Q4 2022 Rockwell Automation Inc Earnings Call

Thank you for holding and welcome to Rockwell automation <unk> quarterly conference call.

I need to remind everyone that todays conference call is being recorded.

During the call we will open up the lines for questions. If you have a question at that time. Please press star one.

At this time I'd like to turn the call over to Jonathan Kellner head of Investor Relations Ms down there. Please go ahead.

Thank you Julien good morning, Thank you for joining us for Rockwell automation fourth quarter fiscal 2022 earnings release conference call with.

With me today is Blake Moret, our chairman and CEO and against that our CFO .

Our results were released earlier this morning, and the press release and charts have been posted to our website.

Both the press release and charts include in our call today will 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, but they're like 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.

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.

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, Hi, Jana and good morning, everyone. Thank you for joining us today.

Let's turn to our fourth quarter results on slide three.

We had a great finish to the fiscal year and delivered very strong operating performance.

I'm proud of how our teams navigated this challenging year with continued supply chain volatility significant inflation and currency headwinds.

Our Q4 results were in line with our expectations with organic sales and earnings both growing double digits year over year and sequentially.

Orders came in as expected in the quarter a record backlog along with very low order cancellation rates reflect the continued solid underlying demand from our customers across many industries and regions.

Total revenue of over $2 1 billion was up 17, 6% year over year.

Organic sales grew 25% versus prior year in line with our expectations.

Acquisitions contributed almost two points of growth this quarter.

Currency translation reduced sales by about 5% driven by continued strengthening of the U S dollar.

As expected, we continued to see a gradual stabilization of global supply chain.

Similar to last quarter. The split Q4 shipments by business segment and region was driven by access to specific electronic components.

In the intelligent devices business segment organic sales grew over 16% versus prior year with growth in all regions.

While growth in this segment for the quarter was once again disproportionately impacted by component availability, we were able to mitigate these supply issues with the benefits from our resiliency actions we.

We see continued market need for our intelligent devices from power Flex drive to our motion technology to our best in class safety solutions, our independent cart technology business had a record year with both orders and sales growing over 35% year over year.

Software and control organic sales growth of over 32% versus prior year was above expectations.

Strong double digit growth in view in logics, which driven by an improving components supply and our redesign investments.

Lifecycle services organic sales were up 16% year over year.

Book to Bill in this segment was one point or two very good for our fourth quarter.

Information solutions and connected services had another quarter of double digit growth in both orders and sales.

Here are a couple of wins and ISC is to highlight the continued value of our recent acquisitions and new releases in these areas.

One of our flex wins this quarter was with Futaba North America, a member of the Toyota business network.

<unk> has selected flex smart manufacturing platform for its ERP mes quality management and production monitoring or.

Our state of the art solution provides real time inventory management complex planning and full visibility into this customer's manufacturing operations.

Another example of how our newer offerings are adding new value to our traditional customers is our win with Kraft Heinz This quarter are plex platform, along with Calypsos digital design and implementation services are helping craft meet its productivity yield and quality goals.

<unk>.

We also continue to broaden our customer base with our fix cloud native maintenance managements discipline in the quarter fixed was chosen by Barrett steel the Uk's largest independent steel stockholder to help reduce their unplanned downtime with a solution that could be easily scale.

Across 28 sites.

Connected services sales were also strong in the quarter with double digit growth in digital projects and cyber security services.

In the quarter.

<unk> grew 14%, bringing our IRR to over 8% of total revenue.

Segment margin of over 23% was up 540 basis points year over year, reflecting another quarter of strong execution.

Adjusted EPS grew 30% year over year.

Earlier this week, we completed the acquisition of the Danish company cubic.

A worldwide leader in modular systems for electrical panels.

This acquisition will help expand the global reach for our intelligent devices and will bring new customers and partners, including a broader market access in renewable energy and data centers.

Let's now turn to slide four to review key highlights of our Q4 end market performance.

All three industry segments grew double digits. This quarter driven by continued gradual improvement in the availability of electronic components.

And our discrete industries sales were up almost 20%.

Within discrete automotive sales were up 25% versus prior year.

We had numerous wins this quarter with our customers continuing to invest in their global operations, whether it's starting up a new factory securing their network infrastructure or upgrading existing facilities with cloud native software.

One of our key EV wins this quarter was with Hyundai motors for their U S. Greenfield Mega site in Bryan County, Georgia.

Andi Motors has selected Rockwell as their controls partner for press body paint and General Assembly.

Semiconductor sales grew 30% year over year with several global wins this quarter.

In addition to securing a sizable turnkey project in Asia with our proven facilities monitoring system we.

We had an important win here in the U S to provide flexible wafer transfers as part of this customer's automated material handling system, our independent cart technology is being leveraged at scale to support this customer's labor productivity and capacity goals.

In E Commerce and warehouse automation, our sales were up high single digits in the quarter.

Even with a slowdown in new E Commerce fulfillment center investment retailers continue to adopt our solutions for greater warehouse efficiency and throughput.

Moving to our hybrid industry segment sales in this segment grew over 20% led by growth in food and beverage life Sciences and <unk> industrial.

Food and beverage sales were up 20% versus prior year.

Similar similar to last quarter, we continue to see a good pipeline of Greenfield and brownfield projects at our key customers.

In the quarter, we won several multi site deals with some of the largest food and beverage companies with a healthy mix of intelligent devices software and digital consulting and implementation services.

Life Sciences sales grew over 35% in the quarter.

We continued customer investments in software cyber security and modular process control.

Tire was up 20% versus prior year led by growth at our end user customers. This is another vertical where we are seeing an increase in greenfield projects in all regions.

Turning to process. This industry segment grew mid teens versus prior year with growth in metals chemicals and oil and gas one.

One of the wins in chemicals this quarter was with Bora Lyondellbasell petrochemical the joint venture between Lyondellbasell and bore enterprise group.

The customer chose our advanced analytics solution to help improve product quality and increased production capacity at their new polymer production plant in China.

Turning now to slide five in our Q4 organic regional sales performance North America organic sales grew by 20% versus the prior year.

Latin America sales were also up 20%.

EMEA sales grew over 24% and Asia Pacific was up almost 18%.

Let's move to slide six an update to our orders and backlog performance this fiscal year.

Order cancellations continued to stay within our historical low single digit range.

Our orders of over $10 billion and record backlog of over $5 billion. This year set the stage for another year of strong sales growth in fiscal year 'twenty three.

As we turn to slide seven let's review highlights of fiscal 'twenty two.

We had another year of record orders with total orders of over $10 billion growing 20% versus prior year.

Ported and organic sales grew 11% and impressive performance in light of all the challenges of the year.

Information solutions and connected services continue to meaningfully contribute to our growth with over $800 million in sales growing double digits.

<unk> is also growing double digits and now accounts for more than 8% of our total revenue.

Adjusted EPS was up 1% versus prior year, excluding last year's onetime items adjusted EPS was up 11%.

Free cash flow conversion of 61% was driven by higher working capital Nick will cover this in more detail later.

The investments we've made this year have strengthened the resiliency of our business model and position us for sustained growth in fiscal year 'twenty three and beyond.

Let's now move to slide eight fiscal 2023 outlook.

With the size of our record backlog.

Our outlook for fiscal 2023 is predicated on the availability of components gear.

Given continued supply chain volatility, we think a conservative approach is appropriate.

Our fiscal 'twenty three guidance projects total reported sales growth of nine 5%.

Organic sales growth of 11% at the midpoint assumes continued supply chain stabilization with four points of growth coming from price and seven points coming from volume.

We expect acquisitions to contribute a point of profitable growth and currency to be a headwind of about two five points.

<unk> is expected to have another year of double digit growth.

We are projecting segment margin to expand by 60 basis points year over year adjusted.

Adjusted EPS is expected to grow 12% versus prior year.

And we target generation of over $1 $1 billion of free cash flow next year with a return to a more normalized conversion of 95%.

Let me turn it over to Nick to provide more detail on our Q4 performance and financial outlook for fiscal 'twenty three Nic.

Thank you Blake and good morning, everyone.

I'll start on slide nine fourth quarter key financial information.

Fourth quarter reported sales were up 17, 6% over last year.

Q4, organic sales were up 25% and acquisitions contributed one nine points to total growth.

Currency translation decreased sales by four eight points.

Segment operating margin expanded to 23, 3% and was in line with our expectations.

540 basis point increase was driven by higher sales and positive price cost, partially offset by noted the negative impact from currency.

Corporate and other expense was $35 million and in line with the prior year.

Adjusted EPS of $3 and <unk> was in line with our guidance and grew 30% 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 fourth quarter was 17, 8% a.

The year over year increase was related to the cumulative impact of several one time discrete items recognized in the prior year.

Free cash flow was $359 million and was up $200 million over the prior year driven by higher pre tax income.

Working capital on a currency neutral basis grew 10% sequentially versus our plans for a 10% decline.

Our planned inventory reductions did not materialize in the quarter due to the continued build of raw material and work in process waiting on critical components.

The actions, we put in place to right size inventory are taking longer to implement in the current supply chain environment.

Our inventory days on hand at the end of the current year were close to 130 days versus a pre pandemic average of 90 to 100 days.

One additional item not shown on the slide.

We repurchased approximately 300000 shares in the quarter at a cost of $76 million for the full year, our share repurchases totaled $301 million in line with our July guidance.

On September 3rd year, $1 $3 billion remained available under our repurchase authorization.

Slide 10 provides the sales and margin performance overview of our three operating segments.

Total and organic sales grew double digits across all three segments with software and control growing over 30% year over year.

Backlog for all three segments grew sequentially and was up over 75% year over year.

Segment margins for the intelligent devices segment expanded to 22, 3% on higher sales and positive price cost, partially offset by the negative impact from currency.

Compared to last year software and control margins were up over 10 percentage points.

Driven by higher sales and positive price cost, partially offset by negative currency impacts.

Lifecycle services segment margin was 10, 7% and increased 260 basis points versus prior year benefiting from higher sales booked.

Book to Bill in the quarter was 1.0 to.

Okay.

The next slide 11.

Provides the adjusted EPS walk from Q4 fiscal 'twenty, one to Q4 fiscal 'twenty two.

Core performance was up a $1 15.

On a 25% organic sales increase.

Approx approximately 10 were related to nonrecurring accelerated investments that were made in the prior year.

These investments were mostly in our software and controls segment.

The impact of currency was a 25 reduction in EPS, which was about 10 worse than our expectations, reflecting the continued strengthening of the U S dollar throughout the quarter.

Incentive compensation was a <unk> <unk> benefit.

As previously noted our higher adjusted effective tax rate was a <unk> 60 headwind due to prior year comps.

Acquisitions, including the impact of interest added 15.

Primarily related to the prior year Plex deal fees.

A reduction in outstanding shares added about a nickel.

Slide 12 provides a walk from our Q4 mid pointed in our July guidance to our actual Q4 adjusted EPS results.

Other than currency sales and profits in the quarter played out in line with our guidance.

Currency impact on sales was about $25 million worse than we expected and a dime worse on EPS beat.

The impact from currency on EPS was offset by slightly lower incentive compensation and a more favorable adjusted tax rate.

Strong organic sales growth and good execution delivered over 23% operating margin in the quarter.

Slide 13 provides key financial information for the full year fiscal 'twenty two.

Reported sales grew 10, 9% to seven 8 billion.

Including over two points coming from acquisitions.

Currency negatively impacted sales by approximately $200 million or two seven points org.

Organic sales were up over 11% with growth balanced across all regions and business segments.

Full year segment margin remained at about 20%.

The benefit from higher volumes and lower incentive compensation was fully offset by higher wages and labor inefficiencies in our projects and in our plants caused by supply chain constraints.

Margins were also negatively impacted by negative price costs, primarily in the first half of the year.

We increased our growth investments by double digits. This year with a big focus on key product launches new digital capabilities.

Increased sales force investment.

Plant capacity expansion.

Corporate and other was down $16 million, mostly related to acquisition costs associated with duplex acquisition in the prior year.

Adjusted EPS was up 1%.

A detailed year over year adjusted EPS walk can be found in the appendix for your reference.

Excluding the impact of the tax rate in the prior year, one time items, which included a favorable legal settlement and one time accelerated investments.

Our adjusted EPS was up 11%.

As discussed earlier free cash flow performance was below our expectations with free cash flow conversion of 61%.

The $460 million decrease.

And free cash flow was driven by a 50% increase in working capital.

On a currency neutral basis as well as the payment of the fiscal year 'twenty one bonus in fiscal year 'twenty two.

There was no bonus payments made in fiscal year 'twenty one.

Working capital as a percent of sales was 16% compared to 12% a year earlier.

Return on invested capital was 15, 2% for fiscal year 'twenty two and.

<unk> 16 points worse than the prior year, primarily related to higher invested capital and lower pre tax GAAP income driven by a mark to market adjustments made on our DTC investment in both years.

For the year, we deployed about $900 million of capital.

Towards dividends share repurchases and inorganic investments in fiscal year 'twenty two.

We also paid down debt by about $150 million.

Our capital structure and liquidity remains strong.

Before I cover fiscal year 'twenty three guidance, let's turn to page 14.

In fiscal year 'twenty, two our backlog grew by over 75% year over year, including strong double digit growth in each segment.

Pre pandemic, we had about one month or less of the following year's revenue in the backlog for software and control and intelligent devices.

Our backlog now represents over 50% of of our fiscal year 'twenty three sales guide for both of these segments.

This unprecedented backlog coverage adds to our confidence in our revenue outlook.

Our backlog.

Also includes the benefits of price increases that were implemented throughout fiscal year 'twenty two.

Let's move on to the next slide 15 guidance for fiscal year 'twenty three.

We are expecting sales of about $8 5 billion in fiscal 'twenty three.

95% at the midpoint of the range.

We expect organic sales growth to be in a range of 9% to 13% and 11% at the midpoint of our range.

This outlook includes our current backlog levels are.

Our latest assumptions on supply chain stabilization as well as continued price growth momentum.

We expect full year segment operating margins to be about 25%.

At the midpoint, our guidance assumes full year core convert earnings conversion of between 30% and 35%.

I'll cover a few more details on this on the next slides.

We expect the full year adjusted effective tax rate will be around 18%.

We do not anticipate any material discrete items to impact our tax rate in fiscal 'twenty three.

Our adjusted EPS guidance is $10 20 to $11.

This compares to fiscal 'twenty, two adjusted EPS of $9 49.

At the midpoint of the range. This represents 12% adjusted EPS growth.

I will cover a year over year adjusted EPS walk on a later slide.

We expect full year fiscal 'twenty three free cash flow conversion of about 95% of adjusted net income.

This revenue this reflects a $190 million of capital expenditures.

We are planning for a reduction in our working capital days with a focus on inventory days on hand.

Our working capital is targeted to be about 15% of sales.

Still above our historic amount of around 12%.

Is the return to pre pandemic supplier lead times is slow.

Finally, our projections include additional income tax payments of around $100 million.

Related to the change in U S tax law that no longer allows for the immediate expensing of R&D.

A few additional comments on fiscal 'twenty three guidance.

Corporate and other expense is expected to be around $120 million net.

Net interest expense for fiscal 'twenty, three is expected to be around $120 million.

And finally, we're assuming average diluted shares outstanding of 115 1 million shares.

Let's turn to slide 16.

Given the continued supply chain volatility and many moving pieces, we wanted to provide a slide that lays out the tailwind and headwinds that are included in our fiscal year 'twenty three guidance.

From a topline perspective.

Our 11% organic sales growth is supported by our higher backlog.

This includes about 7% from higher volumes due to general supply chain stabilization low cancellation rates and resiliency benefits coming from our redesign efforts done in fiscal 'twenty, two and continuing in fiscal 'twenty three.

About 4% is coming from price growth, mostly tied to price actions that went into effect in fiscal 'twenty two.

We also have factor again about 1% or inorganic growth for our recently completed acquisition of cubic.

While the supply chain shows some signs of stabilization.

In Q4, there continues to be volatility along with dynamic.

A dynamic macro environment.

Macro economic environment, including the unfavorable impact of currency.

All of these factors has informed our sales guidance and range.

On adjusted EPS, We expect margin expansion from increased volume and positive price growth.

The net favorable impact of price cost on margins is about 100 basis points.

We also will benefit from a higher discount rate favorably impacting our pension expense and we'll see about a <unk> 15 benefit from share repurchases.

We continue to make investments in and in attracting and retaining key talent as well as restoring our bonus payout back to 100%.

Combined these two items are around a 150 basis point headwind to our margins.

While we do expect a positive price cost for the year. We are also factoring in continued inflation.

Primarily in electronic components.

We expect our margins to be negatively impacted by unfavorable mix and currency.

Combined these two items will be a negative impact of around 150 basis points.

We are expecting an adjusted effective tax rate of 18% or about a <unk> 20 headwind.

The next slide 17 provides the adjusted EPS walk from fiscal 'twenty two to fiscal 'twenty three guidance at the midpoint for your reference and which I spoke to on the previous slide.

From a calendar <unk> nation viewpoint.

We expect our second and third quarters to have the highest sales growth rates for the year with each up mid to high teens year over year.

We expect Q1 and Q4 to be in the single digit growth range.

Following the first quarter, we expect sequential sales to improve over the balance of the year.

We expect segment margins and adjusted EPS to decline year over year in Q1.

We see segment margins in the mid teens for Q1, which is factored into our full year view of 25%.

In Q1, we are projecting a year over year margin decrease.

Increases in spend unfavorable mix.

And currency, partially offset by positive price cost.

We are seeing improved margins improved sequentially. Following Q1, driven by higher volumes and continued positive price cost.

Moving on to the next slide 18, I'll make a few comments on our capital deployment framework.

Our long term capital deployment priorities remain the same our first priority is organic growth.

After that we focused capital deployment on inorganic activities.

Then we focus on capital returns to shareholders through our dividend and then share repurchases.

In addition to our organic and inorganic investments our capital deployment plans for fiscal 'twenty. Three include a focus on delevering.

Dividends of about $540 million.

Share repurchases of between 200 $300 million.

With that I'll turn it back over to Blake for some closing remarks before we start Q&A.

Thanks, Nick as we look to 2023, we are confident in our ability to execute our strategy.

Our record backlog underlying customer demand and a more resilient operating model set the stage for a year of double digit sales and earnings growth.

As you've heard today, we're continuing to invest for our future, including investing in attracting and retaining key talent.

I would like to thank our people for their relentless commitment to solving the immediate needs of our customers, while focusing on continued innovation and investment for the future.

We're excited to share some of these innovations with you at our Investor day in Chicago During automation Fair later this month.

We will be introducing an industry first cloud native programming application for logics, our new operator interface package, new Io for process industries on machine motor control and a host of other differentiated offerings that make this time a historic moment in rockwell's.

Journey.

John 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.

Julien, let's take our first question.

Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again.

Our first question comes from Scott Davis from Melius Research. Please go ahead. Your line is open.

Hey, good morning, guys.

Hey, good morning Jana.

Good morning.

Thanks for the detail, but can you give us a sense of.

Inflection points in end markets things that youre expecting to get.

Perhaps meaningfully better or meaningfully worse than your 23 guide.

So.

Scott just working through the different industry.

Industry segments.

We talk about continued investment within the discrete industry segment, and EV and battery I mentioned, the <unk> win great win for us with the Greenfield and we continued to see both the established brand owners as well as the startups increased capacity in their EV fleets because they have.

<unk> II, otherwise, they're going to lose share and theyre not going to be ready to meet growing consumer demand. There. So we see that continuing.

We continue to see a semiconductor move.

Moving forward and even with.

Sure.

<unk>.

A decrease in demand in the consumer markets. The trends remain that people are going to try to make.

Every product that they produce smarter and theres going to continue to be growth in semiconductor.

In consumer and certainly in the industrial markets that we participate in in automotive and so on.

So we can see continued investment there and.

As we talked about a little bit we're playing an expanded role in semiconductor production, most specifically referenced by that.

Material handling that wafer handling win.

We talked about on the call.

We see.

Warehouse automation, continuing I don't see a.

An immediate reacceleration in e-commerce, but for retailers wanting to be more efficient in back of store and then their own warehouses. We continued to see good business there going forward into fiscal 'twenty three.

And.

In the hybrid industry segment, the food and beverage continues a lot of that activity.

Apart from a few of the Greenfields that were participating in is actually productivity and resilience plays within existing facilities. So.

This is one of the best areas for our cyber security.

<unk> said the services that we're providing in assessing and Remediated ing in monitoring these facilities is particularly attractive to a lot of these <unk>.

In beverage and consumer packaged goods companies.

Pharmaceuticals, we continue to see the trends towards personalized medicine.

Continuing on and within the hybrid industry segment eco industrial with renewables.

And energy management water treatment that continues to be strong I think with.

Good secular tailwind and then in process oil and gas.

We continue to see double digit growth ahead for the <unk> joint venture.

Obviously theres a lot of interest in the U S expanding our ability to provide energy.

Both for our own domestic needs as well as potentially more export.

And along with traditional fossil fuels and helping them with their energy transition plans and all of them of course have those plans.

Renewables as well and we've talked.

Before about customers like first solar.

Our continuing to build out their capabilities in renewables and we're playing a strong role in that so when we look at these verticals, we continue to see strength even in the face of.

What are certainly some macro economic headwinds.

Good answer Blake or get their answer when you get into the detail of auto when you think about the spend higher spend in EV batteries is there a.

A certain negative offset and ice or is there.

Some pent up demand I suppose just from the Covid lockdowns as such in that.

That part of the World, where it's still needs to be some money spent.

Some color there would be helpful. Thanks, Scott.

Scott I think the brand owners are going to continue to focus on there.

Profit makers right they've got their own sources of profit that are funding. These new ventures, and so when you think of the trucks and the.

Bigger vehicles, the luxury vehicles that are providing.

Providing an outsized percentage of the profit theyre going to be working to keep those areas strong through this there are probably going to be very judicious when it comes to.

Model changeovers, and things like that but in terms of keeping those plants up and running.

That's a good read for us with all of the installed base that we have.

Okay I'll pass it on thank you and best of luck.

Thanks Scott.

Our next question comes from Andrew <unk> from Bank of America. Please go ahead. Your line is open.

Hi can you hear me.

We can yes Andrea.

Excellent.

Can you just talk about baby.

Any onetime items.

That's you got to shift from third quarter that youre not getting to ship in the first quarter.

Other than normal seasonality of price cost.

Any specific market or geography that was particularly strong in the quarter that sort of leading to bear conservative portrait test on mix in revenue in Q1. Thank you.

Yes, the biggest swing, we're going to see Andrew is in our software software and control.

<unk>, we're in the our fourth quarter, we saw.

Good availability of components.

That we're benefiting our results in the fourth quarter as we work with our suppliers there.

We are seeing a decline in our software and control in the first quarter as we were expected the specific components that we.

That will be during part of the first quarter that will be an even shorter supply and thats part of what we're causing what we're guiding in our in our in our statements about the first quarter.

This is really coming from our increased.

As you can imagine Andrew throughout the year, we will become even tighter engaged with our component suppliers to make sure we're making the right plans and making the right promises to our customers and with this we could see that there is a couple of components that are going to be impacting us in partway through first quarter.

Nick just to add to that Andrew.

The granularity of our analysis and out of our key suppliers I should add continues to improve and we think that that had.

A bearing on Q3 and Q4 coming in as we expected in terms of the component supply working with these suppliers. We did identify a constraint in ship supply that will disproportionately affect software and control for a portion of Q1.

The suppliers that we're working with have a high say do ratio.

They have characterized the issue we understand it we're working closely with them.

But that's embedded in the Q1 imply.

Implied guide.

Alright, Gotcha, just hung our stand in terms of your backlog as you look.

Enter 2023.

What percent of your revenue is underwritten at this point by the existing backlog and how does it compare to sort of a normal year end. Thanks, so much.

Yes so.

Nick will add some additional details to this but we have about 60% of the full year in backlog tip.

Typically we have about a month.

Most of our products are delivered off of a distributor shelf or very quickly from one of our factories.

Either drop shipped or through the distributor and so having well over half of the year.

Shipments in the guidance in backlog is absolutely unprecedented then you see the slide that we posted to kind of show the development of that across all three of our business segments.

Guidance, Yes, sorry next year, yes, Andrew I don't really have anything to add to that that.

Those.

Comments about less than a month and a greater than nine greater than half of the year. That's really focused on our software and control an intelligent devices I would call our lifecycle services a more normal it's slightly elevated backlog, but thats a more normal type backlog. It's the other two segments that have the extended.

The amount of backlog.

So it's just a really ability to ship instigated factor that.

That is correct.

Thank you.

Our next question comes from Jeff Sprague from vertical research. Please go ahead. Your line is open hi.

Thank you good morning, everyone.

Hi, Jeff Hi.

I just wanted to try to deconstruct the grid I'm sorry.

Bridge, a little bit more if we could.

In particular, just thinking about price cost right.

I think you talked about 100 basis point tailwind there Nick.

I guess, the math I'm doing here is 4% prices kind of like over $300 million box right. So thats like two bucks a share so to get price cost down to call. It roughly a buck that we'd be talking about cost being about half of what prices.

So that gets me to like $150 million benefit on price costs, or maybe 200 basis points.

Do you agree with that math, but I'd just love some more color on what's going on in price cost and mix.

Now the really frame that number up a little bit more precisely yes.

Yes.

Most most of your math makes sense and aligns with how we're thinking about it we are expecting.

Input cost.

Inflation too.

Q in 'twenty, three and that's reflected in that again about half of what we're seeing a price. That's that's that's it.

<unk> accurate read that.

That you are making Jeff.

As far as the.

Where that that inflation that we're expecting we're expecting all or virtually all of it in.

In electronic components, where we have been seeing that continuing to go up and we're projecting that to continue to go up in fiscal year 'twenty three things like logistics, we have seen some benefits more recently, but where we're calling that closer to flat for next year, because while we are seeing some rate decreases were also anticipating some.

Extra fuel cost that will largely offset that on the logistics side. So in terms of the math on it I think the only thing I would point out is that.

Price not only affects cei.

Numerator in that equation. It also affects the denominator as well so adjusting both your the income benefit but also the impact it has on revenue that's what I, that's where I get to the 100 basis point impact on margin.

Great. Thanks for that and then.

Just a little bit more on Q1.

Pretty clear on the answer to Andrew's question about supply availability, but maybe just give us a little color on the <unk>.

On the cadence of investment spending it always seems to be a bit of a parlor game every year figuring out.

How thats progressing over the year it sounds like it's heavier in Q1, and then tapers off but can you.

Give us a little bit more color on how to think about that.

Our investment spend now and you got to realize Jeff This is coming off.

Near where we increased our investment spend by.

10% or a little over that.

And now we are planning in our plans this year about a 5% increase on top of that so that brings us to the.

The cadence throughout the year I don't see any big significant change in the cadence when I was talking about the movement of spend.

That's really more a statement on Q1 of last year to Q1 of fiscal year 'twenty three that that that will be going up sequentially from Q4 to Q1, I don't see our investment spend changing very much that are that will stay at a pretty consistent level.

Great. Thanks, I'll pass it on.

Our next question comes from Josh <unk> from Morgan Stanley . Please go ahead. Your line is open.

Hi, good morning, all.

Hey, Josh.

I guess first question on backlog conversion, you sort of touched on a little bit of it but any sort of explicit view on whether or not you guys will be working down backlog or any view on how order rates kind of progressed throughout the year like is that something that youre planning on dipping into as part of that <unk>.

<unk> growth or is the expectation.

That order rates kind of stay in this ZIP code and you kind of ended up kind of flattish on the backlog situation I know, it's not normal guidance item, but we're kind of in an unusual point in time.

Yes for sure.

You start by saying, even even with orders and shipments converging a bit in Q4, we still built backlog in Q4, and so we continue to expect significant backlog as we exit fiscal year 'twenty three.

To continue to provide orders information through the year, we think it's an important point, but as we've been saying and as we're now seeing as lead times in certain areas.

I will start coming down in our levels of customer service are increasing we will see those orders and those shipments converge, but they remain they remained well above pre pandemic order rates net.

Yes, yes.

I don't think I have much to add to what Blake said there we.

<unk>.

Okay.

I think particularly in the second half of the year, if we started to see some <unk>.

Some reduction in the backlog.

Driven by reductions in our lead times, we would see that is healthy.

Got it that's helpful. And then just on the incremental margins I think longer term targeting something a little bit higher than sort of a reference point last year.

Spec those to accelerate I guess sort of the input cost environment in some of the the one accumulates around supply chain.

But on the investment side, I guess, what changed or what are you guys seeing to accelerate that a.

A little further here like is there a specific market or channel shortfall or what exactly should we kind of anchor to US is the driver of maybe that that's slightly higher number.

The 5% increase that we're talking about in fiscal 'twenty three I just wanted to make sure I'm answering the right question.

Yes, so our I guess more broadly whats driving the incrementals apart from the things that are kind of beyond your control.

Well first on the investment spend that's that I would put in a very normal range of growth for us from a historic perspective and that it's the typical things that we.

That we've been investing and we're investing in product development, we are investing in our SaaS capabilities. Some of our enterprise Digitization, we continue invest in our sales force.

And as well as we've been doing some investment in plant capacity expansion and we see that continuing continuing to go. We're also investing in our own talent and the compensation that we are providing for the talent that's all part of.

That roughly 5% increase in 23 now.

One of the big things, we have as I said earlier that we have a core conversion that are in the 30% to 35% range. That's in line with our our financial framework that we've laid out one of the bigger moving items and that is just the restoration of our bonus that.

That we had a noticeably less than planned bonus in fiscal year 'twenty two.

In this guide we're planning for that to go back to our 100% level and our core conversion. If we were to normalize for that would be at 40%.

Yes.

Add a little bit more.

Touched on some of the new product introductions.

We're going to be bringing out and that really are creating new streams of value for customers and investors for that matter.

At automation fair, we're going to be introducing a cloud native programming package for logic, there's going to be an industry first for a major program will controller line. It's a big deal. It wind general availability went GA a few days ago and this is the <unk>.

<unk> of a whole new level of value for our customers for many many years to come.

A new operator interface package that came to us.

Began really with our acquisition of offset it was.

Extra benefit in addition to the hardware that we have from awesome, that's going to be at automation fair our brand new line of process.

No.

Specifically for process industries, a major step in.

The areas that we've been talking about for a while now to add new process functionality to logics control systems on machine motion control with kinetics and power Flex. These are things that customers have been asking for for years and we're coming out.

Now with these items and it's the beginning of these new revenue stream streams in areas like cloud Native software one of the most important things you get is continued innovation and releases to the market with on Prem software, you're often bound by annual or semi annual releases and while we'll continue.

To do that with our strong on Prem offering continuing to innovate at a faster pace with these new cloud native offerings is a whole new source of value for us and so some of that is embedded with those investment spending increases along with the go to market to make sure that we're.

Getting the word out and where we are in front of the customers we need to be.

Got it that's helpful. Thanks, guys.

Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.

Hi, good morning.

I just wanted to circle back maybe to some of the comments on the first.

Fiscal quarter.

So I think you talked about 15%.

Segment margins down from I guess, 23% sequentially in Q4.

And you mentioned mix a couple of times. So is the point there that the software and control margins are down.

Already heavily versus that kind of a point.

Im wide average and then.

Right in thinking it's around sort of 180 190 of EPS in fiscal Q1, Theres nothing odd happening below the line or anything like that just wanted to clarify that a little bit on mix in the EPS.

Yeah, Julian the biggest thing I'm talking about when I talk about mix is exactly what you referenced of our software and control. It was a noticeable help to us in Q4 with the 30% plus growth there.

And it will become a headwind to lessen in the first quarter.

We expect it to be growing below the rest of the company average so that that swing there will be part of what's happening in terms of other things like things with corporate other with tax rate I don't see anything out of the norm.

Impacting us.

Q1, disproportionately one way or the other versus the full year.

Got it so thats sort of 180 190 isn't a bad sort of starting point. If you are down from the 210 a year ago.

With GPS on jewelry, and you're asking me to start to guide quarterly EPS guidance I'm trying to give as much color as I can but I havent pegged.

Exact range for EPS for Q1, we tend to guide for the full year.

Yes.

Understood and then just thank you Nick just my quick follow up.

It would be around the.

Order intake.

Blake you made some very positive comments around the overall environment.

Guess ABB had talked about kind of a normalization of discrete automation orders by.

By the customers as supply chains.

<unk> that may be slightly extended kind of times.

Customers to place orders because of the macro so kind of two different drivers may be weighing on orders a little bit I, just wondered if rockwood had seen either of those points affecting the order intake at all.

Yes, I think in the end.

The first.

With as lead times come in a bit and we're seeing that.

With certain of our product lines, you need less coverage, particularly if you are a machine builder you don't need as many months of coverage of the products to complete your equipment.

And so that's going to reduce the size and maybe the frequency of those orders and I.

I think that that is.

A positive trend because it means customer service is coming back to where we expected to be in graphically you see a bit of that on some of the charts that we showed in terms of customers with your second point customers, saying now we don't really need it now not seeing much of that I can tell you that the calls I'm having with customers.

<unk> frequently are that they want their stuff.

So we're not seeing much at all in the way of customers, saying and ship it when you can.

Steph I ordered a few weeks ago don't worry.

Not getting those calls so that.

That would be my characterization of what we're seeing.

Great. Thank you.

Thanks Julien.

Our next question comes from Brendan <unk> from Bernstein. Please go ahead. Your line is open.

Good morning, all thanks for taking my question.

Yeah.

So I just wanted to.

Double click on the cancellation trends, they've ticked up a little bit over the last couple of quarters.

I guess two questions here one is there a root cause or is this just noise in the numbers and then to disappoint a clarification. The 1%, 2%, 3% are these quarterly cancellation rates or is that an annualized rate.

Yes, those are those are quarterly.

Rates and I would put them more in the noise CAD category. I mean these are these are rates that are low single digits.

They're well within the range of what we've seen what we've seen historically.

Okay excellent. Thank you.

Yes.

Our next question comes from Steve Tusa from Jpmorgan. Please go ahead. Your line is open.

Hey, guys.

Good morning.

One on the <unk>.

On the end markets can you give us a little bit of color around <unk>.

Very strong sales growth orders a bit less of a growth maybe just give us a little bit of color on the on the orders to the extent you know.

Were there any end markets that were actually.

Down or are they all up on orders.

Yes, so we don't provide specific information on an incoming orders by industry, but based on the line of sight that we have with customers in these areas, where we're working specifically with them on projects.

Or whether it's in pharmaceutical.

We're getting new medicines to market.

Or it's new plants for EV like the Honda win or oil and gas wins that we see through <unk>, We've got pretty good line of sight to that incoming activity and it remains robust I mean again.

While the the order rates.

I have moderated a bit they are still well above pre pandemic levels in the verticals that I talked about during my my tour.

In answer to Scott's question got it got it and then just on this.

The <unk> margin.

It's just a little bit more lumpy than what we've heard from others.

Is there anything in the Rev. Rec revenue recognition around the software businesses that is kind of moving these margins around at all but we have to consider for a business like this going forward that may have an influence on <unk> just the seasonality here for that business and also why wouldn't the supply constraint impact.

Intelligent devices more if they were kind of based on more of the products.

Sure. Let me, let me start with that and then Nick May have additional comment.

The software and controls story is really around.

The reduced volume there is nothing in there with software Rev. Rec Flex continues to perform well we didn't talk as much about it on the call, but we're very happy with the development of Plex with the strategic value of the industrial logic as well as the financial performance of plaques and we will.

Talk more about that during our Investor day in a few weeks. So there's nothing there that's causing margins.

Two to be affected it's more about the volume in the.

The issue that I talked a little bit about is.

The specific components that are disproportionately used in software and control, there's a reduced supply for a portion of Q1 that picks back up and so really thats.

We're giving a little bit more insight, there, but thats whats, causing the reduction after an over 30% year over year growth rate in the fourth quarter, with where software and control and as we've talked about often all of our products are very.

Highly impacted positively by increasing growth, we saw that manifested in Q4 with software and control and we're seeing that moderate in Q1, and then with sequential growth from there through the balance of the year.

Yes, Steve one one way.

We are still seeing from a macro standpoint general stabilization.

John .

Occurring from a supply chain perspective.

I am pointing out what we're seeing with software and control is some particular isolated incidences, where we have this visibility of what's coming at us during the current quarter and we just wanted to highlight that to you. It's not a general trend is something very specific and very short term.

Alright, but not software not related to software Rev Rec.

Okay. Thank you.

Thank you.

Our next question comes from Andy Kaplowitz from Citi. Please go ahead. Your line is open.

Hey, good morning, everyone.

Hey, Andy Blake, there's obviously concern out there regarding the slower global economy by orders as you've talked about have remained strong can you give more color into what your customers are telling you about their capex plans with already talked about some of your more cyclical end markets outperforming on the semi as in autos.

How much do you think reassuring is helping you and disappointed where do you think we are in let's call. It the re shoring cycle. If you may.

Yes.

I like talking about shoring, rather than re shoring, because it's really more about.

The U S being a outsized beneficiary of new Capex as opposed to shuttering plants in China.

Other parts of Asia, and bringing it to <unk>.

Back to the U S. It's really about new lines of business new capacity.

Filling out a little more of a local for local strategy that a lot of manufacturers are providing and I don't see anything with the current economic headwinds that would cause people to say just kidding, let's go back to.

Pushing manufacturing to other parts of the world and Chase lower labor rates.

I see if anything.

The U S continuing to be a beneficiary as people are trying to add redundant lines as people are trying to get closer to their consumers so that they're not having to rely on.

10000 mile.

Supply chains.

We're going to continue and one of the things I look at is our own plans as a manufacturer what is Rockwell billing and we look at our Capex that Nick talked about which is <unk>, which is up year over year for things that we feel like we need to do for the near term and also to sustain share gains going forward.

And the continued investment in the U S. We have a very important manufacturing that we're going to continue in the U S. Because it's it's our biggest market and.

We continue to support manufacturing close to the consumer here just as we do in Europe and in Asia and in Latin America.

Very helpful. Blake and then can you give us a little more color on what he's seeing in process automation markets. It seems like you are forecasting a bit of an uptick in mining related growth for 'twenty three are still forecasting double digit chemicals related growth. Despite chemical related companies, having more difficult time lately. So what are your customers telling you there and then given the later cycle nature of late.

Lifecycle solutions should we expect a bigger margin tick up in that business and 23 versus the other segments.

So so process.

We're expecting a good banks.

Fiscal year 'twenty, three and this is an area where even apart from the recent activity.

The recent dynamics backlog is very meaningful and so when we look at backlog for instance, incentives. It's very strong it's an even higher number in terms of the percentage of revenue.

That's in backlog for fiscal 'twenty three than the Rockwell company average and that's typical because it's engineered solutions that take longer to plan and stage and design.

Commission and so on.

So we see that as a good read for oil and gas activity in mining and we've had some we've had some decent wins I wouldnt call mining back at a torrid pace.

Their metals is pretty good and we don't talk as much about metals, but metals continues to be a big automation market and especially with the release of some of the new high performance drives yes, we have got.

Better capacity better capabilities than we've had in years for addressing that market. There is still some activity in forest products and chemical and we talked about the win with <unk>.

For Lyondellbasell Ware.

Our offerings are our continued enhancement of offerings with logic space control systems.

It was going to help us in chemical the new Io that we're going to be introducing at automation fair is going to be a major step for chemical as well. So those are some of the things going on there and then in life life Science as you mentioned that.

Really strong growth in the fourth quarter, we've talked about how life sciences is not as affected by the component shortages because so much of our business in life Sciences is actually based on software and high value services and from a macro standpoint people want to live long.

Our healthier lives and personalized medicine as a way to help that.

That objective and Thats something that were particularly strong in.

Appreciate the color.

Yeah, Joanne we'll take one more question.

Thank you our last question will come from Phil bowler from Barrick Barrick. Please go ahead. Your line is open.

Hi, good morning, Thanks for the question.

I'm keen to hear what level of safety buffer you've baked in to this organic growth guide for the year. There was a bit of an overshoot. This time last year I appreciate that there's 60% of the <unk>.

<unk> already in the backlog, but I guess I'm surprised to see.

And 11% midpoint, given the macro so anything you can share in terms of.

Overall confidence levels of safety buffer would be great and where that might reside.

On the top line assumptions or perhaps it's more in the margin side, which collectively gives you the confidence levels for them for the earnings for the year.

Sure.

Let me start by saying that.

The overarching driver is what we have in backlog over $5 billion in backlog is unprecedented and with continued strong order entry and with continued very low cancellation rates. That's the primary store.

Now in terms of the tone I did mentioned during my prepared remarks that we feel like a conservative approach is appropriate I'm not going to dimension that or quantify that but.

That was a.

A deliberate comment in the prepared remarks.

Got it thanks, and just as a bit of a follow up close adjacency really is the company's appetite for M&A at this point be that large or small I'm thinking more in the context of peers.

We've now got Amazon, who we're going to have a lot of fire power.

Schneider, who are looking to acquire the rest of Aviva does M&A need to move higher on rockwell's agenda from a competitive dynamics standpoint or has your thinking evolved in terms of the need to participate more strongly in M&A. Thanks.

We're very happy at the increased participation in the M&A that we've demonstrated over the last few years and more importantly, the way that it's helped add new value for customers as well as investors and will go into this in a little more detail on a couple of weeks at Investor day, but.

First looking at the strategic fit with some well defined priorities that we've talked about and then the financial framework, we're very happy with the way that our M&A that we've already completed most recently with the cubic acquisition and that we have in the funnel will continue to.

Strengthen us as a pure play automation provider, it's one of our strengths.

And the market access that we have to provide new value from M&A immediately into all of the industry segments of discrete and hybrid and process is second to none so I'm happy with the way that we're positioned with M&A, we're going to keep doing it we have a strong bal.

Hence sheet and we've got a great track record of turning these acquisitions into real value.

Great. Thanks.

Okay.

We are at a time for questions today, I would like to turn the call back over to MS down there for closing remarks.

Thank you that concludes today's call. Thank you for joining us.

This concludes today's conference call at this time you may disconnect. Thank you.

Okay.

Sure.