Watsco at J.P. Morgan Conference: Strategic Moves Amid Market Shifts

On Wednesday, 12 March 2025, Watsco Inc. (NYSE: WSO) participated in the J.P. Morgan Industrials Conference 2025, offering a strategic overview of their operations and market positioning. The company highlighted its robust Q4 performance, digital strategy, and inventory management, while also addressing challenges related to supply chains and economic conditions.

Key Takeaways

• Watsco emphasized the transition to A2L refrigerants, managing $1 billion in inventory.
• The company is targeting a 27% gross margin, leveraging digital platforms for growth.
• Rockwell’s focus is on cost optimization and R&D, with a strong order book.
• Both companies are navigating supply chain challenges with strategic investments.
• Watsco’s market share dynamics are heavily influenced by key vendors like Carrier and Rheem.

Financial Results

• Watsco reported a strong Q4, with residential business growth in the teens and an overall market increase of 9%.
• They aim to maintain a 27% gross margin, with parts and supplies achieving margins between 35% and 40%.
• Rockwell’s Q1 earnings exceeded bottom-line expectations, with a book-to-bill ratio over 1.0 and $2 billion in orders.

Operational Updates

• Watsco is transitioning $1 billion of inventory to A2L refrigerants across 700 locations, ensuring availability within an hour for customers.
• The digital platform is a significant growth driver, with a $2.5 billion impact and usage by 60,000 contractors.
• Rockwell is investing 6% of sales in new product development, focusing on software and intelligent devices.

Future Outlook

• Watsco anticipates further market share gains, supported by a strong consumer base and low unemployment.
• Rockwell expects gradual improvement in sectors like food and beverage, with increased forecasts in life sciences.
• Both companies are addressing supply chain challenges with proactive inventory and cost management strategies.

Q&A Highlights

• Watsco’s executives discussed pricing strategies, leveraging technology to optimize margins on existing and new products.
• Rockwell highlighted its cost optimization program, aiming for $250 million in savings by fiscal 2025.
• The impact of tariffs and reshoring initiatives was acknowledged, with both companies confident in their growth strategies.

For more detailed insights, please refer to the full transcript below.

Full transcript - J.P. Morgan Industrials Conference 2025 Conference:

Operator: right. Great. Kicking off day two of the conference here. We’ve got the guys from Watsco, Barry Logan, Executive VP and Rick Gomez, VP of Corporate Development. And And they’re just initials, by

Barry Logan, Executive VP, Watsco: the way. We don’t it doesn’t actually stand for Executive Vice President.

Operator: Yes, they do these guys do it these guys just do everything. They do it all. Pat’s also up here. Pat covers the distributors for us at JPMorgan. Guys, thanks for being here.

And we’re going to tag team a little bit on this one. But just wanted to first start off, I know it’s March, I think, twelfth. It was a little bit warm out yesterday here in New York. It’s a little bit chillier this morning. What are you guys seeing so far?

Anything evolving since you guys reported from an early selling season indication perspective? Obviously, it’s a little bit too early to be definitive, but anything in the channel that you’re seeing that’s interesting on the ground is a start.

Barry Logan, Executive VP, Watsco: All right. Read some tea leaves early in the season. So, yes, I mean, we had obviously a blowout fourth quarter, blowout meaning that overall residential businesses were up in the teens. The overall market was up for us at 9%, nice drop through to the bottom line and so on. I would have expected a bit of a return to more conventional growth rates, but stable.

And that’s what I would say that’s what we have seen quarter to date. March is half the quarter. March is critical to this time of year, but not necessarily an indicator of what we see going into the season. But we’re seeing growth. We’re seeing margins behave well.

I’ll have a better answer in May, June, July when our business is 30% or 40% larger than it is today, but so far so good. I don’t know if you have any color to that.

Rick Gomez, VP of Corporate Development, Watsco: No, just to note that it was as cool yesterday morning in South Florida as it was this morning up here. So we’ve enjoyed a little bit of springtime ourselves. The only thing I would add to what Barry said is that there is we are obviously in the middle of an important product transition that’s impacting the whole channel, it’s impacting the whole market. That seems to be unfolding as planned. And first quarter is that ninety to one hundred and twenty day period where you have to convert $1,000,000,000 of inventory across 700 locations and get that as precisely right as you can, so that you’ve got availability to support your customers come the selling season.

So we are in the midst of all that right now, obviously tracking it very closely and we are seeing good uptick and good acceptance of the new product in the channel and it’s starting to now become some element of our sales here in March. But as Barry said, I think the real test of all of this will become the selling season and we’ll all be smarter at that point, I think.

Operator: Anything with regards to I’m not going to use the term pre buy because I think it’s been used now enough. And anything that’s evolved in the channel that you look at and you say, oh, that’s interesting kind of post year end that you’ve gotten a little more information on from a inventory in the channel perspective, whether it’s at contractors or not? And then also just on the pricing that’s going on out there competitively with the various OEMs and different strategies. Anything surprised you in the last few weeks here as things evolve?

Barry Logan, Executive VP, Watsco: I can’t think of anything on the inventory side that surprised us or has been tricky. It’s going to be tricky to get, as Rick said, $1,000,000,000 of inventory out of the system over the last one hundred and twenty days and new products into the system over the next and go through that with a measure of precision. It means our branch managers are having awesome ten, twelve hour days over the last sixty days to really set the table for the season. I can’t think of anything that’s happened or going on that’s any different or than we thought or had wanted. But that doesn’t mean it’s simple.

It’s a big complex machine that’s turning over product really for the selling season coming up. On the pricing side, we wanted to be and can be a merchant during these times. We can look to optimize price and margin of what we’re selling out of. I think we’ve done that and doing that. We also have the opportunity to look at $1,000,000,000 of new product that we’re about to sell and set price and margin.

And when I say that, that’s not just talking to customers, that’s talking to our vendor community as well as to their price coming into the market that we’re then passing through. Now we have some science and math and technology to help us do that. We didn’t have that three or four years ago. And so I think margins and pricing in general, I would say again is a positive because of those kind of two bodies of work going on.

Operator: And from an inventory perspective, is it being managed pretty smooth where it’s kind of a normal seasonal level and you’re churning underneath? Or is it going to be lumpy where you’re going to get a bunch of this stuff in because it’s available and that’s their ship date to you? Like how smooth is this process on inventories inventory churn?

Barry Logan, Executive VP, Watsco: It is not smooth and it is a bit of a wave that flows in. And as a distributor of HVAC stuff, we only have one goal with inventory. That’s to have it for our customer an hour from now. Our lead times are not next week or two days from now. Our lead time promise is an hour from now.

So where we hedge risk of inventory is to have more of it if we feel like the channel or the supply chain is tricky. So I could see us early part of this year being heavier on the new inventory to assure that and to assess that to address that risk. And we get out of season and we get out of season towards the fall and end of the year, rebalance that and there should also be obviously a more serene supply chain going on six months from now.

Operator: So you’re saying there’s a bit of a pre buy of the A2L?

Barry Logan, Executive VP, Watsco: I wouldn’t say pre buy. I would say a building of of inventory because lead times and so on aren’t what they’re going to be in six months. I don’t like the word pre buy as if we’ve decided to take part of our balance sheet and buy a ton of new product. That’s not what Watsco is or does. This is a purchasing manager in Houston buying for 15 stores, adding a bit of inventory into his market.

And it may be a different calculus and a different equation in Central Florida. It’s not a Watsco push down of strategic petroleum reserve by Bitcoin. It’s not that. This is a very regional, very market driven, very brand driven. And going back to that local contractor that needs the product in an hour.

So any thoughts to that?

Rick Gomez, VP of Corporate Development, Watsco: No. Just to have a little fun with Steve, you can’t call it a pre buy during the year. You can only call it if you’re crossing a year. So technically, what we think

Operator: in the quarter. So maybe it’s a first quarter pre buy for the second quarter. But the point is you’re trying to mitigate the risk by taking on a little bit more of this stuff as opposed to really managing it tightly to a band or at least that’s your sense of what your guys are doing on the ground.

Barry Logan, Executive VP, Watsco: That’s correct. With the yes. And again, it’s a learning process, right? The manufacturers are learning how to get this new stuff out of their factories and plan for it and logistics and push it out in pairs. Again, we sell products in pairs made in different factories.

So we’re actually converging product in our stores and having so it’s like almost a double edged equation. I’m not just buying from a factory, we’re buying from multiple multiple factories and then merging that, converging that into our stores. And so that’s the trickiness. And everything I just said is not simple in these transitions. And that’s where the phobia of lead times and on time delivery and things like that derive a bit higher inventory, which is what we should be doing in terms of playing offense with our balance sheet.

But it’s not buying allocating capital to buy products ahead of time. I don’t define it like that.

Operator: Right. And then just last one for me and then I’ll pass over Pat for a couple. Just on the pricing that’s coming out for these guys, any interesting movements on that front? I know most a couple of guys have been out with like letters about tariffs and pushing that through. Has that actually been triggered yet?

Or is that still kind of a TBD?

Barry Logan, Executive VP, Watsco: Well, I think some have moved forward with pricing, new pricing in March to get something going because they’re already incurring inflation absent tariffs. And then the tariff discussion adds a layer of risk and reality to the overall equation for the OEM. And but the question is what’s reality, right? So So I think there’s a little bit of that consternation on the fence waiting to see what really happens. And their question for their meeting is how is that going?

And we’ll listen to it and be the benefactor of it in some ways. But I think there’s Phase one has kind of occurred and Phase two is contingent on what’s happening with the tariff situation. Right.

Pat, Analyst, JPMorgan: Okay.

Rick Gomez, VP of Corporate Development, Watsco: Pat, you want to follow-up here?

Pat, Analyst, JPMorgan: Yes. I just wanted to peel back the comment you made on price optimization with respect to the older inventory that you now have. So you’re not obviously getting OEM price increases for that. But it sounds like you’re going to maybe try to get a little price on that stuff, maybe just peel that back a little bit?

Barry Logan, Executive VP, Watsco: Yes, it’s more past tense at this point than future tense with four ten product. We when we started the year, our business units felt they could gain some price on 410A products. And if there’s a scarcity value that is created from that, then that should that’s a value we should be able to obtain in the market. We’ll talk about the materiality of that when we have the numbers all the way through the quarter. But that’s been a thinking and a process really beginning probably in December of last year.

It’s more past tense than future tense.

Pat, Analyst, JPMorgan: Meaning that past tense meaning that you that is executed in the fourth quarter?

Barry Logan, Executive VP, Watsco: I mean, part of the benefit was in the fourth quarter.

Operator: Got it.

Barry Logan, Executive VP, Watsco: And most of the benefit with that particular narrows concept is in the first quarter, but it’s not something that builds on itself or adds to itself once we get into the A2L product. Then it’s a new product with that second phase of what I said, which is how do we have a

Ajahn Ezellner, Rockwell: good

Barry Logan, Executive VP, Watsco: merchant execution on all new products that we’ll be selling on scale as we get into the season.

Operator: And so I guess just magnitude wise that we should think about it as not double digit, more kind of mid single digit?

Barry Logan, Executive VP, Watsco: I don’t know what that means.

Operator: Not a double digit price increase, more of like a mid single digit pricing.

Rick Gomez, VP of Corporate Development, Watsco: I think if you’re referring to 410A product.

Operator: Yes. Yes, the step up

Rick Gomez, VP of Corporate Development, Watsco: on 410A, the sliver that you’re selling through. No, I think, look, in the absence of some OEM initiated pricing action in the market at scale, it’s hard to be that aggressive. And so you tend to be more measured than aggressive in that scenario. And so the reason why it’s hard ex ante to really size the magnitude of this is that there is no single lever at Watsco that says, here, let’s change price by X. We’re talking about 40 to 60 P and L leaders and 700 locations and 130,000 customers.

So it really is a bit of a sum of the parts in terms of what we derive at the end of it, which is why looking forward or trying to size it in real time is difficult. But yes, I would characterize it more in that low single digit world because that’s the and plus we didn’t have as you saw on our year end balance sheet, it wasn’t we weren’t starting with an inflated inventory position of 4x10a product to begin with. So I think our bent and our focus has been more on getting on with the transition sooner rather than later and not lingering with legacy product in the channel, which does come with its risks at the end of the year if you have too much of it. So it’s threading a needle of how much do you think you should have for the customers and measuring lead times on new products for the OEM community. And as I said, we’re kind of in that crossover point here in March and April and we’ll tell you more about it after season.

Barry Logan, Executive VP, Watsco: It’s in basis points, Steve. If I do the algebra on the overall margin, it’s not percentage points, but it’s more than zero, which is good.

Operator: Yeah. I think there was for some of the OEM discussions, there was a narrative that like you just would basically take your 04:10AM like mark it up to your A2L product and move along. So just wanted to make sure we had an idea of the magnitude.

Barry Logan, Executive VP, Watsco: I’ll really say this directly, there is zero opportunity for that to happen. Okay. It’s basis points and it’s single digit percentage points in terms of price.

Pat, Analyst, JPMorgan: In terms of the volume dynamics last year and how that plays through to 25%, so Watsco grew its volumes mid single digits in residential equipment last year. I think the market was generally kind of flattish, so pretty good relative performance. Can you talk through some of the dynamics that as we roll into ’twenty five might be a little bit different? And I’m thinking about you had some probably volume coming back from one of your big vendors, Reem. I said it, you didn’t say it.

And then there was the issues at Goodman, which I don’t think is a huge vendor for you, which may be benefited volumes for some of your other vendors? And as you think about that ’25, how does that kind of play through in your thinking?

Barry Logan, Executive VP, Watsco: Yes. I’ll try to put things in perspective. And this is 10,000 material, so you can get a sense for it. First Carrier is by far our largest vendor. And when I say large, it’s again in the 10 ks, about half of what we buy, therefore more than half of what we sell.

What’s unknown or I would say unknown, what’s underappreciated is that’s seven different brands. It’s not just the Carrier brand. It’s multi branded. It’s multifaceted. It’s covering different parts of the waterfront.

The most sophisticated thing we sell or the cheapest thing we might sell is made by carrier. So it is a bandwidth of products and a spectrum of products. And that is, I would say, five years ago with the spin off, their investment, their understanding of that asset, their dependence on distribution to serve well to go out and prosecute growth and market share expansion is where they’ve done a very good job. I think a year ago, not a year ago, maybe six months ago, they said on conference call, we listen to our customers and here’s what we’re doing. Well, that’s us.

I didn’t hear that phrase six, seven years ago. Maybe they listened, but they didn’t necessarily have the capacity or the investment from their parent to go do it. So I would say, especially in the last two years, as things have settled down a bit on product in the post COVID kind of thing, That’s a powerful partner that’s come to the table and listening to the strategic objectives and investing in those objectives and helping us go sell product and grow the market. If you look in our numbers, the Care Enterprise profit sharing that we share with them has doubled in the last five years. It’s over $100,000,000 or close to $100,000,000 And that’s a benefit to that relationship.

That is a two way street. We’ve grown our business and they’ve grown theirs. So I’ll leave that let’s park that there because it is an ongoing market share and development campaign. We’re not done, we’re not happy, we’re not content, we’re not complacent. We meet every 90 days with the senior leaders and go through a strategy of how we’re going to do that.

And I’ll leave it at that. So that’s part of last year’s growth. It’s the intention going forward in a material way because it’s our by far our most material supplier. Rheem is about $500,000,000 manufacturer to us. So that’s roughly 6%, seven % of our business.

I wanted to grow 10%, twenty %, thirty % because it shrunk 5%, ten %, fifteen % a year ago. And that’s an opportunity to regain share, to regain business. We did some of that last year at a lower margin. We intend to do more of that at a higher margin this year with this change in products. But you’re going to put the materiality within the scope of what I just said of being 6%, seven % of our overall business.

And Goodman is probably half of that. And so it’s another great vendor. They’ve been probably the number two player behind Carrier for our entire careers. Discount the materiality of that statement. We want to do more business with them in the markets.

We have much of our Goodman business is in the Deep Sun Belt. And yes, they’ve had a choppy period of changing over their products beginning last year. But I think when those cylinders finally kick in and hit, it’s an opportunity for us. And the other 1,400 independent distributors than us will have to deal with a better Goodman set of distribution. Again, I think the materiality of it is diluted in that statement.

But nonetheless, that’s how I would profile the top three. I could go to tell another half hour story of the next seven, all of which is built on post COVID as the market flattened out, how do we gain share, what do we do as partners to gain share. I could tell a Mitsubishi story. I could tell a Greece story in China. I could tell a carrier story about ductless products, etcetera.

But that’s what’s going on. And it’s nice to have this pattern where we’re not just figuring out this crazy circus of either COVID or postcode, but now it’s actually new product, things are more serene, certainly six months from now even more so. And we kind of like how things are set up. So I guess though

Operator: the fall to that is Daikin on their call very visibly said their market share was dropped to 19% and that they have initiatives called like win back or something and they want to get 80% of that back like in the near term. I guess the question is, is that are you starting to see some of that in the marketplace? Is there because that seems like more of a hammer approach than like that they’re going to be very aggressive about this. Are you seeing anything out there in their supply, their behavior or anything like that?

Rick Gomez, VP of Corporate Development, Watsco: Yes. I think I mean, my $0.02 on it is that Daikin is a far more strategic OEM than they are given credit for. They’re very measured in their thinking and in how they do things. I’ll take you back maybe two point five, three years ago where they had massive supply chain disruptions in their facility in Houston. And the entire market was in the same state of wondering what they would do and how they would react.

And they’ve done so in a very, again, measured thoughtful way. So nothing seems disruptive, nothing seems overly aggressive at this point. Just to underscore something that Barry said is, I think they are more material and more long term thinking than people give them credit for. And what share what their share is this quarter probably isn’t to their satisfaction. I think their eyes are more focused on what it could be in three, five and ten years.

So they’ve been a great partner. We’ve been a distributor of theirs for twenty some odd years maybe longer. And it’s a partnership that we think has some latent growth potential. Another thread to the question just just to expand on what Barry said earlier is that for the I’d say the last eighteen months have been more normal as it relates to just supply chain availability, and I’m referencing specifically residential like commercial product. What that does is that it allows us to prosecute and go after organic growth initiatives that we historically are very, very good at.

And there’s one not too far from here actually right in this market. We have a business unit based in Boston that has expanded their territory with their primary OEM, that’s Mitsubishi. We have other initiatives with other OEMs going on. The smoothness of the supply chain allows for that kind of organic growth strategy business unit by business unit, market by market. And combine that with the digital strategy that is sort of how we lead with a lot of these growth initiatives, it means that market share that’s gained has a better chance of being sticky, has a better chance of being higher growth, higher quality, higher durability market share going forward.

Pat, Analyst, JPMorgan: You mentioned Mitsubishi. So the ductless market for you guys is remind us how big is the percentage of units or revenue in residential equipment and how that probably grew double digits last year. Is that kind of the outlook for this year as well?

Barry Logan, Executive VP, Watsco: It did. So, yes, I think that was overall is about 10%, fifteen % of total units that we sell. And part of that is commercial products as well with VRF, it goes beyond residential. VRF would be a material part of that actually that Boston business we’re talking about that’s selling into this market as well. I’m not sure I can splice it in my head with residential versus commercial on ductless.

But yes, I mean, again, there are probably four primary vendors we’re doing business with. Mitsubishi is by far the largest in North America and we’re their largest customer, for example, Gree, the largest in China, we’re their sole exclusive distributor for the North American market. And that’s been a developing brand, now a 9 figure brand in The U. S. Market through that relationship.

And then Carrier has tried to solve its ductless needs for its distribution through partnerships and joint ventures with Midea, Toshiba, now that they own it. And that’s playing catch up really to the others. But you can’t rule it out because I would say Carrier has the most advanced distribution to go sell that product. But it’s a work in process and part of the equation too. And but those products have become more efficient, more accepted by contractors, more likely to be recommended by contractors.

That was always the barrier of entry for those products, not the manufacturers, not the distributors, but the contractor saying to a homeowner or a business, you should do this. And so it will always be an ingredient of growth in the industry, but it will still be I think never disruptive to what the industry is doing.

Operator: Maybe we can well, sorry, one more question. It’s on the market. So flat last year, you guys grew mid single digit, gained a decent amount of share. So is this year kind of the market grow a little bit faster and you guys don’t have that much share gain? Is that the algorithm that you’re thinking about?

Barry Logan, Executive VP, Watsco: We’ll never like say those words out loud. We’re not looking for a lot of share gain. We’re always looking for a lot of share gain.

Operator: That’s a good number though, the five versus the flat.

Barry Logan, Executive VP, Watsco: Yes. The way I’ve always handicapped this conversation in my career is, because in March, I don’t have insight really to the season yet, is that the long term thirty year, forty year compound growth rate of unit growth is 4% rounded. Does it look like that? That’s about all I can think of, right? And I don’t see a reason why the market shouldn’t be a conventional kind of market.

And our job is to grow share against that, of course. I don’t see a reason why the market can’t grow in its long term growth rate this year. Okay. Consumer is strong, unemployment is down, contractor credit is never asked about. It’s our biggest leading indicator of what’s going on.

And credit has been extreme low risk, extreme low write offs. I mean, two or three basis points of write offs. I’ve done this job when write offs of bad debt is two fifty basis points, 300 basis points. So when it’s 10 basis points or less, it’s a good market.

Rick Gomez, VP of Corporate Development, Watsco: Got it. And just to double click on one element of the answer there is, share gains don’t just magically happen. You have to work hard at those share gains. And so question is, what do we have that makes that a more compelling proposition to the contractor? And the answer is this digital platform that now exists within Watsco that is a $2,500,000,000 part of our business that’s in the hands of 60,000 contractors.

It allows them to do things digitally and with us that very, very few distributors can offer those same contractors in the market. And so we need to couple, I think, if we go back in time maybe two point five years, three years in the markets that we’re in, we can confidently say we’ve grown share about two basis points over that horizon. We think market share is best gauged over that period of time because a ninety or one hundred and eighty day period isn’t always indicative of a whole lot of things beyond that. And so we like the long term trajectory of that market share. It has magically coincided with a great uptick in our digital strategy and our e commerce business.

I don’t think that’s by accident. I think those are two very those things are tethered in the end. And if you think about who our customer is, it’s largely a three to four truck small business owner operator and they’ve never had access to the technology that we are now providing them. And it’s helping them think differently about their business. It’s helping them envision different possibilities within their four walls.

And it’s turning that owner operator into a more sophisticated actor in the channel. So those investments have been have paid off in spades. And I think it is the linchpin to why we think there’s confidence beyond whatever the market gives us, whatever that long term trajectory is of 3% to 4%, we think there’s an upward bias to that over time because of the digital strategy.

Barry Logan, Executive VP, Watsco: And in the scorecard, just again, now I’ll exhaust the thought, but if I take our 9% growth in the quarter in sales, the digital community was in the teens. The non digital community was less than nine. So what happens? Is it the more advanced, ambitious, technology driven contractors growing at a faster rate, taking share from there? Could be an answer, right?

Could be a share wallet discussion with our user community, could be a few different things. But we also know the attrition of that user community is a fraction of the attrition of our conventional old school contractor that might want to go on Trane’s trip to Portugal this year instead of our trip to Mexico. Our industry still has customer trips going somewhere. You lose market share with a customer if they liked someone else’s trip better. Still happens by the way, that’s not like 1970.

That’s we may be going to Portugal this year. I don’t know. But I know which contractors are going to grow faster over time. And so that’s why we really like this digital strategy. We always invite anyone to come down after our conference calls to like listen to that and hear it.

It’s a longer term perspective. We get questions about AI. We get questions about what the manufacturers are doing and what our competitors are doing. And we’ve always believed that if we’re there first with our customer to take them to basically run their business on our platforms, that’s an advantage no one else can create if we do it first. So that’s where these investments are paying off, we think also.

Pat, Analyst, JPMorgan: We want to ask obviously a question on gross margin. But before we do that, anybody in the audience have questions on the markets, want to ask? No? Okay. So maybe just talk about how we should think about the gross margin performance.

27% has been kind of your line in the sand for gross margin. Should we think about that as kind of what the expectation is for 25% as well? Because there’s a lot going on this year with product transition and what have you should could be better than that, could be higher than that?

Barry Logan, Executive VP, Watsco: Sure. I feel better than worse about answering that question, by the way. We’ve pegged 27% a couple of years ago after increasing gross margin during COVID. And the fundamental question was, is it temporary or permanent? And I think, Steve, you sat in our office at a meeting, I think it was you, and you asked, is there any risk of going back to where it was?

I said, there’s no risk. And that’s like a straightforward statement not often said in a meeting. And that’s because we also felt very strong that the technology, the culture, the tools in the field, the just if not just simply the people doing their job that had raised margin, we’re going to keep pushing the boundary of what had been a 25% gross margin. And the other interesting analysis is everyone in this room manages a portfolio. Everyone’s portfolio last year went up 21% and I’m making the number up.

What’s my point? My point is inside that portfolio, you have underperformers, you have outperformers. What you report as your investment return is an average, right, of your portfolio. So is our gross margin. When we say 27%, that is an average across 10 business units.

We have business units that are at 30%, which then admits to you that we have business units less than 27%. And what are the attributes? And what’s the leadership? And what’s the technology use? And what’s the constant struggle, the constant improvement criteria you need to get to well beyond 27%.

So I’m almost doing therapy about this now and answer your question. I could be a little more, again straightforward maybe, but we see 27% again as today’s stopping point. We see higher margins over time assuming our portfolio of business units are adopting some of the technologies are better at those technologies of their peers that are already closer to that. It’s also a product mix opportunity. Our business units that are higher have a bigger mix of parts and supplies.

Those that are lower do not. When we sell parts and supplies, we’re in the 30s, 35% to 40% margins for some product lines. Equipment, therefore, I’m telling you is less than 27%. So we want to grow our equipment business. It’s more profitable when we do.

But to our margin, the parts and supplies, algebraically at least, are is an upside to our current performance. So if I think real short term, again, where we have a measure of inflation going on this year, we have a measure of new product growth coming in this year. As of March 12, a pretty stable market that we see ahead of us. I would expect to improve margin this year, not have margin risk. I say that March 12.

So I mean

Operator: On that parts and supply side, there’s been a bit of volatility on the gas front. 410A is down and kind of stable, but the 455B we’ve heard is it’s either availability, some canister issues or they’re raising price to offset the 410A weakness they didn’t expect. Anything on that front that’s a variable that’s influencing your results here in the near term or maybe just an update on what you’re seeing on that gas in the channel?

Barry Logan, Executive VP, Watsco: Sure. Well, first refrigerant is a $200,000,000 product for us. So again, 3% of sales just to like the scope the answer when before I give the answer or give some scope before I give the answer. There has been, I would say, deflation on average over the last three years in four ten gas, which defies logic because it’s become a more scarce product. And but nonetheless, that’s what it is.

And as for so I don’t think there’s a story to tell. Margins are fine in Refrigerant. There There’s no price volatility per se. There’s no more deflation going on. I don’t think we’re nor are we seeing the upside of greater scarcity that economically should occur.

With April, it’s probably less than $25,000,000 of revenue today. That will grow as contractors stock their trucks and get that infrastructure kind of in place. Nothing early on that I would say is a trend or a signal that we that we see Steve. That’s also an OEM question where they’re buying railcars of it in a factory. It’s a more material event at the OEM level.

We’re buying 25 pound containers one pellet at a time and you should ask them that question. That’s a broader dynamic.

Christian Roth, Rockwell: Okay.

Operator: Great. We’re out of time. Thanks, guys. Thank you, everybody. Thank you.

Ajahn Ezellner, Rockwell: You.

Christian Roth, Rockwell: Okay. You and you

Operator: Okay.

Christian Roth, Rockwell: Okay.

Ajahn Ezellner, Rockwell: Okay.

Christian Roth, Rockwell: Okay. Okay.

Barry Logan, Executive VP, Watsco: Okay.

Christian Roth, Rockwell: Okay.

Pat, Analyst, JPMorgan: You

Christian Roth, Rockwell: Okay.

Pat, Analyst, JPMorgan: Okay.

Barry Logan, Executive VP, Watsco: Okay.

Operator: Okay, great. We’ve got Ajahn Ezellner and Christian Roth from Rockwell. Guys, thanks so much for being with us today. We usually just like to do a bit of intro and State of the Union as a start. If you’d like to kick it off with any kind of comments on what you guys have been talking about in the last few weeks and what you’re seeing out there, we can just start there and then we’ll go into it.

Ajahn Ezellner, Rockwell: Sure. I could do that. Thanks, Steve. Happy to be here and thanks for having us. So, yes, we reported Q1 earnings.

So for us, we’re in a fiscal year. So the first quarter for us was a good quarter. We performed better than our own expectations on the bottom line, kind of in line with expectations on the top line. The book to bill was a little bit better than what we would have expected. So we got over 2,000,000,000 in orders for the first time in, what, I think seven quarters.

So that was really strong performance, and it was pretty broad based. And certainly, we had a lot of discussion on the conference call and days afterwards around, hey, is there any pre order, pre buy going on? I’m sure you’re going to ask us some more of those questions as well. The discussion on our conference call though was around the fact that, no, it really felt like it was pretty broad based and it was and it was all aspects of our business and on top of that around the globe. And so, you know, in areas that you probably, if you were going to see a pre buy, you wouldn’t be seeing it there.

So that part was good. But, you know, it’s one quarter. We got a full year ahead of us. I’m sure you’re also going to talk, Steve, about some of the ramp that we have as the year goes on. And we want to make sure that we continue to grow incrementally and gradually during the course of the year, both on the sales side as well as the margin side.

And we’re focused on executing against that.

Operator: Great. Let’s just kind of like jump into the what’s been happening here, first of all, on the demand side. Most of the companies here have not CapEx remains solid and kind of stable, sluggish, but it hasn’t really softened. The ISM print, I thought was pretty weak. Ajani, you’ve been around for a little while.

Some of the companies we cover have decoupled from the ISM. Is the ISM still something you guys look at as an indicator? And how does that kind of inform your views going forward?

Christian Roth, Rockwell: Sure. I would start Well, Steve, as you know, we look at a lot of different indicators when we do forecasting. Historically, we’ve correlated the most with industrial production over longer periods of time. But we do, of course, look at a lot of different things, PMI, ISM, IP. It’s one factor.

And we talked about PMI getting above 50 was a good indicator. We do look at our customers as well. What’s going on with their pipeline? What’s going with our win rates? What are we hearing from individual industries that we serve?

So certainly, a lot of things factor into our surveys of our distributors and machine builders. So we take it all in as we look at how do we forecast our orders and sales and on our business. It’s not a particular one factor like ISM or PMI.

Operator: Got it. Is it the step down to 48 new orders? I mean, is that something that when that happens, you kind of like go out and canvas your customers and try and figure out if there’s a change or that’s not really that material enough of a change to start to react?

Ajahn Ezellner, Rockwell: Yes. So we have a pretty normal cadence for us. And so we’re, we’re doing periodic surveys of the OEMs and machine builder side of the business. And we’re also in constant conversations with our distributor partners. So really, there’s there was nothing that we react to around that.

But let’s be honest, right, we are a short cycle business. So we are just as interested as anything else to see what the orders were yesterday. So are we. Any comments on that? No comments.

Okay.

Operator: Three ms was here yesterday and they talked about orders holding up okay, but they actually took their sales down by a moderate amount, 2% to 1.5%. I don’t know if that’s the channel basically just being a little more cautious about when they want to take the product. Is that what you guys kind of saw in orders that the channel is just a little more cautious about wanting to have the product? Or was that more of just a like, a timing, like, hey, this is when I really need it? So, you know, like, maybe just explain that disconnect a bit between the orders and the timing of the shipments?

Ajahn Ezellner, Rockwell: Yes. So just to make sure we’re level setting on that, this is really going back to, again, our first

Operator: quarter

Ajahn Ezellner, Rockwell: where we talked about the fact that book to bill was greater than one and that really the delta around that had to do with the delivery dates on some of the projects. And really, it was more related to the project activity and the the demand date of those customers. And so, you know, if there was a, if there was anything we were gonna see when it comes to distributors not wanting to take the stock, right, a hesitation around that, you would see them put in some different delivery dates on the standard product portion of the business, and we didn’t see that at all. They were taking it at the lead times that we were offering. So there was no real manipulation around that that we saw.

So generally, felt fine with it. Probably just to confirm that we are not actually getting interim updates on our view right now. Understand that maybe three ms did that yesterday, but for us, we’re not feeling like this is a moment for us to do that.

Operator: Yes. And that’s standard practice for you guys. Totally understand. It

Ajahn Ezellner, Rockwell: is. Yes.

Operator: Yes. We still have to ask and kind of get it. Absolutely, yes. We have to give it a try. So maybe just expanding the lens a little from a demand perspective and you guys have guided for you have provided forecast for the verticals.

So maybe what informed those forecasts? And let’s just kind of like walk through some of them here and what you’re seeing. So I’ll start with food and bev because that’s people don’t talk about it a lot, but that’s your biggest single end market. I’m sure some of that comes through European machine builders, but maybe what informed your forecast on food and bev? How does that decouple from their CapEx budgets?

Maybe just an update on the vertical there.

Christian Roth, Rockwell: Sure. So first of all, let’s talk about what happened in Q1 for us, fiscal Q1. So food and beverage and broadly hybrid industry segment that has Food and Beverage, Home and Personal Care, Life Sciences, Tire did better than we expected. Food and Beverage, not seeing a lot of greenfields there. Now we are winning some of them here and there, but the majority of spend is really customer’s investments and their productivity, efficiency, resilience, cybersecurity.

So we’re seeing spend there. What we see with machine builders, especially packaging machine builders who serve predominantly or in a big way food and beverage and home and personal care, kind of the broader consumer packaged goods sector, we’re seeing some green shoots there. And it’s encouraging and you might notice, Steve, that especially HPC, those machine builders are viewed as a leading indicator on the recovery side. Now it’s only one quarter, so that was kind of an early, green shoot, but that was one of the things that gave us confidence. We haven’t changed our expectations for the full year for food and beverage, but certainly it’s a great data point.

We talked about European machine builders. As you know, this is where we had a lot of our excess inventory last year, especially with our largest controllers. So we are seeing that destocking coming to an end. So that’s great. We see a stabilization and especially with Italian machine builders.

But overall, Food and Beverage and HPC came in better than we expected.

Ajahn Ezellner, Rockwell: Yes. And maybe I’ll add to that just to say that we do obviously have sales teams that are focused on verticals. And part of their process is to actually go engage with those end user customers and talk to them about their CapEx and OpEx budgets. And the view that they got from those customers around the projects they had planned for this year, it supported our overall view for what we thought our performance was going to be for fiscal

Christian Roth, Rockwell: ’twenty five. I’ll just add, Steve, we are expecting a gradual sequential improvement. So when you look at our forecast for the full year, whether it’s by industry or for the company, it’s one view from a year over year standpoint. Remember, first half of last year, we still had some product backlog. But it’s really more of a quarter over quarter story.

And we do expect a gradual improvement in food and beverage certainly is one of them.

Operator: And did you I would assume that a lot of those guys, you said Italian, the European OEMs, Any do they talk at all about kind of cross border risks and reciprocal tariffs or anything like that? This your customers coming, not necessarily you guys coming cross border, but the customers coming into The U. S. Have they talked about that at all? I mean, I’m sure it’s pretty fluid, but Yeah.

Ajahn Ezellner, Rockwell: I think it’s pretty fluid. Obviously, they’re when they’re talking to us, they’re asking us questions around what what what does it mean for them from a pricing perspective because, of course, they want to have predictability in their business. And then, of course, there’s it’s happening on the other side for them too, which is okay, what’s the potential impact on their business and how exactly are they going to be in a position to recover if there are additional costs. As we all know, it’s a fairly dynamic environment, and there’s some difficulty to have predictability around it right now. And so I think the key for us at least and with our discussions with all of our customers, whether they be OEMs or distributors, is that we are putting in place a process to say, hey, look, if we’re going to actually incur a cost, that our intention is to recover that and here’s our process for doing it.

Operator: And on these OEMs, you talked about that being the biggest aspect of destocking. So basically, you’re saying that like the growth there is actually for them is not that great, but you guys are now kind of like recoupling to that trend line and that’s kind of a gradual I

Christian Roth, Rockwell: think a good word is stabilization.

Operator: Yes. Where are you when it comes to that? Will we be more normal and in line by kind of year end with those guys? Or do you still have a ways to go?

Christian Roth, Rockwell: I think the most important part is for the whole company. We’re talking about really end demand is starting to be represented in our sales, right? And so we are as we as we go through the year, this is why we are not really going to talk too much about orders going forward because we’re back to that normal environment pre pandemic where orders and sales are kind of sitting on top of each other. Yeah. So that that’s a, I guess, a good way to just explain where we are

Operator: with that. That’s been my view as well. But obviously, everybody likes orders. So that’s kind of the food and bev. And any signs of longer term food and bev?

What is the what’s kind of the natural growth rate you see in that industry?

Christian Roth, Rockwell: We haven’t shared that just for that particular industry, but there are a lot of areas within food and beverage segment because it’s you know, there are a lot of areas there. There’s agricultural processing, there’s protein, there’s

Operator: Yep.

Christian Roth, Rockwell: You know, confectionery and all those things. We’re working with the leaders in all of the different segments on their next gen platforms. Production logistics, what we’re doing with autonomous mobile robots is a source of a lot of conversations in pipeline there. They’re investing in software. We can I know we can we might talk about it later, but a lot of what we’re doing with AI and how for them, really, it’s more if they’re not building out capacity right now, it’s how do they increase the production volume and yield and improve their quality?

And we’re doing a lot more with our advanced technology, with our AI, with our software offerings. And so it’s an attractive market. Food and beverage has never been the fastest growing, but it also has been very resilient through the years. We expect it’s 20% of our total revenue, so it’s our single largest vertical within that. And this is why it’s one of our focus industries.

We see a lot of areas, submarkets that are slated to grow faster than average.

Operator: Right. And then just lastly on the hybrid side, life sciences, seems like it’s a bit of a there’s some waves here. There’s a big wave and then it settles in and now it seems like there’s a bit of a pickup there as well. On the life sciences side, maybe just the same conversation.

Christian Roth, Rockwell: We had a yes, we actually increased our forecast for the full year in life sciences. So we see a lot of good activity. Similar to food and beverage and HPC, a lot of customers are investing in their resilience and overall kind of efficiency, production efficiency. However, we do see some greenfields there, especially in the GLP-one side and we have good presence there. As you might know, we have a very strong software offering, especially in MAS and digital, a lot that helps us a lot with life sciences companies.

We had a pretty large win with a European life sciences company just last quarter we talked about. So we are it’s a combination about core automation and some of our newer software offerings, but well positioned. So we expect that to do better than we thought coming into the year.

Operator: And when it comes to that 5% to 8%, I’m sure the long term growth rate, I’m sure life sciences is at the high end of that when you think about it longer term?

Christian Roth, Rockwell: So when we introduced that 5% to eight percent longer term framework growth target, we talked about five focus industries, life sciences was one of them. So we talked about it for a reason.

Operator: Okay. Turning to discrete and auto, just talk about what’s going on underneath the surface there. There’s obviously the EV stuff, not the biggest market for you guys, but still important and growing, but obviously some concerns there that around the future of that capacity. Just talk about the difference between EVs and the traditional OEMs.

Christian Roth, Rockwell: So automotive is about 10%. It’s a little bit less than 10% of our total revenue, of which EV is about a third. In our Q1, automotive actually came in as expected. Yes, it’s challenged. We expect it to be challenged.

But especially if you look at automotive brand owners, they’re not they’re kind of delaying their CapEx plans right now. They’re still spending on their OEE and productivity. This is where, again, our auto AMR business is doing well because these customers are trying to complement their scarce labor with technology, with autonomous mobile robots. There’s growth. If you look at historically, automotive for us has been driven by both model changeovers and MRO.

These model changeovers are not going anywhere. Customers these automotive companies will need to continue to innovate to get more models out there, which drives business for us. For sure, we have a great readiness to serve the EV market. We’ve talked about it. But regardless of the powertrain, whether it’s ICE, hybrid, battery, we are well prepared to serve these customers.

So longer term, we think it’s going to be good. EV growth is going to be there. It’s more subdued. It’s less than we all expected a few years ago, but it’s still growing. And so we think longer term we’re well positioned, but it certainly is being impacted by some of the trade and policy uncertainty this year as well.

Operator: And I guess on those mega projects that you guys had highlighted two years ago, semis we could also throw in there from a discrete perspective. Are you seeing any signs of life in those projects that have been delayed that may be coming back on or what’s kind of the timeline, the reset timeline of some of those?

Christian Roth, Rockwell: We do see projects and in fact when we talk about projects or mega projects, semiconductor is one of the verticals there that has a lot of those projects in the pipeline. This year, we expect to be challenged. If you look at the excess inventory, especially in industrial and EV markets, you look at the trade and policy and certainly similar to automotive, that’s certainly weighing on this customer’s plans.

Operator: Right. So there’s not a lot of visibility in those things reaccelerating.

Christian Roth, Rockwell: Not in fiscal ’twenty five in a big way, but like I said, quarter over quarter, we do expect kind of a gradual improvement for overall company.

Operator: And then one last one on discrete. Warehouse automation was very strong. What’s driving that organically?

Christian Roth, Rockwell: E commerce and warehouse automation. So we kind of combine both the e commerce but also a more broader warehouse automation application space, continues to be strong. It’s a combination of new fulfillment centers on the e commerce side and we serve the whole ecosystem. So the end user, the SI’s, the machine builders who serve that customer segment. So that’s going strong.

And we have a great combination of our core automation, but also some of our newer offerings, including our Emily three d, our digital twin software to help us there. On top of that, just really broadly, if you look at the infrastructure for warehouses today, it’s not sufficient to meet today’s and tomorrow’s needs. And so that’s driving a lot of modernization of existing warehouses for other customers. We’re talking about global logistics companies, parcel companies, traditional retailers who are who want to have the competitive advantage and they want to use this opportunity to upgrade. And so it’s both.

And one more thing, we did talk about our data center business. It’s also grouped in that as well. So all three are doing well. That’s right.

Operator: The Q8 business that you report the data center stuff like that. Yes, so that’s very strong obviously. And then just lastly on process, that’s a market that has been coming back but pretty slow. Any comments there on how that’s going to trend?

Christian Roth, Rockwell: Sure. We haven’t changed our outlook for process. We think if you look at within that, energy is about 15% of our total revenue. And it’s a combination of course, traditional oil and gas, but also what we’re doing with carbon capture, decarbonization renewables. Q1 was a tough year over year comp, so that kind of informs what happened there overall, well positioned.

There’s still customer investment in oil and gas and where we play is really getting more out of the existing wells, is using software and automation to expand that a lot more on upstream. But we’re also working with direct air capture, CCUS broadly, renewables. And so we think it’s a good business. And for us, we have been investing in our process architecture, process technology and expertise. And so that’s been paying off.

Process is our largest industry segment, if

Operator: you look at our revenue breakdown. For a lot of these end markets, I mean, can you significantly decouple from customer CapEx budgets? I mean, are there any where you see an opportunity to really like outperform customer CapEx budgets?

Christian Roth, Rockwell: You mean broadly industry in the process? Broadly,

Operator: in any of these industries, you’d highlight, hey, the CapEx budgets are here, but like we have something that’s really going to drive a plus 3%, four % growth relative to CapEx budgets, kind of outgrowth?

Christian Roth, Rockwell: Yeah. I mean, if you look at what’s going on right now, whether it’s food and beverage, whether it’s automotive, whether it’s life sciences, the customers are optimizing their offerings right now. They’re not they’re reluctant to make any large capital outlays right now, but they’re investing, whether it’s AMR, whether it’s software, could be MAS, it could be our digital twin. It’s really cybersecurity and recurring revenue we have through that in addition to other managed services. Not to say completely decoupled.

CapEx still drives a big part of our business, but we have been investing and diversifying our revenue streams to give us more access to some other things that are more resilient.

Operator: One last question on demand, more higher level. I think in November, when all this happened, new administration, I’m sure that there were some customers that saw the writing on the wall and wanted to get ahead of things. Did you have any conversations or have you had any conversations where people are kind of like proactively looking at reshoring and bringing it back to The U. S? Have you seen an uptick in those conversations?

The translation from tariffs and all the noise out there into the actual kind of on the ground bringing stuff back to The U. S?

Ajahn Ezellner, Rockwell: Yes. I don’t know if I would necessarily specifically index it to an administration or the election or anything like that. But it’s been an ongoing conversation for sure around folks that are looking for bringing their production closer to their end user customers, taking out some of the issues that they may have seen during the supply chain crisis. You know, labor efficiency, labor availability continue to be issues. And so the ability to maybe invest closer to where their customers are in taking labor out of the equation, I mean, that’s where Rockwell lives.

That’s where we can help them.

Operator: So a bit more evolutionary than kind of an inflection? Right. Okay. Just moving away from demand and to the margin side, this is a topic that’s near and dear to your heart, I’m sure. Yes.

How is that progress coming along? I know you’ve only been here for a relatively short period of time, but some big expectations out there. What are maybe some of the things that have surprised you early on here?

Ajahn Ezellner, Rockwell: Any challenges, opportunities? Yes. I think just to go back in time a little bit. So I’ve been with the organization for seven months. Before I joined, there was a cost out program that was underway.

And so that started in the second half of fiscal twenty twenty four. The first wave of that was really more focused on SG and A and bringing more efficiency into our organization. And so that was primarily headcount related, and that was mostly done in the second half of fiscal twenty twenty four. If you go from kind of one year ago or a little bit more than a year ago to today, we’re down, I think, 12% in headcount in that timeframe. Part of it from reductions and then part of it through normal attrition and just being conservative on our add backs.

So that is, you know, really we’re seeing the kind of the annualization of that through the first half of this year. The second wave is underway right now. That wave is really more focused on the COGS area. And looking at our direct materials spend, our indirect materials, our logistics spend, trying to bring more efficiency into our operations, our SKU count and rationalizing that, which is really where I’ve dug in a lot more. And so I I like the program a lot.

I think it was it’s a great opportunity, and it’s not to say that the, the Rockwell team had been doing anything wrong. It was really more of the fact that, over the last three, four years in the supply chain crisis, it was all hands on deck and working really hard to get the materials in the door to get them converted and get them out the door as fast as possible. When you’re doing that, right, you’re spending a bunch of extra money on the logistics side, doing things via air freight instead of ocean freight. You’re spending money on overtime. You’re probably not being super efficient in your operations.

We weren’t doing a lot of productivity projects in our factories during that time frame. So it’s a really good opportunity to have that reset. And so that should yield us about $250,000,000 of savings in fiscal ’twenty five. And then, of course, we’re going to get the annualized benefit of that into fiscal ’twenty six. And on top of that, if volume does continue to grow, then we’re going to get that benefit just because it’s a really hard program to implement when you’re talking about a low to no volume growth environment.

And so when you actually do get some volume growth, then you really yield the benefits of these kind of programs.

Operator: So the 30% to 35% incremental margins you guys have talked about, I think that’s still the number?

Christian Roth, Rockwell: 35%.

Operator: Thirty five % incremental margins you guys have talked about. Is that still the number? Or should you expect if we get a little bit of volume, you should be above that early in that cycle? Are you is there an upside bias to that number?

Ajahn Ezellner, Rockwell: Yes. I mean, so we are generally, we’re holding that 35% just because you know, at least the way I look at it, first of all, from quarter to quarter, it’s probably not gonna you know, it’s it’s not gonna be as simple and easy as that. And that overall through that cycle, we should be looking at 35% number. Now theoretically, you know, if we continue to execute this really well, you continue to expand your gross margins, then you should be in a position to build off of that. Not quite ready to sign up for that one.

Operator: Got it. And is there a wave two of this perhaps on the COGS side next year, a more and what I mean by that is a more kind of official plan as opposed to just getting the volume leverage or is this are we kind of like done with the kind of

Ajahn Ezellner, Rockwell: No, I appreciate you asking the question because it’s really important. And so you know, the I’ll go back even to before I started at Rockwell. One of the first discussions I had with Blake in the interview process was around, well, okay, this is great. I understand it’s a really good initiative. But what’s the organization doing to make sure that a framework is put in place to turn this into something that’s not event driven, but is really more of a way of life?

And so and it was already in process, and there was work being done on it. But that’s how we ended up on the Rockwell operating model and, taking all the learnings, all this good work that the organization has done, using this opportunity for a reset, and then taking that and building off of it and turning it into a really strong continuous improvement and operational excellence program, which we talked about at our investor day in in November. And so it’s not necessarily a another wave to come behind this. It’s really more of a how do we institutionalize it, have it so that it it it continues to evolve regardless of who the leaders are at the organization or any individuals and make it so that it’s really part of our way of living.

Operator: And so the way we’ll see that is not necessarily like, hey, on October 1 or whatever, we’ve got another $50,000,000 plan that’s going to result in this much in savings. It’s just more like, hey, we’re guiding to 35% plus incremental margins. That’s the way we would it would be much more just organic and part of the business as opposed to another item of the bridge.

Ajahn Ezellner, Rockwell: Yes, I think it probably will be more just part of the business and not really part of the bridge. And you may see us take some of that yield off of those and use it to reinvest in the business.

Operator: Yep. That makes ton of sense. Turning to tariffs, maybe just remind us Sure.

Ajahn Ezellner, Rockwell: Can I pause you for a second? Sure. So can we I want to take a moment to just talk about investment in the business. 100 percent. If we can.

Operator: Yeah.

Ajahn Ezellner, Rockwell: Because you’ve had an underweight rating on Rockwell for quite some time. Yes. You’ve been fairly critical of our investment spending during the last half a dozen years or so. And so we should take the opportunity, right, to your conference, we should talk about it. Sure.

We should talk about the investments that Rockwell is making in our business, in particular, new product development. And so just to give the facts out there, so about 6% of our sales are plowed back in new product development every year. That’s NPI specifically. We feel comfortable with that number. That number is heavily from the software and control side.

Software is a much bigger investment number, right? So that’s in the low teens for us. For Intelligent Devices, that’s a kind of mid teens percentage. In the intelligent sorry.

Christian Roth, Rockwell: Mid single digits.

Ajahn Ezellner, Rockwell: Oh, sorry. Mid single digits. Pardon me. It’s a mid single digits number. And that is a business that has a heavier configured order portion of the business, which is not something that needs R and D spend specifically.

Yes, exactly. It’s labor. And so for the product portion of that business, it’s also getting an outsized spend. And life cycle services, again, is more of a project type business, which doesn’t need that kind of investment. So So I’ve read your reports.

I’ve seen the questioning around our investment level for sure. At the same time, ultimately, especially when you’re talking over half a decade or longer timeframe, this should ultimately manifest in an answer in things like market share. 100%. So from our data points and what we look at, and our data points are pretty broad based around, we look at industry data points, we look at what’s happening with our win rates, we look at what’s going on with the competitive environment and our peers and what we can see from the detail around that. We feel like during that kind of half a dozen years that we’ve held on or gained share in most of our product categories.

So we feel like our investment level is pretty good. But at the same time, again, your conference is your floor. So we talk about it? 100%. So what I’ve seen

Operator: in the numbers and the bridges you guys have given, there was a $2,000,000,000 investment account. You guys would talk about how much that was either going up or down year over year. And you could see whether that was tracking with sales or not, I. E, falling into margin or not. And in times where you guys were seeing volume declines, that number was being toggled back and effectively being used to defend margins, which is your strategy and your prerogative.

In addition, if you then translate that and go to the field, and the field work we do, we go to conventions, we visit with your competitors and look at the different booths and the offerings, you go to the other company’s booths, and they are certainly a lot more fancy than what you guys are presenting from a whatever it is software perspective. In addition, going to Pack Expo, visiting with several of your machine builder partners that you’ve introduced us to over the last fifteen years, Chris Seay introduced us a while ago, the feedback from some of those customers is that you guys are losing sockets on some of those products. So again, I’ve never said in my reports that I can see in the revenue numbers that you guys are losing market share. I’ve always talked about it as a risk because I can’t see it and I agree with that and I’ve never said that Siemens is substantially outgrowing you guys. But that’s the the mosaic that I see.

And as a smaller company with a much smaller R and D budget, Siemens has obviously invested, I don’t know, $5,000,000,000, 10 billion dollars in software to come over the top. Clearly a more they were early on that. They were much more focused in that strategy versus you guys where it’s been definitely more fragmented. That’s the mosaic I see.

Christian Roth, Rockwell: So Sure, Steve. If I may, two things. One, really quickly, and the old version of investment spend, there was a big base, as you know, had SG and A and R and D in it. Sure.

Ajahn Ezellner, Rockwell: And

Christian Roth, Rockwell: that’s what we used to report. We went away from it because it was really obscuring the true NPI spend. You can look at our R and D spend through the years, and it matches what Christian said, about 6% of sales. Within investment, when you do have some years, you have to drive productivity. And we always drive productivity in the functions.

That functional spend wasn’t that 2,000,000,000 spend. So it was not really true new product development that you were looking at. Going forward, we’re going to talk only about R and D so then you can see what we’re doing. So that’s more of, I guess, reporting structure or characterization. On the share part, especially you mentioned Siemens or fancier industry booth.

Listen, at the end of the day, it’s what we’re doing for our customers in our production automation space. Yes, Siemens is spending a lot of money in the production design in a product design and product automation space. The recent acquisitions, the R and D, we are focusing we’ve carved out production space. And in that space, we’ve made significant investments organically and inorganically over the last several years, as you know. And we think we have a leading portfolio actually.

And I’ll be happy to talk about whether on the software front or on the devices front, but there’s a big difference. There’s PLM, there’s CAD, there’s EDA and then there’s actual production. And those are very different areas.

Operator: Well, they also have a virtual PLC that they’re pretty excited about. And it’s like for like versus your virtual PLC, it’s hard to I’m not a technical expert, but at face value, it’s kind of hard to

Christian Roth, Rockwell: I’m glad you brought it up actually. And you were at our Investor Day in our Automation Fair. When you look at virtual controller, by the way, we do have our version that

Operator: shows And again, this is like point 0001% of revenue.

Christian Roth, Rockwell: Right? Right. Right. No. The the most important part is really it’s software defined automation, and virtual controller is only one part of it.

What we’re doing is so much broader than that, which is really how do you take and define and design application content, and then you can just be hardware agnostic. It’s not just a PLC. It’s visualization. It’s IO. It’s how you deliver all the content.

And what we have with our cloud native platform, we’re better positioned than anyone else to do that. And so we can talk about virtual PLCs. We can talk about software. We can talk simulation all day long. And so we didn’t mean to kind of ambush you here, but I think it’s an important conversation to have because, R and D is there, and we are, you know, developing leading technologies in our space.

Operator: And to be clear about this, I’m not sure like bullet one, two and three of my thesis has been about market share. And just factually, The Street had like $14 a share of earnings as their forward estimates and you guys are doing $9 So I think like that has nothing to do with market share. That has more to do with almost like 75% to do with how the cycle played out and where people’s expectations were at that time. So I don’t want the message to be to like, I’m underweight Rockwell because you guys are like losing share left and right. And if things picked up tomorrow and the cycle changes, like, I don’t think you guys are going to sit there and not participate.

Christian Roth, Rockwell: Understood. But I’m glad we cleared up the R and D part, the R and D and investments, I think. Sure.

Ajahn Ezellner, Rockwell: Yeah. Maybe one other data point just to make sure we’re, that we all are on the same page around this. That new product development investment amount, that 6% number, that actually excludes any of our sustaining R and D. So sustaining spend for engineering is about another two points to three points that we’re spending. So our total engineering spend is upwards of high single digits.

So we are spending a fair bit. And again, really overweight as a percentage on the software side of the business.

Operator: Yes. And to be clear, if the economy picks up and CapEx picks up and we start building a bunch of plants in The U. S, I don’t think you guys are going to sit that out. And obviously, share in this industry changes very slowly over time because you’re leveraging installed base and nobody really rips and replaces unless something’s wrong.

Ajahn Ezellner, Rockwell: Then installed base is a great powerful tool for us. It

Operator: is, For sure. I really appreciate this conversation. This is actually a ton of fun.

Ajahn Ezellner, Rockwell: Yeah. Me too. I love it. Yeah. Thank you.

That’s it. That’s all we got time for. All right. Great.

Operator: Thank you.

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