Our view: In this note, we highlight relevant read-throughs for ATS from Rockwell’s FQ4 results. Given that Rockwell is a Component Supplier and higher up the Automation value chain relative to System Integrators/OEMs (i.e., Rockwell supplies parts/equipment to companies such as ATS), we view the company’s results as providing only a directional indication of demand trends in end- markets and regions that are relevant to ATS (recall that in F2022, none of ATS’ suppliers accounted for more than 3.5% of its supplier spend). Overall, we view Rockwell’s FQ4 results and F2024 outlook as directionally positive for ATS. For more information on ATS, see our recent Investor Day takeaways note here.
Relevant commentary from Rockwell’s FQ4 results
Rockwell (not covered) generated revenue of $2,562.9MM (+20.5% YoY, +17.7% YoY on an organic basis; vs. consensus of $2,439.5) and Adjusted EPS of $3.64 (+19.7% YoY; vs. consensus of $3.47). On the earnings call, management noted that sales growth is currently more reflective of the company drawing down its elevated backlog (which is still well-above pre-pandemic levels at $4.1B exiting Q4, but below management's Q3 guidance of $4.5B-$5.0B exiting F2023) than underlying demand trends given the normalizing lead times following supply chain disruptions caused by the COVID-19 pandemic. By industry segment, Rockwell’s FQ4 results reflected Discrete (~25% of FQ4 revenue), Hybrid (~40%), and Process (~35%) organic sales up ~15%, ~low teens, and ~25% YoY, respectively. Most relevant to ATS, Rockwell reported Q4 FY23 organic sales growth in Automotive, Food & Beverage, and Life Sciences of ~30%, ~up low double digits, and ~up mid single digits, respectively. Recall that the Transportation, Life Sciences, and Food & Beverage end-markets accounted for ~84% of ATS’ revenue in F2023. Rockwell’s Q4 YoY organic sales growth in North America and EMEA was +12.2% and +23.4% YoY, respectively (Latin America and Asia Pacific were +24.1% and +31.5%, respectively). Recall that North America and Europe contributed to ~91% of ATS’ F2023 sales (with Asia/other accounting for the remainder). Overall, we believe Rockwell’s Q4 results and introduced F2024 outlook (further details below) offer a positive read-through for ATS, as they point to continued strong end-user demand for automation solutions.
Rockwell also introduced F2024 guidance, which calls for: 1) organic sales growth of -2% to +4% YoY (Rockwell expects orders to increase low-single digits, with the highest growth expected in the Americas); 2) segment operating margin of ~21.5% (+20bps YoY); and, 3) Adjusted EPS of $12.00-$13.50 (-1.0% to +11.4% YoY). Rockwell's management believes that orders reached a trough in Q4 (they have already begun trending higher since October), which combined with normalizing lead times (largely back to pre- pandemic levels now) and lower distributor inventory (in part driven by improving lead times), should support higher orders in F2024 (i.e., orders should now be more reflective of demand, from customers like ATS, going forward). Further, management noted that the lower-end of Rockwell's organic growth forecast (-2% YoY) reflects the potential for deterioration in the macro backdrop (which could result in projects getting "pushed to the right" or canceled outright) and slower-than-expected inventory reduction at distributors. With that said, we note that the company reported +16.7% YoY sales growth in F2023 (+16.9% on an organic basis), which followed +10.9% YoY growth in F2022 (+11.3% on an organic basis), implying that the F2024 revenue growth guidance range still reflects a relatively strong outlook, in our view. Overall, we view improving lead times as directionally positive for ATS; however, we view the potential for the above-noted headwinds to impact results as modestly negative.
By industry segment, Rockwell forecasts Discrete organic sales to be -LSD% YoY in F2024 (vs. up ~15% YoY F2023), while Hybrid and Process are both expected to be +LSD% YoY (vs. up ~15% and ~20% YoY in F2023, respectively). Most relevant to ATS, Rockwell expects Food & Beverage, Life Sciences, and Automotive to each be up low-single digits. See Exhibit 1 inside for more details. Overall, we expect ATS’ sizeable backlog to support revenue growth over the near- to medium-term, while further easing of inflationary pressures should also support margins.