Rockwell Automation Inc

NYSE:ROK

Earnings Call Transcript 2020-Q4

[Operator]

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. [Operator Instructions]

At this time, I would like to turn the call over to Jessica Kourakos, Head of Investor Relations. Ms. Kourakos, please go ahead.

[Jessica Kourakos, Head of Investor Relations]

Thanks, Amy. Good morning and thank you for joining us for Rockwell Automation’s fourth quarter fiscal 2020 earnings release conference call. With me today is Blake Moret, our Chairman and CEO; Patrick Goris, our CFO; and Steve Etzel, our CFO elect.

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 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. In addition, we’ve filed an 8-K and have posted supplemental information on our website related to our new business segments and adjusted earnings definition. 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 the call over to Blake.

[Blake Moret, Chairman and Chief Executive Officer]

Thanks, Jessica, and good morning, everyone. Thank you for joining us on the call today. Before we begin discussing our results and outlook, I’d like to make a few opening remarks.

I first want to address Patrick’s recent announcement that he will be leaving Rockwell to start a new chapter in his career. In his 14 years with us, the company has continued its long legacy of financial discipline and delivering superior shareowner returns, and we wish him well in his next pursuit.

Many of you know Steve Etzel, who will be stepping in as CFO on an interim basis. Steve has been with us for over 30 years and over these years has run investor relations, treasury, and corporate FP&A. The Board and I have full confidence he will reinforce our strong financial framework and continued commitment to superior shareowner returns. Patrick and Steve are ensuring a very smooth transition, while we consider internal and external candidates for a permanent successor.

I also want to send my deepest thanks to the thousands of employees who have been working under very difficult conditions, including the temporary pay cuts we implemented in May, to help us preserve jobs and to serve our customers during the pandemic. These cost actions enabled us to protect our company’s financial strength and allowed us to continue making important targeted investments to drive our future growth.

Now, with business conditions gradually improving, we will reverse the temporary pay reductions by the end of November, one month earlier than expected. In addition, our guidance for next year assumes a return to a fully funded bonus plan. Because of our employees’ hard work and dedication, we have never been so well positioned for what lies ahead. This is another testament to the type of culture we have at Rockwell and I couldn’t be prouder.

Turning now to our Q4 results on Slide 3. While business conditions remain difficult relative to a year ago, we are pleased with the steady improvement we’re seeing. In Q4, total reported sales declined by 9% versus the prior year. Organic sales were down about 12% versus prior year, but grew 10% sequentially.

Product sales outperformed our expectations and were driven by better-than-expected results in Drives and Motion. Motion performance was led by our Independent Cart Technology, where we received the largest single order in Rockwell Automation’s history. We won this multi-year project from the U.S. Navy based on a need for precise, highly responsive motion control not available with traditional systems, and on Rockwell’s long track record as a dependable U.S. supplier. Independent Cart provides a new way for us to add value and drive growth. You’ll be hearing more about it, and other innovative technologies, at our upcoming Investor Day on November 17.

Turning to Information Solutions and Connected Services. Organic sales were up low-single digits versus prior year. IS/CS orders grew double digits over the prior year in both software and connected services. IS/CS sales reached approximately $400 million in fiscal 2020 on an organic basis and were well in excess of that when including all of our recent inorganic investments.

Demand for software sold as a result of our PTC partnership is also increasing rapidly as we enter the new fiscal year, and we’re very happy with the recent extension and expansion of this relationship. Together with PTC, we added over 200 new customer logos in fiscal 2020, and deal sizes in our Information Solutions software business continue to grow. The synergies of our combined offering are very evident to customers.

In Connected Services, our recent Kalypso acquisition is doing particularly well and is helping us further differentiate. Kalypso is already contributing to some large competitive wins, and they just had the best orders quarter in their history.

Total sales include a three point positive contribution from inorganic investments, led by our Sensia joint venture, along with the Kalypso and ASEM acquisitions. Total backlog in the quarter grew double digits versus the prior year and grew high-single digits on an organic basis. Our Q4 Solutions and Services book-to-bill was 0.87 and full-year book-to-bill was over 1. This Solutions and Services book-to-bill does not include the large Independent Cart order we received from the U.S. Navy.

Turning to profitability, strong segment operating margin performance of over 20% in the quarter was flat with last year on lower sales, underscoring our increasing business resilience. Free cash flow was also very strong, reinforcing our solid balance sheet and liquidity position.

Let’s now turn to Slide 4, where I will provide a few highlights of our Q4 organic end-market performance. Our discrete market segment declined approximately 10%, with automotive performing better than we expected, driven by stronger MRO and projects sales. Among the more notable projects in the quarter was a significant OT cybersecurity win in Europe with one of the major German car companies. And in electric vehicles, we saw momentum continue in the industry with battery manufacturers and brand owners. We are excited by recent announcements from both new and established automakers as they focus on production of compelling new EV offerings.

In semiconductor, we had another very strong quarter and grew high-single digits versus the prior year. This vertical is benefiting from a variety of secular tailwinds such as the rise of smart devices and the resulting internet of things, along with the need for faster data centers and the adoption of 5G wireless technology. In addition to facilities management, which has been a strong foundation for us, we see an opportunity for our material handling technology as well as our software.

In e-commerce, we had a significant expansion win at Cloostermans, one of the largest and most important suppliers to the global ecommerce industry. This is another industry with long-term secular tailwinds that will continue to invest in automation and industrial software to support its tremendous future growth.

Turning now to our hybrid market segment. This segment declined a little less than 5% and outperformed the discrete and process industry segments. Food and beverage and life sciences each declined low-single digits for both the quarter and for the year. Packaging OEMs had another strong quarter and delivered double-digit growth versus the prior year. We believe these markets will outperform in fiscal 2021. Eco-industrial outperformed other industries in the quarter, driven by growth in water, where we continue to benefit from a differentiated offering that integrates control, power, and industrial software.

Tire and rubber was down double digits but performed in line with our expectations. In the quarter, we had key wins at important strategic accounts, including Cooper Tire, which continues to strengthen its global track and trace capabilities to support the company’s long-term growth plans. They chose FactoryTalk software because of our strong MES and analytics capabilities, and our differentiated ability to connect to both Rockwell and non-Rockwell control platforms. Once again, our strong software portfolio, our ecosystem of best-of-breed partners, and our expertise in connecting diverse manufacturing environments were all important reasons Rockwell won this very competitive project with Cooper Tire.

Process markets were down approximately 20%. Oil and gas was a little weaker than we expected, but that was partially offset by better-than-expected performance in most other process markets like mining and pulp and paper. Sensia held up fairly well during the quarter and continues to demonstrate their competitive differentiation.

Turning now to Slide 5 and our organic regional sales performance in the quarter. North America organic sales declined by 12% versus the prior year. Business conditions improved through the quarter, particularly in products, where orders significantly exceeded our expectations. While our large Independent Cart win was part of that result, we also saw great software orders within Information Solutions that more than doubled versus the prior year, creating strong momentum entering the new fiscal year.

In EMEA, sales declined 12% largely due to CapEx delays. These were partially offset by strong growth in water. We also saw growth in life sciences and PPE-related machine builder business. Sales in the Asia Pacific region declined 9% largely due to declines in end user business within automotive and mass transit. Double-digit growth in mining and life sciences partially offset those declines. China sales declined, but orders grew mid-single digits year-over-year in the quarter. Latin America declines were led by mining and oil and gas.

Let’s now turn to Slide 6 to review highlights for the full year. It’s an understatement to say that fiscal 2020 turned out very different than the plans we discussed together at a great Investor Day during an incredible Automation Fair in Chicago last November. The shadow of the pandemic soon created unique challenges, but I’m proud of our ability to respond while taking big steps forward in the execution of our strategic vision.

We kept the safety of our employees at the top of our list and continued to provide dedicated service to our customers, many of whom are producing the food, water, protective gear, and medicine that keep us going. The pandemic has focused us all on what’s truly important. We took thoughtful actions to manage costs through this pandemic while at the same time protect strategic investments, including some very big internal development projects. And you can see those investments drive the performance of our software business, which reached over $500 million in revenue in fiscal 2020 and was one of the best performing areas of our business in both orders and sales this year.

We deployed over $500 million for inorganic investments that contributed almost four points to our top line growth; and we deployed over $700 million in cash toward dividends and repurchases enabled by our strong free cash flow. I am tremendously proud of what we’ve accomplished in fiscal 2020, and I’m excited about the resulting momentum as we enter fiscal 2021.

Turning now to our outlook on Slide 7. As I said earlier, we saw strong sequential momentum exiting the year. Industrial production is projected to grow in the second half of our fiscal year. So it may take a couple of quarters for us to climb back to year-over-year sales growth from the Q3 trough in fiscal 2020. We expect double-digit year-over-year growth during our third and fourth quarters. Of course, we are all closely monitoring global infection levels related to this pandemic, but we are not assuming a widespread shutdown of customer manufacturing operations. We expect reported sales to grow about 7.5% at the midpoint of the guidance range, including 5% of organic growth and over a point of growth from our fiscal 2020 and fiscal 2021 acquisitions to date.

In addition, we are adopting annual recurring revenue as an important metric for the company and have added ARR as a performance metric in our incentive compensation framework beginning this year. ARR is expected to grow double digits in fiscal 2021, after showing over 6% growth in fiscal 2020. This is further evidence of our ability to build an even more resilient business model. Adjusted EPS is expected to reach $8.65 at the midpoint, which is up 10% from last year’s fiscal 2020 results. We are targeting free cash flow conversion of 100%.

A more detailed view into our outlook by end market is found on Slide 8. I won’t go into the details on this slide, but as you can see, we expect positive organic sales growth in all of our key end markets next year with the exception of oil and gas.

With that, let me now turn it over to Patrick who will elaborate on our fourth quarter and fiscal year 2020 financial performance. We’ll then have Steve discuss our fiscal 2021 outlook in his remarks. Patrick?

[Patrick Goris, Chief Financial Officer]

Thank you, Blake, and good morning everyone. I’ll start on Slide 9, Fourth Quarter Key Financial Information. Sales, segment margin, Adjusted EPS and free cash flow were all better than expected in the fourth quarter, mainly as a result of better organic sales growth and productivity. Organic sales improved as the quarter progressed and were up 10% sequentially versus Q3. Compared to last year, Q4 organic sales were down 12% and acquisitions contributed just over 3% to total growth.

Currency translation was a smaller headwind than expected and decreased sales by 0.3 points. Overall company backlog increased year-over-year in the quarter. Backlog for our short-cycle products was up double digits from a year-over-year and sequential perspective, even excluding the very large Independent Cart order Blake referred to earlier. Segment operating margin was 20.2%, the same as last year. The negative impact of lower sales was partially offset by a combination of temporary and structural cost actions. Fourth quarter results included about $10 million of restructuring charges which are expected to yield over $15 million in additional annualized structural cost savings, most of these savings will be realized in fiscal 2021.

General corporate net expense was $22 million, pretty much in line with what we expected. As I mentioned earlier, adjusted EPS of $1.87 was better than expected, mainly as a result of better organic sales, productivity, and a slightly lower tax rate. I’ll cover a year-over-year adjusted EPS bridge on a later slide. The adjusted effective tax rate for the fourth quarter was 15%, a bit lower than we expected, due to a slightly different geographic mix of our pre-tax income. Free cash flow performance remained strong. We generated over $300 million of free cash flow in the quarter, well over 100% conversion on adjusted income. Note that this result includes a voluntary $50 million pre-tax contribution made to the U.S. pension plan. This voluntary pension contribution was not reflected in our prior guidance.

Slide 10 provides the sales and margin performance overview of our operating segments. Organic sales of both segments improved significantly compared to last quarter. Both segments were up about 10% on an organic basis compared to Q3, though organic sales remained lower compared to last year. Segment margin of both segments increased over 300 basis points compared to Q3, mainly due to higher organic sales, but also as a result of cost control including a full quarter benefit of our cost reduction actions and generally improving operating efficiencies.

Compared to last year, Architecture & Software margins were up 100 basis points, despite the impact of lower sales, mainly as a result of our cost actions, including lower incentive compensation. Segment margins for the Control Products & Solutions segment declined 60 basis points compared to last year, with cost actions offsetting most of the impact of lower organic sales. The next Slide 11, provides the adjusted EPS walk from Q4 fiscal 2019 to Q4 fiscal 2020. As you can see, core performance was down about $0.15 on a 12% organic sales decline. This implies core earnings conversion, that is, excluding the effects of acquisitions and currency of a little below 20%, which is a bit better than the outlook I shared with you in July. A positive adjusted EPS contribution from acquisitions is offset by unfavorable currency impacts.

Slide 12 provides key financial information for full year fiscal 2020. After a good start to the fiscal year, we experienced significant year-over-year sales declines in the second half as a result of the COVID-19 pandemic. Organic sales declined 8% for the fiscal year. Our cost reduction actions protected key investments and helped to partially mitigate the impact of lower sales. We selectively increased investments in some of our highest priority areas.

R&D expense was about flat compared to fiscal 2019, and R&D as a percent of sales increased further to 5.9% of sales in fiscal 2020. Full year segment margin remained at about 20% compared to record 22% segment margins last year, and Adjusted EPS was down 11%. Free cash flow performance remained strong, and excluding the $50 million voluntary pension contribution in fiscal 2020, was flat compared to last year. Free cash flow conversion was over 110% of adjusted income. And finally, return on invested capital remained well above our target of over 20%.

Before I turn it over to Steve, I want to mention that we deployed about $1.3 billion of capital towards acquisitions, dividends, and share repurchases in fiscal 2020. Our capital structure and liquidity remain very strong. At September 30, our fiscal year end, cash on the balance sheet was over $700 million, and our total debt was about $2 billion. During the fourth quarter, we paid off the $400 million term loan that we executed earlier in the year, and our net debt-to-EBITDA ratio at September 30 was 1.0. With that, Steve.

[Steve Etzel, Chief Financial Officer elect]

Thank you, Patrick. Moving to Slide 13 product order trends, this slide shows our daily order trends for our products, which account for about two-thirds of our overall sales and represent our shorter-cycle businesses. As we expected, order intake for products continued to improve during the quarter. Our guidance for fiscal 2021 assumes this trend will continue. Daily product order performance through October continued to improve on a year-over-year basis, down low-single digits. Solutions orders are recovering slower than product orders.

Let’s move on to the next Slide 14, guidance for fiscal 2021. As Blake mentioned, we are expecting sales of about $6.8 billion in fiscal 2021, up about 7.5% at the midpoint of the range. We expect organic sales growth to be in the range of 3.5% to 6.5% and about 5% at the mid-point of our range. From a calendarization viewpoint, we expect first half organic sales to be down compared to fiscal 2020, followed by a stronger second half with organic sales up mid-to-high teens. As a reminder, first half fiscal 2020 organic sales were about flat, followed by double-digit declines in the second half.

We therefore expect easier comps starting in Q3 of fiscal 2021. We expect segment operating margin to be between 20% and 20.5% probably at the higher end of that range. At the midpoint, our guidance assumes full year core earnings conversion, which excludes the impacts of currency and acquisitions of between 30% and 35%. As we mentioned last quarter, we expect to offset a $150 million year-over-year headwind related to fully funding our incentive compensation and reversing fiscal 2020 temporary cost reduction actions with additional productivity. We expect the full-year adjusted effective tax rate will be about 14%. This includes a 300-basis point benefit related to discrete items which we expect to realize late in the fiscal year.

Our underlying adjusted effective tax rate is expected to be 17% to 18%. As disclosed in our earnings release, we are modifying our definition of adjusted EPS beginning in fiscal 2021. Under the new definition, we are now also excluding purchase accounting depreciation and amortization expense from adjusted EPS. This has the effect of increasing adjusted EPS by approximately $0.20 on a full year basis. Please note that we filed an 8-K this morning that provides historical information reflecting the new definition of adjusted EPS, as well as recast historical information for our new operating segments that we announced previously.

Our adjusted EPS guidance range on the new basis is $8.45 to $8.85. This compares to fiscal 2020 adjusted EPS of $7.87 on the new basis. On an apples-to-apples basis, at the midpoint of the range, this represents 10% adjusted EPS growth on about 5% higher organic sales. We expect adjusted EPS to improve throughout the year and anticipate first quarter fiscal 2021 adjusted EPS to be lower than our fiscal 2020 fourth quarter performance, primarily as a result of a $0.30 sequential headwind related to increased incentive compensation expense and the reversal of our temporary cost actions as of the end of November.

Finally, we expect full-year 2021 free cash flow conversion of about 100% of adjusted income. This assumes $150 million of capital expenditures and a $50 million voluntary pre-tax U.S. pension contribution. A few additional comments on fiscal 2021 guidance, corporate and other expense, which we previously referred to as general corporate net expense, is expected to be around $105 million. Net interest expense for fiscal 2021 is expected to be between $90 million and $95 million, a little lower than fiscal 2020.

Finally, we’re assuming average diluted shares outstanding of about 117 million shares. The next Slide 15 provides the adjusted EPS walk from fiscal 2020 to the fiscal 2021 guidance midpoint. Moving from left to right, fiscal 2020 adjusted EPS was $7.68 on the old definition. Next you see the $0.19 impact of the new definition of adjusted EPS. So, fiscal 2020 adjusted EPS on the new basis was $7.87. Core performance is expected to contribute about $1.90. This includes the benefit of higher organic sales, as well as the benefit of our cost reduction actions.

Reinstatement of the bonus and reversal of the temporary cost actions, together, will be a headwind of about $1.15. As mentioned in last quarter, we expect these headwinds to be offset by productivity, which is in core. Currency forecasts project a weaker U.S. dollar compared to fiscal 2020, which should contribute about $0.10 to EPS. The higher tax rate is expected to be about a $0.15 headwind. Acquisitions made during fiscal 2020, and so far this year, are expected to add about $0.10. Note that Sensia is now in core, as October 1 was the one-year anniversary of the formation of the joint venture. As mentioned, at the midpoint of our guidance range, adjusted EPS is $8.65.

Moving on to the next Slide 16, I’ll make a few comments on our capital deployment framework. You may recognize this slide from our last Investor Day. Our capital deployment priorities remain the same. Our first priority is organic growth. After that, we focus capital deployment on inorganic activities. Then we focus on capital returns to shareowners, through our dividend and then repurchases.

Our capital deployment plans for fiscal 2021 include dividends of about $500 million. As a reminder, we announced a 5% dividend increase last week. Consistent with our past track record, we expect our remaining capital deployment to include a balance of inorganic investments and share repurchases. We resumed share repurchases on October 1, the beginning of our fiscal year.

In summary, our guidance assumes a continued sequential improvement in organic sales performance. Cost actions are expected to offset the significant headwind of reinstating incentive compensation and reversing temporary cost actions and we expect about 10% adjusted EPS growth and continued strong free cash flow conversion. Turning to Slide, 17, I’ll finish with a comment about our new segment structure which is effective for fiscal 2021.

As a reminder, our first quarter fiscal 2021 results will be reported in the new, three-segment format as shown here. With that, I’ll turn it back over to Blake for some closing remarks before we start Q&A.

[Blake Moret, Chairman and Chief Executive Officer]

Thanks, Steve. We continue to see our customers take steps to increase their resilience, agility, and sustainability. Resilience includes investments to reduce single points of failure, with a growing list of companies announcing plans to build or expand North American operations. Our strong market share in the U.S., Mexico, and Canada make us a natural beneficiary of these plans. Other measures to increase resilience include increased automation, traceability, and remote monitoring, which are all Rockwell strengths. We’re making investments in our own operations, which we’ll showcase during next week’s Investor Day. Our contribution to operations agility is demonstrated by our great results in consumer and life sciences packaging equipment and the growth of our software to manage the increasingly dynamic SKU’s offered by our customers.

The pandemic has prompted new food and beverage packaging formats, along with quantities of testing kits, therapeutic drugs, and hopefully very soon, doses of vaccines. Quite simply, these cannot be manufactured at the necessary scale, safety, and quality without automation. We’re proud of the role our innovation is playing at Pfizer, Roche, and many other companies as we help the world recover. The need to increase the sustainability of industrial processes is only increasing.

Clean drinking water is one of the reasons our Eco Industrial focus is so important for the future, along with electric vehicles and the everyday ways our products reduce energy consumption in every industry. This expanded value gives us optimism for the coming years. In fiscal 2021 we are guiding to high single-digit reported growth, paced by our highest-margin segment. This results in guidance that also includes double-digit EPS growth. I’m looking forward to telling you more about our plans next week, with the help of great customers, partners, and a very talented Rockwell leadership team.

With that, let me pass the baton back to Jessica to begin the Q&A session.

[Jessica Kourakos, Head of Investor Relations]

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. Thank you. Amy. Let’s take our first question.

[Operator]

Your first question comes from the line of Scott Davis with Melius Research. Scott, your line is open.

[Scott Davis, Melius Research]

Hey, good morning guys.

[Blake Moret, Chairman and Chief Executive Officer]

Good morning.

[Scott Davis, Melius Research]

And congrats, Patrick. Good luck. You’ll be missed, I’m sure.

[Patrick Goris, Chief Financial Officer]

Thank you, Scott. This contract with the Navy is interesting. I mean, I haven’t heard you talk about Independent Cart in a while. What is the U.S. Navy doing with the technology?

[Blake Moret, Chairman and Chief Executive Officer]

Scott, we can’t talk in specifics about the particular application, but I can tell you that Independent Cart in general allows for more precise motion control than some of the traditional methods of servo amps and other types of technology. So with the kind of acceleration and deceleration profiles that are needed for some of these high performance applications, Independent Cart was really a differentiated solution. It also has to operate and as you can imagine, very difficult environments.

The vital point is that, while we don’t talk as much about our government business, now Rockwell’s been a trusted U.S. supplier to the government for a long time, and so some of these premium high-performance applications were a natural fit.

[Scott Davis, Melius Research]

Okay, makes sense. And then you mentioned Blake, PTC helping you add 200 new customer logos. What – I know that it might be a little bit varied, but any general theme around what type of new customers you’re able to bring in, any particular end markets, geographies, that type of thing that you could point to?

[Blake Moret, Chairman and Chief Executive Officer]

Scott, one of the things that we’ve really been proud of our partnership with PTC is good diversity of customers and geographies that we’ve been able penetrate with the combined offering. So, while food and beverage and consumer-facing industries, as they are large for Rockwell’s overall business are the source of a lot of the applications. It goes across automotive and mining as well as many of the other industries that we talk about all the time. It gives us new ways to win in these, and some of the things that we’re most excited about that we’ve talked about before are that it’s not just on top of Rockwell control systems, about half of these applications are going on top of competitive control systems. So it’s a new way to add value and to be meaningful in those customers’ digital transformations. It’s really across the various industries and across the geographies. We have wins in every geography we serve.

[Scott Davis, Melius Research]

Okay. Very helpful. Thanks, and good luck, guys.

[Blake Moret, Chairman and Chief Executive Officer]

Thanks, Scott.

[Operator]

Your next question comes from the line of John Inch with Gordon Haskett. John, your line is open.

[John Inch, Gordon Haskett]

Thank you very much. Good morning, everybody, and congratulations, Patrick.

[Patrick Goris, Chief Financial Officer]

Good morning, John. Thank you.

[John Inch, Gordon Haskett]

Welcome. Do you guys expect the cadence of the 10% core sequential sales to be sustained throughout the year? I realized that in aware of your mid-single digit core year-over-year, but talk to me about just sort of the sequential cadence, and do you expect that to sustain itself or if not even perhaps accelerate over the balance of fiscal 2021 as part of your guide?

[Steve Etzel, Chief Financial Officer elect]

Hi, John, this is Steve. We expect a gradual sequential recovery throughout the year, including into the first quarter. And as we said on the call, that implies a first half decline year-over-year, and then a second half year-over-year growth rate in mid- to high-teens.

[Blake Moret, Chairman and Chief Executive Officer]

Yes. What I would also add John is that we did see good orders in October in terms of improvement. So, particularly on the products, that was an encouraging sign as we entered the year. We have to say that services and solutions order recovery is lagging behind those product orders, but products are really the leading indicator that we look at.

[John Inch, Gordon Haskett]

Right. Right. I understand that year-over-year. But does that translate into, like, how does that translate in terms of your expectations in terms of sequential improvement? Like we did 10% this quarter, do you expect that to slow in the December and March quarters and then pick back up? Just a little bit more color on how you think about the sequential trend.

[Steve Etzel, Chief Financial Officer elect]

Yes. John, I think it’s best to think of it as a mid-single digit quarter-to-quarter sequential growth in fiscal 2021.

[John Inch, Gordon Haskett]

Okay, good. No, that’s helpful. And then just as a follow-up on your Page 15 on your EPS walk, where did the structural actions fall? I think you said in core, I just want to confirm that there’s no structural actions that are sort of offsetting the temporary return, like you’ve split it. And maybe I remember, Patrick, last quarter, you talked about you’re going to take out some redundant facilities, maybe some sales offices and stuff. Is there a way to quantify the carryover of this structural impact in EPS? So I see the $15 headwind. What does that map against in terms of this structural takeout that is in response to the pandemic, right? Like would have been sort of…

[Steve Etzel, Chief Financial Officer elect]

Sure. John, the $15 headwind that you see there on the walk is the bonus rehearsal, I’m sorry, the bonus reinstatement and the temporary cost reversal. That bonus is about $115 million in and of itself for the full year. I will point out by the way as it relates to the bonus; it’s obviously a full year headwind. The biggest headwind we’ll see on a year-over-year bonus is in the second, I’m sorry, yes, the second quarter, but each quarter will have some headwinds.

In terms of some of the structural savings and so on, on that bridge, that’s all in core. We have about $60 million of structural savings, which relate to restructurings that we’ve taken over the last several quarters, including in Q4. And then there’s some other cost reduction actions through a cost improvement, if you will, through increased efficiencies in our plants and so on as volume increases.

[John Inch, Gordon Haskett]

Great. No, that’s quite helpful. Thanks very much everyone. Appreciate it.

[Blake Moret, Chairman and Chief Executive Officer]

Thank you, John.

[Steve Etzel, Chief Financial Officer elect]

Thanks.

[Operator]

Your next question comes from the line of Julian Mitchell with Barclays. Julian, your line is open.

[Julian Mitchell, Barclays]

Hi, good morning. And thanks Patrick for all the help. And I look forward to working with you again, Steve. Perhaps, the first question just around the top line. Again, I understand that I think you called out good orders and good backlog trends in that the short cycle business and products, but wanted perhaps to focus on that solutions and service and process piece. I think the process sales were down 20% or so in Q4 guiding for low-single digit growth in the year ahead. Maybe help us understand how quickly you get to that return to growth in fiscal 2021. And when we should start to see that solutions? And so this book-to-bill looks a bit healthy, I think was down year-on-year, the book-to-bill in Q4.

[Blake Moret, Chairman and Chief Executive Officer]

That’s right, Julian. Typically the book-to-bill is down for solutions and services in Q4, as we see normal seasonality increased the amount of shipments in the quarter. That being said, we are expecting orders to pick up in the first half of the year. Oil and gas is probably the most subdued as we talked about in some other areas like mining and pulp and paper, the activity is a little bit more vigorous. We continue to focus on the OpEx expenditures in oil and gas through Sensia.

I would also say if we look at the typical performance of our various businesses, as we come out of a downturn like this, products are almost always going to lead the solutions and services orders. We’ve seen that repeated over many years and multiple cycles. So we’re not surprised by this. But at the end of the day, you have to compete and win for each order that’s up. There’s still business out there. We are confident that that activity is going to increase, but we have to be on the winning side as that business comes up. And that’s what we’re focused on, not only with our traditional resources, but with some of the new acquisitions.

So we’ve got a really helping in that space. And I mentioned Kalypso, but there are other unsung heroes when we look at some of the acquisitions in OT cybersecurity with Avnet and Orlo, when we look at MES tech and the ability to quote even more competitively for the delivery of software-based projects, those are all going to help us recover just as fast as possible as those projects increase in frequency.

[Julian Mitchell, Barclays]

Thank you. And then maybe Blake, just a more strategic one and perhaps we’ll hear more about this at the Investor Day. But it did seem as if the broadening of that strategic alliance with PTC was quite substantive that you talked about a couple of weeks ago. Maybe give us some background as to why the relationship now includes PLM and SaaS. And maybe how your own perspectives on the benefits of co-offering PLM may have shifted, if at all?

[Blake Moret, Chairman and Chief Executive Officer]

Sure. Julian, I know a couple of aspects of the expanded relationship. The starting point is that we have a great foundation. The pace of competitive wins is picking up. I mentioned before that it seems to be catalyzing the increased size of all of our software wins; so not just what we’re doing directly with PTC, but on the MES side as well, for instance, and then our own FactoryTalk analytics offering.

Another specific example of the way that the partnership is evolving is that we’re focused on annual recurring revenue now. So it’s not just about the new annual contract value of wins, but it’s also about the total value of the business, including the renewals. And of course, that’s absolutely essential for us to be on the same side of the table, as we’re both focused on increasing that recurring base.

Specifically with respect to PLM and Onshape and some of their offerings, we see the opportunity to help pull through PTC in some of these digital thread opportunities, we preserve an open approach and respect customers’ installed base. But having the ability when a customer is looking at PTC, the ability to include that in the digital thread offering is proving to be very valuable. And with the recent acquisition of Kalypso, we have formidable capabilities with respect to digital thread. So this is just another tool that we have at our disposal. And we continue to look for meaningful ways to integrate PTC technology with our own offering, not just on the software side, but also really importantly on the way that data is pulled from the control and brought up to that information layer.

[Julian Mitchell, Barclays]

Great. Thank you.

[Blake Moret, Chairman and Chief Executive Officer]

You’re welcome.

[Operator]

Your next question comes from the line of Jeff Sprague with Vertical Research. Jeff, your line is open.

[Jeff Sprague, Vertical Research]

Thank you. Good morning, everyone.

[Blake Moret, Chairman and Chief Executive Officer]

Good morning, Jeff.

[Jeff Sprague, Vertical Research]

Good morning. Two for me. First is just kind of on the software and control side, thanks for the timely restates. Kind of interesting, right, the software and control kind of in the two worst quarters of the pandemic, basically performed in line with intelligent devices. What if you could just speak to your view of kind of resiliency in that business over time? And as part of that, if we’re going to talk ARR, can you baseline us on what it is for the fiscal year of 2020? So we are kind of level set here.

[Blake Moret, Chairman and Chief Executive Officer]

Yes. Jeff, I’ll make a couple of comments. And then Patrick and Steve may add to that. I mean, software and control includes the essential heart of a control system. The control function, whether it’s based in hardware or software or a combination of the two is processing the inputs and changing the states of outputs. And that’s going to remain a persistent part of control systems in all of the industries that we serve. We see some evidence of that as we talked about the great performance in packaging on our end, compact logics really performed quite well relative to the rest of the control during the last couple of quarters.

So we think that that’s an essential functionality and regardless of where the execution point moves from hardware and firmware to pure software or back, depending on customer preferences, we’re confident that we can continue to perform very well there. On the software side, the pure software side, we are increasing the focus on ARR. It’s a little bit over 5% of sales currently. And as we talked about last Investor Day, as we’ll talk about again next week, the goal is to bring it to 10% and more in the next few years, and we think we’re on a good path to do that.

I should add it takes all hands on deck to make that happen. It starts with great software, either that we’re developing ourselves or that we’re buying. It also includes increasing our selling capabilities and significant part of our recent investments is adding sales who had a specific focus on software and also the infrastructure within the company to make sure we do a great job of processing those orders and that we’re decreasing churn rates and so on. So it’s really the full company on board and an integrated effort to grow that.

[Jeff Sprague, Vertical Research]

And then separately, just on the decision to go ex-amort, just kind of interested in the philosophical decision there. I mean, we’ve seen it happen at other companies, so certainly you’re not alone. Most of the placements that happened there was kind of a investor push for it because the amortization was quite high relative to GAAP EPS. And there was a clear disconnect here. What should we – if anything gleaned from making this adjustment, right, it’s kind of 2% of earnings. I guess my read would be we’ve got a much more active M&A pipeline coming at us, but any color there would be greatly appreciated. Thank you.

[Steve Etzel, Chief Financial Officer elect]

Sure. This is Steve. We did a lot of benchmarking, as you said, we did get a lot of investor input as it relates to this. We obviously have been on a path doing more acquisitions than perhaps in our history. We have a goal of growing top line more than a point per year from acquisitions and we have been doing more. And we thought now is the right time to make the change and come more in line with a lot of other companies that we compare our substance.

[Jeff Sprague, Vertical Research]

Thank you.

[Operator]

Your next question comes from the line of Steve Tusa with JPMorgan. Steve, your line is open.

[Steve Tusa, JPMorgan]

Hi, good morning.

[Blake Moret, Chairman and Chief Executive Officer]

Good morning Steve.

[Steve Tusa, JPMorgan]

So just thinking about kind of the sequential or I guess the year-over-year performance, maybe a little bit better, because John kind of got you on the sequential side, 2Q last year you guys outperformed almost everybody by a lot. And anything you guys want to kind of highlight as far as the project comps there at all in the second quarter that we should take down of in our models?

[Blake Moret, Chairman and Chief Executive Officer]

Steve, I think we’re in a period of time in general where things are going to be highly variable by geographies and by end markets and by end user, OEM split. So we’re kind of top line there, you’re correct and I think in Q2, it looks like our performance last year outpaced pretty much all of our competitors. And during this time, relative position and amount of business in different parts of the world, I think are going to have a big impact on the results.

In general, the theme is of course towards recovery. And as we said, as we pull out from the Q3 trough, we expect gradually recovering conditions and a return to strong year-over-year growth in Q3 as industrial production returns to grow and as we have easier comps. The other point I would make regarding Q2 that you mentioned fiscal 2020, it was broad-based. Automotive, I think was a bit of a positive surprise, but it wasn’t just automotive, but there were a number of industries that were positive in the quarter.

[Steve Tusa, JPMorgan]

Okay. And then just – yes, go ahead. Sorry.

[Patrick Goris, Chief Financial Officer]

I am just going to elaborate a little bit on what I mentioned earlier since you brought up Q2. But all of our bonus headwinds of $115 million for the full year, the headwind is going to play out by quarter something like $10 million headwind in Q1, $45 million to $50 million in Q2 and approaching $30 million per quarter in Q3 and Q4.

[Steve Tusa, JPMorgan]

Okay, great. Thanks for the color. And then just lastly on these new segment breakouts, on the Software & Control side, I mean, I think the majority of those sales are kind of logics and the PLCs, those margins and I think in 2019 at the peak were 30% for that segment, given that the vast majority of that segment is the hardware. Can I assume that hardware sale is pretty high margin for you guys?

[Blake Moret, Chairman and Chief Executive Officer]

Well, yes, no question that logics hardware is good margin for us. If you do the math and you look at what we’ve provided on fiscal 2020 breakout by segment, about $1.7 billion in Software & Control and all of the software is in this segment. So that, we said it was over $500 million in fiscal 2020 of the pure software. And then, I should also mention, that this is the segment that is currently attractive in the majority of our investment. So whether it’s in logics or it’s in the software development as a percentage of sales this segment would have the highest investment.

[Steve Tusa, JPMorgan]

Right. And then PTC related sales that come through there, I think you’ve said will flow through at your kind of normal incremental margin. So, you’re basically booking similar margins on those PTC sales, if you will?

[Steve Etzel, Chief Financial Officer elect]

Steve, the way you can think about it, if we package PTC and offerings to one of our customers we probably achieve between 30% and 40% incremental margins there, so in-line with overall company average, lower of course than it would be our own controllers or our own software.

[Steve Tusa, JPMorgan]

Yes. Great, thanks a lot for the color. I appreciate it.

[Steve Etzel, Chief Financial Officer elect]

Thank you, Steve.

[Operator]

You’re next question comes from the line of Andy Kaplowitz with Citigroup. Andy, your line is open.

[Andy Kaplowitz, Citigroup]

Good morning guys. Patrick, congrats. Steve, looking forward to working with you again.

[Steve Etzel, Chief Financial Officer elect]

Thank you, Andy.

[Andy Kaplowitz, Citigroup]

Blake. I know you spoke about this a bit in your prepared remarks, but can you give us a little more color into what you’re seeing in terms of your customers, either reassuring or investing to avoid single points of failure? We know you’ve talked about in the past, life sciences, semiconductors, are you seeing investment continuing to increase in these sectors or actually increasing outside of these sectors?

And when you think about the order uptake you’ve seen, would you characterize the significant amount of orders as it related to this type of investment?

[Blake Moret, Chairman and Chief Executive Officer]

Yes. As we’ve talked about before Andy, life science is probably the area where we have the longest list of customers that have announced plans to do things in the U.S. Some of these have been public about what they’re doing. You take about, what Becton, Dickinson is doing or Sanofi and so on, and other customers that we’re working with, but they haven’t yet disclosed that publicly and so we respect that.

We’ve also seen some high profile semiconductor announcements that we’ve talked in the past about Taiwan Semi and the work that we’re doing with them. And there are some others out there in other industries, our consumer electronics, consumer tools, I’d say it’s a steady cadence and we have – let’s say get started kids, if you will to work with customers who are considering doing these sorts of things that our salespeople are familiar with.

It’s really a part of the overall attempts for resilience. So we’re not seeing an avalanche of that reassuring. We see that steady, but the business that’s coming out of it, it’s meaningful. It’s certainly in the millions of dollars that we’re seeing there.

[Andy Kaplowitz, Citigroup]

Thanks for that Blake. And then can you give us more color into what you’re seeing in the automotive markets? You mentioned it was better than you expected, but down 20% in Q4, as you know was only modestly better than Q3, it declined and auto builds did improve materially globally. So we know you’re guiding automotive being up 10% in FY 2021, was there anything that kind of held you back in Q4 versus build and maybe update us on sort of the EV transition we’re seeing seems to be accelerating a bit that should help you, I think as you go into 2021.

[Blake Moret, Chairman and Chief Executive Officer]

Yes, we did see as with almost all our industries, so good sequential. It was so strong, a double-digit sequential increase in automotive. So up 20% gives us optimism. Then as we talk about, fiscal year 2021 get into around 10% growth in automotive. We think we have a line of sight on the projects and the improving MRO to substantiate that. And obviously within there, areas like electric vehicle that we think are particularly good for us as we see higher win rates in EV than across the general portfolio for automotive.

[Andy Kaplowitz, Citigroup]

Thanks for that. Blake.

[Blake Moret, Chairman and Chief Executive Officer]

Thanks Andy, welcome.

[Operator]

Your next question comes from the line of Andrew Obin with Bank of America. Andrew, your line is open.

[Andrew Obin, Bank of America]

Hi, guys. Good morning.

[Blake Moret, Chairman and Chief Executive Officer]

Hey, good morning, Andrew.

[Andrew Obin, Bank of America]

So Patrick congratulations. And Steve, look forward to working with you again as everybody has mentioned. Maybe Patrick, I’ll ask you a question about Mexican effects, I won’t do that. Just a couple of questions, so first, you also announced in addition to PTC partnership, you also announced the expansion of your partnership with Microsoft. And I was just wondering, because Microsoft is aligned with PTC, but yet they’re trying to do their own thing in industrial vertical. Can you just talk a little bit more, what it is you are doing more with Microsoft, because clearly you guys have been aligned for a long time, but is there anything new there? They’re more focused on SaaS, more focused on cloud. So that’s my first question.

[Patrick Goris, Chief Financial Officer]

Sure. The primary focus of this new expansion of work with Microsoft is targeted at Azure infrastructure and the cloud. And so we’re working with Microsoft and we’ll be demonstrating some of our new capabilities that are already well along in the areas of design as well as information in using a SaaS approach for new capabilities.

So these really complement our existing capabilities and are kind of a forerunner of a significant amount of new functionality, both on-prem and in the cloud that customers will see over the next year or so. So it’s really, it’s focused on combining forces using their expertise with Azure in our OT expertise to provide new design tools for customers and we’re very excited about it.

I’m excited, not only about the functionality, the specific functionality that’s going to bring, but it’s the pace with which we were able to join forces, assemble teams and to come together to create new value. From the first meeting really that we talked about this with Microsoft to now it’s been less than a year. And that’s a great foreshadowing of things to come.

[Andrew Obin, Bank of America]

Do you need to reconfigure your sales force to out-sale to sort of do more of the SaaS Azure sales?

[Blake Moret, Chairman and Chief Executive Officer]

We’re certainly going to be adding additional talent and learning new motions within our sales force, but it’s really a microcosm of the overall convergence of IT and OT. Our home field advantage is understanding of these customers and the operational technologies and what happens on the plant floor and how they make money or avoid downtime. And complimenting that with perspectives of people who understand the software selling motion is what we’re right in the middle of now.

We’re making significant investments in new talent, training enablement for our overall sales force and so it’s bringing that talent up together, the existing plus the new.

[Andrew Obin, Bank of America]

And just a follow-up question, again with the new administration, frankly we are hearing from a lot of investors that new administration maybe mean less focused on reassuring, because tariffs will go away. What kind of conversations have you had with your customers, about sort of contingency plans and their longer-term strategy on capacity in the U.S. and globally, in light of the election results. Thank you.

[Blake Moret, Chairman and Chief Executive Officer]

We’re encouraged in that, the Biden campaign and the Biden administration has talked about the importance of U.S. manufacturing. And so that is the single most important issue for us. And we’re optimistic that they recognize the importance that manufacturing in this country plays as a part of the vital core of the American economy. And so we’re looking forward to working with them through professional organizations and so on, to find ways to increase the manufacturing in the U.S. along with the attendant issue of workforce development which is a crucial issue for us as well.

[Andrew Obin, Bank of America]

Very much.

[Operator]

Your next question comes from the line of Nigel Coe with Wolfe Research. Nigel, your line is open.

[Nigel Coe, Wolfe Research]

Thanks. Good morning, everyone. Thanks for fitting me in here. So just want to go back to John’s question on sequential sales. Did you say 1Q up 5% and I’m not sure if that was what you indicated. Just normally 1Q is below 4Q, so I just want to make sure I got that right.

[Patrick Goris, Chief Financial Officer]

Yes. So, we are seeing some momentum as I just described in the product side, but it’s typical for Q1 for solutions to be down. So my general comment was roughly mid-single digit sequential growth. It could be a little slower than that in Q1. And that’s part of the reason why we’ve mentioned that Q1 EPS could be down sequentially, expected to be done sequentially from Q4 then as well as the sequential headwind from the temporary actions being reversed and bonus being reinstated.

[Nigel Coe, Wolfe Research]

Right. But the point is that there’s enough momentum in products that offset the seasonal down take inflations?

[Patrick Goris, Chief Financial Officer]

Yes, I think directionally that’s probably the case.

[Nigel Coe, Wolfe Research]

Okay, great. That’s helpful. And then the expansion of the relationship with PTC, one of your big competitors has taken a very strong view on the PLM, PLC integration. And I think historically Rockwell has been a bit more skeptical about that. I’m just wondering, has there been a change in your view of integration amongst those layers? And then sort of within that, have you done all of the investment required to offer integrated solution with PTC or is there still some investment spending to be done around that?

[Blake Moret, Chairman and Chief Executive Officer]

Yes. Our view is that, our customer is going to have multiple applications to create their version of the digital thread and that’s going to vary by different industries. So what you’re looking for in terms of the digital thread in oil and gas is going to be different than what you’re looking for in automotive typically.

Let’s say, we are selectively looking at integration between interesting parts of the PTC portfolio. One of the specific areas that Jim Heppelmann highlighted during LiveWorx this past summer was Onshape and our Emulate3D simulation capabilities. And so that’s one area that’s very interesting, and we have differentiated value. We’re using it in our own facilities and it’s helped us win competitively in other areas. But that doesn’t mean that we have to have that capability in every instance in-house.

So an open approach and respecting the investment that customer has already have made in terms of training and installation, different vendors, application software in industry is an important tenant of our approach to the market. And so we don’t necessarily need to own everything, but where we pick particularly interesting use cases like the one I just mentioned between Onshape and Emulate3D, that’s an example where we will go deeper and we will provide additional integration tools to add that value.

[Nigel Coe, Wolfe Research]

Right. Well, thanks Blake. Thanks, Steve. And Patrick, good luck.

[Steve Etzel, Chief Financial Officer elect]

Thank you, Nigel.

[Operator]

This concludes our question-and answer-session. I will now turn the call back over to Jessica Kourakos for closing remarks.

[Jessica Kourakos, Head of Investor Relations]

Thank you. Thank you, Amy. I’ll turn it back to the Blake for few final comments.

[Blake Moret, Chairman and Chief Executive Officer]

Thanks, Jessica. Nobody is better positioned than Rockwell and our partners to bring information technology and industrial operational technology together. We remain focused on the well-being of our employees, and we continue to manage thoughtfully through a gradual recovery.

At the same time, we are happy to see the positive results of steps being taken to accelerate profitable growth. I also want to wish Patrick all the best. Patrick, you’ve played a big role in our success, and you will be missed. We wish you all good health and thank you for your interest and support.

[Operator]

This concludes today’s conference call. At this time, you may just disconnect. Thank you.