Q3 2021 Rockwell Automation Inc Earnings Call
Okay.
Thank you for holding and welcome to Rockwell automation and Squawk on the conference call I.
I need to remind everyone that todays conference call is being recorded later in the call. We will open up the line spray questions. If you have a question at that time. Please press star 1.
At this time I would now like.
To turn to call over to Jessica <unk> head of Investor Relations Ms. <unk>. Please go ahead.
Thanks, Ryan Good morning, and thank you for joining us for Rockwell automation is third quarter fiscal 2021 earnings release Conference call with me today is Blake Moret, our chairman and CEO and Nick <unk>.
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 in our call today, we will reference non-GAAP measures.
Both the press release and charts include reconciliations of these non-GAAP measures a webcast of this call will be available at that website for.
A replay for the next 30 days.
For your convenience a transcript of our prepared remarks will also be available on our website at the conclusion of today's call supplemental information related to our new business segments can be also found in the Investor Relations section of our corporate website.
Before we get started I need to remind you that our comments.
<unk> 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 of our SEC filings, so with that I'll hand, the call over to Blake.
Thanks Jessica.
And good morning, everyone. Thank you for joining us today.
Before I begin let me first congratulate our Milwaukee Bucks for such an incredible season go box.
Let me now take a moment to talk about a couple of key highlights in the quarter.
First of all I am pleased to welcome.
Cyril prototype as our new Chief Technology Officer. He succeeds Tsuji Chan who is retiring later this year after a long and very impactful career at Rockwell and I'll talk more about his legacy in November.
Cyril brings a wealth of automation.
<unk> and digital transformation experience to the role with great global experience and a passion for helping customers.
This mindset and additional perspective will help drive even more value from the combination of our core automation software and managed services offerings.
To provide positive outcomes for customers.
We also announced the signing of a definitive agreement to acquire Plex systems, which we expect to close in Q4 of this year <unk> is the leading cloud native smart manufacturing platform operating at scale and it will be a big part of our.
Factory tour software as a service offerings.
We look forward to showcasing its unique capabilities and integration into a complete production system at Investor day during our November automation fair in Houston.
Now, let's turn to our quarterly results on slide.
Keith.
We saw another quarter of exceptional demand across our product portfolio.
Total orders surpassed $2 billion, reflecting a very strong demand pipeline.
Total revenue of over $1.8 billion.
And a new record and grew 33%.
Percent, including a 1 point contribution from recent acquisitions, including awesome Calypso and fix.
Organic sales grew 26% versus prior year, despite significant supply chain challenges.
The manufacturing supply chain continues to remain.
Strained due to increased levels of demand and persistent electronic component shortages. It's a dynamic situation that we are monitoring closely our.
Our global supply chain organization continues to navigate these challenges and is taking a variety of measures investing in both short and long term.
Apologies to increase our supply chain resiliency.
I will now comment on our top line performance by business segment.
Intelligent devices organic sales increased 29% led by strong broad based demand for our automation products from an orders perspective.
Stratus is the third consecutive quarter of record order intake in this segment once again strong order growth in motion was driven by our independent cart technology, offering which saw over 100% orders growth in the quarter. Indeed.
Independent card orders growth was broad based and included strong win.
<unk> the e-commerce, and warehouse automation, including Interlocks, an important north American material handling OEM partner, whose machines are supporting some of the largest e-commerce applications in the world.
<unk> is leveraging our independent cart technology, and our high bottleneck area of their process.
<unk> was able to realize a 30% increase in sortation throughput.
Software and control organic sales grew 32% led by strong demand across the segment.
Logic sales grew over 40% versus the prior year and was our strongest major product family.
<unk>.
Orders for the software and control business segment grew over 55% year over year showing strong momentum.
And lifecycle services organic sales increased 17% versus the prior year and increased 8% sequentially book.
Book to Bill for the segment of $1.1.
<unk> is expected to drive continued sequential sales improvement in this segment through the fourth quarter.
Total company backlog grew by over 50% year over year.
Turning to profitability segment operating margin of 20% increased by 340 basis points.
Versus the prior year, primarily due to higher sales.
Adjusted EPS of $2.31.
Grew 75% and was above our expectations.
<unk> sales and favorable mix all contributed to our strong profit performance in the quarter as we continue to increase.
<unk>, our business resiliency and make technology and people investments that set us up for a strong future.
Turning to information solutions and connected services, which represent many of Rockwell is newest digital revenue streams, we had another great quarter organic sales and orders grew strong double digits.
With contributions across a variety of end markets. Recent orders also include a number of meaningful software and infrastructure as a service wins with some of the world's most important food and beverage and life Sciences manufacturers.
For example, Sinovac 1 of the largest pharmaceutical manufacturing.
Factors in China recently chose our pharma suite Mes to help bolster production of their vaccines.
We also had a great win with GE renewable energy on a Greenfield project to develop a major power plant in Africa.
Once operational this hydro plants.
As expected to provide 30% of the country's energy demand, while reducing annual power generation costs by $100 million.
In addition to using our core automation products or capabilities in industrial cyber security helped us win even greater share of this greenfield.
Check.
Calypso also continues to play a very important role within our connected services offerings and last week received Ptc's systems integrator partner of the year Award. This is in addition to Rockwell receiving Ptc's overall partner of the year Award.
As we continue to see good synergies across the PTC Rockwell portfolio.
Turning to slide 4.
At last year's Investor Day, we talked about how we are bringing our factory talk software offering to the cloud with SaaS offerings in 3 key areas.
<unk> talked design.
Sign hub factory talk operations hub, and our factory talk maintenance hub.
The organic development of our factory talk design hub is well underway and complements our best in class studio 5000 software.
With the addition of Plex, we will have a world class.
Full scale factory talk operations hub.
Flex is smart manufacturing platform includes 1 of the most advanced cloud native mes offerings available as well as cloud native quality and supply chain management solutions.
Capabilities like inventory management supply chain optimization.
And track and trace are more critical than ever and we will have unmatched on premise and cloud native solutions.
Last week, we also announced our partnership with Kessler, a leading provider of cloud based traceability software that will be a great complement to both our on Prem and cloud native supply.
<unk> chain offerings.
The foundation of our factory talk maintenance hub comes from last year's acquisition of fix.
On AI enabled maintenance management platform with our cloud native offering that has sold 100% on a subscription basis.
Since the acquisition.
We've seen accelerated growth ex fix including the addition of their first 2 customers with contributions of over $1 million of annual recurring revenue each.
This quarter fixed revenue grew by over 40% both year over year and sequentially in.
They've added on average over 50.
<unk> logos per month since I joined Rockwell.
Fixed <unk> plex applications are highly complementary with many opportunities for customers to further improve manufacturing productivity product quality and asset utilization and.
In addition, we believe that fixes high velocity <unk>.
<unk>, New <unk> model will provide additional revenue synergies in the years ahead.
As we mentioned on the call to announce the Plex deal, we're moving fast because manufacturers are picking up the pace of innovation and we have the opportunity to leap ahead with new value from highly scalable.
<unk>.
Mark and well integrated information solutions that build on our rock solid heritage born in the world of real time data.
Let's now turn to slide 5 where I'll provide a few highlights of our Q3 end market performance figures are organic sales.
<unk> performance in our discrete industry segment with roughly 40% sales growth.
Within this industry segment automotive sales grew at about 50%.
Led by an increase in capital project activity, we estimate 2 thirds of the capital projects. We are winning are related to <unk> projects.
Great to taking flight.
For example, we had another win at the Indian automotive supplier Wipro Party.
Where our core automation technology will be Houston, EV Battery Pack Assembly line, 1 of North America's largest automotive brand owners.
In semiconductor we grew about.
Project, 5%, we believe strong secular tailwind increasing capital spend and broadening share of wallet with customers are all driving our growth.
We are raising our semiconductor growth outlook once again to high teens for the year.
Another highlight within discrete was our performance.
<unk> e-commerce with sales growing approximately 65% versus prior year.
This vertical is significant secular tailwind with pure play e-commerce players as well as traditional retailers that are transforming their warehouses through automation.
Turning now to our hybrid.
Third industry segment. These verticals also had a terrific quarter.
Food and beverage grew over 30% and had the most significant outperformance relative to our expectations as customers prioritize investing in technologies that help them differentiate their offerings and maximize their growth.
We believe we are taking share in this market and that our technical and commercial strength is reaping dividends that should carry through into fiscal 'twenty 2.
Life Sciences grew over 40% in Q3 was another great performer in the quarter Life Sciences was our fourth largest industry in the quarter.
<unk> not far behind automotive and we continue to believe we are taking share in this fast growing vertical Keith.
Key wins included a highly competitive win for a large greenfield project with Boutin 10 to fast track their COVID-19 vaccine production in Brazil.
Our plant <unk>.
System factory talk batch and pharma suite Mes will enable a best in class Paperless system.
That will fully integrate with batch control and other equipment on the factory floor.
Our fastest growing vertical in the hybrid segment was tire which was up about 60%.
<unk> in the quarter.
Key wins included Toyota Tire group in Japan, where Rockwell was chosen as the automation standard for their plant in Serbia.
Our core automation technology, our Iot ready architecture, and strong mes capability, while critical factors in securing this key win.
When tire has always been a strong industry vertical for Rockwell and our technologies are actively supporting our customers' increasing investments in innovation and production capacity.
Process markets were up approximately 15% and were better than expected. This.
This was the first.
First quarter, where we saw all of our major process industry verticals returned to positive growth, including oil and gas, which grew low single digits versus the prior year and grew high single digits sequentially.
Turning now to slide 6 in our Q3 organic regional sales performance North.
North America organic sales grew by 29% versus the prior year with strong double digit growth across all 3 industry segments.
<unk> sales increased 21% driven.
Driven by strength in food and beverage entire <unk>.
Sales in the Asia Pacific region grew 23% with broad.
Base growth led by semiconductor and life Sciences and tire.
In China, we saw a double digit growth driven by strength in tire life Sciences, and EV. We continue to expect growth in China will exceed the company average for the year as our longer cycle businesses kick in.
Latin America growth of 26% was led by food and beverage and automotive.
Let's now turn to slide 7 to review highlights for the full year outlook.
Orders momentum and backlog are expected to drive strong sales growth in the balance of the year and into fiscal 2022 or higher top.
Line guidance is driven by improvements in our hybrid and process industry segments.
Our new outlook for total reported sales growth is up 12%, including 8% organic growth versus the prior year.
We're seeing strong growth in both core automation as well as information solutions and connected services.
Acquisitions are contributing over 1 point of profitable growth.
We are increasing our margin expectation to 20%.
Our new adjusted EPS target of $9.20 at the midpoint of the range represents 17% growth compared to the prior year.
This also includes.
15th from transaction fees related to our pending acquisition of Plex.
I should add that we expect double digit annual recurring revenue growth in fiscal 'twenty, 1 with the <unk> acquisition expected to add over $175 million to our IRR totals next.
<unk> full year.
A more detailed view into our outlook by end market as found on slide 8 I will.
I'll go into the details on this slide but as you can see we continue to expect broad based organic sales growth this year.
With that let me now turn it over to Nick who will elaborate on our third quarter perform.
<unk> and updated financial outlook for fiscal 'twenty 1 Nick.
Thank you Blake and good morning, everyone I'll.
I will start on slide 9 third quarter key financial information.
Third quarter reported sales were up 33% over last year organic.
Organic sales were up 26.
6%.
Acquisitions contributed 1 point of growth and currency translation increased sales by 5 points.
Segment operating margin was 19, 9% an expansion of 340 basis points compared to Q3 of last year.
Higher sales volume.
With favorable mix and price all contributed to our margin expansion.
These factors more than offset higher incentive compensation, our planned investment spend.
Last year's pay reductions and higher input costs.
Corporate and other expense was 29 million.
<unk>.
Slightly higher than last year, mainly driven by costs related to the pending plex acquisition.
The adjusted effective tax rate for the third quarter was 14, 6% compared to 14, 1% last year.
Third quarter adjusted EPS.
$2.31.
Above our expectations primarily related to higher sales.
I'll cover a year over year adjusted EPS Bridge for Q3 on a later slide.
Free cash flow was $437 million or.
Our conversion of 100.
Third 61% in the quarter.
Strong conversion in the quarter was driven by continued management of our working capital.
Year to date.
Free cash flow conversion was 118%.
And free cash flow dollars was up 39% versus last year.
1 additional.
You'll item not shown on the slide.
We repurchased 225000 shares in the quarter at a cost of $60 million.
For the full year, we have lowered our repurchase target from $350 million to $300 million.
In anticipation of our upcoming flex transaction.
At June 3600, $13 million remained available under our repurchase authorization.
Slide 10 provides the sales and margin performance overview of our 3 operating segments.
The intelligent devices segment had organic sales growth of.
29% in the quarter.
Segment margin was 21, 9%.
500 basis points higher than last year, mainly due to higher sales.
This segment did see higher input costs, both year over year and sequentially.
However, these costs were largely offset by price.
Once again, we once again had strong orders performance in the quarter intelligent devices orders grew approximately 65% led by North America and EMEA demand.
Software and control segment organic sales grew 32% in the quarter.
Acquisitions contributed.
3 points to growth.
Segment margin was 25, 2%, which was 270 basis points above last year.
The margin benefit from higher sales was partially offset by higher investment spend.
These investments relate primarily to software development.
<unk> and additional sales resources to drive revenue growth in fiscal year, 'twenty 2 and beyond.
Software and control orders also grew strong double digits led biologics, which grew double digits in all regions.
Organic sales of the lifecycle services segment.
<unk> grew 17% year over year led by life Sciences, food and beverage and semiconductor.
Acquisitions contributed about 1.5% to growth.
Operating margin for this segment was 10, 3%.
An increase of 60 basis points compared to last.
This increase was primarily due to higher sales, partially offset by the reinstatement of incentive compensation.
Third quarter book to Bill performance for the lifecycle services segment was $1.1 8.
The next slide 11 provides the adjusted EPS.
Year block from Q3 fiscal 'twenty to Q3 fiscal 'twenty 1.
Starting on the left.
Core performance had a positive impact of approximately $1.65.
Primarily due to higher sales and favorable mix.
We did see higher input costs this quarter.
Quarter compared to a year ago, which we have been offsetting with targeted price increases throughout the year.
Approximately 10 cents was related to nonrecurring accelerated investments that we announced earlier this year. These.
These investments are mostly in our software and control segment.
Kirk.
We contributed about <unk> <unk>.
Incentive compensation.
The reversal of the temporary pay reductions was the year over year headwind of approximately 55.
Of which bonus was 40 and temporary pay actions 15th.
As a reminder.
Currency there was no bonus expense in Q3 of fiscal 'twenty.
Acquisitions were about <unk> <unk> dilutive as we expected.
Moving to slide 12 quarterly product order trends.
This slide shows our average daily order trends for our products, which.
<unk> foods, our software portfolio.
The trend shown here account for about 2 thirds of our overall sales.
Order intake improved again this quarter.
Q3 product order levels grew year on year as well as sequentially.
Are at an all time high.
Particularly.
Which include areas, where in logics and motion.
Not included on this slide our orders for the lifecycle services segment, which were up double digits in the quarter, both sequentially and year over year.
The overall strong order performance resulted in total company backlog of over 2.
Strong.
Growing over 50% year over year.
This takes us to slide 13 updated guidance.
We are increasing our organic sales growth to 8%.
Which is a 1 point increase from the previous midpoint of 7%.
We expect.
<unk> see translation to now contribute about 2.5 points to growth.
We still expect acquisitions to contribute about 1.5%.
In total we are forecasting reported sales to be about $7.1 billion were up 12%.
We have also.
The current updated the adjusted EPS guidance to a new range of $9.10 to $9.30.
This new range now includes about 15 of transaction fees related to the pending flex acquisition.
I'll review the bridge from the prior guidance.
Midpoint of 915 to the new midpoint of $9.20 on the next slide.
Segment operating margin is now expected to be approximately 20%.
This represents a 50 basis point increase from prior guidance and primarily reflects higher sales.
Also our actually offset by additional bonus expense.
We continue to expect positive price cost for the full year.
Our adjusted effective tax rate is still expected to be about 14%.
The same as prior guidance. This includes a 200 basis point annual.
Is that related to discrete items, which we expect to realize in Q4.
We believe our normalized adjusted effective tax rate is around 18%.
Given our strong generation of free cash flow through the first 3 quarters, we are now projecting free cash flow conversion.
Benefit to be above 105% of adjusted income.
A few additional comments on fiscal 'twenty.
1 guidance.
Corporate and other expense is expected to be about $135 million and now includes about 20 million.
Primarily from the transaction related fees and expenses anticipated for the pending acquisition of flex.
Net interest expense for fiscal 'twenty..1 is now expected to be about 95 to $100.100 million and now reflects the expected incremental.
It'll interest of about $5 million related to new debt for the pending acquisition of flex.
Finally, we are assuming average diluted shares outstanding of $117.1 million shares.
This takes us to slide 14.
This slide.
Which is the midpoint of our April adjusted EPS guidance range to the midpoint of our new guidance starting on the left.
There is a higher contribution from core operating performance.
Primarily due to the higher organic sales and increase in margin.
The.
<unk> <unk> from currency is now expected to be <unk>, <unk> higher compared to prior guidance.
Next given the increase in guidance there is about a <unk> 15 impact from higher bonus expense.
Full year bonus expense is now expected to be approximately 175 million.
<unk>.
Given our projected full year performance. This bonus is higher than the initial fiscal year 'twenty 1 target of about $115 million for comparison. This was zero for fiscal year 2020.
Finally, we now have about a 15.
<unk> impact coming from the pending acquisition of flex, which we anticipate will close in Q4.
This brings the new midpoint of the guidance range to $9.20.
Finally, a few more comments on plex, turning now to page 15.
Flex will.
Be reported in our software and control segment and be a part of our information solutions and connected services portfolio of offerings.
We are forecasting that in fiscal year 'twenty 2.
It will generate $175 million of <unk>.
$160 million of revenue.
After the adjustment for deferred revenue.
And a neutral impact to earnings per share.
About 35 of incremental EPS from operations is forecasted to fully offset the deferred revenue adjustment integration expenses and incremental interest expense.
We expect fiscal year, 'twenty, 3 revenues to be above $200 million.
With a meaningful contribution to EPS in fiscal year 'twenty 3.
We have included further details in the appendix on the financial impact of Plex in fiscal year 'twenty, 1 'twenty 2.
With.
With that I'll hand, it back to Blake for some additional comments.
Thanks, Nick.
Once again strong order trends in record backlog underpin a robust top line outlook and we have confidence in our team's ability to navigate the supply chain challenges.
And we continue to invest.
Our future.
The combination of our software portfolio with our controllers intelligent devices and lifecycle services creates unique value for customers across discrete hybrid and process end markets.
Our momentum would not be possible without the tremendous.
Efforts of our employees I'd like to thank everyone at Rockwell and particularly the people in our integrated supply chain organization, we've done a great job managing pandemic challenges and now mitigating our sourcing constraints.
We're leveraging our own manufacturing expertise to help customers be.
<unk> and resilient agile and sustainable.
Let me now pass the baton back to Jessica and we'll begin the Q&A session.
Thanks, Mike before we start the Q&A I just want to say that we would like to get to as many of you as possible. So please limit yourself to 1 question and a quick follow up. Thank you rein, let's take our first question.
Question.
Thank you.
A reminder to ask a question. Please press star 1 on your telephone keypad.
Again, Thats star 1 to ask a question. Please standby, while we compile the Q&A roster.
Your first question comes from Julian Mitchell from Barclays.
Be more children.
Hi, good morning.
Just wanted to understand first of all how we should be thinking about operating leverage.
Over let's say the next sort of 12.18 months realized in the current quarter there is a.
Heavy headwind from incentive compensation, and probably some headwinds as well from trying to manage supply chain constraints and component costs.
Just wondered how quickly those sorts of items, you think should fade as we move beyond this current fiscal quarter.
And when you look at the business mix.
How we should think about sort of operating leverage please.
Hey, Julien.
First just to round out 'twenty, 1 as far as operating leverage and we often at Rockwell talk about our core conversion, we see full year 'twenty, 1 being right in the range.
Of the 30% to 35% core conversion that we often talk about as far as thinking about the future of course, we will say more about that in November at our Investor day, but like 1 way to think about it is.
There are several things nothing drives our operating margin like top line growth and give.
Our 30% to 35% core conversion, we think thats still a helpful way to think about it and that implies that we would expect our margins to expand next year, but of course I'm going to give we will give more detail.
That at our Investor day in November.
Perfect.
Perfect. Thanks, very much and then just.
As we're thinking about.
The automotive.
End market within discrete.
Very very strong growth, 50% I think you delivered in the third quarter year on year.
Just wondering if you could update us sort of as you're looking into 'twenty.
2.
What portion of your backlog, perhaps if there is such a thing and also as it related to EV.
And how you think about the sustainability of that also capex rebounds.
Sure John.
We.
We think that about <unk>.
<unk> of the capital projects that we're currently seeing in automotive.
Current EV content.
And.
EV powertrain as quickly passing.
The powertrain business, we're seeing for internal combustion engines as a part of the mix within automotive.
Motive and.
And we see that trend, continuing and probably accelerating as new entrants into the EV market either to.
Established.
Brand owners and and then the startups are bringing are bringing their products to market.
And our sales are of course.
Directly to gross brand owners as well as all of the tier suppliers like like Wipro power, you've got we mentioned a little bit earlier, so around the world we're very.
Positive very bullish on our portfolio and.
Quite frankly, we think flex is going to help that with tier suppliers, because that's 1 of their strengths, providing theyre smart manufacturing platform to tier automotive suppliers. So we see this trend continuing.
And we're expecting strength going into the next fiscal year in auto.
Great. Thank you.
Okay.
Your next question comes from Scott Davis from Melius Research Your line is open.
Hey, good morning, guys Hi, Jessica.
Good morning.
I'm kind of intrigued just to follow up on Julians question, there I mean.
These projects I mean, how do they compare versus ice and like complexity.
And scope.
And any different dynamics I guess.
Are there less suppliers more suppliers more competition less competition just any additional color you can give there would be helpful. I think.
Sure.
Thanks, Joe.
For Rockwell, there's actually upside too.
The project.
Versus a traditional internal combustion engine.
So starting with the drivetrain.
Out of our independent cart technology wins for <unk>.
Precision motion control have actually.
<unk> been on the battery and the drivetrain side, if you will for heavy where traditionally in internal combustion engines. Rockwell has had a smaller content that may not be true for.
Some of the other suppliers who have a traditional.
Revenue stream for.
C&C or what have you, but we don't and so we're not losing business in that transition. It's a net positive force on the software side. The EV manufacturers are adopting right from the start.
<unk> software as a necessary element of their production scheduling system and so.
So, whereas 10 years ago or so what we're seeing is a nice to have but not necessarily.
Our requirement with these new facilities coming online Mes is seen as a necessary part of the bill of material. If you will and then you combine all the other pieces of putting a vehicle together.
We remain the same so you still have to stamp and paint metal you assemble the components you test them at the end of the line and so on and those are all applications that Rockwell has.
Good.
Good good offerings for in terms of the competitive landscape as you would expect.
The.
The suspects are there in terms of the traditional part of the.
Vehicle.
Manufacturing and assembly on the battery and.
In the.
The electric vehicle drive train very heavy Asian content.
China, Japan.
In Korea.
And so I would say, it's even more international.
With a bias towards Asia, and some of those new elements and we've put together good teams for tracking and pursuing these projects that span across multiple countries.
Usual is really helpful.
You have increasingly become more bullish Blake on independent cart kind of almost I recall here for the last year.
How does this scale out I mean could you actually do.
Our full Amazon style kind of warehouse and independent cart is that even possible does it scale.
To that.
At the size.
There's lots more applications within say, an Amazon fulfillment center that.
Can be accomplished through independent car today those pieces of their overall facility are typically been.
Provided by multiple of our <unk>.
Customers. So you don't see necessarily 1 single.
Sub supplier to them, providing all of the conveyance and sortation and so on and so we're working with some of the big ones of course, whose names you would recognize but theres also a whole host of integrators and machinery.
With a good idea that Amazon is bringing into their ecosystem and so we're working with a lot of the smaller suppliers.
I would also add this isn't just for the Big E. Commerce Giants now this is for the big box retailers, who also looking to all.
Automate their material handling.
The walmarts of the World are also looking at the solutions.
At their individual locations, where they're bringing in tremendous amounts of material.
To try to get it in the right place more efficiently than ever before but we see almost limitless opportunity.
Opportunity just in the e-commerce area for additional adoption of independent cart and as we've talked about we see independent cart wins and other applications outside of E. Commerce, we see it in life Sciences, we see it in food and beverage packaging, given scalability and flexibility that manufacture.
Manufacturers could never see before and then we have some let's say more unusual applications like the 1 we talked about with the U S. Navy a few quarters ago.
Excellent. Good luck guys. Thank you.
Thanks Scott.
Your next question comes from.
Josh box Lewinsky from Morgan Stanley Your line is open.
Hi, good morning, James.
Hey, Josh.
Just a follow up on I guess what.
What might be several questions on orders and backlog Blake. So you have another quarter here with pretty healthy order intake.
Per inside that over 2 billion of backlog up a lot year over year.
Anything about this cycle or the complexion of Greenfield and brownfield that you guys are seeing that would make that shippable over a longer period of time than usual, obviously, you guys have sort of a reputation for being more.
You recycle.
But how is that evolving over what timeframe would you view that backlog is sort of a shippable number.
Yeah, I would I would not look at this backlog as being a longer term shift for bolt.
Just on the mix of industries or projects the longest.
Long as backlog.
Orders that we get are typically in solutions and Thats. The part of the business, that's actually been a little bit slower.
To recover so theres nothing in that mix that would indicate that these backlog increases are due to some <unk>.
Special case with respect to higher price.
Project content or what have you, it's really due to just the dramatic.
Surge that we have seen and see sustained over the last few quarter in orders coupled with supply chain constraints, but we've given you the color about the individual verticals that it's coming.
<unk> from and it's a great balance.
That.
He's been across discrete and hybrid and now.
The process markets are starting to kick in a bit there.
Got it that's helpful. And then just a follow up on some of the moving pieces on the cost side for per unit.
Yes.
Quarter, maybe some earlier quarters, there was a bit of a talk on some.
Some of the investments being kind of Frontloaded for 'twenty, 1 where maybe that's a bit more of a tailwind into 'twenty..2 if we had to add up the investments in the incentive comp piece is that is that something that levels.
Out on a normalized basis or is there still some kind of catch up or give backward you start off next year and the Pascal.
Yeah, Josh in terms of our investments for full year 'twenty..1 we expect our total investments to go up about 2% for the full year.
And that's really.
I think backend loaded I said last quarter that we expected year on year. The the investments to go up between 90 and $100 million compared to the second half of 'twenty.
Our best estimate now is it's going to go up $85 million a year on year for the for the second half.
So I'd call it more backend loaded than front end loaded up of our investments and then in terms of investment spending next year, Josh. It again, it's early but I don't see any reason to think that it would not be fairly evenly spread over the year I don't I don't see any big seasonality impacting next year.
In our investment spend.
Okay. Thanks.
Yeah.
Your next question comes from Andy Kaplowitz from Citigroup. Your line is open.
Hey, good morning, guys.
Andy.
Blake I'm sure you don't want to go back.
Too much in 'twenty 2 at this point you know, but given orders are so much higher and they keep trending up what kind of confidence at this point do you order trends give you in delivering organic growth in FY 'twenty..2 that you know it could be close to 21 or at least at or above your 2 times industrial production target.
Well.
You're saying too much about 22 until November.
We're very positive on.
Where we are the orders momentum the <unk>.
Backlog that we expect.
To largely ship as we get.
Closer to normal levels.
Through the balance of the year.
<unk>, our ability to compete and win in.
The competitive projects.
Across the world and across the verticals I think it's a great setup and it should.
Bode well for our growth and performance going into the next year and beyond.
That's helpful and maybe just focusing.
I'm processing markets, obviously, youre seeing especially in chemicals, given the monster you've raised your 'twenty 1 forecast.
<unk> growth, but are you starting to see more significant improvement yet in oil and gas and what's your confidence level in sort of more of a typical later cycle recovery for process as you go forward.
Yes, we continue.
To see.
Optimism for oil and gas.
As it.
Is it always seems to do lagging the earlier cycle discrete businesses, but we grew year over year and sequentially and oil and gas we expect.
Another.
Quarter of growth.
In oil and gas in the fourth quarter and.
While there is still a lot of uncertainty these projects around the world.
And we're continuing to watch.
Covid infections and.
Those.
Our continuing to.
<unk>.
Our concern for US we think we're in a good spot with oil and gas and some of the comments from some of the earlier cycle oil and gas operators the people who are providing.
Drilling technology as well as oilfield services those generally lead.
The impact on our business.
<unk> by say 6 to 9 months and so we are opt.
Optimistic that some of the early signs that we saw this quarter in oil and gas are going to persist and pick up.
I appreciate it Blake.
Yes. Thank you.
Yeah.
Your next question comes from Nigel Coe from Wolfe Research Your line is open.
Hi, good morning, I'm on for Nigel Coe.
Oh My gosh.
Looking at the investment question again, I, we're still looking at the 35 million tailwind and for the incentives it still around.
$30 million for 2022.
In terms of the tailwind for 'twenty 2.
I'm not yet in a position where we're sharing guidance on what we expect investment spend to be for for 2002, but.
Our total investment spend this year.
Is.
Clean up approximately 2% very much like like our what we've seen in prior years.
As far as headwinds in tailwind I didn't quite catch all of that but for instance, it would be more likely that our bonus is back in a in a more normal zone of where we're at I talked about during earlier on this.
Call.
That's an example, but I won't necessarily say investments will will necessarily go down.
Or not repeat the 1 exception is we had temporary investments these accelerated investments with $30 million that is going exactly as we anticipated that 30.
<unk> in the second half of the year about $10 million of that we spent in the third quarter a $20 million. We are anticipating in the fourth quarter those will not repeat into <unk> into 'twenty 2 and.
And we did those investments too.
Accelerate our.
Million in 'twenty, 2 and then the last point is as I said earlier with when Julians question, It's our expectation that margins will be expanding in fiscal year 'twenty 2.
Okay.
Yeah.
Gotcha and another 1 was that.
In terms, Jonathan Dean Hum.
The artist momentum you mentioned, it's not as long cycle.
Have any idea when the conversion will happen.
Sales.
Well.
Obviously, we're seeing.
Group sales rates.
Growth that were above our expert expectations in Q3 and that led us to raise the guidance of organic growth at the midpoint for this year and we expect that we'll be shipping the backlog.
The balance of 'twenty, 2 getting us closer.
Towards.
So.
More normal backlog levels.
Backlog will be up in Q4, a little bit, but not as not as market an increase as we saw in Q3.
I appreciate it. Thank you okay. Thank you.
Yes.
So your next question comes from Steve Tusa from Jpmorgan. Your line is open.
Hi, good morning.
Good morning, Steve. Thanks are unusual for all the details just wanted to maybe I I might've missed the comment on incentive.
Incentive comp what what is normal just mechanically.
What do you think is normal incentive comp kind of relative to the level that you're you know performing out this year.
Yes, Steve we started the year with our planned compensation, which which is what we would consider a normal amount of $115 million given our expectation of exceeding that performance. We're currently.
We're currently expecting total bonus expense this year to be approximately $175 million.
Okay. So just mechanically we should assume that next year, you'd get a $60 million tailwind from that.
I think thats, a pretty fair assumption, Okay, and then just just for the investments I mean.
So should we kind of think about investments up to and then and then remove the $30 million. So.
Is that is that kind of the profile for investments going forward at least for next year.
In terms of the investments, yes, the $30 million you should think of that as something that we're not planning to repeat.
It's we still haven't given our guidance here, we're working through a lot of things of how we want to what we want to invest on in 'twenty, 2 but but yes. Your euro assumption of taking $30 million out of what we've done this year that that's the way, we've been saying that and I agree with that approach, okay. So something like.
It's like.
$60 million plus the $30 million and then and then we have to kind of make up our minds on how much kind of the core investment account goes up and that's that's kind of the profile for those costs.
I think the best way is to look to November when we're going to be able to provide more detail.
[laughter] okay.
I won't ask you for the date of that that.
That would be the follow up but 1 more question for you just on this orders our orders sorry on the <unk> deal.
That's a pretty big growth number in 'twenty 3.
Is there is there something to do with the accounting around deferred revenue.
On that front, because 30% seems to be a pretty dramatic acceleration as to where this company has been in the past and then how much of their revenue is actually like.
<unk>, that's really kind of detached from from their kind of ERP core and.
Thanks for the details again, yes, so a couple of things.
So I'll start and Nick May have some additional comments.
First of all.
The figure in 'twenty 3 is after the adjusted.
Adjustments for deferred revenue that impact of revenue in 'twenty, 1 and 'twenty..2 so you don't see the deferred revenue.
Revenues are adjustment in 'twenty 3 so we're not looking for 30% top.
Top line growth in 'twenty, 3 but we will not be seeing the deferred revenue adjustments carrying into that year and then in terms of the mix of flex is offering so they offer a.
Model.
Modular smart manufacturing platform and it has the ERP. It has MBS. It has quality management it has supply chain and so, particularly when youre talking to small and medium sized manufacturers. They don't have big centralized engineering resources to take a bunch of.
New software applications and hope that they knit together and so flex offers an integrated suite of those modules MBS is a large portion of it they have the ERP and those other applications I mentioned, but they've done some good work over the last couple.
Years to Modularize their offerings, so that a customer is in force to buy what they don't want we'll continue to support all of these applications for the customers who've already bought them and we're going to be helping plex.
Expand the introduction of the offering outside of the U S as well.
Well as to other industries like food and beverage and pharmaceuticals that they haven't had as much exposure to in the past.
Got it.
Steve just to.
Make sure Youre youre seeing it in the appendix.
We've provided some additional detail breaking out 'twenty 2.
4 plex and that shows the underlying revenue and then the deferred revenue adjustment, we actually a range on that that we're anticipating that we provide that so you can put it in context of how to think about that growth that we're showing.
Right that's super helpful. Okay. Thanks, a lot.
We have 1 last question from Noah Kaye from open Hymer. Your line is open.
Good morning, Thanks for taking the questions I guess, just following up on that I would love to hear some of the responses that you've been getting a you know.
The plex announcements, both from the customer base and internally.
There've been some questions about.
On Prem versus cloud migration for a lot of these manufacturing customers.
Got it another arrow coming in our quiver, but you also have your own.
So.
Broad portfolio of offerings, some of which are of course legacy on Prem and.
And some of which are moving to the cloud. So can you just talk a little about the response.
And what you think.
Customers are going to be trying to figure out how do you think it can help them over the coming quarters and years.
Sure.
Thanks for the question look on the day that we announced it I got a lot of unsold assistant feedback.
From both employees and customers that I have developed relationships with over the years and they were really excited thrilled about what we were bringing in they felt like it made great sense.
It added while we can offer to complement the core automation.
So you've been buying from us for years or in some cases, where they're trying to decide through their digital transformation partner is with this what we have and this is something we've talked about for a long time and approach that meets customers, where they are on their journey, we're still going to sell a lot.
That on premise software and customers who've made investments there and they wanted to see a migration path and our Mes orders a production center based MBS continuing to grow in those orders get larger and we continue to see lots of runway for that software for customers, who have decided they wanted.
And on premise solutions, but we have the opportunity for customers, who have made the decision that they're going to start working with these applications with cloud native software and they are ready to start working there to build on <unk>, great customer base and introduce it to those customers who said.
<unk> said they are ready to look at that as well and so having that approach.
It all comes back to that theme of an open approach, where we're not forcing 1 philosophy down a customer's throne, and we're telling them. We can meet them where they are on their journey with life of that data to be coming from Rockwell core automation components, but.
But as we've talked about before a lot of this software we fully expect is going to give us a way in into competitive strongholds, where we're not currently the supplier of the core automation and we're going to be providing the value at the software and then working on the automation pieces as well so it's going to be a both approach.
And we're thrilled about the new ways to win that flex gives us.
Okay. Thanks, Blake, let me ask 1 more question.
I don't think it was address too much.
On this call, but you mentioned both in the press release and I think.
In the prepared remarks.
Some of the supply.
Chain constraints and I was wondering if we could get a little bit more color around where you see the supply chain pressures really still manifesting for Rockwell internally.
And what that looks like over the coming couple of quarters. But then also if you can just touch on what impact. This is maybe still having non demand I mean, I got to imagine for any ops or production.
<unk> planner.
Isn't this re ramp is like drinking from a fire, but it was every day.
<unk>.
Just wondering to what extent.
You're seeing your customers'.
Demand.
Or kind of Capex plans.
Being held back by just the challenges of re ramping.
Sure.
So in the quarter, we saw a little bit of an impact on our supply chain in automotive MRO. It was a small amount and we did not see that affecting capital projects.
Or other industries, and we still believe that while there.
This is something that our customers.
Our operations and supply chain organizations are going to continue to be working on.
For the foreseeable future, it's not going to crimp the supply going forward and in fact it is.
Probably lessening with respect to automotive.
From what we may have seen.
Earlier in the year.
The part of the supply chain constraints that we're thinking about our in terms of converting our own converting our own backlog and Ive mentioned specifically that are.
Supply chain organization, I think is doing a terrific job maverick.
Adding this but it's not going to be over.
In the next quarter, we're going to continue to be dealing with these supply chain constraints for the foreseeable future and we're looking at how do we deal with these on a short term basis, but also on a longer term basis and I would say electronic components are.
On average a piece of that some of this is just simply brought on by the extremely sharp recovery in demand that we've seen.
We continue to see an orders.
But then there's also the labor and we have to make sure that we're a great destination.
For labor in our plants in our supply chain organization and our development teams and so on across the organization because as you know it's a very hard it's a very active labor market right now and again I think we're doing a great job with that.
<unk>.
Really.
A nation <unk>.
Collaboration across all parts of the organization to make sure that we're pulling together so that when people are considering rockwell as a destination that we come out on top so it's those 2 areas I would say, but again in terms of the demand, we're really not seeing a significant dampening.
Opening of demand brought on by our customer supply chain constraints.
That's extremely helpful. Thanks, so much yes, thanks Noah.
Okay.
Thank you I would now like to turn the call over back to Mr. Echoes.
Thanks, Brian.
Thanks, everyone for joining.
Today I know, it's a very very busy day for earnings, but we appreciate your interest and support and we will see you will see you soon.
That concludes today's conference call at this time you may now disconnect. Thank you.
Okay.
Sure.
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