Rockwell Automation, Inc Q2 FY2021 Earnings Call

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. Later in the call, we will open up the lines for questions. At this time, I would like to turn the call over to Jessica Kourakos, Head of Investor Relations. Ms. Kourakos, please go ahead.

Thank you, Tanya. 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. 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. To get started, I need to remind you that our comments will include statements related to the expected future results of our company. 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.

Thanks, Jessica. Good morning everyone. Thank you for joining us on the call today. Slide three. Strong orders momentum we saw last quarter accelerated and broadened across verticals in fiscal Q2 surpassed $2 billion, which is a new record. 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. Total reported sales grew 6%, including a two-point contribution from recent acquisitions, including Awesome, Kalypso, and Fiix. Organic sales grew a little over 1% versus the prior year, despite significant supply chain constraints. Manufacturing supply chains continue to be stressed by sharply increased demand, along with various well-publicized disruptions around the world that have reduced output and narrowed freight lanes. We'll continue to navigate these challenges in the coming months, taking measures to continue increasing supply chain resiliency. I'll now comment on our topline 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, up double-digits. CPG companies continue to add packaging flexibility. Software & Control organic sales also grew 6%, led by strong demand across this segment. We saw growth in Logix control, visualization, hardware and software, network and security infrastructure across the balance of our FactoryTalk software portfolio. Net sales growth over 12% for the segment in the quarter. Orders for the Intelligent Devices and Software & Control business segments totaled 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 and gas. On a sequential basis, revenue and orders grew mid-single-digits; expect continued sequential sales improvement in this segment for the balance of the year. Information Solutions & Connected Services had another strong quarter. Organic sales and orders were double-digits contribution across a variety of end markets. This quarter's orders also included a number of meaningful software and infrastructure-as-a-service multi-year wins for some of the world's largest food and beverage manufacturers. This included Kraft Heinz, where we actively monitor our 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 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 a very good growth from discrete industry segment, high single-digit 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 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 e-commerce with sales growing over 70% versus the prior year. Once again, our differentiated offering, featuring our independent Cart Technology, is enabling e-commerce applications at a growing number of marquee accounts. This vertical has significant secular tailwinds 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 and 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 and 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 during the quarter, for Dawn AST pharmaceutical company, facing the challenge of exporting products that need to comply with FDA regulations. Dawn AST 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're raising our view on life sciences and expecting it to grow about 20% in fiscal 2021. Process markets were down approximately 10% and were weaker than expected, led by larger declines in oil and gas. Process verticals typically lag our discrete business by about half a year. That said, we saw sequential improvement in North America for oil and gas during Q2, with finding customers becoming more active. 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 and beverage, e-Commerce 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%, broad-based growth led by semiconductor, chemicals, and life sciences. Asia Pacific backlog reached another record high in the quarter. We expect strong sales growth in the region, both in the upcoming quarter and for the full year. In China, we saw over 30% organic growth, driven by strong growth in all three industry segments, including particular strength in EV and semiconductor in discrete, tire, life sciences, and food & beverage in hybrid, mining, and chemical in process. We expect growth in China will exceed the company average for the year as our longer cycle businesses kick in. Let's now turn to Slide 6 for highlights on the full year outlook. Orders momentum in the first half of the year is expected to drive strong sales growth in the balance of the year, especially as we enter a period of easier comparisons. Higher top-line guidance is driven by improvements during the quarter, our discrete and hybrid industry segments that more than offset incremental declines in process. Our new outlook for total reported sales is over 10% year-over-year growth at the midpoint, including 7% organic growth. Core automation is not the only driver of growth this year, as we also expect double-digit sales growth in Information Solutions & Connected Services. We're seeing good contribution from both organic and inorganic sources. We also expect double-digit ARR growth in fiscal 2021. We expect margins to stay relatively flat with last year, despite the reinstatement of our bonus and the incremental one-time investments we spoke about last quarter, that will largely impact the second half. Our new adjusted EPS target is $9.15 at the midpoint of the range, representing over 16% growth compared to the prior year. A more detailed view into our outlook by end market can be found on Slide 7. I won't go into the details on this slide, but as you can see, we continue to expect broad-based organic sales growth this year with Oil & Gas lagging. Our diversification across higher growth end markets is one aspect of the increasing business resilience that we talked about during the Investor Day in November. With that, let me now turn it over to Nick, who will elaborate on our second quarter performance and updated financial outlook for fiscal 2021.

Thank you, Blake, and good morning, everyone. Slide 8, second quarter reported sales were up 5.6% year-over-year. Organic sales were up 1.3%, slightly better than our expectations. Acquisitions contributed 1.9 points of growth, and currency translation increased sales by 2.4 points. Segment's operating margin was 22%, flat compared to Q2 of last year. This represents strong underlying improvement considering a $60 million headwind from the year-on-year change in the bonus. Corporate and other expenses of $30 million was $12 million higher than last year, primarily due to mark-to-market adjustments related to our deferred compensation plans. Adjusted effective tax rate for the second quarter was 16.7%, last year's rate benefited from several larger discrete items. Second quarter adjusted EPS was $2.41, well above our expectations. As of March 31, $674 million remains available for share repurchase authorization. Slide nine provides the sales and margin performance overview of our three operating segments. The Intelligent Devices segment had organic sales growth of 5.8% in the quarter. Segment margin was 23.8%, 80 basis points higher than last year, mainly due to higher sales and lower spending, partially offset by the reinstatement of incentive compensation. As Blake highlighted earlier, we once again had strong orders performance in the quarter, particularly in our products businesses. Intelligent Devices orders grew approximately 20%, both year-over-year and sequentially. Software & Control segment's organic sales grew 5.6% in the quarter, with acquisitions contributing four points to growth. Segment margin was 29% for the quarter. Margin benefits from higher sales were offset by the reinstatement of incentive compensation. Software and control orders also grew mid-teens, both year-over-year and sequentially. Organic sales of the LifeCycle Services segment declined 11% year-over-year as the recovery in this segment continues at a slower pace than our products businesses. Acquisitions contributed positively to this segment's performance. Operating margin for this segment declined 310 basis points to 9% versus 12.1% a year ago, primarily due to lower sales and the reinstatement of incentive compensation, partially offset by favorable mix and cost savings from actions taken in the prior year. The second quarter book-to-bill performance for the LifeCycle Services segment was 1.19. On the next slide 10, provides the adjusted EPS bridge from Q2. Starting on the left, we are seeing a positive impact of approximately 12 cents from the improvements in sales and profitability. Slide 11 shows our product order trends and our average daily order trends for our products. Order intake for product offerings grew year-on-year as well as sequentially and reached an all-time high. Particularly strong areas were in traditional products, utilization, and Logix. Orders for the lifecycle services segment also improved in the quarter, albeit at a slower pace than our product order growth. The overall strong order performance resulted in a record company backlog, growing over 30% year-over-year and double-digits sequentially. This takes us to slide 12 and our updated guidance. We are increasing our organic sales growth outlook by one point across the range. The new range is 5.5% to 8.5%, with a midpoint of 7%. We expect currency translation to now contribute about 2% to growth. We still expect acquisitions to contribute 1.5%. In total, the midpoint of our reported sales guidance range is 10.5% or about $7 billion. We've also updated the adjusted EPS guidance to a new range of $8.95 to $9.35. I'll review the bridge from the prior guidance midpoint to the new $9.15 midpoint on the next slide. Segment operating margin is expected to be approximately 19.5%. This is unchanged from prior guidance and primarily reflects strong Q2 margin performance and the higher sales guidance offset by higher supply chain costs, bonus expenses, and less favorable currency impacts. As a reminder, the second half includes higher spending as well as the incremental one-time software development and sustainability investments that we discussed on last quarter's call. The one-time investments will primarily affect the Software & Control segment. Our adjusted effective tax rate is still expected to be about 14%, the same as prior guidance. As previously mentioned, this includes a 300 basis point benefit related to discrete items, which we expect to realize late in the fiscal year. We continue to project free cash flow conversion to be approximately 100% of adjusted income. A few additional comments on fiscal 2021 guidance. Corporate and other expense is expected to be about $110 million. Total purchase accounting amortization expense for the full year is expected to be about $50 million. Net interest expense for fiscal 2021 is still expected to be between $90 million and $95 million, and finally, we're still assuming average diluted shares outstanding of about 117 million shares. This takes us to slide 13. This slide bridges the midpoint of our January adjusted EPS guidance range to the midpoint of our new guidance. Starting on the left, there's a higher contribution from core operating performance, primarily due to the higher organic sales guidance and favorable mix, partially offset by higher supply chain costs. Contribution from currency is now expected to be $0.10 lower compared to prior guidance. Next, given the increase in guidance, there's about a $0.15 impact from higher bonus expense, which brings the new midpoint of the guidance range to $9.15. Finally, a quick comment regarding the second half, we expect second half year-over-year organic sales growth of about 20%. With that, I'll hand it back to Blake for some additional comments.

Thanks, Nick. With a solid first half under our belt, we look at the remainder of fiscal 2021 with optimism. Strong order trends and record backlog underpin a robust top-line outlook. We have confidence in our team's ability to navigate the supply chain challenges. Looking to our future, we continue to invest in software capabilities, including development, sales resources, and infrastructure. These investments support strong growth in our software business and ARR for fiscal 2022 and beyond. Our momentum would not be possible without the tremendous efforts of our employees. I'd like to thank everyone at Rockwell, and particularly our integrated supply chain organization, which has done a great job managing pandemic challenges and now mitigating sourcing and logistics constraints. We're leveraging our own manufacturing expertise to help customers be more resilient, agile, and sustainable. Nobody is better positioned to help our customers deal with these increasingly complex manufacturing challenges and opportunities than Rockwell, and our ecosystem of best-in-class partners. With that, let me make some remarks about Steve Etzel, who is participating in his final earnings call. Steve stepped up during a critical period for us as we pivoted into the early stages of this recovery and accelerated our transformation. An experienced and dedicated leader for our fellow employees is exactly what we needed. Nick and I joined thousands of employees in wishing Steve and Michelle all the best in happy retirement and a little adventure time. I now pass the baton back to Jessica to begin the Q&A session.

Thanks, Blake. Before we start the Q&A, I just want to say that we would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up. And for those of you that had some trouble hearing us on the call, we'll make sure to have the prepared remarks available on our Investor Relations website immediately after the call. With that, let me pass it on to Tanya to start the Q&A.

Your first question is from Scott Davis with Melius.

Good morning, everybody.

Good morning.

Congrats on your retirement, Steve. It’s great to hear from you, Nick. I have to say, you sound more excited on this earnings call than I’ve heard in a while. Regarding the large new semi projects that have been announced, when do you expect to start submitting RFPs for those? Do you think that will be part of the business in 2022 or 2023? I assume none of this is included in the new projects or the increased forecast for 2021?

Scott, we are seeing some increased business in semi. I don't know that it's going into the US fabs that have been announced. But with some of these customers, we're already seeing some significant orders, which contributed to semi helping to power the growth in Asia. So it's not just the big fabs going into the US; it's activity in other parts of the world, and we're starting to see that now. As far as the US fabs go, I think you're right. I think that's more of a story for next year and beyond. But everybody in that industry is making investments, and we're working hard to maximize our share of wallet at each of those customers.

Good. And just a quick follow-up. Regarding the incentive compensation, is the run rate guidance for the second quarter what we should expect for each quarter this year?

So, Scott, the run rate that we've been at for the first half is what we should expect for the second half as well. It's a little higher in the actual run rate in the second quarter. Because there's a little bit of catch-up given our added performance, but the run rate we've had through the first half is exactly what we expect to have in the second half.

Okay. Thank you. Good luck, guys.

Thanks, Scott.

Your next question is from Andrew Obin with Bank of America.

Yes. Good morning. Just a question, sort of longer-term question. What kind of conversations are you having with your customers? We know that short-term things are getting better. You guys are excited about longer-term prospects for US CapEx. But are you starting to have these discussions with your customers about sort of longer-run CapEx growth in North America?

Andrew, I do believe that this is the beginning of a sustained period of expansion in the North American manufacturing economy. The breadth of the orders that we're seeing, the mix of supply for existing operations plus expansions and then the occasional greenfield gives us a lot of confidence that we are seeing a sustained period of growth. We're having those discussions across various industries. You look at EV; there's no chance of that slowing down. You look at semiconductor for the obvious reasons as they're increasing capacity, e-commerce with the secular tailwinds there; life sciences, food and beverage, and the return of oil and gas. All of those are areas that we have significant exposure to. And we expect that, that's going to sustain for a period of time.

And just a follow-up question. How do you adjust your own supply chain and manufacturing footprint to be able to service this, which seems to be a structural increase for a while?

Well, you look at increasing single points of failure in the supply chain, both on the part of our suppliers, as well as in our own internal operations. In some cases, that's done in supply. In other cases, it's redundant lines within our own operations. When it comes to areas where there's engineering required for specific projects, more work in terms of remote operations, to be able to go deeper in the commissioning process remotely, final acceptance testing, does it require the same degree of travel that it once did. And looking carefully at sizing our operations and inserting the agility, including our own automation to be able to maximize the number of different products that can come off a single line. So you look at the same kind of packaging flexibility that's driving the strong double-digit growth packaging to OEMs. We're incorporating a lot of those same concepts into our own operations, including our manufacturing just down the hall from where we are right now in Milwaukee.

Thank you.

Thanks, Andrew.

Your next question is from John Inch with Gordon Haskett.

Thank you. Good morning, everybody. I'd like to start on taxes. Rockwell carries, I think, the lowest tax rate in multi-industry or very close to that. If items drive to raise U.S. corporate taxes exceeds, are there tax levers Rockwell can pull to offset what would appear to be a possibly disproportionately negative impact for your company?

John, it's a bit early for us to determine the exact actions we will take. However, we are continuously exploring ways to optimize our supply chain and serve our customers, which also relates to our tax situation. Regarding other options, we're waiting to see how things develop. As we've mentioned in our 10-K, our current tax rate consists of various components, and an increase in the tax rate would certainly affect us, along with elements like FDII and GILTI. We're looking forward to getting more specifics to understand the overall impact on us and identify any additional opportunities we may have.

Well, Nick, based on your understanding of what's being proposed, because it's all there on the web, right? Rockwell's success in having lowered its tax rate, presumably through your international operations and the way you're structured. Is any of that prospectively more at risk versus simply you being in the same boat and your U.S. taxes will rise along with everyone else? I don't think anyone's that concerned if Rockwell's U.S. taxes go up the same as everybody else's, because it is what it is. It's more to the question of the opportunity to maintain a disproportionately lower tax rate based on your success of having achieved this. Are there provisions that you understand that could be sort of tackling those areas? And can you do something about that type of thing?

Yes. So, yes, you're exactly right, John. If there's an increase in the tax rate, that will impact us, as I presume it will impact others fairly proportionately. What we see in what's been written that has an impact on what we have as an advantage in relatively low GILTI rate and some benefits from FDII. We're still waiting for any kind of information of theirs replacing FDII, if there's any incentives that are going to be put in place to be encouraging U.S. based manufacturing, which Rockwell does have a significant base of U.S. manufacturing. And then in the end, John, just making a bit broader macro changes to U.S. tax policy that ultimately do encourage more U.S. based manufacturing, that's ultimately benefiting our underlying business as well, given our strong presence that we have in the U.S.

Yes. No, I agree with that. Just then lastly, Nick, in the short time you've been at Rockwell, I'm wondering if you could talk about best practices or accomplishments you'd like to say, bring over or see adopted based on your many years at 3M?

Hey, John, thanks for that question. So let me just describe it this way. What am I seeing as priorities? And then what I'm observing in the company? First, from a priority standpoint, a high degree of priority in my early days here on execution. There's a lot of moving parts in the world and in this company and making sure that our company delivers from an execution perspective, that's a high priority. And then Rockwell has some very sound strategies about how to continue to increase our importance to our customers as the world of automation changes and industrial automation changes. My focus is going to be on how we best realize those strategies and make those happen. Now, John, part of your question, just early observations, a great company. And one of the things I find very refreshing and positive, this is a company full of engineers. Engineers focused on productivity. And that kind of productivity enables opportunity for investment. So I find a very healthy balance here of what are we doing to drive productivity, but also how do we invest for future growth.

Got it. Thanks, Nick. Thanks, Blake.

Thanks, John.

Your next question is from Julian Mitchell with Barclays.

Just wanted to highlight maybe on the segment margin outlook. So it looks like in the second half, you're implying a segment margin down slightly year-on-year, despite the very high organic growth of 20%. So I understand what's going on with incentive comp, but maybe just on investment spend, remind us sort of the scale of that investment in the second half. If there's any specific weighting between the two quarters that are left? And whether there's any sort of carryover investment spend into next year as an increase?

Yes. When comparing the second half of 2020 to the second half of 2021, the year-over-year margins will be quite similar. The improvements in margins will come from growth, some price increases, and benefits from structural actions we've implemented over the past 18 months. However, the factors that will keep the margin roughly flat year-over-year include the impact of bonuses we've discussed, rising input costs, and investments. Regarding investment spending, I can provide some perspective. For the second quarter, our investment spending decreased a couple of percentage points compared to the same quarter last year. For the entire year, we anticipate a 2.5 percentage point increase over 2020. This increase comes from the investments we've previously mentioned, including one-time accelerated software development expenses that will occur evenly in the last two quarters of the year. We're also investing in growth platforms as part of our plan, which includes hiring and various projects. Additionally, we observed a $5 million to $10 million shift in spending from what we planned for the second quarter to the second half of the year, primarily due to some delays in hiring and projects. This shift doesn't alter our overall spending plan but does move some expenditures to the latter half of the year. We expect a noticeable increase in investments in the second half. As for next year, some of the investments will taper off. We've been cautious about these incremental investments, especially those we highlighted last quarter, which are temporary and will not extend into 2022. This is all factored into our second half EPS assumption, which remains unchanged from what we indicated a quarter ago.

Thank you, Nick. And maybe just a follow-up question around life cycle services trends. The sales were down, I think, low double-digit last quarter. But a book-to-bill of almost 1.2. So maybe characterize for us what kind of recovery slope we should see in Lifecycle Services from here?

Yes. Let me just make the general comment, and then Nick can add additional color. But LifeCycle Services' backlog is up year-over-year and sequentially. And so, we are expecting sequential improvements through Q3 and Q4.

Yes, and as Blake just said, we continue to expect it to get better. We do expect for the full year, it will not be growing as fast as our other two segments.

Great. Thanks very much and I wish Steve all the best. Thank you.

Thank you, Julian.

Your next question is from Jeff Sprague with Vertical Research.

Thank you. Good morning, everyone. Just maybe two for me. First on supply disruptions, and I'm sorry if I missed it, you were cutting out a lot at the beginning. But can you just elaborate a little bit on what you saw in the quarter? And we did pick up some things in our survey that suggested you were having some problems delivering PLCs and other things. Can you just give us a little bit of color on whether that's accurate, where you're at on kind of untangling that and was there any kind of discernible negative top line impact from supply disruptions either in the quarter or in your outlook for the back half?

Yes, Jeff, we factored supply chain constraints into our outlook. So there is an impact. And I think it's the things that you're hearing about throughout the industry that are affecting us like other manufacturers. So certainly, electronic components, including chips are in short supply, and we're seeing other mechanical products and materials, sized strengths with resins that are used in a variety of manufacturing processes based on some of the bad weather, a little shorter-term than some of these other issues. Freight lanes continue to be narrow. And so seeing constricted building to transport products would be another area. We've done a nice job of having the necessary labor in place, so we really kept to an absolute minimum in our manufacturing operations; we still hire more. We've added several hundred people last quarter. And so that part is shared. But we're going to continue to be very dynamic situation based on sharply increased demand as well as others. And we're working with customers to minimize the disruption.

Okay. And just on the investment spend, I understand there's some identifiable things you're doing that might be a little bit larger than the typical project. But it doesn't strike me that a 2.5% increase in investment spend for the year is unusual, but you're kind of suggesting it is as part of this margin construct. So perhaps, I have that wrong, but 2.5% growth in investment spend, I think, would be about $50 million, that kind of dovetails to the $0.35 you talked about in the back half on the software deals. Is there something else in that equation? Maybe you could just frame the kind of normal trajectory of investment spend?

Yes, Jeff. I think the part of that, that I just want to make sure is clear is that, that increase in investment spend is all second half. In fact, more than all in the second half because year-on-year the first half, it was down. So just as we look sequentially first half to second half, we're seeing that sequentially going up, brings the full year to that $50 million that you're talking about of the year-on-year change, but more than all of that change is coming in the second half.

Got it. Thank you. Understood.

Your next question is from Andy Kaplowitz with Citi.

Hey, good morning, guys.

Hi, Andy.

Hey, Andy.

Steve, congrats. Welcome, Nick. So you mentioned the big March order you had in your order trends, which makes two out of the last three quarters that you've called out larger orders. So given your focus, for instance, on independent cart, which does tend to attract large orders, an increased focus on e-commerce. At what point are these larger orders more the rule than the exception? And then could you talk about the cadence of your Q2 orders ex the large order? In March, did you see a continued pickup in orders throughout the quarter?

Andy, let me start by saying, I hope you're right, and I hope seeing these large orders across different industries and different offerings becomes the rule rather than the exception. We are happy to see it. The most recent one, as you said, was in e-commerce. We traditionally haven't called out in as much specificity the orders development from month-to-month or quarter-to-quarter. We thought, during the pandemic, it made sense to give you that additional visibility. And it does show the developing dynamic of having some of these large orders in industries and in some cases, non-traditional offerings, so it gives us more ways to win. And so we're looking at that. We have seen a little bit of an uptick in large orders in general that began in Q2, and we would expect that to continue as our life cycle services segment kicks in, and that is where a fairly good proportion, our bigger traditional projects are home-grown. So we do expect more of that to come. The majority of our business continues to be more run rate. We used to say $3 million to $5 million was a pretty big project for us. But now we're seeing an increasing frequency of bigger ones.

Blake, that's helpful. And then you hired several new leaders, including Nick, a few months ago. We know Scott and Brian have different roles, but both seem focused on improving and accelerating Rock software sales, annual recurring revenue. So maybe it's early days, but could you talk about the impact they're having so far on that side of the business? And we just focus on Software & Control. It obviously has easy comparisons in the second half of your fiscal year, but it's already growing 12% in Q2. So is the expectation at this point that this segment could be a double-digit grower through maybe '22?

I won't comment specifically on '22, but I really like the idea that our highest margin segment is also the fastest growing, so that's a nice place to be. I've been very happy with the new perspectives that our new executives have brought to the organization and the way that the organization has embraced them. That's not easy to do, to bring people in at a senior position into a well-established company with a long culture, a strong culture. But I've been very happy with the way that we brought in those new perspectives into the organization. Brian is focused on increasing the frequency and the impact of new product introductions, particularly around software. Scott's focused on doing the things to focus our sales force on delivering outcomes to customers and increasing our annual recurring revenue. Great experience that he brings and high credibility as he works with our sales force. And obviously, as Nick said earlier, the financial organization analyzes the execution of this strategy are all good things.

Hi. Good morning.

Hi, Steve. Good morning, Steve.

Thanks for all the details. The slide deck is very straightforward and a lot of very informative. So easy to digest. Thank you for that. Appreciate it. The $2 billion in orders, I think that's like the total absolute number for the quarter, correct? And I mean, that's a relatively big number. How do you see that kind of playing out over the course of the next couple of quarters, given it's such a solid book-to-bill, if you will?

Yes. Well, we wanted to call that out because this is really before Lifecycle Services is kicking in full. So we're expecting a nice run of that magnitude of orders for the company over the next few quarters, and this is primarily driven at this point with products. But again, as the project business ramps up, which is our expectation, that could deliver some continued nice results there.

Okay. Regarding the investment spending, going back to Jeff's question, it seems you're indicating that some of the increase in investments this year will decrease. Does that imply that the number will actually drop next year, or will it just grow at a slower rate from a higher base? Typically, you experience a headwind of around $45 million to $50 million, or even up to $80 million year-over-year, especially since 2010 when investments have been increasing faster than sales. Can you clarify this message and the outlook for next year?

Sure. Thanks, Steve. I believe it's a little early to get anything too declarative on 2022. However, just to clarify, this increase in investment spend is approximately $30 million of that we are saying is temporary. The rest of it is part of our normal increase in investment spend. And then the other way to think about it, Steve, is we also expect a 30% to 35% potential the core conversion. And that's the way we've operated, and that's the way we continue to expect to operate.

Right. And that 30% to 35% would be, again, like an all-in kind of number for the segments, including whatever happens with this investment bucket for next year? Correct?

That's correct. When we say that, 30% to 35%, that includes the investment spend. We, however, are holding ourselves to a higher bar and not giving ourselves that credit for that $30 million of incremental spend when we think about that core conversion next year.

Yes. Okay. That makes sense. I appreciate the color. Thanks.

Thanks, Steve.

Your next question is from Josh Pokrzywinski from Morgan Stanley.

Hi. Good morning, guys.

Hey, Josh.

So Blake, I just want to talk about software for a minute and maybe what you're seeing out there. Are you running into competitors when you win some of these orders? Is it more of a non-competitive process where you're just sort of attaching onto an installed base? And then maybe talk about what product lines you're seeing strength, and I think Honeywell talked about cybersecurity. I know you have an offering there as well. So maybe just sort of a landscape of what you're seeing in the software side?

Sure. So parts of the software business are still somewhat fragmented where you're largely competing against doing nothing on the part of our customer or a homegrown solution. And we still see a lot of that within, say, IoT applications. In MES, it's a little bit more, let's say, mature. And you are typically competing with a fairly well-known competitor, sometimes our traditional full-scope automation competitors, sometimes niche competitors. And that visualization, I would say, is similar to that, which is a big part of our software offering. Again, a little bit more stratified, but there's the new applications, IoT, analytics, and things like that. It's still a fairly diffuse, let's say, competitor landscape customers are looking for the outcomes. And you're also having to dovetail into an installed base. That's a big part of it, because a lot of your challenges come in the interfaces with existing installations, and that's why we've taken that open approach to expect that these customers already have software and hardware in place and don't want to rip it all out. With respect to cybersecurity, even apart from the hardware, we got a cybersecurity business that's over $100 million in terms of the services. It grew double digits, very strong. We're seeing good contribution from recent acquisitions of Avnet and Oilo, and that's an area that I'm particularly proud of, because it's an area that when we introduced it, it wasn't one that customers necessarily thought of Rockwell first for. But we're having a great impact on customers, and we're working with a whole new set of decision-makers, including the CIO and his or her team in some really big companies, so I'm very happy with the development of that part of our business.

Got it. That's helpful. And then just a follow-up question on orders. Maybe taking a step back, I get that that $2 billion of orders really only covers about two-thirds of the business. And some of that's longer cycle. But cyclically, seasonally, I don't know if you necessarily go backwards from here. Does that suggest that Rockwell is an $8 billion company over the next couple of years? Like why wouldn't the $2 billion get multiplied by something near four, and you have a bit of a fudge factor for Lifecycle Services, like what leaks out of that equation, because it seems like a pretty big number pretty early in the cycle?

Well, we're happy with it. That's why we've called it down. I want to make sure and you know this, Josh that the $2 billion is a company number. But we're notching that figure even before Lifecycle Services really kicks in like we expect to over the next couple of quarters. But yes, we're expecting that as we've created more ways to win, our strategy is to accelerate profitable growth. That's what we've been talking about in the last two years, doing it by growing as a higher multiple of industrial production in our core, continuing double digits in Information Solutions and Connected Services and making acquisitions that are going to, again, give us more ways to win.

Hey, perfect. Thanks for that.

Thanks, Josh.

Your next question is from Nigel Coe with Wolfe Research.

Thanks. Good morning. Nick is going to hear new voice, we couldn’t hear that well, and Steve congratulations on your retirement. I hate to go back over investor spend again, but I'm a little bit bamboozle about some of new pieces here. But when you talk about the increase in the full year, 2.5% mentioned, $50 million you okay with. Is that the second half increase, or is that $50 million for the full year and the second half is more than to that number? Just want to clarify that, please.

Yes, Nigel, happy to clarify that. We were down in investment spend in the first half of the year. We were down approximately between $40 million and $50 million. We now expect the full year to be up approximately $50 million or $55 million. That means the delta of $90 million to $100 million higher investment spend in the second half standalone.

Okay. That's clear. And then moving on to semi, I know it's a relatively small portion of your revenues. But, obviously, everyone very excited about the investment spend that we are seeing committed in the U.S. Can you just remind us where do you currently play? Where does Rockwell currently play in the fab? And what opportunities do you see to maybe increase the scope going forward?

Sure. Nigel, the primary applications are around facilities management. So it's making sure that the environment is clean and not the right temperature and the right humidity and so on. It's a fairly complex automation project, and that's our traditional area. Lately, we've had some success in increasing the scope even within that facilities management, including things like cybersecurity and other related services and networking. We see additional opportunity in the materials handling. And also, given that we are a good-sized user of electronic components and use circuit boards and so on. We've developed some artificial intelligence applications that have helped us be more productive, and we're working with some customers to acquaint them with our capabilities there as well. So, there's a lot of additional room for expansion from that base.

Thanks, Blake. It’s very helpful. Thanks.

Your final question is from Noah Kaye with Oppenheimer.

Good morning and thanks. You commented earlier about the process of continuing to increase your importance to the customers. And Blake, some of the supply issues you've cited on this call around freight, narrowing and trip shortage, and just materials availability in general. I mean, obviously a huge portion of your customer base is all going through that at the same time. And so I was curious if you can talk to us a little bit about how you're seeing the customers use some of your software offerings like FactoryTalk and others to deal with these supply chain issues and how that is advancing your dialogue with them and your opportunity set?

One of the ways, just for an example looking at our own MES software, when we added that into our operations over the last decade, there were a couple of ways that, that increased our efficiency. It decreased work in progress, and it also helped us with air-proofing, to be able to have a defined workflow, so as our customers are having to bring new talent on that may be new to these types of operations, that workforce development is a big deal. It sometimes sits right on the critical path of getting new capacity up and running. So whether it's the MES software that we've been offering, augmented reality offerings that we have with PTC. We've got some great solutions as well as the training that we provide to help with these new hires at our customers come online as fast as possible. I also believe that the flexibility we are adding in our own operations, and I mentioned earlier, in our own contractor facility here in Milwaukee, is giving us insight that we can impart to our customers to help them be more agile, to produce a wider variety of SKUs on a single line. I saw an application recently with a beverage company that's able to make a very wide range of packaging formats for beverages, using our independent cart technology. And it's a whole different game than it was 10 years ago in terms of different types of SKUs that these companies can create to maximize their shelf space and retail outlets.

Yes. And you mentioned, MES being able to reduce work in progress. But we're hearing about, for example, in auto suppliers trying to reach two and three layers deeper into their supply chain and trying to, through software, do better tracking, not walking away from just-in-time, but really trying to evolve and get a better visualization of the entire supply base. Is that something that Rockwell can play a role in and then how also?

Yes, absolutely. Being able to take those real-time production signals and to be able to look upstream into that supply base, and just as you said, going deeper and before, it's not a nice to have anymore, it's a requirement to be able to look at those suppliers and to be able to marry that with your real-time production requirements, particularly when you're looking at increasingly multiple potential sources of supply for those components or those materials that you need. So, we see a lot of activity going forward. And you talk to customers, nothing gets them more interested in when you talk about the role that we can play in a connected supply chain. There's huge amounts of additional productivity that we can help with there and our ecosystem, because that's an area that ecosystem is going to play a very large role.

Make sense. Thanks so much.

Yes. Thanks, Noah.

Operator, now I'll turn it back to Blake for a few final comments.

Thanks, Jessica. In summary, we're very pleased with our strong performance in the quarter. The recovery in manufacturing is accelerating at a much faster pace than we initially expected. Rockwell is extremely well positioned in this recovery, and we're especially excited about the new product introductions and services that we will bring to market over the next couple of years. It's an exciting time to be a part of the Rockwell journey. We thank you for your interest and ongoing support.

That concludes today's conference call. At this time, you may now disconnect.