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 and Market Strategy. Ms. Zellner, please go ahead.

Thank you, Julianne. Good morning, and thank you for joining us for Rockwell Automation's third quarter fiscal 2023 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 third quarter results on slide three. We saw good double-digit growth in both sales and earnings this quarter as component shortages continue to ease. Lead times also continue to reduce across our product lines with recovery to pre-pandemic lead times expected for all products by the end of the calendar year. We did miss almost a week of planned shipments in May because of a longer than expected changeover to a new third-party logistics supplier at our North American Distribution Center. Shipments from this distribution center recovered in June and we now have higher capacity in place for Q4 fiscal year 24 and beyond. Both total and organic sales grew over 13% versus prior year, with currency and acquisitions roughly netting each other out. Currency translation decreased sales by less than a point, and acquisitions contributed over a point of growth this quarter. Similar to prior quarters, the split of our sales by business segment, region, and industry was largely driven by the composition of our backlog. In the intelligent devices business segment, organic sales were up 8% versus prior year. The changeover in our distribution center had the biggest impact on this segment in the quarter. Within the intelligent devices segment, Independent cart technology continues to be a disruptive technology, and we had several more strategic material handling wins in the U.S. this quarter. The recent launch of our on-machine Armour Kinetics motion control products adds to our innovative material handling portfolio. We also had an important win in Europe with Sedum, one of the world's leading desalination companies, where our PowerFlex drives and services expertise are helping this customer deliver economical and sustainable drinking water to millions of people in developing regions. Software and control organic sales grew over 24% year over year. Logic sales were up almost 40% this quarter, reflecting the strong differentiation of our control platform and the continued benefits from supply chain resiliency investments we've made over the last year. Another example of our many ways to win within software and control is recent success at a well-known global parcel delivery company where the combination of our awesome industrial PCs, BIN manager, and VIEW software unseated a longstanding competitor as the customer standardizes its North America facilities on a Rockwell visualization platform. Lifecycle Services organic sales increased 8% versus prior year. Book to bill in this segment was 1.08, led by strong orders in Sensia and our services business. Sensia had another good quarter of orders and sales with multiple large deals across EMEA and Asia. We also delivered higher sequential margins in lifecycle services this quarter. Information solutions and connected services sales grew 10% versus prior year. We had multiple wins across our entire information solutions portfolio in Q3, including both our on-prem and cloud native software. This quarter, one of the world's top tire manufacturers, located in Asia Pacific, selected Rockwell's Factory Talk Production Center to develop its new global MES platform. Another important IS win in Asia was with a Japanese global leader in HVAC, where our cloud native Plex platform is being deployed on Microsoft Azure at one of their Greenfield plants. The customer chose our SaaS solution to quickly start up a manufacturing execution and quality management system without the need for extensive on-premise hardware, software, and support. We saw Plex synergy wins continue to ramp up in the quarter as our strong market access machine is contributing to new SAS logos. In the quarter, we saw the benefits of our software partnership with PTC with numerous recurring revenue wins through a combination of our digital services business and PTC's ThingWorx visualization platform. Also regarding PTC, we continue to monetize the investment we made in 2018. We now own less than 5% of total shares outstanding, and in accordance with the terms of our agreement, I am stepping off of their board. Our commercial relationship remains strong and was extended in June. In connected services, we had an important cybersecurity win with ADNOC, the Abu Dhabi National Oil Company. This customer is leveraging our network of security services and expertise, along with an intrusion detection system from our partner, Dragos, to help secure its network infrastructure and comply with cyber governance regulations. Our total annual recurring revenue grew a very strong 17% year-over-year this quarter. Segment margin of 21.1% was flat to last year and in line with our expectations despite the shipment shortfall. Adjusted EPS grew over 13% year-over-year. Backlog is beginning to reduce as lead times improve. Let's now turn to slide four to review key highlights of our Q3 end market performance. Our discrete sales were up about 10% versus prior year. Within discrete, automotive sales grew mid-teens year over year. One of the notable customer wins here this quarter was with a Korean Tier 1 supplier working on an EV battery project for a European brand owner. This customer is using our core automation offerings, including motion control, to provide tooling for battery thermal management. Another automotive win this quarter was with Jaguar Land Rover, where Rockwell was selected to support the JLR electrified architecture for three of their EV body shops in the UK. Semiconductor sales grew high teens this quarter. Building on strength over the last few quarters, we continue to see broader adoption of our wafer transport solutions by the world's leading semiconductor manufacturers. This quarter, we also had an important Plex win in semiconductor at SAC, Saudi Arabia, as the customer implements our smart manufacturing platform at its site in Riyadh. In e-commerce and warehouse automation, sales were down high teens versus prior year, driven by continued delays and some cancellations at our e-commerce customers. Moving to our hybrid industry segment, sales in this segment grew 15% year over year, led by strong growth in food and beverage and tire. Food and beverage sales were up mid-teens versus prior year. We continue to see both greenfield and brownfield investments in this vertical, with one of our most important multi-year wins this quarter focused on a customer's global fleet modernization program. A leading global food processing company is standardizing over 50 of its sites on our PlantPAX control platform. This competitive DCS win is a testament to our progress in process control applications in both technology and domain expertise. Life sciences sales grew mid-single digits versus prior year. This industry continues to see strong investments in CapEx and OpEx projects across all regions, both in traditional pharmaceuticals and newer advanced therapy medicinal products. We had a strategic win with Biocero, a member of the BiCo group in North America, where our combined technologies increased the speed and accuracy of new drug development. Biocero selected our independent CART technology to automate lab workflows for a cell and gene therapy program. Tire was up over 35% in the quarter. Turning to process industries, process sales were up 15% year over year, led by growth in oil and gas and mining. Turning now to slide five in our Q3 organic regional sales, as I said earlier, our growth by region this quarter and for the full year, fiscal year 23, reflects the composition of our backlog rather than the underlying customer demand. North America organic sales grew about 2% year over year against higher comps. Latin America was up 7%. Through Q3, our orders in the Americas are outpacing the rest of the world. EMEA sales grew 34% and Asia Pacific was up over 44%. We did see an uptick in order cancellations in China this quarter. Let's now move to slide six, fiscal 2023 outlook. We are confident that shipments in the fourth quarter will recover the shortfall in Q3 caused by the distribution center change. Shipments in July were in line with our forecast for the full year. Our fiscal 23 guidance assumes a total reported sales growth range of 14 to 16%, and we continue to expect organic sales growth of 15% at the midpoint. We now expect the impact from acquisitions and currency to offset each other. Nick will cover this in more detail later. We have said all along that we expect further normalization of ordering patterns as lead times and constrained products improve, and that's what we are seeing right now. With improving lead times, machine builders do not need as many months of products on order and are no longer placing unusually large advance orders. Their incoming orders and front log remain strong, and improving component lead times will help them improve their cash flow. We also expect distributor restock orders will pick up as they receive the last constrained items that allow them to clear their committed inventory and complete customer orders. our order cancellation rates remain low. We now expect our full-year fiscal year 23 orders to be in the $8.5 to $9 billion range. Given this updated order outlook, we now expect to finish the year with about $4.5 to $5 billion in backlog, with about 80% of that backlog shippable in fiscal year 24. We expect organic ARR to grow 15%. Segment margin is expected to increase by 160 basis points year over year. We are increasing the midpoint of our adjusted EPS guidance by 5 cents and now expect adjusted EPS to grow 25% versus prior year. And we now expect 80% free cash flow conversion due to higher working capital. Let me turn it over to Nick to provide more detail on our Q3 performance and financial outlook for fiscal 23. Nick?

Thank you, Blake, and good morning, everyone. I'll start on slide eight, third quarter key financial information. Third quarter reported sales were up 13.7% over last year. Q3 organic sales were up 13.2%, and acquisitions contributed 120 basis points to total growth. Currency translation decreased sales by 70 basis points. About three points of our organic growth came from price. Segment operating margin expanded to 21.1% and was in line with our expectations as improved productivity offset lower than expected sales. The 30 basis point year-over-year increase in margin was driven by higher sales, volume, and positive price cost, partially offset by higher investment spend. Corporate and other expense was $32 million in line with our expectations. Adjusted EPS of $3.01 was below our expectations due to our shift in shipments from Q3 to Q4. Adjusted EPS grew 13% versus prior year. I'll cover a year-over-year adjusted EPS bridge on a later slide. The adjusted effective tax rate for the third quarter was 14.1% and in line with the prior year. Free cash flow of $240 million was $87 million lower than prior year, driven by increases in working capital and income tax payments, partially offset by higher pre-tax income. The increase in working capital was primarily driven by higher accounts receivable and inventory. Inventory grew by six days, primarily in finished goods as a result of the shift in planned shipments from Q3 to Q4. One additional item not shown on the slide, we repurchased approximately 220,000 shares in the quarter at a cost of $62 million. On June 30th, $1 billion remained available under our repurchase authorization. Slide nine provides the sales and margin performance overview of our three operating segments. Organic sales growth was led by software and control, which grew 24% year over year. Turning to margins, intelligent devices margin decreased by 290 basis points year over year due to higher investment spend, unfavorable mix, and higher incentive compensation, partially offset by positive price cost. Segment margin for software and control increased 340 basis points compared to last year on higher sales volume and positive price cost, partially offset by higher investment spend. We continue to accelerate top-line growth and profitability from acquisitions in the past few years, including Plex, Fix, and Awesome. Life cycle services margin was similar to last year and improving sequentially through the year as planned. Our focus on productivity is yielding benefits now and into the coming quarters. We continue to expect life cycle services margin to expand sequentially and exceed 10% in Q4. The next slide, 10, provides the adjusted EPS walk from Q3 fiscal 22 to Q3 fiscal 23. Core performance was up 90 cents, excluding increased investment spend of 35 cents on a 13.2% organic sales increase. Incentive compensation was a 20 cent headwind This year-over-year increase reflects the higher expected bonus payout this year versus a below normal payout last year. The year-over-year impacts from tax, interest expense, currency, and share count were each immaterial to EPS this quarter. Before we turn to our fiscal 23 guidance, let's spend a few minutes talking about our orders trends on slide 11. we think it will be helpful to provide more color on our orders progression over the last couple years and going forward first in fiscal 2020 we saw reduced orders caused by the constraints on customers operations and uncertainty that the pandemic created then in fiscal 21 and fiscal 22 we saw increased orders driven by the combination of three things. First, historically high levels of investment in certain verticals like EV and semi, as well as an increasing need for more automation to address workforce shortages and business resiliency. Second, catch up on projects that many of our customers deferred during fiscal year 20. And three, large advance orders due to extended lead times caused by component shortages. In fiscal year 23, we are continuing to see strong underlying demand, but we are now seeing the long-anticipated moderation in orders driven by our improving lead times for products. As we stated earlier, we expect lead times to continue to normalize in the next two quarters and we expect virtually all of our product lead times to be back at pre-pandemic levels by the end of calendar year 23. Once our lead times are back at normal levels, we expect customer orders to closely align with the strong underlying demand. I think it's worth noting that over the fiscal year 2019 to fiscal year 23 time period, encompassing the ups and downs of the order cycle, we will have grown revenue at a compound annual growth rate of 8% plus a backlog that is more than tripled during that timeframe. Let's now move to the next slide, 12, guidance for fiscal 23. We are increasing the midpoint of our recorded sales guidance from 14.5% to 15%. We expect organic sales growth in the range of 14 to 16% And we now expect a full year currency headwind of 100 basis points, 50 basis points better than our previous guidance. This update, this updated outlook reflects the weakening of the U.S. dollar in recent weeks. We continue to expect volume to add 10 points of growth and price to add five points of growth. And we still expect full-year segment operating margin to be about 21.5%, unchanged from prior guidance. Our updated guidance still assumes full-year core earnings conversion of close to 40%. We continue to expect the full-year adjusted effective tax rate to be around 17.5%, unchanged from our prior guide. We are narrowing our adjusted EPS guidance range to $11.70 to $12.10. This increases the midpoint of our EPS guidance to $11.90, up $0.05 from prior guidance and up 25% from last year. The $0.05 increase is driven by currency. We now expect full-year fiscal 23 free cash flow conversion of about 80% of adjusted income. This updated guidance reflects the new calendarization of our revenue and our updated projection of inventory days on hand. We do expect our inventory days on hand to drop by the end of the year to 125 days. This will be lower than the approximately 130 days of inventory we had at the end of fiscal year 22 but will likely not reduce to the 112 days we originally expected. Our outlook for cash tax payments also increased as we realized capital gains on our sales of PTC shares. Income tax payments tied to these gains are reflected in our free cash flow results. A few additional comments on fiscal 23 guidance. Corporate and other expense is still expected to be around $120 million. Net interest expense for fiscal 23 is still expected to be about $130 million. And we're still assuming average diluted shares outstanding of 115.6 million shares. With that, I'll turn it back over to Blake for some closing remarks before we start Q&A. Blake? Thanks, Nick.

As we continue to stay close to end users, machine builders, and distributors, a few key themes emerge. First, demand remains strong. We've mentioned softness in e-commerce and in parts of the Chinese economy, but investment by end users and machinery builders continues across the majority of regions and serve verticals. The global supply chain is improving, but it will take some months to flush the inefficiencies that have built up over the last few years, especially inventory. This is seen at machine builders, distributors, and in our own operations. Third, the opportunities for automation to play a strategic role in our customer success have never been higher. Workforce scarcity, American shoring of manufacturing, and the premium being placed on business agility are all positive reads for Rockwell. We're moving fast to meet these needs with new capacity and capabilities. It's hard to believe, but our annual Automation Fair and Investor Day are only about three months away, and you should look forward to hearing more about the exciting next leg of our journey. I want to thank all our employees and also our unmatched distributors who have worked so hard to bring us to this point and who collectively make the difference at our customers. 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. Julianne, let's take our first question.

Thank you. As a reminder to ask a question, please press star followed by one on your telephone keypad. Our first question comes from Andy Kapowitz from Citigroup. Please go ahead. Your line is open.

Good morning, everyone. Hey, Andy. Blake or Nick, can you give us more color into the order of visibility you have that allowed you to construct slide 11? If I add all the timing, it looks like you expect a relatively significant orders inflection higher, maybe even in the first half of 24. And it also looks like you think orders could reach the peak levels again that you saw in 22. Is that what you're attempting to say? And then what markets would you most likely see an uptick in bookings?

Yeah, Andy, there's a few factors that contribute to that outlook for orders. First are the continued high investment levels and some important verticals for us. We see continued investments as we track new CapEx announcements in areas like semiconductor and EV and renewables. while we see a general focus on automation at many of our other verticals like food and beverage, life sciences, energy, and so on. We also have had a number of conversations with customers and distributors that give us a consistent view that demand remains strong. As I and members of my team have talked directly to machine builders and end users, they're all proceeding with plans based on the consistent demand for their products. We described in my remarks what we're seeing in terms of machine builders who are not placing the unusually large advance orders that they did, say, a year ago. And we've also had direct conversations with our distributors. And in North America, some of our largest distributors are actually seeing year-over-year order increases. So again, that consistently strong demand picture informs that view that we showed you on slide 11 of orders recovering, complementing the remaining strong backlog.

Thanks for that, Blake. And then, Nick, can you quantify how much impact the change in U.S. distribution you made had on sales and earnings in Q3. And then specifically, could you go over how to think about margin moving forward for your segments? It looks like, you know, you talked about the change impacting intelligent devices, but moving forward, should we be thinking 20% to 21% for that segment, which was your prior guide? And then conversely, software margin continues to go up. Can you sustain mid-30% margins in that segment?

Yeah, as far as the sales impact... We had originally planned when we guided what we expected for growth expectations between Q3 and Q4, we had expected some disruption. We were planning close to a week of disruption that this would be causing and the loss of capacity during our third quarter. That ended up extending by several more days in terms of the total impact it had on us. All in, something in the range of $50 to $100 million of revenue is, I think, a good ballpark to think about of what we're seeing of a shift of revenue there between the third and fourth quarter from what we were anticipating three months ago. And then in terms of margin progression, Andy, For the rest of this year, we continue to expect that margins will expand. We think fourth quarter margins will be our highest margin for the year. We continue to expect to see strong margins in our software and control business, something similar to what we've been seeing the last couple quarters. And as I've said for the last couple quarters, we expect sequential margin improvement in lifecycle services. We expect that will be over 10% in Q4. And then intelligent devices, as we recapture some of that revenue that shifted from Q3 to Q4, we think added revenue there will be bringing that margin up from where we were in the third quarter. All in, we still expect ITD's intelligent devices margin to be a little under 20% for the full year, software and control to be well over 30%, and lifecycle services will be below 10% for the full year. It'll be similar to a little less than what it was in fiscal 22, but all in progressing nicely with the focus we're having on productivity there. Thanks, Hank.

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

Hi, good morning, all. Hey, Josh. Blake, so just on the order normalization and customers, including some of the OEMs, adapting to shorter lead times, I sort of get that that's kind of maybe a bit of a one-time accordion squeeze as those folks don't need to go out the same length of time or even pull that in. Any sense of sizing?

what that is what that impact might be on on that implied second half order outlook just trying to distinguish between the supply chain and you know sort of the back end of that phenomenon versus maybe what run rate orders might be yeah i i mean getting a little bit more color on uh how this plays out you know during the most uh constrained period of uh component shortages we saw some oems that were placing orders for a year or more of their equipment demand, where in normal times when lead times were at, let's say, normal for the products that they put in their equipment, that might be only three or four months of demand. Now, that's not across the board, but we did see cases of those larger orders. As the lead times have recovered actually a little bit faster, than we expected over the last quarter or so. And as we expect them to continue to improve, then we see OEMs no longer needing to place such long orders. And as they focus, as I said, on flushing some of the inventory and WIP that they have in their operations. Importantly, their front log remains strong. And as I visited machine builders and my staff has visited machine builders over the last couple of months, that's a consistent message that their demand remains strong. It's just they don't need to place such a large block of orders. Now, I want to put this in perspective. OEMs are in the neighborhood of a third of our business. So we don't see the same patterns or need for you know, those large orders at users, but that is an effect that's impacted our machine builders. And in a little bit of a similar timeframe with our distributors, their inventories will relieve as they get those last constrained items over the next couple of months and are able to ship their committed inventory. That's inventory that's already been committed to specific end user projects.

got it that's helpful and then maybe for a follow-up just want to take a step back i mean there's a lot of there are a lot of elements of the business now where you can sort of see this before and after in terms of investment we talk a lot about nearshoring energy transition you see process orders looking strong on that but i can't help but notice that you know 30 of the business is food and bev and consumer packaged goods where i i don't know if it's quite as obvious that we're seeing near-shoring or some fundamental breakout. I know you called out, you know, bigger food and Bev win, but maybe just talk about how that piece of the business has seen a secular shift or perhaps hasn't. If you want to put backlog in context or anything else there, that would be helpful.

Sure. So you're right. I mean, that as part of our hybrid industry segment is the single largest segment of our end market demand segment. And what we're seeing in food and beverage and home and personal care is an increase focused on efficiency and resilience. So even though we don't see the same amount of greenfield investment that we do, say, with electric vehicles or batteries, those big food and beverage companies are investing in their resilience. So they're adding some measure of redundancy. They're investing heavily in OT cybersecurity, which is one of our very fastest growing businesses and meaningful multimillion dollar orders. They're also dealing with workforce shortages. So we're all aware that unemployment remains very low. And I think in general, that's a positive read for us. But it creates continuing problems with these manufacturers in staffing those lines. And so they're looking for augmenting the technology that we're providing with highly trained workers as those workers are more scarce. And we're seeing our offering result in some important competitive wins with added more ways to win. So it's not just our core technology. It's those cybersecurity services. And we talked about several wins with Plex. as the synergy wins ramp up there as we turn on that market access machine. So those are some of the things that are driving the good food and beverage and home and personal care growth that we're seeing this year. Understood. Appreciate it. Best of luck. Yeah.

Thanks, Josh.

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

Thanks very much. Maybe not taking a step back. If we look at slide 11, you've got the order trends line chart there. Trying to think about backlog to sales coverage and where you think that normalizes. As you said, pre-COVID, you were 20% odd backlog to sales. Recently, you've been well over 50%. But that will come down. And I just wondered your sort of best views on where it settles out. Because I guess, you know, if we look at some of your peers like Fanuc, they've all seen this huge orders slump as well. And they're talking about customer, you know, inventory depletion through next year. And I guess one could also make the case perhaps that more localized supply chains can mean shorter lead times and order patterns, not longer ones. So just wondered sort of your perspectives on that and testing that conviction around why the orders improved from early calendar 24. Sure.

I'll make a few comments, Julian, and then Nick may have some additional detail. You know, as you think about the composition of our business, you know, for a starting point, we said, The backlog that we expect to finish the fiscal year in a couple of months with is remaining high, between $4.5 and $5 billion, and 80% of that is shippable in fiscal year 24. I think your question is, okay, how does that develop and what is beyond that? Think about the product backlog as lead times return to normal for products at the end of this calendar year as getting back to its normal low levels of backlog. You know, we traditionally looked at, you know, products as having lead times of days or weeks. It either shifts directly off our distributor shelves or we build it, you know, very quickly in our factories. And I think that gets back in fiscal year 24. There's a portion of that product business within intelligent devices that is configured to order. And that continues to have lead times that are measured typically in weeks, sometimes in a couple of months. That business has been really strong for us here recently. We think we're gaining considerable share there. And so that's going to be a somewhat meaningful component of backlog even after 24 within the intelligent devices area. And then as lifecycle services becomes, you know, bigger, continues to grow, then we typically have seen, you know, somewhere in the neighborhood of half a year of backlog for lifecycle services. So backlog becomes smaller as we leave fiscal year 24. But it remains considerably larger than the billion and a half or so that you remember from pre-pandemic because we're a bigger company and we have some of these new components. I would also say, you know, there's software and recurring revenue that continues to grow nicely. We talked about ARR growing. 17% this quarter, and so that's a part of the equation as well. Nick?

Yeah, and Julian, to frame it up a little in the way you asked the question where pre-pandemic backlog closer to 20% of our revenue and more recently this year where we're around 50% or higher than 50%, I don't, based on the things Blake was just describing, I don't think it will go back down to a 20%, but something in the 30 or low 30s percent, I think that's a reasonable estimation right now for us, Julian, of where to think where our backlog is in a more normal state.

That's very helpful, thanks, and I appreciate it's very difficult to call, so thank you for the thoughts. Maybe on the areas or markets where you're seeing or expecting the most severe orders normalization, do we assume it's mostly discrete markets globally? I think China, there's obviously some orders pressure that your peers have talked about, but is it sort of a global phenomenon across various discrete markets? Is that the way to think about it?

Yeah, I think it's the phenomenon that we described with machine builders, which is is not exclusively in discrete. We have good business with SCID OEMs, process machine builders as well, but they're buying product. It's less weighted towards engineered solutions. And so I think that's where you've seen that phenomenon as they were placing orders for a year or sometimes more of their machine coverage, and they don't need to do that anymore, and so they're looking at opportunities to improve their cash flow, get the existing equipment out as the constrained products from us deliver, and then to fill their forward machine needs with smaller orders, because they can depend more on the lead times.

Great. Thank you.

Yeah, thank you.

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

Thank you. Good morning. Hello, everyone. Hey, Jeff. Hey, good morning. Hey, sorry if I missed it. I was on a few minutes late, but a lot of talk about future backlog. But could you just square us up on where the backlog actually ended in the quarter and also kind of what the price volume complexion was in the actual quarter?

Jeff, I'll take the second part of your question first. Of our 13% organic growth, 10% of that was volume and 3% of that was price. And it was very much like as we expected. This was the quarter where we are starting to laugh ourselves against the more significant price increases that we were realizing in the second half of our fiscal year 22. In terms of the backlog, we haven't put out a specific number on it, Jeff. It did come down some in Q3, and we expect it to come down further in Q4 to that $4.5 to $5 billion range, but we haven't put a specific number on that, partly weaning ourselves off of like frequent updates on all of that, but giving you a trend of where that's going.

Okay, great. Yeah, it's just helpful to have the anchor if we're going to talk about the future, right, so we can all relate to that in future conversations, but I get it. And then just on investment spending, is there actually a change in the year outlook on how you'll, the level of investment spending, or we just have some time in between quarters?

No, Jeff, investment spend is staying almost exactly where we've been expecting, both for the year and by quarter, actually. It's very, very much following our plan.

Okay, great. I'll leave it there. Thank you, guys. Appreciate it.

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

Hi, guys. Good morning. Can you hear me?

Yes, Andrew.

Hey, Andrew. Hey, just as you think about, you know, it seems that you are about to embark on a multi-year growth spurt. How should we think, how do you guys think about your cash conversion just structurally going forward? Do you just need to accept permanently lower cash conversion? We just need to invest in working capital and growth? And if not, what levers can you pull to sort of get it back to, you know, this 99% level that we've had?

Yeah, Andrew, thanks for that question. Our longer-term plan and expectation is that we should be at 100% free cash flow conversion or averaging that over time, even in a period where we are growing more substantially than we have, I'll say, pre-pandemic. And with where we stand now with our working capital, where we're estimating it to exit fiscal year 23. We think that creates some tailwinds for us in cash conversion in the next couple years for us that even in a higher growth world, we can still be generating something from an operational standpoint closer to the 100% free cash flow conversion. There are a couple headwinds I'll just want to make sure you're aware of, Andrew. One is We are at the point now where we are making more substantial cash tax payments on the transition tax that was part of TCJA. Some companies adjust that out of their free cash flow conversion. We don't. We keep that in there. And we're also being impacted by the recent requirement that we capitalize for tax purposes, our R&D expense, and that's having a several percentage point, between five and ten percentage point impact to our free cash flow conversion in the next few years. It's something after five or six years we work our way through that just becomes part of the base, but it is having that between five and ten percent impact to free cash flow conversion. And then the last I'll note is as we've been liquidating our PTC shares, realizing the gain, the nuances of how free cash flow reporting is, that gain is not part of our denominator in that equation, but the cash taxes is part of that, of the numerator in that equation. And it's just a nuance I'm pointing out that has impacted us this year and could impact us in coming quarters as well. But I'll call those more noise versus your underlying question, I think, on the ability of our business model to be generating 100% free cash flow conversion.

Great. And then just on your ARR, you know, I think 17% very healthy. Could you give us a look sort of under the hood what the components are, which portions of your business is doing better? You know, maybe talk about MES, talk about FIX. Plex, whatever it is you guys want to talk about, but just give us a sense of what's driving the software growth. Thank you.

Sure. So, you know, I mentioned a few wins with Plex in the quarter, and Plex has continued to be a good performer for us, both in terms of the expansion of existing customers as well as new logos where Rockwell's market access gave us opportunities there. So Plex was a strong performer in the quarter. FIX as well with the asset management. You know, these are two SaaS applications that are doing quite well for us and contributed substantially to that 17% ARR. I mentioned some wins with PTC. Those are subscription wins. Those were some major competitive victories for us in the quarter. And then on the high-value services side, cybersecurity services. And, you know, I've talked about that. That's been right at the top of our, you know, fast-growing businesses. And we have a recurring revenue component of cyber. So those things were probably at the top of the list in contributing to what you're right, was really good ARR in the quarter. Thanks so much. Yeah. Thanks, Andrew.

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

Hi. Good morning. Hi, Steve. Hey, can we just start? Can you just remind us? I mean, you guys were relatively, you know, we never really had this orders discussion before COVID. Like your book to bill was generally like around one back then, right? Is that about right?

Yeah, Steve, that is correct. The only exception is our lifecycle services business component. That could have some nuances from quarter to quarter, but generally we were pretty much a one-to-one book to bill.

Right, so like eating into backlog this quarter you mentioned, so obviously your orders were like, what were they, like a little bit above two or something like that?

Yeah, we haven't given the specific order value for Q3, but we gave the four-year expectation of $8.5 to $9 billion of orders.

Okay, and when we look at this kind of like daily order volume, I mean like that would kind of equate to the the quarterly order numbers, I would think. That's not like scaled or adjusted for seasonality or anything like that, right?

That is correct. We're not adjusting for any seasonality here.

Yeah, okay. That's fair. And then just the last question, just philosophically, you know, you guys went from like not really giving orders to, you know, maybe not disclosing them this year. At one point, I think you guys were thinking about that. Now you're disclosing them and now you're kind of like, you know, forecasting them, I guess. Are we going to continue to get this level of color as we go through the next couple of quarters? Like maybe like just philosophically, any view on like maybe normalizing some of this disclosure? Because it just seems like there's more provided, but it's in different forms. And, you know, it just seems like it's not particularly as straightforward as maybe it could be.

So Steve, we're continuing to provide the information that we think is most important to investors. And over the last few years, as you said, orders have become a more important component as they have decoupled from shipments at different times. And so we felt it was important to provide that additional information. As we look at going forward, we're going to continue to look at where orders remain material to investor decisions and to provide that kind of information. And we continue to look at how we're making decisions about running the business going forward and providing you some insight into that. And that's why it's going to take, you know, some different forms as time goes on because the value of it and the, um, the horizon of that I think are important. So this quarter we made the decision to give a little bit of a view going forward and showing on that slide 11 the relationship between orders and big macro events going forward so that you and investors can put that into perspective.

Yeah, and it is helpful. So we thank you for all the extra disclosure here regardless. So thanks, Ijana, for that. Really appreciate it.

Our next question comes from Noah K. from Oppenheimer. Please go ahead. Your line is open.

Thanks for taking the question. I just want to go to Lifecycle Services, you know, several quarters continuing of a positive book to build. You know, you commented on margins for this year. How do we think about incremental margins, you know, going forward, especially as, you know, you start to get this sort of richer mix, right? I know a lot of revenue associated with what comes out of this ends up in, you know, S&C, but just help us think about incremental margins going forward.

Yeah, as I think about where we're going with margins in our lifecycle services business in the next couple years, We expect that lifecycle services will be an outsized contributor to our margin expansion in the coming years. One way we think about our margin expansion is through our core conversion of the 30 to 35 percent range. That would imply that lifecycle services is going to be helpful to that number. As I look over the next couple of years, I believe lifecycle services will be our highest margin expansion business segment of the three segments.

Yeah, and I would say that, you know, the Sensia contribution, which is in lifecycle, we have seen improvement there, and we expect to see continued improvement. So that's a major component. Yep.

Thanks. And maybe I just want to step back and ask a broader question about the demand environment. You know, in past quarters, you and, you know, the industry and trade press and all sorts of folks have talked about the long runway here from, you know, IRA, IIJA, shoring, all these trends. And you look at a quarter like this and see, you know, you know, some of the order dynamics, and I understand a lot of that's just supply chain, you know, normalizing. I guess, Willie, step back. Where do you think we kind of are in this wave of manufacturing investment, and specifically in the United States?

Yeah, I think I like looking at a vertical-by-vertical approach of this because it breaks it down into, I'd say, you know, more objective components. EV and battery, by any objective measure, there is continued strong investment as people are building out the capacity to build more electric vehicles. If you look at any city in the U.S., you know, the number of electric vehicles remains low. All projections are that that's going to increase, and there's nowhere near as much capacity needed to serve that demand, even with the announcements of new green fields that have already been made. So we see that as a multi-year trend. Semiconductor for national security reasons and to be able to reduce geopolitical risk impacting the semiconductors that make our world go, we see that as a multi-year trend. And importantly, it's not just the fabs, it's all the supporting infrastructure that's needed to make that stick as well. We talk about redundancy and resiliency in some of the other industries, food and beverage, life sciences with offerings, not just the core automation, but the additional software and the services. I think these are multi-year trends. Workforce, again, with unemployment as low as it is, it's just not possible to build the things that we need to preserve a standard of living without the technology augmenting a highly engaged workforce. Those two things are going to be required across a broad swath of the industries that we serve. So I think the outlook for automation remains good over a multi-year period. We're seeing the current impact of some of the ordering dynamics that we've talked a lot about on this call, but the fundamental outlook for automation and Rockwell's ability to outperform, I think, is very strong.

Julianne, we'll take one more question.

Thank you. Our last question will come from Nigel Coe from Wolf Research. Please go ahead. Your line is open.

Hi, Joanna. Thanks for fitting me in here. Hi, guys. Good morning. So, we've covered a lot of ground here, but just North America was 1% organic. So, even if we factor in the $50 to $100 million impact from the D.C., it still seemed quite weak. And I'm sure there's some inventory headwinds there, but are we seeing any push out in projects, some of the larger projects in North America?

You know, the main contributor to the growth in North America is really the composition of the backlog. And in fact, as we look at the orders in North America, they've outpaced the rest of the world year to date in fiscal year 23. There are certainly anecdotes of projects that have been pushed, but we have not seen that as a prevalent trend. and we continue to see low cancellation rates within our backlog.

Okay, that's very clear. And then, Nick, your comments on what a normal backlog is, and obviously higher than what it's been in the past, but it seems to suggest that we should be expecting backlog to maybe burn down towards maybe close to $3 billion. Is that fair?

Yeah, it's dependent on what revenue is, but for those reasons that Blake went through in our mix, We just don't see it getting back to that 20% that it used to be, but something in the 30% to 35% range, and yeah, multiply that by our revenue, and that's our best estimate now. I think in the coming quarters, we'll keep learning more about that, but if you ask for our best estimate right now, that's where we are. Okay. Thanks, guys. Cheers.

Thank you. Thank you, everyone, for joining us today. That concludes today's conference call.

At this time, you may disconnect. Thank you.