Rockwell Automation, Inc.

Thank you for holding and welcome to Rockwell's 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. If you have a question at that time, please press star 1. At this time, I would now like to turn the call over to Jessica Caracos, Head of Investor Relations. Ms. Caracos, please go ahead.

Thanks, Rain. Good morning and thank you for joining us for Rockwell Automation's third quarter fiscal 2021 earnings release conference call. With me today is Blake Morett, our chairman and CEO, and Nick Gangstad, our CFO. 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. Supplemental information related to our new business segments can be also found in the investor relations section of our corporate website. 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.

Thanks, Jessica, and good morning, everyone. Thank you for joining us today. Before I begin, let me first congratulate our Milwaukee Bucs for such an incredible season. Go Bucs. Let me now take a moment to talk about a couple of key highlights in the quarter. First of all, I'm pleased to welcome Cyril Pertikot as our new Chief Technology Officer. He succeeds Sujit Chand, who is retiring later this year after a long and very impactful career at Rockwell. And I'll talk more about his legacy in November. Cyril brings a wealth of automation and digital transformation experience to the role with great global experience and a passion for helping customers. His mindset and additional perspective will help drive even more value from the combination of our core automation, software, and managed services offerings to provide positive outcomes for customers. We also announced the signing of a definitive agreement to acquire Plex Systems, which we expect to close in Q4 of this year. Plex is the leading cloud-native smart manufacturing platform operating at scale, and it will be a big part of our factory-taught software-as-a-service offering. We look forward to showcasing its unique capabilities and integration into a complete production system at Investor Day during our November Automation Fair in Houston. Now, let's turn to our quarterly results on slide three. We saw another quarter of exceptional demand across our product portfolio. Total orders surpassed $2 billion, reflecting a very strong demand pipeline. Total revenue of over $1.8 billion hit a new record and grew 33%, including a one-point contribution from recent acquisitions, including Awesome, Calypso, and Fix. Organic sales grew 26% versus prior year, despite significant supply chain challenges. The manufacturing supply chain continues to remain constrained due to increased levels of demand and persistent electronic component shortages. It's a dynamic situation that we are monitoring closely. Our global supply chain organization continues to navigate these challenges and is taking a variety of measures, investing in both short and long-term strategies to increase our supply chain resiliency. I'll now comment on our top-line performance by business segment. Intelligent devices organic sales increased 29%, led by strong broad-based demand for our automation products. From an orders perspective, this is the third consecutive quarter of record order intake in this segment. Once again, strong order growth in motion was driven by our independent cart technology offering. which saw over 100% orders growth in the quarter. Independent cart orders growth was broad-based and included strong wins in e-commerce and warehouse automation, including Intralots, an important North American material handling OEM partner whose machines are supporting some of the largest e-commerce applications in the world. Intralux is leveraging our independent cart technology in a high bottleneck area of their process and was able to realize a 30% increase in sortation throughput. Software and control organic sales grew 32%, led by strong demand across the segment. Logic sales grew over 40% versus the prior year and was our strongest major product family. Orders for the software and control business segment grew over 55% year-over-year, showing strong momentum. In lifecycle services, organic sales increased 17% versus the prior year and increased 8% sequentially. Book to build for the segment at 1.18 is expected to drive continued sequential sales improvement in the segment through the fourth quarter. Total company backlog grew by over 50% year over year. Turning to profitability, segment operating margin of 20% increased by 340 basis points versus the prior year, primarily due to higher sales. Adjusted EPS of $2.31 grew 75% and was above our expectations. Stronger sales and favorable mix all contributed to our strong profit performance in the quarter as we continue to increase our business resiliency and make technology and people investments that set us up for a strong future. Turning to information solutions and connected services, which represent many of Rockwell's newest digital revenue streams, we had another great quarter. Organic sales and orders grew strong double digits with contributions across a variety of end markets. Recent orders also include a number of meaningful software and infrastructure as a service wins with some of the world's most important food and beverage and life sciences manufacturers. For example, Cinevac, one of the largest pharmaceutical manufacturers in China, recently chose our PharmaSuite MES to help bolster production of their vaccines. We also had a great win with GE Renewable Energy on a greenfield project to develop a major power plant in Africa. Once operational, this hydro plant is expected to provide 30% of the country's energy demand while reducing annual power generation costs by $100 million. In addition to using our core automation products, our capabilities in industrial cybersecurity helped us win even greater share of this greenfield project. Calypso also continues to play a very important role within our connected services offerings. and last week received PTC's Systems Integrator Partner of the Year Award. This is in addition to Rockwell receiving PTC's overall Partner of the Year Award, as we continue to see good synergies across the PTC Rockwell portfolio. Turning to slide four. At last year's Investor Day, we talked about how we are bringing our FactoryTalk software offering to the cloud with SaaS offerings in three key areas, FactoryTalk Design Hub, FactoryTalk Operations Hub, and our FactoryTalk Maintenance Hub. The organic development of our FactoryTalk Design Hub is well underway and complements our best-in-class Studio 5000 software. With the addition of Plex, we will have a world-class, full-scale factory talk operations hub. Flex's smart manufacturing platform includes one of the most advanced cloud-native MES offerings available, as well as cloud-native quality and supply chain management solutions. Capabilities like inventory management, supply chain optimization, and track and trace are more critical than ever, and we will have unmatched on-premise and cloud-native solutions. Last week, we also announced our partnership with Kessler, a leading provider of cloud-based traceability software that will be a great complement to both our on-prem and cloud-native supply chain offerings. The foundation of our factory-taught maintenance hub comes from last year's acquisition of FITS, an AI-enabled maintenance management platform. with a cloud-native offering that has sold 100% on a subscription basis. Since the acquisition, we've seen accelerated growth at FIX, including the addition of their first two customers with contributions of over $1 million of annual recurring revenue each. This quarter, FIX revenue grew by over 40% both year-over-year and sequentially, and they've added, on average, over 50 new logos per month since they've joined Rockwell. FIX and PLEX applications are highly complementary, with many opportunities for customers to further improve manufacturing productivity, product quality, and asset utilization. In addition, we believe that FIX's high-velocity, go-to-market model will provide additional revenue synergies in the years ahead. As we mentioned on the call to announce the Plex deal, we're moving fast because manufacturers are picking up the pace of innovation and we have the opportunity to leap ahead with new value from highly scalable, easy to use, and well integrated information solutions that build on our rock solid heritage born in the world of real time data. Let's now turn to slide five where I'll provide a few highlights of our Q3 end market performance. Figures are for organic sales. We had great performance in our discrete industry segment, with roughly 40% sales growth. Within this industry segment, automotive sales grew at about 50%, led by an increase in capital project activity. We estimate two-thirds of the capital projects we are winning are related to EV projects taking flight, For example, we had another win at the Indian automotive supplier Wipro Pari, where our core automation technology will be used in an EV battery pack assembly line for one of North America's largest automotive brand owners. In semiconductor, we grew about 35%. We believe strong secular tailwinds, increasing capital spend, and broadening share of wallet with customers are all driving our growth. we are raising our semiconductor growth outlook once again to high teens for the year. Another highlight within discrete was our performance in e-commerce, with sales growing approximately 65% versus prior year. This vertical has significant secular tailwinds with pure play e-commerce players as well as traditional retailers that are transforming their warehouses through automation. Turning now to our hybrid industry segment, these verticals also had a terrific quarter. Food and beverage grew over 30% and had the most significant outperformance relative to our expectations as customers prioritized investing in technologies that helped them differentiate their offerings and maximize their growth. We believe we are taking share in this market and that our technical and commercial strength is reaping dividends that should carry through into fiscal 22. Life Sciences grew over 40% in Q3 and was another great performer in the quarter. Life Sciences was our fourth largest industry in the quarter, not far behind automotive, and we continue to believe we are taking share in this fast-growing vertical. Key wins included a highly competitive win for a large greenfield project with Butantan to fast track their COVID-19 vaccine production in Brazil. Here our PlantPAX control system, factory-taught batch, and PharmaSuite MES will enable a best-in-class paperless system that will fully integrate with batch control and other equipment on the factory floor. Our fastest-growing vertical in the hybrid segment was tire, which was up about 60% in the quarter. Key wins included Toyo Tire Group in Japan. Morocco was chosen as the automation standard for their plant in Serbia. Our core automation technology, our IoT-ready architecture, and strong MES capability were all critical factors in securing this key win. Tire has always been a strong industry vertical for Rockwell, and our technologies are actively supporting our customers' increasing investments in innovation and production capacity. Process markets were up approximately 15% and were better than expected. This was the first quarter where we saw all of our major process industry verticals return to positive growth, including oil and gas, which grew low single digits versus the prior year and grew high single digits sequentially. Turning now to slide six in our Q3 organic regional sales performance, North America organic sales grew by 29% versus the prior year, with strong double-digit growth across all three industry segments. EMEA sales increased 21%, driven by strength in food and beverage and tire. Sales in the Asia-Pacific region grew 23%, with broad-based growth led by semiconductor, life sciences, and tire. In China, we saw double-digit growth, driven by strength in tire, life sciences, and EV. We continue to expect growth in China will exceed the company average for the year as our longer cycle businesses kick in. Latin America growth of 26% was led by food and beverage and automotive. Let's now turn to slide seven to review highlights for the full year outlook. Orders momentum and backlog are expected to drive strong sales growth in the balance of the year and into fiscal 2022. Our higher top-line guidance is driven by improvements in our hybrid and process industry segments. A new outlook for total reported sales growth is up 12%, including 8% organic growth versus the prior year. We're seeing strong growth in both core automation as well as information solutions and connected services. Acquisitions are contributing over a point of profitable growth. We are increasing our margin expectation to 20%. A new adjusted EPS target of $9.20 at the midpoint of the range represents 17% growth compared to the prior year. This also includes $0.15 from transaction fees related to our pending acquisition of Plex. I should add that we expect double-digit annual recurring revenue growth in fiscal 21, with the plus acquisition expected to add over $175 million to our ARR totals next fiscal year. 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 continue to expect broad-based organic sales growth this year. With that, let me now turn it over to Nick, who will elaborate on our third quarter performance and updated financial outlook for fiscal 21. Nick?

Thank you, Blake, and good morning, everyone. I'll start on slide nine, third quarter key financial information. Third quarter reported sales were up 33% over last year. Organic sales were up 26%. Acquisitions contributed one point of growth, and currency translation increased sales by five points. Segment operating margin was 19.9%, an expansion of 340 basis points compared to Q3 of last year. Higher sales volume, a favorable mix, and price all contributed to our margin expansion. These factors more than offset higher incentive compensation, our planned investment spend, last year's pay reductions, and higher input costs. Corporate and other expense was $29 million, slightly higher than last year, mainly driven by costs related to the pending PLEX acquisition. The adjusted affected tax rate for the third quarter was 14.6% compared to 14.1% last year. Third quarter adjusted EPS was $2.31, above our expectations, primarily related to higher sales. I'll cover a year-over-year adjusted EPS bridge for Q3 on a later slide. Free cash flow was $437 million, or conversion of 161% in the quarter. Strong conversion in the quarter was driven by continued management of our working capital. Year to date, free cash flow conversion was 118% and free cash flow dollars was up 39% versus last year. One additional item not shown on the slide, we repurchased 225,000 shares in the quarter at a cost of $60 million. For the full year, we have lowered our repurchase target from $350 million to $300 million in anticipation of our upcoming Plex transaction. At June 30th, $613 million remained available under our repurchase authorization. Slide 10 provides the sales and margin performance overview of our three operating segments. The intelligent devices segment had organic sales growth of 29% in the quarter. Segment margin was 21.9%, 500 basis points higher than last year, mainly due to higher sales. This segment did see higher input costs both year over year and sequentially. However, these costs were largely offset by price. Once again, we once again had strong orders performance in the quarter. Intelligent devices orders grew approximately 65%, led by North America and EMEA demand. Software and control segment organic sales grew 32% in the quarter. Acquisitions contributed three points to growth. Segment margin was 25.2%, which was 270 basis points above last year. The margin benefit from higher sales was partially offset by higher investment spend. These investments relate primarily to software development and additional sales resources to drive revenue growth in fiscal year 22 and beyond. Software and control orders also grew strong double digits, led by logics, which grew double digits in all regions. Organic sales of the lifecycle services segment grew 17% year over year, led by life sciences, food and beverage, and semiconductor. Acquisitions contributed about 1.5% to growth. Operating margin for this segment was 10.3%, an increase of 60 basis points compared to last year. This increase was primarily due to higher sales, partially offset by the reinstatement of incentive compensation. Third quarter book-to-bill performance for the life cycle services segment was 1.18. The next slide, 11, provides the adjusted EPS walk from Q3 fiscal 20 to Q3 fiscal 21. Starting on the left, core performance had a positive impact of approximately $1.65, primarily due to higher sales and favorable mix. We did see higher input costs this quarter compared to a year ago, which we have been offsetting with targeted price increases throughout the year. Approximately $0.10 was related to non-recurring accelerated investments that we announced earlier this year. These investments are mostly in our software and control segment. Currency contributed about $0.05, incentive compensation And the reversal of the temporary pay reductions was a year-over-year headwind of approximately $0.55, of which bonus was $0.40 and temporary pay actions $0.15. As a reminder, there was no bonus expense in Q3 of fiscal 20. Acquisitions were about $0.05 diluted, as we expected. Moving to slide 12, quarterly product order trends. This slide shows our average daily order trends for our products, which includes our software portfolio. The trends shown here account for about two-thirds of our overall sales. Order intake improved again this quarter. Q3 product order levels grew year-on-year as well as sequentially and are at an all-time high. Particularly strong areas were in logics and motion. Not included on this slide are orders for the lifecycle services segment, which were up double digits in the quarter, both sequentially and year over year. The overall strong order performance resulted in total company backlog of over $2 billion, growing over 50% year over year. This takes us to slide 13, updated guidance. We are increasing our organic sales growth to 8%. which is a one-point increase from the previous midpoint of 7%. We expect currency translation to now contribute about 2.5 points to growth, and we still expect acquisitions to contribute about 1.5%. In total, we are forecasting reported sales to be about $7.1 billion, or up 12%, We have also updated the adjusted EPS guidance to a new range of $9.10 to $9.30. This new range now includes about 15 cents of transaction fees related to the pending flex acquisition. I'll review the bridge from the prior guidance midpoint of 915 to the new midpoint of 920 on the next slide. Segment operating margin is now expected to be approximately 20%. This represents a 50 basis point increase from prior guidance and primarily reflects higher sales partially offset by additional bonus expense. We continue to expect positive price costs for the full year. Our adjusted effective tax rate is still expected to be about 14%, the same as prior guidance. This includes a 200 basis point annual benefit related to discrete items, which we expect to realize in Q4. We believe our normalized adjusted effective tax rate is around 18%. Given our strong generation of free cash flow through the first three quarters, we are now projecting free cash flow conversion to be above 105% of adjusted income. A few additional comments on fiscal 21 guidance. Corporate and other expense is expected to be about $135 million and now includes about $20 million primarily from the transaction-related fees and expenses anticipated for the pending acquisition of FLEX. Net interest expense for fiscal 21 is now expected to be about $95 to $100 million and now reflects the expected incremental interest of about $5 million related to new debt for the pending acquisition of Flex. Finally, we're assuming average diluted shares outstanding of 117.1 million shares. This takes us to slide 14. This slide bridges the midpoints of our April adjusted EPS guidance range to the midpoints of our new guidance, starting on the left. There is a higher contribution from core operating performance, primarily due to the higher organic sales and increase in margin. The contribution from currency is now expected to be $0.05 higher compared to prior guidance. Next. Given the increase in guidance, there is about a 15 cent impact from higher bonus expense. Full year bonus expense is now expected to be approximately $175 million. Given our projected full year performance, this bonus is higher than the initial fiscal year 21 target of about $115 million. For comparison, this was zero for fiscal year 2020. Finally, we now have about a $0.15 impact coming from the pending acquisition of Plex, which we anticipate will close in Q4. This brings the new midpoint of the guidance range to $9.20. Finally, a few more comments on Plex, turning now to page 15. Flex will be reported in our software and control segment and be a part of our information solution and connected services portfolio of offerings. We are forecasting that in fiscal year 22, it will generate $175 million of ARR, $160 million of revenue after the adjustment for deferred revenue, and a neutral impact to earnings per share. About $0.35 of incremental EPS from operations is forecasted to fully offset the deferred revenue adjustment, integration expenses, and incremental interest expense. We expect fiscal year 23 revenues to be above $200 million with a meaningful contribution to EPS in fiscal year 23. We have included further details in the appendix on the financial impact of Plex in fiscal year 21 and 22. With that, I'll hand it back to Blake for some additional comments.

Thanks, Nick. Once again, strong order trends and record backlog underpin a robust top-line outlook, and we have confidence in our team's ability to navigate the supply chain challenges. And we continue to invest in our future. The combination of our software portfolio with our controllers, intelligent devices, and lifecycle services creates unique value for customers across discrete, hybrid, and process end markets. Our momentum would not be possible without the tremendous efforts of our employees. I'd like to thank everyone at Rockwell, and particularly the people in our integrated supply chain organization, We've done a great job managing pandemic challenges and now mitigating our sourcing constraints. We're leveraging our own manufacturing expertise to help customers be more resilient, agile, and sustainable. Let me now pass the baton back to Jessica, and we'll begin the Q&A session.

Thanks, Blake. Before we start the Q&A, I just want to say that we would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up. Thank you. Rain, let's take our first question.

Thank you. As a reminder, to ask a question, please press star 1 on your telephone keypad. Again, that's star 1 to ask a question. Please stand by while we compile the Q&A roster. Your first question comes from Julian Mitchell from Barclays. Your line is open.

Hi, good morning. Just wanted to understand, first of all, how we should be thinking about operating leverage over, let's say, the next 12, 18 months. Realizing the current quarter, there is a heavy headwind from incentive compensation and probably some headwinds as well from trying to manage supply chain constraints and component costs. Just wondered how quickly those sorts of items you think should fade as we move beyond this current fiscal quarter. And when you look at the business mix, how we should think about sort of operating leverage, please.

Hey, Julian. First, just to round out 21 as far as operating leverage, and we often at Rockwell talk about our core conversion. We see full year 21 being right in the range of the 30% to 35% core conversion that we often talk about. As far as thinking about the future, of course, we'll say more about that in November at our Investor Day. But, like, one way to think about it is there's several things. Nothing drives our operating margin like top line growth. And given our 30 to 35% core conversion, we think that's still a helpful way to think about it. And that implies that we would expect our margins to expand next year. But of course, I'm going to give, we'll give more detail about that at our investor day in November.

Perfect. Thanks very much. And then just, you know, as we're thinking about the automotive end market within discrete, you know, very, very strong growth, 50%, I think you delivered in the third quarter year on year. Just wondered if you could update us, you know, sort of as you're looking into 22, you know, what portion of your backlog perhaps, if there is such a thing in auto, is related to EVs? and how you think about the sustainability of that auto CapEx rebound.

Sure. Well, Julian, we think that about two-thirds of the capital projects that we're currently seeing in automotives have EV content. And EV powertrain is quickly passing the powertrain business we're seeing for internal combustion engines as a part of the mix within automotive. And we see that trend continuing and probably accelerating as new entrants into the EV market, either the established brand owners and then the startups are are bringing their products to market. And our sales are, of course, directly to those brand owners as well as all of the tier suppliers like Wipro Pari that we mentioned a little bit earlier. So around the world, we're very positive, very bullish on our portfolio and, you know, Quite frankly, we think Plex is going to help that with tier suppliers because that's one of their strengths, providing their smart manufacturing platform to tier automotive suppliers. So we see this trend continuing, and we're expecting strength going into the next fiscal year in auto.

Great. Thank you.

Thanks, Julian.

Your next question comes from Scott Davis from Meal Use Research. Your line is open.

Hey, good morning, guys. Hey. Jessica.

Morning.

I'm kind of intrigued just to follow up on Julian's question there. I mean, these EV projects, I mean, how do they compare versus ICE in, like, complexity and scope and, you know, any different dynamics? Like, you know, are there less suppliers, more suppliers, more competition, less competition? Just any additional color you can give there would be helpful, I think.

Sure. You know, for Rockwell, there's actually upside to an EV project versus a traditional internal combustion engine. So starting with the drivetrain, a lot of our independent car technology wins for precision motion control have actually been on the drivetrain. battery and the drivetrain side, if you will, for EV, where traditionally in internal combustion engines, Rockwell has had a smaller content. That may not be true for some of the other suppliers who have the traditional revenue stream for CNC or what have you, but we don't. And so we're not losing business in that transition. It's a net positive for us. On the software side, the EV manufacturers are adopting right from the start MES software as a necessary element of their production scheduling system. And so whereas 10 years ago or so it was seen as a nice-to-have but not necessarily a requirement, with these new facilities coming online, MES is seen as a necessary part of the bill of material, if you will. And then you combine all the other pieces of putting a vehicle together that remain the same. So you still have to stamp and paint metal. You assemble the components. You test them at the end of the line and so on. And those are all applications that Rockwell has good offerings for. In terms of the competitive landscape, as you would expect, the usual suspects are there in terms of the traditional part of the vehicle manufacturing and assembly. On the battery and in the electric vehicle drivetrain, very heavy Asian content, China, Japan, Korea, And so I'd say it's even more international with a bias towards Asia and some of those new elements. And we've put together good teams for tracking and pursuing these projects that span across multiple countries.

That's really helpful. And you've increasingly become more bullish, Blake, on independent car kind of almost every call here for the last year. How does this scale out? I mean, could you actually do a full Amazon-style kind of warehouse, an independent cart? Is that even possible? Does it scale to that type of size?

There's lots more applications within, say, an Amazon fulfillment center that can be accomplished through independent cart. Today, those pieces of their overall facility are typically being provided by multiple of our customers. So you don't see necessarily multiple. one single sub-supplier to them, providing all of the conveyance and sortation and so on. And so we're working with some of the big ones, of course, whose names you would recognize, but there's also a whole host of integrators and machinery builders with a good idea that Amazon is bringing into their ecosystem. And so we're working with a lot of these smaller suppliers. And I would also add, this isn't just for the big e-commerce giants. Now, this is for the big box retailers who are also looking to automate their material handling. You know, the Walmarts of the world are also looking at these solutions at their individual locations where they're bringing in tremendous amounts of material to try to get in the right place more efficiently than ever before. almost limitless opportunity just in the e-commerce area for additional adoption of independent cart. And as we've talked about, we see independent cart wins in other applications outside of e-commerce. We see it in life sciences. We see it in food and beverage packaging given scalability and flexibility that manufacturers could never see before and then we have some let's say more unusual applications like the one we talked about with the u.s navy a few quarters ago excellent uh good luck guys thank you thanks thanks guys your next question comes from josh fox levinsky from morgan stanley your line is open

Hi, Mike. Hey, Josh. Just to follow up on, I guess, you know, what might be several questions on orders and backlog. Blake, so you have another quarter here with pretty healthy order intake. You referenced that over $2 billion of backlog up a lot year over year. Anything about this cycle or the complexion of Greenfield and Brownfield that you guys are seeing that would make that shippable over a longer period of time than usual? Obviously, you guys have sort of a reputation for being more short cycle. But how is that evolving? And over what time frame would you view that backlog as sort of a shippable number?

Yeah, I would not look at this backlog as being longer-term shippable, you know, based on the mix of industries or projects. The longest backlog, you know, orders that we get are typically in solutions, and that's the part of the business that's actually, you know, to recover. So there's nothing in that mix that would indicate that these backlog increases are due to some special case with respect to higher project content or what have you. It's really due to just the dramatic surge that we have seen and seen sustained over the last few quarter in orders you know, coupled with supply chain constraints. But we've given you the color about the individual verticals that it's coming from, and it's a great balance that, you know, has been across discrete and hybrid, and now the process markets are starting to kick in a bit there. Got it. That's helpful.

And then just a follow-up on some of the moving pieces on the cost side for you, Nick. I think last quarter, maybe some earlier quarters, there was a bit of a talk on some of the investments being kind of front-loaded for 21, where maybe that's a bit more of a tail end of the 22. If we had to add up the investments and the incentive comp piece, is that something that levels out on a normal-wide basis, or is there still some kind of catch-up or give-back where you start off next year in the plus column?

Yeah, Josh, in terms of our investment for full year 21, we expect our total investments to go up about 2% for the full year. And that's really more back-end loaded. I said last quarter that we expected year on year the investments to go up between $90 and $100 million compared to the second half of 2020. Our best estimate now is it's going to go up $85 million year on year for the second half. So I'd call it more back-end loaded than front-end loaded of our investments. And then in terms of investment spending next year, Josh, again, it's early, but I don't see any reason to think that it would not be fairly evenly spread over the year. I don't see any big seasonality impacting next year in our investment spend. Okay, thanks.

Your next question comes from Andy Kaplowitz from CD Group. Your line is open.

Hey, good morning, guys. Hey, Andy. Blake, I'm sure you don't want to give us too much on 22 at this point, but given orders are so much higher and they keep trending up, what kind of confidence at this point do your order trends give you in delivering organic growth in FY22 that could be close to 21 or at least at or above your two times industrial production target?

Well, without saying too much about 22 until November, you know, we're very positive on where we are, the order's momentum, the backlog that we expect, you know, to largely shift as we get, you know, closer to normal levels through the balance of the year, our ability to compete and win in competitive projects, you across the world and across the verticals. I think it's a great setup, and it should, you know, bode well for our growth and performance going into the next year and beyond. That's helpful.

Maybe just focusing on process markets. Obviously, you're seeing, especially in chemicals, given you mostly raised your 21 forecasts and some improved growth, but are you starting to see more significant improvement yet in oil and gas. What's your confidence level and sort of more of a typical later cycle recovery for process as you go forward?

Yeah, you know, we continue to see optimism for oil and gas as it always seems to do, lagging the earlier cycle discrete businesses. But we grew year over year and sequentially in oil and gas. We expect another quarter of growth. in oil and gas in the fourth quarter. And while there's still a lot of uncertainty, these are projects around the world and we're continuing to watch COVID infections and those are continuing to be a concern for us. We think we're in a good spot with oil and gas and some of the comments from some of the earlier cycle oil and gas operators, the people who are providing drilling technology as well as oil field services, those generally lead the impact on our business by, say, six or nine months. And so we are optimistic that, you know, some of the early signs that we saw this quarter in oil and gas are going to persist and pick up. Appreciate it, Blake. Thank you.

Your next question comes from Nigel Coe from Wolf Research. Your line is open.

Hi, good morning. I'm on for Nigel Coe. My question will be looking at the investment question again. I was still looking at the $35 million tailwind, and for the incentive, it's still around $30 million for 2022.

In terms of the tailwind for 22, I mean, I'm not yet in a position where we're sharing guidance on what we expect investment spend to be for 22. But our total investment spend this year is going up approximately 2%, very much like what we've seen in prior years. As far as headwinds and tailwinds, I didn't quite catch all of that. But, for instance, it would be more likely that our bonus is back in a more normal zone of what I talked about earlier on this call. That's an example. But I wouldn't necessarily say investments will necessarily go down. or not repeat. The one exception is we have temporary investments, these accelerated investments of $30 million. That is going exactly as we anticipated, that $30 million in the second half of the year. About $10 million of that we spent in the third quarter. $20 million we're anticipating in the fourth quarter. Those will not repeat into 2022. And we did those investments to... accelerate our growth in 2022. And then the last point is, as I said earlier with Julian's question, it's our expectation that margins will be expanding in fiscal year 2022.

Another one was that in terms of the the order's momentum. You mentioned it's not as long cycle. Do you have any idea when the conversion will happen into sales?

Well, obviously, we're seeing good sales rates that were above our expectations in Q3, and that led us to raise the guidance of organic growth at the midpoint for this year. And we expect that we'll be shifting the backlog through the balance of 22, getting us closer to towards more normal backlog levels. Backlog will be up in Q4 a little bit, but not as marked an increase as we saw in Q3.

Appreciate it. Thank you.

Thank you.

Your next question comes from Steve Dusa from J.P. Morgan. Your line is open.

Hey, good morning. Morning, Steve. Thanks, as usual, for all the details. Just wanted to, maybe I might have missed the comment on incentive comp. What is normal, just mechanically, what do you think is normal incentive comp, kind of relative to the level that you're performing at this year?

Yeah, Steve, we started the year with our planned compensation, which is what we would consider our normal amount of $115 million. Given our expectation of exceeding that performance, we're currently expecting total bonus expense this year to be approximately $175 million.

Okay, so just mechanically, we should assume that next year you'd get a $60 million pay-align from that. I think that's a pretty fair assumption. Okay. And then just for the investments, I mean, so should we kind of think about investments up to and then remove the $30 million? So is that kind of the profile for investments going forward, at least for next year?

You know, in terms of the investments, yeah, the $30 million, you should think of that as something that we're not planning to repeat. But we still haven't given our guidance here. We're working through a lot of things of how we want to, what we want to invest on in 22. But yes, your assumption of taking $30 million out of what we've done this year, that's the way we've been saying that, and I agree with that approach.

So something like $60 million plus the $30 million, and then we have to kind of make up our minds on how much kind of the core investment account goes up, and that's kind of the profile for those costs.

I think the best way is to look to November when we're going to be able to provide more detailed bridges.

Okay. I won't ask you for the date of that. That would be the follow-up. But one more question for you just on this orders. orders, sorry, on the Plex deal. That's a pretty big growth number in 23. Is there something to do with the accounting around deferred revenues on that front? Because 30% seems to be a pretty dramatic acceleration as to where this company has been in the past. And then how much of their revenue is actually like pure MES that's really kind of detached from their kind of ERP core? Thanks for the details again.

Yeah, so a couple of things I'll start, and Nick may have some additional comments. First of all, the figure in 23 is after the adjusted adjustments for deferred revenue that impact the revenue in 21 and 22. So you don't see the deferred revenue adjustment in 23. So we're not looking for 30%. top-line growth in 23, but we will not be seeing the deferred revenue adjustments carrying into that year. And then in terms of the mix of Plexus offering, you know, so they offer a modular smart manufacturing platform, and it has ERP, it has MES, it has quality management, it has supply chain. And so particularly when you're talking to small and medium sized manufacturers, they don't have big centralized engineering resources to take a bunch of disparate software applications and hope that they knit together. And so Plex offers an integrated suite of those modules. MES is a large portion of it. They have ERP and those other applications I mentioned, but they've done some good work over the last couple of years to modularize their offerings so that a customer isn't forced to buy what they don't want. We'll continue to support all these applications for the customers who've already bought them, and we're going to be helping Plex They expand the introduction of the offering outside of the U.S. as well as to other industries like food and beverage and pharmaceuticals that they haven't had as much exposure to in the past.

Got it. Steve, just to make sure you're seeing it, in the appendix we've provided information some additional detail breaking out 22 for Plex, and that shows the underlying revenue and then the deferred revenue adjustment, actually a range on that that we're anticipating. We provide that so you can put it in context of how to think about that growth that we're showing.

Right. That's super helpful. Okay. Thanks a lot.

We have one last question from Noah K. from Oppenheimer. Your line is open.

Good morning. Thanks for taking the questions. I guess just following up on that, we'd love to hear some of the responses that you've been getting to the Plex announcement, both from the customer base and internally. And I think there have been some questions about on-prem versus cloud migration for a lot of these manufacturing customers. You know, you've got another arrow coming in the quiver, but you also have, you know, your own broad portfolio of offerings, some of which are, of course, legacy and prem, and some of which are moving to the cloud. So can you just talk a little about the response and what you think, you know, customers are going to be trying to figure out and how you think you can help them over the coming, you know, quarters and years?

Sure, thanks for the question. Look, on the day that we announced it, I got a lot of unsolicited feedback from both employees and customers that I've developed relationships with over the years, and they were really excited thrilled about what we were bringing in. They felt like it made great sense and it added what we can offer to complement the core automation that they've been buying from us for years, or in some cases, you know, where they're trying to decide who their digital transformation partner is. With this, what we have, and this is something we've talked about for a long time, an approach that meets customers where they are on their journey. We're still going to sell a lot of on-premise software, and customers have made investments there and they want to see a migration path. And our MES orders of production center-based MES continue to grow when those orders get larger. And we continue to see lots of runway for that software for customers who have decided they want an on-premise solution. But we have the opportunity for customers who have made a decision that they're going to start working with these applications with cloud-native software, and they're ready to start working there. to build on Plex's great customer base and introduce it to those customers who said they're ready to look at that as well. And so having that approach, it all comes back to that theme of an open approach where we're not forcing one philosophy down a customer's throat and we're telling them we can meet them where they are on their journey. We'd like for that data to be coming from Rockwell core automation components, but as we've talked about before, a lot of this software we fully expect is going to give us a way in into competitive strongholds where we're not currently the supplier of the core automation, and we're going to be providing the value at the software and then working on the automation pieces as well. So it's going to be a both approach, and we're thrilled about that. the new ways to win that Plex gives us.

Okay, thanks, Blake. Let me ask one more question. I don't think it was addressed too much on this call, but, you know, you mentioned both in the press release and I think, you know, in the prepared remarks, you know, some of the supply chain constraints. And I was wondering if we could get a little bit more color around, you know, where you see the supply chain pressures really still manifesting for Rockwell internally and what that looks like over the coming couple of quarters. But then also, you know, if you can just touch on what impact this is maybe still having on demand. I mean, I got to imagine for any ops or production planner, you know, this ramp is like drinking from a fire hose every day. And so, you know, just wondering to what extent you know, your senior customers, you know, demand, you know, or kind of CapEx plans somewhat being held back by, you know, just the challenges of the ramping.

Sure. So in the quarter, we saw a little bit of an impact on supply chain in automotive MRO. There was a small amount, and we did not see that affecting capital projects or other industries. And we still believe that while this is something that our customers' operations and supply chain organizations are going to continue to be working on, for the foreseeable future, it's not going to crimp the supply going forward. And in fact, it's probably lessening with respect to automotive from what we may have seen earlier in the year. The part of the supply chain constraints that, you know, we're thinking about are in terms of converting our own backlog. And I mentioned specifically that our supply chain organization, I think, is doing a terrific job navigating this. But it's not going to be over in the next quarter. We're going to continue to be dealing with these constraints. supply chain constraints for the foreseeable future. And we're looking at how do we deal with these on a short-term basis, but also on a longer-term basis. And I would say electronic components are a piece of that. Some of this is, you know, just simply brought on by the extremely sharp recovery in demand that we've seen and that we continue to see in orders. But then there's also the labor, and we have to make sure that we're a great destination for labor in our plants, in our supply chain organization, in our development teams, and so on across the organization, because as you know, it's a very hot, it's a very active labor market right now. And again, I think we're doing a great job with that. We have really good collaboration across all parts of the organization to make sure that we're pulling together so that when people are considering Rockwell as a destination, that we come out on top. So it's those two areas, I would say. But, again, in terms of the demand, we're really not seeing a significant dampening of demand brought on by our customer supply chain constraints.

That's extremely helpful. Thanks so much.

Yeah, thanks, Noah.

Thank you. I would now like to turn the call over back to Ms. Caracos.

Thanks, Rayne. Well, thanks, everyone, for joining us today. I know it's a very, very busy day for earnings, but we appreciate your interest and support, and we'll see you soon.

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