you guys expected it to, even though I think there was a fair amount of support for it at the highest levels in both companies. But what was kind of the postmortem of why it didn't work out?

Yes. Scott, I think for starters, standing up a new entity a few months before COVID kind of descended on the world had a particular impact in energy markets for that period of time. So that created a challenging starting point. I think from an operation standpoint, the scope that Sensia had laid out was broad, which added costs. And while we worked it into a position of operational profitability, we jointly decided that it wasn't going to meet our long-term goals to justify the continued, let's say, complexity of a JV. And so returning the originally contributed businesses added simplification. And I would also say that we're different companies than we were in 2019. We've added considerable technology capabilities, both in terms of the control architecture as well as software and digital twins, simulation, which is useful in a lot of these applications. And so we felt it was the right time to simplify and obviously, the increased profitability reflected on the overall company as attractive as well.

So it just sounds like just since there's not a lot of earnings impact of the adjustment that it wasn't very profitable JV overall. But is the -- is getting Process up to Discrete margins something that is more a function of volumes? Or is there a cost or product issue or scale? I mean, just a little color there, and then I'll pass it on.

Yes, sure. So first of all, just due to the nature of process applications typically requiring more engineering content, order-specific engineering content, you have more people involved. And -- so that's going to put some suppression on margins as opposed to just providing raw product into an application. That being said, the work that Lifecycle Services has done over the last couple of years to really dramatically increase their margins reflects the proof that those margins can be improved even in a people-intensive business. And obviously, the further incorporation of artificial intelligence and the software-defined automation that we've been talking about helps as well as you make greater use of libraries and reduce the integration costs through digital twins. So I think the work that we're doing on the products, the work we're doing in Lifecycle Services specifically, the rigor with which they select projects to pursue, which was part of the reason for the good performance in Q4, all of those things that bode well for us to be able to continue to grow in process, specifically in energy and oil and gas more profitably going forward.

Our next question comes from Andrew Obin from Bank of America.

Impressive growth numbers in Software & Control. Could you give us a sense, and I know you don't give an exact number, but can you give us a sense where the Logix volumes are relative to where we were pre-COVID?

Sure. So Andrew, in the back half of the year, we touched pre-COVID unit volumes for Logix. For the full year fiscal '25, we were still below pre-COVID. And so there's room to run just with the math of that as obviously, the market is expanding. And then, of course, we benefited from good price over that period of time. So in fiscal '26, we do expect Logix unit volumes to get back to those pre-COVID levels and then obviously continue on from there with market growth as well as market share.

Excellent. And I may be wrong on the timing, but I believe in '26, you're going to start rolling out new Logix products. And I'm sure you will talk about it at the Analyst Day. But does that impact sort of margin patterns seasonality in the year? Because I think there is a big product upgrade ahead of you over the next couple of years.

Yes. Andrew, you're right. And actually, we've already started. So we released new Logix L9 processor ahead of schedule. We're already taking orders for it. It provides a higher performance than any other Logix processors that we've had. And that's just one example. Process I/O is off to a good start where we've released a new family of Process I/O. And then what we've been talking about a lot is software-defined automation, which includes Logix and software form, and you'll be able to see that in a couple of weeks when you're in Chicago. So a lot of vitality in that business with more to come. In terms of the impact, we don't typically see a big swell of orders when we release a new product. It's more of a contribution to the steady sequential growth of the product family. But I would tell you that orders are off to an impressive start for those new products.

Our next question comes from Andy Kaplowitz from Citigroup.

I think you said previously that book-to-bill is now running close to 1x. So I assume that was the case in Q4. And would you expect that to continue to be the case moving forward? And then I know today, you said bigger CapEx projects are still getting delayed. But are you any more confident that you'll see some of these larger orders move forward in '26 or can you sustain a book-to-bill around 1x without a big improvement in these projects?

Sure. So in general, the product business orders and shipments are really right on top of each other, and we continue to expect that. So the orders that distributors are saying are translating into orders on us at normal rates. Deliveries are fine. And -- so we don't expect that to change in the year. And we'll continue to provide the book-to-bill in Lifecycle Services where you do have some offset due to the longer lead times in projects in that business. In terms of CapEx in the year, it does continue -- we do continue to see projects being delayed. And as we've characterized it before, we see typically those projects that our customers subject to a higher level of approval, delegation of authority requirement in their organization. So there are projects coming through. We certainly talked about a few of those a few minutes ago. And we expect gradual sequential improvement through the year. The guide does not contemplate some big improvement in the capital environment. So that would be a factor that would push us more to the higher end of the guide if we did see a release of capital at a greater rate through the year.

That's helpful. And then just looking at your segment margin forecast, as you said, you're forecasting over 40% incremental margin, which could arguably described as --- '26 could arguably described as a more normal year for Rockwell where you're layering in restructuring savings as productivity. And I think incentive comp is more normalized as well versus FY '25. I think, Christian, you mentioned you're still absorbing some tariff headwinds. So does that mean that, that's the kind of incremental margin we can count on from Rock moving forward? Maybe just a little bit more on the puts and takes would be helpful.

Sure. Andy, Christian will have some more to say on this. But at a high level, while we are proud of good incremental conversion expected in the year due to all the factors that you said, including normalized run rate for compensation, continuing aggressive productivity and so on, we're not ready to change our guidance for incremental for a long-term framework.

Yes. And so just to build off of that, the long-term framework has us at a 35% incremental number. Again, that's kind of through the cycle, mid-cycle to mid-cycle. You're going to see some variability from quarter-to-quarter, obviously, and also from year-to-year periodically. So as we're looking at the momentum we're taking into fiscal '26, that 40% felt like an appropriate number. It's not a heroic change from the 35%, but we are seeing just a little bit better opportunity in this coming year.

Our next question comes from Julian Mitchell from Barclays.

I wanted to start on the top line guidance. So you're just finishing the year with very strong growth. You're guiding for sort of mid-single digits at the midpoint for the year ahead and starting off, I suppose, with high single digit year-on-year in the first quarter. So I just wanted to try and understand when we're thinking about that revenue guide for the balance of the year, was it sort of constructed with a view around sort of normal seasonality or just very tough comps in the second half? And anything happening to price year-on-year as we move through fiscal '26?

Yes. So a couple of comments. And again, I think Christian will have more detail. As we look across the end markets, in general, we're looking at mid-single-digit growth for Discrete and Hybrid, low single-digit growth for Process. We had some outliers there. Semiconductor flattish in Discrete, warehouse, e-commerce up around 10%. And then in Hybrid, good results expected from the part of the business, food and beverage, life sciences and so on. But CapEx continues to be suppressed in terms of spending. And so that influences the low single-digit expectation in process.

Yes. And so as we kind of shape that year out, Julian, you're right, we implied in that guide and the way we think about the first quarter and the way we shape the first quarter, yes, we're looking at high single digit growth year-over-year in the first quarter and then the comps get more difficult as the year goes on. We are looking for sequential revenue improvement from Q1 to Q2 and then on through the remainder of the year. But if you're looking at year-over-year [ growth rates ] during the course of the year, then yes, those are going to be at a declining level from a -- again, more due to the difficult comps.

And just on that pricing, I think it was 4 points in the fourth quarter. Does that sort of assume to be de minimis tailwind exiting this new fiscal year?

Yes. So the way we talked about pricing for fiscal '26 is that we're looking at 1 point of underlying price and 1 point of tariff-based price is what's included in our guide. As you're aware, price is not something that you can just universally make changes around their market dynamics or competitive dynamics. So part of what we're working on is a -- we want to make sure we have a balanced approach. Tariff-based pricing is, of course, absolutely critical for us to ensure that, that EPS neutrality is kept intact. At the same time, we also want to make sure we get underlying price. Tariffs have helped us on price realization broadly. You saw that kind of throughout fiscal '25, which is a great thing. As we turn the corner and we go into fiscal '26, again, we want that balanced approach and ensuring that we can get that tariff-based price is absolutely critical. When we think about the 1% underlying price, again, we feel really good about our ability to realize that hopefully, we can continue to try to execute at a higher clip.

And then just a quick follow-up on margins. So you had 110 bps of margin expansion. The year just finished off volumes that were down slightly in the year and a big comp headwind. The year ahead, volumes are up low single digit in the guide, no big comp headwind and the same margin expansion. Is your point there that you're just using that sort of placeholder for now of 40% that there isn't some big hike in the specific investment spend or something like that?

Yes. So there is no really big hike in investment spend, that's for sure. I don't know if I'd call it a placeholder necessarily. We had really good progress in fiscal '25 on cost reduction and margin expansion. Blake highlighted it. That $325 million is a very significant number for this organization. We have additional opportunities as we go into fiscal '26. We're going to talk about that a little bit more when we get into Investor Day as well. So there is a portion of that that's definitely built into our guide. At the same time, we want to make sure that we are continuing to have great profitability growth and that 40% number seems -- again, seems like something we can go execute against.

Our next question comes from Chris Snyder from Morgan Stanley.

It certainly seems like demand is getting better. If you look at the order rates in the above $2 billion the last 2, 3 quarters. Last year, they were below $2 billion. Do you think that this is cycle momentum? Do you think this is a reshoring tailwind investment coming through? Do you think you guys are just gaining share versus the market because when you look broadly at the industrial economy or even your competitors in Discrete, we're not really seeing this level of acceleration or momentum broadly.

Sure. Well, Chris, I think there's pieces of each of the factors that you mentioned. First of all, the U.S. is probably the healthiest market around the world, and that's a home field for us with high share. So we're going to get a lot of that benefit from investment. And we'll talk more about this in a couple of weeks at Investor Day, but we did see higher orders due to capacity expansion in the U.S. this year than last year, and we expect to see higher orders from that activity in fiscal year '26. The demand, particularly for the product side of the business, which is still more than half of our business is good. Optimization of brownfields, adding software into facilities that have a base level of automation and looking for more efficiency with information management software. We have a portfolio that's second to none. We do think that we're taking share there. So I think it's all those pieces that put us in a favorable position.

And then I wanted to follow up around the medium-term margin target, which you guys have out there of 23.5%. You just did a 22.5% and I know Q4 is the seasonal peak, but the quarter did have headwinds from FX and tariffs. I imagine there's more cost-out opportunity next year given that you guys exited pretty strong on that front. And then another 50 bps, I guess, of margin uplift from Sensia JV going away. It just feels like we're getting awfully close to that 23.5% target. I guess in that context, are you rethinking that? And do you think there's meaningful upside to that prior target?

Christian and I are both smiling because it is something that we're proud of is that progress. But we are laser-focused on attaining the current targets that we've set out there. As we've talked about, we've got plans already underway to get us to and through that number, but we're focused on hitting it first.

Yes. And it's absolutely -- we want to continue to make progress against that. And Blake's response in saying to and through that is top of mind for us. We are really spending a lot of time and energy to make sure that we have a lot of runway to continue to go through that as we move forward. At the same time, we're not ready to put a new target in place. Let's go achieve this one first.

Our next question comes from Steve Tusa from JPMorgan.

Congrats on the execution.

Thanks, Steve.

Just on inflation, what level of inflation did you guys see in the quarter?

Inflation was relatively modest. Keep in mind, we have a lot of cost reduction and margin expansion actions that are underway inside the organization. So it's a good countermeasure that we've been taking all year long. We expect that to continue to be an opportunity for us to work to offset inflation as we go into '26.

Okay. And then the 1% tariff that you got, you said that was offset in the quarter or that was -- or you were ahead of the tariffs in the quarter?

Yes. On the EPS line, it was neutral for us in the quarter. That is the tariff-based price that we achieved. And the tariff-based price that we achieved in the fourth quarter was simply to offset the tariff-based costs.

Okay. That makes sense. And going forward, for next year, do you still expect inflation to be kind of minimal and then maybe a little bit ahead on the tariff stuff?

Yes. So we do expect the inflation to be relatively minimal. We're not seeing anything out there that we're ready to call out. From the tariff-based price and cost perspective, again, our expectation is to keep that EPS neutral. It's a really important factor for us. That is we are not using tariffs as an opportunity for us to expand margins. We're not using tariffs as an opportunity for us to grab some profit. We truly are -- and importantly for our customers, we are using tariff-based pricing to simply to offset the costs that we're incurring.

Okay. One last quick one. Just you guys didn't mention orders this quarter. You said last quarter, it was -- the book-to-bill was around 1. I know there's some seasonality here. Where was the -- where did the book-to-bill land this quarter?

Yes, book-to-bill still within that range of around 1 that we have been talking about with product orders right on top of shipments.

Your next question comes from Nigel Coe from Wolfe Research.

Christian, I just want to have another crack at the incremental margin of 40%. I think comp came in at [ 2.60% ] this year. I think you've mentioned in the past that [ 2.25% ] is the right run rate. So just wondering if that's still the case. And there should be some wraparound on costs from 2025 into 2026. We sized that at $50 million, $75 million, somewhere like that. Again, is that the right math there?

Yes. So on the incremental side and specifically around compensation, the number of it that I gave in my prepared comments was $255 million. So you're right in that ballpark. The way to think about comp for us as we turn the page and look at '26 is that generally, things have normalized. So you shouldn't expect us to actually put to see comp as a specific bar chart in our waterfalls as we talked through it. It's going to be part of our core as is the productivity and the ongoing cost reduction and margin expansion. So that -- again, that part has generally normalized. We've got really good motions in place to continue to work on margin expansion broadly using all the levers inside the organization, whether you're talking about price, cost reduction and margin expansion, again, or just continued leverage on the business. So again, feel very comfortable around trying to drive towards that 40%.

And is the math on the cost wraparound in the right zone as well?

I think that that's correct, but...

I get it. I get it. And then, Blake, maybe on some of the -- 2 of the end markets. Auto growing low double digits and warehouse, e-com up 70%. Is the warehouse really being driven by -- you called out, I think, Clearpath up 25%. So just wondering if that's the big driver of warehouse and if that continues into 2026. And then on auto, we are seeing a lot of brownfield expansion plans in the U.S. So just wondering if in your '26 plan, whether you're expecting auto to be maintaining in the double-digit zone.

We're expecting auto to be mid-single digits in the -- well, in fiscal year '26. It stabilized in a lot of ways. We are seeing some projects. But as they're retooling to ICE and hybrid again, but we're not placing a lot of bets on CapEx all springing back there. With respect to e-commerce and warehouse automation, it is really a shared contribution across the company in both traditional sources of value like Logix and variable speed drives and motion control, along with some of the newer things that do include the OTTO AMRs as well as software throughout that. So it's an industry. And as we've talked about it, it's multifaceted. To be sure, there's some data center in there, but there's also parcel handling. There's CPG companies that have their own warehousing as well. And we have great readiness to serve in that area, which many of these customers have identified as kind of a hidden opportunity for major productivity in their operations.

Julianne, we'll take one more question.

Our last question will come from Jeff Sprague from Vertical Research.

Christian, I just want to come back to sort of understanding sort of the Sensia accounting and sort of like in my simple mind, right, I think if you and Schlumberger are picking up your ball and going home, there shouldn't be a charge, but I understand you build an organization, and therefore, you need to take a charge around dismantling it. But if you're dismantling overhead as you take it apart, why isn't there some earnings benefit going forward from the dissolution of those costs? Hopefully, that makes sense. That's what I'm a little confused by.

Yes, it makes -- it does make sense. So keep -- there's a couple of factors that go with this. Obviously, when we established the joint venture, we did have to put it onto our balance sheet that had a value to it. So when we took the decision to dissolve it, there was an impairment that occurred. So we had to recognize that, which was what we did in the fourth quarter. As we pull apart those pieces, there are parts that come back to Rockwell, there are parts that go to SLB, and there is a P&L that's attached to both of those as well as assets that go with them and employees and whatnot. And so there's a bunch of mathematics that go with it. There are some other transactional -- minor transactional costs that will occur as we get closer to the closing date. So generally, that's how it all pulls together. And when we think about what the future state is going to be, again, as Blake mentioned, we do expect it to be somewhat beneficial to our overall company margins as well as that for the Lifecycle Services business.

Understood. And then corporate looks low even kind of making the adjustment for the asbestos-related accounting. Is this where some of the overhead and restructuring and kind of cost actions that you've talked about are really bearing fruit? Or is there some kind of change in allocation between corp and the segments going on? And is that 100-ish a pretty good run rate going forward? Maybe it grows with inflation going forward, but is that a pretty good baseline?

Yes, [ the $100 million ] is a pretty good baseline. The delta -- you're right, there's a couple of deltas that are happening there. One is the removal of the asbestos and environmental. The other part is the driver of that next step of the reduction is related to the implementation costs on our cost reduction and margin expansion activities that we incurred in fiscal '25. A lot of that's built into our base right now, and it's being driven more within the various aspects in the segments. So that's where that's going, but it's also -- a lot of those costs, those execution costs are also going to be going away.

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

At this time, you may disconnect. Thank you.