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'd like to turn the call over to Ajana Zellner, Head of Investor Relations. Ms. Zellner, please go ahead.

Thank you, Julianne. Good morning. Thank you for joining us for Rockwell Automation's fourth 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 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 it over to Blake.

Thanks, Ayjana. And good morning, everyone. Thank you for joining us today. Let's turn to our fourth quarter results on slide three. We had a great finish to the fiscal year and delivered very strong operating performance. I'm proud of how our teams navigated this challenging year with continued supply chain volatility, significant inflation, and currency headwinds. Our Q4 results were in line with our expectations, with organic sales and earnings both growing double digits year over year and sequentially. Borders came in as expected in the quarter. Our record backlog, along with very low order cancellation rates, reflect the continued solid underlying demand from our customers across many industries and regions. Total revenue of over $2.1 billion was up 17.6% year over year. Organic sales grew 20.5% versus prior year, in line with our expectations. Acquisitions contributed almost two points of growth this quarter. Currency translation reduced sales by about 5%, driven by continued strengthening of the U.S. dollar. As expected, we continue to see a gradual stabilization of global supply chain. Similar to last quarter, the split of Q4 shipments by business segment and region was driven by access to specific electronic components. In the intelligent devices business segment, organic sales grew over 16% versus prior year with growth in all regions. While growth in this segment for the quarter was once again disproportionately impacted by component availability, we were able to mitigate these supply issues with the benefits from our resiliency actions. We see continued market need for our intelligent devices from power flex drives to our motion technology to our best in class safety solutions. Our independent car technology business had a record year with both orders and sales growing over 35% year over year. Software and control organic sales growth of over 32% versus prior year was above expectations. Strong double-digit growth in view and logics was driven by an improving component supply and our redesign investments. Lifecycle services organic sales were up 16% year-over-year. Book-to-bill in this segment was 1.02, very good for our fourth quarter. Information solutions and connected services had another quarter of double-digit growth in both orders and sales. Here are a couple of wins in ISCS to highlight the continued value of our recent acquisitions and new releases in these areas. One of our Plex wins this quarter was with Futaba North America, a member of the Toyota Business Network. Futaba has selected Plex Smart Manufacturing Platform for its ERP, MES, quality management, and production monitoring. Our state-of-the-art solution provides real-time inventory management, complex planning, and full visibility into this customer's manufacturing operations. Another example of how our new offerings are adding new value to our traditional customers is our win with Kraft Heinz this quarter. Our Plex platform, along with Calypso's digital design and implementation services are helping Kraft meet its productivity, yield, and quality goals. We also continue to broaden our customer base with our FIX, Cloud Native Maintenance Management System. In the quarter, FIX was chosen by Barrett Steel, the UK's largest independent steel stockholder, to help reduce their unplanned downtime with a solution that could be easily scaled across 28 sites. Connected services sales were also strong in the quarter with double-digit growth in digital projects and cybersecurity services. In the quarter, ARR grew 14%, bringing our ARR to over 8% of total revenue. Segment margin of over 23% was up 540 basis points year-over-year, reflecting another quarter of strong execution. Adjusted EPS grew 30% year-over-year. Earlier this week, we completed the acquisition of the Danish company Cubic, a worldwide leader in modular systems for electrical panels. This acquisition will help expand the global reach for our intelligent devices and will bring new customers and partners, including a broader market access in renewable energy and data centers. Let's now turn to slide four to review key highlights of our Q4 end market performance. All three industry segments grew double digits this quarter, driven by continued gradual improvement in the availability of electronic components. In our discrete industries, sales were up almost 20%. Within discrete, automotive sales were up 25% versus prior year. We had numerous wins this quarter, with our customers continuing to invest in their global operations, whether it's starting up a new factory, securing their network infrastructure, or upgrading existing facilities with cloud-native software. One of our key EV wins this quarter was with Hyundai Motors for their U.S. Greenfield Megasite in Bryan County, Georgia. Hyundai Motors has selected Rockwell as their controls partner for press, body, paint, and general assembly. Semiconductor sales grew 30% year-over-year with several global wins this quarter. In addition to securing a sizable turnkey project in Asia, with our proven facilities monitoring system, we had an important win here in the U.S. to provide flexible wafer transfers as part of this customer's automated material handling system. Our independent cart technology is being leveraged at scale to support this customer's labor productivity and capacity goals. In e-commerce and warehouse automation, our sales were up high single digits in the quarter. Even with a slowdown in new e-commerce fulfillment center investment, retailers continue to adopt our solutions for greater warehouse efficiency and throughput. Moving to our hybrid industry segment, sales in this segment grew over 20%, led by growth in food and beverage, life sciences, and eco-industrial. Food and beverage sales were up 20% versus prior year. Similar to last quarter, we continue to see a good pipeline of Greenfield and Brownfield projects that are key customers. In the quarter, we won several multi-site deals with some of the largest food and beverage companies with a healthy mix of intelligent devices, software, and digital consulting and implementation services. Life sciences sales grew over 35% in the quarter. with continued customer investments in software, cybersecurity, and modular process control. Tire was up 20% versus prior year, led by growth at our end-user customers. This is another vertical where we are seeing an increase in greenfield projects in all regions. Turning to process, this industry segment grew mid-teens versus prior year, with growth in metals, chemicals, and oil and gas. One of the wins in chemicals this quarter was with Borah-Lyondell-Bussell Petrochemical, the joint venture between Lyondell-Bussell and Borah Enterprise Group. The customer chose our advanced analytics solution to help improve product quality and increase production capacity at their new polymer production plant in China. Turning now to slide five in our Q4 organic regional sales performance. North America organic sales grew by 20% versus the prior year. Latin America sales were also up 20%. EMEA sales grew over 24% and Asian Pacific was up almost 18%. Let's move to slide six, an update to our orders and backlog performance this fiscal year. Order cancellations continue to stay within our historical low single-digit range. Our orders of over $10 billion and record backlog of over $5 billion this year set the stage for another year of strong sales growth in fiscal year 23. As we turn to slide 7, let's review highlights of fiscal 22. We had another year of record orders, with total orders of over $10 billion growing 20% versus prior year. Reported and organic sales grew 11%, an impressive performance in light of all the challenges of the year. Information solutions and connected services continue to meaningfully contribute to our growth, with over $800 million in sales growing double digits. ARR is also growing double digits and now accounts for more than 8% of our total revenue. Adjusted EPS was up 1% versus prior year, excluding last year's one-time items, adjusted EPS was up 11%. Free cash flow conversion of 61% was driven by higher working capital. Nick will cover this in more detail later. The investments we've made this year have strengthened the resiliency of our business model and positioned us for sustained growth in fiscal year 23 and beyond. Let's now move to slide eight, fiscal 2023 outlook. With the size of our record backlog, our outlook for fiscal 2023 is predicated on the availability of components. Given continued supply chain volatility, we think a conservative approach is appropriate. Our fiscal 23 guidance projects total reported sales growth of 9.5%. Organic sales growth of 11% at the midpoint assumes continued supply chain stabilization with four points of growth coming from price and seven points coming from volume. We expect acquisitions to contribute a point of profitable growth and currency to be a headwind of about two and a half points. ARR is expected to have another year of double digit growth. We are projecting segment margin to expand by 60 basis points year over year. Adjusted EPS is expected to grow 12% versus prior year. And we target generation of over $1.1 billion of free cash flow next year with a return to a more normalized conversion of 95%. Let me turn it over to Nick to provide more detail on our Q4 performance and financial outlook for fiscal 23. Nick?

Thank you, Blake. And good morning, everyone. I'll start on slide nine, fourth quarter key financial information. Fourth quarter reported sales were up 17.6% over last year. Q4 organic sales were up 20.5% and acquisitions contributed 1.9 points to total growth. Currency translation decreased sales by 4.8 points. Segment operating margin expanded to 23.3% and was in line with our expectations. The 540 basis point increase was driven by higher sales and positive price costs, partially offset by the negative impact from currency. Corporate and other expense was $35 million and in line with the prior year. Adjusted EPS of $3.04 was in line with our guidance and grew 30% 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 fourth quarter was 17.8%. The year-over-year increase was related to the cumulative impact of several one-time discrete items recognized in the prior year. Free cash flow was $359 million and was up $200 million over the prior year driven by higher pre-tax income. Working capital on a currency neutral basis grew 10% sequentially versus our plans for a 10% decline. Our planned inventory reductions did not materialize in the quarter due to the continued build of raw material and work in process waiting on critical components. The actions we put in place to right-size inventory are taking longer to implement in the current supply chain environment. Our inventory days on hand at the end of the current year were close to 130 days versus a pre-pandemic average of 90 to 100 days. One additional item not shown on the slide, we repurchased approximately 300,000 shares in the quarter at a cost of $76 million. For the full year, our share repurchases totaled $301 million, in line with our July guidance. On September 30th, $1.3 billion remained available under our repurchase authorization. Slide 10 provides the sales and margin performance overview of our three operating segments. Total and organic sales grew double digits across all three segments. with software and control growing over 30% year over year. Backlog for all three segments grew sequentially and was up over 75% year over year. Segment margins for the intelligent devices segment expanded to 22.3% on higher sales and positive price cost, partially offset by the negative impact from currency. Compared to last year, software and control margins were up over 10 percentage points, driven by higher sales and positive price costs partially offset by negative currency impacts. Life cycle services segment margin was 10.7% and increased 260 basis points versus prior year, benefiting from higher sales. Book to bill in the quarter was 1.02. The next slide, 11, provides the adjusted EPS walk from Q4 fiscal 21 to Q4 fiscal 22. Core performance was up $1.15 on a 20.5% organic sales increase. Approximately 10 cents were related to non-recurring accelerated investments that were made in the prior year. These investments were mostly in our software and control segment. The impact of currency was a 25-cent reduction in EPS, which was about 10 cents worse than our expectations, reflecting the continued strengthening of the U.S. dollar throughout the quarter. Incensive compensation was a 10-cent benefit. As previously noted, our higher adjusted effective tax rate was a 60-cent headwind due to prior year comps. Acquisitions, including the impact of interest, added 15 cents, primarily related to the prior year PLEX deal fees. Our reduction in outstanding shares added about a nickel. Slide 12 provides a walk from our Q4 midpoint in our July guidance to our actual Q4 adjusted EPS results. Other than currency, sales and profits in the quarter played out in line with our guidance. Currency impact on sales was about $25 million worse than we expected and a dime worse on EPS. The impact from currency on EPS was offset by slightly lower incentive compensation and a more favorable adjusted tax rate. Strong organic sales growth and good execution delivered over 23% operating margin in the quarter. Slide 13 provides key financial information for the full year fiscal 22. Reported sales grew 10.9% to $7.8 billion, including over two points coming from acquisitions. Currency negatively impacted sales by approximately $200 million, or 2.7 points. Organic sales were up over 11%, with Growth bounced across all regions and business segments. Full year segment margin remained at about 20%. The benefit from higher volumes and lower incentive compensation was fully offset by higher wages and labor inefficiencies in our projects and in our plants caused by supply chain constraints. Margins were also negatively impacted by negative price costs. primarily in the first half of the year. We increased our growth investments by double digits this year with a big focus on key product launches, new digital capabilities, increased sales force investment, and plant capacity expansion. Corporate and other was down $16 million, mostly related to acquisition costs associated with the Plex acquisition in the prior year. Adjusted EPS was up 1%. A detailed year-over-year adjusted EPS walk can be found in the appendix for your reference. Excluding the impact of the tax rate and the prior year one-time items, which included a favorable legal settlement and one-time accelerated investments, our adjusted EPS was up 11%. As discussed earlier, free cash flow performance was below our expectations. with free cash flow conversion of 61%. The $460 million decrease in free cash flow was driven by a 50% increase in working capital on a currency neutral basis, as well as the payment of the fiscal year 21 bonus in fiscal year 22. There was no bonus payment made in fiscal year 21. Working capital as a percent of sales was 16%. compared to 12% a year earlier. Return on invested capital was 15.2% for fiscal year 22 and 16 points worse than the prior year, primarily related to higher invested capital and lower pre-tax gap income driven by our mark-to-mark adjustments made on our PTC investment in both years. For the year, we deployed about $900 million of capital towards dividends, share repurchases, and inorganic investments in fiscal year 22. We also paid down debt by about $150 million. Our capital structure and liquidity remain strong. Before I cover fiscal year 23 guidance, let's turn to page 14. In fiscal year 22, our backlog grew by over 75% year over year including strong double-digit growth in each segment. Pre-pandemic, we had about one month or less of the following year's revenue in the backlog for software and control and intelligent devices. Our backlog now represents over 50% of our fiscal year 23 sales guide for both of these segments. This unprecedented backlog coverage adds to our confidence in our revenue outlook. Our backlog also includes the benefits of price increases that were implemented throughout fiscal year 22. Let's move on to the next slide, 15, guidance for fiscal year 23. We are expecting sales of about $8.5 billion in fiscal 23, up 9.5% at the midpoint of the range. We expect organic sales growth to be in a range of 9 to 13% and 11% at the midpoint of our range. This outlook includes our current backlog levels, our latest assumptions on supply chain stabilization, as well as continued price growth momentum. We expect full-year segment operating margins to be about 20.5%. At the midpoint, our guidance assumes full-year core earnings conversion of between 30 and 35%. I'll cover a few more details on this on the next slide. We expect the full year adjusted effective tax rate will be around 18%. We do not anticipate any material discrete items to impact our tax rate in fiscal 23. Our adjusted EPS guidance is $10.20 to $11. This compares to fiscal 22 adjusted EPS of $9.49. At the midpoint of the range, this represents 12% adjusted EPS growth. I will cover a year-over-year adjusted EPS walk on a later slide. We expect full-year fiscal 23 free cash flow conversion of about 95% of adjusted income. This reflects $190 million of capital expenditures. We are planning for a reduction in our working capital days with a focus on inventory days on hand. Our working capital is targeted to be about 15% of sales, still above our historic amount of around 12% as the return to pre-pandemic supplier lead times is slow. Finally, Our projections include additional income tax payments of around $100 million related to the change in US tax law that no longer allows for the immediate expensing of R&D. A few additional comments on fiscal 23 guidance. Corporate and other expense is expected to be around $120 million. Net interest expense for fiscal 23 is expected to be around $120 million. And finally, we're assuming average diluted shares outstanding of 115.1 million shares. Let's turn to slide 16. Given the continued supply chain volatility and many moving pieces, we wanted to provide a slide that lays out the tailwinds and headwinds that are included in our fiscal year 23 guidance. From a top line perspective, our 11% organic sales growth is supported by our higher backlog. This includes about 7% from higher volumes due to general supply chain stabilization, low cancellation rates, and resiliency benefits coming from our redesign efforts done in fiscal 22 and continuing in fiscal 23. About 4% is coming from price growth, mostly tied to price actions that went into effect in fiscal 22. We also have factored in about 1% inorganic growth for our recently completed acquisition of Cubic. While the supply chain shows some signs of stabilization In Q4, there continues to be volatility along with a dynamic macroeconomic environment, including the unfavorable impact of currency. All of these factors have informed our sales guidance and range. On adjusted EPS, we expect margin expansion from increased volume and positive price growth. The next favorable impact of price cost on margins is about 100 basis points. We also will benefit from a higher discount rate favorably impacting our pension expense, and we'll see about a 15 cent benefit from share repurchases. We continue to make investments in attracting and retaining key talent, as well as restoring our bonus payout back to 100%. Combined, These two items are around a 150 basis point headwind to our margins. While we do expect a positive price cost for the year, we are also factoring in continued inflation, primarily in electronic components. We expect our margins to be negatively impacted by unfavorable mix and currency. Combined, these two items will be a negative impact of around 150 basis points. We're expecting an adjusted effective tax rate of 18% or about a 20 cent headwind. The next slide, 17, provides the adjusted EPS walk from fiscal 22 to fiscal 23 guidance at the midpoint for your reference and which I spoke to on the previous slide. From a calendarization viewpoint, we expect our second and third quarters to have the highest sales growth rates for the year. with each up mid to high teens year over year. We expect Q1 and Q4 to be in the single-digit growth range. Following the first quarter, we expect sequential sales to improve over the balance of the year. We expect segment margins and adjusted EPS to decline year over year in Q1. We see segment margins in the mid-teens for Q1, which is factored into our full-year view of 20.5%. In Q1, we are projecting a year-over-year margin decrease from increases in spend, unfavorable mix, and currency partially offset by positive price cost. We are seeing margins improve sequentially following Q1 driven by higher volumes and continued positive price cost. Moving on to the next slide, 18, I'll make a few comments on our capital deployment framework. Our long-term capital deployment priorities remain the same. 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. In addition to our organic and inorganic investments, our capital deployment plans for fiscal 23 include a focus on de-levering, dividends of about $540 million, and share repurchases of between $200 and $300 million. With that, I'll turn it back over to Blake for some closing remarks before we start Q&A.

Thanks, Nick. As we look to 2023, we are confident in our ability to execute a strategy. A record backlog underlying customer demand and a more resilient operating model set the stage for a year of double-digit sales and earnings growth. As you heard today, We're continuing to invest for our future, including investing in attracting and retaining key talent. I would like to thank our people for their relentless commitment to solving the immediate needs of our customers while focusing on continued innovation and investment for the future. We're excited to share some of these innovations with you at our Investor Day in Chicago during Automation Fair later this month. we will be introducing an industry-first cloud-native programming application for Logix, a new operator interface package, new I.O. for process industries, on-machine motor control, and a host of other differentiated offerings that make this time a historic moment in Rockwell's journey. Ajana will now begin the Q&A session.

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. Julianne, let's take our first question.

Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. Our first question comes from Scott Davis from Milius Research. Please go ahead. Your line is open.

Hey, good morning, guys. Hey, good morning. Thanks for the detail, but can you give us a sense of inflection points and end markets, things that you're expecting to get perhaps meaningfully better or meaningfully worse in your 23 guide?

So, Scott, just working through the different industry segments, you know, we talk about continued investment within the discrete industry segment in EV and battery. I mentioned the Hyundai wind, great wind force with the greenfield, and we continue to see both the established brand owners as well as the startups increase capacity in their EV fleets because they have to. Otherwise, they're going to lose share and they're not going to be ready to meet growing consumer demand there. So we see that continuing. We continue to see semiconductor moving forward. And even with, you know, a decrease in demand in the consumer markets, The trends remain that people are going to try to make, you know, every product that they produce smarter, and there's going to continue to be growth in semiconductor in consumer and certainly in the industrial markets that we participate in and automotive and so on. So we see continued investment there, and as we talked about a little bit, we're playing an expanded role in semiconductor production, most specifically referenced by that material handling, that wafer handling win that we talked about on the call. We see warehouse automation continuing. I don't see a, you know, an immediate reacceleration in e-commerce, but for retailers wanting to be more efficient in back of store and in their own warehouses, we continue to see good business there going forward into fiscal 23. In the hybrid industry segment, food and beverage continues. A lot of that activity, apart from a few of the green fields that we're participating in, is actually productivity and resilience plays within existing facilities. So this is one of the best areas for our cybersecurity offerings. The services that we're providing in assessing and remediating and monitoring these facilities is particularly attractive to a lot of these food and beverage and consumer packaged goods companies. Pharmaceuticals, we continue to see the trends towards personalized medicine continuing on. And within the hybrid industry segment, eco-industrial with renewables and energy management, water treatment, that continues to be strong, I think, with good secular tailwinds. And then in process, oil and gas, we continue to see double-digit growth ahead. for the CENCIA joint venture. Obviously, there's a lot of interest in the U.S. expanding our ability to provide energy, both for our own domestic needs as well as, you know, potentially more export. And along with traditional fossil fuels and helping them with their energy transition plans, and all of them, of course, have those plans, Renewables as well, and we've talked before about customers like First Solar that are continuing to build out their capabilities in renewables, and we're playing a strong role in that. So, you know, when we look at these verticals, we continue to see strength even in the face of, you know, what are certainly some macroeconomic headwinds.

A good answer, Blake, or a good, thorough answer. When you get into the detail of auto, when you think about the spend, higher spend in EV and batteries, is there a certain negative offset in ICE, or is there some pent-up demand, I suppose, just from the COVID lockdowns and such in that part of the world where there still needs to be some money spent? Some color there would be helpful. Thanks.

Yeah, Scott, you know, I think the brand owners are going to continue to focus on their profit makers, right? They've got their own sources of profit that are funding these new ventures. And so when you think of the trucks and, you know, the bigger vehicles, the luxury vehicles that are providing an outsized percentage of the profit, they're going to be working to keep those areas strong through this. They're probably going to be very judicious when it comes to, you know, model changeovers and things like that. But in terms of keeping those plants up and running, that's a good read for us with all the installed base that we have.

Okay.

I'll pass it on. Thank you, and best of luck. Yeah. Thanks, Scott.

Our next question comes from Andrew Obin from Bank of America. Please go ahead. Your line is open.

Hi. Can you hear me? We can. Yes, Andrew. Excellent. Can you just talk about maybe any one-time items that you got to ship in third quarter that you're not getting to ship in the first quarter, other than normal seasonality of price cost, but any specific market or geography that was particularly strong in the quarter that's sort of leading to very conservative forecast on mixed revenue in Q1? Thank you.

Yeah. swing we're going to see, Andrew, is in our software and control segment. We're in our fourth quarter. We saw good availability of components that were benefiting our results in the fourth quarter. As we work with our suppliers there, we are seeing a decline in our software and control in the first quarter as we work specific components that we that will be during part of the first quarter that will be an even shorter supply. And that's part of what we're guiding in our statements about first quarter. This is really coming from our increase. As you can imagine, Andrew, throughout the year, we've become even tighter engaged with our component suppliers to make sure we are making the right plans and making the right promises to our customers And with this, we could see that there's a couple components that are going to be impacting us in partway through first quarter.

Yeah, Nick, just to add to that. Andrew, you know, the granularity of our analysis and that of our key suppliers, I should add, continues to improve. And we think that that had, you know, a bearing on Q3 and Q4 coming in as we expected in terms of the component supply. Working with these suppliers, we did identify a constraint in ship supply that will disproportionately affect software and control for a portion of Q1. The suppliers that we're working with have a high say-do ratio. They have characterized the issue. We understand it. We're working closely with them, but that's embedded in the Q1 implied guide.

I gotcha. And just understand, in terms of your backlog, as you look into 2023, what percent of your revenue is underwritten at this point by the existing backlog? And how does it compare to sort of a normal year end?

Thanks so much. Yeah, so Nick will add some additional detail to this, but we have about 60% of the full year in backlog. Typically, we have about a month. You know, most of our products are delivered off of a distributor shelf or very quickly from one of our factories, either drop shift or through the distributor. And so having well over half the year of our shipments in the guidance in backlog is absolutely unprecedented. And, you know, you see the slide that we posted to kind of show the development of that across all three of our business segments.

Right. Yeah. Yeah. Sorry, Nick. Yeah.

Yeah, Andrew, I don't really have anything to add to that. Those comments about less than a month and greater than half a year, That's really focused on our software and control and intelligent devices. I would call our lifecycle services a more normal. It's slightly elevated backlog, but that's a more normal type backlog. It's the other two segments that have the extended amounts of backlog.

So it's just the reliability to ship as the gating factor.

That is correct.

Thank you.

Our next question comes from Jeff Sprague from Vertical Research. Please go ahead. Your line is open.

Hey, thank you. Good morning, everyone. Hey, Jeff. Hey. I just wanted to try to deconstruct the grid, I'm sorry, the bridge a little bit more if we could. In particular, just thinking about price cost, right? I think you talked about 100 basis point tailwind there. And Nick, I guess the math that I'm doing here is 4% price is kind of like over 300 million bucks, right? So that's that's like two bucks a share. So to get price costs down to call it roughly a buck, that we'd be talking about costs being about half of what price is. So that gets me to like $150 million benefit on price costs or maybe 200 basis points. I don't know if you agree with that math, but I just love some more color on what's going on in price cost and mix and just how to really frame that number up a little bit more precisely.

Yeah. Most of your math makes sense and aligns with how we're thinking about it. We are expecting input cost inflation to continue in 23, and that's reflected. And again, about half of what we're seeing of price, that's an accurate read that you're making, Jeff. As far as where that inflation that we're expecting, we're expecting all or virtually all of it in electronic components, where we've been seeing that continue to go up and we're projecting that to continue to go up in fiscal year 23. Things like logistics, we've seen some benefits more recently, but we're calling that closer to flat for next year because while we're seeing some rate decreases, we're also anticipating some extra fuel costs that will largely offset that on the logistics side. So in terms of the math on it, I think the only thing I'd point out is that price not only affects the numerator in that equation, it also affects the denominator as well. So adjusting both the income benefit, but also the impact it has on revenue. That's what I That's where I get to the 100 basis point impact on margin.

Great. Thanks for that. And then just a little bit more on Q1. Pretty clear on the answer to Andrew's question about supply availability. But maybe just give us a little color on the cadence of investment spending. It always seems to be a bit of a parlor game every year figuring out how that's progressing over the year. It sounds like it's heavier in Q1 and then tapers off, but can you give us a little bit more color on how to think about that?

No, our investment spend now, and you got to realize, Jeff, this is coming off a year where we increased our investment spend by 10% or a little over that. And now we're planning in our plans this year about a 5% increase on top of that. So that brings us to the cadence throughout the year. I don't see any big significant change in the cadence. When I was talking about the movement of spend, that's really more a statement on Q1 of last year to Q1 of fiscal year 23, that that will be going up. Sequentially from Q4 to Q1, I don't see our investment spend changing very much. That'll stay at a pretty consistent level.

Great. Thanks.

I'll pass it on.

Our next question comes from Josh Pokowinski from Morgan Stanley. Please go ahead. Your line is open.

Hi, good morning, all. Hey, Josh.

I guess first question on backlog conversion, you sort of touched on a little bit of it, but any sort of explicit view on whether or not you guys will be working down backlog or any view on how order rates kind of progress throughout the year? Is that something that you're planning on dipping into as part of that volume growth or the expectation that order rates kind of stay in this zip code and you kind of end up kind of flattish on the backlog situation? I know it's not a normal guidance item, but we're kind of in an unusual point in time. Yeah, for sure.

Let me just start by saying, you know, even with orders and shipments converging a bit in Q4, we still built backlog in Q4, and so, you know, we continue to expect significant backlog as we exit fiscal year 23. We're going to continue to provide, you know, orders information through the year. We think it's an important point, but as we've been saying and as we're now seeing, you know, as lead times in certain areas, start coming down and our levels of customer service are increasing, we'll see those orders and those shipments converge, but they remain well above pre-pandemic order rates.

Nick? Yeah, I don't think I have much to add to what Blake said there. I think particularly in the second half of the year, if we started to see some reduction in the backlog, driven by reductions in our lead times, we would see that as healthy.

Got it. That's helpful.

And then just on the incremental margins, I think longer term targeting something a little bit higher and sort of a reference point last year to expect those to accelerate. I guess sort of the input cost environment and some of the 1Q noise around supply chain, But on the investment side, I guess, you know, what changed or what are you guys seeing to accelerate that a little further here? Like, is there a specific market or channel shortfall or, you know, what exactly should we kind of anchor to as the driver of maybe that slightly higher number?

The 5% increase that we're talking about in fiscal 23, I just want to make sure I'm answering the right question.

Yes. Or I guess more broadly, what's driving the incrementals apart from the things that are kind of beyond your control?

Well, first on the investment spend, that I would put in a very normal range of growth for us from a historic perspective. And it's the typical things that we've been investing in. We're investing in product development. We're investing in our SaaS capabilities, some of our enterprise digitization. We continue to invest in our sales force and as well as we've been doing some investment in plant capacity expansion and we see that continuing to go. We're also investing in our own talent and the compensation that we are providing for the talent. That's all part of that roughly 5% increase in 23. One of the big things we have, I said earlier that we have a core conversion in the 30 to 35% range. That's in line with our financial framework that we've laid out. One of the bigger moving items in that is just the restoration of our bonus. That we had a noticeably less than planned bonus in fiscal year 22. In this guide, we're planning for that to go back to our 100% level. And our core conversion, if we were to normalize for that, would be at 40%.

Yeah, just to add a little bit more, I touched on some of the new product introductions that we're going to be bringing out and that really are creating new streams of value for customers and investors, for that matter. At Automation Fair, we're going to be introducing a cloud-native programming package for logics. This is going to be an industry first for a major programmable controller line. It's a big deal. It went general availability, went GA a few days ago. And this is the start of a whole new level of value for our customers for many, many years to come. A new operator interface package that came to us began really with our acquisition of Awesome. It was an extra benefit in addition to the hardware that we have from Awesome. That's going to be at Automation Fair. A brand new line of process I.O., specifically for process industries, a major step. in the areas that we've been talking about for a while now to add new process functionality to Logix control systems. On-machine motion control with kinetics and PowerFlex. These are things that customers have been asking for for years. And we're coming out now with these items. And it's the beginning of these new revenue streams. In areas like cloud-native software, One of the most important things you get is continued innovation and releases to the market. With on-prem software, you're often bound by annual or semi-annual releases. And while we'll continue to do that with our strong on-prem offering, continuing to innovate at a faster pace with these new cloud-native offerings is a whole new source of value for us. And so some of that is embedded with those investment spending increases, along with the go-to-market to make sure that we're getting the word out and we're in front of the customers we need to be.

Got it. That's helpful. Thanks, guys.

Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.

Hi. Good morning. I just wanted to circle back maybe to some of the comments on the first fiscal quarter. So I think you talked about 15% segment margins down from, I guess, 23% sequentially in Q4. And you mentioned mix a couple of times. So is the point there that the software and control margins are down very heavily versus that kind of eight-point firm-wide average? And then, you know, we write in thinking it's around sort of 180, 190 of EPS in fiscal Q1. You know, there's nothing odd happening below the line or anything like that. Just wanted to clarify that a little bit on mix and the EPS.

Yeah, Julian, the biggest thing I'm talking about when I talk about mix is exactly what you referenced of our software and control. It was a noticeable help to us in Q4 with the 30% plus growth there. And it will become a headwind to us in the first quarter because we expect it to be growing below the rest of the company average. So that swing there will be part of what's happening. In terms of other things, like things with corporate other, with tax rate, I don't see anything out of the norm impacting us in Q1 disproportionately one way or the other versus the full year.

Got it. So that sort of 181.90 isn't a bad sort of starting point if you're down from the 210 a year ago of EPS.

Julian, you're asking me to start to guide quarterly EPS guidance. I'm trying to give as much color as I can, but I haven't pegged an exact range for EPS for Q1. We tend to guide for the full year.

Understood. Thank you, Nick. Just my quick follow-up would be around the order intake. I think, Blake, you made some very positive comments around the overall environment. I guess ABB had talked about a normalization of discrete automation orders by their customers as supply chains are easing and maybe slightly extended kind of times for customers to place orders because of the macro. So kind of two different drivers maybe weighing on orders a little bit. I just wondered if Rockwell had seen either of those points affecting the order intake at all.

Yeah, I think in the first, as lead times come in a bit, and we're seeing that with certain of our product lines, you need less coverage, particularly if you're a machine builder. You don't need as many months of coverage of the products to complete your equipment. And so that's going to reduce the size and maybe the frequency of those orders. And, you know, I think that that is – a positive trend because it means customer service is coming back to where we expect it to be and Graphically you see a bit of that on some of the charts that we showed in terms of customers with your second point Customers say now we don't really need it now not seeing much of that. I can tell you that the calls I'm having with customers frequently or that they want their stuff and so we're not seeing much at all in the way of customers saying I Ship it when you can. You know, that stuff I ordered a few weeks ago, don't worry. I'm not getting those calls. So that would be my characterization of what we're seeing.

Great. Thank you. Yeah. Thanks, Julian.

Our next question comes from Brendan Lukey from Bernstein. Please go ahead. Your line is open.

Morning, all. Thanks for taking my question. Morning. So I just wanted to double-click on the cancellation trends. They've ticked up a little bit over the last couple quarters. I guess two questions here. One, is there a root cause, or is this just noise in the numbers? And then two, just a point of clarification, the 1%, 2%, 3%, are these quarterly cancellation rates, or is that an annualized rate?

Yeah, those are quarterly rates, and I'd put them more in the noise category. I mean, these are rates that are low single digits, and, you know, they're well within the range of what we've seen historically.

Okay, excellent. Thank you. Yep.

Our next question comes from Steve Tusa from J.P. Morgan. Please go ahead. Your line is open.

Hey guys, good morning. On the end markets, can you give us a little bit of color around very strong sales growth orders, a bit less of growth? Maybe just give us a little bit of color on the orders to the extent you know. Were there any end markets that were actually down or were they all up on orders?

Yeah, so we don't provide specific information on incoming orders by industry. But, you know, based on the line of sight that we have with customers in these areas where we're working specifically with them on projects, you know, whether it's in pharmaceutical, you know, for getting new medicines to market, or it's new plants for EV like the Hyundai wind, or oil and gas winds that we see through Sensia, we've got pretty good line of sight to that incoming activity. And it remains robust. I mean, again, while the order rates have moderated a bit, they're still well above pre-pandemic levels in the verticals that I talked about during my tour in answer to Scott's question.

Got it. And then just on this, on the S&C market, margin. It's just a little bit more lumpy than what we've heard from others. Is there anything in the revenue recognition around the software businesses that's kind of moving these margins around at all that we have to consider for a business like this going forward that may have an influence on 4Q to 1Q? It's just the seasonality here for that business. Also, why wouldn't the supply constraints impact intelligent devices more if they were kind of based on more of the products?

Sure. Let me start with that, and then Nick may have additional comment. You know, the software and control story is really around reduced volume. There's nothing in there with software rev rec. Plex continues to perform well. We didn't talk as much about it on the call, but we're very happy with the development of Plex. With the strategic value, the industrial logic, as well as the financial performance of Plex. And we will talk more about that during Investor Day in a few weeks. So there's nothing there that's causing margins to be affected. It's more about the volume. And the issue that I talked a little bit about is with specific components that are disproportionately used in software and control, there's a reduced supply for a portion of Q1 that picks back up. And so really that's, you know, we're given a little bit more insight there, but that's what's causing the reduction, you know, after an over 30% year-over-year growth rate in the fourth quarter with software and control. And as we've talked about often, all of our products are very, highly impacted positively by increasing growth. We saw that manifested in Q4 with software in control, and we're seeing that moderate in Q1, and then with sequential growth from there through the balance of the year.

Yeah, Steve, one way, we are still seeing from a macro standpoint general stabilization occurring from a supply chain perspective. What I'm pointing out, what we're seeing with software and control is some particular isolated incidences where we have this visibility of what's coming at us during the current quarter, and we just wanted to highlight that to you. It's not a general trend. It's something very specific and very short-term.

Right, but not software, not related to software, RevRec. Yeah, okay. Okay, thank you. Thank you.

Our next question comes from Andy Kaplowitz from Citi. Please go ahead. Your line is open.

Hey, good morning, everyone. Hey, Andy. Blake, there's obviously concern out there regarding a slower global economy, but your orders, as you've talked about, have remained strong. Can you give more color into what your customers are telling you about their CapEx plans? We've already talked about some of your more cyclical end markets outperforming the semis and autos, but how much do you think reshoring is helping you at this point, and where do do you think we are, and let's call it the reshoring cycle, if you may?

Yeah, you know, I like talking about shoring rather than reshoring because it's really more about the U.S. being an outsized beneficiary of new capex as opposed to, you know, shuttering plants in China and, you know, other parts of Asia and bringing it, you know, bringing it back to the U.S. It's really about new lines of business, new capacity, filling out a little more of a local for local strategy that a lot of manufacturers are providing. And I don't see anything with the current economic headwinds that would cause people to say, just kidding, let's go back to, you know, pushing manufacturing to other parts of the world and chase lower labor rates. I see, if anything, the U.S. continuing to be a beneficiary as people are trying to add redundant lines, as people are trying to get closer to their consumers so that they're not having to rely on, you know, 10,000 mile supply chains. We're going to continue. And one of the things I look at is our own plans as a manufacturer. What is Rockwell doing? And we look at our CapEx that Nick talked about, which is up year over year for things that we feel like we need to do for the near term and also to sustain share gains going forward, and the continued investment in the U.S. We have a very important manufacturing that we're going to continue in the U.S. because it's our biggest market and we continue to support manufacturing close to the consumer here just as we do in Europe and in Asia and in Latin America.

Very helpful, Blake. And then can you give us a little more color to what you're seeing in process automation markets? It seems like you're forecasting a bit of an uptick in mining-related growth for 23. You're still forecasting double-digit chemicals-related growth despite chemical related companies having more difficult time lately. So what are your customers telling you there? And then given the later cycle nature of life cycle solutions, should we expect a bigger margin take up in that business in 23 versus the other segments?

So process, we're expecting good things in fiscal year 23. And this is an area where even apart from the recent activity, The recent dynamics, backlog is very meaningful. And so when we look at backlog, for instance, in Sensia, it's very strong. It's an even higher number in terms of the percentage of revenue that's in backlog for fiscal 23 than the Rockwell company average. And that's typical because it's engineered solutions that take longer to plan and stage and design, commission, and so on. So we see that as a good read for oil and gas. There's activity in mining, and we've had some decent wins. I wouldn't call mining, you know, back at a torrid pace there. Metals is pretty good, and we don't talk as much about metals, but metals continues to be a big automation market, and especially with the release of some of the new high-performance drives, we've got better capacity, better capabilities than we've had in years. for addressing that market. There's still some activity in forest products and chemical, and we talked about the win with Bora, Lyondell, Bissell, where, you know, our offerings, our continued enhancement of offerings with logic space control systems is going to help us in chemical. The new I.O. that we're going to be introducing at Automation Fair is going to be a major step for chemical as well. You know, those are some of the things going on there. And then in life sciences, you mentioned that. Really strong growth in the fourth quarter. We've talked about how life sciences is not as affected by the component shortages because so much of our business in life sciences is actually based on software and high-value services. And from a macro standpoint, People want to live longer, healthier lives, and personalized medicine is a way to help that objective, and that's something that we're particularly strong in.

Appreciate the color. Yep. Julianne, we'll take one more question.

Thank you. Our last question will come from Phil Bowler from Barenburg. Please go ahead. Your line is open.

Oh, hi. Good morning. Thanks for the question. I'm keen to hear what level of safety buffer you've baked into this organic growth guide for the year. There was a bit of an overshoot this time last year. I appreciate that there's 60% of the year already in the backlog, but I guess I'm surprised to see an 11% midpoint given the macro. So anything you can share in terms of overall confidence levels or safety buffer would be great and where that might reside in be that on the top line assumptions or perhaps it's more in the margin side, which collectively give you the right confidence levels for the earnings for the year?

Sure. Well, let me start by saying that the overarching driver is what we have in backlog. Over $5 billion in backlog is unprecedented. And with continued strong order entry and with continued very low cancellation rates. That's the primary story. Now, in terms of the tone, I did mention during my prepared remarks that we feel like a conservative approach is appropriate. I'm not going to dimension that or quantify that, but that was a deliberate comment in the prepared remarks.

Got it. Thanks. And just as a bit of a follow-up or slight adjacency really is the company's appetite for M&A at this point, be that large or small, I'm thinking more in the context of peers. We've now got Emerson who are going to have a lot of firepower, Schneider who are looking to acquire the rest of Aviva. So does M&A need to move higher on Rockwell's agenda from a competitive dynamics standpoint or has your thinking evolved in terms of the need to participate more strongly in M&A. Thanks.

Well, we're very happy at the increased participation in M&A that we've demonstrated over the last few years, and more importantly, the way that it's helped add new value for customers as well as investors. And we'll go into this in a little more detail in a couple of weeks at Investor Day. But, you know, first looking at the strategic fit with some well-defined priorities that we've talked about, and then the financial framework, we're very happy with the way that our M&A that we've already completed, most recently with the cubic acquisition and that we have in the funnel, will continue to strengthen us as a pure play automation provider. It's one of our strengths. and the market access that we have to provide new value from M&A immediately into all of the industry segments of discrete and hybrid and process is second to none. So I'm happy with the way that we're positioned with M&A. We're going to keep doing it. We have a strong balance sheet, and we've got a great track record of turning these acquisitions into real value.

Great. Thanks.

We are out of time for questions today. I'd like to turn the call back over to Ms. Zellner for closing remarks.

Thank you.

That concludes today's call. Thank you for joining us. This concludes today's conference call. At this time, you may disconnect. Thank you.