Q3 2022 Rockwell Automation Inc Earnings Call
At this time I would like to turn the call over to <unk> Zellner head of Investor Relations.
<unk>. Please go ahead.
Thanks Rex.
Thank you for joining us for Rockwell automation third quarter fiscal 2022 earnings release conference call.
With me today is Blake Moret, our chairman and CEO and Nick Young our CFO .
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 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 copy of our prepared remarks will also be available on our website at the conclusion of today's call.
Before we get started I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward looking statements.
Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings, so with that I'll hand, it over to Blake.
Thanks, John and good morning, everyone. Thank you for joining us today.
I want to also take this opportunity to congratulate our China on her promotion since our last earnings call.
Let's turn to our third quarter results on slide three.
We had a strong quarter with orders slipped merch margin and profit all at or above our expectations. We successfully navigated supply chain disruptions in a still volatile environment and we saw the positive impact of pricing actions that demonstrate our strong position.
<unk> in the market.
Total orders grew over 17% versus prior year with strong demand in all three business segments.
Our continued order strength reflects the value our customers place on rockwell's differentiated offerings and the increased need for automation solutions, regardless of the current macroeconomic backdrop.
Total revenue of almost $2 billion was up six 5% year over year organic sales came in as expected and grew over 7% versus prior year acquisitions contributed two five points of growth.
Currency translation reduced sales by over 3% driven by continued strengthening of the U S dollar.
While we saw a gradual overall improvement in supply chain through the quarter, our sales volume and mix continued to be impacted by component shortages as we've been discussing for a while now.
Our topline performance both by segment and region was driven by specific component availability in Q3 more than the underlying demand which remains strong.
In the intelligent devices business segment organic sales were up over 2% year over year, but below expectations. This segment was disproportionately impacted by component availability further exacerbated by extended China Covid shutdowns.
Software and control organic sales growth of over 13% versus prior year was above expectations. Our strong performance here reflects both an improvement in the chip supply and some early benefits from the recent resiliency investments say.
Sales of our view, operator interface panels, which we redesigned to optimize our component supply were up almost 60% year over year, our software sales grew double digits versus prior year.
And lifecycle services organic sales increased almost 9% versus the prior year. Despite continued component shortages and a partial shutdown of our Shanghai facility earlier in the quarter.
Within lifecycle services since you had another quarter of strong growth with both orders and sales up over 20% year over year.
Sales in our services business also grew double digits, driven by higher demand for asset management and cyber security.
Lifecycle services book to Bill was 127 in the quarter, reflecting continued strength in our orders.
Information solutions and connected services orders and sales both grew strong double digits in the quarter with particular strength in EMEA software and industrial cyber security sales.
Within information solutions, we had a number of strategic wins this quarter, thanks to our industry, leading portfolio of scalable and flexible software offerings for instance, Eli Lilly and company has chosen Rockwell automation pharmacy suite Mes solution.
As the next generation Mes platform for their drug products.
In addition to our on Prem software wins.
We continue to gain traction with our recent cloud native acquisitions.
One of our flex wins this quarter was with <unk> and Arizona based company focused on electrification of light and medium duty fleet vehicles worldwide.
Our smart manufacturing platform will help this customer's aggressive growth plan with advanced supplier and inventory management improved data visibility and reporting.
We're also happy to report the sale of a plex application that will run natively on Microsoft Azure in Europe , as well as a growing list of wins in food and beverage companies. These are important deal synergies that we are starting to realize.
At fix we continue to see strong double digit sales growth led by both new logo wins and expansion deals.
Our competitive maintenance management wins across many verticals.
Including EV and food and beverage reflect the platform's differentiated AI capabilities and ease of deployment.
Connected services orders and sales were also strong in the quarter, demonstrating customers' increasing reliance on our deep domain expertise cyber security services and 24 by seven remote support, especially as many companies are struggling.
Labor shortages and temporary budget constraints.
In the quarter total AAR are was up almost 60% and organic IRR grew 18%.
Our strong operating performance and focus on price cost execution.
Resulted in exceptional earnings this quarter.
With adjusted EPS growing 15% versus prior year.
Let's now turn to slide four to review key highlights of our Q3 end market performance.
As I mentioned earlier, while we saw a gradual overall improvement and supply chain constraints. This quarter some of our businesses and industry verticals, mainly discrete and the hardware intensive parts of hybrid were disproportionately impacted by the ongoing component supply issues.
And our discrete industries.
Sales were up low single digits.
Within this industry segment automotive sales were up 6% versus prior year.
We continue to see investments into EV transition from both traditional brand owners and EV startups.
With a healthy mix of Greenfield and brownfield activities.
In Q3, we.
We had a strategic greenfield win in Asia.
We are a Chinese automotive company Chery auto.
Jos Rockwell's differentiated mes, Iot and core automation offerings over their traditional European supplier to build a smart plant and increase their speed to market.
In addition to working with leading electric vehicle manufacturers.
We continue to gain share in the EV battery space.
With several competitive wins in the quarter, both in Asia and Europe .
While most of our previous wins in this space, we're in battery Assembly and conveyance.
We're starting to expand our presence in battery sales.
<unk> integrated logics in motion offering were selected by Doer clean technology systems to provide an end to end coding process from powder handling and slurry mixing to coding and drawing.
Semiconductor sales declined 2% versus prior year.
And were significantly impacted by Covid related shutdowns in China.
Despite the near term supply chain challenges impacting its own ecosystem. This industry continues to see strong demand with about 80, Greenfield and 300 brownfield projects announced to date.
In E Commerce and warehouse automation, our sales were down over 15% in the quarter, mainly driven by electronic component shortages and tough prior year comps.
While we are seeing a slowdown in investments from some E. Commerce customers. We continue to work with traditional retailers and grocers, who are investing in new automated infrastructure to gain share in the market.
Turning to our hybrid industry segment.
Sales in this segment grew mid single digits led by growth in life Sciences, and food and beverage.
Food and beverage sales were up mid single digits versus prior year.
While inflation might put some pressure on new expansion investments, we continue to expect especially strong demand in certain markets like agriculture processing.
Where rockwell has high share and a differentiated technology offering.
We saw a number of Capex wins in Latin America, this quarter with one of our food and beverage wins coming from CP Cal co a Brazilian nature based ingredients manufacturer, because rockwell and our plant.
Process control architecture, as our automation partner for the next capacity expansion project.
Life Sciences sales grew over 15% in Q3 with strong year over year growth in medical devices pharma and biotech.
This was another industry, where our differentiated process controller, along with strong network infrastructure and overall project management expertise helped us win a competitive project with Thermo Fisher in their joint venture plant in China.
A combination of industry, leading mes and Iot software and the multi disciplined logics platform for hybrid applications, along with our increasing expertise in biotech and Celgene therapies.
<unk> as well in this fast growing vertical.
Tire was up low single digits in the quarter.
We continue to see increased customer demand for our software and services in this vertical in the quarter. We had our first pollex win entire with pro <unk> entire group a global leader in tire manufacturing headquartered in Italy.
Customer chose our plex Q amass to standardize quality management across its global operations.
Moving to process. This industry segment grew 12% versus prior year with oil and gas mining and metals all growing double digits.
We continue to grow our presence in processed by displacing the traditional dcs players across our oil and gas mining and chemical industries.
Our investments in process control technology, and petrochemical expertise are paying off as demonstrated by our recent wins in North America and Europe .
We also had a strategic multimillion dollar ESG win where Rockwell will be helping one of the most active operators in the Permian basin reduce its greenhouse gas emissions and bring all operated oil and gas assets to net zero by 2050.
Turning now to slide five in our Q3 organic regional sales performance. Once again. These results were heavily impacted by a component availability.
North America organic sales grew by 11% versus the prior year.
Latin America sales increased by over 15%.
EMEA sales were up over 3% and Asia Pacific was down almost 6%.
Let's move to slide six and an update to a new slide we had provided last quarter.
As you can see order cancellations remained very low and are within our historical ranges are strong orders and record backlog of over $5 billion continued to support strong sales in fiscal year 'twenty two and beyond.
As we turn to slide seven let's review highlights for the full year outlook.
Orders are expected to stay strong for the remainder of this fiscal year.
While we continue to expect strong double digit year over year and sequential organic sales growth in Q4, resulting in double digit growth for the full year.
We're reducing the midpoint of our organic growth range to 11%.
Our revised guidance reflects ongoing supply chain volatility in this environment, especially for business operations and suppliers located in Asia the supply.
Electronic components is gradually improving but remains volatile.
Acquisitions are expected to contribute two five points of profitable growth more than offsetting a two point headwind from currency translation.
We continue to expect double digit growth in both core automation as well as information solutions and connected services.
We continue to expect another year of double digit annual recurring revenue growth.
Our organic investments and acquisitions I'll make this revenue stream become a more meaningful contributor to our overall business resilience.
Our additional investments and resiliency actions are progressing well as we develop deeper relationships with key suppliers complete redesign projects and realized price to mitigate inflation.
We expect our margins to expand in Q4 on higher sales and continued price cost execution with.
With only one more quarter to go we have narrowed our adjusted EPS guidance range with a midpoint still at $9 50.
We continue to expect free cash flow conversion of 85% for the full year.
Nick will now add detail to our Q3 results and financial outlook for fiscal 'twenty two Nick.
Thank you Blake and good morning, everyone.
I'll start on slide nine third quarter key financial information.
Third quarter reported sales were up six 5% over last year with organic sales up seven 1% and acquisitions, adding another two five points to total growth.
Foreign currency translation reduced sales by three 1%.
While the U S. Dollar has strengthened against many currencies the strength against the Euro has had the largest impact on rockwell in the quarter.
We saw our organic sales improved through the quarter helped by some easing of supply chain constraints. Following the lifting of COVID-19 restrictions in China.
Segment operating margin was 28% an increase of 90 basis points versus last year.
Mostly due to higher sales and lower incentive compensation.
Actually offset by higher investment spend.
Last quarter, we shared our expectation that price cost with improved significantly in Q3 and that is exactly what happened.
Price in the quarter more than offset our year over year increases in input costs.
Our adjusted EPS in the quarter with $2 66 up 15% from the prior year.
I'll cover our year over year adjusted EPS Bridge on a later slide.
The adjusted effective tax rate for the third quarter was 14, 5% and in line with the prior year. This was better than our expectations due to a favorable return to provision true up.
Free cash flow dollar generation was $327 million in the quarter and down compared to the prior year due to higher working capital primarily in receivables.
A higher percentage of our sales in June .
Then in the prior year and our free cash flow conversion exceeded 100% in the quarter. Despite our increases in working capital.
When additional items not shown on this slide.
We repurchased 860000 shares in the quarter at a cost of $176 million.
On June $31 $3 billion remained available under our repurchase authorization.
Slide 10 provides the sales and margin performance overview of our three operating segments.
We had a good quarter with organic sales up in all three business segments, both year over year and sequentially improving.
Improving sales and our strong operating execution resulted in sequential margin growth of over 500 basis points.
Intelligent devices organic sales were up two 7% in Q3.
This segment had the largest negative impact in the quarter from component availability and extended shutdowns in China.
Compared to last year intelligent devices margins declined 220 basis points to 19, 7%.
Primarily driven by higher investment spend.
Year over year price increases, we're able to neutralize the impact of higher input costs.
Margin in this segment improved sequentially by 510 basis points, driven by positive price costs and higher volume.
Software and control total sales were up 19%, including 13, 4% organic growth versus the prior year.
Strong sales were driven by improved chip supply and benefited from resiliency actions taken earlier in the year.
Segment margins were up 620 basis points compared to last year and up 680 basis points sequentially.
Due to higher sales.
Price cost was positive year over year and sequentially.
Lifecycle services organic sales grew eight 7%.
Led by strong double digit growth in Cynthia.
Demand continues to remain strong across all businesses book to Bill was 127 for Q3.
Segment margin declined 90 basis points compared to the prior year, driven by supply chain constraints and higher investment spend.
Partially offset by higher sales and lower incentive compensation.
Segment margin was up again sequentially on higher sales with gradual improvement in the supply chain. We expect the trend of sequential margin expansion to continue in the coming quarters.
The next slide 11.
Provides the adjusted EPS walk from Q3 fiscal 'twenty, one to Q3 fiscal 'twenty two.
Starting on the left.
CT performance was up about 15%.
Including about 25 from higher sales.
Price cost contributed <unk>.
Strong execution led to about 10 of productivity.
We saw some favorable corporate items about half of which were due to timing between Q3 and Q4.
We also continue to invest in growth and resiliency, which offset the core growth by 35.
In the prior year, we made about 10 of nonrecurring accelerated investments that mostly impacted our software and control business.
Currency negatively impacted our earnings by about 10.
On a year over year basis incentive compensation was about <unk> <unk> tailwind.
This brings us to our total adjusted EPS of $2 66.
Let's move to the next slide 12, our guidance for fiscal 'twenty two.
We are updating our sales guidance to a new range of approximately seven 7% to $7 9 billion in fiscal 'twenty two.
Up 10, five to 12, 5% for the year.
We expect organic sales growth to be in the range of 10% to 12%.
And we expect about two five points of growth coming from acquisitions and currency translation will be a headwind of about two points.
Our sales guidance range reflects the continued volatility we see in the supply chain.
The midpoint of our guidance implies a 9% sequential increase in Q4 total sales driven.
Driven by improved material flow from key suppliers, including those in China.
Further sequential improvement from resiliency actions.
And higher sequential price realization.
We continue to expect full year segment operating margin to be about 20% and unchanged from our prior guide.
We expect our margins to continue to expand in the fourth quarter the.
The margin expansion will come primarily from higher sequential sales and continued positive momentum on price costs.
While price cost will be negative for the full year. It is positive in the second half.
We now expect second half core conversion above 40%.
We expect our full year adjusted effective tax rate to be around 16% and 5%.
And we are narrowing our adjusted EPS guidance range to $9 30.
To $9 70.
With no change to our midpoint of $9 50 from prior guidance.
Finally, we continue to expect full year fiscal 'twenty, two free cash flow conversion of about 85% of adjusted income.
A few additional comments on fiscal 'twenty two guidance.
Corporate and other expense is now projected to be around $110 million.
Net interest expense for fiscal 'twenty, two is now expected to be about $120 million.
We're assuming average diluted shares outstanding of $116 7 million shares.
Finally on capital deployment.
Our capital allocation priorities for this year remain the same including our focus on deleveraging.
As I mentioned earlier, we repurchased about $176 million worth of shares in Q3.
And are now projecting our full year share repurchases to be about $300 million.
Turning now to page 13.
While there is no change to the midpoint of our adjusted EPS guidance, we wanted to show some of the moving pieces within this number starting on the left.
There is a lower contribution due to the lower organic sales guidance.
This is fully offset by improved productivity favorable segment mix and lower corporate expenses.
Currency is an additional headwind of about <unk> <unk>.
More favorable tax rate.
<unk>, which brings us to a midpoint of $9 50.
Although not on this page, we continue to expect our acquisitions, including <unk> to be about neutral this year, including incremental interest expense or a year over year benefit of about <unk> 15.
With that I'll turn it back over to Blake for some closing remarks before we start Q&A Blake Thanks, Nick.
<unk> had a good quarter of growth price realization profitability and investment for the future. We are executing well and I'm proud of how our teams are managing supply chain complexity to serve the needs of our customers and.
In volatile times, our relentless focus on helping customers creates long term differentiation and value.
<unk> will now begin the Q&A session.
We would like to get to as many of you as possible. So please limit yourself to one question and a quick follow up thank you.
Let's take our first question.
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.
Your first question comes from the line of Scott Davis Your line is open.
Good good morning, guys good morning Jana.
Good morning, good morning.
A little bit different tone, this quarter than last quarter, and thats nice to see a bounce back but.
This may be a little hard to answer but you have an order book Thats up about 17% how much of that you don't have to give you an exact number but is price because I know you had some pretty big price increases that were announced is it order of magnitude is half of that order book prices.
Some way to kind of size that.
Hey, Scott.
For the full for the third quarter, we had about three 5% price growth for the total company. That's about half of our total organic growth I think thats, a pretty fair estimate to apply to our order growth as well at three 5% is about.
Of that 17% order growth three 5% of that is coming from price, yes Wow.
Yeah Okay.
Okay, sorry Blake.
Yes, Hey, Scott I was just going to add when we talk about orders.
Just to give some scale to the magnitude of the orders they remain around 45% above pre pandemic level. So in addition to the very large existing backlogs were continuing to add that at a rate above our expectations.
No. That's good to hear and then you gave the example that Cherry win example, Blake, which I thought was interesting.
It is a deal like that priced in U S. Dollars is it priced in local currency I mean, how do you kind of compete against.
Our suite of competitors that have such a big currency advantage.
Maggie obviously with AA.
Hey, Scott most of our transactions in a country like China are priced in in the local currency and that's generally the way we do business when there start to be large movements in FX like what we're seeing there that becomes part of our pricing strategy, we have hedges in place too.
Texas protect earnings in the short term and in the longer term then pricing becomes part of that strategy of how we will adjust pricing in the local currency to be offsetting what we're seeing in terms of FX movements.
Really helpful. All right I'll pass it on good luck. Thank you.
Scott.
Your next question comes from the line of Josh Parker Winski. Your line is open.
Hey, good morning team.
Josh.
So just software and control.
Pretty solid quarter, there I guess that division has been a little bit less impacted by supply chain versus intelligent devices, but I guess, if I think back to your kind of other periods of macro volatility. It just seems to do this every now and then where youll have.
Pretty decently big quarter on margins and revenue.
Lumpy in terms of shipments or avail.
Availability pull forward like you guys had earlier in the year anything you could sort of give us a direction on trend line would be helpful.
Sure Josh.
First of all limited pull through.
Pull forward in that.
We're still looking at.
Large year over year and sequential growth in Q4, I think you can think of this the hardware portion of software and control.
As having less skus.
Then intelligent devices and.
The chip availability was the relatively higher for software and control being able to ship <unk> compact logics and the associated Io. So in the quarter. It was less impacted and again with the kind of backlog that we have and the continuing orders.
We we can ship as much as we have components for across all of the business segments, and we expect that to be the case for quarters to come.
Got it that's helpful. And then just quick follow up on the orders.
Anything that you can kind of break down further in there whether it's any currency headwinds.
I noticed net of cancellations, but any kind of change in that growth. So have cancellation stepped up in.
Project size like are those getting bigger or smaller.
Josh we have been seeing over time, the size of our orders getting larger and that trend continues but in terms of the specifics of your question.
Theres really nothing significant to call out everything is tracking very similar to what we've seen in the past.
Blake mentioned in our prepared comments orders are coming in.
<unk> stronger than now than what we had anticipated for the quarter.
And the FX piece is that does that move around at all.
FX is one of the things come impacting our orders within Europe , but and that's included in what we're seeing for that so.
The euro devalue about 10% and Thats part of what we're seeing in the ordered in the total global orders that we reported in Q3.
Super helpful. Appreciate it best of luck.
Okay.
Your next question comes from the line of Julian Mitchell Your line is open.
Next let's move on.
On to the next one.
Excellent.
Your next question comes from Andy Kaplowitz Your line is open.
Hey, good morning, everyone.
Morning, Andy.
Blake can you elaborate on your comments regarding an improving supply chain.
We see continued improvement in composite component availability throughout the quarter and in July here and I know you mentioned starting to get better maybe give us a little more color around that do you have visibility towards more normalized growth.
Pressured by supply chain as you go into FY 'twenty three.
So A&D.
Look we we continue to see chip constraints being a factor.
Sure.
The near term.
We did see improvement through the quarter.
As Youll recall, we saw.
More severe wave of.
Covid shutdowns in China in April and May.
And we were able to largely recover from that as said chips.
Began flowing a little bit more strongly in the back half of the quarter.
And we continue to see gradual improvement in Q4 and into our fiscal year 'twenty three.
It remains a volatile situation.
You can't count the chips until they show up on you receive in dock, but we do see a gradual improvement that continues into the.
Early part of Q4.
And thanks for that Blake, and then Blake or Nick I know you don't want to talk too much about 23%, but when you think about incremental margin. Obviously, it's ticked up here in the second half as you said Nick as you look at next year, maybe talk about the puts and takes and remind us about investments.
Incentive comp as we were in the second half.
At this point and then obviously growth is taking off we usually your guidance of 30% to 35% of the progress that higher could you do higher incremental margins given the easy comps at least in the first half of the year.
Yes so.
So some of the puts and takes to be thinking about we're thinking about for fiscal year 'twenty three.
As Blake just said supply chain component availability, that's going to continue to be probably our most important factor in particular around round growth. Some of the things that will be impacting our our margin and what we're thinking about now is aspects like price cost where as I've said.
Earlier that was negative in the first half of the year shifting to positive in the second half we expect that to continue to be positive for us.
Issues like inflation issues like FX, and what that can be Julien too to our profit and margin.
The level of investment spend.
Another factor, we're thinking about <unk>.
We also have a number of new product launches and how that will be impacting us in fiscal year 'twenty three.
So all of those things in the <unk>.
Other one we right now we are paying a bonus this year that is below our normal planned level. We would expect that to go back to the planned level in fiscal year 'twenty three all of those things in combination we think the our financial framework around core conversion of 30% to 35%.
Remains a good starting point to think about 23.
And profit and margin expansion for us.
Thanks for that Nick.
Your next question comes from the line.
Julian Mitchell your line is open.
Thanks, very much and good morning.
Maybe.
Nick I know those are an asset.
What about next year sort of EBIT bridge moving parts, but if we just focus on slide four sorry, slide 11, and you look at those main points surround.
Price cost investment spends productivity and incentive comp maybe those items in particular, when we're thinking about the fourth quarter and the year on year impact anything major to call out versus what you just saw in the third quarter I'm, assuming price cost is a bigger tailwind than that five.
Figure.
But anything perhaps dimension on the investment spends or productivity or the incentive comp for Q4.
And in Q4, a couple of things that are changing I had mentioned in my prepared remarks.
Corporate items relative to a benefit of four.
For Q3, we expect some of that is timing and will come back in Q4 that will flip from being a benefit to two <unk>.
A headwind in Q4 versus what we were originally estimating price causes you estimated will continue to improve for us.
Volume will continue to be a positive as we're expecting even higher volume growth in Q4 than in Q.
And then in Q3.
And then overall investment spend we expect that to be pretty flat between Q3, and Q4, not really big chain change happening there and we do expect productivity to continue to be a benefit to us in Q and Q4 as well.
That's very helpful. Thank you, Nick and then maybe sort of a broader question the the software and control operating margins very volatile, particularly from the outside and.
And maybe the inside as well quite hard to predict on a sort of three to six six months view it looks like for the sort of second fiscal half overall, you have a low thirties sort of software and control operating margin.
Is that a reasonable sort of run rate looking into 2003 in the medium term or are there any sort of exceptional mixed tailwind or something that you would call out that are bolstering that software and control margin right now yes.
Yes, so a few things to keep in mind when you're looking at the margins that we're we've been experiencing and experiencing right now now.
The higher margin that we had in Q3 are higher sales volume was by far the driving factor on that.
In the first half of the year it was being negatively impacted by a lower volume growth.
It was also being impacted by negative price cost, which is now flipping to positive.
We also in the first half of the year, where we had the lion's share of our flex integration expenses and while we're still investing there.
That's going to be at a lower level. So the 30 plus percent.
That we're experiencing I don't see that as something being off track of what to be expecting going forward.
From software and control.
That's very helpful. Thank you.
Your next question comes from the line of Noah Kaye your.
Line is open.
Thanks for taking the question Blake.
Blake obviously, it looks like we're going to have elevated backlogs here for a period of time given the continued order strength, but you mentioned E. Commerce is one area is starting to slow down.
There are pockets, where you're starting to see some softening in a possibly in the longer cycle.
Tight parts of the business.
I cant all be green lights at this point so.
Curious for where you think we may see some softness.
As we head into 2023, and the order environment, and where you think you've got some cushion there in terms of the mix of products and service since Youre offering.
Yes, Thanks Noah.
I think e-commerce in particular.
<unk> has been the outlier that we've seen.
So far in that day, but they've taken a pause in some of the expansion within that vertical we also talk about warehouse automation.
Outside of e-commerce, and they're continuing to look at productivity opportunities.
With in some cases, reducing labor requirements.
More efficient handling of <unk>.
Product at the front end and that end of their process and of their of their stores. So that continues to be pretty strong with some nice recent nice recent wins there.
I would say in general the closer to the consumer that you are those would be the areas that we are probably watching the most closely.
We do continue to see strong industrial.
Production figures and as you know over a long period of time IP is what rockwell's performance topline performance is most correlated to and we still see.
A positive IP number in our served markets, especially in the U S. So.
EV continued strong we've talked before that.
It's hard to imagine that either the established brand owners or the startups are going to take a pause and trying to convert their fleet capacity.
To EEP theyre going to have to continue because they got fear of missing out.
And being able to get in early two to get some experience and to get some volume there semiconductor.
We see a lot of in process.
Activity, regardless of what happens from a legislative standpoint.
Pharmaceutical food and beverage, it's just hard to bed.
Too much against these verticals, but again E. Commerce. So we have seen some softening and in general the closer to the consumer you are may be recreational vehicles, but that's obviously, it's not a big part of our overall auto number there.
Yes, and maybe just to follow up on this.
Don't know if the current environment FX, how customers think about on prem versus cloud native but but what are you seeing in terms of customer preferences.
Does this environment create a little bit more momentum for our cloud native and are you seeing kind of relatively stronger orders trends on some of their cloud native offerings will talk about that.
Balance share durations no. It's good question I mean.
Yes.
Some of the advantages of our cloud native deployment is that you don't have to.
Continue to invest or to create.
A large <unk>.
On Prem infrastructure to either.
Acquire the assets.
Servers, and such and the.
<unk>.
You can deploy a cloud native solution much quicker and Thats why.
Offerings like flex and fixed had been so popular among small and medium sized businesses that just don't have that money to invest in those areas and they want to get up and running quick they are on a kind of a quicker time constant there and some of the bigger companies are taking that play.
And looking at how they can apply that as well and I think thats part of the reason that we're seeing plex win in some of the verticals that we're part of the synergy that we had baked in to baked into the model, where we see food and beverage.
Tire these new verticals that they just didn't have the resources to address and we're seeing some wins there and similarly with fix some of the wins that we've seen in Asia in India for instance.
I think part of that where customers want it now and they don't want to tap to wait to build all the infrastructure.
So it's part of the reason that we have.
A parallel offering we have a really strong on prem offering with our production center based EMEA aspect continues to grow well and then flex some fixed we're doing what we expected them to do for us.
Okay. Thanks for the color appreciate it.
Sure.
Your next question comes from the line of Steve Tusa. Your line is open.
Hi, good morning.
Dave Martin and Steve.
So what are you guys seeing.
The.
In the process industries, just as a start orders there seem to be holding up pretty well.
Orders are going quite well in process and I would say.
Orders and shipments for that matter.
If you noticed that we gave a little bit more in the way of.
Customer wins this quarter that wasn't a coincidence.
I've seen the number of.
Bigger wins tick up a bit in process and I think some of the investments that we've made over the last really five or six years, beginning with Maverick and expertise.
Obviously, the joint venture with Schlumberger <unk> co.
Calypso that expertise along with the steady drumbeat of new technology introductions are helping to increase the win rate and as Nick mentioned, increasing the order size from a macro standpoint oil and gas spending, particularly in areas of efficiency, which is really where we are.
Sure.
Centered even more than the capex side of things.
Is helpful, but chemical had I think their best quarter ever for Us Matt.
Metals is still a very big automation market.
Mining.
Out there I don't think mining has hit its full full stride, but we are seeing activity, particularly in battery materials. So a lot of wins in lithium.
Over the recent past.
Hey, just a follow up on the.
On the I guess, the essence see margin and then the cash flow.
Hi, Nick what what what do you think is kind of your long term cash conversion.
This year, 85%.
A little low relative to history. It actually I mean, your fourth quarter looks like a pretty big step up to get to that number.
To begin with but even putting that aside maybe.
Maybe you could just comment on that what what how much confidence you guys have in that fourth quarter ramp because it's a big number but then beyond that what is the normal cash conversion and does that lower cash conversion have anything to do with.
Growing software revenue.
Maybe a little more lumpy versus the actual cash.
Yes, thanks for that question Steve.
On the cash flow conversion side, 100% as are what I consider our normal run rate.
In fiscal year 'twenty, two we are seeing.
Noticeable increases in our working capital with some of the supply chain.
Constraints that we're seeing we see places where we have been building inventory.
And.
Until the biggest constraint on that is causing our free cash flow projection for the full year to be 85% is working capital I don't think Thats a permanent thing I think that we will start to see some normalcy impacted.
We expect our working capital need to be in total dollars to be coming down in the fourth quarter and that's why we're expecting AE.
Hi.
<unk> pretty noticeable free cash flow generation in Q4 to benefit it will be benefited by higher higher profits in Q4, but.
Even higher conversion as we bring down some of those working capital balances it won't get to normal in 'twenty, two but in 'twenty three 'twenty four we see our working capital the types of terms, we have getting back closer to our to our normal range, which is why I say, 100% is about right.
You mentioned a little at the beginning on on software and control margin. It was there something in particular, you're wanting to talk about on that Steve.
Hopped on a little late but the margin there was obviously very strong.
Is there something.
What was driving that outside of maybe just was it just the.
Devices.
Within that business the price cost there or is there something else going on with the with the more software oriented revenue streams, yes.
First of all it's not it has not been in.
Negatively impacted by software.
That's a.
A nice growing part of the total software.
Portfolio part of that business is portfolio. The three big things that were driving up the margin.
This quarter, one is the higher sales.
This is a business that as our sales go up we clearly see the margin benefit impacting that.
We were also benefited.
By price cost flipping from negative in the first half of the year Devine.
Positive in the in the third quarter, it will become even more positive in the fourth quarter.
And then finally, maybe mismatched say that earlier earlier, we were investing more in our flex integration and while we are still investing.
The level of investment in flex integration is as planned coming down and that is another thing thats, helping our margins go up in software and control.
Got it great. Thanks, a lot for color.
Yes.
Your next question comes from the line.
I'm Andrew <unk> Your line is open.
Hi, yes, good morning.
Hey, Andrew I and good morning.
Just a question in terms of as we think about supply chain for our chips.
As far as you can tell where are we in terms of adding capacity for what you need right because based on talking to chip brokers sort of lower end stuff that industrial views are still in very short supply and my understanding is that the big hope if capacity additions.
In North America at the same time, we're hearing that.
Not only you guys. Congrats shapes, what guys like Lam research kind of get chips to provide the equipment. So where are we in terms of the scope and timing of capacity additions in North America over the next 12 to 18 months that would be irrelevant for Rockwell. Thank you.
Yes, it's a good question Andrew and.
Sure.
<unk> supports the thesis of <unk>.
Gradually improving supply. So obviously, it's important for us to continue to deepen relationships with our existing suppliers and the ones that are going to be most important to us going forward and one for whom industrial is an important part of their business models and as we talk to them specifically.
<unk>.
The process nodes and to increase supply that's going to be important to us we see some of that capacity starting to come online. The end of this calendar year. So no Ti has a couple of plants coming on line analog devices.
Intel.
With their tower acquisition recently and some of their new investment. So we look closely at the new capacity and while a lot of it is in the.
The leading edge nodes.
Our handsets in communications and so on for the suppliers that are most important to us they are making investments in.
The fabs that are going to produce the wafers that will ultimately result in the chipset are most important to us. So when we go through our analysis product by product and shift by shift within those products. We look at are we getting increased allocation or redesign efforts going.
To have an impact such as with a few terminals that I've talked about for the last couple of quarters and we have some more of those projects that are coming to fruition here in the next few months and then the capacity additions that are coming from either our existing suppliers or in some cases, new suppliers that.
We're adding to the list of qualified vendors there.
Thank you and then just a follow up question also to keep on chips and others.
A lot of news on incremental.
Semiconductor capacity coming in to the U S specific client.
Samsung.
Have filed.
With the state of Texas.
The spending seems to be.
Very very material I think 200 billion is what the number is used.
The pushback, we get on the thesis that this is important for you guys is that historically.
Semiconductor end market just doesn't represent a large vertical for you yet the spending number seems to be very material very material impact on overall capex in the U S. How should we think about opportunity in semiconductors for Rockwell and are you having converse.
Patients with the folks who are ending is that would be material to our numbers over the next year or two.
Yes, I would characterize the opportunity is growing both in terms of the base of total announced capex as well as our ability to serve so traditionally the majority of our business in semiconductors spin the facilities management control systems, the <unk> systems, which are.
Controlling the temperature and the cleanliness and the humidity.
The air and the environment, particularly in clean rooms, and we've always had some capability in that space turns out that Maverick is really good at that as well and so we.
Considerably increased our expertise in that area. There are drives that go into those air handling systems and we are beginning to win a larger portion.
Of the drives in addition to the software and the engineering and those FMC ups systems and those are multimillion dollar system. So we're one of few of those here recently that are that are noteworthy.
Independent cart for.
Material handling.
It is also a technology that we didn't traditionally have an SaaS technology gets qualified for a clean room environment. We're.
We're seeing increased opportunities there cyber security and so on.
Obviously these fabs are very concerned about being resilient in that dimension as well and we've got the best offering to go in on the <unk>.
Production floor. So we're seeing a lot of meaningful wins in cyber security as well. So those are just a few of the areas that we're providing value not only for the direct our fabs himself, but also for the capital equipment suppliers.
Each remained good customers of ours.
And as more incremental capacity is sort of shifts to North America versus what we've seen Asia.
Does it create opportunities in adjacencies longer term that you have not been present, just to grow organically or through M&A.
Yes for sure because you got ecosystem, it's one thing to announce a fab and for Intel or Ti micron or Samsung to build their facility, but they need a village right they need an ecosystem and each of these areas for the year.
Chemicals that are need the substrates of lead frames all of those things and those are all opportunities for us, particularly in the U S, where we have our own.
Sure well, mainly the strongest support.
<unk> installed base.
Very much.
Your final question comes from the line of Rob Mason Youre line is open.
Hi, yes, good morning.
I had a question about the the order pace and what we've been seeing there it sounds like.
Orders will still stay solid in the fourth quarter, maybe up a little bit.
Previously Blake.
<unk> talked about some order pull forwards.
Heads I'm just curious how that dynamic is continuing to play out in the order rate if youre still seeing that if it's backed off.
Accelerated you talked about larger order sizes, whether that plays into that dynamic.
That you spoke to.
Yes, I think theres still.
Some of what we've talked about in the past where because of the lead times are still long or longer than we or our customers would like people are placing orders to cover that spread between now and when they actually expect to get the material side and we see that most market.
With the machinery builders, they have a certain amount of machines and in the past they might have.
All he placed orders to cover X months.
That.
Those bookings that they have in their backlog and their needs for our automation equipment and they may have doubled that.
At this point to be able to cover that but thats the machine builders and I think while we continued to see some of that we hope to see over the coming quarters. Those lead times poll in and we've seen some green shoots where we're seeing some improvements and in the lead times in fact want some competitive.
Business, because we can deliver faster than competitors in certain areas and as we see those lead times reduce naturally we will see the orders from some of those machine builders for instance, reduce a bit. They also have big backlogs and so theyre looking to get that material, but as shown.
Those continued low cancellation rates and as I mentioned earlier.
Customers want the equipment they need not can tell you from the conversations that we continue to add with the leadership of our customers. They continue to want that material.
Just as fast as they can so that would be.
The most tangible element of a pull forward, but we don't see people.
Placing orders in the last quarter of the current quarter to avoid price increases and things like that so I would say our order development continues to be healthy.
Very good just one quick follow up for Nick just around price cost it sounds like we will continue to get.
Some incremental benefit in the fourth quarter is there a way to think about the year over year benefit.
Do we top out in the fourth quarter and start to moderate as we go into 'twenty. Three are you still expecting that year over year benefit.
To rise as you go into 'twenty three.
So the.
In the fourth quarter will be the highest benefit of all the quarters Rob.
While im not guiding for 'twenty three yet the first half of 'twenty three will be getting the benefit of the fact that we don't anticipate it to be negative.
As it was in the first half of 'twenty. Two so just the absence of that negative we see we think creates some year on year benefit in the first half of fiscal year, 'twenty, three and not yet guiding for the full year of 23, what we're expecting for the net price cost.
Understood. Thank you.
There are no further questions at this time, Ms Zellner I turn the call back over to you. Thanks.
Okay that concludes today's call. Thank you for joining us.
That concludes today's conference call at this time you may disconnect. Thank you.
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