Q1 2024 Rockwell Automation Inc Earnings Call

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

Need to remind everyone that todays conference call is being recorded.

Later in the call we will open up the lines for questions.

If you have a question at that time, Please press star one.

At this time I would like to turn the call over to John Zillmer head of Investor Relations and market strategy with Zelman. Please go ahead.

John Walsh: Thank you Julien good morning, and thank you for joining us for Rockwell automation first quarter fiscal 'twenty 'twenty four earnings release conference call.

John Walsh: With me today is Blake Moret, our chairman and CEO and Nick Young our CFO.

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

Speaker Change: Both the press release and charts include in our call today will reference non-GAAP measures.

Speaker Change: Both the press release and charts include reconciliations of these non-GAAP measures.

A webcast of this call will be available on our web site for replay.

30 days.

Speaker Change: For your convenience a transcript of our prepared remarks will also be available on our website at the conclusion of today's call.

Speaker Change: 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.

Speaker Change: So with that I'll hand, it over to Blake.

Blake Moret: Thanks, Hi, Jana and good morning, everyone. Thank you for joining us today.

Blake Moret: Let's turn to our first quarter results on slide three.

This quarter, we saw double digit sequential growth in orders with all business segments and regions up from the trough in Q4 of last year.

Blake Moret: While we are continuing to see the impact of excess inventory in the channel.

Blake Moret: The underlying demand from machine builders and end users remained strong.

Blake Moret: Total sales were up three 6% year over year organic.

Blake Moret: Organic sales grew 1% in the quarter led by North America.

Blake Moret: China was the single largest drag on our shipments.

Blake Moret: Currency translation increased sales by over one point.

Blake Moret: And acquisitions contributed almost a point and a half of growth.

Blake Moret: Our organic sales did come in below our expectations largely due to the timing of a recovery to a more normal product book and bill process.

Blake Moret: As the source of our demand shifts from older backlog to new orders that need to be shipped as soon as they are received we are working through some lingering shortages in line constraints our.

Blake Moret: Our supply chain team is expected to complete this transition in Q2 with little impact on the full year.

Blake Moret: And our intelligent devices business segment organic sales were down four 5% versus prior year.

While product shipments in this segment experienced the biggest supply chain constraints in the quarter, we were able to offset some of that impact with strong performance from our configure to order businesses and from recent acquisitions.

Blake Moret: Our clear path in cubic acquisitions had a strong quarter, both on topline and bottomline showcasing the tremendous value of these offerings are bringing to our customers across new verticals and applications.

Blake Moret: Last quarter I talked about our presence in data center build outs and cubic's momentum with large cloud service providers continues to fuel our growth in this end market.

Blake Moret: I'll touch on some of the important clear path wins later on the call.

Blake Moret: Software and control organic sales increased 4% year over year and were in line with our expectations logics continues to demonstrate unique value in the marketplace and we've made some major software investments in this segment over the last few years.

Blake Moret: We are seeing the value from this innovation demonstrated by double digit sales growth in our cloud native and on Prem information software offerings.

Blake Moret: Lifecycle services organic sales grew over 8% versus prior year better than we expected.

Blake Moret: Book to Bill in this segment was $1 one three with strong order activity across solutions services, and our <unk> joint venture.

I am pleased with how our <unk> team is making progress with profitable growth in the quarter Q1 orders and sales were up over 25% year over year.

One of the strategic sense of wins, this quarter, which with melita oil and gas joint venture.

Blake Moret: One of the largest oil and gas companies in Libya. Since he has advanced measurement technology is helping this customer modernize all of their liquid metering skids and establishes <unk> as one of the key players in the region for major metering turnkey solutions.

Another highlight of the quarter was our continued growth in <unk> <unk>.

Blake Moret: Total annual recurring revenue was up 20% year over year with strong growth across our plex and fixed SaaS offerings and recurring services, including our growing cyber security business.

Blake Moret: The impact of these contracts on our financial performance is also increasing especially in the year with relatively low product growth.

Blake Moret: This quarter, our Plex SaaS platform was selected by <unk> energy.

Blake Moret: On energy startup focused on grid scale storage for utility companies.

Blake Moret: Eos energy in partnership with Acro automation systems as selected Rockwell automation to provide plex Mes and Qos information software to complement <unk> battery manufacturing solution.

Blake Moret: Built on Rockwell's control platform.

Blake Moret: <unk> is currently building out the first state of the art manufacturing line that will manufacture E. R synergies next Gen Z three batteries.

Blake Moret: Segment margin of about 17% and adjusted EPS of $2 <unk>.

Blake Moret: Were both down versus prior year the.

Blake Moret: The adjusted EPS was below our expectations and Nick will discuss this further in a few minutes.

Speaker Change: Let's now turn to slide four to review key highlights of our Q1 industry segment performance.

Speaker Change: Where we get into the individual verticals keep in mind that the more product intensive industries were the most impacted by planned shipments moving to Q2 and later in the year.

Speaker Change: Our discrete sales were down 10% year over year.

Speaker Change: Within discrete automotive sales were down high single digits, while auto customers are focused on near term profitability and temporary slowdown in EV demand. They continue to fund new EV and battery Capex programs. In addition to these investments we are seeing.

Speaker Change: <unk> activity across our traditional ice and plug in hybrid platforms as brand owners and tier suppliers are looking to diversify their exposure in response to consumer demand and infrastructure limitations.

Speaker Change: As you know Rockwell has a substantial installed base with these established automotive customers and.

Speaker Change: And is well positioned to capture additional market share regardless of the application.

Speaker Change: This quarter, our logic platform was selected by aka solve borgwarner, our global battery producer and automotive tier supplier developing innovative battery manufacturing processes for their production plants in Seneca South Carolina in Darmstadt, Germany. This.

Speaker Change: Customer plans to increase their production volume in Europe, and North America and scale to more plants globally.

Another exciting automotive win this quarter came from clear path robotics.

Speaker Change: We're a large brand owner will be using over 100 of our auto autonomous mobile robots in their U S sub assembly applications.

Speaker Change: Semiconductor sales were also down high single digits versus prior year, while the industry is still navigating through a myriad of challenges, including geopolitical risk excess memory capacity and workforce shortages, we continue to see new announcements in orders for Greenfield.

Speaker Change: <unk> and legacy Fab upgrades, along with continued momentum in our wafer transport solutions.

Speaker Change: Within our e-commerce and warehouse automation industry sales.

Speaker Change: Sales declined mid teens and were in line with our expectations.

Speaker Change: Customers across many verticals continue to modernize their existing operations to match the current market needs in.

Speaker Change: In addition to a strong funnel of these warehouse transformation projects.

Speaker Change: We're starting to see renewed capex plans from our e-commerce customers for fulfillment center builds later in fiscal year, 'twenty four and in fiscal year 'twenty five.

Speaker Change: Moving to our hybrid industries.

Speaker Change: Within this industry segment growth in life Sciences, and tire were offset by declines in food and beverage.

Food and beverage sales were down high single digits versus prior year.

Speaker Change: Given the mix of products, serving this customer segment. Our Q1 performance in this vertical was most impacted by our internal capacity constraints mentioned earlier on the call.

Speaker Change: Similar to previous quarters, we continue to see large end users investing their digital and cyber capabilities across their global footprint.

Speaker Change: This quarter, we had another sizable clear path win at one of the largest food and beverage manufacturers in the world, where the customer chose our auto amr's to replace their existing <unk> system to increase throughput and flexibility while enhancing material.

Speaker Change: Movement security.

Speaker Change: It is clear our customers across many industries are focused on augmenting their existing workforce through autonomous and innovative solutions to drive further productivity safety and sustainability and their operations.

Speaker Change: Life Sciences sales grew 10% in the quarter.

Speaker Change: Note that our life Sciences revenue was more weighted to software and services versus products.

Speaker Change: In addition to our Mes and cyber security services momentum.

Speaker Change: We're continuing to see increased investments in high growth areas, such as advanced therapy medicinal products and GOP, one diabetes and obesity drugs.

Speaker Change: Tire was up high single digits.

Speaker Change: Moving to process sales in this industry segment grew over 10% year over year. Once again led by strong growth in oil and gas metals and mining.

Speaker Change: Oil and gas sales were up over 25% this quarter.

Speaker Change: I already mentioned our performance in <unk> and we continue to see follow on orders from our customers de carbonization and Digitization projects worldwide.

Speaker Change: Let's turn to slide five in our Q1 organic regional sales.

Speaker Change: North America organic sales were up over 4% year over year.

Speaker Change: North American manufacturers are continuing to invest.

Speaker Change: And we expect this region to be our strongest performing market this year.

Speaker Change: Latin America was down half a point.

Speaker Change: EMEA sales were down about 2%.

Speaker Change: In Asia Pacific sales declined over 7%.

Speaker Change: Similar to the last few quarters, we continue to see challenges in the Chinese manufacturing economy with high cancellations and push outs relative to the rest of the world.

Speaker Change: Sales in China were down high teens versus prior year.

Speaker Change: Moving to slide six for our fiscal 2020 for outlook.

Speaker Change: We continue to expect our full year orders to grow low single digits versus prior year with strong sequential growth through the balance of this fiscal year.

Speaker Change: Factoring our performance through January are.

Speaker Change: Our continuous to continuous analysis of distributor inventory levels and strong pipeline of customer projects. We are reaffirming our fiscal 'twenty four sales guidance range with organic sales projected to grow 1% at the midpoint.

Speaker Change: Currency is also expected to increase sales by 1%.

Speaker Change: And we now expect acquisitions to contribute a point and a half of growth.

Speaker Change: <unk> is still slated to grow about 15%.

Speaker Change: Segment margin is expected to increase slightly versus prior year with significant second half increases coming from increased product volume spending discipline and the growing benefit of productivity initiatives being taken and lifecycle services.

Speaker Change: Nick will share additional calendar <unk> in detail in his section.

Speaker Change: Adjusted EPS is slated to grow 5% year over year at the midpoint again weighted to the back half of the year.

And we still expect free cash flow conversion of 100% let.

Speaker Change: Let me turn it over to Nick to provide more detail on our Q1 performance and financial outlook for fiscal 'twenty for Nick.

Nick Young: Thank you Blake and good morning, everyone.

Nick Young: I'll start on slide seven first quarter key financial information.

Nick Young: First quarter reported sales were up three 6% over last year.

Nick Young: Q1, organic sales were up 1% and acquisitions contributed 140 basis points to total growth.

Nick Young: Currency translation increased sales by 120 basis points about three points of our organic growth came from price in line with our expectations.

Nick Young: Segment operating margin was 17, 3% compared to 22% a year ago. This.

Nick Young: This 290 basis point decrease reflects higher investment spend.

Nick Young: Mix between products and solutions.

Nick Young: And lower supply chain utilization.

Nick Young: While our Q1 spend was down sequentially, we had a difficult year over year comparison due to an abnormally low investment spend in Q1 of last year.

Nick Young: Key areas of year over year spending increases include investments in new products.

Nick Young: Digital infrastructure and commercial resources I'll comment later on the expected progression of our investments spend when I cover our full year outlook.

Nick Young: As Blake mentioned orders inflected upward sequentially, and we expect strong sequential order growth through the remainder of the year.

Nick Young: The expected slope of orders is consistent with what we have discussed over the last couple of quarters.

Nick Young: Adjusted EPS of $2 <unk>.

Nick Young: Down 17% compared to last year was below our expectations, primarily due to lower than expected sales and lower segment operating margin.

Nick Young: The devaluation of the Argentine peso was an additional 10 cents adjusted EPS headwind in Q1.

Operator: Thank you for holding and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. If you have a question at that time, please press star 1. At this time, I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead.

Nick Young: I'll cover our year over year adjusted EPS Bridge on a later slide.

The adjusted effective tax rate for the first quarter was 18% slightly above the prior year rate.

Nick Young: Free cash flow was negative $35 million compared to a positive $42 million in the prior year.

Nick Young: Our lower year over year free cash flow generation in the quarter was driven by higher incentive compensation payout during the quarter, which was tied to our fiscal 'twenty three performance.

Aijana Zellner: Thank you, Julian. Good morning, and thank you for joining us for Rockwell Automation's first quarter fiscal 2024 earnings release conference call. With me today is Blake Moret, our Chairman and CEO, and Nick Gangstad, our CFO. Our results were released earlier this morning, and the press release and chart have been posted on our website. Both the press release and charts include, and our call today will reference, non-GAAP measures. A webcast of this call will be available on our website briefly for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's webinar.

Nick Young: Working capital decreased in Q1, driven by lower accounts receivable, partially offset by lower accounts payable.

Nick Young: One additional item not shown on this slide.

Nick Young: We repurchased approximately 400000 shares in the quarter at a cost of $120 million.

Nick Young: On December 31, $800 million remained available under our repurchase authorization.

Nick Young: Slide eight provides the sales and margin performance overview of our three operating segments.

Speaker Change: Blake discussed our topline performance in the quarter, So I'll focus on our margin performance as.

Aijana Zellner: 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. However, 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 our SEC filings. So with that, I'll hand it over to Blake.

Speaker Change: As I mentioned earlier, our investment spend in the year ago quarter was lower than normal as most of the incremental fiscal 'twenty three investment started in Q2 of last year.

Speaker Change: This resulted in a difficult year over year margin comparison in Q1 for both intelligent devices and software and control.

Blake Moret: Thanks, Aijana. And good morning, everyone. Thank you for joining us today. On slide three, we saw double-digit sequential growth in orders across all business segments and regions, up from the trough in Q4 of last year. While we are continuing to see the impact of excess inventory in the channel, underlying demand from machine builders and end users remains strong.

Intelligent devices margin decreased to 16, 2% compared to 22, 4% a year ago.

Speaker Change: The decrease from prior year was driven by lower sales volume.

Speaker Change: The timing of prior year investment spend in knee and the impact of acquisitions partially.

Speaker Change: Offset by positive price cost.

Speaker Change: Our clear path in cubic acquisitions.

Speaker Change: <unk> intelligent devices are performing well and are making commercial and we are making commercial and technical investments here to accelerate profitable growth.

Blake Moret: Total sales were up 3.6% year over year. Organic sales grew 1% in the quarter, led by North America. China was the single largest drag on our ship.

Speaker Change: Software and control margin of 25% decrease from 29, 2% last year.

Speaker Change: The lower margin was driven by the timing of prior year investment spend and lower supply chain utilization, partially offset by price cost.

Blake Moret: Currency translation increased sales by over 1 point, and acquisitions contributed almost a point and a half of growth. However, our organic sales did come in below our expectations, largely due to the timing of our recovery to a more normal product book and bill process. As a source of our demand shifts from older backlog to new orders that need to be shipped as soon as they are received, we are working through some lingering shortages and line constraints. Our supply chain team is expected to complete this transition in Q2 with little impact on the full year. In our Intelligent Devices business segment, organic sales were down 4.5% versus the prior year.

Speaker Change: Lifecycle services book to Bill was 113.

Speaker Change: Lifecycle services margin of 10, 4% doubled from the year ago margin of five 2%.

Speaker Change: Strong margin performance was driven by higher sales lower incentive compensation and higher margins in Cynthia.

Speaker Change: We are realizing productivity benefits from lifecycle services restructuring actions, we took last year and those benefits are coming in as expected.

Speaker Change: The next slide nine provides the adjusted EPS walk from Q1 fiscal 'twenty three to Q1 fiscal 'twenty four.

Blake Moret: While product shipments in this segment experienced the biggest supply chain constraints in the quarter, we were able to offset some of that impact with strong performance from our configured-to-order businesses and from recent acquisitions. Our ClearPath and Cubic acquisitions had a strong quarter, both on the top line and the bottom line. Showcasing the tremendous value these offerings are bringing to our customers across new verticals and applications. Last quarter, I talked about our presence in data center buildouts, and Qubic's momentum with large cloud service providers continues to fuel our growth in this end market. I'll touch on some of the important clear path wins later in the call.

Speaker Change: Core performance was down 10% on a 1% organic sales increase.

Speaker Change: As positive price cost was more than offset by negative product mix and lower supply chain utilization.

Speaker Change: Higher investment spend was a 40 <unk> EPS headwind.

Speaker Change: Incentive compensation was a 20 tailwind.

Speaker Change: This year over year improvement reflects a lower projected bonus payout this year versus an above target payout last year.

Speaker Change: The impact from acquisitions with a 10 cent headwind and aligned with our expectations.

Speaker Change: The year over year impact from currency was a <unk> <unk> headwind with the <unk> <unk> headwind from the Argentine peso revaluation more than offsetting the positive impact from other currencies.

Blake Moret: Software and control organic sales increased 4% year over year, and we're in line with our expectations. Logix continues to demonstrate unique value in the marketplace, and we've made some major software investments in this segment over the last few years. We're seeing the value from this innovation demonstrated by double-digit sales growth in our cloud-native and on-prem information software offerings. Lifecycle Services organic sales grew over 8% versus the prior year, better than we expected. Book to bill in this segment was 1.13, with strong order activity across solutions, services, and our Centsia joint venture. I'm pleased with how our Ascensia team is making progress with profitable growth in the quarter. Q1 orders and sales were up over 25% year over year. One of the strategic Sencia wins this quarter was with Melita Oil and Gas Joint Venture, one of the largest oil and gas companies in Libya. Sensia's advanced measurement technology is helping this customer modernize all of their liquid metering skids and establishes Sensia as one of the key players in the region for major metering turnkey solutions.

Speaker Change: The <unk>.

Speaker Change: The net <unk> <unk> currency headwind was offset by a <unk> <unk> tailwind from interest expense <unk> <unk>.

Speaker Change: Share count and tax rate were immaterial to the year over year change in EPS this quarter.

Speaker Change: Let's now move on to the next slide 10 guidance for fiscal 'twenty four.

Speaker Change: We are reaffirming our guidance for fiscal 'twenty four of reported sales growth of 5% to six 5% and organic sales growth in the range of negative two to positive 4%.

Speaker Change: As Blake mentioned earlier, we now expect acquisitions to add 150 basis points to growth up from 100 basis points in our prior guidance.

Speaker Change: As the growing pipeline of projects from clear path is leading to higher expected growth given.

Speaker Change: Given this improvement clear path is now expected to dilute adjusted EPS by 20.

Speaker Change: Versus our prior expectation of 25.

Speaker Change: We now expect a full year currency tailwind of 100 basis points down from 150 basis points in our prior guide because projections for the euro and the Canadian dollar have weakened slightly for the year.

Speaker Change: We continue to expect price to be a positive contributor to growth for the year.

We expect the full year adjusted effective tax rate to be around 17% and we are reaffirming our adjusted EPS guidance range of $12 to $13 50.

Blake Moret: Another highlight of the quarter was our continued growth in ARR. Total annual recurring revenue was up 20% year-over-year, with strong growth across our PLEX and FIX FAS offerings and recurring services, including our growing cybersecurity business. The impact of these contracts on our financial performance has also increased, especially in a year with relatively low product growth. This quarter, our Plex SaaS platform was selected by EOS Energy. An energy startup focused on grid-scale storage for utility companies, EOS Energy, in partnership with Acro Automation Systems, has selected Rockwell Automation to provide PLEX, MES, and QMS information software to complement Acro's battery manufacturing solution, built on Rockwell's control platform.

Speaker Change: We expect full year fiscal 'twenty four free cash flow conversion of about 100% of adjusted income.

Speaker Change: This reflects our continued expectation that inventory days on hand will drop to approximately 125 days by the end of fiscal year 'twenty four.

Compared to 140 days of inventory, we had at the end of fiscal year 'twenty three.

Speaker Change: We continue to expect free cash flow conversion during the first half to be well below 100%, mostly tied to the higher incentive compensation payment made in Q1 relative to our fiscal year 'twenty three performance and higher income tax payments related to the realized capital gain on the sale of our stake in <unk>.

Speaker Change: PTC as well as our tax cuts and jobs act transition tax payment.

Speaker Change: From a calendar <unk> perspective, we expect Q2 sales dollars and segment margin to be similar to Q1 levels with.

Blake Moret: Acro is currently building out the first state-of-the-art manufacturing line that will manufacture EOS Energy's next-gen Z3 battery. However, segment margin of about 17% and adjusted EPS of $2.04 were both down versus the prior year. The adjusted EPS was below our expectations, and Nick will discuss this further in a few minutes. Let's now turn to slide four to review key highlights of our Q1 industry segment performance. Before we get into the individual verticals, keep in mind that the more product-intensive industries were the most impacted by planned shipments moving to Q2 and later in the year. Our discrete sales were down 10% year over year. With the industry, automotive sales were down high single-digit.

Speaker Change: We previously expected the lead times on our last constrained products would return to normal by the ended Q1. This is now being pushed back to the middle of the year.

Speaker Change: This means that our split between first half and second half revenue will be even more weighted towards the second half.

Speaker Change: Our plan was and continues to be for balanced spend across the four quarters of fiscal year 'twenty four compared to our upward trajectory of spend in fiscal year 'twenty three as confidence in supply chain.

Speaker Change: Recovery pace group gives.

Speaker Change: Given the split of sales between first and second half that means first half margins will be noticeably lower compared to the year prior and second half margins noticeably higher we expect.

Speaker Change: Margins in Q2 to remain similar to what they were in Q1, and then increase to the mid twenties.

Blake Moret: While auto customers are focused on near-term profitability and a temporary slowdown in EV demand, they continue to fund new EV and battery CapEx programs. In addition to these investments, we are seeing increased activity across our traditional ICE and plug-in hybrid platforms as brand owners and tier suppliers are looking to diversify their exposure in response to consumer demand and infrastructure limitations. As you know, Rockwell has a substantial installed base with these established automotive customers and is well positioned to capture additional market share regardless of the application.

Speaker Change: In Q3 and Q4.

Speaker Change: That expansion in margin is virtually <unk>.

Speaker Change: All driven virtually all by revenue returning to levels consistent with end demand.

Speaker Change: We anticipate investment spend to be relatively flat across the four quarters of fiscal year 'twenty four.

Speaker Change: From a year on year perspective, Q2, and Q3 increases in investment in the investment spend will be approximately $10 million each and then a year over year decrease in Q4.

Speaker Change: A few additional comments on fiscal 2000 and for guidance.

Speaker Change: Corporate and other expense is expected to be around $125 million net.

Blake Moret: This quarter, our logic platform was selected by Akasol Borg-Warner, a global battery producer, an automotive tier supplier, developing innovative battery manufacturing processes, for their production plants in Seneca, South Carolina, and Darmstadt, Germany. This customer plans to increase their production volume in Europe and North America and scale to more plants globally. Another exciting automotive win this quarter came from ClearPath Robotics, where a large brand owner will be using over a hundred of our Autonomous Mobile Robots in their U.S. subassembly applications.

Speaker Change: Net interest expense for fiscal 'twenty, four is expected to be about $120 million.

Speaker Change: And we're assuming average diluted shares outstanding of $115 1 million shares.

Speaker Change: We expect to deploy between 300 and $500 million to share repurchases during the year.

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

Blake Moret: Thanks, Nick.

Blake Moret: Despite geopolitical volatility.

Blake Moret: Our detailed discussions with our distributors machine builders and end users point, a fairly healthy market conditions.

Blake Moret: Our outlook for fiscal year 'twenty four is based on an acceleration of new product orders as distributors and machine builders reduce excessive inventory.

Blake Moret: Semiconductor sales were also down high single digits versus the prior year. While the industry is still navigating through a myriad of challenges, including geopolitical risk, excess memory capacity, and workforce shortages, we continue to see new announcements and orders for Greenfield projects and legacy fab upgrades, along with continued momentum in our wafer transport solution within our e-commerce and warehouse automation industry. Sales declined mid-teens and were in line with our expectations. However, customers across many verticals continue to modernize their existing operations to match the current market's needs. In addition to a strong funnel of these warehouse transformation projects, we're starting to see renewed CapEx plans from our e-commerce customers for fulfillment center builds later in fiscal year 24 and in fiscal year 25. Moving to our hybrid industry. Within this industry segment, growth in life sciences and tires was offset by declines in food and beverage. Food and beverage sales were down high single digits versus prior year.

Blake Moret: Our operations team is working around the clock to ensure we can convert these new orders into shipments at lead times that are as good or better than pre pandemic lead times.

Blake Moret: We continue to gain share across our key platforms, especially here in North America. We are seeing early orders from customer projects facilitated by economic stimulus and automation continues to be an important way to maximize the productivity of available workers.

Our recent acquisitions are performing well on both revenue and cost.

Blake Moret: Clear path robotics being a stand down addition to rockwell's portfolio <unk>.

Blake Moret: <unk> seen multimillion dollar wins across diverse end markets, including automotive food and beverage and even warehousing and logistics and this is just the beginning.

Blake Moret: We have a unique portfolio of high value assets that we've built and bought with the best partner ecosystem in the business.

Our focus is now to integrate these elements as only a pure play can growing share profitability and cash flow by driving efficiency and synergy.

Blake Moret: Given the mix of products serving this customer segment, our Q1 performance in this vertical was most impacted by our internal capacity constraints mentioned earlier on the call. Additionally, similar to previous quarters, we continue to see large end users investing in their digital and cyber capabilities across their global footprint. This quarter, we had another sizable clear path win at one of the largest food and beverage manufacturers in the world, where the customer chose our Auto AMRs to replace their existing AGV system to increase throughput and flexibility while enhancing material movement security. It is clear that our customers across many industries are focused on augmenting their existing workforce through autonomous and innovative solutions to drive further productivity, safety, and sustainability in their operations. Life Sciences sales grew 10% in the quarter.

Blake Moret: John will now begin the Q&A session.

John Walsh: Thanks, Mike I would like to get to as many of you as possible. So please limit yourself to one question and a quick follow up Julien, let's take our first question.

Certainly as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.

John Walsh: Our first question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.

Andrew Kaplowitz: Good morning, everyone.

Andrew Kaplowitz: Hey, Andy.

Andrew Kaplowitz: Nick you mentioned that your orders were up double digit sequentially could you tell us where backlog was ending Q1 and regardless you did reiterate your low single digit order growth guide for FY 'twenty. Four so are you beginning to see more substantial turn in orders here in fiscal Q2 as your distributors bought amount their inventory levels and if so what end markets would you say are in.

Andrew Kaplowitz: Reflecting the most.

Nick Young: Yes, Andy we ended last year with a backlog of $4 1 billion all in and it went down high single digits in during the first quarter.

Blake Moret: Note that our life sciences revenue is more weighted to software and services versus products. In addition to our MES and cyber security services momentum, we're continuing to see increased investments in high-growth areas, such as advanced therapy medicinal products and GLP-1 diabetes and obesity drugs. Tire was up high single digits.

Nick Young: In terms of what we're seeing with orders.

Andrew Kaplowitz: Youre exactly right, we are seeing an inflection up in the orders from the Q4 trough.

Andrew Kaplowitz: And.

Andrew Kaplowitz: And we're expecting that to continue into the second quarter of double digit growth into the second quarter in terms of where that where we're seeing that I will turn that over to Blake. Yes. Let me just mentioned Additionally, A&D that distributor inventory is coming down.

Blake Moret: Moving to process, sales in this industry segment grew over 10% year over year, once again led by strong growth in oil and gas, metals, and mining. Oil and gas sales were up over 25% this quarter. I already mentioned our performance in Sensia, and we continue to see follow-on orders from our customers' decarbonization and digitization projects worldwide. Let's turn to slide five in our Q1 Organic Regional Sales. North America organic sales were up over 4% year over year.

Blake Moret: So as we've talked about before we have good visibility into our distributor inventory based on our channel model and we are seeing that going down as we expected as we're seeing the orders it's a good mix across industries, including some of the industries that we're.

Blake Moret: <unk> by the lower shipments in the first quarter like auto and food and beverage. We're also seeing it across the entire portfolio as we talked about.

Blake Moret: Annual recurring revenue very strong from a software and a high value services standpoint, and other aspects of lifecycle services, but we do expect that that order recovery is going to be broad based across our key industries, including in discrete and high.

Blake Moret: North American manufacturers are continuing to invest, and we expect this region to be our strongest performing market this year. Latin America was down half a point.

Blake Moret: EMEA sales were down about 2%, and Asia Pacific sales declined over 7%. Similar to the last few quarters, we continue to see challenges in the Chinese manufacturing economy with high cancellations and pushouts relative to the rest of the world. Sales in China were down in the high teens versus the prior year.

Blake Moret: Brit to complement the continuing good performance in.

Blake Moret: Process, such as oil and gas.

Speaker Change: Very helpful guys and then you didn't change your adjusted EPS guidance for the year, but you did mention that you expect modest EPS growth. That's back end loaded I know Blake you suggested that your supply chain team should catch up with the more book and Bill type environment in Q2, and Nicki talked about and the margin jump starting in Q3, but maybe you could talk more about your confidence level.

Blake Moret: Moving to slide six for our fiscal 2024 outlook, we continue to expect our full-year orders to grow low single digits versus the prior year, with strong sequential growth through the balance of this fiscal year. Factoring our performance through January, our continuous analysis of distributor inventory levels, and a strong pipeline of customer projects, we are reaffirming our fiscal 24 sales guidance range with organic sales projected to grow 1% at the midpoint, while currency is also expected to increase sales by 1%.

And getting that margin jump, you're expecting Q3, and does a relatively slow start for EPS for the year suggest modest EPS growth for FY, 'twenty, four meaning somewhat lower than that 12% $13 50, EPS range or are you not trying to signal that.

Speaker Change: No.

Speaker Change: We're reaffirming the guide.

Speaker Change: We introduced in in November.

Speaker Change: Significant increase in APAC EPS in the second half of the year is based on the increased volume you'll recall last year, we went from roughly $2 billion of shipments in the first quarter of fiscal year 'twenty, three two and exit of around two $5 billion and we expect.

Blake Moret: And we now expect acquisitions to contribute a point and a half of growth. ARR is still slated to grow about 15%. Segment margin is expected to increase slightly versus the prior year, with significant second half increases coming from increased product volume, spending discipline, and the growing benefit of productivity initiatives being taken in lifecycle services. Nick will share additional calendarization detail in his section.

Speaker Change: Thing to see something similar in this year in fiscal year 'twenty four from the Q1 that we're talking about a $2 billion roughly of shipments to around $2 $5 billion at the end of the year, that's what's going to drive the higher margins and EPS last year of the causal for.

Speaker Change: That ramp was based on getting chip supply. This year is the ramp the ramp up of orders.

Nicholas C. Gangestad: Adjusted EPS is slated to grow 5% year over year at the midpoint, again weighted to the back half of the year. And we still expect free cash flow conversion of 100%. Now, I turn it over to Nick to provide more detail on our Q1 performance and financial outlook for fiscal 24. Okay, Nick?

Speaker Change: I appreciate it guys.

Speaker Change: Thanks, Andy.

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

Jeffrey Todd Sprague: Thank you good morning, everyone.

Jeffrey Todd Sprague: Hey, Jeff Hey, can we just can we just drill back into the supply chain comments.

Nicholas C. Gangestad: Thank you, Blake, and good morning, everyone. I'll start with slide 7, the first quarter key financial information. First quarter reported sales were up 3.6% over last year. Q1 organic sales were up 1%, and acquisitions contributed 140 basis points to total growth. Currency Translation Increased Sales by 120 Based on, About three points of our organic growth came from price, in line with our expectations. Segment operating margin was 17.3% compared to 20.2% a year ago.

Jeffrey Todd Sprague: They seem inconsistent right when we think about it.

<unk> this quarter.

Jeffrey Todd Sprague: Our lower than revenues in the prior three quarters right. So youre getting a lot more out the door.

Jeffrey Todd Sprague: The prior three quarters. So can you just elaborate a little bit more on what exactly happened in the supply chain, what kind of bottlenecks you are dealing with are.

Jeffrey Todd Sprague: Are they at the Rockwall factory level are they.

Jeffrey Todd Sprague: At the supplier level.

Speaker Change: Please clear that up for us if you could.

Jeffrey Todd Sprague: Sure Jeff.

Speaker Change: So what we're seeing is the.

Speaker Change: Shift and the timing going from a <unk>.

Nicholas C. Gangestad: This 290 basis point decrease reflects higher investment spend, a mix between products and solutions, and lower Supply Chain Utilization. While our Q1 spend was down sequentially, we had a difficult year-over-year comparison due to an abnormally low investment spend in Q1 of last year. Key areas of year-over-year spending increases include investments in new products, Digital Infrastructure, and Commercial Resources.

Speaker Change: Dynamic of shipments such that based entirely on reducing large amounts of backlog too.

Jeffrey Todd Sprague: Recovery to a more normal product book and build process. So the big shipments that we saw over the last year were based on ships coming in with a very visible.

Jeffrey Todd Sprague: Really mass of past due backlog that was in a relatively concentrated set of skus for us. So whether it was variable speed drives are motion controller logic side, we have very good visibility into what we needed to ship as soon as.

Nicholas C. Gangestad: I'll comment later on the expected progression of our investment spend when I cover our full year outlook. As Blake mentioned, orders inflected upward sequentially, and we expect strong sequential order growth through the remainder of the year. The expected slope of orders is consistent with what we have discussed over the last couple of quarters. However, adjusted EPS of $2.04, down 17% compared to last year, was below our expectations, primarily due to lower-than-expected sales and lower segment operating margins. The devaluation of the Argentine peso was an additional 10 cents adjusted EPS headwind in Q1. I'll cover a year-over-year adjusted EPS bridge on a later slide. The adjusted effective tax rate for the first quarter was 18%, slightly above the prior year rate.

Jeffrey Todd Sprague: We got the chips.

Jeffrey Todd Sprague: The shift in Q1, which should be complete in Q2 of moving to a more normal distribution of having the vast majority of our shipments in the quarter based on book and Bill that is new orders coming in that get turned around in the quarter.

Jeffrey Todd Sprague: Things that hampered us in Q1.

Jeffrey Todd Sprague: The lingering tail of those past due backlog items that we talked about taking a little bit longer than Q1, two clear out as well as some continuing component challenges and then the shift to being able to build safety stock to be able to handle those incoming order.

Jeffrey Todd Sprague: That.

Jeffrey Todd Sprague: That progress continues in Q2, we expect to be substantially complete with that in the quarter, but thats. The difference of what we were shipping out last year versus what we're shipping out now I should also mention we've talked in the past about our <unk>.

Nicholas C. Gangestad: Free cash flow was negative $35 million compared to a positive $42 million in the prior year. Our lower year-over-year free cash flow generation in the quarter was driven by higher incentive compensation payout during the quarter, which was tied to our fiscal 23 performance. Working capital decreased in Q1, driven by lower accounts receivable, partially offset by lower accounts payable. One additional item not shown on the slide. We repurchased approximately 400,000 shares in the quarter at a cost of $120 million.

Jeffrey Todd Sprague: Pasty being over $10 billion and that remains true our capacity to ship in terms of physical plant and labor is over $10 billion and thats going to be important as we continue to grow.

Jeffrey Todd Sprague: Okay.

Speaker Change: Great and then.

Speaker Change: Again, if we could just talk a little bit more detail, maybe it's for Nick I think you.

Nick Young: We're pretty explicit on sort of the margins.

Nicholas C. Gangestad: On December 31st, $800 million remained available under our repurchase authorization. Slide 8 provides a sales and margin performance overview of our three operating segments. Blake discussed our top-line performance in the quarter, so I'll focus on our margin. As I mentioned earlier, our investment spend in the year-ago quarter was lower than normal, as most of the incremental fiscal 23 investments started in Q2 of last year. This resulted in a difficult year-over-year margin comparison in Q1 for both intelligent devices and software in control. The intelligent devices margin decreased to 16.2% compared to 22.4% a year ago.

Nick Young: For Q2.

Nick Young: Can you just give us a little bit.

Nick Young: Color, though on on kind of the mix and what's what's driving that I mean, it does sound like youre expecting some sequential revenue lift in Q2, so why would margins be roughly similar to Q1.

Nick Young: Yes, we're expecting dollar revenue to be very similar in Q2 to what it was in Q1 and very similar similar margin.

Nick Young: The mix of what we're selling in Q1 to Q2.

In Q1, we had more of it coming out of our backlog and less from current quarter book and Bill in Q2 that will be shifting that mix will be shifting to more coming out of current quarter orders as we continue to bring that backlog down.

Nicholas C. Gangestad: The decrease from the prior year was driven by lower sales volume. The timing of prior year investment spend and the impact of acquisitions, partially offset by positive price costs, are ClearPath and Cubic Acquisitions. Both parts of Intelligent Devices are performing well and are making commercial, and we are making commercial and technical investments here to accelerate profitable growth. Software and control margin of 25% decreased from 29.2% last year.

Nick Young: On the margin front.

Nick Young: Many of the things that we saw in the first quarter, we're going to be keeping investment spend very similar to what it in Q2 very similar to what it was in Q1 the year on year change of that will come down, but the sequential will be almost identical and then mix mix will probably not.

Nick Young: He was a drain was a negative to us in Q1, and we expect mix to continue as a negative into Q2 both from.

Nick Young: Our segment mix, where we expect higher growth in.

Nicholas C. Gangestad: The lower margin was driven by the timing of prior year investment spend and lower supply chain utilization, partially offset by price-cost. Life Cycle Services' book to bill was 1.13. Life Cycle Services' margin of 10.4% doubled from the year-ago margin of 5.2%. Strong margin performance was driven by higher sales, lower incentive compensation, and higher margins in cents. We are realizing productivity benefits from the lifecycle services restructuring actions we took last year, and those benefits are coming in as expected. The next slide, nine, provides the adjusted EPS walk from Q1 fiscal 23 to Q1 fiscal 24. Core performance was down 10 cents on a 1% organic sales increase, as positive price cost was more than offset by a negative product mix and lower supply chain utilization.

Nick Young: In our highest growth and lifecycle services, but also within segments, where we're seeing more of our sales in.

Nick Young: In intelligent device coming from our configure to order business.

Speaker Change: Alright, thank you.

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

Andrew Kaplowitz: Hi, guys good morning.

Andrew Kaplowitz: Morning, Andrew.

Andrew Kaplowitz: Yes, just a follow up I guess on Jeff's question.

Speaker Change: We go back to your analyst day, I think the message is that.

Speaker Change: This is a transition year and then revenue growth.

Speaker Change: Reverts to plan next year, which means it's going to accelerate.

Speaker Change: Very nicely can you just expand.

Speaker Change: Do you make sure that over the next 18 months Rockwell can actually deliver the volumes.

Uh huh.

Speaker Change: Are there any structural changes that youre, making to your internal processes.

Speaker Change: And the supply chain to sort of ensure a smooth ramp up.

Nicholas C. Gangestad: Higher investment spend was a 40 cent EPS headwind, and incentive compensation was a 20 cent tailwind. This year-over-year improvement reflects a lower projected bonus payout this year versus an above-target payout last year. The impact from acquisitions was a 10 cent headwind and aligned with our expectations. The year-over-year impact from currency was a 5-cent headwind, with the 10-cent headwind from the Argentine peso revaluation more than offsetting the positive impact from other currencies. The Five Cents.

Speaker Change: Yes, Andrew there is as I mentioned before the first is to make sure that we have.

Fixed assets in place we've been working on that for over a year, which allowed us to get to the $9 billion worth of shipments last year, which was a fairly healthy step up from prior and we've kept going to where today, we feel like we have over $10 five.

Speaker Change: <unk>.

Speaker Change: Worth of capacity in terms of the assets as Youll recall.

Nicholas C. Gangestad: The net $0.05 currency headwind was offset by a $0.05 tailwind from interest expenses. Share counts and the tax rate were each immaterial to the year-over-year change in EPS this quarter. Let's now move on to the next slide, 10, Guidance for Fiscal 24. We are reaffirming our guidance for fiscal 24, which is reported sales growth of 0.5% to 6.5%, and organic sales growth in the range of negative 2 to positive 4%. As Blake mentioned earlier, we now expect acquisitions to add 150 basis points to growth, up from 100 basis points in our prior guidance, as the growing pipeline of projects from ClearPath is leading to higher expected growth. Given this improvement, ClearPath is now expected to dilute adjusted EPS by 20 cents versus our prior expectation of 25 cents.

We're fairly asset light manufacturing.

Speaker Change: Process, It's assembly test fixtures at surface Mount machines, and so on and we're making sure not only in our organic business, but also with the acquisitions, where we're seeing such strong growth that we're making the investments to be able to fuel that growth labor is the other area.

Speaker Change: We have adequate product labor in place currently we are continuing to ramp up based on the growth in our engineered to order business and the share gains that we're seeing there the labor through the year in that and in some cases, we're holding labor in place to make sure.

Speaker Change: That it's there as we see that order ramp continue through the year from a structural standpoint.

Speaker Change: We are working through ways to drive efficiency to get scale throughout the organization.

Nicholas C. Gangestad: We now expect a full-year currency tailwind of 100 basis points, down from 150 basis points in our prior guide because projections for the euro and the Canadian dollar have weakened slightly for the year. We continue to expect price to be a positive contributor to growth for the year. We expect the full year adjusted effective tax rate to be around 17%, and we are reaffirming our adjusted EPS guidance range of $12 to $13.50. We expect full year fiscal 24 free cash flow conversion of about 100% of adjusted income.

Speaker Change: Some of this is standard lean concepts, but it's also adding the things that we've learned about needing resilience in terms of redundancy across multiple plants in some cases redundant sources of supply to be able to reduce the dependence on single suppliers and <unk>.

Speaker Change: Single parts of the World. So we're working all of those plays in operations as well as with the engineers.

Speaker Change: Andrew going back to your first comment we do expect to be exiting fiscal year 'twenty four as we go through this transition.

Margins that are very encouraging as Nick talked about as well as volume that supports continued growth in 'twenty five and beyond.

Nicholas C. Gangestad: This reflects our continued expectation that inventory days on hand will drop to approximately 125 days by the end of fiscal year 24, compared to 140 days of inventory we had at the end of fiscal year 23. We continue to expect free cash flow conversion in the first half to be well below 100%, mostly tied to the higher incentive compensation payment made in Q1 relative to our fiscal year 23 performance and higher income tax payments related to the realized capital gain on the sale of our stake in PTC as well as our Tax Cuts and Jobs Act transition tax payments. From a calendarization perspective, we expect Q2 sales dollars and segment margin to be similar to Q1 levels. We previously expected the lead times on our last constrained products to return to normal by the end of Q1. This is now being pushed back to the middle of the year.

Speaker Change: Thank you and just a follow up question.

Speaker Change: We've been getting some incoming calls just post concerned about.

Speaker Change: No doubt and packaging Capex I think there were specific headlines.

Speaker Change: Also mining in other area of concern I know sort of discrete and process, but can you just comment about these two specific markets, maybe a little bit more granularity what you are seeing around the world. Thanks, So much.

Speaker Change: Sure so for.

For us packaging is typically.

Speaker Change: Being incorporated as part of our vertical industries of food and beverage consumer packaged goods.

Speaker Change: And we are seeing.

Speaker Change: Machine Rebuilders in those areas of life Sciences is well I should mention there is packaging.

Speaker Change: Madison and life Sciences of course, and we are seeing those machine builders similar charge distributors work through.

Nicholas C. Gangestad: This means that our split between first half and second half revenue will be even more weighted towards the second half. Our plan was and continues to be for balanced spend across the four quarters of fiscal year 24 compared to our upward trajectory of spend in fiscal year 23 as confidence in the supply chain recovery pace grew. Given the split of sales between the first and second half, that means first half margins will be noticeably lower compared to the year prior, and second half margins will be noticeably higher. We expect margins in Q2 to remain similar to what they were in Q1 and then increase to the mid-20s in Q3 and Q4. That expansion in margin is driven virtually entirely by revenue returning to levels consistent with end demand. We anticipate investment spend to be relatively flat across the four quarters of fiscal year 24.

Speaker Change: Inventory in their system, it's in a similar kind of profile to what we're seeing with our distributors.

Speaker Change: We expect over the coming few months that works off in exposures, what we continue to see from direct conversations with those customers with those machine builders strong underlying demand with respect to mining, we actually are seeing relative strength in mining.

Speaker Change: The areas that we focus on some of that is driven by materials for batteries.

Speaker Change: But in general we do expect to see low single digit growth in mining in the year.

Speaker Change: Thanks, so much.

Speaker Change: Thanks, Andrew.

Speaker Change: Our next question comes from Nigel Coe from Wolfe Research. Please go ahead. Your line is open.

Nigel Coe: Thanks, Good morning, sorry about that.

Nigel Coe: Thanks for the question.

Nigel Coe: I'm, sorry, I missed part of the call Nick will you have running through.

Nicholas C. Gangestad: From a year-on-year perspective, Q2 and Q3 increases in investment spend will be approximately $10 million each, and then a year-over-year decrease in Q4. A few additional comments on fiscal 24 guidance. Corporate and other expense is expected to be around $125 million. Net interest expense for fiscal 24 is expected to be about $120 million.

Nigel Coe: Through the <unk>.

Nigel Coe: The guidance did you call out the the degree of order acceleration I know you called out double digit growth sequentially. Just wondering if you quantified the order and backlog exiting the quarter.

Nick Young: Yes, yes, I did call some of that out first week, we saw.

Nick Young: Double digit order growth sequentially.

Nick Young: In Q1, and we expect double digit order growth sequentially in Q2.

Nick Young: And then a further ramp into Q3 and Q4 for orders and that's being driven by the.

Nicholas C. Gangestad: And we're assuming average diluted shares outstanding of 115.1 million shares. We expect to deploy between $300 and $500 million to share repurchases during the year. With that, I'll turn it back over to Blake for some closing remarks before we start Q&A.

The progress we're seeing with.

Nick Young: Excess inventory in the channel coming out in terms of the backlog we ended fiscal year 2003, with a backlog of $4 one.

Nick Young: $1 billion, and we saw that come down.

Blake Moret: Thanks, Nick. In spite of geopolitical volatility, our detailed discussions with our distributors, machine builders, and end-users point to fairly healthy market conditions. Our outlook for fiscal year 24 is based on an acceleration of new product orders as distributors and machine builders reduce excessive inventory. Our operations team is working around the clock to ensure we can convert these new orders into shipments at lead times that are as good or better than pre-pandemic lead times. We continue to gain share across our key platforms, especially here in North America. We are seeing early orders from customer projects facilitated by economic stimulus, and automation continues to be an important way to maximize the productivity of available workers. Our recent acquisitions are performing well in both revenue and cost, with ClearPath Robotics being a standout addition to Rockwell's portfolio.

Nick Young: High single digit percent in the first quarter.

Speaker Change: Okay. That's really helpful. Thanks, and then sort of missed that.

Are we still looking at $3 billion at the point where that stabilizes.

Speaker Change: We start to see that real inflection in and order rates.

Speaker Change: I am sorry, the $3 $3 billion.

Speaker Change: Yes, we began towards the backlog I think that's what you called out as sort of normal ish level.

Speaker Change: Yes.

Speaker Change: What.

Speaker Change: What I said on the last call is that we expect the backlog in a more normal range of 30% to 35% of our revenue.

Speaker Change: Think that we still see that as a good point I'd say our current projection.

Speaker Change: At the high end closer to the high end of that 30% to 35% range now for fiscal year 2000.

Speaker Change: Okay. That's great and then my follow on question that is.

Speaker Change: And that the mix.

Speaker Change: Impacts from lifecycle services outgrowing.

Speaker Change: The software controls on it but.

Aijana Zellner: We've seen multi-million dollar wins across diverse end markets, including automotive, food, and beverage, and even warehousing and logistics, and this is just the beginning. We have a unique portfolio of high-value assets that we've built and bought with the best partner ecosystem in the business. Our focus is now to integrate these elements as only a pure play can, growing share, profitability, and cash flow by driving efficiency and synergy. Ajana will now begin the Q&A session. Thanks, Blake.

Speaker Change: Maybe it's a 240 basis points of gross margin compression year over year, maybe just unpack that for us in terms of mix versus M&A impacts.

Speaker Change: I'm just curious because.

Speaker Change: Given the pricing was three points plus cost plus.

Speaker Change: Pretty big Delta.

Yeah. So if you look at our press release, we have gross profit down 240 basis points year on year.

Speaker Change: <unk>.

Speaker Change: About a third of that is coming from the investment spend that I talked about year on year that debt because our in our R&D spend is part of that growth gross okay.

Speaker Change: That's.

Speaker Change: That's about a third of that decline in the margin there.

Operator: We would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up. Julian, let's take our first question. Certainly. As a reminder, to ask a question, please press the star followed by the number one on your telephone keypad. Our first question comes from Andy Kaplowitz from Citigroup. Please go ahead; your line is open. Good morning, everyone. Hey Andy,

Speaker Change: Our acquisition.

Speaker Change: Clear path and birth or are 30 basis points or a small part of that.

Speaker Change: And then the rest of it would be coming from mix and Underutilization of our.

Speaker Change: Under Underutilization of our supply chain in the first quarter.

Speaker Change: Okay that makes sense. Thanks, Nick.

Speaker Change: Yep.

Nicholas C. Gangestad: Blake or Nick, you mentioned that your orders were up double digits sequentially. Could you tell us where the backlog was ending Q1? And regardless, you did reiterate your low single-digit order growth guide for FY 24. So are you beginning to see a more substantial turn in orders here in fiscal Q2 as your distributors bottom out their inventory levels? And if so, what end markets would you say are inflecting the, Yeah, Andy, we ended last year with a backlog of $4.1 billion all in, and it went down high single digits during the first quarter. In terms of what we're seeing with orders. You're exactly right.

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

Stephen Tusa: Hi, good morning.

Stephen Tusa: Good morning, Steve.

Stephen Tusa: So I guess just just from a.

Stephen Tusa: No.

Stephen Tusa: Ability perspective on the deliveries.

Stephen Tusa: Is there a particular end market or anything like that.

Driving this what kind of looks to be a very very choppy outcome on on delivery as it is it like are there certain segments of the market or product types that are.

Stephen Tusa: Not maybe flowing as smoothly as they have in the past.

Stephen Tusa: Steve It's really I mean, it is product and it's centered in the.

Stephen Tusa: Intelligent devices so.

Stephen Tusa: Where you have the greatest diversity of Skus between variable speed drives motion control and <unk>.

Nicholas C. Gangestad: We're seeing an inflection up in orders from the Q4 trough, and we're expecting that to continue into the second quarter of double-digit growth. In terms of where we're seeing that, I'll turn that over to Blake. Yeah, let me just add additionally, Andy, that distributor inventory is coming down. So, as we've talked about before, we have good visibility into our distributor inventory based on our channel model. And we are seeing that going down as we expected.

Stephen Tusa: Each of the areas, where you're seeing that shift that I mentioned earlier.

Stephen Tusa: We were <unk>.

Stephen Tusa: Bringing down a significant amount of past due backlog and now we're moving towards what is a more normal booking bill environment, but there is no.

Stephen Tusa: No.

Stephen Tusa: Unser Mountable challenges that we don't expect to be resolved in Q2 was the shift that we saw really Q1 and a little bit into Q2 is that move from having the vast majority of our shipments as past due backlog moving to more book and Bill Center intelligent.

Blake Moret: As we're seeing the orders, it's a good mix across industries, including some of the industries that were pressured by the lower shipments in the first quarter, like auto and food and beverage. We're also seeing it across the entire portfolio, as we talked about, annual recurring revenue, very strong from a software and a high-value services standpoint, and other aspects of lifecycle services. But we do expect that that order recovery is going to be broad-based across, you know, our key industries, including discrete and hybrid to complement the continuing good performance in processes such as oil and gas. Very helpful guys.

Devices segment.

I guess just also just Nick from an earnings perspective.

Stephen Tusa: Okay.

Stephen Tusa: First half is going to be relatively low is how much of a linear step up do you think for three and four Q.

Stephen Tusa: As we just think about the seasonality here.

Stephen Tusa: Yeah.

Stephen Tusa: It will really be bringing us where the first two quarters of this year.

Stephen Tusa: Sure.

Speaker Change: Hey, under reflecting end demand.

Speaker Change: For our products has that excess inventories being worked through in Q3, and Q4 are getting back to a more normal. So yes that makes it more heavily weighted to the back half of the year.

Nicholas C. Gangestad: And then you didn't change your adjusted EPS guidance for the year, but you did mention that you expect modest EPS growth that's back and loaded. I know, Blake, you suggested that your supply chain team should catch up with the more book-and-build type environment in Q2, and Nick, you talked about the margin jump starting in Q3, but maybe you could talk more about your confidence level in getting that margin jump you expect in Q3. Does a relatively slow start for EPS for the year suggest modest EPS growth for FY24, meaning somewhat lower than that 12 to 1350 EPS range, or are you not trying to signal that? No, well, we're reaffirming the guide that we introduced in November.

Speaker Change: But given our plans of what we'll be doing some spending.

Speaker Change: The type of earnings growth is very consistent with what we expect with that kind of uptick in revenue into Q3 and Q4.

Speaker Change: Okay, and just lastly, just on the orders, we're getting to something in the kind of one point I don't know 1617 range does that is that about right.

Speaker Change: Yes, we haven't we haven't given the specific number Steve we talked about double digit sequential growth from the trough in Q4 to Q1 with expected continuing double digit sequential growth from Q1 to Q2 and really continuing through the year.

Speaker Change: Okay, great. Thanks, a lot.

Speaker Change: Yes. Thank you.

Speaker Change: Our next question comes from Chris Snyder from UBS. Please go ahead. Your line is open.

Nicholas C. Gangestad: The significant increase in EPS in the second half of the year is based on increased volume. You'll recall last year, we went from roughly $2 billion of shipments in the first quarter of fiscal year 23 to an exit of around $2.5 billion. And we're expecting to see something similar this year, in fiscal year 24, from the Q1 that we were talking about of $2 billion in shipments to around $2.5 billion at the end of the year. That's what's going to drive the higher margins in EPS.

Chris Snyder: Thank you I wanted to ask about the guidance step up in margins from the high teens level in the fiscal second quarter to about mid twenties.

Chris Snyder: In the fiscal third quarter I understand the volumes are getting better sequentially.

Chris Snyder: But that implied sequential afirma.

Chris Snyder: Incremental is much much sharper than what we would kind of say if normalized for the company. So can you just talk about other drivers of that sequential margin uplift into the back half.

Chris Snyder: And just just volume.

Speaker Change: Yes, there is.

Speaker Change: There are three things I'll point out on that Chris.

Speaker Change: The vast majority I'll say, 75% of that margin expansion is just coming from the volume increase.

Jeffrey Todd Sprague: Last year, the causality for that ramp was based on getting chip supply. This year, it's the ramp of orders. Appreciate it, guys. Thank you. Our next question comes from Jeff Sprague from Vertical Research. Please go ahead, your line is open. Thank you. Good morning, everyone.

Speaker Change: The increase in holding investment spending flat.

Speaker Change: Ross the year, the second and third pieces are pretty equal one is coming from.

The improved utilization of our factories that will in our supply chain that we will see as a result of that and then the third is.

Blake Moret: Can we just drill back into the supply chain comments? They seem inconsistent, right, when we think about it. You know, revenues this quarter are lower than revenues in the prior three quarters, right? So you're getting a lot more out of the door, you know, the prior three quarters. So can you just elaborate a little bit more on what exactly happened in the supply chain, what kind of bottlenecks you're dealing with? Are they, you know, at the Rockwell factory level? Are they, you know, at a supplier level? Just please clear that up for us if you could.

Speaker Change: We saw good progress on our lifecycle services margin and we expect that to continue and Thats also going to be part of our continued margin expansion from the first half to the second half.

Speaker Change: Thank you I appreciate that and then.

Speaker Change: Some of the supply chain constraints, you guys called out that debt.

Speaker Change: Weighed on shipments in the first quarter.

Speaker Change: I don't think I caught it but could you provide.

Speaker Change: Any sort of magnitude on how much sales were impacted by that and.

Speaker Change: And it does not seem like Thats coming back in the second quarter. It seems like bigger than kind of deferred into the back half of the year is that right. Thank you.

Speaker Change: Yeah, I would I would put the rain we had originally guided that we expected.

Blake Moret: Sure Jeff, so what we're seeing is the shift and the timing going from a dynamic of shipments that's been based entirely on reducing large amounts of backlog to recovery to a more normal product book and bill process. So the big shipments that we saw over the last year were based on chips coming in with a very visible, really large mass of past due backlog that was in a relatively concentrated set of SKUs. So, whether it was variable speed drives or motion control or Logix IO, we had very good visibility into what we needed to ship as soon as we got the chip.

Speaker Change: Tom.

Speaker Change: Low single digit growth in the first quarter, we came in at one. So there is that there is a portion but it's probably in the 50 to <unk>.

Speaker Change: $70 million range of of what we're talking about there and yes much of that is going into the second half of the year.

Speaker Change: That is correct.

Speaker Change: Thank you.

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

Julian Mitchell: Hi, good morning.

Julian Mitchell: I just wanted to try and square sort of the comments on capacity utilization and the supply constraints with inventories. So I think they're running we'll wait for the queue for the December balance, but it sounded like those are sort of stable sequentially maybe.

Nicholas C. Gangestad: We're seeing the shift in Q1, which should be complete in Q2, of moving to a more normal distribution of having the vast majority of our shipments in a quarter based on book and bill. That is, new orders coming in that get turned around in the quarter. The things that hampered us in Q1 were the lingering tail of those past-due backlog items that we talked about taking a little bit longer than Q1 to clear out, as well as some continuing component challenges, and then the shift to being able to build safety stock to be able to handle those incoming orders. We hope that progress continues in Q2. We expect to be substantially complete with that in the quarter, but that's the difference between what we were shipping out last year versus what we're shipping out now.

Julian Mitchell: And they've been running at a mid teens share of sales versus sort of eight 9% pre.

Julian Mitchell: Covid.

Julian Mitchell: And they rose a lot the last 12 months, even as sales rose so just want to understand.

Julian Mitchell: Stan.

Julian Mitchell: It sounds like inventories to sales inventory days should fall in the balance of the year.

Julian Mitchell: But do you need sort of some.

Julian Mitchell: Is that based on a much faster sales throughout the plant you need to sort of under produce somewhat to get the inventory back down or do you think that inventories will stay much higher now as a share of sales medium term than pre COVID-19 for some reason, even though lead times are normal.

Nicholas C. Gangestad: I should also mention that we've talked in the past about our capacity being over $10 billion, and that remains true. Our capacity to ship, in terms of physical plant and labor, is over $10 billion, and that's going to be important as we continue to grow. Okay, right, and then. Again, if we could just talk a little bit more about it, maybe it's for Nick. I think you're pretty explicit on sort of the margins for Q2. If you just give us a little bit of color, though, on kind of the mix and what's driving that.

Yeah, Julian there is theres a few things that will change their first of all you know our projection that we're going to move from 140 days of inventory down to 125 debt.

Julian Mitchell: That's been there and that's that's unchanged now the mix of that.

Julian Mitchell: As we're looking at this shift to more and more of our revenue coming from current quarter orders that we're booking and billing.

Julian Mitchell: Part of our action plans there as we see some increased needs for safety stock of.

Julian Mitchell: Those finished goods so as we go through the.

Nicholas C. Gangestad: I mean, it does sound like you're expecting some sequential revenue lift in Q2. So why would margins be roughly similar to Q1? Yeah, we're expecting dollar revenue to be very similar in Q2 to what it was in Q1 and a very similar similar margin. The mix of what we're selling in Q1 to Q2, in Q1 we had more of it coming out of our backlog, and less from current quarter book and bill in Q2 that'll be shifting that mix will be shifting, to more coming out of current quarter orders as we continue to bring that backlog down, on the margin front, many of the things that we saw in first quarter we're going to be keeping investment spend very similar to what it in q2 very similar to what it was in, In Q1, the year-on-year change of that will come down, but the sequential will be almost identical.

The balance of this year, there will be some places where finished goods go up but that will be more than offset by.

Julian Mitchell: The reductions that we're seeing in our components.

Julian Mitchell: Driven by the improved lead lead times, we have for those components as well as our work in progress. So we're expecting as we progressed through 2004 to be seeing that kind of shift.

Julian Mitchell: The 125 days will still be well above our <unk>.

Julian Mitchell: Pre pandemic levels, where we were typically under 100 days of inventory.

I see but I guess.

Julian Mitchell: So that's two years ago people would have said you need higher inventory because backlogs are very high and you need inventory to sort of satisfy the projects in backlog.

Julian Mitchell: But now you are saying is you go back towards a more normal book and ship business that also requires sort of higher.

Julian Mitchell: Inventories I just wanted to understand what's kind of changed in the thinking there.

Nicholas C. Gangestad: And then mix will probably not be as negative as it was for us in Q1, and we expect mix to continue as a negative into Q2. Segment mix, where we expect higher growth in our highest growth in life cycle services, but also within segments where we're seeing more of our sales in intelligent devices coming from our configure to order. Great, thank you. Our next question comes from Andrew Obin from Bank of America. Please go ahead; your line is open. Hi guys. Good morning. Good morning, everyone.

Julian Mitchell: Yes in order to have sufficient inventory to be able to ship products very quickly to our to our customers and our distributors when they want it.

Julian Mitchell: We've been working on getting our products recovery back to where we can ship now part of the progress we're making in the next couple of quarters is getting all of our safety stocks on our for our finished goods to where we feel they should be in order to make sure where we're performing and executing to our customers.

Julian Mitchell: <unk>.

Julian Mitchell: That part of that plan.

Julian Mitchell: And so so finished goods will not decline, but we expect all of our decline to be coming in the in our raw materials and work in progress.

Blake Moret: Yeah, just to follow up, I guess, on Jeff's question, if we go back to your Analyst Day, I think the message is that this is a transition year, and revenue growth, I mean, reverts to plan next year, which means it's going to accelerate very nicely. Can you just expand on that, how do you make sure that over the next 18 months, Rockwell can actually deliver the volumes? Are there any structural changes that you are making to your internal processes and supply chains to sort of ensure a smooth ramp-up? Yeah, Andrew. There is, as I mentioned before, the first is to make sure that we have the fixed assets in place.

Speaker Change: That's helpful. And then just the follow up on that would be when you look at your sort of customers and distributors.

Speaker Change: How are you seeing them managing their inventories.

Speaker Change: And of your product and how are they feeling about those inventory levels today. Please.

Speaker Change: Yes, we expect our distributors to.

Speaker Change: Be carrying a little higher amount of inventory given the customer service challenges that the industry has had over the last couple of years, we expect that equilibrium that distributors get to to be a little higher level than it was pre pandemic and that's with <unk>.

Blake Moret: We've been working on that for over a year, which allowed us to get to the $9 billion worth of shipments last year, which, you know, was a fairly healthy step up from before. And we've kept going to where today we feel like we have over $10.5 billion worth of capacity in terms of the assets. As you'll recall, we're a fairly asset light manufacturing process. It's assembly, it's test fixtures, it's surface mount machines, and so on.

Speaker Change: Very specific discussions with them about how they're thinking about the balance of customer service and working capital. We're also seeing with our machine builders that as I mentioned before some of them are still continuing to work down.

Speaker Change: Inventory in their own system, but we expect that to be complete over the coming months I don't know of any difference in the way machine builders are looking at carrying levels of inventory and working capital, but with our distributors, we do expect them to normalize at a little higher level than they would.

Blake Moret: And we're making sure not only in our organic business but also with the acquisitions where we're seeing such strong growth that we're making the investments to be able to fuel that growth. Labor is the other area. We have adequate product labor in place. Currently, we are continuing to ramp up based on the growth in our engineer to order business and the share gains that we're seeing there. The labor through the year in that And in some cases, we're holding labor in place to make sure that it's there as we see that order ramp continue through the year. From a structural standpoint,

Speaker Change: Have traditionally.

Speaker Change: That's very helpful. Thank you.

Speaker Change: Thank you our next question.

Speaker Change: Our next question comes from Noah Kaye from Oppenheimer. Please go ahead. Your line is open.

Noah Kaye: Thanks very much.

Noah Kaye: I just want to ask one final one on the.

Noah Kaye: Production constraints can you help us understand a little bit better what is different about the configure to order business versus the type of.

Blake Moret: We are working through ways to drive efficiency, to get scale throughout the organization. You know, some of this is standard lean concepts, but it's also adding the things that we've learned about needing resilience in terms of redundancy across multiple plants and, in some cases, redundant sources of supply to be able to reduce the dependence on single suppliers in single parts of the world.

Noah Kaye: Products that you've been working down our backlog.

Noah Kaye: Is there a.

Noah Kaye: Focus on different line does it require different personnel just help us understand some of the actual operational dynamics you are going through as you kind of reconfigure for a more normal book and ship environment.

Speaker Change: Sure. Let me let me just clarify that the shift that's going on that we saw challenges in the first quarter was the move from servicing backlog of products to shipping out book and bill of products.

Blake Moret: So we're working on all of those plays and operations as well as with the engineers. Andrew, going back to your first comment, we do expect to be exiting fiscal year 24 as we go through this transition with margins that are very encouraging, as Nick talked about, as well as volume that supports continued growth in 25 and beyond. Thank you. And just a follow-up question. We've been getting some incoming calls, just folks concerned about the slowdown in packaging capex. I think there were specific headlines.

Speaker Change: We are the orders coming in the quarter, we continue to have a certain amount of configure to order business. Our motor control centers are big drives our independent cart technology and so on that isn't represented the biggest challenge to us those are very different processes.

Speaker Change: Configure to order businesses come in with varying degrees of.

Speaker Change: Customization specific to a customer, but the big dynamic that we've been talking about in Q1 is the move from a somewhat concentrate concentrated list of Skus that we have backlog building that backlog built up because we couldnt get the <unk>.

Blake Moret: Also, mining, another area of concern, I know, sort of discrete and processed. But can you just comment on these two specific markets, maybe with a little bit more granularity, what you are seeing around the world? Thanks so much.

Speaker Change: Moving to book and Bill of a more diverse set of Skus as we see the largest portion of our shipments coming from orders received in that quarter, not one or two or three quarters. Prior. So that's the main dynamic that we're working through you have.

Blake Moret: Sure. So, for us, packaging is typically being incorporated as part of our vertical industries of food and beverage, consumer packaged goods, and we are seeing machinery builders in those areas and life sciences as well. I should mention packaging medicine and life sciences, of course, and we are seeing those machine builders, similar to our distributors, work through inventory in their system. It's in a similar kind of profile to what we're seeing with our distributors in that we expect over the coming few months that this will work off and exposes what we continue to see from direct conversations with those customers, with those machine builders, strong underlying demand. With respect to mining, we are actually seeing relative strength in mining in the areas that we focus on. Some of that is driven by materials for batteries, but in general, we do expect to see low single-digit growth in mining. Thanks so much.

Speaker Change: Much less visibility to what's coming in from that book in vivo profile. So that's one of the changes and what Nick was talking about in the previous question is we are in the process of building up safety stock in those areas. So that we can deal with the ebb and flow of a normal or.

Speaker Change: Order book in a quarter being able to turn that around and convert those orders to shipments in the quarter. So those are the processes that are somewhat different from what the world. We've been living in for the last year or so to what were transitioning to and will continue to operate in and we hope for.

Speaker Change: On time.

Speaker Change: Thanks, Brian if I could ask just wanted to follow up I know you are not.

Speaker Change: You reiterated your organic industry segment outlook essentially for the full year.

Nigel Coe: Thanks, Andrew. Our next question comes from Nigel Coe from Wolfe Research. Please go ahead, your line is open. Thanks. Good morning.

Speaker Change: Is there any change or shift you've seen in the timing.

Speaker Change: Demand.

Speaker Change: Orders for any of the major segments or sub segments.

Brian: It does seem like most of the cadence here is really driven by your own.

Operator: Sorry about that. Thanks for the question. I'm sorry, I missed the part of the call, Nick, where you were running through the guidance point. Did you call out the degree of auto-acceleration?

Brian: Production considerations and where channel inventory is but is there any shift in timing you can see among the <unk>.

Brian: And customers.

Brian: Yes, I think I think you said it right the largest impact is based on getting those shipments out the door being able to see the distributors returned to <unk>.

Nicholas C. Gangestad: I know you called out double-digit growth sequentially. Just wondering if you quantified the order and backlog x in the quarter. Yeah, yeah, I did call some of that out.

Brian: Equilibrate.

Nicholas C. Gangestad: First, we saw double-digit order growth sequentially in Q1, and we expect double-digit order growth sequentially in Q2. We, and then a further ramp into Q3 and Q4 for orders. And that's being driven by the progress we're seeing with. In terms of the backlog, we ended fiscal year 23 with a backlog of $4.1 billion, and we saw that come down by a high single-digit percentage in the first quarter. Okay, that's really helpful.

Brian: We continue to see good activity in process applications, we talked around oil and gas.

Brian: Specialty chemicals.

Brian: Mining.

Brian: These are all areas that are relatively strong certainly we've seen some slowdown in certain of the EV projects, but those projects are continuing we're continuing to win new business in those areas and as I talked about in my prepared remarks in.

Brian: Internal combustion engines and in hybrid manufacturing, we have very good readiness to serve in those areas as well with a lot of experience. So in a year of low growth.

Nicholas C. Gangestad: Thanks. Are we still looking at $3 billion as the point where this stabilizes and where we start to see that real inflection in order rates? I'm sorry, but $3 billion?

Not seeing any big ebbs and flows in the vertical and market needs being the predominant factor in any changes through the year.

Nicholas C. Gangestad: Yeah, $3 billion is the backlog. I think that's what you called out as sort of a normalish level. Oh, yeah, what I said on the last call is that we expect the backlog in a more normal range of 30% to 35% of our revenue. I think that we still see that as a good point.

Speaker Change: Understood. Thanks Blake.

Blake Moret: Thanks, Joanne we'll take one more question.

Blake Moret: Our last question will come from Joe O'dea from Wells Fargo. Please go ahead. Your line is open.

Joe Ritchie: Hi, good morning, Thanks for taking my question.

Joe Ritchie: First I just wanted to ask about the back half of the year margin profile and it does seem like a transition from maybe a higher concentration of a narrower band of products that you would've had shipping out of backlog in 2003 compared to more kind of book and ship in quarter and 24.

Nicholas C. Gangestad: I'd say our current projections see us at the high end, closer to the high end of that 30% to 35% range now for fiscal year 2024. Okay, that's great. And then my follow-on question, Nick, is, I understand that the MIX impacts from life cycle services are growing, you know, the software control and ID, but maybe the 240 base points of gross margin compression year to year, maybe just unpack that for us in terms of MIX versus M&A impacts. Just curious, because that, you know, given the pricing was three points, price cost positive, that's a fairly big delta. Yeah, so if you look at our press release, we have gross profit down 240 basis points year on year. I'm, About a third of that is coming from the investment spend that I talked about year-on-year. That's because our R&D spend is part of that growth process. So that's about a third of that decline in the margin there. Our acquisitions, ClearPath and Verve, our 30 basis points are a small part of that. And then the rest of it would be coming from the mix and underutilization of our supply chain in the first place. Okay, that makes sense. Thanks, Nick.

Joe Ritchie: Is a bit of a mix headwind and so when we think about back half of 'twenty for margins being better than back half of 'twenty three.

Joe Ritchie: Can you expand on that a little bit is it devices is <unk>.

Joe Ritchie: Cycle is up.

Joe Ritchie: The software control is down a bit year over year, but just trying to contemplate what could still be a year over year mix headwind as you broaden out the book and ship.

Speaker Change: Yes, I think what youre seeing from a positive standpoint is the greater percentage of products as those orders increase through the year to be sure. We are seeing some headwind based on the comparables with a year, where logics grew over <unk>.

30% last year. It was one of our most profitable product lines, but the other point is that recognizing the.

Speaker Change: The puts and takes in this year, we did take cost out beginning in Q4 of the last year and so that gives us help to being able to push those margins at the exit of 24 higher than they were.

Speaker Change: That's in across our business and functions most noticeably in lifecycle services.

Speaker Change: Great and then.

Speaker Change: Just on the sort of channel inventory observations and it sounds like it's taking a little bit longer than previously anticipated to get channel inventories to targeted levels.

Speaker Change: What are your observations of why that is in terms of kind of end market demand patterns or maybe a little bit more inventory out there than you appreciated for why it would be more middle of the year versus versus first half of the year, where we would've seen channel inventory correct.

Nicholas C. Gangestad: Yep. Our next question comes from Steve Tusa from J.P. Morgan. Please go ahead, your line is open. Hi, good morning. Morning, Steve.

Stephen Tusa: So I guess just from a, you know, stability perspective on the deliveries, you know, is there a particular end market or anything like that that's driving this what kind of looks to be a very, very choppy outcome on delivery? Is it?

Speaker Change: We're really we're really talking about.

Speaker Change: Variability that could be in the area of weeks or a month.

Speaker Change: I wouldn't read too much into talking middle of the year versus.

Speaker Change: Second quarter, we did see a good double digit sequential increase in orders in Q1, we expect that again in Q2 January represents a sequential increase based on what we've seen so far from Q1 and so.

Blake Moret: Is it like, are there certain segments of the market or product types that are, you know, not maybe flowing as smoothly as they have in the past? No, Steve, it's really the product, and it's centered on intelligent devices. So where you have the greatest diversity, between variable speed drives and motion control?

Speaker Change: While we continue to see that inventory at our distributors coming down pretty much as we expected, yes, Joe I will just add I mean, we're obviously in close dialogue with with <unk>.

Joe: With all of our distributors and a high percentage of them.

Blake Moret: And these are the areas where you're seeing that shift that I mentioned earlier, where we were bringing down a significant amount of past due backlog, and now we're moving towards what is a more normal book and bill environment, but there are no insurmountable challenges that we don't expect to be resolved in Q2. It was the shift that we saw really in Q1 and a little bit into Q2, that move from having the vast majority of our shipments past in backlog moving to more book and bill centered within intelligent devices. I guess also just, Nick, from an earnings perspective, you know, the first half is going to be relatively low. How much of a linear step up do you think for three and four Q as we just, you know, think about the seasonality here? Yeah, it will really be bringing us where the first two quarters of this year are under reflecting and demand for our products as that excess inventory is being worked through. And then Q3 and Q4 are getting back to more normal.

Joe: <unk> to us that they expect to be done with that.

Joe: D, they're reducing excess inventory sometime during Q2.

Joe: And net area at an equilibrium point there.

Speaker Change: That's really helpful. Thank you.

Speaker Change: Thank you everyone for joining us today that concludes todays conference call.

At this time you may disconnect. Thank you.

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Nicholas C. Gangestad: So yes, that makes it more heavily weighted to the back half of the year, but given our plans of what we'll be doing with spending, the type of earnings growth is very consistent with what we'd expect with that uptake in revenue into Q3 and Q4. Okay, and just lastly, just on the orders, we're getting to something in the kind of 1 point, I don't know, 1.6, 1.7 range. Is that about right?

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Blake Moret: Yeah, we haven't given the specific number, Steve. We talked about double-digit sequential growth from the trough in Q4 to Q1 with expected continuing double-digit sequential growth from Q1 to Q2, you know, and really continuing through the year. Okay, great. Thanks a lot.

Chris Snyder: Yep, thank you. Our next question comes from Chris Snyder from UBS. Please go ahead, your line is open. Thank you. I wanted to ask about the guided step-up in margins from the high teens level in the fiscal second quarter to about the mid-20s in the fiscal third quarter. I understand volumes are getting better sequentially, but, you know, that implied sequential incremental is much, much sharper than what we would kind of say is normalized for the company. So can you sort of talk about other drivers of that sequential margin uplift into the back half beyond just volume? Yep, there's there's three things I'll point out on that, Chris.

Nicholas C. Gangestad: The vast majority, I'll say 75% of that margin expansion is just coming from the volume, increased holding invest, and spending flat across the year. The second and third pieces are pretty equal. One is coming from the improved utilization of our factories and our supply chain that we'll see as a result of that. And then the third is.

Nicholas C. Gangestad: We saw good progress on our life cycle services margin, and we expect that to continue, and that's also going to be part of our continued margin expansion from the first half to the second. Thank you. I appreciate that. And then on some of the supply chain constraints, you guys called out that, you know, weighed on shipments in the first quarter. I don't think I caught it, but could you provide any sort of magnitude on how much sales were impacted by that? And it does not seem like that's coming back in the second quarter.

Nicholas C. Gangestad: It seems like they are then kind of deferred into the back half of the year. Is that right? Thank you. Yeah, I would, I would put the rain. We had originally guided that we expected, uh... low single-digit growth in the first quarter. We came in at one. So there is a portion, but it's probably in the fifty to sixty percent rate. $70 million range of what we're talking about there.

Nicholas C. Gangestad: And yes, much of that is going into the second half. That is correct. Thank you. Our next question comes from Julian Mitchell from Barclays. Please go ahead. Your line is open.

Julian Mitchell: I just wanted to try and square sort of the comments on capacity utilization and supply constraints with inventories. So I think they're running, we'll wait for the queue for the end December balance, but it sounds like those are sort of stable sequentially maybe, and they've been running at a mid-teens share of sales versus sort of eight, nine percent pre-... COVID and they rose a lot the last 12 months even as sales rose so just want to understand sort of it sounds like inventories to sales inventory days should fall in the balance of the year, But do you need sort of some, you know, is that based on a much faster sell throughout of the plant, you need to sort of underproduce somewhat to get the inventory back down?

Julian Mitchell: Or do you think that inventories will stay much higher now as a share of sales in the medium term than pre-COVID for some reason, even though lead time is shorter? Yeah, Julian, there's a few things that will change there. First of all, you know our projection that we're gonna move from 140 days of inventory down to 125 days. That's been there, and that's undeniable. Now the mix of

Nicholas C. Gangestad: As we're looking at this shift to more and more of our revenue coming from current quarter orders that we're booking and billing, um, Part of our action plan there is that we see some increased needs for safety stock of those finished goods. So as we go through the balance of this year, there will be some places where finished goods go up, but that will be more than offset by the reductions that we're seeing in our components. This is driven by the improved lead times we have for those components, as well as our work in progress. So, we're expecting, as we progress through 24, to be seeing that kind of shift. The 125 days will still be well above our – are pre-pandemic levels where we were typically under 100. I see. But I guess I can understand it.

Nicholas C. Gangestad: Two years ago, people would have said you need higher inventory because backlogs are very high, and you need inventory to satisfy the projects in backlog. But now you're saying as you go back towards a more normal book and ship business, that also requires sort of higher inventories. I just want to sort of understand what's kind of changed in the thinking there.

Nicholas C. Gangestad: Yeah, in order to have sufficient inventory to be able to ship products very quickly to our customers and our distributors when they want them, we've been working on getting our product recovery back to where we can ship. Now, part of the progress we're making in the next couple of quarters is getting all of our safety stocks for our finished goods to where we feel they should be in order to make sure we're performing and executing to our customers' expectations. That's part of that plan.

Blake Moret: And so finished goods will not decline, but we expect all of our decline to be coming in our raw materials and work. That's helpful. And just the follow up on that would be when you look at your sort of customers and distributors, how are you seeing them managing their inventories of your kind of your product? And how are they feeling about those inventory levels today? Yeah, we expect our distributors to be carrying a little higher amount of inventory; given the customer service challenges that the industry has had over the last couple of years, we expect that equilibrium that distributors reach to be a little higher level than it was pre-pandemic. And that's with very specific discussions with them about how they're thinking about the balance of customer service and working capital.

Blake Moret: We're also seeing with our machine builders that, as I mentioned before, some of them are still continuing to work down inventory in their own system, but we expect that to be complete in the coming months. I don't know of any difference in the way machine builders are looking at, you know, carrying levels of inventory and working capital, but with our distributors, we do expect them to normalize at a little higher level than they would traditionally. That's very helpful.

Noah Kaye: Thank you. Thank you. Our next question comes from Noah Kaye from Oppenheimer. Please go ahead.

Noah Kaye: Your line is open. Thanks very much. I just want to ask one final question on the production constraints. Can you help us understand a little bit better what is different about the configure to order business versus, you know, the type of products that you've been working down a backlog of? Does it focus on different lines?

Blake Moret: Do you need, you know, different personnel? Just help us understand, you know, some of the actual operational dynamics you all are going through as you, you know, kind of reconfigure for a more normal book and ship environment. Sure. Let me just clarify that the shift that's going on where we saw challenges in the first quarter was the move from servicing the backlog of products to shipping out book and bill of products where the orders come in during the quarter. We continue to have a certain amount of the configured to order business, our motor control centers, our big drives, our independent car technology, and so on. But that isn't the biggest challenge to us. Those are two very different processes.

Blake Moret: Those configured to order businesses come in with varying degrees of customization specific to a customer. But the big dynamic that we've been talking about in Q1 is the move from a somewhat concentrated list of SKUs that we have a backlog building up, that backlog built up because we couldn't get the chips, moving to book and bill a more diverse set of SKUs as we see the largest portion of our shipments coming from orders received in that quarter, not one or two or three quarters prior. So that's the main dynamic that we're working through. You have much less visibility into what's coming in from that book and bill profile.

Blake Moret: So that's one of the changes. And what Nick was talking about in the previous question is that we're in the process of building up safety stock in those areas so that we can deal with the ebb and flow of a normal order book in a quarter, being able to turn that around and convert those orders to shipments in the quarter. So those are processes that are somewhat different from the world we've been living in for the last year or so to what we're transitioning to and will continue to operate in, we hope, for a long time. Thanks, Blake.

Noah Kaye: If I could ask just one follow-up question. You reiterated your organic industry segment outlook, essentially, for the full year. Is there any change or shift you've seen in the timing of demand and orders for any of the major segments or sub-segments? It does seem like most of the cadence here is really driven by your own production considerations and where channel inventory is. But is there any shift in timing you can see among the end customers? Yeah, I think I think you said it right.

Blake Moret: The largest impact is based on getting those shipments out the door, being able to see the distributors return. We continue to see good activity in process applications. We talk about oil and gas, specialty chemicals, and mining. These are all areas that are relatively strong.

Blake Moret: Certainly, we've seen some slowdown in certain of the EV projects, but those projects are continuing. We're continuing to win new business in those areas. As I talked about in my prepared remarks, in traditional internal combustion engines and in hybrid manufacturing, we have a very good readiness to serve in those areas as well, with a lot of experience.

Blake Moret: In a year of low growth, we're not seeing any big ebbs and flows with vertical end market needs being the predominant factor in any changes. Understood. Thanks, Blake.

Operator: Julian, we'll take one more question. Our last question will come from Joe O'Day from Wells Fargo. Please go ahead, your line is open. Hi, good morning.

Joe Ritchie: Thanks for taking my question. First, I just want to ask about the back half of the year's margin profile. And it does seem like a transition from maybe a higher concentration of a narrow or band of products that you would have had shipping at a backlog in 23 compared to more kind of book and ship in quarter in 24 is a bit of a mixed headwind. And so, you know, when we think about the back half of 24 margins being better than the back half of 23, can you expand on that a little bit?

Blake Moret: Is it, you know, devices are up, life cycle is up, maybe software and control is down a bit year over year, but just trying to contemplate what could still be a year over year mixed headwind as you broaden out the book and ship. Yeah, I think what you're seeing, you know, from a positive standpoint is the greater percentage of products as those orders increase through the year. To be sure, we are seeing some headwinds based on the comparables with the year where Logics grew over 30% last year, you know, as one of our most profitable product lines. But the other point is that, you know, recognizing the puts and takes in this year, we did take cost out beginning in Q4 of the last year, and so that gives us help, you know, to being able to push those margins at the exit of That's in, you know, across our business and functions, most noticeably in lifecycle service. Great.

Blake Moret: And then just on the sort of channel inventory observations, it sounds like it's taking a little bit longer than previously anticipated to get channel inventories to targeted levels. You know, what are your observations of why that is in terms of kind of end market demand patterns or maybe a little bit more inventory out there than you appreciated for why it would be more in the middle of the year versus, you know, the first half of the year where we would have seen channel inventory correct? You know, we're really talking about variability that could be in the area of weeks or a month. I wouldn't read too much into talking about the middle of the year versus the second quarter.

Blake Moret: We did see a good double-digit sequential increase in orders in Q1. We expect that to happen again in Q2. January represents a sequential increase based on what we've seen so far from Q1. And so we continue to see that inventory at our distributors coming down pretty much as we expected. Yeah, Joe, I'll just add that we're obviously in close dialogue with all of our distributors, and a high percentage of them are affirming to us that they expect to be done with, and they're reducing excess inventory sometime during Q2, and that they're at an equilibrium.

Nicholas C. Gangestad: That's really helpful. Thank you. Thank you everyone for joining us today. That concludes today's conference call. At this time, you may disconnect. Thank you.

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