Stephen Tusa

Stephen Tusa asked about the level of inflation experienced in the quarter and whether the 1% tariff-based pricing achieved in Q4 fully offset tariff costs. He also inquired about expectations for inflation and tariff impact in fiscal 2026, and the overall book-to-bill ratio for the current quarter.

Answer

Christian Rothe, SVP and CFO of Rockwell Automation, stated that inflation was relatively modest in the quarter, offset by cost reduction and margin expansion actions. He confirmed that the 1% tariff-based pricing in Q4 achieved EPS neutrality by offsetting tariff-based costs. For fiscal 2026, Rothe expects inflation to remain minimal and reiterated the goal of maintaining EPS neutrality for tariff-based pricing, emphasizing it's not for margin expansion. He also confirmed the book-to-bill ratio remained around one, with product orders matching shipments.

Stephen Tusa inquired about the level of inflation seen in the quarter, the impact of tariff-based pricing on EPS, and the current book-to-bill ratio.

Answer

Christian Rothe, SVP and CFO, stated that inflation was relatively modest, offset by ongoing cost reduction and margin expansion actions. He confirmed that tariff-based pricing achieved in Q4 was neutral to EPS, solely offsetting tariff-based costs, and this approach will continue in fiscal 2026. Rothe also reiterated that the book-to-bill ratio remained around one, with product orders aligning with shipments.

Stephen Tusa asked for clarification on the Q4 Electrical Americas revenue outlook, specifically if residential weakness persists and if one-time Q3 issues will ship, and whether the implied 18% growth is impacted by residential. He also questioned why Electrical Americas' margins might not improve more significantly next year, given current year's 50 bps decline, 100 bps inefficiencies, and absorption of tariffs and deals.

Answer

Paulo Ruiz, Chief Executive Officer, confirmed that residential remains weak but stated that the Q3 miss (less than one day of sales) would carry over as a tailwind for Q4, contributing to the strong double-digit growth. He also noted that Q4 has easier year-over-year comparables. Regarding margins, Ruiz explained that the current year's four acquisitions represent significant investments that will not be repeated at the same pace next year, allowing for a focus on digestion. He anticipates that the 100 basis points of inefficiencies from ramping 12 facilities will gradually diminish as the footprint matures, leading to improved margins over time, though he cautioned that it's too early for specific 2026 guidance.

Stephen Tusa asked for clarification on the Q4 Electrical Americas revenue, specifically if residential weakness and one-time shipping delays from Q3 explain why the implied 18% growth is lower than the prior range. In a follow-up, he questioned why Electrical Americas' margins wouldn't improve more significantly next year, given the current year's 50 basis points decline, 100 basis points of inefficiencies, and absorption of tariffs and deals.

Answer

CEO Paulo Ruiz confirmed that residential weakness and Q3 shipping delays, representing less than one day of sales, are carryovers that will act as a tailwind for Q4, contributing to the strong double-digit growth. He also noted that Q4 2024 had an easier comparable with only 9% growth. Regarding margins, Paulo Ruiz explained that while Eaton is absorbing costs from four acquisitions and investments this year, the pace of deals is not expected to continue next year. He anticipates that the 100 basis points of inefficiencies from ramping 12 facilities in Electrical Americas will gradually diminish as the plants mature, leading to margin improvement over time, though specific 2026 guidance will be provided in February.

Questioned the rationale for the lower EBITDA margin expansion guided for 2024 compared to 2023 and asked about the company's competitive strategy as a standalone entity amid industry consolidation.

Answer

The reduced margin expansion in 2024 is due to increased investments in growth areas like sales and product development. Over the long term, margin growth is expected to be consistent with past trends. The company is open to all possibilities but feels it is well-positioned to compete effectively on its own.