Q4 2021 Rockwell Automation Inc Earnings Call
Thank you for holding and welcome to Rockwell automation quarterly conference call.
I need to remind everyone that todays conference call is being recorded.
Later in the call we will open up the lines for questions.
If you have a question at that time, Please press star one.
At this time I'd like to turn the call over to Jessica Curriculars head of Investor Relations Mr.
Mr. <unk>. Please go ahead.
Thanks, Chris.
Good morning, and thank you for joining us for Rockwell automation fourth quarter fiscal 2021 earnings release conference call with me today is Blake Moret, our chairman and CEO and Nick gangster at 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 will rough.
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 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 additional information and news about our company can also be found on Rockwell's Investor Relations Twitter feed using the handle at investors rock. That's at investors are okay before we get to.
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.
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 our SEC filings, so with that I'll hand, the call over to Blake.
Thanks, Jessica and good morning, everyone. Thank you for joining us today.
Let's turn to our quarterly results on slide three.
We saw another quarter of exceptional demand across all three business segments.
Total orders surpassed $2.2 billion and grew 40% over the prior year, reflecting a very strong demand pipeline across our portfolio of core automation and digital transformation solutions.
Total revenue of over $1 $8 billion grew 15% with additional sales that shifted into fiscal 'twenty, two due to supply chain headwinds.
Organic sales grew 13% versus prior year.
We had very strong growth in core automation and information solutions and connected services grew double digits in both orders and revenue.
This performance was led by strong demand for software and cyber security services.
Turning to a R. R. We continue to make significant progress to drive recurring revenue.
<unk> grew organically by over 18%.
And including our recent acquisition of Plex now accounts for over 8% of total sales.
Segment margin of 18% came in line with our expectations with the execution of planned investments in Q4.
I will now comment on our top line performance by business segment.
Intelligent devices organic sales increased 15% versus prior year, even with significant headwinds from supply chain from.
From an orders perspective. This is the fourth consecutive quarter of record order intake in this segment with orders, 30% above fiscal 2019 levels.
We continue to see significant strength across the automation portfolio and share gains, particularly evident in motion led by our independent cart technology.
Software and control organic sales grew 14% led by strong demand across the segment, including double digit growth in logics.
Orders grew approximately 50% year over year, once again, showing great momentum across the software control visualization and network portfolios.
And lifecycle services organic sales increased 7% versus the prior year and increased 2% sequentially, even with some projects delayed as a result of component availability.
Lifecycle services book to Bill of one point O nine was well above seasonal Q4 levels.
Total company backlog of $2 9 billion grew by over 80% year over year over 40% of backlog is related to our lifecycle services business.
Turning to information solutions and connected services, which represent many of rockwell's newest digital revenue streams. We had another great quarter. Recent orders included a number of meaningful software and infrastructure as a service wins.
One of the more notable wins in the quarter was <unk> group one of the world's largest sustainable packaging companies. The company had placed a million dollar order for fixed software in Q3 to reduce unplanned downtime.
Like a lot of manufacturers is trying to respond to a sharp increase in demand by Q4 as it relationship developed we pulled through an additional $4 million purchase our core automation products showcasing the tremendous synergy resulting from our new software.
<unk> and intelligent devices.
With their growing 45% and over 470, new fixed customers added in just the last nine months.
I'm very happy with the contributions fix has been able to make to our overall business.
We also had a great win with one of the world's largest food and beverage companies in two key application areas. The first wind is in the area of predictive analytics, where our calypso digital consulting business will combine our factory talk innovation suite with our automation technology to provide real time mom.
Trillium analytics for their manufacturing environment.
The second application is in the area of sustainability.
Software and automation technology will be used to help monitor water air gas electricity and steam usage to develop real time kpis that further reduce their carbon footprint and drive quantifiable production outcomes.
Calypso continues to play a very important role within Rockwell and is spearheading some of the most exciting digital transformation projects in all of manufacturing.
Our customers are recognizing rockwell's expanding capabilities to converge, it and Ot and be a strong partner throughout the digital transformation journey. In fact, we announced yesterday that we are adding to our calypsos capabilities with our acquisition of <unk>, which will strengthen and expand their supply.
Change solutions domain expertise.
This expertise combined with our operations management software and that of our partners drive great outcomes for our customers.
We're very excited to be expanding our presence in the connected supply chain since it is such a critical high growth area.
We also accelerated our factory talked SaaS offering with the acquisition of Plex in September the integration is going well and we look forward to showcasing the entire factory talks software offering including flex at our upcoming Investor Day on November 10 in Houston, We hope to see you there.
Sure.
I'd also like to highlight the increasing traction we are seeing with our PTC partnership.
Our sales force is seeing the number and size of engagements growing the.
The capabilities and versatility of the combined solution is a great way to win with both existing customers and new ones all over the world.
A number of the wins, we saw this quarter, we're in diverse industries around the world.
We're happy with this partnership and think it's a great part of our software portfolio.
Let's now turn to slide four where I'll provide a few highlights of our Q4 end market performance we.
We had great performance in our discrete industry segment with roughly 15% sales growth.
Within this industry segment automotive sales grew about 15% led by an increase in EV capital project activity.
<unk> a strategic win at Magna one of the top tier one auto manufacturers delivering EV content for GM and Ford.
Semiconductor was strong growing 20% off of a very good quarter last year.
E. Commerce performance was also exceptional with sales growing approximately 30% versus a strong prior year.
Turning now to our hybrid industry segment the verticals in this segment also had a terrific quarter.
Food and beverage grew about 15% led by strong Greenfield and brownfield project opportunities in North America, and EMEA as well as strong double digit OEM demand.
Life Sciences grew over 15% in Q4 and remains one of our top growth verticals.
We see continued growth in the overall life Sciences market.
And evidenced that we are taking market share.
Once again, our fastest growing vertical in the hybrid segment was tire, which was up about 35% in the quarter.
<unk> markets grew over 10% with strong sequential and year over year growth in oil and gas, especially in our <unk> JV and.
In summary, we are clearly seeing very strong growth across discrete and hybrid segments as well as improving oil and gas trends.
Turning now to slide five in our Q4 organic regional sales performance.
North America organic sales grew by 16% versus the prior year with strong double digit growth across all three industry segments EMEA.
EMEA sales increased 7% driven by strength in food and beverage tire and metals.
Sales in the Asia Pacific Region grew 12% with broad based growth led by EV semiconductor and mining.
In China, we saw a double digit growth driven by strength in mining life Sciences tire and EV.
Let's now turn to slide six to review highlights of fiscal 'twenty one.
Record orders of $8 2 billion grew 26% reported.
Reported sales grew 11% even with supply chain constraints organic sales grew almost 7%.
<unk> revenue exceeded $500 million at year end and grew double digits organically.
Adjusted EPS grew 20% and we once again generated significant cash flow.
Due to our very profitable financial framework strong focus on productivity and financial discipline.
At the same time, we made significant investments in our future to accelerate profitable growth that.
That included organic investments as well as inorganic investments in fiscal 'twenty, one we accelerated funding of software development projects and deployed approximately $2 5 billion towards inorganic investments at the same time, we returned $800 million back to shareowners in the form of dividend.
<unk> and buybacks.
Turning to slide seven you can see how these investments and our strong order momentum and backlog are helping to accelerate our topline performance heading into fiscal 'twenty two.
Our new fiscal 'twenty two outlook expects total reported sales growth of 17, 5%, including 15, 5% organic growth versus the prior year.
These projections take into account our latest view of supply chain constraints we.
We have the people supplier commitments and plant capacity to support this growth, but we will no doubt need to continue to manage new challenges as they emerge in this highly dynamic environment.
We expect double digit growth in both core automation as well as information solutions and connected services.
Acquisitions are expected to contribute two points of profitable growth.
We are increasing our margin expectations to 21, 5% up 150 basis points over the prior year.
Our new adjusted EPS target of $10 80.
At the midpoint of the range represents about 15% growth compared to the prior year.
I should add that we expect another year of double digit annual recurring revenue growth, including a recent plex acquisition, which adds approximately $170 million.
Two our IRR totals in fiscal 'twenty two.
A more detailed view into our outlook by end market as found on slide eight.
I won't go into the details on this slide but as you can see we continue to expect broad based organic sales growth in fiscal 'twenty two.
With that let me now turn it over to Nick who will elaborate on our fiscal 'twenty, one results and financial outlook for fiscal 'twenty two Nick.
Thank you Blake and good morning, everyone.
I'll start on slide nine fourth quarter key financial information.
Fourth quarter reported sales were up 15% over last year.
Q4 organic sales were up 12, 6%.
And acquisitions contributed one point to total growth.
Currency translation increased sales by one five percentage points.
Segment operating margin was 17, 9% in line with our expectations.
The 230 basis point decline was primarily related to higher planned investment spend.
The reversal of temporary pay options and the restoration of incentive compensation, partially offset by the impact of higher sales.
Corporate and other expense was $33 million the year over year increase was from deal costs associated with the <unk> acquisition.
Adjusted EPS of $2 33 was better than expected and grew 21% versus the prior year.
Ill cover a year over year adjusted EPS Bridge on a later slide.
The adjusted effective tax rate for the fourth quarter was negative 3% much lower than expected compared to 15% in the prior year.
Lower than expected rate was related to the cumulative impact of several one time discrete items recognized in the current quarter.
Free cash flow performance was in line with our expectations, we generated $160 million of free cash flow in the quarter.
The free cash flow generation includes higher levels of working capital in the current year to support our increasing revenue and build inventory in anticipation of the accelerated revenue levels.
In fiscal year 'twenty two.
One additional item not shown on the slide.
We repurchased 200000 shares in the quarter at a cost of $61 million for.
For the full year, our share repurchases totaled $301 million in line with our July guidance.
On September 3500, $52 million remained available under our repurchase authorization.
Slide 10 provides the sales and margin performance of our three operating segments.
Organic sales of both intelligent devices and software and control were up double digits.
Lifecycle services organic sales were up sequentially and up 7% year over year led by oil and gas life Sciences, and food and beverage.
All segments saw strong double digit growth in orders.
Impaired to last year intelligent devices margins were up 100 basis points on higher sales.
This segment did see higher input costs, both year over year and sequentially. However, these costs were largely offset by price.
Segment margins for the software and control segment declined 330 basis points compared to last year.
With higher planned investment spend partially offset by higher organic sales growth.
This segment benefited from positive price cost in the quarter.
Lifecycle services segment margin was eight 1% and declined 820 basis points driven by the reversal of temporary pay actions the reinstatement of incentive compensation as well as unfavorable mix, partially offset by higher sales.
The next slide 11 provides the adjusted EPS walk from Q4 fiscal 'twenty to Q4 fiscal 'twenty one as you can see core.
Core performance was up about <unk> 70 on a 12, 6% organic sales increase.
Approximately 10 cents was related to nonrecurring accelerated investments that we announced earlier this year.
These investments are mostly in our software and controls segment.
The reversal of temporary pay actions and restoration of incentive compensation contributed negative <unk> 45.
Acquisitions were a <unk> 15 headwind due to the deal costs associated with the <unk> acquisition.
As previously noted our lower adjusted effective tax rate contributed <unk> 40.
Slide 12 provides a walk from our Q4 midpoint in our July guidance to our actual Q4 adjusted EPS results.
We usually don't provide this information, but I wanted to show how the quarter played out relative to the midpoint of what we had guided back in July.
The unforeseen impact or the Delta variance in southeast Asia added incremental pressure to the supply chain, but the impact of the volume Miss a 40 was mitigated to lower incentive compensation.
Their productivity and a favorable mix all of which contributed 35.
As previously noted a more favorable tax rate benefited our EPS versus guidance by 25.
Moving to slide 13 product order trends.
This slide shows our average daily order trends for our products, which includes our software portfolio. As a reminder, the trend shown here account for about two thirds of our overall sales.
Order intake was broad based and improved sequentially for the fifth consecutive quarter.
Q4 product order levels grew at about 40% versus the prior year and are well above pre pandemic levels as customers are increasingly interested in investing in our core automation and software both of which are essential to drive the outcomes that come from digital transformation.
Slide 14 provides key financial information for the full year fiscal 'twenty one.
Reported sales grew 10, 5%, including over one point coming from acquisitions.
Organic sales were up six 7% led by double digit growth in our hybrid and discrete end markets and improving process verticals.
Full year segment margins remained at about 20%, including close to $30 million of one time accelerated investments, mostly in our software and controls segment.
R&D expense was up 14% compared with fiscal 'twenty and R&D as a percent of sales increased further to 6% of sales in fiscal 'twenty one.
Our core automation, which excludes the impact or excuse me, our core conversion, which excludes the impact of acquisitions currency and our accelerated onetime investments was 34%.
Corporate and other was up just over $20 million.
<unk> related to acquisition costs associated with the flex acquisition.
Adjusted EPS was up 20% a detailed year over year adjusted EPS walk can be found in the appendix for your reference.
Free cash flow performance remained strong and was in line with our July expectations.
Free cash flow conversion was 103% of adjusted income.
Finally, ROIC remained well above our target of over 20%.
For the year, we deployed about $3 $3 billion of capital towards acquisitions dividends and share repurchases in fiscal 'twenty one.
Our capital structure and liquidity remained strong.
Let's move on to the next slide 15 guidance for fiscal 'twenty two.
As Blake mentioned, we are expecting sales of about $8 2 billion in fiscal 'twenty, two up 17, 5% at the midpoint of the range.
We expect organic sales growth to be in the range of 14% to 17%.
And about 15, 5% at the midpoint of our range.
This outlook includes our latest assumptions on supply chain constraints.
We expect full year segment operating margins to be about 21, 5%.
We expect positive price cost for the full year from the additional price increase we implemented this month.
At the midpoint of our guidance.
Assumes full year core earnings conversion of between 30 and 35%.
We believe we are in the early stages of the cycle of sustained growth and are making investments to fuel this growth in 'twenty two and beyond.
Our fiscal 'twenty two segment margin and core converging outlook includes our plan to increase R&D and other growth related investments by double digits.
We expect the full year adjusted effective tax rate to be around 17% we.
We do not anticipate any material discrete items to impact tax in fiscal 'twenty two.
This rate is under current tax law should tax loss change, we would provide an updated outlook with the impacts from these changes.
Our adjusted EPS guidance is $10 50 to $11 10.
This compares to fiscal 'twenty, one adjusted EPS of $9 43.
At the midpoint of the range. This represents 15% adjusted EPS growth.
I will cover a year over year adjusted EPS walk on the next page.
From a calendar as Asian viewpoint based on our current supply chain availability, we expect our first quarter sales to be relatively flat compared to our Q4 of fiscal 'twenty one.
Following the first quarter, we expect sequential sales to improve over the balance of the year.
We expect segment margins and the adjusted EPS to decline sequentially in Q1, and then improve throughout the year in line with our sales volume and the timing of price increases.
We anticipate recent price increases to having more substantial benefit in subsequent quarters, given the timing of when customer agreements are renewed throughout the year.
Also as a reminder, fiscal 'twenty. One Q1 included a nonrecurring 45 gain related to the settlement of a legal matter.
Finally, we expect full year fiscal 'twenty, two free cash flow conversion of about 90% of adjusted income.
This reflects a $150 million to $55 million million bonus payout for the fiscal 'twenty one performance.
$165 million of capital expenditures and funding higher levels of working capital to support higher sales.
Our working capital is targeted to be aligned with our historic amount of about 12% of sales.
A few comments additional comments on fiscal 'twenty two guidance.
Corporate and other expense is expected to be around $125 million.
Net interest expense for fiscal 'twenty, two is expected to be about $115 million.
And finally, we're assuming average diluted shares outstanding of about 100 117 in the <unk> 5 million shares.
The next slide 16 provides the adjusted EPS walk from fiscal 'twenty, one to fiscal 'twenty two guidance at the midpoint moving from left to right.
Core performance is expected to contribute $2 15.
This includes the benefit of higher organic sales.
We anticipate price realization will exceed input cost inflation by about 10.
Our pricing philosophy is built on the high value that we bring our customers.
In light of increasing input costs, we have taken several price adjustments this year to mitigate and we are prepared to take additional price actions as needed.
The removal of the onetime accelerated investments made in fiscal year 'twenty, one will be about a <unk> <unk> benefit.
The onetime gain from a legal matter that was settled in the prior year is a 45 headwind.
<unk> will be a 15 tailwind in fiscal 'twenty, two including the impact of incremental interest.
We have included further information showing the impact of flex.
In both fiscal 'twenty, one and fiscal 'twenty two in our appendix no real significant changes to what we showed in July.
We expect about <unk> impacts coming from share dilution.
And the higher tax rate is expected to be about a 75 cent headwind.
Moving on to the next slide 17, I'll make a few comments on our capital deployment framework.
Our long term capital deployment priorities remain the same our first priority is organic growth after that we focused capital deployment on inorganic activities and then we focus on capital returns to shareholders through our dividend and then share repurchases.
In addition to our organic and inorganic investments our capital deployment plans for fiscal 'twenty to include a focus on Delevering.
Dividends of about $520 million and share repurchases of $100 million.
In summary, our guidance assumes that a combination of order and backlog growth that drives 15, 5% organic sales at the midpoint and.
And reaches the total sales of over $8 billion.
We continue to offset inflationary pressure through additional price actions.
Yielding segment margins of 21, 5% we expect.
Adjusted EPS growth of 15% and continued strong free cash flow with that I'll turn it over to Blake for some closing remarks before we start the Q&A.
Nick as we look forward to fiscal 'twenty, two strong order trends in record backlogs underpin a robust topline outlook, we're making investments in our capacity technology and people to support our future growth.
Our people delivered great results this year and I want to take a moment to recognize new tremendous work during especially challenging times as.
As the world recovers investments in automation and digital transformation have never been more top of mind.
Nobody is better positioned to help industrial customers be more resilient agile and sustainable.
As many of you will see at our upcoming Investor day, we're taking manufacturing to a whole new level and look forward to a great year ahead.
Let me now pass the baton back to Jessica to 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 one question and a quick follow up thank you.
Chris Let's take our first question.
Certainly and just as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad. Our first question is from Scott Davis with Melius Research. Your line is open.
Good good morning, everybody.
Good morning, Scott.
Good.
What are your what are your customers, saying like when you think about kind of debt.
Issue here with not just labor materials and kind of cadence of projects I mean, it seems like every day, we see some sort of multibillion dollar announcement.
There's also the reality that there are just so many integrators and other folks who can get this stuff done so.
I know your guide for fiscal <unk> is relatively conservative, but you had things staffing back right after that what.
What are your customers, saying at least about their ability.
I think their ability to at least get projects done on time today looks like.
Well I think sometimes it's useful to look at our own plans as a manufacturer in our own right and our investments I think are broadly indicative of what a lot of customers in different industries are doing they're looking to make sure that they have the capacity.
To meet the current demand, but also looking to get in place the capacity to launch new lines of business and find new ways to win and Thats language that we've used but we're hearing that from a lot of our customers as well. So in some cases, it's just meeting the capacity demand.
So when we look at semiconductor and when we look at life Sciences.
In some of these areas, it's to meet current capacity and well known areas and other cases people are looking to launch new lines of business with EV, probably being the best known of that.
They are very eager to take delivery of our products and.
One of the things that we have is the intimacy through our own salespeople as well as through our distribution of line of sight to these projects that are driving the demand and when they are needed. So we're not we're not just guessing when they might need these products, we know what projects.
They're going into and when those projects are expected to start to be sure.
Theres certainly some delays in those projects that our customers are saying, but they're trying to get these <unk> this capacity up and running just as soon as possible.
Yes that makes a lot of Samson and how do you think about I mean are you.
I assume your pricing.
Sure.
You have tremendous pricing power right now I mean, there has to be some semblance of shortage in the industry. Overall is that can you talk just about price and then I'll pass it on.
Yes, I'll make a couple of comments and then Nick can add to that as well I mean, we're looking at.
Expanding margins in the coming year, taking share in some important industries and product areas and building the foundation for the future.
And we're doing it with select pricing increases.
I think one of the things that bears mentioning is the tools that we've implemented for pricing have dramatically improved over the last couple of years. So pricing can be a real science with a lot of analytics and I think we've significantly upgraded the tools and the talent. So that we can get price.
We are the market bears that but also where we can reserve the right to be selectively aggressive to win share Nick Yes, I'll just add a couple of things Scott art, our pricing philosophy is built on the on this high value, we are bringing to our customers and what we're seeing with increasing input costs, we have taken several pre.
Adjustments this in fiscal year 'twenty one.
And we're prepared to take additional price actions as needed if input costs increase more than what we're anticipating at this point. So we do command premium prices in the market is reflected in our margins.
We continue to focus on the value, we are creating for our customers and the relationships we have there.
Okay. Good luck guys. Thank you see you next week.
Thank you.
Yeah.
Our next question is from Andrew <unk> with Bank of America. Your line is open.
Hi, guys good morning.
Right.
Joe highlighted.
Plus 18% in the quarter can you just talk about what are the key drivers.
How should we think about the strong exit rate into 'twenty two.
Yes.
So very happy with the development of our <unk>. Both in terms of the percentage growth and then the step change that we receive from acquisition slide flex and.
So we're currently looking at an IRR of over 8% of the company's total and we're continuing on on that path. If you think about the main elements of our in the company.
Starts with software software subscription software delivered as a service and the associated technical support which is also delivered as a contract to bundled with the software or as a separate subscription for software that's still being sold as a perpetual license, but we.
Also have got some interesting additional areas.
Fiber security and infrastructure as a service so our industrial data center.
That comes it's hardware with the software and services bundled to be able to monitor network traffic on premise has been a great.
Offering that we've had it's a good business in its own right and it also pulls through a lot of additional opportunities because it's a different set of decision makers. So those are really the primary areas and we continue to look to expand.
With the opening of our new sock this year to be able to offer additional services.
<unk> bought as a subscription as we develop and release orgs.
Organically developed software that sold as a service thats running in the cloud I'm very happy with the robust robust outlook for growth of existing offerings, plus new product introductions, a number of which you will see next week at automation fair.
I guess, we'll wait until the analyst should hear more about that but can you just highlight oil and gas improvement can you just give more details by end market.
North American envelope sort of upstream midstream.
Build greenfield just a little bit more color there. Thank you.
Yes. So we did we were encouraged by the development of oil and gas in the fourth quarter and the outlook for fiscal 'twenty, two our oil and gas is about 60%.
<unk> is about 60% in upstream.
With most of the remainder in midstream so we're not really doing a whole lot and the downstream side, we do provide power control products in Maverick is doing work downstream often with our safety offering but the majority of our businesses in the upstream and we were happy to see both sequential and year over year.
Our growth in the fourth quarter, we saw particularly strong orders from <unk> and the growth was contributed to by all of the regions.
Thank you very much.
Thanks, Andrew.
Our next question is from Jeff Sprague with vertical research your line is open.
Okay.
Jeff Sprague with vertical research. Your line is open. Please go ahead.
I'm sorry, you got me there now.
Hey, just a couple of questions just first on price I don't know if you said it but could you be specific on the amount of price you actually achieved in 2021 and what's embedded in 2022, we see the positive price cost spread obviously of 10.
Curious on the actual nominal price capture involved here.
Yes, Jeff we had a little over 1% price growth in fiscal year 'twenty one.
And we're projecting and.
Approximately 2% net price growth in 'twenty. Two however, I will be quick to caution that is based on our current level of.
Cost increases we are prepared to increase that more if we see additional cost increases coming in that we haven't anticipated in our latest price adjustments.
And then also I guess investment spend would be embedded in the core number.
But I think you said, Nick Youre growing at double digit are you growing it actually less than sales growth I Wonder if you could just kind of speak to.
What the.
The actual rate of growth is actually is it is it a tailwind inside that core number.
Jeff that is accretive to our margin today its not growing at the same pace as our sales but again.
As I said double digits through the low double digits.
And Jeff just to put some color on it.
We see ourselves in the early stages of a cycle of sustained growth and we are making investments in 'twenty two to fuel that growth both in 'twenty, two and beyond and so we are increasing our spending in 2002 on on R&D and other growth related investments.
Some of the places we're investing Jeff.
We're investing in some key product and software development projects.
Mostly in software and control.
Investing in customer facing selling resources.
And the addition of some travel and customer facing expenses that had gone down during during the pandemic.
And we're also expanding investments in our plant capacity.
Those are some of the big areas, Jeff where youre seeing investment spend increase in 2002.
And I'm, sorry, if I could just squeeze one more in Nick could you just elaborate a little bit more on Q1, I mean actually it would be normal for Q1 sales to decline sequentially I think and you have them flat.
So the idea that EPS may decline sequentially does just jump out a little bit.
Maybe just elaborate what's going on with price cost or other things to drive to that outcome in the quarter. Thank you Scott.
Yes, Jeff what we are seeing is.
Our Q1 sequential with Q4 that.
Thats really based from a revenue standpoint is based on what we are anticipating from supply chain.
Constraints and that that will be keeping our revenue flat as we move from Q4 into Q1 from a margin standpoint, and an EPS perspective.
On some of our price increases that we have implemented will be impacting the later quarters of 'twenty two more than they will be impacting the first quarter of 2002, so part of what I'm sharing as I say, what we expect for margin in the first quarter of 'twenty two is impacted by the timing of price increases.
Impacting our revenue and our margins as we go through the year, we also expect that.
Cost increases from a decline from a year on year perspective will be most pronounced in our first quarter and then from an EPS perspective, I will just point out first quarter of last year, we had a 45 gain.
From a legal settlement and that we will not be repeating.
Okay.
Thank you.
Thanks, Jeff.
Our next question is from Josh <unk> with Morgan Stanley. Your line is open.
Hey, good morning, guys.
Josh Hi, Josh.
Just first question I guess on backlog like you talked about it several times is kind of a source of strength in the next year, how much of the growth is really kind of catch up or conversion of maybe this this excess or elevated backlog versus maybe commentary on the underlying end markets.
So as we talked about our backlog of $2 9 billion is is that a huge level.
We said about 40% of that is Wi cycle services, reflecting the strengthening dynamic of our longer cycle project business, which includes a high process content and then.
You of course have.
Product backlog, that's being built.
By those enormous.
Order quarters.
And intelligent devices and also in software and control. So we have a huge tailwind coming from that but we see continuing demand the demand remains strong coming in at.
And so it really is a mix.
But the sharply increased sales in 2002 is due to strength in secular tailwind, let's say investment themes in a number of the industries that we're serving and just in general as people are building in resilience and agility into their basic.
Operations, we think that that is part of whats being reflected in our orders intake and the subsequent sales growth in 'twenty, two and we're making the investments to be a beneficiary of those trends beyond 'twenty two as well.
Okay, and then maybe it's just a coincidence but.
Everything from like an end market perspective up 15% as is pretty strong, but also strangely level I guess on one hand, maybe a good economic indicator, but also has been nothing at the end market basis is sort of standing out is is there.
Anything that can sort of be added to that or anything maybe at the product level that tells a different story.
Sure.
I think if you go one level deeper in some of those end markets.
Automotive, obviously EV investment for capital projects is coming out and so that side of high level. You look at life Sciences. There is obviously the work the work there associated with Covid treatments and vaccines.
We're a little surprised by the uniformity, but I think each one has its own story.
Oil and gas so we love it to be part of the pack again, so to speak. So I think if you go through each one you can see that and then obviously there is some regional variation as well.
So.
Got it that's helpful Best of luck guys.
Thanks, Josh.
Our next question is from Julian Mitchell with Barclays. Your line is open.
Hi, good morning.
Just wanted to follow up on the free cash flow topic.
I know you made some comments around that in the prepared remarks, but the free.
Free cash flow I think as guided about $1 1 billion.
That would imply the same free cash flow dollar number for sort of five years in a row now so just wondered if there is.
Something maybe in the business mix is shifting towards more.
Or more software focused is becoming a drag on the cash flow near term is that as the business model sort of shift.
Or do you just view it as each year. There is some onetime headwinds that are kind of keeping that free cash flow.
Sort of stuck at that number even as the sales and adjusted profit is growing.
Yes, Julian the biggest story in the 90% free cash flow conversion for us in 'twenty, two is really the higher revenues and that and the working capital that we're putting plans in place to go with those higher revenues.
That's the single biggest thing secondary things that we are seeing Julian R&D.
Payout of our bonus in 'twenty two related to that 'twenty. One performance and then we're also increasing our capex investment in light of the higher demand for our products, but but no in terms of our mix and anything going on from that perspective, that's not really having an impact Julian.
<unk>.
Understood. Thank you.
And then just.
We're trying to follow up on the topic of sort of backlog in conversions I think youll your backlog is worth.
A third of your fiscal 'twenty two revenue guide.
I think you said it was $2 9 billion in the guide is eight two.
Just wanted sort of as you look at sort of backlog conversion today is the.
Assumption that it's.
It's slower right now because of supply constraints that conversion into revenue that accelerates from January February and also your incoming orders pace.
Continues to grow over the balance of the year is that the sort of the way to think about backlog and orders.
In a word yes, that's right and I should mention.
The quality of the backlog. We think is good sensitive said higher percentage of products than you would normally expect in terms of the <unk>.
The traditional split of our backlog because of the longer lead times with some of those products.
Okay.
Perfect. Thank you very much.
Thank you.
Our next question is from Steve Tusa with Jpmorgan. Your line is open.
Hi, good morning.
Steve.
Just on this topic of investment spend I think you guys.
Have this like a bucket of like 2 billion box that you use on the P&L to talk about investment spend.
Thank you through and Capex in the discussion with maybe Jeff It was.
What is that.
$2 billion going to grow this year.
And then what is the number net.
<unk>.
Decline in one time. So if you include the one time impact what is the year over year growth or absolute headwind have you want to talk about it.
On on that $2 billion of investment spend that typically run through the P&L.
So Steve we had.
Approximately $30 million of one time spend that we did in fiscal year 'twenty. One that's not repeating then to our total fiscal year 'twenty two of the roughly $2 billion of <unk>.
Investment spend that's what we're saying is going up double digits in 'twenty to low double digits actually so there is a little over $200 million of the increase there in investment spend.
Okay got it and then any other.
Parts of the bridge that you want to call out on that.
On this front whether it's.
Some of the <unk>.
The incentive comp or sorry, I was on a call earlier you may have you may have highlighted but anything else on the bridge.
Moving around.
We have some one times that impacted us in fiscal year 'twenty, one that we're pointing out that those will not repeat also the tax rate is based on current tax law.
If tax law does change we will update what we expect for that but.
Steve those are a couple of the things I would just point out.
Okay, great. Thanks, a lot.
Thanks, Steve.
Our next question is from Andy Kaplowitz with Citigroup. Your line is open.
Hey, good morning, guys, Hey, Andy Blake.
Blake. This is your third quarter in a row with orders of $2 billion or more and they have continued to go higher without larger projects. This quarter I know we've asked you. This before but do you get any sense that some of the strength has been customers getting in line or double ordering and given its still seems early in your process automation recovery any inorganic additions you've made at the company is it reasonable to think that.
<unk> can maintain or even grow from these levels over the next few quarters.
Yes, so in Q4.
There certainly were some pull ins in the quarter, but as we talk to our sales force and distribution, we think it's well under 10% of the total so we think the vast majority of what we're seeing is underlying demand and it's broad based across multiple industries.
So we do believe.
And we're seeing this into October we continue to see strong demand.
Coming from customers.
Some of these secular tailwind that we've talked about and you pick the industry.
Our investing whether it's in transportation or food and beverage life Sciences chemicals is expected to have decent growth in the coming year FERC.
Building building chemicals, and packaging and chemicals. So you can see it from a variety of places and so we're very optimistic about continued order growth in the year, particularly.
Particularly because we are talking to customers about new things new capabilities that <unk>.
<unk> 24 to 36 months ago, we didn't have in our portfolio, but there's a pretty significant expansion of what we can talk to customers about and all three of our business segments.
And Blake I wanted to follow up on the comments you made on EV, obviously during the quarter. There were several additional announcements of planned capex by some of your customers.
EV battery facilities, and you mentioned that your EV business led 15% automotive growth despite.
Big production declines from many of your customers. So could you give us more color into what youre expecting for EV related business in FY 'twenty, two we know youre, saying automotive up mid teens and how much of that is just auto build recovery versus what could be the opportunity for you in EV.
I think the majority of it is getting the new models on the road that's our web.
Traditional brand owners are getting out there with EV and how the start ups our stay in business getting a return on the investments that have been made in FERC for scale, you think about automotive being about 8% of rockwell's total business with EV.
A quarter of that so about 25% and we expect over multiple years EV and associated battery are going to be a strong driver of growth for us and that's around the world I mean, you look at that.
We ended that we're getting in China associated with battery and EV and it's clearly a calling card for US we look at the wins with our Mes software.
The opportunities that we have with flex in the tier providers.
All of these things I think are positive for us.
I appreciate it Blake.
Yes. Thanks.
Our next question is from Markus Mittermeier with UBS. Your line is open.
Yes, hi, good morning.
Good morning, Hey, good morning, I wanted to come back to backlog and pricing, it's a crude and link the two I wonder sort of how much ability you have an existing backlog to adjust price since there if need be.
Markets.
The significant majority of our backlog we are not re pricing there is a relatively small portion of our backlog that has more dynamic prices that we can adjust.
So we are not changing the prices in our in our product backlog.
But as Blake mentioned earlier, when we look at our total backlog and as we work through some of that in 'twenty two.
Favorable it's favorable in terms of the mix that we're seeing there. So we don't expect it to be dilutive, we actually expect it to be accretive to us in 'twenty two.
That's helpful. Thanks, and then Blake you mentioned share gains in motion I Wonder if you could elaborate a little bit on that each region, which product categories and what's the other permit.
Driver there.
So I've mentioned, our motion control and we're seeing share gains from a couple of places first of all our traditional product set of controlling the motion of a.
More traditional motor.
We have some very strong products, there and their fit and an overall integrated control and information architecture are doing very well, we had some product releases up organically developed products last year that get to the.
The more price sensitive markets like China, and we've seen some good uptick in our kinetics products there.
But an area that we've talked.
Especially abound in the last few quarters is independent cart technology, and so it's linear motion control and due to its ability to save space on machinery, the acceleration and deceleration rates the integration as part a fundamental part of the machinery really gives us a very diff.
<unk> offering and a variety of industries around the world. So it can be used in power transmission and vehicles. It can be used an entire building in packaging for food and beverage and life Sciences, there's even some interesting applications that we're working on in mining and so it's a very versatile.
Set of technology, we bought two small companies to get into that to complement actually technology. We've had for many years and that will continue to invest and build it into the overall <unk>.
Automation architecture. So we're very happy with the growth that we're seeing there which continues at strong double digits.
Operator, we'll take one last question.
Certainly our final question is from Noah Kaye with Oppenheimer. Your line is open.
Thanks for taking the question.
Certainly in the acquisition of Nevada.
And very timely with supply chain management.
<unk> had seen ramping across industries and Blake, you've often talked about rockwell's owned manufacturing journey of being a great test case for customers I'm curious how do you think.
Let's say, having in Nevada, and the ability to.
Managed supply chain and a cloud solution how might that.
Impact or be able to impact you going forward just to gain increased control and visibility of your own supply chain and how do you see are benefiting our customers.
Yes, we're excited about using the technology in our own operations, we've got a pretty good system.
On the floor and.
Taking that data into information.
<unk> systems today, but one of the real excitements for a big company like Rockwell.
Our cloud based solution is the ease of implementation for the same reasons that small and medium sized businesses like it because they may not have an it department to be able to manage a big fleet.
Computers in their plants the ability to have a cloud based approach is.
It's exciting when we make new acquisition side, when we open more agile plants around the world the heavy lift that would come with more traditional systems.
May not be what's most appropriate on the other hand, we're going to continue to do well with our on Prem Mes offering because you have a lot of companies, particularly those in regulated industries that cannot change quickly they need to have the ability to maintain this.
System with no change for many years and so got on Prem system can be very helpful. There and so we see the two coexisting for a long time to come.
Okay.
Thanks, That's helpful. And then just curious if you can comment on any potential shifts in customer spending from Capex to Opex, you mentioned sense, yes, it seems to be recovering.
Wondering as many of the customer base, particularly on the process side are being relatively disciplined with capex investments whether this is a significant transition youre seeing and any potential wallet share gains as a result.
Well, we think Cynthia for oil and gas we take the fundamental value proposition is still as strong as.
When we.
Entered into it and we are seeing that reflected in our orders in mining as you said.
Those companies are being disciplined with their capital spend even with.
Super High commodity prices, we haven't seen a.
<unk> increase.
In the release of funds for Big capital expenditures.
Some of Thats going to have to come because they only stay in business by having the ability to efficiently.
Bring the resources to market.
And we're talking to them about quotes.
There is activity there, but we haven't seen it manifest itself yet.
I did mention earlier chemical is a process vertical, but we do see good.
And the teams over the year and it's for things like construction resins as well as chemicals used in packaging because people are still getting lots of products in boxes delivered to them.
Okay, perfect. Thanks, and looking forward to next week.
We'll see you there.
Operator.
This concludes the Q&A session I'd like to turn the call back over to Mr. <unk> for any closing remarks.
Thanks, Craig and thanks, everyone for joining us we look forward to seeing you next week hopefully.
And that and have a great day.
Yeah.
That concludes today's conference call at this time you may now disconnect. Thank you.
Yes.
Sure.