Q1 2022 Rockwell Automation Inc Earnings Call
Okay.
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 would like to turn the call over to Jessica Caracas, I'd imagine Investor Relations. Mr. <unk>. Please go ahead.
Thanks Anna.
Good morning, everyone and thank you for joining us for Rockwell automation is first quarter fiscal 2022 earnings release conference call with me today is Blake Moret, our chairman and CEO and Nick gangster out 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 on our website for replay for the next 30 days for your convenience a transcript of our prepared remarks will also be available on our website at the conclusion of today's call.
Additional information and news about our company can also be found on Rockwell and bet Rockwell's Investor Relations Twitter be using to handle at investors are okay. That's odd investors are okay.
Before we get started I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in our SEC filings.
That I'll hand, the call over to Blake. Thanks.
Thanks, Jessica and good morning, everyone. Thank you for joining us today.
Let's turn to our first quarter results on slide three.
Total orders grew by more than 40% tober $2.5 billion once again, reflecting very strong demand across our portfolio of core automation and digital transformation solutions.
Total revenue of $1 $9 billion grew 19%.
Organic sales grew 17% versus prior year better than our expectations, despite significant supply chain challenges in the quarter.
The main fracturing supply chain remains constrained due to extremely high levels of demand and persistent electronic component shortages, it's a very dynamic situation and our global supply chain organization continues to navigate these challenges.
We're taking a variety of actions, including qualifying additional semiconductor technology and investing in capacity to increase our supply chain resiliency and support our growth.
Turning now to our topline performance.
Core automation sales and orders momentum was broad based across our product lines, including control visualization network motion power sensors and safety.
In the intelligent devices business segment organic sales increased 26% versus prior year, even with significant headwinds from supply chain.
Software and control was also impacted by supply chain constraints, but organic sales growth of 8% was above our expectations.
We also had very strong orders growth in this segment.
Of note industrial PC orders at Austin, a recent acquisition were particularly strong and almost doubled from a year ago.
And lifecycle services organic.
Organic sales increased 10% versus the prior year.
Led by double digit growth at <unk>, and our solutions business demand.
Demand is strongly increasing in this segment as demonstrated by double digit sequential orders growth and a one three book to bill for the segment.
Information solutions and connected services grew double digits in both orders and revenue.
Q1 sales were particularly strong across the entire information solutions portfolio as well as calypsos digital consulting services.
Industrial cyber security demand was strong in the quarter and included a strategic win with one of the world's leading natural gas pipeline companies in North America.
We also had a key win with one of the largest beverage manufacturers in EMEA.
Demonstrating how our industrial cyber business continues to create new ways for us to win.
Our investments in the cloud are also showing very good traction.
Another notable win in the quarter was with the shift group.
Normally known as Spartan Motors.
The shift group is a global leader in the commercial vehicle industry, and a big beneficiary of the EV and last mile delivery trends.
Here Plex is smart manufacturing platform was chosen to enable best practices across their operations reduced material costs automate quality processes, all while supporting high speed line deployments.
At fix we had another great quarter with their HR are growing over 40% and over 600, new fixed customers added in just the last 12 months in.
In the quarter.
Rockwell expanded its presence within lucid motors, one of the top up and coming luxury EV companies in the World Lucid had already selected Rockwell's factory talk software to manage production and is growing their fixed subscription base to ensure readiness and facilitate ski.
Guild resource effectiveness. This is a great example of the synergies we are already seeing across our cloud and on Prem software portfolios and the positive contributions they are making to our overall business.
I'd also like to highlight the continued traction we see with our PTC partnership the capabilities and versatility of the combined solution has contributed to our significant software portfolio differentiation and has become a great way to win with customers.
In summary, I'm very happy with how these digital offerings are contributing to our recurring revenue base, including contributions from our organically developed software.
And our recent acquisitions in the quarter doubled in the quarter total.
<unk> grew by over 50% and organic IRR grew double digits.
Let's now turn to slide four where I'll provide a few highlights of our Q1 end market performance.
Each of our industry segments showed strong double digit year over year organic growth.
And as we've said our strong orders are reflective of underlying demand advanced orders for longer lead time products that are not immediately needed made up about 10% of the total.
And our discrete industry segment sales grew approximately 20% versus the prior year.
Within this industry segment automotive sales grew mid teens led by a 50% increase in EV capital project activity around the world and strong growth in EV battery.
Led by our independent cart technology.
Semiconductor sales grew over 25% in the quarter with strong double digit growth in all regions significant Greenfield project activity is leading to our strong growth at semiconductor focused engineering firms and machine builders.
E Commerce was our fastest growing vertical with sales growing approximately 50% over the prior year.
E Commerce orders included a series of multimillion dollar wins to automate new fulfillment centers throughout North America for a well known e-commerce provider.
We believe our strong differentiation in motion, including advanced material handling technology and support services are driving market share gains in this fast growing vertical.
Turning now to our hybrid industry segment.
The verticals in this segment also had a terrific quarter.
Food and beverage grew over 20% in Q1 with broad growth across the regions. Once again SKU expansion end of line automation and the need for greater manufacturing flexibility are important trends requiring greater levels of automation.
We believe the steady pipeline of Greenfield and brownfield project opportunities, our deep relationships with machine builders and our strong technology differentiation are driving record demand in this key vertical.
Life Sciences sales grew over 10% in Q1 off of an extremely strong quarter last year and remains one of our fastest growing verticals in fiscal 'twenty two.
We have significantly invested in this area of our business over the last few years and believe we are well positioned to gain more share through broader and deeper offerings and expertise.
Our fastest growing vertical in the hybrid segment. This quarter was tire which grew about 35% in the quarter. This is another great vertical that is investing heavily in innovation.
Turning to process. This industry segment grew approximately 15% led by improving trends in upstream and midstream oil and gas are Cynthia joint venture had strong sales and orders in the quarter led by strength in process automation and lift control solutions <unk>.
Yes, digitalization solutions are well suited to the energy industry's desire to improve productivity and extend the useful life of existing infrastructure as well as the desire to use modern technology to improve safety and reduce environmental impact.
<unk> operating and capital budgets increasingly open up we believe <unk> is well positioned for double digit growth in fiscal 'twenty two.
Turning now to slide five in our Q1 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 sales increased 15% driven by strength in food and beverage and tire in metals.
Asia Pacific was our fastest growing region in Q1 growing 25% with broad based growth led by semiconductor and food and beverage.
In China, we saw double digit growth driven by strength in tire food and beverage chemical and mass transit.
Let's now turn to slide six to review highlights for the full year outlook.
We now expect orders for the year to exceed $9 billion.
Which is above what we expected just a few months ago, and really taking our business to a whole new level.
We continue to expect total reported sales growth of 17, 5%, including 15, 5% organic growth versus the prior year.
Our projections reflect a detailed review of supply chain constraints by supplier and product line over the course of the year, but as we've said before these constraints remain very dynamic.
We continue to expect double digit growth in both core automation as well as information solutions and connected services.
Acquisitions are off to a good start and expected to contribute two points of profitable top line growth.
We are maintaining our margin expectation and adjusted EPS target of $10 80 for the year, which represents about 15% growth at the midpoint of the range compared to the prior year.
I should add that we continue to expect another year of double digit annual recurring revenue growth, including a recent plex acquisition, which adds approximately $170 million to our IRR totals in fiscal 'twenty two.
Okay.
A more detailed view into our outlook by end market as found on slide seven.
I'll go into the details on this slide but as you can see there is no change to the outlook for our three industry segments.
With that let me now turn it over to Nick who will elaborate on our Q1 results and financial outlook for fiscal 'twenty two Nick.
Thank you Blake and good morning, everyone.
I'll start on slide eight.
First quarter key financial information.
First quarter reported sales were up 19% over last year.
This is slightly better for the quarter than we expected and indicated in November .
We saw some improvement in the timing of electronic component shipments from our suppliers that resulted in a stronger first quarter than we anticipated.
Q1, organic sales were up 17% and acquisitions contributed two six points to total growth.
Currency translation decreased sales by under one point.
Segment operating margin was 19, 1% better than expected and improved sequentially from Q4.
Our stronger sales performance improved our margin during the quarter.
Versus last year, our margins declined 70 basis points due to higher planned spend and negative price cost both in line with expectations.
These were both partially offset by the impact of higher sales.
Corporate and other expense was $29 million.
Our adjusted EPS in the quarter was $2 14.
Q1 of fiscal year 'twenty, one included a nonrecurring favorable legal settlements of 45.
Excluding the prior year favorable legal settlement adjusted EPS grew 11% versus the prior year.
I'll cover a year over year adjusted EPS Bridge on a later slide.
The adjusted effective tax rate for the first quarter was 15, 3% and in line with the prior year.
Free cash flow was negative by $50 million in the quarter and down compared to prior year due to the payout of the fiscal 'twenty one bonus.
An increase in our working capital to serve our strong demand and higher planned tax payments.
One additional item not shown on the slide.
We repurchased 151000 shares in the quarter at a cost of $49 million.
On December 31, $503 million remained available under our repurchase authorization.
Slide nine provides the sales and margin performance overview of our three operating segments.
Total reported sales grew double digits across all three of our segments.
Intelligent devices grew organic sales by 26%.
Compared to last year intelligent devices margin expanded 430 basis points to 23, 7%.
On higher sales, despite a price cost headwind.
Software and control organic sales were up 8%.
Segment margins for this segment declined 730 basis points compared to last year with higher planned investment spend and the impact of acquisition integration costs.
Partially offset by higher organic sales.
This segment also saw a negative price cost in the quarter.
Lifecycle services grew organic sales by 10%.
<unk> margin was five 5% and declined 340 basis points.
Driven by higher planned investment spend.
Unfavorable project mix and higher input costs, partially offset by higher sales.
Margin is expected to grow through the balance of the year as a result of strong sales growth and a higher margin backlog.
The next slide 10 provides the adjusted EPS walk from Q1 fiscal 'twenty, one to Q1 fiscal 'twenty two.
Starting on the left.
Core performance was up about 55.
On a 16, 8% organic sales increase.
Approximately 20 was related to temporary pay actions that were benefiting the prior year and have since been reversed.
This is the last quarter that we have this in our prior year comparable as a headwind.
Currency was slightly unfavorable by about <unk>.
Acquisitions had a negative impact of 10.
Mostly related to flex.
We continue to expect that flex, including the impact of interest expense will be breakeven in fiscal year 'twenty to EPS and up 15 from fiscal year 'twenty one.
As a reminder, our prior year EPS included a nonrecurring legal settlement gain of 45.
This brings us to our total EPS of $2 14.
Let's move on to the next slide 11 guidance for fiscal 'twenty two.
We are reaffirming our sales guidance 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 a range of 14% to 17% and 15 and 5% at the midpoint of our range.
This guidance is based on our current view of electronic component availability.
By quarter we.
C Q2 sales improving sequentially low to mid single digits.
With continued improvement in the second half of the year.
Our first half is expected to be in line with our initial projections with our first quarter being a little stronger than our second quarter coming in a little lower due to timing of electronic component availability.
We are pleased with our supply chain team's ability to navigate through this dynamic environment and keep the focus on serving our customers.
We expect full year segment operating margin to be about 21, 5%.
We continue to expect slightly positive price cost for the full year, we expect the first half the impact of price cost on margins to be dilutive by approximately 200 basis points.
And that the margin impact in the second half from price cost will be accretive by over 100 basis points.
Given the first half of the year negative impact of price cost, we expect margins in the second quarter to be similar to Q1 margins with a positive impact from higher sales being offset by higher sequential input costs.
We expect the phasing of our price increases along with higher sales will significantly benefit margins in the second half of the year.
Our full year view on margins and the impact of price cost on those margins remains unchanged.
We continue to expect full year core earnings conversion of between 30 and 35%.
And we are on track to grow our R&D and other growth related investments by double digits.
These investments will position us well as we drive sustained growth in 'twenty two and beyond.
We continue to expect the full year adjusted effective tax rate.
Be around 17% we.
We do not anticipate any material discrete items to impact tax in fiscal 'twenty two.
We're also reaffirming our adjusted EPS guidance of $10 50.
To $11 10 at the midpoint of the range. This represents 15% adjusted EPS growth.
Finally, we are projecting full year fiscal 'twenty, two free cash flow conversion of about 90% of adjusted income.
This reflects a $155 million bonus payout made in quarter, one for the fiscal 'twenty one performance.
$165 million of capital expenditures and funding higher levels of working capital to support significantly higher sales growth.
Our working capital target.
Is aligned with our historical amount of about 12% of total sales.
A few additional comments on fiscal 'twenty two guidance.
Corporate and other expense remains around $125 million.
Net interest expense for fiscal 'twenty, two is expected to be about $115 million.
And we're assuming average diluted shares outstanding.
$117 5 million shares.
Finally on capital deployment, no change to our strategy our fiscal 'twenty two priorities.
Our first priority is organic growth.
After that we focused capital deployment on inorganic activities.
Then we focus on capital returns to shareholders through our dividend and then share repurchases.
And we continue to focus on Delevering in fiscal year 'twenty two.
With that I'll turn it back over to Blake for some closing remarks before we start Q&A. Thanks, Nick.
Strong order trends in record backlog underpin our robust topline outlook for fiscal 'twenty two as we said last quarter, we're making investments in our capacity technology and people to support our future growth.
We are investing in our operations to expand capacity by $500 million per quarter, while at the same time, increasing the resiliency of our supply chains. We've.
We made significant progress in the quarter to release factory talks SaaS offerings, including new Plex smart manufacturing platform capabilities and.
And we've expanded fixes applied AI capabilities.
We also released the next version of emulate three D to further our capabilities and creating an operating digital twins of production systems.
Significant release of new logics functionality is scheduled for next quarter.
Importantly, last year's accelerated organic investments have allowed us to release, new secure remote access functionality and cloud based data management of automation design information earlier than originally anticipated.
In summary, Q1 was a great start to the year we.
We've been very busy capitalizing on the opportunities we see today, while at the same time building for the future.
I wanted to take a moment to recognize the people in our organization and the tremendous work that went into these results during especially challenging times, we're making significant investments in existing and new talent and are empowering them with the technologies and resources to be successful.
We continue to encourage fresh ideas from across the organization and look at ways to increase our value through the customers eyes.
I feel confident that investments in automation and digital transformation have never been more top of mind than they are today.
As a pure play leader devoted exclusively to these areas, we think our agility, our differentiated portfolio of products and services are significant domain expertise and our ecosystem of best in class partners make us the best positioned company to benefit from what should be a.
Difficult multi year growth cycle.
Let me now pass the baton back to Jessica to begin the Q&A session. Thanks.
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.
Let's take our first question.
I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Scott Davis with military Research. Your line is now open.
Hey, good morning, everybody, Hey, Scott Scott.
Jessica everybody, but.
Kind of like I wanted to ask about this emulate three D. The digital twin stuff is that becoming the new kind of the standard to do a full.
Some factory simulation digitally before you break ground does that is that becoming the norm or is that still.
Kind of tip of the iceberg stuff.
I think Scott.
Scott I think we're still climbing the adoption curve there, but everybody is aware of the promise of being able to simulate production systems before actually starting to run material through a line and this is one of those areas that I think the pandemic.
Because you Couldnt get everybody that you traditionally would have wanted to be on site shoulder to shoulder on a line commissioning a new line and so the ability to go and to digitize your system to be able to tune it to be able to get a good picture of what <unk>.
Happen to actually much further down the path without actually having to have people together and running product through align in the traditional way. So we see the most advanced companies well ended of proofs of concept, we're heavily involved with them on that and I should add this is <unk>.
Area that the Calypso acquisition, and then followed by the more recent Nevada acquisition has really helped to complement the technology that we have with emulate <unk> and some of the new logistics capabilities to have the people who can describe that holistically at the higher levels of the organization.
Better required to sign off on that sort of initiative has really been helpful for us.
Okay. That's helpful and then.
Blake historically that in the Upcycle you always have this unfavorable project mix, but there has got to be some supply and demand imbalances here were supplying into these projects is going to be harder and harder just given how many projects there are.
Is there a scenario that this cycle is a little bit different that you can price those those projects in the bids more more aggressively and have less of an unfavorable.
Mix impact or is that just not how it works.
No I think.
Couple of things first of all I do think that this cycle is going to be a little bit unusual now there's always some.
Differences from one one cycle to the next but I think this one.
Maybe a little bit elongated because with the amount of longer term capital investment.
In verticals wide semiconductor where that new capacity is not going to come on for a while where they still have to build the ecosystem of local partners around these big Fabs I think we could see a cycle that actually lasts a little bit longer than maybe day.
I mean in the past in terms of demand and being able to supply into this.
Right now the bottleneck is the chips, we're working through that but I still think that that material is getting out there and we are going to see the completion of these projects I can't I haven't seen any evidence that people are not moving.
Moving forward with their expansion plans.
<unk> of supply chain constraints or slowing them down, but everybody is trying to come out of the pandemic better positioned than their competitors in terms of capacity and new offerings and I don't see that changing.
Okay. Good luck, Mike Thank you.
Yes.
Your next question comes from the line of Andrew <unk> with Bank of America. Your line is now open.
Hey, guys good morning, Hey, Andrew Andrew.
Just first question you guys sort of said that first quarter was better than expected in second quarter was.
A little bit weaker and I think inside of price cost and supply constraints.
I guess the question were hearing is that for a lot of companies actually the fourth quarter.
It seems to be a big pinch point and you guys manage to do better than expected in the fourth quarter. So what specific color I'm just trying to figure out how it is you were able to get stuff out of the door.
And your first fiscal quarter and why would it get worse in the second quarter. Thank you.
So.
Andrew we have a broad base of suppliers side.
Obviously, it goes well beyond just the semiconductor suppliers, but even within that category.
We're managing a broad base of suppliers because virtually all of our intelligent devices are intelligent. They have semiconductor based technology. We are in daily contact with our key suppliers through our supply chain organization and conversations that include media <unk>.
Senior team.
And basically we were able to get a few more chips and the yard in the first quarter than we had originally forecast, but we're expecting the second quarter to be a little bit lighter, it's a dynamic situation, but the fundamental I guess framework you should think about is that with the.
Ms backlog that we have.
The new incoming orders are coming in on top of that so the demand.
It is not the constraint and we don't expect it to be.
For quite some time to come.
Rick anything to add to that yes, our our deal of what we were going to be getting for the first half of the year from for chips as our most significant component that just hasnt changed some of them came in a little earlier than we were able to ship things out in the first quarter. The first half view of what we were going to get just did not change Andrew.
No that makes sense and maybe a follow up question on software and control.
You highlighted higher planned investment spend can you just versus your expectations and just wanted to figure out where it was the margin on software and control versus your expectation for the quarter.
And how much of how much of this investment spend was planned and how much of it was discretionary in the quarter and what were you spending money on thanks, so much.
Yes, Andrew it's the software and control margins were actually just a little bit better than what we had in our internal planning.
The investment spending is right in line with that total for the total company were three months ago, We said that we'd be upping, our investment spend by approximately $200 million.
Our first quarter, we executed exactly on on that plan roughly $50 million a quarter sequence.
Over each quarter of last year that were increasing and that that spending.
Is the plan we were also impacted in the margin in the first quarter by our.
Our continued spend on the acquisition integration cost, we expect that impact on the margin will diminish in the coming quarters as we work through the integration.
So for the full year, Andrew I know you didn't ask it quite this way, but we think the margins are going to continue to grow in software and control. We don't think it's going to be.
Of our total company margin expansion of 150 basis points, we largely think of software and control and control is largely flat compared to last year and the most of our margin expansion coming from intelligent device and lifecycle services now specifically, what we were spending on.
We are spending on product development software development and software and control.
We also are spending more on our customer facing selling resources.
Software and control is one piece of that is we are building more specialization in how we sell and in some of the software and control products.
Those are a couple a couple of things that we increased our spending on Blake will add a little more detail on that Andrew just specifically in terms of the things within software and control as we've talked about cloud native software development and multiple products within the factory talk hub that we.
Florida, a little bit during Investor day. There is also new visualization tools hardware and software that are under development and then new hardware functionality.
Round of logics control system, we're going to have major new product releases and all three of those areas in the next 12 months.
No. Thank you. This is just one of those funds to hear Jim last night complement Purion your software growth as well. Thanks, a lot yeah. Thank you the PTC relationship is going well.
And our next year.
Your next question comes from the line of Jeff Sprague with vertical research. Your line is open.
Thank you good morning, everyone.
Hey, Jeff Hey, Jonathan.
Good to catch up with everybody and can we just delve a little bit more into the sequentially and I know, we touched on it a bit on the prior questions but.
Just thinking about.
Margins being flat sequentially on on higher revenues sequentially.
So you addressed availability, but as price cost actually worse in the second quarter also or is there.
Something else going on in incentives or investment spend or something like that that would create that.
Kind of a lack of leverage on sequential revenue growth.
Yes, Jeff in terms of price cost you're exactly right in what you're theorizing there price costs were negative <unk>.
Negatively impacting us in the first quarter.
Even more negatively impacted in the second quarter, bringing that first half.
Impact to that roughly 200 basis point negative impact on margin.
Then from there it starts to ascend the price cost and that we will be getting getting.
Substantially better in the third and fourth quarter on price cost.
And that's largely how we have this planned out at the beginning of the year with what we shared three months ago.
I think the only dynamic that's been happening throughout in the first three months as we are seeing costs go higher and we're seeing our planned price actions go higher as well so both of those moving in tandem to keep our net price cost exactly what we said three months ago.
And so the expected relief.
In the second half.
As a function of continued price mounting and kind of Anniversarying are you baking in actually cost relief in the back half maybe you could discount.
I mean of course, Jeff that would be great to think that will happen, but we're not planning for cost relief. We are planning for continued cost inflation going in it will be the price part in the phasing in of our pricing.
That will be positively impacting us in the second half of the year.
And then could you also just separately address.
How to think about the orders and the nature of my question is.
$9 billion of orders.
10% long lead time stuff, so let's call it 90% shorter cycle orders, maybe you want to use a different term.
But.
That would kind of imply.
Little over $8 billion.
Orders on the short cycle deliverable stuff, that's sort of where your revenue guide is plus or minus a little bit.
Is that the way to think about just kind of the reaction function here between orders and conversion to sales or I'm sure. It's a little bit more complicated than that but just maybe frame up how orders convert to sales and if maybe thats changing because of the supply chain and other disruptions that we're dealing with.
Yes, Jeff.
The other main component I'd say of the equation is the very large entering backlog that we have here. So this this orders saw continued orders growth comes on top of historic levels of backlog and even the longer lead time orders and all disk.
<unk> that a little bit.
Those will.
We will likely ship or a large part of that will ship in the fiscal year. So when we say longer lead time that doesn't necessarily mean, it's pushed out beyond the end of fiscal 'twenty two to be sure. We're going to have very large backlog and any scenario at the end of fiscal 'twenty to setting up.
For fiscal 'twenty, three but let me give an example of what those.
Advanced orders would be so you think of an OEM that has big backlog in their own shop of machines to be built and they would typically buy let's say three months of components from Rockwell controllers and drives and serve our amplifiers and so on because of the longer lead times I may extend that out to six.
Month's worth of compounding orders that they're placing on us. So thats. The example, where they have the demand it's not speculative digest increase their advanced orders in that respect and we look carefully at both that customer demand as well as distributor order patterns will work.
<unk> closely with them and that gives us the confidence to say that this is representative of underlying demand that goes right to the end user.
Alright, thanks for the color I'll pass the Baton, yes, thanks, Jeff.
Your next question comes from the line of Josh <unk> with Morgan Stanley . Your line is now open.
Hi, Good morning, guys Hey.
Hey, Josh Hey, Josh.
So maybe just on the intelligent device devices margins first I know we've covered some ground there but.
Anything that you can tell us Nick about who is there.
Inventory preposition, just waiting for chips or something else that kind of goes the margin with this first wave like price cost getting worst year in the second quarter.
Is it really as com and I think across the industrial universe, because price has been so high like anything that <unk>.
Sort of gave you the kind of initial advantage.
When you were able to get that extra supply in this quarter that goes away or is it just inflation.
The single biggest thing that was driving that margin expansion in the intelligent device and we had high expectations for intelligence device margin as well in the first quarter, but what drove it even higher as the higher sales than what than what we were.
Then what we were expecting and Thats why I am guiding that we're in.
Not planning margin expansion there being in the total company sequentially, because what we see for a bit that bit of benefit from higher revenue in the second quarter as low to mid single digits I talked about that will be largely offset by price cost.
Getting a little worse in the second quarter now what I would just described in terms of our overall pricing philosophy. Here is we are seeking to price in a way to offset our input costs and.
We're not pricing in a way to.
Generate even more substantial profits off of that but to largely offset the input cost inflation that we're seeing we see opportunities for how we beat can be using our pricing to be gaining share around the world and we are.
We are.
Basically trying to offset it and thats why at three months ago, and now we still see it slightly as a benefit to earnings per share, but but not a substantial differ.
Difference there between input costs and price, yes, it's in line with.
The idea that we've talked about of accelerating profitable growth and we remain committed to the idea and are seeing this play out but nothing expands margins wide topline growth and so we think that we're striking a good balance between the near term profitability and the investment to create an even brighter future.
Got it that's helpful. And then just a follow up on Jeff's question on orders.
Interesting that.
That stat on the longer lead time stuff is it really a big part of the equation sort of suggests that customers are ordering earlier to try to secure their spot in line. So I guess, that's a good thing, but like is the only thing that sort of delaying kind of convergence of orders and sales what should be a shorter cycle business just.
Apply chain or is there some other kind of yes.
Delay in the process labor or something on the customers and that kind of prevents us from converging near term.
Josh its supply chain constraints. So we've got this enormous demand that.
As a result, I think of three.
Basic thanks first of all it's the secular trends that you're seeing play out across industries and geography.
<unk>.
Higher degree of importance on automation and digital transformation than ever before so it's secular. It's also cyclical we are still early and what we believe is going to be a multi year period of economic expansion and then finally, it's our position.
In this market and I think all three of those things are driving the demand.
Hey, Josh one thing I'll add is we've invested in our own internal capacity that we do not see that as a constraint silly as Blake said, it's that component availability and getting that and we're equipped and ready to go.
For that as that ramps up.
The final point just to summarize fiscal 'twenty two sales would be higher were it not for the supply chain constraints that we're managing as Nick said our capacity.
Our labor.
Based on very dynamic practices kind of hand to hand.
Around the world, making sure that we're acquiring talent keeping talent pay competitive wages all of those things we're keeping ahead of it.
Great I appreciate the color best of luck guys.
Yes, Thanks, Josh.
Okay.
Your next question comes from the line of Julian Mitchell with Barclays. Your line is now open.
Okay.
Hi, good morning.
Just wanted to circle back on the orders outlook again. So is this sort of assumption backing into that 9 billion plus number for the year that you probably have decent double digit order growth year on year in Q2.
And then maybe it's down year on year in the back half.
As supply chain conditions get easier, but you've got tougher comps as well is that the sort of the right way to think about orders over the balance of this year.
And Julien we based on what we're seeing and what we're expecting.
We do think we are going to see order growth.
In our second quarter year on year order order growth and then second half of the year.
You can do their own math of calculating what that would mean of what that means if we're at $9 billion like whether it's up.
Year on year or down a little I think thats, a little too fine of a point, but what we're seeing in second quarter. So far we think that's in line with that and we think it's going to be growth year on year, yes.
Yes, the other the other point I would just add as we've continued to see this order momentum for multiple quarters now and the trends are extending into January so we.
We see it again thats reflective of underlying demand.
Multiple industries and we can point to the specific investments based on the large greenfield site have been announced as well as on the ground individual salespeople from distributors from our own people who are directly involved in these projects. So we feel very good about the overall demand.
That's helpful. Thank you and then just my second question.
On the price cost aspect.
So you mentioned some price some extra price increases.
Nevertheless, the organic sales guide and.
In aggregate unchanged. So does that mean that pricing for the year as a whole is still not that different from that 2% type tailwind you'd mentioned before and then maybe just to clarify when you talk about price cost is that cost aspect solely sort of.
And the.
Logistics and components and labor is kind of separate from that.
I'll take the second part of the question first Julian when we talk and think about price cost. It is large it is exactly what you are saying what we're paying for all the inputs as well as logistics cost labor is something that we largely manage around productivity and what we're what we're doing there to improve the.
<unk> team productivity of our operations.
Often our incentive to more than offset what we see of wage inflation.
Relation there so when we talk input costs.
In the cost price cost equation, its input costs and logistics.
Now in terms of pricing in our in our overall guide, yes, we have chosen to keep our our organic growth guide the same.
Three months ago, when asked they indicated a 2%.
Roughly 2% price growth that we were planning for the full year. We think that's critical up I'm not going to put a new number on it because we needed.
I mean, it's a dynamic situation with price and cost, but we see that number going going up.
We're focusing more on the net.
Keeping that in balance than what.
The two parts of that equation.
So we kept the guide the same.
It is likely in the.
One quarter from now with things like FX things like price will be incorporating all of that into the guide.
Great. Thank you.
Thanks Julien.
Your next question comes from the line of Brendan look with Bernstein. Your line is now open.
Good morning, all thanks for taking my question.
Hey, Brandon.
As you as you talk to customers are you seeing any early indications of shifting manufacturing footprints sort of on the back of the extended supply chain crisis.
Or is this really more of a capex recovery story.
Share gains when you're looking at growth projections.
I think I think it's new investment I would not look at it as shifting manufacturing, although I think.
Manufacturing in North America is probably a larger percentage of our company's global investment than it has been traditionally so I don't see people closing plants in Asia for instance, and bringing them back as the majority of what's driving the demand, but I do see as people are <unk>.
Planning, new capacity, whether its brownfields or greenfields or upgrades, adding digitization solutions to existing capacity.
I see North America.
That obviously is our strongest market as being an outsized beneficiary. So automation in general as I said before from a secular standpoint is increasing then.
And the cycle, it's still early in our position in high growth high investment areas of both geography and technology are positive and are what are driving a lot of this outlook.
Excellent. Thank you.
Thanks Brendan.
Your next.
<unk> comes from the line of Steve Tusa with Jpmorgan. Your line is now open.
Hey, guys. Good morning. Thanks.
Hey, Steve Good morning, Steve.
Congrats on good execution here.
The kind of above seasonal so it looks like you guys chewed through a little bit of that backlog at least.
I just wanted to make that clear on the comments you just made.
You are guiding for exit at zero.
I think youll have a headwind if you snap the line today, what's that headwind on Forex I would assume that that would be a headwind for the Isd, yes, Steve we if I snapped a line earlier this week it would be between 1% and 2% negative impact we chose I chose not to be updating because it's volatile and we have enough volatility.
I didn't want to be updating.
For just one component and not updating for all.
So we.
We have FX that size by snap the chalk line right now a little bit worse than our initial guide we had price that is better than our initial guide and we have input costs that are that are higher than our initial guide all in we think that leads to an aggregate, where we think our topline growth and EPS growth is that we see.
Three months ago still make the most sense.
Right right right Okay.
Got it and then how much.
I have like 35 million Bucks for perplex revenues in the quarter and then what.
Our orders for <unk> side.
Is there some sort of.
Deferred revenue kind of booking dynamic there.
Im not a software guy so.
I feel like every time, our company to a software deal there is like a bunch of orders that flow through in the first quarter.
Can you just talk to revenues and orders at flex.
Yes.
Your numbers on flex or just.
In terms of revenue that's exactly exactly where they were orders were substantially higher.
Mike ballpark looking at is about 20% higher than what our revenue was.
Okay.
It's not a huge number though it sounds like.
You didn't rebook anything there.
Eight orders for them.
No no no no no no yes.
Okay, and then just one last one.
On kind of the.
The back half of the year.
And any anything to talk about as far as just to keep in mind for third or fourth third and fourth quarter.
Dynamics.
I mean, the biggest two things, Steve or what I've already talked about it in terms of revenue.
We see continued sequential improvement as we are estimating.
Estimating and <unk>.
Improved access to electronic components as we progress into our second half in terms of margin and profitability.
The single biggest dynamic that's going to be driving the margin up is the flip on price costs from negative to positive in the second half and then also benefiting the second half is the improved leverage with the added sales that we'd be happy to note that.
Steve the biggest dynamics going on in the second half there isn't there isn't done.
Another another big Big thing going on there and I would just say continued very very strong backlog. So just the simple math of what we shipped in what we book indicates the backlog remains an EBIT growth so that that remains healthy.
Awesome. Thanks for all the detail I appreciate it thank you.
Your next question comes from the line of Andy Kaplowitz with Citigroup. Your line is now open.
Hey, good morning, guys.
Andy.
Like you mentioned, China up strong double digits in Q1 in Asia Pacific actually led your global growth I know you still have easy comparisons in Asia Pacific, but I think you've been talking about changing the way you go to market, there and youre, making investments in the region. So as Q1 results is Q1, a result of those efforts and then obviously there seems to be some macro risks in the regions.
Can you give us a little more color into what youre seeing there.
Sure.
Specifically on China.
If we look at the verticals that contributed to that strong double digit growth there was a tire which.
In general of course continues to be a great.
Great vertical and there's a lot of tire activity.
Complementing the EV activity going on in China, and we're a beneficiary of that food and beverage is an area where that worldwide is our single biggest vertical.
And we've had some great.
Recent traction within China, and food and beverage.
Chemical and then mass transit and so these are industries that.
Has generally been pretty good for us in China, and when I talk about new new ways to get to market, it's really complementing our traditional distribution, but we've also given our local leadership.
More empowerment to make investments that they say are appropriate with our relatively lower share in China. We think by doing basic things correctly theres lots of room to run and it's a combination.
A nation of our core products as well as the new ways to win information solutions and connected services and those have really seen is our calling card.
Getting into customers, even when they're installed base might be with competitive product. It's a way for engaging high level decision makers as we bring that new value to them in those companies across food and beverage and life Sciences and EV.
All intensely interested and climbing the productivity productivity curve fast and so thats, where we see particular endorsement of our software, which is a strong contributor in China as well as new disruptive technology like independent cart, which we continue to win some very large.
Orders in China based on independent card, particularly in EV and battery Assembly.
Thanks for that Blake and then Nick I know you didn't change your overall sales growth forecast I mean, if I look at the pieces of the end markets. It looks like he's raised a little bit ecommerce life sciences oil and gas CE lowered chemicals.
Put that all together I think last quarter, you told us that even with supply chain issues.
Still <unk>.
Relatively confident about your range even at the high end does the sort of implicit changes in these in these end markets that you made here. This quarter suggests that you might even have more confidence, especially given the orders that you just recorded in Q1.
Okay.
And we remain confident that we are guiding exactly where we think it will be.
Those small things that you were talking about those are like more on the fringe that we think our guidance is based.
Far less of a view of that.
Man and far more by what we see all of our our ability to be procuring components and.
And that that view has not changed and we.
We continue to think where we are guiding is exactly what we're going to be able to deliver this year.
Thanks, guys.
Thanks, Andy.
Okay.
That concludes today's question and answer session Ms Crackers, I turn the call back to you.
Thanks Aman. Thanks, everyone that concludes today's call. We appreciate your support and look forward to talking to you soon.
Have a great day.
That concludes today's conference call at this time you may disconnect. Thank you.
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