Rockwell Automation, Inc.

Thank you for holding, and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. If you have a question at that time, please press star 1. At this time, I would like to turn the call over to Jessica Karakis, Head of Investor Relations. Ms. Karakis, please go ahead.

Thanks, Emma. Good morning, everyone, and thank you for joining us for Rockwell Automation's first quarter fiscal 2022 earnings release conference call. With me today is Blake Moret, 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 on our website for a reply 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. Additional information and news about our company can also be found on Rockwell's Investor Relations Twitter feed using the handle at investors are okay. That's at investors are okay. 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 details in 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. Let's turn to our first quarter results on slide three. Total orders grew by more than 40% to over $2.5 billion, once again reflecting very strong demand across our portfolio of core automation and digital transformation solutions. Total revenue of $1.9 billion grew 19%. Organic sales grew 17% versus prior year, better than our expectations, despite significant supply chain challenges in the quarter. The manufacturing supply chain remains constrained due to extremely high levels of demand and persistent electronic component shortages. It's a very dynamic situation, and our global supply chain organization continues to navigate these challenges. We're taking a variety of actions, including qualifying additional semiconductor technology and investing in capacity to increase our supply chain resiliency and support our growth. Turning now to our top-line performance. Core automation sales and orders momentum was broad-based across our product lines, including control, visualization, network, motion, power, sensors, and safety. In the intelligent devices business segment, organic sales increased 26% versus prior year, even with significant headwinds from supply chain. software and control was also impacted by supply chain constraints but organic sales growth of eight percent was above our expectations we also had very strong orders growth in this segment of note industrial pc orders at awesome our recent acquisition were particularly strong and almost doubled from a year ago in lifecycle services Organic sales increased 10% versus the prior year, led by double-digit growth at Sensia and our solutions business. Demand is strongly increasing in this segment, as demonstrated by double-digit sequential orders growth and a 1.38 book-to-bill for the segment. Information solutions and connected services grew double-digits in both orders and revenue. Q1 sales were particularly strong across the entire information solutions portfolio, as well as Calypso's digital consulting services. Industrial cybersecurity demand was strong in the quarter and included a strategic win with one of the world's leading natural gas pipeline companies in North America. We also had a key win with one of the largest beverage manufacturers in EMEA, demonstrating how our industrial cyber business continues to create new ways for us to win. Our investments in the cloud are also showing very good traction. Another notable win in the quarter was with the Shift Group, formerly known as Spartan Motors. The Shift Group is a global leader in the commercial vehicle industry and a big beneficiary of EV and last-mile delivery trends. Here, Plex's smart manufacturing platform was chosen to enable best practices across their operations, reduce material costs, automate quality processes, all while supporting high-speed line deployments. At FIX, we had another great quarter, with their ARR growing over 40% and over 600 new FIX customers added in just the last 12 months. In the quarter, Rockwell expanded its presence within Lucid Motors, one of the top up-and-coming luxury EV companies in the world. Lucid had already selected Rockwell's FactoryTalk software to manage production and is growing their fixed subscription base to ensure readiness and facilitate skilled resource effectiveness. This is a great example of the synergies we are already seeing across our cloud and on-prem software portfolios and the positive contributions they're making to our overall business. I'd also like to highlight the continued traction we see with our PTC partnership. The capabilities and versatility of the combined solution has contributed to our significant software portfolio differentiation and has become a great way to win with customers. In summary, I'm very happy with how these digital offerings are contributing to our recurring revenue base, including contributions from our organically developed software, PPC, and our recent acquisitions. In the quarter, total ARR grew by over 50 percent, and organic ARR grew double digits. Let's now turn to slide four, where I'll provide a few highlights of our Q1 end market performance. Each of our industry segments showed strong, double-digit, year-over-year organic growth. And as we've said, our strong orders are reflective of underlying demand. Advanced orders for longer lead time products that are not immediately needed made up about 10% of the total. In our discrete industry segment, sales grew approximately 20% versus the prior year. Within this industry segment, automotive sales grew mid-teens, led by a 50% increase in EV capital project activity around the world and strong growth in EV battery led by our independent CART technology. Semiconductor sales grew over 25% in the quarter, with strong double-digit growth in all regions. Significant greenfield project activity is leading to our strong growth at semiconductor-focused engineering firms and machine builders. E-commerce was our fastest-growing vertical, with sales growing approximately 50% over the prior year. e-commerce orders included a series of multimillion-dollar wins to automate new fulfillment centers throughout North America for a well-known e-commerce provider. We believe our strong differentiation in motion, including advanced material handling technology and support services, are driving market share gains in this fast-growing vertical. Turning now to our hybrid industry segment, The verticals in this segment also had a terrific quarter. Food and beverage grew over 20% in Q1, with broad growth across the regions. Once again, SKU expansion, end-of-line automation, and the need for greater manufacturing flexibility are important trends requiring greater levels of automation. We believe the steady pipeline of greenfield and brownfield project opportunities, our deep relationships with machine builders, and our strong technology differentiation are driving record demand in this key vertical. Like sciences, sales grew over 10% in Q1 off of an extremely strong quarter last year and remains one of our fastest growing verticals in fiscal 22. We have significantly invested in this area of our business over the last few years and believe we are well-positioned to gain more share through broader and deeper offerings and expertise. Our fastest-growing vertical in the hybrid segment this quarter was tire, which grew about 35% in the quarter. This is another great vertical that is investing heavily in innovation. Turning to process, this industry segment grew approximately 15%, led by improving trends in upstream and midstream oil and gas. Ascensia Joint Venture had strong sales and orders in the quarter, led by strength in process automation and lift control solutions. Sensia's digitalization solutions are well suited to the energy industry's desire to improve productivity and extend the useful life of existing infrastructure, as well as the desire to use modern technology to improve safety and reduce environmental impact. As operating and capital budgets increasingly open up, we believe Centsia is well positioned for double-digit growth in fiscal 22. Turning now to slide five in our Q1 organic regional sales performance. North America organic sales grew by 16% versus the prior year, with strong double-digit growth across all three industry segments. EMEA sales increased 15% driven by strength in food and beverage and tire and metals. Asia Pacific was our fastest growing region in Q1, growing 25% with broad-based growth led by semiconductor and food and beverage. In China, we saw double-digit growth driven by strength in tire, food and beverage, chemical, and mass transit. Let's now turn to slide six to review highlights for the full-year outlook. We now expect orders for the year to exceed $9 billion, which is above what we expected just a few months ago and really taking our business to a whole new level. We continue to expect total reported sales growth of 17.5%, including 15.5% organic growth versus the prior year. Our projections reflect a detailed review of supply chain constraints by supplier and product line over the course of the year, but as we've said before, these constraints remain very dynamic. We continue to expect double-digit growth in both core automation as well as information solutions and connected services. Acquisitions are off to a good start and expected to contribute two points of profitable top-line growth. We are maintaining our margin expectation and adjusted EPS target of $10.80 for the year, which represents about 15% growth at the midpoint of the range compared to the prior year. I should add that we continue to expect another year of double-digit annual recurring revenue growth including our recent Plex acquisition, which adds approximately $170 million to our ARR totals in fiscal 22. A more detailed view into our outlook by end market is found on slide seven. I won't go into the details on this slide, but as you can see, there is no change to the outlook for our three industry segments. With that, let me now turn it over to Nick, who will elaborate on our Q1 results and financial outlook for fiscal 22. Nick?

Thank you, Blake, and good morning, everyone. I'll start on slide eight, first quarter key financial information. First quarter reported sales were up 19% over last year. This is slightly better for the quarter than we expected and indicated in November. We saw some improvements in the timing of electronic component shipments from our suppliers that resulted in a stronger first quarter than we anticipated. Q1 organic sales were up 17%, and acquisitions contributed 2.6 points to total growth. Currency translation decreased sales by under one point. Segment operating margin was 19.1%. better than expected and improved sequentially from Q4. Our stronger sales performance improved our margins in the quarter. Versus last year, our margins declined 70 basis points due to higher planned spend and negative price costs, both in line with expectations. These were both partially offset by the impact of higher sales. Corporate and other expense was $29 million. Our adjusted EPS in the quarter was $2.14. Q1 of fiscal year 21 included a non-recurring favorable legal settlement of 45 cents. Excluding the prior year favorable legal settlement, adjusted EPS grew 11% versus the prior year. I'll cover a year-over-year adjusted EPS bridge on a later slide. The adjusted effective tax rate for the first quarter was 15.3% and in line with the prior year. Free cash flow was negative by $50 million in the quarter and down compared to prior year due to the payout of the fiscal 21 bonus, an increase in our working capital to serve our strong demand, and higher planned tax payments. One additional item not shown on the slide We repurchased 151,000 shares in the quarter at a cost of $49 million. On December 31st, $503 million remained available under our repurchase authorization. Flag 9 provides the sales and margin performance overview of our three operating segments. Total reported sales grew double digits across all three of our segments. Intelligent devices grew organic sales by 26%. Compared to last year, intelligent devices margin expanded 430 basis points to 23.7% on higher sales despite a price-cost headwind. Software and control organic sales were up 8%. Segment margins for this segment declined 730 basis points compared to last year, with higher planned investment spend and the impact of acquisition integration costs, partially offset by higher organic sales. This segment also saw negative price costs in the quarter. Lifecycle services grew organic sales by 10%. Segment margin was 5.5% and declined 340 basis points, driven by higher planned investment spend unfavorable project mix, and higher input costs, partially offset by higher sales. Margin is expected to grow through the bounce of the year as a result of strong sales growth and a higher margin backlog. The next slide, 10, provides the adjusted EPS walk from Q1 fiscal 21 to Q1 fiscal 22. Starting on the left, Core performance was up about 55 cents on a 16.8% organic sales increase. Approximately 20 cents was related to temporary pay actions that were benefiting the prior year and have since been reversed. This is the last quarter that we have this in our prior year comparables as a headwind. Currency was slightly unfavorable by about 5 cents. Acquisitions had a negative impact of 10 cents, mostly related to PLEX. We continue to expect that PLEX, including the impact of interest expense, will be break-even in fiscal year 22 EPS and up 15 cents from fiscal year 21. As a reminder, our prior year EPS included a non-recurring legal settlement gain of 45 cents. This brings us to our total EPS of $2.14. Let's move on to the next slide, 11, guidance for fiscal 22. We are reaffirming our sales guidance of about $8.2 billion in fiscal 22, up 17.5% at the midpoint of the range. We expect organic sales growth to be in a range of 14 to 17% and 15.5% at the midpoints of our range. This guidance is based on our current view of electronic component availability. By quarter, we see Q2 sales improving sequentially low to mid single digits, with continued improvement in the second half of the year. Our first half is expected to be in line with our initial projection, with our first quarter being a little stronger, and our second quarter coming in a little lower due to timing of electronic component availability. We are pleased with our supply chain team's ability to navigate through this dynamic environment and keep the focus on serving our customers. We expect full-year segment operating margins to be about 21.5%. We continue to expect slightly positive price costs for the full year, we expect the first half impact of price costs on margins to be dilutive by approximately 200 basis points, and that the margin impact in the second half from price costs will be accretive by over 100 basis points. Given the first half of the year negative impact of price costs, we expect margins in the second quarter to be similar to Q1 margins. with the positive impact from higher sales being offset by higher sequential input costs. We expect the phasing of our price increases, along with higher sales, will significantly benefit margins in the second half of the year. Our full-year view on margins and the impact of price costs on those margins remains unchanged. We continue to expect full-year core earnings conversion of between 30% and 35%. And we're on track to grow our R&D and other growth-related investments by double digits. These investments will position us well as we drive sustained growth in 22 and beyond. We continue to expect the full-year adjusted effective tax rate to be around 17%. We do not anticipate any material discrete items to impact tax in fiscal 22. We're also reaffirming our adjusted EPS guidance of $10.50 to $11.10. At the midpoints of the range, this represents 15% adjusted EPS growth. Finally, we are projecting full-year fiscal 22 free cash flow conversion of about 90% of adjusted income. This reflects a $155 million bonus payout made in quarter one for the fiscal 21 performance, $165 million of capital expenditures, and funding higher levels of working capital to support significantly higher sales growth. Our working capital target is aligned with our historical amount of about 12% of total sales. A few additional comments on fiscal 22 guidance. Corporate and other expense remains around $125 million. Net interest expense for fiscal 22 is expected to be about $115 million. And we're assuming average diluted shares outstanding of 117.5 million shares. Finally, on capital deployment, no change to our strategy or fiscal 22 priorities. Our first priority is organic growth. After that, we focus capital deployment on inorganic activities. Then we focus on capital returns to shareholders through our dividend and then share repurchases. And we continue to focus on de-levering in fiscal year 22. With that, I'll turn it back over to Blake for some closing remarks before we start Q&A.

Thanks, Nick. Strong order trends and record backlog underpin a robust top-line outlook for fiscal 22. As we said last quarter, we are making investments in our capacity, technology, and people to support our future growth. We are investing in our operations to expand capacity by $500 million per quarter, while at the same time increasing the resiliency of our supply chains. We made significant progress in the quarter to release factory-taught SaaS offerings, including new Plex smart manufacturing platform capabilities and, with expanded fixes, applied AI capabilities. We also released the next version of Emulate 3D to further our capabilities in creating and operating digital twins of production systems. A significant release of new Logix functionality is scheduled for next quarter. Importantly, last year's accelerated organic investments have allowed us to release new secure remote access functionality and cloud-based data management of automation design information earlier than originally anticipated. In summary, Q1 was a great start to the year. We've been very busy capitalizing on the opportunities we see today while at the same time building for the future. I want to take a moment to recognize the people in our organization and the tremendous work that went into these results during especially challenging times. We're making significant investments in existing and new talent and are empowering them with the technologies and resources to be successful. we continue to encourage fresh ideas from across the organization and look at ways to increase our value through the customers eyes i feel confident that investments in automation and digital transformation have never been more top of mind than they are today as a pure play leader devoted exclusively to these areas We think our agility, our differentiated portfolio of products and services, our significant domain expertise, and our ecosystem of best-in-class partners make us the best-positioned company to benefit from what should be a significant multi-year growth cycle. Let me now pass the baton back to Jessica to 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. Emma, let's take our first question.

I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. Your first question comes from the line of Scott Davis with Millis Research. Your line is now open.

Hey, good morning, everybody. Hey, Scott. Good morning, Scott. Jessica, everybody, but kind of like I wanted to ask about this emulate 3d, the digital twin stuff is is that becoming the new kind of the standard to do a full kind of some factory simulation, you know, digitally before you break ground? Is that is that becoming the norm? Or is that still kind of tip of the iceberg stuff?

I think, you know, Scott, I think we're still climbing the adoption curve there. But everybody is aware of the promise of being able to simulate production systems before actually starting to run material through a line. And this is one of those areas that I think the pandemic accelerated because you couldn't get everybody that you traditionally would have wanted to be on site shoulder to shoulder on a line to commissioning a new line. And so the ability to go and to digitize your system, to be able to tune it, to be able to get a good picture of what should happen, takes you much further down the path without actually having to have people together and running product through a line in the traditional way. So we see the most advanced companies well into proofs of concept we're heavily involved with them on that and i should add this is an area that the calypso acquisition and then followed by the more recent avada acquisition has really helped to complement the technology that we have with emulate 3d and some of the new logics capabilities to have the people who can describe that holistically at the higher levels of the organization that are required to sign off on that sort of initiative has really been helpful for us.

Okay, that's helpful. And then, Blake, you know, historically in the up cycle you always have this unfavorable project mix, but there has got to be some supply and demand imbalances here where, supplying into these projects is going to be harder and harder, just given how many projects there are. Is there a scenario that this cycle is a little bit different, that you can price those projects and the bids more aggressively and have less of an unfavorable mix impact, or is that just not how it works?

No, I think a couple of things. First of all, I do think that this cycle is going to be a little bit unusual. Now, there's always some you know, differences from one cycle to the next. But I think this one may be a little bit elongated because with the amount of longer-term capital investment in verticals like semiconductor, where that new capacity is not going to come on for a while, where they still have to build an ecosystem of local partners around these big fabs, I think we could see a cycle that actually lasts a little bit longer than maybe that mean in the past. In terms of demand and being able to supply into this, you know, right now the bottleneck is the chips. We're working through that, but I still think that the material is getting out there, and we are going to see the completion of these projects. I can't I haven't seen any evidence that people are not, you know, moving forward with their expansion plans because of supply chain constraints. They're slowing them down, but everybody's trying to come out of the pandemic better positioned than their competitors in terms of capacity and new offerings, and I don't see that changing.

Okay. Good luck, Blake. Thank you.

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

Hi, guys. Good morning. Hey, Andrew. Hi, Andrew. Just the first question, you guys sort of said that first quarter was better than expected and second quarter was, you know, a little bit weaker. And I think you cited price cost and supply constraints. I guess the question we're hearing is that for a lot of companies, actually, the fourth quarter seems to be a big pinch point, and you guys managed to do better than expected in the fourth quarter. So what specifically, I'm just trying to figure out how it is you were able to get stuff out of the door in your first fiscal quarter, and why would it get worse in the second quarter? Thank you.

So, Andrew, we have a broad base of suppliers. You know, obviously it goes well beyond just the semiconductor suppliers, but even within that category, we're managing a broad base of suppliers because, you know, Virtually all of our intelligent devices are intelligent. They have semiconductor-based technology. We are in daily contact with our key suppliers through our supply chain organization and in conversations that include me and my senior team. And basically, we were able to get a few more chips in the first quarter than we had originally forecast, but we're expecting the second quarter to be a little bit lighter. It's a dynamic situation, but, you know, the fundamental – I guess, framework you should think about is that with the enormous backlog that we have, you know, the new incoming orders are coming in on top of that. So the demand, you know, is not the constraint, and we don't expect it to be, you know, for quite some time to come.

Nick, anything to add to that? Yeah, our view of what we were going to be getting for the first half of the year from for chips as our most significant component, that just hasn't changed. Some of them came in a little earlier and we were able to ship things out in the first quarter. The first half view of what we were going to get just did not change, Andrew.

No, that makes sense. And maybe a follow-up question on software and control. You highlighted high planned investment spent. can you just versus your expectation a i just wanted to figure out where was the margin on software and control versus your expectation uh for the quarter and how much of uh you know how much of this investment span was planned and how much of it was discretionary in the quarter and what were you spending money on thanks so much yeah andrew it's uh the software and control margins were actually just a little bit better than what we had in our internal planning um

The investment spending is right in line with that total for the total company where three months ago we said that we'd be upping our investment spend by approximately $200 million. Our first quarter we executed exactly on that plan, roughly $50 million a quarter over each quarter of last year that we're increasing. And that spending – We were also impacted in the margin in the first quarter by our continued spend on the acquisition integration costs. We expect that impact on the margin will diminish in the coming quarters as we work through that, the integration. So for the full year, Andrew, I know you didn't ask it quite this way, but we think the margins are going to continue to grow in software and control. We don't think it's going to be, you know, Of our total company margin expansion of 150 basis points, we largely think of software and control as largely flat compared to last year, and most of our margin expansion coming from intelligent device and lifecycle services. Now, specifically what we were spending on, we were spending on product development, software development, and software and control. We also... are spending more on our customer-facing selling resources, and software control is one piece of that as we are building more specialization in how we sell in some of the software and control products. So those are a couple things that we've increased our spending on. Blake will add a little more detail on that.

Yeah, Andrew, just specifically in terms of the things within software and control, as we've talked about, cloud-native software development in multiple products within the factory talk hub that we explored a little bit during Investor Day. There's also new visualization tools, hardware and software, that are under development, and then new hardware functionality around the Logix control system. We're going to have major new product releases in all three of those areas in the next 12 months.

Thank you. This is super useful. It was fun to hear Jim last night compliment you on your software growth as well. Thanks a lot.

Yeah, thank you. The PTC relationship is going well.

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

Thank you. Good morning, everyone. Hey, Jeff. Hey, Jeff. Hey, good to catch up with everybody. Hey, can we just delve a little bit more into the sequentials? And I know we touched on it a bit on the prior questions, but just thinking about, you know, margins being flat sequentially on, you know, on higher revenues sequentially. is um so you addressed availability but is is price cost actually worse in the second quarter also or is there you know something else going on in incentives or investment spend or something like that that would create that kind of lack of leverage on sequential revenue growth yeah jeff um in terms of price costs uh you're exactly right in what you're theorizing there price costs were negative

negatively impacting us in the first quarter, they will even more negatively impact us in the second quarter, bringing that first half impact to that roughly 200 basis point negative impact on margin. Then from there, it starts to ascend the price-cost, and that will be getting substantially better in the third and fourth quarter on price-cost. And that's largely how we had this planned out at the beginning of the year when what we shared three months ago. I think the only dynamic that's been happening throughout in the first three months is we are seeing costs go higher and we're seeing our planned price actions go higher as well. So both of those moving in tandem to keep our net price cost exactly what we said three months ago.

And so the expected relief in the second half, is a function of continued price mounting and kind of anniversary. Are you baking in actually cost relief in the back half?

Maybe you could just go. No, I mean, of course, Jeff, that would be great to think that will happen, but we're not planning for cost relief. We are planning for continued cost inflation going in. It will be the price part and the phasing in of our pricing that will be positively impacting us in the second half of the year.

And then could you also just separately address, you know, how to think about the orders? And the nature of my question is, you know, 9 billion of orders, you know, 10% long lead time stuff. So let's call it 90% shorter cycle orders. Maybe you want to use a different term. But, you know, that would kind of imply, you know, a little over $8 billion in orders on the short cycle deliverable stuff. That's sort of where your revenue guide is, plus or minus a little bit. Is that the way to think about just kind of the reaction function here between orders and conversion to sales? I'm sure it's a little bit more complicated than that, but just maybe frame up how – orders convert to sales and if maybe that's changing because of, you know, the supply chain and other disruptions that we're dealing with?

Yeah, Jeff, you know, the other main component, I'd say, of the equation is the very large entering backlog that we have there. So, you know, this orders, continued orders growth comes on top of historic levels of backlog. And even the longer lead time orders, and I'll describe that a little bit, those will likely shift or a large part of that will shift in the fiscal year. So when we say longer lead time, that doesn't necessarily mean it's pushed out beyond the end of fiscal 22. To be sure, we're going to have very large backlog in any scenario at the end of fiscal 22 setting up for fiscal 23. But let me give an example of what those, you know, advance orders would be. So you think of an OEM that has big backlog in their own shop of machines to be built, and they would typically buy, let's say, three months of components from Rockwell, controllers and drives and servo amplifiers and so on, because of the longer lead times they may extend that out to six months worth of component orders that they're placing on us so that's the example where they have the demand it's not speculative they just increase their advanced orders in that respect and we look carefully at both that customer demand as well as distributor order patterns. We're working closely with them, and that gives us the confidence to say that this is representative of underlying demand that goes right to the end user.

Great. Thanks for the color. I'll pass the baton.

Yeah, thanks, Jeff.

Your next question comes from the line of Josh Pokrowinski with Morgan Stanley. Your line is now open.

Hi, good morning, guys. Hey, Josh. Hey, Josh. So maybe just on the intelligent devices margins first, I know we've covered some ground there, but anything that you can tell us, Nick, about, you know, was there kind of inventory pre-position just waiting for chips or something else that kind of goosed the margin with this first wave? Like price-cost getting worse here in the second quarter isn't really – as common, I think, across the industrial universe is because price has been so high. Like anything that, you know, sort of gave you the kind of initial advantage, you know, when you were able to get that extra supply in this quarter that goes away, or is it just inflation?

The single biggest thing that was driving that margin expansion in intelligent devices And we had high expectations for intelligence device margin as well in the first quarter. But what drove it even higher is the higher sales than what we were expecting. And that's why I'm guiding that we're not planning margin expansion there in the total company sequentially because, What we see for a bit of benefit from higher revenue in the second quarter, as the low to mid single digits I talked about, that will be largely offset by price costs getting a little worse in the second quarter. Now, what I would just describe in terms of our overall pricing philosophy here is we are seeking to price in a way to offset our input costs. And we're not pricing in a way to generate even more substantial profits off of that, but to largely offset the input cost inflation that we're seeing. We see opportunities for how we can be using our pricing to be gaining share around the world. And we are basically trying to offset it. And that's why three months ago and now, we still see it slightly as a benefit to earnings per share, but not as substantial. difference there between input cost and price?

Yeah, it's in line with the idea that we've talked about of accelerating profitable growth. And we remain committed to the idea, and they're seeing this play out, that nothing expands margins like top-line growth. And so we think that we're striking a good balance between the near-term profitability and the investment to create an even brighter future.

Got it. That's helpful. And then just to follow up on Jeff's question on orders, you know, interesting that, you know, that stat on the longer lead time stuff isn't really a big part of the equation. It sort of suggests that customers aren't ordering earlier to try to secure their spot in line. So I guess it's a good thing, but, like, is the only thing that's, sort of delaying kind of convergence of orders and sales on what should be a shorter cycle business, just supply chain? Or is there some other kind of delay in the process, labor or something on the customer's end that kind of prevents those from converging near term?

Josh, it's supply chain constraints. We've got this enormous demand that a result, I think, of three basic things. First of all, it's the secular trends that you're seeing play out across industries and geography. placing a higher degree of importance on automation and you know digital transformation than ever before so it's secular it's also cyclical we are still early in what we believe is going to be a multi-year period of economic expansion and then finally it's our position uh in this market and i think all three of those things are are driving the demand

Hey, Josh, one thing I'll add is we've invested in our own internal capacity that we do not see that as a constraint. So, as Blake said, it's that component availability and getting that, and we're equipped and ready to go for that as that ramps up.

Yeah, and just a final point just to summarize, fiscal 22 sales – would be higher were it not for the supply chain constraints. So we're managing, as Nick said, our capacity, our labor, you know, based on very dynamic practices, kind of hand-to-hand, you know, around the world, making sure that we're acquiring talent, keeping talent, paying competitive wages, all those things. We're keeping ahead of it. Great. Appreciate the call. Best of luck, Ed. Yeah, thanks, Josh.

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

Hi, good morning. Just wanted to circle back on the orders outlook again. So is the sort of assumption, you know, backing into that $9 billion-plus number for the year, that you probably have decent, you know, double-digit order growth year-on-year in Q2, And then maybe it's down year on year in the back half, you know, as supply chain conditions get easier, but you've got tougher comps as well. Is that sort of the right way to think about orders over the balance of this year?

Julian, based on what we're seeing and what we're expecting, we do think we are going to see order growth in our second quarter, year-on-year order growth. And then second half of the year, you can do the own math of calculating what that would mean, of what that means if we're at $9 billion. Like whether it's up year on year or down a little, I think that's a little too fine of a point. But what we're seeing in second quarter so far, we think that's in line with that, and we think it's going to be growth year on year.

Yeah, the other point I would just add is, you know, we've continued to see this order momentum for multiple quarters now, and the trends are extending into January. So we see it, again, as reflective of underlying demand. in multiple industries. And we can point to the specific investments based on, you know, the large green fields that have been announced as well as on the ground, individual salespeople from distributors, from our own people who are directly involved in these projects. So we feel very good about the overall demand.

That's helpful. Thank you. And then just my second question, um, on the price cost aspect, um, So you mentioned some price, some extra price increases, but you've left the organic sales guide in aggregate unchanged. So does that mean that pricing for the year as a whole is still not that different from that 2% type tailwind you'd mentioned before? And then maybe just to clarify, when you talk about price costs, Is that cost aspect solely sort of freight and logistics and components and labor is kind of separate from that?

I'm going to take the second part of the question first, Julian. When we talk and think about price costs, it is exactly what you're saying, but we're paying for all the inputs as well as logistics costs. Labor is something that we largely manage around productivity and what we're doing there to improve the efficiency and productivity of our operations often are incented to more than offset what we see of wage inflation there. So when we talk input costs, we're in the price-cost equation. It's input costs and logistics. Now, in terms of pricing and our overall guide, yes, we have chosen to keep our our organic growth guide the same. Three months ago when asked, I indicated a 2%, roughly 2% price growth that we were planning for the full year. We think that's going to go up. I'm not going to put a new number on it because we, I mean, it's a dynamic situation with price and cost, but we see that number going up. We're focusing more on the net, keeping those bad in balance than what the the two parts of that equation are. So we kept the guide the same. I think it's likely in the one quarter from now, things like FX, things like price, we'll be incorporating all of that into the guide.

Great. Thank you. Thanks, Julian.

Your next question comes from the line of Brendan Luke with Bernstein. Your line is now open.

Morning, all. Thanks for taking my question.

Hey, Brandon.

If you talk to customers, are you seeing any early indications of shifting manufacturing footprints on the back of the extended supply chain crisis? Or is this really more of a CapEx recovery story and share game when you look at your growth projections?

You know, I think it's new investment. I would not look at it as shifting manufacturing, although I think, you know, manufacturing in North America is probably a larger percentage of a company's global investment than it has been traditionally. So I don't see people closing plants in Asia, for instance, and bringing them back as the majority of what's driving the demand. But I do see, as people are planning new capacity, whether it's brownfields or greenfields or upgrades, adding, you know, digitization solutions to existing capacity, I see North America, and that obviously is our strongest market, as being a half-size beneficiary. So automation in general, as I said before, from a secular standpoint, is increasing. Then in the cycle, it's still early. And our position in high-growth, high-investment areas of both geography and technology are positive and are what are driving a lot of this outlook.

Excellent. Thank you. Thanks, Brandon.

Your next question comes from the line of Steve Tusa with J.P. Morgan. Your line is now open.

Hey, guys. Good morning. Hey, Steve. Morning, Steve. Congrats on good execution here. Kind of above seasonal, so it looks like you guys shoot through a little bit of that backlog at least. I just wanted to make that clear on the comment you just made. You're guiding Forex at zero. I think you'll have a headwind. If you snap the line today, what's that headwind on Forex? I would assume that that would be a headwind.

Yes, Steve. If I snapped the line earlier this week, it would be between a 1% and 2% negative impact. I chose not to be updating because it's volatile and we have enough volatility. I didn't want to be updating for just one component and not updating for all. We have FX that's, if I stamp the chalk line right now, a little bit worse than our initial guide. We have price that is better than our initial guide, and we have input costs that are higher than our initial guide. All in, we think that leads to an aggregate where we think our top line growth and EPS growth that we said three months ago still make the most sense.

Right. Got it. I have $35 million for Plex revenues in the quarter. What were orders for Plex? Is there some deferred revenue booking dynamic there? I'm not a software guy, so I feel like every time our company does a software deal, there's a bunch of orders that flow through in the first quarter. Can you just talk to revenues and orders at Plex?

Yeah, your numbers on Plex are just in terms of revenue. That's exactly where they were. Orders were substantially higher. My ballpark looking at it is about 20% higher than what our revenue was.

Oh, okay. It's not a huge number, though. It's not like you didn't rebook anything there in orders for them.

No, no, no, no, no. Yeah.

Okay, and then just one last one on kind of the back half of the year. Anything to talk about as far as, you know, just to keep in mind for third and fourth quarter dynamics?

Yeah, I mean, the biggest two things, Steve, are what I've already talked about in terms of revenue. We see continuous sequential improvement as we are – estimating and improved access to electronic components as we progress into our second half. In terms of margin and profitability, the single biggest dynamic that's going to be driving the margin up is the flip on price cost from negative to positive in the second half. And then also benefiting the second half is the improved leverage with the added sales that we'd be having. see the biggest dynamics going on in the second half. There isn't another big thing going on there.

Yeah, and I would just say, you know, continued very strong backlog. So, you know, just a simple map of what we shipped and what we booked, you know, indicates the backlog, you know, remains and even grows. So that remains healthy.

Awesome. Thanks for all the details. Appreciate it. Yeah, thank you.

Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is now open.

Hey, good morning, guys. Hey, Andy. Hey. Blake, you mentioned China up strong double digits in Q1, and Asia-Pacific actually led your global growth. I know you still have easy comparisons in Asia-Pacific, but I think you've been talking about changing the way you go to market there and you're making investments in the region. So is Q1 a result of that? Is Q1 a result of those efforts? And then obviously there seems to be some macro risk in the region. So could you give us a little more color into what you're seeing there?

Sure. You know, just specifically on China, if we look at the verticals that contributed to that strong double-digit growth, there was tire, which, you know, in general, of course, continues to be a great vertical, and there's a lot of tire activity complementing, you know, the EV activity going on in China, and we're a beneficiary of that. Food and beverage is an area where that worldwide is our single biggest vertical. And we've had some great recent traction within China in food and beverage markets. uh chemical uh and then mass transit and so these are industries that uh you know have generally been pretty good for us in china and when i talk about new uh new ways to get to market it's really complementing you know our traditional uh distribution uh but we've also given our local leadership um more empowerment uh to make investments that they say are appropriate With our relatively lower share in China, we think by doing, you know, basic things correctly, there's lots of room to run. And, you know, it's a combination of our core products as well as the new ways to win, information solutions and connected services. And those are really seen as a calling card getting into customers, even when their installed base might be with competitive product. It's a way for engaging high-level decision-makers as we bring that new value to them. And, you know, those companies across food and beverage and life sciences and EV, they're all intensely interested in climbing the productivity curve And so that's where we see particular endorsement of our software, which is a strong contributor in China, as well as new disruptive technology like independent card, which, you know, we continue to win some very large orders in China based on independent card, particularly in EV and battery assemblies.

Thanks for that, Blake. And then, Nick, I know you didn't change your overall sales growth forecast. I mean, if I look, though, at the pieces of the end markets, it looks like you've raised a little bit e-commerce, life sciences, oil and gas, you lowered chemicals. So if you sort of put that all together, I think last quarter you told us that even with supply chain issues, you still felt relatively confident about your range even at the high end. Does the sort of implicit changes in these end markets that you made here this quarter suggest that you might even have more confidence, especially given the orders that you just recorded in Q1?

Andy, we remain confident that we're guiding exactly where we think it will be. But those small things that you're talking about, those are like more on the fringe that we think our guidance is based far less of a view of demand and far more by what we see of our ability to be procuring components. And that view has not changed. We continue to think where we're guiding is exactly what we're going to be able to deliver this year. Thanks, guys. Thanks, Andy.

That concludes today's question and answer session. Ms. Caracas, I turn the call back to you.

Thanks, Emma. Thanks, everyone. That concludes today's call. We appreciate your support and look forward to talking to you soon. Have a great day. Thank you. That concludes today's conference call. At this time you may disconnect.

Thank you.