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 one. At this time, I would like to turn the call over to Ajana Zellner, Head of Investor Relations. Ms. Zellner, please go ahead.

Thanks, Rex. Good morning. Thank you for joining us for Rockwell Automation's third quarter fiscal 2022 earnings release conference call. With me today is Blake Moretz, 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 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. 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 the 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 it over to Blake.

Thanks, Ayjana. And good morning, everyone. Thank you for joining us today. I want to also take this opportunity to congratulate Ayjana on her promotion since our last earnings call. Let's turn to our third quarter results on slide three. We had a strong quarter with orders, shipments, margin, and profit all at or above our expectations. We successfully navigated supply chain disruptions in a still volatile environment, and we saw the positive impact of pricing actions that demonstrate our strong position in the market. Total orders grew over 17% versus prior year, with strong demand in all three business segments. Our continued order strength reflects the value our customers place on Rockwell's differentiated offerings and the increased need for automation solutions, regardless of the current macroeconomic backdrop. Total revenue of almost $2 billion was up 6.5% year over year. Organic sales came in as expected and grew over 7% versus prior year. Acquisitions contributed 2.5 points of growth. Currency translation reduced sales by over 3%, driven by continued strengthening of the U.S. dollar. While we saw a gradual overall improvement in supply chain through the quarter, our sales volume and mix continue to be impacted by component shortages, as we've been discussing for a while now. Our top line performance, both by segment and region, was driven by specific component availability in Q3 more than the underlying demand, which remains strong. In the intelligent devices business segment, organic sales were up over 2% year over year, but below expectations. This segment was disproportionately impacted by component availability, further exacerbated by extended China COVID shutdowns. Software and control organic sales growth of over 13% versus prior year was above expectations. Our strong performance here reflects both an improvement in the chip supply and some early benefits from the recent resiliency investments. Sales of our Vue operator interface panels, which we redesigned to optimize our component supply, were up almost 60% year over year. Our software sales through double digits versus prior year. In lifecycle services, organic sales increased almost 9% versus the prior year, despite continued component shortages and a partial shutdown of our Shanghai facility earlier in the quarter. Within lifecycle services, Sensia had another quarter of strong growth with both orders and sales up over 20% year over year. Sales in our services business also grew double digits, driven by higher demand for asset management and cybersecurity. Lifecycle services book to bill was 1.27 in the quarter, reflecting continued strength in our orders. Information solutions and connected services orders and sales both grew strong double digits in the quarter, with particular strength in MES software and industrial cybersecurity sales. Within information solutions, we had a number of strategic wins this quarter, thanks to our industry-leading portfolio of scalable and flexible software offerings. For instance, Eli Lilly and Company has chosen Rockwell Automation's PharmaSuite MES solution as a next-generation MES platform for their drug products. In addition to our on-prem software wins, we continue to gain traction with our recent cloud-native acquisitions. One of our Plex wins this quarter was with Zebex, an Arizona-based company focused on electrification of light and medium duty fleet vehicles worldwide. Our smart manufacturing platform will help this customer's aggressive growth plan with advanced supplier and inventory management. improved data visibility, and reporting. We're also happy to report the sale of a Plex application that will run natively on Microsoft Azure in Europe, as well as a growing list of wins in food and beverage companies. These are important deal synergies that we are starting to realize. At FIX, we continue to see strong double-digit sales growth led by both new logo wins and expansion deals. Our competitive maintenance management wins across many verticals, including EV and food and beverage, reflect the platform's differentiated AI capabilities and ease of deployment. Connected services orders and sales were also strong in the quarter, demonstrating customers' increasing reliance on our deep domain expertise, cybersecurity services, and 24 by 7 remote support, especially as many companies are struggling with labor shortages and temporary budget constraints. In the quarter, total ARR was up almost 60%, and organic ARR grew 18%. Our strong operating performance and focus on price-cost execution resulted in exceptional earnings this quarter. with adjusted EPS growing 15% versus prior year. Let's now turn to slide four to review key highlights of our Q3 end market performance. As I mentioned earlier, while we saw a gradual overall improvement in supply chain constraints this quarter, some of our businesses and industry verticals, mainly discrete and the hardware-intensive parts of hybrid, were disproportionately impacted by the ongoing component supply issues. In our discrete industries, sales were up low single digits. Within this industry segment, automotive sales were up 6% versus prior year. We continue to see investments in the EV transition from both traditional brand owners and EV startups with a healthy mix of greenfield and brownfield activities. In Q3, we had a strategic greenfield win in Asia, where a Chinese automotive company, Cherry Auto, chose Rockwell's differentiated MES, IoT, and core automation offerings over their traditional European supplier to build a smart plant and increase their speed to market. In addition to working with leading electric vehicle manufacturers, We continue to gain share in the EV battery space with several competitive wins in the quarter, both in Asia and Europe. While most of our previous wins in this space were in battery assembly and conveyance, we're starting to expand our presence in battery cells. Rockwell's integrated logics and motion offering was selected by Duer Clean Technology Systems to provide an end-to-end coding process. from powder handling and slurry mixing to coating and drying. Semiconductor sales declined 2% versus prior year and were significantly impacted by COVID-related shutdowns in China. Despite the near-term supply chain challenges impacting its own ecosystem, this industry continues to see strong demand with about 80 greenfield and 300 brownfield projects announced today. In e-commerce and warehouse automation, our sales were down over 15% in the quarter, mainly driven by electronic component shortages and tough prior year comps. While we are seeing a slowdown in investments from some e-commerce customers, we continue to work with traditional retailers and grocers who are investing in new automated infrastructure to gain share in the market. Turning to our hybrid industry segment, Sales in this segment grew mid-single digits, led by growth in life sciences and food and beverage. Food and beverage sales were up mid-single digits versus prior year. While inflation might put some pressure on new expansion investments, we continue to expect especially strong demand in certain markets like agriculture processing, where Rockwell has high share and a differentiated technology offering. We saw a number of CapEx wins in Latin America this quarter, with one of our food and beverage wins coming from CP Calco, a Brazilian nature-based ingredients manufacturer, who chose Rockwell and our PlantPAX process control architecture as their automation partner for the next capacity expansion project. Life Sciences sales grew over 15% in Q3, with strong year-over-year growth in medical devices, pharma, and biotech. This was another industry where our differentiated process controller, along with strong network infrastructure and overall project management expertise, helped us win a competitive project with Thermo Fisher in their joint venture plan in China. A combination of industry-leading MES and IoT software and the multi-discipline Logix platform for hybrid applications, along with our increasing expertise in biotech and cell gene therapies, position us well in this fast-growing vertical. Tire was up low single digits in the quarter. We continue to see increased customer demand for our software and services in this vertical. In the quarter, we had our first Plex win in Tire with Prometheon Tire Group, a global leader in tire manufacturing headquartered in Italy. The customer chose our Plex QMS to standardize quality management across its global operations. Moving to process, this industry segment grew 12% versus prior year, with oil and gas, mining, and metals all growing double digits. We continue to grow our presence in process by displacing the traditional DCS players across oil and gas, mining, and chemical industries. Our investments in process control technology and petrochemical expertise are paying off, as demonstrated by our recent wins in North America and Europe. We also had a strategic multi-million dollar ESG win, where Rockwell will be helping one of the most active operators in the Permian Basin reduce its greenhouse gas emissions and bring all operated oil and gas assets to net zero by 2050. Turning now to slide five in our Q3 organic regional sales performance, once again, these results were heavily impacted by our component availability. North America organic sales grew by 11% versus the prior year. Latin America sales increased by over 15%. EMEA sales were up over 3%, and Asia Pacific was down almost 6%. Let's move to slide six, an update to a new slide we had provided last quarter. As you can see, order cancellations remain very low and are within our historical ranges. Our strong orders and record backlog of over $5 billion continue to support strong sales in fiscal year 22 and beyond. As we turn to slide 7, let's review highlights for the full-year outlook. Orders are expected to stay strong for the remainder of this fiscal year. While we continue to expect strong double-digit year-over-year and sequential organic sales growth in Q4, resulting in double-digit growth for the full year, we're reducing the midpoint of our organic growth range to 11%. Our revised guidance reflects ongoing supply chain volatility in this environment, especially for business operations and suppliers located in Asia. The supply of electronic components is gradually improving, but remains volatile. Acquisitions are expected to contribute two and a half points of profitable growth, more than offsetting a two-point headwind from currency translation. We continue to expect double-digit growth in both core automation as well as information solutions and connected services. We continue to expect another year of double-digit annual recurring revenue growth. Our organic investments and acquisitions help make this revenue stream become a more meaningful contributor to our overall business resilience. Our additional investments and resiliency actions are progressing well. as we develop deeper relationships with key suppliers, complete redesigned projects, and realize price to mitigate inflation. We expect our margins to expand in Q4 on higher sales and continued price-cost execution. With only one more quarter to go, we have narrowed our adjusted EPS guidance range with our midpoint still at $9.50. We continue to expect free cash flow conversion of 85% for the full year. Nick will now add detail to our Q3 results and financial outlook for fiscal 22. Nick?