Q2 2022 Rockwell Automation Inc Earnings Call
31% down from the prior year as we said last quarter, we expect Q2 to be the most impacted by negative price cost as.
As the benefits from prior price actions will be more heavily weighted to the second half of fiscal year, 'twenty, two and into fiscal year 'twenty three.
I'll cover a year over year adjusted EPS Bridge on a later slide.
The adjusted effective tax rate for the second quarter was 16% and in line with the prior year.
Free cash flow was $46 million in the quarter and down compared to the prior year due to lower pretax income.
And higher income tax payments.
Income tax payments were in line with our expectations and higher year over year due to payments made in the current quarter in the U S related to fiscal year 'twenty, one discrete tax transactions.
Free cash flow results were lower than expectations, driven by lower pretax income and.
And higher working capital as we continue to build our sub assemblies for more rapid conversion into finished goods as we receive critical components.
Turning to page 10.
This is a new slide we added this quarter.
This slide shows the actual impact for quarter, one and quarter two and what we included in our projections for the second half for both price and input costs first.
First on pricing.
From our three price increases since last summer, we expect those actions to provide about $400 million of cost recovery once fully implemented.
Less than 10% of this benefit was realized in the first half of fiscal year 'twenty two.
The ramp to achieve the pricing impact occurs because much of our pricing is set by pricing agreements, we have with our customers.
Once we announce a price increase these customers will not see the increases until their current annual agreements renew.
We are implementing actions to accelerate realization on future price increases.
The price growth projected here is only from previously announced price increases and factors in higher inflationary costs not yet seen.
If inflation forecast for fiscal 'twenty three worse since more than expected, we will take further price actions to offset these costs.
On input costs, we did see a higher year over year and sequential increase in input costs in Q2.
These increases were driven by increased logistics cost and a higher level of broker buys.
We anticipate these elevated costs to continue increasing for the balance of the year.
For fiscal 'twenty, two we expect input costs to increase over $200 million.
Primarily due to higher electronic component costs and higher freight.
On a net price cost basis, we are negative in the first half and positive in the second half.
We now expect full year price cost to be slightly negative in fiscal 'twenty two.
Slide 11 provides the sales and margin performance overview of our three operating segments.
Total reported sales were up mid to high single digits in both our software and control and lifecycle services segments.
Intelligent devices was down 5% as this segment was impacted more by supply chain constraints.
Intelligent devices organic sales were down 3% in Q2 and up 10% in the first half.
Compared to last year intelligent devices margins declined 920 basis points to 14, 6% driven by a negative price cost.
And lower volumes.
This segment accounted for the vast majority of the Miss to our internal expectations in both sales and margins.
We expect the second half margins in this segment to expand by 200 to 300 basis points sequentially on higher volumes and higher price from earlier implemented price actions.
Software and control organic sales were up less than one point and 4% in the first half.
Segment margins were up sequentially for this segment and declined 520 basis points compared to last year.
Mostly due to higher year over year investment spend.
Negative price cost and the impact of acquisition integration costs.
We expect the second half margins in this segment to expand by over 600 basis points sequentially on higher sales and higher priced from implemented price actions.
Lifecycle services grew organic sales by 11%.
Including more than 20% growth from Cynthia.
Demand remained strong across all businesses and end markets book to Bill was 134 for Q2 <unk>.
Segment margin was up sequentially for this segment and declined 170 basis points compared to the prior year driven by lower labor utilization caused by supply chain constraints.
Partially offset by higher sales volume and lower incentive compensation.
Margin is expected to grow through the balance of the year with strong sales growth and a higher margin backlog.
The next slide 12 provides the adjusted EPS walk from Q2 fiscal 'twenty, one to Q2 fiscal 'twenty two starting on the left.
Core performance was down about 75 on a one 3% organic sales increase.
As we continue to make growth related investments. We also were impacted by the timing of merit increases and lower labor utilization.
As previously discussed price cost had a negative 25 impact in the quarter.
Given our updated guidance, we lowered our estimate for fiscal year 'twenty to incentive compensation.
On a year over year basis incentive compensation was about <unk> 25 tailwind.
This brings us to our total EPS of $1 66.
Let's move on to the next slide 13 guidance for fiscal 'twenty two.
We are updating our sales guidance to a new range of approximately seven $8 billion to $8 billion in fiscal 'twenty two up.
Up 11% to 15% for the year.
We expect organic sales growth to be in the range of 10% to 14% we.
We expect currency translation to be a headwind of one five points and about two five points of growth coming from acquisitions.
Our wider sales guidance range reflects the volatility we see in the components supply and uncertainty of the full impacts of Covid related shutdowns in China.
As Blake mentioned earlier, we are forecasting an increase in sales in the second half in line with improved material flow from key suppliers.
From a calendar <unk> perspective, we are forecasting improved sequential performance over the balance of the year with a heavier weighting in Q4, driven by the resiliency actions Blake mentioned as well as the timing from higher price realization.
We expect full year segment operating margin to be about 20%.
This is a 150 basis point reduction from our prior guidance and is the result of our volume decrease.
The impact from higher input costs since our January guidance is expected to be more than offset with reduced spending levels, including lower incentive compensation.
We will continue to prioritize our growth and results resiliency investments.
We expect second half margins of around 22% up four percentage points from first half levels.
Primarily driven from higher sales volume and a 250 basis point improvement from price cost.
The first half impact of price cost on margins on a year over year basis was dilutive by approximately 250 basis points and the margin impact in the second half from price cost will be accretive by over 100 basis points.
We expect margins to improve sequentially, 3% to 400 basis points in the third quarter and another 4% to 500 basis points in the fourth quarter.
We now expect full year core earnings conversion of between 20% and 25% with second half core conversion of approximately 40%.
We continue to expect the full year adjusted effective tax rate to be around 17%, we do not anticipate any material discrete items to impact tax in fiscal 'twenty two.
We are decreasing our adjusted EPS guidance range to $9 20 to $9 80.
At the midpoint of the range. This is up about one point compared to the prior year.
Finally, we expect free cash.
We expect full year fiscal 'twenty, two free cash flow conversion of about 85% of adjusted income.
The decrease from our prior guide of 90% is driven by higher working capital where.
Where we continue to have high inventory levels in order to support our increased demand.
A few additional comments on fiscal 'twenty two guidance.
Corporate and other expense is projected around $120 million net interest expense for fiscal 'twenty, two is expected to be about $115 million.
We're assuming average diluted shares outstanding of about 117 million shares.
Finally on capital deployment, our capital allocation priorities for this year remain the same including our focus on deleveraging.
As Blake mentioned earlier, the board authorized another $1 billion of share repurchases.
Board and management are committed to using our capital deployment framework to drive long term shareholder owner value, including opportunities for increased share repurchases.
Turning now to page 14.
This slide bridges, the midpoint of our January adjusted EPS guidance range to the midpoint of our new range.
Starting on to the midpoint of our new guidance starting on the left.
There is a lower contribution from core operating performance due to the lower organic sales guidance, partially offset by lower spend.
We now expect price cost to be negative for the full year or a <unk> 25 negative impact versus our January guidance.
Currency is expected to be a <unk> 20 headwind.
Given the decrease in our forecasted performance there is about a 35 impact from a projected lower bonus expense.
Which brings the new midpoint of the guidance range to $9 50.
To be about neutral this year, including incremental interest expense.
Thanks, Nick.
This was a tough quarter, but we are aggressively working to temper the impact of persistence and volatile supply chain shortages.
We have provided guidance that reflects a detailed view of expected component availability and actions. We are taking to increase the flow of product and solutions to the market.
We are beginning to see increases in some of the semiconductors. We use we continue to qualify new sources and important new capacity is being built for the technology, we use in many of our products.
For example, the incremental fab capacity a major supplier is planning to bring online will directly benefit a number of our product families in early 2023.
While we do not anticipate supply chain challenges to <unk>, we do expect gradual sequential improvement over the coming quarters.
Want to thank our suppliers for their recognition of the critical role we play in U S manufacturing and industrial applications around the world.
We are on track with our manufacturing capacity expansion to ensure that internal equipment and processes to support our revenue growth in fiscal year 'twenty two and beyond.
Despite these challenges we are also on offense, we continue to introduce new differentiated technology and services, including the January opening of our Israeli cyber security Operation Center to support our worldwide customers.
Later this year, we will release, New factory tour, operator interface and design software at our annual automation fair.
We have reduced spending plans in response to the higher cost, but we are prioritizing programs that will generate new revenue in the coming years, and we are increasing investments that strengthen our resiliency.
We continue to focus on accelerating profitable growth within the long term financial framework that has served us and our investors well.
We complement internal investment with a disciplined capital allocation that is focused on creating value.
The capabilities and dedication of our people continue to set us apart.
From our manufacturing associates and plants around the world to our salespeople working together with supply chain professionals to meet our customers most critical needs to our development engineers balancing the simultaneous demands are building component resiliency and launching new products to the teams who are <unk>.
<unk> on keeping our people safe and productive we're confident that our extra effort will be remembered as we help manufacturers speed Clos protect and move the world.
Jessica we will now begin the Q&A session.
Okay.
Okay.
Operator, you may begin Q&A. If you can all please just I'll refrain from asking more than one question at a time. We appreciate it go ahead Rob.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Scott Davis from Melius Research. Your line is open.
Good good good morning, everybody.
Good morning, Bob.
Yeah.
Im not going to fixate on the details of the quarter as much as is talk about what do you. What do you think your customers do if we were to run into a recession is it is it a different playbook. This time, because they're so far behind on digital transformation.
So those projects continue to get delayed today.
Today's stopped and then restart down there I mean, how does it how do you guys think about how your customers act or respond if.
Particularly on the consumer side, if we do hit a recession.
Yes, Scott I'll make some comments.
Nick may add to that as well, but.
We look at an industry by industry view of what the.
Stated investments are in these different industries, and what's likely to happen, which of these are more at risk.
If we if we see the.
The effects of inflation continuing to weigh on the on the economy.
And some of these macroeconomic events that have happened here in the last few months.
Certain of the big multi year investments, we think are going to be resilient through that I'll start with semiconductor with several hundred billion dollars of announced capacity expansions by these these fabs and backend suppliers I don't think that those are.
Going to be thrown off track.
Bye bye.
By the economic conditions in inflation, because there's just such a need for that in the world. As we are all seeing so I think.
Investments in semiconductor in electric vehicle.
As every company regardless of the current economic conditions is moving to produce vehicles that the world is looking for life Sciences. The continued demands for vaccines and other medicines.
The digital transformation in food and beverage activities as people are trying to be more competitive and save cost. So as you look across these oil and gas the high cost of oil and the need to.
Pump more to be more efficient I think theres certain underlying secular trends that are driving that to be sure in the cycle.
Seeing the impact of chip shortages and huge inflationary pressures, but I think these multi year capacity.
Expansion projects, along with the enormous backlog that we and others have built up are going to create a little different dynamic.
And typical cycle cyclical approaches and then finally, we are happy with our position.
Working with these customers who are we.
Really involved in the most important capacity expansion. So I think there's a good portion of the investment Scott that had been announced that are going to continue on because they have to meet the kind of demand that we're seeing in the world.
Okay. Good color I'll stick to one question. Thank you.
Thanks, guys.
Our next question comes from the line of Andrew <unk> from Bank of America. Your line is open.
Hey, good morning.
And Andrew Mortimer.
Could you just talk about how it did sort of.
Component availability progress throughout the quarter, and what kind of visibility on your supply chain.
You have in terms of variability to add capacity, because we're sort of getting into the chicken and egg thing right. If you guys can ship your controllers to your customers and I wonder how they can add capacity if you can't provide them with controllers. So.
That's my question. Thanks, a lot.
Sure Andrew I mean, it is an interesting dynamic there.
Circularity of what we're providing to capital equipment suppliers and semiconductor and directly to some of the big fab.
Owners.
We use data to some extent by the availability of our equipment. So we are absolutely seeing how critical we are in these operations I don't know that the general availability of <unk>.
Existing suppliers changed a whole lot from month to month as we went through the quarter. Although we did see the early benefits of some of the reengineering that we have done with our products I mentioned the panel view and I think it's a good example, because we now have redundant bills of material.
The new and the old series panel view that give us already.
Significantly increased flow and we'd see other reengineering efforts that will start coming online in Q3 and Q4.
We have done a detailed.
Product by product analysis of all the chips that go into those various products as you can imagine with the breadth of Skus we offer.
As a highly diverse supplier base to this and that gives us the confidence in the.
The guidance going forward, which do reflect more of our suppliers increasing their basic flow with incremental capacity expansions. Obviously it takes a while for the brand new Greenfield fabs to come online, but between now and then we are seeing increased flow.
<unk> for the reasons that I mentioned in my script, Nick Hey, Andrew specifically to the first part of your question.
One month to month during the quarter.
If we saw some improvements in availability as the quarter went on with March being noticeably our largest month of the quarter of shipments out we were able to do.
Thanks, so much good luck.
Thank you.
Your next question comes from the line of Jeff Sprague from vertical research. Your line is open.
Your next question comes from Jeff Sprague from vertical research your line is open.
Thank you good morning.
I just wanted.
Hey, good morning.
Just on the price and price cost.
So youre talking about the 17%.
This increase $400 billion. It's obviously, 6% are you, suggesting you expect.
Some significant additional price or is that kind of a normal leakage between kind of headline price announcements and what is realized.
And also.
Nick you might've been going back and forth between sequential and year over year, but.
I thought you said.
Cost is only going to be $200 million for the year, maybe that was just an incremental number but can you clarify that and maybe just clarify the whole kind.
Price cost equation for the year.
Great Yes, thanks, Jeff.
From the three price increases that we've put into place.
This impact the pricing that we have on our on our products. There are parts of our business such as lifecycle services that those general price increases don't apply to and those are those are done on a contracting.
And project by project basis, so that.
17% and the ultimate yield of $400 million.
That applies to our our price increases on our on our products that we're selling.
And that $400 million that will progress through the next through fiscal year, 'twenty, two and 23 and by the late 'twenty three that fiscal year 'twenty three that's when we expect to be at the fully implemented at that annualized $400 million of pricing.
Kris.
As far as the cost.
The impact for the full fiscal year 'twenty two versus.
The input costs that we had in fiscal year 'twenty. One that's what we're seeing year over year is going to be a $200 million increase now we expect that to continue to go up from the those input cost to continue to go up that's why we put the price increases in that we've had.
In anticipation of further cost increases in the second half of 'twenty, two and into 'twenty three if it turns out that our projections that we underestimated the amount of input cost inflation. We are prepared to act with another price increase if needed.
But right now we believe we have some cushion in 'twenty three a little bit of cushion there.
Okay, great. Thank you.
Yes.
Your next question comes from the line of Josh <unk> from Morgan Stanley . Your line is open.
Hi, good morning, guys.
Josh.
So just on your comment earlier Blake East expect expect to scale.
Order and revenue environment to sort of converge over the next year or so.
Sort of implies a $9 billion on the table before too long I guess, what's your sense on the margin on that.
And we've talked a little bit about price cost, but yes, im wondering sort of what's the mix or kind of pricing level in that backlog and the confidence that stuff starts to to come out that you'll you'll be pleased with the margins on that and I guess the context for that is.
I think last quarter, you talked about some pretty decent pricing power, maybe still got a little surprised on price cost. This quarter. So just trying to see how how reprice of all that backlog is today.
Yes, the majority or the majority of the backlog is in the.
Our higher margin product as it as opposed to solution. So the general quality of the backlog with respect to the margin is good mix kind of talked about the increasing.
Benefits of price increases that we have already implemented and as customer agreements.
Come due for renewal over the coming quarters, we will see a steadily mounting benefit from those price increases and as both of US have said, we're prepared to do more necessary.
So I think the margin is good.
And as we see the growth we also see in terms of absorption and so on.
There is a natural impact that expands margins there we remain committed to the long term framework that we've talked about for the last few years in terms of conversion of incremental revenue and where we're sizing the business to continue to show that commitment.
For good conversion and as Nick said, the second half of the year, we think will demonstrate that.
Great. Thanks.
Thanks, Josh.
Your next question comes from the line of Julian Mitchell from Barclays. Your line is open.
Hi, good morning.
That's very clear guidance on the sort of the profit walk on price and costs.
Wanted to go to circle back to.
Two other pieces in that bridge sort of incentive compensation and then investment spends.
Maybe help us understand exactly what that new incentive comp tailwind is pre.
Pre tax dollars and also the investment spend guided headwind data I think it was 200 million headwind before for the year.
What's the new number and then how much of those two factors boost second half profits just trying to get to that kind of walk to those big margin increases in the back half any color around that those two items. Please.
Julian in terms of our.
Incentive comp that I highlighted are what we often call our bonus.
Started the year with a plan that that would be $130 million given our reduced guidance expectation for the full year, we've reduced that from 130 down to 80 that.
Of that $50 million reduction.
From our original plan is evenly balanced between first half and second half in terms of investment spend.
Youre correct, we started the year, saying, we expect investments spend to grow up approximately $200 million.
We now expect that we've scaled that spending down.
Now instead of increasing 200 to only increase approximately $100 million and that will be part of the benefit that we expect in margin in the second half of the year.
Very helpful. Thank you.
Mhm.
Your next question comes from the line of Brendan <unk> from Alliance Bernstein. Your line is open.
Good morning, all thanks for taking my question.
As you look at the if you look at the last quarter here over the last couple of quarters. How are you thinking about your share position in.
In North America, specifically and if you have a comment perhaps in other regions are there areas, where you believe you're taking share from competitors or sub market segments, where a bit more concerned.
Brendan.
Time as volatile as this were looking over a period of multiple quarters as you suggest and so that first half 9% shipments.
That is something that.
It feels pretty good but even more importantly, it's.
It's the kind of orders and the continued low cancellation rates that we're seeing in every region and as we talked about North America, we see strong orders growth and we expect over the full year in North America to be our fastest growing region.
A lot of anecdotes of where we have.
<unk>, new business from new customers in different spots around the world.
And we're proud of those but I don't think its.
Too early to call some major new share.
Jane movement in those in those areas. So we're continuing to bring new orders and do our best to shipping it out.
And then we will take a look at.
Where we are but in terms of the order flow not only in North America, but across the world in Asia in Europe with both our core.
Automation offerings as well as the new digital transformation solutions I am very pleased with the new business that we're winning from competitively held accounts.
Thank you.
Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.
Like could you give us a little more color into what youre seeing in lifecycle services and process solutions in General I think you mentioned the $1 34 book to Bill in the segment, which is good but it seems like a lot of the growth is concentrated in upstream oil and gas how much leverage do you have to an uptick in midstream investment are you.
Seeing movement in downstream projects at this point and in mining or is it really just completing component issues that are holding you back in those segments.
Sure so in.
In oil and gas our focus is on upstream and midstream I would say there is a fair bit of activity, particularly at our <unk> joint venture.
In terminals and certainly a lot of people are talking about LNG, where we have some good solutions there throughout our offering, especially in our power offering bare. So midstream we are seeing good activity and good funnel.
And this goes back to my previous comment with Brandon, We're seeing some places where we're adding some of our new offerings on.
On top of the core automation, so, adding the software or adding some of the.
The higher level of services on there as well again through <unk>, but they are all about.
Adding automation closed loop control, even autonomous solutions in these operations. So it's really about the upstream and midstream and the downstream.
Refinery control is not a target application for us, but we're doing a lot of the balance of plant as well as the safety systems and we did see some nice wins in the quarter with our safety offering as well.
In mining I think you asked about mining and we are seeing some some increased activity there.
Particularly in Latin America, where we're seeing some of our strongest installed base and we're seeing some of that work come to life as well.
Thanks Blake.
Yes. Thank you.
Your next question comes from the line of Nigel Coe from Wolfe Research. Your line is open.
Thanks, Good morning.
So just as we get the you gave us some elements of the second half ramp back.
Nick I was kind of a couple of things number one given that the bulk of your sales in North America go through distribution.
It's it takes so long to get pricing through the channel just want to understand I think 85, 9% of your sales in North America go through channels I, just want to understand that dynamic.
It seems like your implied full queue is $323 30 at the midpoint can you just confirm that's how you see the ramp up commensurate with that because that would be helpful. Thanks.
Nigel I'll take the first part of that.
What you've calculated for the type of earnings in <unk>.
Q4, that's in the zone of what we're thinking too you've interpreted that correctly.
In terms of the.
Elements that are driving our margin expansion in the second half of the year.
There's several things first and the biggest is the volume.
Versus the first half of the year and versus last year. That's the biggest the flip we see on price costs moving to the positive is the second piece and then the lower the lowering of our spend is is the third piece now in particular your question about price and the timing it takes for us to be getting the price.
That sub.
That's really a function of what I talked about in my opening remarks about we haven't many of our customers on annual agreements and when we announced the price increase thank.
They do not see that price increase even if it's going through distribution they do not see that price increase.
Their exit annual agreement renews, so that can create noticeable lag from the time, we announced until we're actually realizing that that increase that that Nigel is the primary thing even for things through distribution that caused that lag yes.
I could add to that Nick.
Nick and I, both talked about actions too.
Speed the realization of price and.
We are increasing the number of agreements that will not have to wait for that full.
Our lag period until annual agreements renew at customers, we've done that in certain places I wish we had that in place a year ago, but it is going to benefit us going forward as we as we make those changes.
Great. Thank you.
And your final question comes from the line of Noah Kaye from Oppenheimer <unk> Company. Your line is open.
Okay.
Thanks for taking the question.
In past you've provided some metrics around maybe some advanced ordering.
Talking about orders for the year approaching $10 billion.
So how much of this do you think is really pull forward and I guess the second part of it is frankly, if you didn't have these component shortages, how much higher with the revenue be for the year.
Yes, the vast vast majority of the orders that we are receiving are for.
For <unk>.
Current needs for customers.
We have line of sight, our distributors have line of sight to the projects and the machines. They are trying to ship I've been on the call with <unk>.
Several dozen customers as we've talked about what their needs are and their plans to expand and the impact on us with that so the vast majority as we've been talking about is that underlying demand further backed up by the very low continuing cancellation rates there.
And I think that that continues as we as we go forward.
A significant amount of that.
That backlog with with no component shortages would be shipping so the order shipment levels would be much greater but.
But we also do see the impacts of long lead times on the orders.
As our customers' MRP systems are automatically.
Increasing the amount of orders that they're putting in but it's still it represents underlying demand.
Okay.
Okay.
And thank you for your questions I will now turn the call back over to MS. <unk> for some closing remarks.
Thanks, Bob that concludes today's call. So thank you all for joining us.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yes.
[music].
Okay.