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. [Operator Instruction] 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.

Blake Moret:

Thanks, Aijana. And good morning, everyone. Thank you for joining us today. Before we turn to our third quarter results, I'll make some initial comments. As we saw in Q2, operational performance continued to be strong in our third quarter, but order growth continued to ramp at a slower than expected pace. Our accelerated actions to bring costs in line with the lower outlook on current year orders contributed to the strong margin performance in the quarter, and we are well into the more comprehensive program to expand margins introduced during our Investor Day last November. We continue to expect savings of $100 million in the second half of this year from accelerated actions taken this fiscal year, which will create a good starting point for fiscal year 2025. Based on actions taken in the last 12 months, our worldwide headcount is down 6% since Q2, and most others who will be affected have been notified. We will see incremental savings of $120 million next year from these actions alone, plus a larger amount of additional savings from the more comprehensive program, as I'll discuss in a few minutes. We've announced our new CFO, Christian Roth, who starts in two weeks and is excited to begin. Christian brings a successful track record and will work with me and the rest of the team to combine market-beating growth and financial performance in a consistent longer-term model based on the targets introduced last November to create significant share owner value. Turning to specific results in the quarter, Q3 orders were up low single digits, both year-over-year and sequentially, with growth across all regions. However, while our distributors and machine builders are making progress on working down their excess inventory, their orders to us came in lower than expected in the quarter due to weaker end user demand. As a result, we are projecting a more gradual sequential order growth in Q4 and into fiscal year 2025 than we had previously expected. We had another quarter of strong execution with sales, margins, and EPS, all exceeding our expectations. Total and organic sales were down 8.4% versus prior year. Organic sales came in better than we expected, with strong backlog execution in our longer cycle businesses, including lifecycle services and the configured to order products in Intelligent Devices. Organic sales in our Intelligent Devices segment were down by about a point versus prior year. We continue to see a solid pipeline of projects across all product lines, including good opportunities involving Clearpath's auto mobile robots and cubic data center solutions. In software and control, organic sales declined over 31% year-over-year compared to 24% growth in Q3 of last year. Sales in this segment were still better than expected, driven by better Logix recovery as machine builders reduced their inventory. We also saw good growth in our software business, including both on-prem and cloud-native offerings. For example, in the quarter, we had over 150 new logos for a recently launched FactoryTalk optics portfolio. This reinforces the importance of continued investment in innovation and new product introduction as we continue to redeploy and prioritize our spend towards areas of highest growth and strategic importance. We've talked a lot about cost savings during this challenging year, but we're taking great care to preserve the investments that will enable us to continue to grow share. Lifecycle services had another strong quarter, with organic sales up over 11% year-over-year, driven by continued relative strength in process end markets and strong execution of our project backlog. Book-to-bill in this segment was 1.0. We did see some additional project delays, especially affecting our solutions orders. Some manufacturing customers are taking a pause in making large capacity investments as they deal with slower consumer demand, high interest rates, and policy uncertainty around tax tariffs and stimulus incentives. Even so, our customers are still investing in their operational resilience, reflected by continued double-digit sales growth of our recurring managed services. Total ARR for the company was up a strong 17% this quarter. Segment margin of 20.8% and adjusted EPS of $2.71 were well above our expectations. We're making good progress on driving productivity across the enterprise and we are seeing the benefits of these actions with over $40 million of savings in Q3 alone. Turning to Slide 4 to review key highlights of our Q3 industry segment performance. Last quarter we talked about some project delays and end user CapEx slowdown in parts of our business, namely automotive and food and beverage. We saw project delays across a broader group of industries this quarter, which will impact our end market performance through the end of the fiscal year. Sales in our discrete industries were down high single digits versus prior year, with declines in auto and semi being partially offset by year-over-year growth in warehouse automation. Within discrete, automotive sales declined high teens versus prior year. Brand owners are delaying more EV programs as they continue to reassess their product strategy in light of slower consumer adoption and policy uncertainty in the U.S. Semiconductor sales were down high teens. We continue to see delays in new capacity builds and the associated tooling, due in part to questions about the timing and certainty of CHIPS funding disbursements. E-commerce and warehouse automation sales grew high teens versus prior year, led by strong double-digit growth in North America. We continue to see a broad-based recovery at our end-user and machine builder customer segments. Moving to hybrid, sales in this industry segment were down mid-teens, driven by year-over-year declines in food and beverage and Life Sciences. Food and beverage sales decreased mid-teens in the quarter. Producers in certain segments of the food and beverage market, like baking and snacks, are seeing inflationary headwinds as consumers shift from high-end brands to more affordable labels. We're seeing less greenfield activity, but we do continue to see high demand for software and services that optimize processes to increase efficiency. Life Sciences sales were down high teens. Similar to food and beverage, customers and Life Sciences are prioritizing investments in their operational resilience and infrastructure. In the quarter, we had important wins with two leading pharmaceutical companies. The Life Sciences of Merck in Darmstadt, Germany, which operates in the U.S. and Canada as Millipore Sigma, selected Rockwell to assess the company's current plant infrastructure and help enhance the digital connectivity and cybersecurity resilience of operational assets. Another important Q3 win in Life Sciences was with AstraZeneca. Together with our partner, Claroty, we're helping the customer identify and monitor plan assets, detect threats, and integrate internal services and systems to provide a comprehensive global cyber platform for all of their OT environments. Process sales were mixed across the individual vertical markets. Overall, sales were about flat year-over-year with growth in oil and gas and mining offset by declines in chemicals and metals. Oil and gas sales grew low single digits this quarter. Within this segment, our Sensia JV sales grew double digits versus prior year with good growth in process automation and digital solutions offerings. And while we continue to win business in the energy transition space, we did see some North America project push outs tied to customers wanting to understand potential policy changes that may occur after the U.S. elections in November. In mining, our sales increased high single digits versus prior year. Our growth in the quarter was driven by continued double digit growth in Latin America. Here, Rockwell was chosen to integrate an end-to-end solution for Vale's new processing plant. As this customer looks to increase production capacity, reduce water consumption, and enhance cybersecurity infrastructure. This is a great example of how Rockwell brings our hardware, software, and services together to deliver differentiated value for our end users. Let's turn to Slide 5 and our Q3 organic regional sales. The Americas continue to outperform the rest of the world with North America sales flat year-over-year in the quarter and Latin America sales up almost 19%. EMEA sales were down 28% with continued macroeconomic challenges across Germany, Italy and France, impacting end user demand. Despite these headwinds, we continue to make progress with our European machine builders to gain share in the end user market. In the quarter, IMA Group, an Italian-based leader in designing and developing packaging machines, has sold over a dozen machines equipped with our Rockwell platform. By recognizing the technical advantage of our motion control capabilities, coupled with the time to market provided by our integrated architecture solution, their end user, who's based in Germany, is now looking to adopt Rockwell as its preferred choice in all future commissions. Asia Pacific sales declined 22%. In addition to continued inventory de-stocking and economic challenges in China, we saw incremental headwinds from EV battery project delays in Korea this quarter. Moving to Slide 6 for a fiscal 2024 outlook. While our orders are improving sequentially, they're progressing at a more gradual pace than we anticipated. We believe this is largely tied to a pause in new capacity investments as manufacturers focus on cost control and operational efficiency, waiting for a potential reduction in interest rates and broader U.S. policy changes. Therefore, we're reducing our fiscal year 2024 guidance to reflect this gradual pace of orders growth. Taking into account our order progression through early August, we now expect Q4 orders to be up low single digits sequentially. With that, we expect our organic sales to decline 10% for the year. We continue to expect acquisitions to contribute about a point and a half of growth, and we expect currency to be about neutral for the year. Total ARR is expected to grow about 15% and will exceed 10% of total Rockwell sales this year. We now expect our segment margin to be slightly over 19% for the year. While this represents about a 200 basis point decrease versus last year. It also shows the improving resilience of our business model. Adjusted EPS is slated to decline 21% versus prior year. We expect free cash flow conversion of 60%. Nick will cover this in more detail in his section. Before I turn the call over to Nick, I'd like to spend a few moments on Slide 7 to discuss the progress we're making in setting the foundation for long-term productivity and margin expansion. We already talked about the accelerated actions we're taking in the second half of this fiscal year to drive efficiency and scale across our entire company, and we remain committed to delivering $100 million of savings this year and $120 million of incremental savings in fiscal year 2025, mainly targeted at reducing our SG&A spend. We will continue to optimize our general and administrative spend through a targeted approach, although the majority of additional productivity and margin expansion will be realized as a result of reductions in our cost of sales. As you can see from this chart, we expect to save another $130 million in fiscal year 2025 through additional margin expansion and productivity projects bring our total fiscal year 2025 year-over-year savings to roughly $250 million. You can see the broad list of actions and programs that are underway to realize these targets. These productivity projects include savings in the areas of product cost, indirect material, purchase services, logistics, manufacturing workflow, make or buy decisions, portfolio optimization through SKU reduction, and price. We look forward to our new CFO, Christian Roth's additional perspective as we maximize the effectiveness of this program in fiscal year 2025 and preserve it as a foundational part of our operating model going forward, regardless of the top-line growth in any particular year. Let me now turn it over to Nick to provide more detail on our Q3 performance and financial outlook for fiscal 2024. Nick?

Blake Moret:

Thanks, Nick. This will be Nick's last earnings call with us. I'd like to thank him again for his commitment to Rockwell's mission over the last few years. He's working closely with Christian for a smooth transition, and we wish Nick and his family the very best in retirement. Christian will join me in leading the fourth quarter earnings call and Investor Day in November. As always, Investor Day takes place during our Annual Automation Fair. Last year, over 8,500 customers, distributors, partners, and investors joined us in Boston. Registration opens tomorrow for the 2024 event in Anaheim, California, which takes place during the week of November 18. This year, the fair offers an expanded four days of show floor access, showcasing major new hardware, software, and services offerings. Rockwell's technology portfolio, domain expertise, and unmatched ecosystem uniquely position us to help customers in our home market of North America and around the world. We look forward to seeing you in Anaheim in just over three months. Aijana, we will now begin the Q&A session.

Operator:

[Operator Instructions] Our first question comes from Scott Davis from Melius Research. Please go ahead, your line is open.

Blake Moret:

Good morning.

Scott Davis:

Hope we all keep in touch. But hey, guys, I hate to climb into minutiae, but just to kind of clarify the $250 million a little bit. Normally I think I recall your bonus pool something like $160 million ballpark. So would we think for 2025 something we wanted to model conservatively, would it be $160 million or so incentive comp that comes back and to kind of cut into a little bit of that $250 million or is the number bigger than that?

Scott Davis:

Yes, that's clear. Thanks, Nick. And then when you guys -- I know you're not issuing your 2025 guidance and we still have a little time here, but when you think about incremental margins, let's just assume we get back to growth in 2025 on the easier comps. Would you expect incremental margins to be a little higher than they have been historically based on some of this kind of SKU rationalization, the other stuff that's on the -- on Slide 7, would that be a fair assumption to make guys?

Scott Davis:

Okay, fair enough. I'll pass it on. Thank you, guys.

Operator:

Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead, your line is open.

Nick Gangestad:

Hey, Andy.

Blake Moret:

Sure. Andy, for a little bit of context, we have talked in the third quarter about expecting mid-single digit sequential order growth. We've seen sequential order growth through the year, and we said, because we were continuing to see the impact of excess inventories at distributors and machine builders that was going to yield mid-single digit order growth. As that kind of merges with some weakening in end markets, that's where we saw the low single digit sequential orders growth in Q3. And we think that that continues. So rather than a one or two quarter sharper bounce back, We think this is going to continue to be a gradual recovery. Inventories are depleting, both at our distributors and our machine builders. But we have seen some weaker conditions in end markets. And I would characterize that in a couple of buckets. You see a couple that are affected by consumer demand, such as automotive, as consumers are going a little slower in a rush to EV. And you also see it in food and beverage and home and personal care. We see consumers, and you've heard this from the brand owners themselves, are going a little bit down brand as they're being more discriminating on what they pay for packaged goods. Then you also see some pressure based on policy uncertainty going forward. I would say semiconductor and questions about the disbursement of CHIPS and Science Act funds are weighing on semi manufacturers and then an energy transition. So in those broad buckets, that tempers our view on the good side, on the tailwind side, as we go into next year, we're going to be lapping some of the quarters that had the most significant -- that were more significantly impacted in this fiscal year by inventory. And there'll certainly be a lot less inventory at distributors and machine builders in Q1 of fiscal year 2025, for instance, than there was in Q1 of fiscal year 2024.

Nick Gangestad:

Yes, a couple things there, Andy. First of all, the mix between Q3 and Q4 on the $100 million of cost savings that we're expecting, that's shifted a little. I earlier had said one-third, two-thirds, it's now more like 40-60 between Q3 and Q4. We got some good progress in Q3, a little ahead, moving some of those actions earlier. So the differential isn't quite as big between Q3 and Q4 as what we thought three months ago. Now moving into margin and what we're expecting going into Q4 for margin. We had some things noticeably impact our margin better than what we were expecting in Q3. Primarily we guided in Q3 that we expected our -- in our software and control business, we expected a sequential decline of 20%, which would have -- what we said on our last call is that, we thought that would bring our margins in software and control down to the mid-teens. With the strength in the Logix, orders and sales that we saw in Q3, that did not materialize to that level. It ended up, rather than software and control being down 20%, it was down 10%. And that extra revenue and the mixed benefit that brings help boost the margins in software and control much higher than what we were estimating. And that's the primary driver of our over performance of margin in Q3. Now into Q4, we will be getting the benefit of these additional cost actions. In software and control, we don't see an additional ramp up happening in Q4 for our Logix sales. We think that'll be very, very similar to what we saw in Q3. In fact, we think what we saw in Q3 is going to be almost a carbon copy into Q4 from a revenue standpoint, from a margin standpoint for software and control. Intelligent Devices and Lifecycle Services, we expect for both of those a sequential decline. We had some -- both of those businesses had some favorable mix. Driven by, in Q3, we see some of that mix reversing into Q4. And in Lifecycle services, it's part of our customer and project mix that was very beneficial to us in Q3. We think that'll abate some in Q4 and why we see margins going down a couple hundred basis points sequentially. Still part of a more than doubling the margin for the full year than what we saw last year. And then Intelligent Devices, we see about 100 basis point drop in margin. That is also driven by some of our product and project mix there.

Operator:

Our next question comes from Jeff Sprague from Vertical Research. Please go ahead, your line is open.

Nick Gangestad:

Thanks, Jeff.

Blake Moret:

Jeff, I'll offer some comments on that. I think to start with, what is largely back to normal is orders and sales of our products kind of coming back right on top of each other. So getting back to historical pre-COVID levels of book-and-bill. When you get an order for a drive or a Logix controller in the quarter, being able to ship it down and recognize the revenue in the same quarter. Back to very high percentage conversion, operational performance is good. Customers are looking for that material in about the same time frame that they were previously. So that's really good news and puts orders and shipments back very similar from quarter-to-quarter in terms of products. As we look at next year, we're going to be lapping some extremely low order rates. And so, beginning with the fourth quarter, as we start thinking about year-over-year rates again, you're going to see some big numbers in the fourth quarter and likely going into next year. And we do see continued investment. We talked about project delays, but we're winning projects as well. We are seeing the impact of higher than traditional levels of investment, despite the uncertainty for North American manufacturing plant. So I think looking at Q4 as a jumping off point is inevitable, but as we said, we expect continued gradual sequential increases into next year and then we'll certainly be given a lot more detail in November.

Blake Moret:

There's certainly risk with that, Jeff, but there's also the amount of business that we didn't ship in the beginning of the year because there was inventory sitting at distributors and that was a meaningful number throughout the year and it's far less as we move into next year. So you get some tailwind from that.

Blake Moret:

Yep. Thanks, Jeff.

David Ridley-Lane:

Thank you. This is David Ridley-Lane on for Andrew. On that point about de-stocking, it sounds as though you are mainly done with it in North America. How's the visibility for regions outside of there?

David Ridley-Lane:

Thank you. And then a quick follow-up on Lifecycle Services margins, if we take a third quarter and what you're expecting for fourth quarter, would you expect margin progression from that sort of blended second half margin as you go and continue to add volumes?

David Ridley-Lane:

Thank you very much.

Nigel Coe:

Thanks. Good morning and good luck, Nick. So obviously, good news that sell-in to distribution is sort of being matched by order rates, et cetera. But any color in terms of how the sell through from distributors into their customers is tracking for Rockwell products? I think that the message has been that distributors have been cutting inventory levels. It seems like the actual end user demand is weaker for the reasons you cited. So I'm just curious how your intelligence on days of inventory on hand, on shelves, has been tracking through the quarter. And then just maybe just talk about how you've seen this progressing into FY 2025? I know, Jeff, had a crack at 2025, but do you think that we're still in the status now until we get past the election?

Nick Gangestad:

Yes, Nigel, a couple things to add. One is, yes, we do track the amount of new orders being placed on our distributors. And what we see there is, we are seeing that continuing to go up. But part of what we're highlighting in our revised estimate for Q4 is we're not seeing go up at the pace that we were expecting, implying that the end demand is not as robust as what we were thinking three months ago. And then in terms of your question about added visibility into 2025, I'm sure you were asking more about revenue, but I will just add from a margin perspective, what are some of the headwinds and tailwinds we're thinking about for margin next year? The headwinds we've talked about of compensation, both the bonus and our annual merit increase, and we expect to continue investments in new products and digital offerings. Tailwinds that we expect in our margin next year. That $250 million of margin expansion and cost reduction actions we think will be -- we know will be benefiting margin next year. We continue to expect positive price cost next year and then we expect continued margin improvement from our recent acquisitions in the last two or three and that coupled with, right now what's anticipated, no new M&A, we think that will also be marginally enhancing for us in 2025.

Blake Moret:

Yes, I mean the biggest contributor to the M&A this year is Clearpath and the mobile robots. That's project business. I mean those are fairly expensive sales. And so, it's going to be lumpy through the year. We're seeing very strong year-over-year growth overall for that business, but it's going to move around a little bit from month-to-month and quarter to quarter. We remain very optimistic and proud of the accomplishments of that acquisition as well as the verb on the cybersecurity side.

Operator:

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

Nick Gangestad:

Sure, Julian. Thanks for asking. So from an inventory standpoint, given where we have been in the last 2.5 years in terms of ensuring that our customers are getting the products they need. We have been very focused on making sure that we have the stock we need in place to be meeting our customers' requirements. As we went through the – our plans for fiscal year 2024, as we went through the year, is that we expected that in the second half of this year we would be seeing increased demand on us depleting quite a bit of that excess inventory that we ourselves are holding. As we're seeing the demand on us not having that ramp up, but more of this gradual increase that we're talking about, that's leaving us with noticeably more inventory in terms of days of inventory at the end of our fiscal year than what we were estimating earlier in the year or even three months ago. And that's the most significant part of our cash conversion story. In terms of our prior guide of 80% now bringing it down to 60%, we've known all along we have these one-time non-recurring headwinds, things like our extra tax payments that we'd be doing well in excess of our tax expense. We also knew that we'd be having the cash payments for our restructuring actions. So those things are contemplated as part of that 80%, but we were also counting on a noticeable roll down in that working capital and inventory in the second half of the year. And while it's still going to come down in the second half of the year, it's not going to come down nearly at the pace. That's really going to be more of a 2025 development for us.

Blake Moret:

Yes, so we did talk in the last quarter about some weaker CapEx spend, particularly in food and beverage and auto, around new capacity. We indicated that while, for instance, food and beverage customers are still investing in resilience and efficiency, they're pausing new capacity. And similarly -- and I think the well-read theme of EV slowing down a bit as well. We're still seeing projects and behavior that we would characterize as delays, push outs, but not cancellations. And we certainly hope that it doesn't move to that. We're watching it. We're taking a clear-eyed view of what's happening out there. But people are pushing for some of the reasons I mentioned before, as we said, looking at consumer demand, interest rates, and then some policy uncertainty. It doesn't all just stop until the elections, for instance. So we're going to see major projects that are awarded this quarter that are coming from customers across a variety of industries, but not at the pace that we would have thought, say, three or four months ago. And you're right. The dominant theme for the first part of this year was the inventory issue at distributors and machine builders. And now, as that dissipates, we're seeing some pause in capital spend in manufacturing.

Blake Moret:

Yes, thanks.

Noah Kaye:

Thanks. So I'll just bundle a couple of questions here to keep it moving. First, can we actually quantify the revenue impact of the inventory de-stocking in the channel as contemplated in full year guidance. What is the actual revenue headwinds, just so we can level set for next year? And two, thinking about sort of the routability of the cost actions benefiting the P&L. When we get the reinstatement of bonus comp and merit increases, presumably those are fairly rattleable throughout next year, quarterly. Should we think about the same for the cost actions that you're announcing today?

Nick Gangestad:

Yes. And then, Noah, as far as the quarterization or calendarization of the benefits of that $250 million. Well, first let me say, you are correct about the bonus, that that will be like largely equal throughout the four quarters of fiscal year 2025. But in terms of the calendarization, of course, we'll add that kind of information in the November meeting for more detail. That said, what I can tell you is the restructuring benefits are more front half loaded, the things that we started in Q3, whereas those additional margin expansion benefits that we talked about that go on top of that, that is more second half loaded. But the actual calendarization of all of this, we'll share more of that in November.

Blake Moret:

Yep, thanks.

Steve Tusa:

Hi. Good morning.

Blake Moret:

Good morning.

Blake Moret:

So I'll start with the general comment and then Nick can add detail. But you're right, Steve. The productivity that we're looking at, the combination of the actions that were primarily reductions in force on the second half of this year, and the items in the more comprehensive program offsets the headwinds from compensation into next year. We expect our R&D spend, which is part of that overall operating spend. If you add R&D and SG&A together, that's our operating spend. And we expect R&D to be roughly similar as a percentage of sales next year.

Steve Tusa:

Right, but basically, like, whatever I want to assume on volume is what the picture is as far as earnings drop through is concerned. Like, simple as that, it sounds like. There aren't too many other bridge items.

Steve Tusa:

Yes, okay. And then just one last question for you. I mean, so it sounds like you overproduced a bit, I’m sure you have the benefit of that offset obviously by the negative mix. As you take inventory down next year do we look at the drop through on whatever volumes we assume is being neutral to positive on mix, because that should be a little bit more normal, but then you obviously get hit with the overproduction, so it's still kind of that into that more normal like 35% range for you guys?

Steve Tusa:

Just your inventories are up, right? So there's -- you overproduced relative to what the shipments were, just with inventories up. Or am I wrong about that?

Steve Tusa:

Okay. Great. Thanks all for the color, as always, and enjoy retirement, Nick. Thanks.

Operator:

Our next question comes from Joe Ritchie from Goldman Sachs. Please go ahead, your line is open.

Nick Gangestad:

Thanks, Joe.

Blake Moret:

Joe, I'm going to stay away from bigger than a bread box type of dimensioning for next year. But the customers we're talking to, including in automotive and food and beverage, are continuing to make investments in those areas. We look at not just potential capacity that they're adding, but it's about resilience, efficiency in existing facilities. It's one of the things that excites us about the mobile robots, for instance, is that -- most of that's going into existing facilities. So customers, just like Rockwell, are working on their efficiency and their cost, regardless of what's going on in the external environment. And we're really well prepared to address that. So I mentioned before, as we start getting into -- back into year-over-year growth in orders, we'll characterize what that means for shipments into the next year, but I'm very confident with our position.

Nick Gangestad:

Joe, we're implying that Intelligent Devices revenue will be almost exactly the same sequentially between Q3 and Q4. It's not -- we're not expecting a noticeable uptick or downtick sequentially in intelligent devices revenue.

Nick Gangestad:

Not a seasonal uptick there.

Aijana Zellner:

Julianne, we'll take one more question.

Joe O'Dea:

Hi, thanks for fitting me in. I wanted to start on the -- Hi. I wanted to start on the margin expansion and productivity in terms of

Joe O'Dea:

And so primarily structural in terms of how we think about the cost coming out?

Joe O'Dea:

And then just one more on demand. I know a lot of focus on that already, but just trying to understand the past few months. When we look at the end market expectations, I think things came down in nearly every end market relative to three months ago. And so, trying to understand the degree to which things have gotten worse versus the degree to which things just aren't getting better quite as fast as you expected.

Joe O'Dea:

Got it. Thanks a lot.

Operator:

At this time, you may disconnect. Thank you.

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. [Operator Instructions] 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.

Operator:

[Operator Instructions] Our first question comes from Andy Kaplowitz from Citigroup.

Blake Moret:

Sure. Andy, I'll start, and then Nick may have some additional comments. We're expecting mid-single digits sequential growth in Q3 on orders. This is after low double-digit sequential order growth that we saw in Q2. And then we expect high teens sequential orders growth in Q4. And that's based on our analysis of the levels of existing inventory in distribution as well as in the machine builders. For distribution, we expect that largely to clear by the end of the third quarter in most regions. China is probably an outlier that goes a little bit longer, but we're tracking those inventory levels and that's consistent with the direct feedback from those distributors.

Nicholas Gangestad:

Andy, one thing I'll just add on that. What we've seen in April orders is completely consistent with that. Our guide of an expectation of order growth of 5% sequential order growth.

Blake Moret:

Sure. So we are confident that those growth ranges are reasonable as we look through the cycle. It's based on our offering. It's based on the higher growth that we see in North America, which, of course, is our home market, where most of our sales are, and it's our portfolio that we've built that's winning today in the market. So we see that through the individual projects that are competitive, the growing impact of mega projects. I and my team are directly involved with versus our toughest competitors around the world with a good win rate of those projects.

Nigel Coe:

Nick, enjoy your retirement. So I'm just wondering if maybe you can get a bit more color on the kind of the third quarter color you provided. So the -- I mean I'm backing into an EPS close to the $2 per share for the third quarter. So I just want to make sure that aligns with your model. And then in terms of the order rates that you're pointing to mid-single-digit percentage increase sequentially, is that sort of back into like a $2 billion order number? Just trying to get a bit more quantification there, that would be great.

Nigel Coe:

Okay. That's helpful. And then on the cost savings, just on the $100 million of cost savings in the second half of this year, just want to make sure that, that doesn't include any of the bonus accrual reversals or the investment spending pullback. That's all sort of additional cost savings. It feels like it's mainly temporary costs in the back half of this year and then we have more structural costs coming in, in 2025. Is that the right way to think about it?

Nicholas Gangestad:

And Nigel, part of what we were talking about there is the $100 million we're expecting in the second half of this year. Those actions, we expect to have a tail into fiscal year '25 of an additional $120 million. So -- and I'm saying that in reference to your comment about temporary, some of it is temporary, but the majority of it is sustainable and carried makes that tailwind impact benefit into fiscal year '25.

Julian Mitchell:

Wish you all the best, Nick. Thank you for the help. Just maybe circling back on the sort of EPS walk. So you've got that very helpful, Slide 11, for example. But if I think about sort of 3 big buckets of costs you've talked about this morning, you've got incentive compensation, you've got investment spend, and you've got these fixed cost reductions relating to head count cuts. So it looks like for 2024, you've got about a $2 EPS tailwind year-on-year from incentive comp and investment spend combined. Is the right way to think about it that a lot of that reverses in 2025? And then on the other hand, you've got these savings that may be are worth about $1 of EPS from head count cuts in 2025. Just trying to understand of the incentive comp and investment spend, kind of how does that reverse in a substantial way kind of in the following year naturally?

Blake Moret:

Yes. Just at a high level, the actions that we're taking now with their benefit this year and then the incremental benefit next year, when you add that to the more structural actions that we're beginning a more comprehensive program that I mentioned, we expect that to more than offset the headwinds from returned incentive comp investment and so on as we go into fiscal year '25.

Nicholas Gangestad:

Yes. So as of the end of the second quarter, Julian, our product backlog is essentially back to normal. We've had good success working through with our supply chain, and we've brought our backlog back to normal. So going forward, our -- we expect to be operating what we were like pre pandemic, where orders in a particular quarter are very much like what our sales are in a particular quarter. In our second quarter, we were still benefiting from drawing down some of that backlog. We brought down our backlog in high single digits in the second quarter. And that's why our sales in second quarter were higher than our orders. That phenomenon will end going into the second half of the year. And that's why even though we expect orders to be up sequentially, we expect revenue to be down sequentially.

Noah Kaye:

Maybe talk about some of the choices you're making around where to reduce investments in the business. I would love any color. You made a lot of acquisitions. I'm not sure if it's related to that. Maybe you can talk about it if possible on the segment level or by protocol?

Noah Kaye:

Right. Makes sense. And then very helpful on the walk sequentially on orders and your commentary around margins for 3Q, that does seem to imply. Again, we're doing math here on the fly, a pretty big step-up sequentially in margin for 4Q. I'm getting to something like 6 points here. Maybe just talk to the margin math around how you see exiting the year and what, apart from the cost reductions you've announced, would help that step up?

Operator:

Our next question comes from Steve Tusa from JPMorgan.

Nicholas Gangestad:

Yes. Steve, R&D as a percent of revenue is going to be pretty consistent at 6% of revenue. As a percent of revenue, it's not really changing from last year.

Blake Moret:

Yes. Steve, this is Blake. As Nick said, our development expense remains at 6%. We continue to invest robustly in areas, like new product introduction, which is actually increasing over the last few years in terms of what we're delivering to the market, both in terms of the hardware products as well as new software as well. And so I think it would be incorrect to talk about whiplashing that piece of it. We're looking for efficiencies that are taking cost out that had built up over the last few years of volatility as we've gone from pandemic to supply chain shortages and making sure that we're tuned for growth going forward with that.

C. Stephen Tusa:

And then just one last one on the 3Q to the 4Q. I know that the second half of this year was dependent on obviously the sales being there. I mean, how dependent are we from -- going from the 2-ish to 4 from 3Q to 4Q on sales actually being there? Is it the same kind of dynamic as we've been seeing -- we're seeing in 3Q, similar to the comments you made last quarter.

Operator:

Our next question comes from Rob Mason from Baird.

Blake Moret:

There's a few elements of what informs that guidance, Rob. But the first is a significant reduction in packaging machine builder inventory. So within the OEM inventory, packaging machinery has been particularly affected by that. And the feedback we're receiving from the conversations directly with them indicates that, that reduces significantly as we go through the third quarter and into the fourth quarter. The distributor inventory actually is expected to clear again in regions outside of China before that. And so those 2 factors are an important part of it. We also see the normal seasonality in our engineered-to-order and Lifecycle Services shipments. There's always a higher shipment amount at the end of the year there, and that would include Sensia as well.

Robert Mason:

Should we think about the fourth quarter order level as a solid jumping off point as we go into 2025 now, absent the engineered-to-order, normal seasonality there?

Operator:

Our next question comes from Joe Ritchie from Goldman Sachs.

Blake Moret:

Yes. So I mentioned that we're seeing some push out on EV, but we are not seeing cancellations in those projects. And it doesn't mean that they've all gone away. EV is still about 1/3 -- a little bit more than 1/3 of our total automotive business. So there's still some of those projects -- EV projects that we're winning and getting business for now. If we look at some of the other areas of mega projects, the facilities management and control systems or semiconductor fabs. We've got great capabilities there and are playing a major role in a lot of the fabs that have been announced and are currently under construction in the U.S., but around the world, that's been a good business for us in Asia for over a decade. So it's not a new application for us.

Nicholas Gangestad:

Joe, you got it all right, except for the last one, our normal bonus expenses in the $160 million to $170 million range.

Operator:

Certainly. Our last question will come from Joe O'Dea from Wells Fargo.

Blake Moret:

Yes. Actually -- so if you think about those verticals and that's about the size of the overall verticals there, about 60% of our business in consumer packaged goods covered mainly by those 2 verticals is the OEMs, the machine builders. So that's the way you can kind of do the calculus of how much of that business has been suppressed by the higher inventory levels, and we're expecting that to be dissipating over the coming quarters.

Nicholas Gangestad:

Yes. When you strip out things like incentive compensation and what we're showing there from investment spend because those things would normally be part of what we talk about in terms of our incrementals and decrementals, but we stripped out those 2 details to give you more detail of the underlying moving parts in there. But there are many parts of our portfolio where incrementals and decrementals like that in that 60% range are certainly normal. They're normally offset by some degree of incentive compensation or investment spend though.

Aijana Zellner:

Thank you, everyone, for joining us today. That concludes today's conference call.

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 on the call, we will open up the lines for questions. [Operator Instructions]. 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.

Blake Moret:

Thanks Aijana and good morning everyone. Thank you for joining us today. Let's turn to our first quarter results on Slide 3. 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. While we are continuing to see the impact of excess inventory in the channel, the underlying demand from machine builders and end-users remain strong. 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 shipments. Currency translation increased sales by over 1 point, and acquisitions contributed almost 1.5 points of growth. 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 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. Our Clearpath and CUBIC acquisitions had a strong quarter, both on topline and 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 datacenter build-outs and CUBIC's momentum with large cloud service providers continues to fuel our growth in this end-market. I'll touch on some of the important Clearpath wins later on the call. Software & Control organic sales increased 4% year-over-year and were 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 are 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 prior year, better than we expected. Book-to-bill in this segment was 1.13, with strong order activity across solutions, services, and our Sensia joint venture. I'm pleased with how our Sensia 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 Sensia wins this quarter was with Mellitah Oil & 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. 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 Fiix SaaS offerings and recurring services, including our growing cybersecurity business. The impact of these contracts on our financial performance is also increasing, especially in a year with relatively low product growth. This quarter, our Plex SaaS platform was selected by EOS Energy, an energy start-up 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 compliment Acro’s battery manufacturing solution built on Rockwell’s control platform. Acro is currently building out the first state-of-the-art manufacturing line that will manufacture EOS Energy’s next gen Z3 batteries. Segment margin of about 17% and adjusted EPS of $2.04 were both down versus 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 4 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. 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 increased activity across our traditional ICE and plugin 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. This quarter, our Logix platform was selected by Akasol/Borg Warner, a global battery producer and 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 Otto autonomous mobile robots in their US sub-assembly applications. 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 and orders for greenfield projects and legacy fab upgrades, along with continued momentum in our wafer transport solutions. Within our eCommerce and Warehouse Automation industry, sales declined mid-teens and were in line with our expectations. 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 are starting to see renewed CapEx plans from our eCommerce customers for fulfilment center builds later in fiscal year 2024 and in fiscal year 2025. Moving to our hybrid industries. 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. 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. Similar to previous quarters, we continue to see large end users investing their digital and cyber capabilities across their global footprint. This quarter, we had another sizeable Clearpath win at one of the largest food and beverage manufacturers in the world, where the customer chose our Otto AMRs to replace their existing AGV system to increase throughput and flexibility, while enhancing material movement security. 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 in their operations. Life sciences sales grew 10% in the quarter. Note that our life sciences revenue is more weighted to software and services versus products. In addition to our MES and cybersecurity services momentum, we are 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. 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 5 and our Q1 organic regional sales. North America organic sales were up over 4% year-over-year. 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. 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 high teens versus prior year. Moving to Slide 6 for our fiscal 2024 outlook. 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. Factoring in our performance through January, our continuous analysis of distributor inventory levels, and strong pipeline of customer projects, we are reaffirming our fiscal 2024 sales guidance range with organic sales projected to grow 1% at the midpoint. Currency is also expected to increase sales by 1%, and we now expect acquisitions to contribute a 1.5 of growth. ARR is still slated to grow about 15%. 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 in Lifecycle Services. Nick will share additional calendarization detail in his section. 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 me turn it over to Nick to provide more detail on our Q1 performance and financial outlook for fiscal 2024. Nick?

Blake Moret:

Thanks Nick. Despite geopolitical volatility, our detailed discussions with our distributors, machine builders, and end-users point to fairly healthy market conditions. Our outlook for fiscal year 2024 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 on both revenue and cost, with Clearpath Robotics being a standout addition to Rockwell's portfolio. We've seen multimillion 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. Aijana, we'll now begin the Q&A session.

Operator:

Certainly. [Operator Instructions] Our first question comes from Andy Kaplowitz from Citigroup. Please go ahead, your line is open.

Blake Moret:

Hey Andy.

Nick Gangestad:

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. In terms of what we're seeing with orders, you're exactly right, we're seeing an inflection up in the orders from the Q4 trough. 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'll turn that over to Blake.

Andy Kaplowitz:

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 a more book-and-bill type environment in Q2, and Nick, you talked about the margin jump starting in Q3. But maybe you could talk more about confidence level in getting that margin jump you expect in Q3. And does a relatively slow start for EPS for the year suggests modest EPS growth for FY 2024, meaning somewhat lower in that $12 to $13.50 EPS range? Or are you not trying to single that?

Andy Kaplowitz:

Appreciate it guys.

Operator:

Our next question comes from Jeff Sprague from Vertical Research. Please go ahead, your line is open.

Blake Moret:

Hi Jeff.

Blake Moret:

Sure Jeff. So, what we're seeing is the shift in the timing going from a dynamic of shipments that's been based entirely on reducing large amounts of backlog, to a 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 mass of past-due backlog that was in a relatively concentrated set of SKUs for us. 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 chips. 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 the 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. That progress continues in Q2. We expect to be substantially complete with that in the quarter. But that's 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 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.

Nick Gangestad:

Yes, we're expecting dollar revenue to be very similar in Q2 to what it was in Q1 and a very 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 will 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 the first quarter, we're going to be keeping investment spend very similar to what -- 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 will probably not be as -- was a drain -- was a negative to us in Q1. And we expect mix to continue as a negative into Q2, both from a segment mix where we expect higher growth in -- our highest growth in Lifecycle Services, but also within segments where we're seeing more of our sales in Intelligent Devices coming from our configure-to-order business.

Operator:

Our next question comes from Andrew Obin from Bank of America. Please go ahead, your line is open.

Blake Moret:

Morning Andrew.

Blake Moret:

Yes, Andrew, there is. As I mentioned before, the first is to make sure that we have the 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 $10.5 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. 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 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 that it's there as we see that order ramp continue through the year. From a structural standpoint, we are working through ways to drive efficiency, to get scale throughout the organization. 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 in single parts of the world. So, we're working all of those plays in operations as well as with the engineers. Andrew, going back to your first comment, we do expect to be exiting fiscal year 2024, 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 2025 and beyond.

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 the machinery builders in those areas, in Life Sciences as well, I should mention, there's packaging of medicine in 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 works 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 actually are 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 in the year.

Blake Moret:

Thanks Andrew.

Nigel Coe:

Thanks. Good morning. Sorry about that. Thanks for the question. I'm sorry, I missed a part of the call, Nick, where you were running through the guidance point. Did you call out 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.

Nigel Coe:

Okay. That’s very helpful. Thanks and sorry I missed that. 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?

Nigel Coe:

Yes, $3 billion of backlog. I think that's what you called out as sort of normal-ish level.

Nigel Coe:

Okay, that's great. And then my follow-on question, Nick, is I understand that the mix impacts from Lifecycle services are growing, the Software Control and ID. But maybe the 240 basis points of gross margin compression year-over-year, maybe just unpack that for us in terms of mix versus M&A impacts. Just curious because that -- given that pricing was 3 points, price/cost positive, that's a fairly big delta.

Nigel Coe:

Okay, that makes sense. Thanks Nick.

Steve Tusa:

Hi, good morning.

Nick Gangestad:

Hey Steve.

Blake Moret:

No, Steve, it's really -- I mean, it is product and it's centered in the Intelligent Devices. So, where you have the greatest diversity of SKUs between variable speed drives, motion control. 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's no unsurmountable challenges that we don't expect to be resolved in Q2. It 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, centered within the Intelligent Devices segment.

Nick Gangestad:

Yes, it will really be bringing us where the first two quarters of this year are, I'd say, under-reflecting end-demand for our products as that excess inventory is being worked through. And then 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. But given our plans of what we'll be doing from spending, the type of earnings growth, is very consistent with what we expect with that kind of uptick in revenue into Q3 and Q4.

Blake Moret:

Yes, 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.

Blake Moret:

Yes, thank you.

Chris Snyder:

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 mid-20s in the fiscal third quarter. I understand volumes are getting better sequentially, but that implied sequential incremental is much, much sharper than what we would kind of say is normalized for the company. So, can you just sort of talk about other drivers of that sequential margin uplift into the back half beyond just volume?

Chris Snyder:

Thank you. I appreciate that. And then on some of the supply chain constraints you guys called out that 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. It seems like they are then kind of deferred into the back half of the year. Is that right? Thank you.

Chris Snyder:

Thank you.

Julian Mitchell:

Hi, good morning. I just wanted to try and square sort of the comments on capacity utilization and the supply constraints with inventories. I think they're running -- we'll wait for the Q 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 8%, 9% pre-COVID. And they rose a lot the last 12 months even as sales rose. So, I 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 -- is that based on a much faster sell-through out of the plant? You need to sort of underproduce 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 for some reason, even though lead-times are normal?

Julian Mitchell:

I see. But I guess -- I get it. Sort of two years ago, sort of people would have said you need higher inventory because backlogs are very high and you need inventory to sort of satisfy projects and 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.

Julian Mitchell:

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 kind of your product? And how are they feeling about those inventory levels today, please?

Julian Mitchell:

That’s very helpful. Thank you.

Operator:

Our next question comes from Noah Kaye from Oppenheimer. Please go ahead, your line is open.

Blake Moret:

Sure. 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 where the orders come in in the quarter. We continue to have a certain amount of configure-to-order business, our motor control centers, our big drives, our independent cart technology and so on. That isn't representing the biggest challenge to us. Those are very different processes. Those configure-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 backlog building -- that backlog built up because we couldn't get the chips, 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 much less visibility to what's coming in from that book-and-bill profile. So that's one of the changes. And what Nick was talking about in the previous question is we're in the process of building up safety stock in those areas so that we can deal with the ebb and flow of the normal 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 we're transitioning to and we'll continue to operate in, we hope, for a long time.

Blake Moret:

Yes, I think you said it right. The largest impact is based on getting those shipments out the door, being able to see the distributors return to equilibrium. We continue to see good activity in process applications. We talked about oil and gas, specialty chemical, mining. 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 traditional 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, we're not seeing any big ebbs and flows in the vertical end-market needs being the predominant factor in any changes through the year.

Blake Moret:

Thanks.

Operator:

Our last question will come from Joe O'Dea from Wells Fargo. Please go ahead, your line is open.

Blake Moret:

Yes, I think what you're 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 the year where Logix grew over 30% last year as one of our most profitable product lines. But the other point is that, 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 to being able to push those margins at the exit of 2024 higher than they were. That's in -- across our business and functions, most noticeably in Lifecycle Services.

Blake Moret:

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 middle of the year versus 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 we continue to see that inventory at our distributors coming down pretty much as we expected.

Joe O'Dea:

That’s really helpful. Thank you.

Operator:

At this time, you may disconnect. Thank you.

Operator:

Ladies and gentlemen, 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 on the call, we will open up the lines for questions. [Operator Instructions]. 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.

Blake Moret:

Thanks, Aijana, and good morning, everyone. Thank you for joining us today. Let's turn to our fourth quarter results on Slide 3. We delivered strong double digit growth this quarter, with both sales and adjusted earnings growing by over 20% year-over-year. Our solid execution and improving supply chain helped us exceed our Q4 expectations, resulting in double digit sales growth across all regions and business segments. With lead times significantly improving across our product lines, we were able to deliver products to customers faster than expected this quarter, contributing to over $2.5 billion in total sales. This record shipment reflects Rockwell's continued capacity investments, and demonstrates our organization's ability to scale for sustained growth. Total sales were up 20.5% versus prior year. Organic sales grew almost 18% year-over-year. Currency translation and acquisitions each contributed about a 1.5 of growth in the quarter. Consistent with prior quarters, the split of our sales by business segment, region and industry was largely driven by the composition of our backlog. In our intelligent devices business segment, organic sales increased 18% versus prior year with strong growth across all regions. Within this segment, Independent Cart Technology had another strong quarter, finishing this fiscal year with over 50% growth in sales. This offering continues to be an integral part of our advanced material handling and production logistics offering. We are excited about our latest addition to this differentiated portfolio with our acquisition of Clearpath Robotics, and I will cover some strategic highlights of this deal later on the call. Software and control organic sales grew 23% year-over-year. We continue to innovate in both the software and hardware portions of our architecture, with significant new offerings such as high availability, process IO, FactoryTalk optics, and FactoryTalk data mosaics. We are pleased with how our organic and inorganic investments in this business are delivering new customer value and continued share gains. Lifecycle Services organic sales were up over 10% year-over-year. Book to bill in this segment was 0.97 and above the historical average for Q4. Within this segment, our Sensia joint venture had a strong finish to the year with over 50% year-over-year order growth in the quarter. This growth was driven by strategic wins in process automation and artificial lift control systems, positioning this business for continued double digit growth and improved profitability in fiscal year '24. Information Solutions and Connected Services sales grew 10% versus prior year. One of the largest Information Solutions wins ever was with Prometeon Tyre, a global leader in tyre manufacturing headquartered in Italy. This customer was already using our cloud native Plex quality management system, and has recently selected our on-prem MES software to digitize the manufacturing processes at a number of their global sites. This win not only demonstrates the standalone differentiation of our modular offerings, but also highlights the value from the integration of our entire portfolio, making it easier for customers to standardize their global operations. Within Connected Services, we continue to grow our cybersecurity practice with Q4 sales growing 30% year-over-year. Our industrial cybersecurity software and expertise along with differentiated partnerships on the IT security front are helping us grow our cybersecurity services into a business of well over $100 million this fiscal year, with a significant portion of this being recurring revenue. Total annual recurring revenue grew 16% year-over-year. That's a good number, and ARR is a meaningful contributor to our future growth framework. Segment margin of 22.3% was in line with our expectations. Adjusted EPS of $3.64, which is a company record for quarterly earnings, grew almost 20% year-over-year. Significantly improving lead times in our Q4 shipment over performance contributed to rapid backlog production in the quarter. We are ending the year with over $4.1 billion in backlog, over 40% coverage of annual sales, which is still well above pre-pandemic levels. A return to superior customer service remains our highest priority. Let's now turn to Slide 4 to review key highlights of our Q4 end market performance. Our discrete sales grew over 15% versus prior year. Within discrete, automotive sales were up 30% year-over-year, reflecting continued strength of our offerings in both electric vehicle and battery. Our EV business was close to 40% of our total automotive revenue in the quarter, growing double digits both year-over-year and sequentially. One of our strategic battery wins was with Nanotech Energy, a startup with new and innovative energy storage technologies. Nanotech has chosen Rockwell as their exclusive automation partner to build new battery Gigafactories. Semiconductor sales grew high single digits. We continue to take share in facilities management control system applications and major semiconductor companies across the globe. In addition to our existing portfolio, we continue to win and build down a strong funnel of advanced wafer transport solutions, leveraging our Independent Cart Technology across customers' greenfield and brownfield projects. We're also participating in the rapid build down of data centers to support cloud computing and artificial intelligence. Our control systems are used to control and optimize the environment and safety systems in these facilities. And our recent CUBIC acquisition extends our reach into the power distribution portion of data centers. We've seeing some strategic wins in Asia and in the U.S. in the quarter with more to come. In our e-commerce and warehouse automation vertical, sales declined mid-single digits versus prior year. After several quarters of customer delays and cancellations in the e-commerce portion of this vertical, we're starting to see new investments, especially in North America, positioning us for low single digit year-over-year growth in fiscal year '24. Turning to our hybrid industries, strong sales in this segment were paced by good growth in food and beverage, our largest customer vertical. Food and beverage sales grew low double digits versus prior year. In addition to continued cybersecurity and infrastructure modernization wins in this vertical, we had several wins in Q4 incorporating generative AI functionality, where our digital services business is helping our CPG customers use real-time AI assistance as they develop new products, formulations and recipes. Life Sciences sales grew mid single digits in the quarter. This vertical is a great example of how we are delivering expanded customer value through a combination of software, hardware and digital services capabilities. This quarter, our PlantPAx system was selected by [indiscernible], a global biotechnology company developing innovative and affordable cancer medicines for their process control and environmental monitoring solutions at a greenfield site in New Jersey. Tire was up high teens in the quarter with multiple wins across the globe, including the large software deal at Prometeon Tyre I mentioned earlier on the call. Moving to process. Sales in this industry segment grew over 25% year-over-year, led by strong growth in oil and gas, mining and metals. Oil and gas sales were up over 30% in the quarter. This growth was driven by a combination of digital oilfield solutions, including process safety and lift control in EMEA and Asia, as well as several new carbon capture wins in North America. We continue to grow our process industry footprint with the combination of Sensia and Rockwell oil and gas capabilities. We had a notable win this quarter at Multitex Filtration Engineers, an India headquartered global EPC company working on onshore and offshore projects. This was a competitive DCS win for Rockwell, with one of the largest government-owned oil and gas explorer and producers in India. And we are excited to partner with Multitex as they increase their footprint in the U.S. and Middle East. Turning now to Slide 5 and our Q4 organic regional sales. Once again our sales by region in Q4 and for the full year fiscal year '23 reflect the composition of our backlog rather than the underlying customer demand. Our full year orders in the Americas outperformed the rest of the world. North America organic sales were up over 12% year-over-year, but Latin America and EMEA sales grew over 20% in the quarter and Asia Pacific was up over 31%. While we saw strong sales growth in China in fiscal year '23, we continue to see high order deferrals and cancellations in China. Let's move to Slide 6, key highlights of fiscal year 2023. We had a record year of sales and earnings with our total sales exceeding $9 billion. We achieved this milestone ahead of the timeframe we anticipated when we introduced our framework for accelerated profitable growth at Investor Day in 2019. Both reported and organic sales grew 17% this year, well above our original expectations. Information Solutions and Connected Services were up 9% year-over-year, reaching over $870 million, demonstrating our customers' accelerated adoption of new digital offerings. This is almost 3x what this figure was in 2018. Total ARR grew 16% with strong growth in both our software-as-a-service and recurring services offerings. Our strong operating performance resulted in 140 basis points of segment margin expansion versus prior year. Adjusted EPS of $12.12 was up 28%. We generated a record $1.2 billion of free cash flow this year. The much better free cash flow conversion in the quarter was primarily driven by improved working capital. This represents 86% free cash flow conversion for the year, and Nick will provide more detail in his remarks. And last but not least, we continue to invest in key areas of growth. In the last few months, we made two acquisitions, Clearpath and Verve, to further expand our value and accelerate top line growth. While we'll talk more about those investments at our upcoming Investor Day, let's turn to Slide 7 and take a few minutes to share why we are excited about the impact Clearpath will have on both our near and longer term growth. As we've shared with you earlier in the quarter, Clearpath is a leader in autonomous mobile robots, or AMRs, serving customers across many industry segments. Their differentiated portfolio of auto brand AMRs is focused on the production logistics space, where customers traditionally have relied on manual labor to move raw materials and subassemblies to the right place on production lines, and also to move finished goods to shipping docks and warehouses. These workflows have been identified by many automotive companies, semiconductor fabs, and consumer packaged goods suppliers as their top opportunity for efficiency and increased safety. Given the workforce shortage and skills gap, along with the overall move to more autonomous operations, the market for industrial mobile robots in factory floor applications is expected to grow over 30% for the next five years, and we believe no one is better positioned to capitalize on this growth than Rockwell and Clearpath. Together, we are the only end-to-end provider of autonomous operations in this space. We'll bring together our FactoryTalk design capabilities to configure and simulate the production environment, including these AMRs, integrate with our cloud native operations management software, like Plex and Fiix, and optimize the production process with our logics and embedded AI capabilities, all with one technology platform. This is an important milestone for Rockwell, and you will see more of what this can do for industrial operations at Automation Fair and Investor Day next week. We closed this acquisition in early October and expect it to contribute about a point of growth to our top line performance in fiscal year '24. As we move to Slide 8, let's review our fiscal 2024 outlook. Consistent with what we shared with you on our last earnings call, our orders continued to decrease in fiscal 2023 reaching what we believe to be a trough in our fourth quarter. Orders for the full year were $8.2 billion. We expect fiscal year '24 orders to increase low single digits year-over-year. Order growth is expected to be highest in the Americas. Asia orders are expected to be down year-over-year due to China. However, a relatively low exposure to China helps to reduce the impact on our global results. The lead times on our products have largely returned to pre-pandemic levels, with the remainder of our SKUs getting back to normal lead times around the end of our fiscal Q1. This addresses the final golden screw constraints to shipping past due backlog and clearing committed inventory at our distributors. Based on our analysis of lead time reduction by product line, distributor inventory and underlying demand at our largest machine builders and end users, we expect orders to begin to recover in Q1 and build in Q2. Customers continue to move forward with plans for both greenfield and brownfield capacity investments and also with resilience projects requiring increased cybersecurity and digitization. In the U.S., we've been adding commercial resources specifically focused on projects that are incented by recent stimulus authorized by legislation, including infrastructure, IRA and the CHIPS and Science Act. This team won new business during the second half of fiscal year '23 with the strong funnel of additional projects expected to close in fiscal year '24. Our fiscal '24 guidance assumes total reported sales of about $9.4 billion at the midpoint. Organic sales are projected to grow 1% at the midpoint. Currency is expected to increase sales by 1.5% and acquisitions are slated to contribute about a point of growth. We are projecting ARR to have another year of double digit growth. Segment margin is expected to increase slightly versus prior year. Nick will cover this in more detail later. Adjusted EPS is slated to grow 5% year-over-year at the midpoint. At a high level, we expect strong conversion on slightly higher year-over-year organic sales. Good performance in reducing backlog during Q4 of fiscal '23 put forward about $100 million of revenue and $0.25 of earnings. Clearpath is expected to reduce fiscal year '24 adjusted earnings by a similar amount. Let me turn it over to Nick to provide more detail on our Q4 performance and financial outlook for fiscal '24. Nick?

Blake Moret:

Thanks, Nick. As I reflect on 2023, it's clear our continued investments in talent and technology are paying off. I'm proud of how our tight knit organization has navigated through a dynamic environment and helped us deliver a record year of sales and earnings exceeding expectations. Looking at the year ahead of us, we are aware of the macroeconomic backdrop and the geopolitical situation that continues to change every day. You heard us talk today about focusing and optimizing our workforce productivity so that we can continue investing in key areas of growth. Our customers rely on our continued innovation and differentiation to provide energy and critical infrastructure security across the globe to help bring new life saving drugs to market and to use leading technology to augment and enable their workforce. We look forward to seeing a lot of you at our Investor Day in Boston next week, where we will be sharing our long-term business strategy and some of the most exciting developments across our key markets and applications. Aijana will now begin the Q&A session.

Operator:

Thank you. [Operator Instructions]. And we will take our first question from Scott Davis with Melius Research. Your line is open.

Blake Moret:

Good morning, Scott.

Scott Davis:

A lot here, and I'm glad you're doing the Investor Day, because I think there's a lot to dig in here. But until we get there, can you give us a little bit more color on the China comments just around delays and cancellations? It's not a shock, given what we're reading, but maybe a little bit more granularity on what you're seeing there?

Scott Davis:

Okay, that's helpful. And you mentioned that the goodwill impairment on Sensia, but it looks like the next few years, the outlook there is pretty darn good. How do you kind of pair that up? And I would imagine you don't take it too lightly when you take a goodwill impairment. So I'll just stop there.

Scott Davis:

Yes, I would assume that too. Okay, I'll pass it on. Thank you. I appreciate it. Good luck. I'll see you next week.

Operator:

And we'll take our next question from Andy Kaplowitz with Citi. Your line is open.

Blake Moret:

Hi, Andy.

Andy Kaplowitz:

Blake, just focusing on your guidance of low single digit order growth in FY '24 on your confidence of a trough in orders in Q4 '23, could you give us more color in terms of what gives you that confidence? You mentioned orders in October are supporting your view. Maybe you could elaborate on what you're seeing. And then obviously, there have been many conversations regarding mega projects and where we are in that cycle. Do you see your orders being more lumpy centered around mega projects in FY '24 and what are the verticals that they're most likely to come from?

Andy Kaplowitz:

Very helpful, Blake. And Nick maybe just going over your margin expectation a little more for the segments in '24. You already answered Scott's question on Sensia. But what's your confidence level that we do you see a step up in '24 in Lifecycle Services? And then particularly in Intelligent Devices, obviously, that segment has had let's call it some perturbation, some supply chain, do you see more normal environment and improvements in '24 in that segment?

Andy Kaplowitz:

I appreciate the color, guys.

Operator:

We will take our next question from Jeff Sprague with Vertical Research. Your line is open.

Blake Moret:

Hi, Jeff.

Blake Moret:

Sure. Let me make a couple of comments, Jeff. And then Nick may have some to add as well. So we saw orders increasing. If you look at beginning of the quarter of Q4 to the end, we saw orders exit at a higher rate than at the beginning of Q4, and then with a good uptick from that sequentially in October. So that was the ramp we were talking about, and why we believe that Q4 was the trough for orders.

Blake Moret:

And if I can add to that. So our distributors are seeing a higher level of incoming orders than they in turn are placing on us due to their high inventory levels. So we have, as you would imagine, very good visibility into our distributors' incoming orders from their customers, from their end users and the machine builders. And that order activity is higher than what they're in turn placing on us. So that gives us additional confidence that orders will ramp up as their inventory situation comes down.

Blake Moret:

Sure. So at the negative end, you would see a slower reduction of inventories at our distributors and a deterioration in the macro. At the upper end of the range, you would see distributors stabilizing their inventory at higher levels than they did before. So getting back to that equilibrium and placing orders that are more reflective of the underlying demand from users and integrators and machine builders. And you would also see at the high end some of the impact from the big projects being spurred by stimulus, specifically in the U.S. I should add as well that on the high end if we talk about total sales, some of the performance in terms of new acquisitions I think there's some opportunity there as well.

Blake Moret:

Yes. And if I could just add one additional piece. We do expect shipments to ramp sequentially in terms of volume through the year. You get into a little bit of the math of comparables based on having such strong shipments at the tail end of the year that enters into the math of the year-over-year growth as well.

Blake Moret:

Thanks, Jeff.

Andrew Obin:

Yes. Good morning.

Nick Gangestad:

Good morning, Andrew.

Blake Moret:

Yes. I think that would contemplate push outs that turn into cancellations quite frankly, whereas if a project is pushed by a couple of months, it's not going to have a big impact in the year. But if some of those projects or a larger amount of those projects rolled over into deferrals or cancellations, if people said [indiscernible] just kidding about EV, we don't need to build out the semiconductor industry process, which is 35% of our business, if people aren't looking to increase energy, both hydrocarbon and renewable energy forms in the U.S. If we saw a significant reduction of those projects, I think that would contribute to that minus -- that downside part of the range.

Blake Moret:

Yes, we're looking at 15% ARR. And we're very proud of that ARR number, because it's broad based. It's not just the newer acquisitions like Plex and Fiix, but it's our traditional offerings as well, some of the on-prem software. And as we go through the year, based on overall Rockwell, we do expect ARR to increase to above 9% of our total sales in the year. It's a combination, both of the software as well as the high value recurring services. We made some organizational changes to supercharge that area. And that along with some of the new developments and offerings that we have, make us very optimistic about the contribution that ARR is going to have to our overall growth. And obviously, we like the resiliency that it gives our results by not starting each year at zero with respect to software sales.

Blake Moret:

Thanks, Andrew.

Julian Mitchell:

Thanks very much. Maybe I just wanted to follow up first off on Nick your comments on the first quarter. So is the right assumption sort of low single digit organic growth in Q1, as you said? And then margins for the year are guided flattish for the total company. Are we assuming kind of Q1 is similar to that year-on-year just given the acquisition headwinds and so forth? So you have sort of sales up and little bit margins flat and then earnings up a little bit year-on-year then.

Julian Mitchell:

That's very helpful. Thank you. And then I just wanted to come back to the revenue outlook. So one question maybe, we look at North America. I think the guide implies maybe sales are up mid single digits there or something this year. And in '23, North America was the lowest growth region globally. And so we're sort of seven years on from U.S.-China tariffs, two years on from the IIJA. Is it just the pace of these onshore and stimulus projects is so much slower than perhaps people often hope or assume? And just wanted to check that for the year, are you assuming -- it looks like the book to bill will be about 0.9x. Is that correct and what's embedded in the orders and sales color? Thank you.

Nick Gangestad:

And, Julian, the question on the book to bill, yes, your math is right. Approximately 90% book to bill for the full year below that in the first half of the year and above that in the second half of the year.

Blake Moret:

Thanks, Julian.

Nigel Coe:

Thanks. Good morning, everyone.

Nigel Coe:

So we got about thousands questions on backlog, so why not have one more? So the 0.9x book to bill for the full year seems to suggest that we're going to be down sort of the low $3 billion for the year -- by the end of '24. I'm wondering, do we go below that level first half once distributors' kind of stop cutting inventories and then rebuild? Just wondering where you see the backlog stabilizing?

Blake Moret:

So that would indicate an exit of the fiscal year at above $3 billion.

Nigel Coe:

Okay. And that is consistent with what you've said as well. And then just on sort of the -- and Nick, we're talking about $1.4 billion of orders in the fourth quarter fiscal, if you can just kind of verify that, that'd be helpful. And then on the FY '24 bridge, a couple of things. FX, you're assuming 1.5 points of a tailwind. The math we're getting is probably more like a minus one for the full year. So just wondering where are we wrong there? And then on the Lifecycle Services margin expansion, I think it makes sense if based on history, but just wondering what drove improving margins there in '24?

Nigel Coe:

Okay. Thanks, Nick, helpful.

Steve Tusa:

Hi. Good morning.

Nick Gangestad:

Hi, Steve.

Nick Gangestad:

Yes. First, for the full year, I'll just actually say actual numbers. Our total bonus expense in fiscal year '23 is approximately $240 million. And in our plans for fiscal year '24, it's dropping to $120 million. And that expectation of $120 million, that's spread exactly equally across the four quarters of '24. In '23, that $240 million was -- I can give you the actual numbers of how that broke out, Steve, if that helps.

Nick Gangestad:

50 million in Q1, 58 million in Q2, 56 million in Q3 and 80 million in Q4.

Blake Moret:

Yes, the cancellations were in a similar range to what we've been talking about, which is to say they were not the major contributor to the orders, a decrease. The main contributor by far to the orders decrease is the high inventory levels at the distributors. So cancellations were a relatively small piece of it. At this point, clearing those final golden screw or fourth wheel constrained components to be able to allow distributors to shift, complete bills and material is also a smaller component of the overall contributor to the orders down in Q4.

Blake Moret:

Yes, Steve. First of all, as Nick said, we expect the Clearpath contribution to be accretive in fiscal year '26. This is an important strategic move for Rockwell, and one that I think will be apparent as we talk about it and demonstrate it next week. The dilution in fiscal year '24 is based on a combination of them ramping their capability. So think of it as somewhat of a startup mode, but also as making sure that we surround it with the right resources to fully integrate it as quickly as possible into Rockwell to be able to provide that value for customers. So that's not only the technical resources, but it's the commercial resources, it's the infrastructure to help them drive cost out of their operations and drive unit cost out of those AMRs. And so it is some additional investment from Rockwell's part to make sure that we integrate this really thoroughly, because this is a major milestone for us.

Aijana Zellner:

Abby, we will take one more question.

Noah Kaye:

Okay. Thanks for all the details in the guide. Just one housekeeping item. What is the price rollover contribution for 2024, or what is the total contribution of price to organic growth for '24? And then what are you assuming for cost inflation?

Noah Kaye:

Perfect. Thanks, Nick.

Aijana Zellner:

Thank you everyone for joining us today. That concludes our call.

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 on the call, we will open up the line for questions. [Operator Instructions] 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.

Blake Moret:

Thanks, Aijana, and good morning, everyone. Thank you for joining us today. Let's turn to our third quarter results on Slide 3. We saw good double-digit growth in both sales and earnings this quarter as component shortages continue to ease. Lead times also continued to reduce across our product lines with recovery to pre-pandemic lead times expected for all products by the end of the calendar year. We did miss almost a week of planned shipments in May because of a longer-than-expected changeover to a new third-party logistics supplier at our North American distribution center. Shipments from this distribution center recovered in June and we now have higher capacity in place for Q4 fiscal year 2024 and beyond. Both total and organic sales grew over 13% versus prior year with currency and acquisitions roughly netting each other out. Currency translation decreased sales by less than a point and acquisitions contributed over a point of growth this quarter. Similar to prior quarters, the split of our sales by business segment, region and industry was largely driven by the composition of our backlog. In the Intelligent Devices business segment, organic sales were up 8% versus prior year. The changeover in our distribution center had the biggest impact on this segment in the quarter. Within the Intelligent Devices segment, Independent Cart Technology continues to be a disruptive technology, and we had several more strategic material handling wins in the U.S. this quarter. The recent launch of our On-Machine Armor Kinetix motion control products adds to our innovative material handling portfolio. We also had an important win in Europe with SIDEM, one of the world's leading desalination companies where our PowerFlex drives and services expertise are helping this customer deliver economical and sustainable drinking water to millions of people in developing regions. Software & Control organic sales grew over 24% year-over-year. Logix sales were almost 40% this quarter, reflecting the strong differentiation of our control platform and the continued benefits from supply chain resiliency investments we've made over the last year. Another example of our many ways to win within Software & Control is recent success at a well-known global parcel delivery company, where the combination of our awesome industrial PCs ThinManager and View software unseated a long-standing competitor as the customer standardizes its North America facilities on a Rockwell visualization platform. Lifecycle Services organic sales increased 8% versus prior year. Book-to-bill in this segment was 1.08, led by strong orders in Sensia and our services business. Sensia had another good quarter of orders and sales with multiple large deals across EMEA and Asia. We also delivered higher sequential margins in Lifecycle Services this quarter. Information Solutions & Connected Services sales grew 10% versus prior year. We had multiple wins across our entire Information Solutions portfolio in Q3 and including both our on-prem and cloud-native software. This quarter, one of the world's top tire manufacturers located in Asia-Pacific, selected Rockwell's FactoryTalk production center to develop its new global MES platform. Another important IS win in Asia was with a Japanese global leader in HVAC where our cloud-native Plex platform is being deployed on Microsoft Azure at one of their greenfield plants. The customer chose our SaaS solution to quickly start up a manufacturing execution and quality management system without the need for extensive on-premise hardware, software and support. We saw Plex synergy wins continue to ramp up in the quarter as our strong market access machine is contributing to new SaaS logos. In the quarter, we saw the benefits of our software partnership with PTC with numerous recurring revenue wins through a combination of our Digital Services business and PTC's ThingWorx visualization platform. Also regarding PTC, we continue to monetize the investment we made in 2018. We now own less than 5% of total shares outstanding and in accordance with the terms of our agreement, I’m stepping off of their Board. Our commercial relationship remains strong and was extended in June. In Connected Services, we had an important cybersecurity win with ADNOC, the Abu Dhabi National Oil Company. This customer is leveraging our network of security services and expertise along with an intrusion detection system from our partner Dragos to help secure its network infrastructure and comply with cyber governance regulations. Our total annual recurring revenue grew a very strong 17% year-over-year this quarter. Segment margin of 21.1% was flat to last year and in line with our expectations despite the shipment shortfall. Adjusted EPS grew over 13% year-over-year. Backlog is beginning to reduce as lead times improve. Let’s now turn to Slide 4 to review key highlights of our Q3 end market performance. Our discrete sales were up about 10% versus prior year. Within discrete automotive sales grew mid-teens year-over-year. One of the notable customer wins here this quarter was with the Korean Tier 1 supplier working on an EV battery project for a European brand owner. This customer is using our core automation offerings including motion control to provide tooling for battery thermal management. Another automotive win this quarter was with Jaguar Land Rover where Rockwell was selected to support the JLR electrified architecture for three of their EV body shops in the UK. Semiconductor sales grew high-teens this quarter, building on strength over the last few quarters, we continue to see broader adoption of our wafer transport solutions by the world’s leading semiconductor manufacturers. This quarter, we also had an important Plex win in semiconductor at SOC, Saudi Arabia as the customer implements our smart manufacturing platform at its site in Riyadh. In e-commerce and warehouse automation sales were down high-teens versus prior year, driven by continued delays in some cancellations at our e-commerce customers. Moving to our hybrid industry segment. Sales in this segment grew 15% year-over-year led by strong growth in food and beverage and tire. Food and beverage sales were up mid-teens versus prior year. We continue to see both greenfield and brownfield investments in this vertical. With one of our most important multi-year wins this quarter focused on a customer’s global fleet modernization program, a leading global food processing company is standardizing over 50 of its sites on our PlantPAx control platform. This competitive DCS win is a testament to our progress in process control applications in both technology and domain expertise. Life sciences sales grew mid-single digits versus prior year. This industry continues to see strong investments in CapEx and OpEx projects across all regions, both in traditional pharmaceuticals and newer advanced therapy, medicinal products. We had a strategic win with Biosero a member of the BICO Group in North America where our combined technologies increased the speed and accuracy of new drug development. Biosero selected our independent cart technology to automate lab workflows for a cell and gene therapy program. Tire was up over 35% in the quarter. Turning to process industries. Process sales were up 15% year-over-year led by growth in oil and gas and mining. Turning now to Slide 5 in our Q3 organic regional sales. As I said earlier, our growth by region this quarter and for the full year fiscal year 2023 reflects the composition of our backlog rather than the underlying customer demand. North America organic sales grew about 2% year-over-year against higher comps. Latin America was up 7%. Through Q3, our orders in the Americas are outpacing the rest of the world. EMEA sales grew 34% and Asia-Pacific was up over 44%. We did see an uptick in order cancellations in China this quarter. Let’s now move to Slide 6 fiscal 2023 outlook. We are confident that shipments in the fourth quarter will recover the shortfall in Q3 caused by the distribution center change. Shipments in July were in line with our forecast for the full year. Our fiscal 2023 guidance assumes a total reported sales growth range of 14% to 16%, and we continue to expect organic sales growth of 15% at the mid-point. We now expect the impact from acquisitions and currency to offset each other. Nick will cover this in more detail later. We have said all along that we expect further normalization of ordering patterns as lead times and constrained products improve, and that’s what we are seeing right now. With improving lead times, machine builders do not need as many months of products on order and are no longer placing unusually large advanced orders. Their incoming orders and front log remain strong and improving component lead times will help them improve their cash flow. We also expect distributor restock orders will pick up as they receive the last constrained items that allow them to clear their committed inventory and complete customer orders. Our order cancellation rates remain low. We now expect our full year fiscal year 2023 orders to be in the $8.5 billion to $9 billion range. Given this updated order outlook, we now expect to finish the year with about $4.5 billion to $5 billion in backlog with about 80% of that backlog shippable in fiscal year 2024. We expect organic ARR to grow 15%. Segment margin is expected to increase by 160 basis points year-over-year. We are increasing the midpoint of our adjusted EPS guidance by $0.05 and now expect adjusted EPS to grow 25% versus prior year and we now expect 80% free cash flow conversion due to higher working capital. Let me turn it over to Nick to provide more detail on our Q3 performance and financial outlook for fiscal 2023. Nick?

Blake Moret:

Thanks, Nick. As we continue to stay close to end users, machine builders and distributors, a few key themes emerge. First, demand remains strong. We’ve mentioned softness in e-commerce and in parts of the Chinese economy, but investment by end users and machinery builders continues across the majority of regions and serve verticals. Second, the global supply chain is improving, but it will take some months to flush the inefficiencies that have built up over the last few years, especially inventory. This is seen at machine builders, distributors and in our own operations. Third, the opportunities for automation to play a strategic role in our customer success have never been higher. Workforce scarcity, American shoring of manufacturing and the premium being placed on business agility are all positive reads for Rockwell. We’re moving fast to meet these needs with new capacity and capabilities. It’s hard to believe, but our Annual Automation Fair and Investor Day are only about three months away, and you should look forward to hearing more about the exciting next leg of our journey. I want to thank all our employees and also our unmatched distributors who have worked so hard to bring us to this point and who collectively make the difference at our customers. Aijana will now begin the Q&A session.

Operator:

Thank you. [Operator Instructions] Our first question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.

Blake Moret:

Hey, Andy.

Blake Moret:

Yes. Andy, there’s a few factors that contribute to that outlook for orders. First are the continued high investment levels and some important verticals for us. We see continued investments as we track new CapEx announcements in areas like semiconductor, in EV, in renewables, while we see a general focus on automation at many of our other verticals like food and beverage, life sciences, energy and so on. We also have had a number of conversations with customers and distributors that give us a consistent view that demand remains strong. As I and members of my team have talked directly to machine builders and end users, they’re all proceeding with plans based on the consistent demand for their products. We described in my remarks what we’re seeing in terms of machine builders who are not placing the unusually large advanced orders that they did of say a year ago. And we’ve also had direct conversations with our distributors and in North America, some of our largest distributors are actually seeing year-over-year order increases. So again, that consistently strong demand picture informs that view that we showed you on Slide 11 of orders recovering, complimenting the remaining strong backlog.

Nick Gangestad:

Yes. As far as the sales impact, we had originally planned when we guided what we expected for growth expectations between Q3 and Q4, we had expected some disruption. We were planning close to a week of disruption that this would be causing in the loss of capacity during our third quarter. That ended up extending by several more days in terms of the total impact it had on us. All in something in the range of $50 million to $100 million of revenue is I think a good ballpark to think about of what we’re seeing of a shift of revenue there between the third and fourth quarter from what we were anticipating three months ago. And then in terms of margin progression, Andy, for the rest of this year, we continue to expect that margins will expand. We think fourth quarter margins will be our highest margin for the year. We continue to expect to see strong margins in our Software and Control business, something similar to what we’ve been seeing the last couple quarters. And as I’ve said for the last couple quarters, we expect sequential margin improvement in lifecycle services. We expect that will be over 10% in Q4. And then intelligent devices as we recapture some of that revenue that shifted from Q3 to Q4, we think added revenue there will be bringing that margin up from where we were in the third quarter. All in, we still expect ITV smart intelligent devices margin to be a little under 20% for the full year, software and control to be well over 30% and lifecycle services will be below 10% for the full year. And it’ll be similar to a little less than what it was in fiscal 2022. But all in progressing nicely with the focus we’re having on productivity there.

Operator:

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

Blake Moret:

Hey Josh.

Josh Pokrzywinski:

Blake, so just on the order normalization and customers, including some of the OEMs adapting to shorter lead times. I sort of get that that’s kind of a – maybe a bit of a one-time accordion squeeze as those folks don’t need to go out the same length of time or even pull that in. Any sense of sizing what that is? What that impact might be on that implied second half order outlook? Just trying to distinguish between the supply chain and sort of the back end of that phenomenon versus maybe what run rate orders might be?

Josh Pokrzywinski:

Got it. That’s helpful. And then maybe for a follow-up, just want to take a step back. I mean, there’s a lot of – there are a lot of elements of the business now where you can sort of see this before and after in terms of investment. We talk a lot about nearshoring, energy transition, you see process orders looking strong on that. But I can’t help notice that 30% of the business is food and bev and consumer packaged goods, where I don’t know if it’s quite as obvious that we’re seeing nearshoring or some fundamental breakout. I know you called out a bigger food and bev win. But maybe just talk about how that piece of the business has seen a secular shift or perhaps hasn’t? If you want to put backlog in context or anything else that would be helpful.

Josh Pokrzywinski:

Understood, appreciate it. Best of luck.

Operator:

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

Blake Moret:

Sure. I'll make a few comments, Julian, and then Nick may have some additional detail. As you think about the composition of our business, for a starting point, we said the backlog that we expect to finish the fiscal year in a couple of months with is remaining high between $4.5 billion and $5 billion, and 80% of that is shippable in fiscal year 2024. I think your question is, okay, how does that develop? And what is beyond that? Think about the product backlog as lead times return to normal for products at the end of this calendar year is getting back to its normal low levels of backlog. We traditionally looked at products as having lead times of days or weeks that either ships directly off our distributor shelves or we build it very quickly in our factories. And I think that gets back in fiscal year 2024. There's a portion of that product business within Intelligent Devices that is configured to order. And that continues to have lead times that are measured typically in weeks, sometimes in a couple of months. That business has been really strong for us here recently. We think we're gaining considerable share there. And so that's going to be a somewhat meaningful component of backlog even after 2024 within the Intelligent Devices area. And then as Lifecycle Services becomes bigger, continues to grow, then we typically have seen somewhere in the neighborhood of half a year of backlog for Lifecycle Services. So backlog becomes smaller as we leave fiscal year 2024, but it remains considerably larger than the $1.5 billion or so that you remember from pre-pandemic. Because we're a bigger company and we have some of these new components, I would also say there's software and recurring revenue that continues to grow nicely. We talked about ARR growing 17% this quarter. And so that's a part of the equation as well. Nick?

Julian Mitchell:

That's very helpful. Thanks. And I appreciate it's very difficult to call. Thank you for the thoughts. Maybe on the areas or markets where you're seeing or expecting the most severe orders normalization, do we assume it's mostly discrete markets globally? I think China, there's obviously some orders pressure that your peers have talked about, but is it sort of a global phenomenon across various discrete markets? Is that the way to think about it?

Julian Mitchell:

Great, thank you.

Operator:

Our next question comes from Jeff Sprague from Vertical Research. Please go ahead. Your line is open.

Blake Moret:

Hi, Jeff.

Jeff Sprague:

Good morning. Sorry if I missed it. I was on a few minutes late, but a lot of talk about future backlog. But could you just square us up on where the backlog actually ended in the quarter, and also kind of what the price volume complexion was in the actual quarter?

Jeff Sprague:

Okay. Great. Yes, it's just helpful to have the anchor if we're going to talk about the future, right. So we can all relate to that in future conversations, but I get it. And then just on investment spending, is there actually a change in the year outlook on how you'll – the level of investment spending or just a timing between quarters?

Jeff Sprague:

Okay, great. I'll leave it there. Thank you, guys. Appreciate it.

Operator:

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

Blake Moret:

Yes, Andrew.

Andrew Obin:

Hey, just as you think about it seems that you are about to embark on a multi-year growth spurt. How should we think – how do you guys think about your cash conversion just structurally going forward? Do you just need to accept permanently lower cash conversion? We just need to invest in working capital and growth, and if not, what levers can you pull to sort of get it back to this 95% level that we've had?

Andrew Obin:

Great. And then just on your ARR I think 17% very healthy. Could you give us a look sort of under the hood what the components are, which portions of your business is doing better? Maybe talk about MES, talk about Fiix, Plex, whatever it is you guys want to talk about, but just give us a sense of what’s driving the software growth. Thank you.

Andrew Obin:

Thanks so much.

Operator:

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

Blake Moret:

Hey, Steve.

Nick Gangestad:

Yes, Steve, that, that is correct. The only exception is our lifecycle services business component that could have some nuances from quarter-to-quarter, but generally we were pretty much a one-to-one book-to-bill.

Blake Moret:

Yes. We haven’t given the specific order value for Q3, but we gave the full year expectation of $8.5 billion to $9 billion of orders.

Nick Gangestad:

That that is correct. We’re not adjusting for any seasonality here.

Blake Moret:

So Steve, we’re continuing to provide the information that we think is most important to investors and over the last few years, as you said, orders have become a more important component as they have decoupled from shipments at different times. And so we felt it was important to provide that additional information. As we look at going forward, we’re going to continue to look at where orders remain material to investor decisions and to provide that kind of information. And we continue to look at how we’re making decisions about running the business going forward and providing you some insight into that. And that’s why it’s going to take some different forms as time goes on, because the value of it and the horizon of that I think are important. So this quarter we made the decision to give a little bit of a view going forward and showing on that Slide 11, the relationship between orders and big macro events going forward so that you and investors can put that into perspective.

Operator:

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

Nick Gangestad:

Yes. As I think about where we’re going with margins in our lifecycle services business in the next couple years, we expect that lifecycle services will be an outsize contributor to our margin expansion in the coming years. So we – one way we think about our margin expansion is through our core conversion of the 30% to 35% range. That would imply that lifecycle services is going to be helpful to that number. So if as I look over the next couple of years, I believe lifecycle services will be our highest margin expansion business segment of the three segments.

Noah Kaye:

Thanks. And maybe just want to step back and ask a broader question about the demand environment. In past quarters, you and the industry and trade press and all sorts of folks have talked about the long runway here from IRA, IIJA shoring all these trends. And when you look at a quarter like this and see, some of the order dynamics and understand a lot of that’s just supply chain normalizing. I guess, when we step back, where do you think we kind of are in this wave of manufacturing investment and specifically in the United States?

Aijana Zellner:

Julianne, we’ll take one more question.

Nigel Coe:

Aijana, thanks for fit me in here. Hi guys. Good morning. So yes, we’ve covered a lot of ground here. But just North America was 1% organic, so even if we factor in the $50 million to $100 million impact from the DC, it still seemed quite weak. And I’m sure there’s some inventory headwinds there, but are we seeing any push out in projects, some of the larger projects in North America?

Nigel Coe:

Okay. That’s very clear. And then Nick, your comments on sort of what a normal backlog is, and obviously higher than what it’s been in the past, but seems to suggest that we should be expecting backlog to maybe burn down towards maybe close to $3 billion. Is that fair?

Nigel Coe:

Okay. Thanks guys. Cheers.

Aijana Zellner:

Thank you everyone for joining us today. That concludes today’s conference call.

Operator:

Thank you for holding, and welcome to Rockwell Automation 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 your questions. [Operator Instructions] 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.

Blake Moret:

Thanks Aijana. And good morning everyone. Thank you for joining us today. Let's turn to our second quarter results on Slide 3. We had an outstanding quarter of strong growth in both sales and earnings. Our double-digit sales and margin growth continue to reflect Rockwell's strong execution and focus on business resiliency as well as overall improvement in electronic component availability. The demand for our differentiated offerings continue to be strong even in this uncertain economic environment. Through the first half of this fiscal year, our total orders were $4.8 billion, spread evenly between the 2 quarters once we adjust for the estimated price-related pull forward in our fiscal Q1. As expected, our order cancellation rates remain in the low single digits through April. Total sales grew over 25% versus prior year. Organic sales were up over 27% year-over-year and were above our expectations. Currency translation reduced sales by about 3% and acquisitions contributed over 1 point of growth this quarter. As in the prior quarters, the split of sales by business segment, region and industry, was largely driven by access to electronic components and the composition of our backlog. In the Intelligent Devices business segment, organic sales grew 27% versus prior year with broad-based growth across all businesses. We continue to see wider adoption of our independent cart technology in new applications across semiconductor, food and beverage and life sciences. One example of the new application is way for transport in semiconductor fabs. We continue to see increasing demand for this offering including important win with a large U.S company this quarter. These customer investing in modernizing and expanding its material handling systems and our independent cart technology helps increase wafer output and more efficiently utilizes existing fab space leading to increased capacity and significant savings. Software and Control organic sales increased over 40%. Strong growth versus prior year was led by logic, where we continue to see the benefits of our resiliency investments and an overall improvement in supply chain. Lifecycle Services organic sales were up 12% year-over-year. Book-to-bill in this segment was 1.27, led by strong order intake in our Sensia business. Information Solutions and Connected Services sales grew about 10% versus prior year. We had another quarter of competitive multiyear wins across our software and cybersecurity services portfolio. Within Information Solutions, I am pleased with the increasing breadth of our new Plex customers as we continue to expand our SaaS, Smart Manufacturing platform to new industries and geographies. One of our Plex wins this quarter was with AB-InBev, the world's largest brewing company and its start-up business EverGrain, focused on upcycling grain by product into sustainable supply of nutritious food ingredients. Our modular and cloud-native Flix software is helping EverGrain quickly deploy mission-critical quality management capabilities today while providing the functionality for the business to scale in the future. In Connected Services, we saw another quarter of customer demand for our recurring cybersecurity and infrastructure as a service offerings as customers across many industries are continuing to invest in safety and security of their operations. One of these wins was with Darling Ingredients, a food processing company focused on reducing food waste by collecting and repurposing animal-based products. Our annual recurring revenue grew 15% year-over-year in Q2. Segment margin of 21.3% was up over 560 basis points year-over-year and was better than expected. Adjusted EPS grew over 81% year-over-year. We also completed the acquisition of Knowledge Lens this quarter, which adds significant scale to our Kalypso digital services business. Let's now turn to Slide 4 to review key highlights of our Q2 end market performance. Consistent with my earlier comments on the gradually improving supply chain environment, all 3 industry segments grew strong double digits versus prior year. Our discrete sales were up about 20% in the quarter. Within discrete, automotive sales grew over 40% versus prior year. We saw a number of strategic wins in EV and battery this quarter both in the U.S. and China, where a combination of our core automation and strong partner ecosystem helped edge out our biggest competitors. While some customers are optimizing operating costs in the near term, they still continue to invest in building out new capacity to meet their production goals. Semiconductor sales were up mid-teens year-over-year. I already mentioned one semiconductor win. Another example of how Rockwell is expanding our existing semi footprint now with wafer transport applications is our multiyear project win with analog devices. Our independent cart technology was chosen to automate ADI's material handling applications at several of their global fabs. By implementing our technology, ADI will improve operator productivity by at least 20% by moving away from manually delivering lots across the fab. In e-commerce and warehouse automation, our Q2 sales were down mid-single digits versus prior year. While we continue to see a pause in greenfield announcements, e-commerce players, traditional retailers and many consumer packaged goods companies continue to invest in modernizing their warehouses. Turning to our hybrid industries. Sales in this segment increased 35% year-over-year, led by strong growth in food and beverage. Food and beverage sales were up almost 40% versus prior year. We also saw a number of large orders this quarter with customers in this vertical continuing to invest in making their brownfield facilities more efficient and resilient. Demand in our dairy and agriculture processing business remains especially strong. Life sciences sales grew 20% year-over-year. One of the important wins this quarter was with a leading European health care company, where our Kalypso digital services used our Emulate3D simulation software to model and test multiple plant layouts to eliminate potential bottlenecks and increase worker safety. Tire was up over 50% in the quarter. Moving to process. This segment was up over 25% versus prior year, once again led by growth in oil and gas and metals. Within process, we had an important sustainability win. Through Occidental Petroleum's 1.5 subsidiary, Rockwell is providing control systems for direct air capture units that help remove carbon dioxide from the atmosphere. We are proud to be a part of Occi’s low-carbon strategy to deliver large-scale carbon management solutions that accelerate net zero economy. Turning now to Slide 5 and our Q2 organic regional sales. Similar to prior quarters, our growth by region reflects the electronic component availability and what's in our backlog rather than the underlying customer demand. North America organic sales grew 23% year-over-year. Latin America increased 16%, and EMEA sales grew 42% and Asia-Pacific was up 32%. Let's now move to Slide 6, fiscal 2023 outlook. We have previously said that the fiscal '23 sales performance is primarily based on our ability to ship backlog. Given our performance in the first half, improving ship supply and the benefits of our resiliency actions, we are increasing our sales and earnings outlook for fiscal '23. Our fiscal '23 guidance projects total reported sales growth of 14.5%. We expect organic sales growth of 15% at the midpoint. We expect acquisitions to contribute over 1 point of growth and currency to be a headwind of 1.5 points. Nick will touch more on this later. Organic ARR is expected to grow 15%. Segment margin is expected to increase by over 150 basis points year-over-year. Adjusted EPS is expected to grow 25% versus prior year, and we continue to target 95% free cash flow conversion. Before I turn it over to Nick, let me share some of our thoughts on the setup for fiscal year '24. With more than half of this fiscal year behind us and through our continued discussions with end customers, we believe we have better visibility into our full year orders and backlog levels. We expect our fiscal '23 orders to be about $9 billion, which implies a slight moderation of orders in the second half of this year. This is consistent with our expectations of improving component availability and the subsequent reduction in customer lead times. With our current orders outlook, we anticipate exiting the year with backlog levels of around $5 billion, positioning us well for fiscal year '24. Also, as the largest pure play, we have an impressive record of earnings growth, and we expect that to continue given our unique market focus and differentiation. Let me turn it over to Nick to provide more detail on our Q2 performance and financial outlook for fiscal '23. Nick?

Blake Moret:

Thanks, Nick. We are still operating in a dynamic environment and are laser-focused on execution through the rest of this fiscal year. With that said, we are continuing to accelerate new product development and investments in cloud-native technologies. Revenue from our new offerings, both organic and inorganic is becoming a more meaningful contributor to growth and share gains. We are the largest pure-play automation company with market-leading solutions across discrete, hybrid and process industries and we are adding scale to our differentiated offerings through strong partnerships and strategic acquisitions. Our recent acquisition of Knowledge Lens is adding 600 resources with cutting-edge data science, AI and cloud solutions to our existing digital services business. This expanded team is already working with our key customers on their next-generation plans. I want to welcome all Knowledge Lens employees to Rockwell. Our close relationships with end customers, our best-in-class ecosystem and our talent give us confidence in the continued momentum for growth and profitability this year and beyond. Aijana will now begin the Q&A session.

Operator:

[Operator Instructions] Our first question comes from Andy Kaplowitz from Citigroup. Please go ahead. Your line is open.

Blake Moret:

Sure. Well, let me take that first, Andy. We're continuing to add capacity. So at the same time that chip supply is improving. We're continuing to make sure that our labor and our facilities, our redundancy across our integrated supply chain operations is ready to handle continued growth. So let me start there. Now in terms of the demand, this is playing out like we thought it would. We have said for some time now that we did expect orders and shipments to converge as lead times improve. And so that's exactly what you're seeing, but the orders are continuing at a strong pace. And to look at that, let's take kind of a vertical by vertical view, we've talked about the historic generational spending levels in certain of the verticals that are important to us, things like electric vehicle and battery and semiconductor. We're seeing additional expenditures in energy, both as the fossil fuel providers decarbonized and as renewables become a bigger part of our business as well. But we're also seeing across all verticals an increased focus on automation, and that's due to large durable trends, things like scarcity of trained workforce and so the need to complement people with the technologies and the software and the services that we provide. So as I look across that while we continue to pay close attention to macroeconomic conditions, we think the setup for multiyear growth in automation and information is there.

Nick Gangestad:

Yes, Andy, let me take that. As far as software and control with what we're seeing in that business and the mix of what we're selling and the strength in the overall market there, we do see over 30% as a sustainable margin for that business. In terms of lifecycle services, we see that -- that's going to be sequentially going up. And we had talked earlier about getting this to double digits. We see that happening in the fourth quarter. And we think that's a good trajectory we're going to expect to see happen beyond '23 as well. So that's where we're seeing margins in those two segments.

Josh Pokrzywinski:

So Blake, just on some of the order commentary, I want to square the circle here a little bit. Talking about, I guess, you kind of comp the comp sequentially. You had the pull forward that probably happened around the price increase. As you said, lead times are coming down a little bit. So presumably, customers sort of altering plans accordingly, but you still have, call it, flattish sequential order. So something seem to have gotten better. It seems like it's the same markets that get mentioned over and over again, like EV and battery and Life Sciences and a few others that come in there. But did anything, I guess, build momentum quarter-over-quarter and anything in terms of March or April exit rates that we should be aware of?

Josh Pokrzywinski:

And then I guess there's the obligatory question for Nick on investment spending since I think that gets pulled around a little bit, especially when things are a little better than expected. Nick, was there any kind of reallocation of investment spending to get more in this quarter? And how should we think about the rest of the year?

Operator:

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

Blake Moret:

Yes, Andrew, you should think about that as a slight reduction of the current backlog, which sits at about $5.6 billion, but still held up by continuing strong order rates. So it's not intended to be precise, but on the other hand, it does reflect the trends that we're seeing and that is that as lead times improve, we're able to clear past due backlog, but the overall number stays quite high due to the continuing strength of orders.

Blake Moret:

Sure. Well, Plex continues to be a really exciting addition to our offering, and it's playing out like we hoped it would when we made that acquisition. Plex is smart manufacturing platform to be sure, has MES capability, but it also has quality management, supply chain and even ERP functionality for small- and medium-sized businesses. When we bought Plex, they had a great track record in certain verticals like tier automotives, but we knew that with our existing market access, we could expand that into food and beverage and EV and mining. And we also knew that we had the opportunity to geographically diversify their customer base and we're doing just that with wins in Asia and with putting Plex on to Azure in Europe where we've already seen some nice wins there. So it's that synergy that's playing out, and there is lots of room to run with that. So it's working well. I've mentioned before, one of the things that we've done is to take the seasoned veterans of selling cloud-native SaaS software and given them enterprise-wide roles within Rockwell. So software sales leadership, our Chief Marketing Officer and a number of other functions are coming from Plex. So it's not just the technology and the business -- it's also the expertise that we're making sure that we don't vary in the organization.

Blake Moret:

Sure. Plex and Flix are very supportive to the overall growth of our software business.

Julian Mitchell:

Maybe just wanted to try and drill into that book-to-bill element a little bit more for the back half being well below one. It doesn't sound like you're perturbed by that. but just trying to understand, if we look at it in a little bit more detail, anything you'd call out around sort of hybrid versus process versus discrete markets, maybe where you see that book-to-bill or year-on-year orders pressure being most severe. And just maybe a question sort of more broadly on that for Blake. You've had this component flush driving this huge revenue surge right now. Is there sort of a view on the world or the demand environment post that flush changed at all in recent months?

Julian Mitchell:

And when you sort of look at the two components of customer demand being strong and a good pipeline of projects coming up, plus at the same time, a sort of accelerated backlog conversion into revenue because of supply chain, do you think we could be in for quite a prolonged period of having that book-to-bill below one? Or you're sort of thinking, no, we get some adjustments for a couple of quarters and then it moves back into seeing sort of one-to-one like Rockwell's classic business model.

Operator:

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

Nick Gangestad:

Steve, what we talked about is that the backlog at the middle of the year for us now stands at $5.6 billion. That's versus $5.2 million that it was at the beginning of the year. So up $400 million for the first 6 months of the year.

Nick Gangestad:

I haven't provided the product versus the software mix. But in terms of the things that are causing the margin expansion. The biggest factor by far is the volume growth that we're experiencing and the leverage we're getting on that. The second biggest thing that is improving that margin is the favorable price/cost versus where we were in second quarter last year. And then offsetting that, to some extent, to bring it down to a 900 basis point year-on-year increase. We have increased investment spend year-over-year in software and control, and we also are facing noticeably higher incentive compensation. Those are the 2 negative things on the margin in the year-over-year Q2 for Software and Control.

Nick Gangestad:

Yes. We think it will be over 30%. It's -- and that's up from what I have said in the past that we see that margin being able to sustain into the second half of the year. At levels fairly similar to what we're seeing in our second quarter. So full year, we're going to be above 30% could be a few percentage points above 30%.

Nigel Coe:

So I see some of the call, so I apologize if we're going to be sort of like, I will be asking the question we've asked about 3 times. But just wondering about the backlog kind of conversion means supply chains, where are we versus normal in terms of lead times? And converting this backlog, is it more constraint of just the lead times? Is it labor? Is it customer acceptance, project timing? What could cause the backlog to convert even faster in the second half of the year?

Nigel Coe:

And then just another stab at the backlog. Are we seeing the mix of the backlog shifting to some of the larger projects, particularly with the systems, ED plants, et cetera. I mean, so are we seeing some of those larger systems orders coming through in the backlog? And then just kind of another part of that would be you point to $9 billion of orders, so obviously $4.8 billion in the first half, $4.2 billion the first half, $4.2 billion in the second half. What's -- I mean, 4.2% is still a very level, no question about it, but -- what's causing that drop down? Is it project timing? Is it lead times for customers channels are just not placing kind of the same rate of orders. What kind of visibility do you have to that second half deceleration in orders? Again, very healthy level that you are pointing to declining orders.

Operator:

Our next question comes from Rob Mason from Baird. Please go ahead. Your line is open.

Blake Moret:

Yes. You said it. I mean, we're seeing some good growth there. We had a particularly strong orders, and there's a very strong backlog in the business. And so as we move through the coming quarters, we expect the positive contribution of Sensia both in terms of growth and profitability to have an impact first on lifecycle services and then more broadly across Rockwell.

Rob Mason:

Excellent. Just as a follow-up to, any thoughts, I didn't hear any commentary specific to China, just exactly what you're seeing on the ground in China and how that recovery is playing out in your business?

Operator:

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

Blake Moret:

Yes. Andre, it's a good pipeline, and you said it. Those are the priorities. That's fairly broad. But within that, there's a lot of information management software in the production world. So there's some decent targets there. Cybersecurity has been extremely successful for us both organically and as we've added additional capabilities through some acquisitions, advanced material handling. We talk all the time about our independent cart technology, about some of the things we're doing in robotics applications as the lines get blurred between robot control and programmable line control, and we think there's some very interesting things going on there. Obviously, you had AI and autonomy to some of these areas, and there's new dimensions for value for customers. And then New York and Asia, we're very happy, for instance, with what we're doing in -- with awesome, the Italian manufacturer of industrial PCs that also has some great software that's forming the basis for some of our most exciting new introduction. So I would say that the pipeline is good across all of those fronts.

Blake Moret:

Well, they're all focused on building up their fleet capacity so that they can get a return on these giant investments. You don't get that unless you put more jobs per hour on the door and so they're all working to be able to expand their production output. But if you look on the on the road today, you still don't see a ton of electric vehicles and all of them, if you listen to those goals and you look at the trends, this is a multiyear process and from start to finish lines and the basic materials that are needed for the batteries, through the battery making facilities through the electric vehicle assembly. All of that has to build out to be able to get us to a point where you start seeing electric vehicles come anywhere near approaching internal combustion vehicles on the road. So this is multiple years and all of these manufacturers are focused on debottlenecking that whole supply chain, which is going to be in the news for years to come. I think the one other question. I mean the IRA, obviously, that helps there as well as it does with other renewable providers. We've talked before about First Solar, for instance. We talked about Oxy's 1.5 initiative. So we're seeing more and more of these come online across our verticals and people are doing it because it's important for their business models. And again, that's not a femoral thing. That's going to be over multiple years.

Phil Buller:

I was hoping you could expand on the topic of, I guess, the order funnel or pipeline rather than the backlog. I'm wondering if you're more excited about the funnel in process markets, generally speaking, more so than discrete or hybrid at this point. You've thought very helpfully about different customer examples in those like EVs and such. I'm just trying to get a handle on how it aggregates into those big process versus discrete buckets. So which funnel is getting fuller, if you will? And perhaps you can remind us if there's any structural margin differential between those that would be great.

Phil Buller:

And just in terms of the different topic margins here. I know you've touched on the Software and Control margin. The drop through between the three different businesses is quite different, depending on which one you're looking at. And I know that there's been a lot of things bouncing around at the moment. So I guess I was just trying to get a handle on how you think about the H2 margin evolution for each of the three businesses relative to H1. Is there anything that you could point out that we should be bearing in mind beyond Software and Control, please?

Aijana Zellner:

Julian, we will take one more question.

Jairam Nathan:

So I just wanted to spend a little time on the automotive. We are seeing, as the transition towards EVs, we are seeing the number of process steps coming down. And I understand Rockwell probably does not have a lot of content on welding, but do you see any implications as EVs or auto companies go from spot welding to giga casting and things like that?

Jairam Nathan:

And one more, if I may. So I mean all the -- given your outlook, I think the 1 area which actually decline seems to be chemicals. I think you went from a high single digit from a low double -- double digits. So can you explain that a bit?

Operator:

We have no further questions. I'd like to turn the call back over to Ms. Zellner for closing remarks.

Operator:

That concludes today's conference call. At this time, you may disconnect. Thank you.

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. [Operator Instructions] 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.

Blake Moret:

Thanks, Aijana, and good morning, everyone. Thank you for joining us today. Let's turn to our first quarter results on Slide 3. I'm pleased with our team's exceptional focus and execution as we delivered another quarter of strong growth and profitability. Organic sales and earnings were both up year-over-year and better than we expected this quarter. Rockwell's continued investments in resiliency and agility, along with a gradually improving supply chain environment, helped more than offset many of the headwinds we faced heading into Q1. Orders and backlog were up sequentially in the quarter. Order cancellation rates were flat to prior quarter and remain in the low single digits through January. We are encouraged by the continued strength of our end user demand across all business segments and regions. Total sales grew almost 7% versus prior year. Organic sales were up 10% year-over-year, better than our expectations despite a very dynamic supply chain environment. Currency translation reduced sales by 4% and acquisitions contributed about a point of growth this quarter. Consistent with our prior assumptions, the split of sales by business segment, region and industry was impacted by access to specific electronic components and the composition of our backlog. In the Intelligent Devices business segment, organic sales increased about 7% versus prior year with growth in all regions and product lines. We had another quarter of remarkable order growth in our independent cart technology business, driven by large multi-year deals across many industries including EV, material handling and semiconductor. I'll cover some of these strategic wins in a few minutes. Software and Control organic sales grew almost 16% versus prior year. Better than expected growth was driven by our team's ability to quickly redesign and requalify certain Logix products to secure additional components supply with the support from key suppliers. We also continue to see a gradual improvement in electronic component supply. Lifecycle Services organic sales were up 10% year-over-year. Book-to-bill in this segment was a healthy 1.21 and was consistent across solutions, services and Sensia businesses. Information Solutions and Connected Services sales had another quarter of double-digit year-over-year growth. We are seeing a significant uptick here in large multisite and multiyear deals, both in software and services. One of our Information Solutions wins this quarter was with a leading potato processing company, where a combination of our Kalypso digital consulting and enterprise analytics capabilities helped the customer increase throughput and reduce energy costs across multiple production lines. We're proud to be an important digital partner to this global company as they focus on doubling their revenue over the next five years. Our recent software acquisitions continue to land us new logos across various industries and regions. These include Plex wins in metals, food and beverage and automotive and numerous enterprise asset management wins Fiix's cloud-native offering in Asia, where we are leveraging the distribution network to amplify our sales with local customers. On the Connected Services side, we continue to build momentum with enterprise cybersecurity wins with customers across food and beverage, life sciences and consumer packaged goods, prioritizing their investments and resiliency of their operations. One of our key cyber wins this quarter was with one of the world's largest global consumer goods companies, who chose Rockwell's differentiated portfolio of hardware, software and services along with the capabilities of our partner Claroty to manage OT security at hundreds of their sites globally. This multiyear deal will also contribute to our double-digit growth in annual recurring revenue. Q1 ARR grew 14%. Segment margin of 20% was up over 100 basis points year-over-year and was better than expected. Adjusted EPS grew 15% year-over-year. Let's now turn to Slide 4 to review key highlights of our Q1 end market performance. All three industry segments saw strong year-over-year growth and were above expectations, consistent with the continued gradual improvement in electronic component availability. In our discrete industries, sales were up low teens. Within discrete, automotive sales were up 25% versus prior year. We continue to win new and follow-on orders with both the brand owners and the supporting EV ecosystem, including vehicle and battery OEMs and system integrators. A good example of Rockwell's strong position in EV this quarter is our win with a leading battery supplier. Our independent cart technology was selected for the battery cell assembly and formation process to support Ford's BlueOval greenfield plants in Kentucky and Tennessee. We talked about our strategic partnership with Ford at our Investor Day last November, and we are excited about the progress we are making together. Semiconductor sales grew over 20% versus prior year. This is another vertical where we are able to expand our offerings to new applications, including independent cart for wafer transport and Logix-based automation for silicon carbide wafer manufacturing. In eCommerce and warehouse automation, our sales were down low teens versus prior year. Some of our largest eCommerce customers are in the process of shifting their investment from greenfield to brownfield, and we expect continued investments in upgrading existing facilities, including next-gen sortation systems over the course of this fiscal year. One of our large multiyear wins in eCommerce this quarter was with CMC, a leader in smart solutions for sustainable packaging. Rockwell's smart machine architecture, which includes our full portfolio of hardware and software, will help CMC produce its innovative on-demand packaging at scale. Another important win in the quarter was with Phononic, a technology company focused on unique heating and cooling systems. This customer is working with our Kalypso team to create the cloud and IoT infrastructure necessary to support Phononic's disruptive design for cold chain solutions and warehouse applications. Moving to our Hybrid industry segment. Sales in this segment grew low teens year-over-year, led by strong growth in food and beverage. Food and beverage sales were up over 15% versus prior year. As I mentioned earlier, we saw a number of large cybersecurity wins in this vertical, underscoring customers' focus on resiliency and security in their operations. Life Sciences sales grew mid-single digits in the quarter. In addition to software, we saw a high number of cybersecurity wins in this end market this quarter with several important wins coming from Europe. Tire was also up mid-single digits in the quarter. Let's turn to Process. This segment grew mid-single digits versus prior year, led by growth in metals and oil and gas. We rarely talk about our metals vertical, but we had an important sustainability win with Cornish Lithium, a pioneering mineral exploration and development company, who chose Rockwell's PlantPAx process control system for its demo plant to convert lithium concentrate into high-grade refined lithium used for battery production. We are excited to partner with Cornish Lithium on this energy transition journey. Turning now to Slide 5 in our Q1 organic regional sales. Similar to last fiscal year, our performance here is a reflection of electronic component availability rather than the underlying customer demand. North America organic sales grew 8% year-over-year, Latin America sales were up 6%, EMEA sales increased by over 13% and Asia Pacific was up 16%. Let's now move to Slide 6, fiscal 2023 outlook. Given our Q1 performance, our record backlog and a gradually improving supply chain we are increasing our top line and bottom line outlook for fiscal 2023. While we are encouraged by the improving electronic component landscape, the macroeconomic environment is still very dynamic and we continue to take a conservative approach in our operations. Our fiscal 2023 guidance projects total reported sales growth of 12%. Organic sales growth of 13% at the midpoint assumes continued supply chain improvement. The majority of our fiscal 2023 shipments are already in backlog. We continue to expect acquisitions to contribute a point of profitable growth and currency to be a headwind of about 2 points. Nick will touch more on this later. ARR is still expected to grow 15%. Segment margin is expected to increase by over 100 basis points year-over-year. Adjusted EPS is expected to grow 17% versus prior year and we continue to target 95% free cash flow conversion. Let me turn it over to Nick to provide more detail on our Q1 performance and financial outlook for fiscal 2023. Nick?

Blake Moret:

Thanks Nick. In this dynamic environment, we are positioning ourselves and our customers for a more resilient, agile and sustainable future. Automation has never been more important in solving our customers' biggest challenges. A large percentage of these global investments are being made in the U.S., where we have the strongest market share, the best channel and decades-long relationships. Shoring is real for many of our most important verticals, and we see these investments, along with the early benefits of the Inflation Reduction Act, reflected in our continued, strong order rates. We are accelerating the pace of our innovation, including new product introductions across all key product platforms and our recent acquisitions. These were showcased at our very successful automation fair in Chicago, where we welcomed over 18,000 customers, partners and employees to an amazing demonstration of the value provided by Rockwell and our friends. I was also able to meet our new CUBIC team in Denmark a few weeks ago, and I am excited about the new opportunities to expand our sustainability portfolio with an increased presence in renewables, CUBIC's largest customer segment. Importantly, I'm happy with how our culture is both embraced and enriched by our recent additions. And I'm excited to see how we deliver strong growth and new customer value together in the years to come. Aijana will now begin the Q&A Session.

Operator:

Certainly. [Operator Instructions] Our first question comes from Scott Davis from Melius Research. Please go ahead, your line is open.

Blake Moret:

Hey Scott.

Scott Davis:

You guys mentioned a couple of times electronics availability as being still a gating factor. Maybe a little bit more color on that in context kind of how that compares perhaps even just the last quarter and prior quarters and also maybe just some context around the product categories or the geographies where it's particularly still acute?

Scott Davis:

Blake, is that impacting kind of customer order patterns still? I mean is there still so much fear that lead times are too long that folks are potentially holding on to a little extra inventory here and there? Or is that not an issue because they were never able to hold on to inventory because they couldn't get any product to begin with?

Scott Davis:

Okay, congrats and best of luck this year, guys. Thank you.

Operator:

Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead, your line is open.

Blake Moret:

Hey Andy.

Andy Kaplowitz:

Blake, as you started calendar 2023, have you noticed any change in customer conversations around their CapEx plans in any of your end markets that concerns you? And then you talk about how you're thinking about your backlog moving forward? Obviously, it continues to be unusually high. Given the current demand environment, does it seem likely at this point that you end FY2023 with still relatively high backlog that sets you up for a pretty strong 2024?

Andy Kaplowitz:

Very helpful, Blake. And then Nick, maybe I could just ask you for more color on how you are thinking about price versus cost. You mentioned the 7% price in Q1. I think last quarter; you said price cost would be 100 basis points positive tailwind for the year. Has that expanded at on, how are you thinking about the stickiness of your pricing as supply chain-related headwinds begin to subside?

Andy Kaplowitz:

Appreciate it Nick.

Jeff Sprague:

Hey thank you. Good morning everybody.

Jeff Sprague:

Hey, good morning. Just a couple for me. First, just on supply chain and kind of the whole redesign dynamic, Blake. Does this actually create some permanent cost advantage, or actually is the redesign work kind of a negative makeshift thing that needs to kind of be corrected further down the road when the supply chain improves more?

Jeff Sprague:

And then maybe just another kind of a two-parter for me. First on IRA, I was a little surprised to hear you say you're seeing some benefits there. I know like in wind and some other areas things are kind of gummed up waiting on rule promulgation. So I wonder if you could comment on what you're actually seeing there. And then secondly, on semi, I think, your historical strength has been on the material handling side of the house. And I would think independent cart is a better version of material handling in many respects. But could you maybe size in percentage terms or however you could frame it, how your potential share of wallet is changing in semi with your newer offerings?

Jeff Sprague:

It does, thank you.

Operator:

Our next question comes from Josh Pokrzywinski from Morgan Stanley. Please go ahead your line is open.

Blake Moret:

Hi, Josh.

Josh Pokrzywinski:

Blake, just trying to balance out here some of what you're seeing out there versus what we're seeing in the macro, I guess the Fed is trying to create some more employment flag deliberately, and you would think that productivity and automation are sort of a foil for that, but it doesn't really seem to be showing up in orders. And I know some of the markets you mentioned in the prepared remarks where things like food and beverage and life science and EV, and maybe there's just not as much demand variability there. But how do you see kind of this cyclical versus secular balance? And are customers making these investments kind of with the expectation that demand will slow down and these are imperatives anyway?

Joshua Pokrzywinski:

Got you. That's helpful. And then just a follow-up on maybe putting some of these announcements we see out there in context. I think the White House put out something fairly recently, talking about across different verticals like ones you mentioned, some $350 billion [ph] or $400 billion [ph] worth of projects over the next several years. What's sort of the automation exposure within that for some of these bigger announcements? Is it 2% of the spend? 10% of the spend? Just trying to maybe kind of dimensionalize that versus kind of the bigger numbers that we see?

Joshua Pokrzywinski:

Very helpful as always. Thank you.

Operator:

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

Nick Gangestad:

Yes. Julian thanks for the question there. In terms of moving from roughly 20% margin in the first half of the year to 22% margin in the second half of the year, yes, lifecycle services is one of the bigger contributors to that step up as we see lifecycle services going up through the year. But we're expecting margin expansion in all of our segments year-over-year in fiscal year 2023. And lifecycle services just a little bit over the total average for margin expansion that we're expecting. So that's how we're seeing it. In terms of Software & Control, like Julian, just one of the things I just want to point out, as you look at some of the leverage that we're getting, if you're looking at the base, that was including what I was calling out a year ago of some of our incremental expenses related to Plex. So as an example, in our a little over 600 basis points of margin expansion year-over-year in the first quarter in Software & Control, there's about 200 basis points of that, that came from the year-over-year change in what we're experiencing in Plex as we're largely driven by some of those onetime expenses that we had in 2022. In terms of the overall leverage and conversion that we expect in Software & Control, we don't really give it down to that – at a segment level like that. We – you've often hear me talk about our 30% to 35% core conversion. That's more inclusive of everything. But as we grow Software & Control, we continue to expect that that's going to create margin enhancement. That's one of the things that we expect that will enhance our margin. It is also a business that is attracting more of our incremental growth investments as well as we put more investment in that. So Julian, that's just part of the balance. I'd like you to keep in mind on that.

Blake Moret:

Yes. Julian, oil and gas is where we expect a particularly strong ramp from mid-single digit to double-digit. We also see a little bit of that in related chemical industries, particularly the fine chemical applications that are really our sweet spot. Orders continued strong for oil and gas and other verticals in process. They continue, as I mentioned before to see some supply chain shortages that put a little bit of pressure on the shipments in the quarter. But we're comfortable and confident with the continued orders and with the really strong backlog that we'll see the double-digit growth for the full year.

Blake Moret:

I should mention – I should just mention, since we're talking about process if you were at Automation Fair, you saw the new high availability Process IO. So it's not just the traditional value that we're providing, but the strength of some of our recent acquisitions and new product introduction. And as we release over the coming months that high availability IO, that's a major step change in our capabilities in our PlantPAx system. So that's something that had been a gap for a period of time, and we're very happy with the way that the IO has turned out and the endorsement by process customers.

Blake Moret:

Yes.

Steve Tusa:

Hi. Good morning.

Nick Gangestad:

Good morning, Steve.

Blake Moret:

Thank you.

Blake Moret:

Yes, the orders were strong. We continue to give the book-to-bill specifically for lifecycle services, which was at 1.21. And overall, for the company, as we talked about orders and backlog being sequentially up, meaning, obviously, orders were in excess of the shipments for the quarter, it's across the segments and it's across the regions as we see that continued demand. And we will see continued high backlog levels even with the strong shipments and the increased guide, we'll see very strong backlog at the end of 2023 as we go into 2024.

Blake Moret:

Yes. We haven't talked about it other than to say it’s healthy sequential orders because we think the sequential information and the cancellation rates, which we also talked about being flat and remaining in low-single-digits, we think those are the most important factors going forward.

Nick Gangestad:

Yes, Steve, as far as the pricing, what the pricing that we're going to experience for the balance of fiscal year 2023 is all or virtually all of it already baked into our backlog based on the orders that we have and the pricing we put in that. And that will be showing sequential price improvement from what we're seeing right now, just based on how that backlog is playing out. In terms of the guide I'm giving for the full year that is not representing an aspect of price starting to come down from the pricing level we're seeing in the first half. It's just a recognition of – we had virtually no price growth in the first half of fiscal year 2022, and then we had more significant price growth in the second half of fiscal year 2022. So that change from the – it's all based on comp, not on any kind of deceleration there.

Steve Tusa:

Sorry, one more quick one, because you guys mentioned it at the Investor Day, any feedback from the channel on how – on the behavior around this January cancellation policy change?

Steve Tusa:

Yes. All right. Thanks guys. Appreciate it.

Operator:

Our next question comes from Brendan Luecke from Bernstein. Please go ahead. Your line is open.

Blake Moret:

Hey Brendan.

Blake Moret:

Yes. So we've had a big focus on adding ARR. We've talked much more formally about it here in the last couple of years. And while it's still a relatively small part of our total business, I like starting each year with that recurring revenue. It gives you a reason for being constantly intimate with our customers and the whole land and expand motion is well understood to be a good source of ongoing value. We like our position in terms of having that, growing double-digits, and being able to complement it with the physical goods that we're shipping that are still being sold on a perpetual basis, a one-time PO. But over time, we expect to add additional software and services to our annual recurring revenue streams as well as hardware where that makes sense. One of the phenomenon is as we're in our second year of double-digit growth, because our overall business is growing so fast, the ARR as a percentage of the total is not increasing a huge amount, but it is more than keeping pace. And so we're happy with it. We're retooling our internal business processes to be able to take orders with a mix of hardware, software and services to make it easier and easier for customers and channel to be able to restack and expand the content in those subscriptions and so on. So we're happy with the progress there.

Aijana Zellner:

Julienne, we'll take one more question.

Noah Kaye:

Thanks so much. So I just want to clarify a couple of quick questions. Number one, you mentioned that after implementing the cancellation policy, it didn't really appear to impact order patterns. So just to clarify, you've seen orders trending still healthy here so far in 2Q? You've not seen any pull forward?

Noah Kaye:

Right. And then a lot of talk positively around IRA and its long-term impacts; do you get any sense that, that some of the customer base is still waiting on treasury guidance for some of these credits and the like to make some decisions around investment? Any sort of sense of what that forthcoming guidance could mean in terms of opening up orders?

Noah Kaye:

Yes. So very helpful. All right, thanks so much.

Operator:

We are out of time for questions today. I would like to turn the call back over to Ms. Zellner to close out the call.

Operator:

That concludes today's conference call. At this time you may disconnect. Thank you.

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 line for questions. [Operator Instructions] At this time, I’d like to turn the call over to Aijana Zellner, Head of Investor Relations. Ms. Zellner, please go ahead.

Blake Moret:

Thanks, Aijana, and good morning, everyone. Thank you for joining us today. Let’s turn to our fourth quarter results on Slide 3. We had a great finish to the fiscal year and delivered very strong operating performance. I’m proud of how our teams navigated this challenging year with continued supply chain volatility, significant inflation and currency headwinds. Our Q4 results were in line with our expectations with organic sales and earnings, both growing double-digits year-over-year and sequentially. Orders came in as expected in the quarter. Our record backlog, along with very low order cancellation rates reflect the continued solid underlying demand from our customers across many industries and regions. Total revenue of over $2.1 billion was up 17.6% year-over-year. Organic sales grew 20.5% versus prior year in line with our expectations. Acquisitions contributed almost two points of growth this quarter. Currency translation reduced sales by about 5%, driven by continued strengthening of the U.S. dollar. As expected, we continue to see a gradual stabilization of global supply chain. Similar to last quarter, the split of Q4 shipments by business segment and region was driven by access to specific electronic components. In the Intelligent Devices business segment, organic sales grew over 16% versus prior year with growth in all regions. While growth in this segment for the quarter was once again disproportionately impacted by component availability, we were able to mitigate these supply issues with the benefits from our resiliency actions. We see continued market need for our intelligent devices from PowerFlex drives to our motion technology to our best-in-class safety solutions. Our independent cart technology business had a record year with both orders and sales growing over 35% year-over-year. Software & Control organic sales growth of over 32% versus prior year was above expectations. Strong double-digit growth in View and Logix was driven by an improving component supply and our redesign investments. Lifecycle Services organic sales were up 16% year-over-year. Book-to-bill in this segment was 1.02, very good for our fourth quarter. Information Solutions and Connected Services had another quarter of double-digit growth in both orders and sales. Here are a couple of wins in ISCS to highlight the continued value of our recent acquisitions and new releases in these areas. One of our Plex wins this quarter was with Futaba North America, a member of the Toyota business network. Futaba has selected Plex Smart Manufacturing platform for ERP, MES, quality management and production monitoring. Our state-of-the-art solution provides real-time inventory management complex planning and full visibility into this customer’s manufacturing operations. Another example of how our new offerings are adding new value to our traditional customers is our win with Kraft Heinz this quarter. Our Plex platform, along with Kalypso’s digital design and implementation services are helping Kraft meet its productivity, yield and quality goals. We also continue to broaden our customer base with our Fiix, cloud-native maintenance management system. In the quarter, Fiix was chosen by Barrett Steel, the UK’s largest independent steel stockholder to help reduce their unplanned downtime with a solution that could be easily scaled across 28 sites. Connected Services sales were also strong in the quarter with double-digit growth in digital projects and cybersecurity services. In the quarter, ARR grew 14%, bringing our ARR to over 8% of total revenue. Segment margin of over 23% was up 540 basis points year-over-year, reflecting another quarter of strong execution. Adjusted EPS grew 30% year-over-year. Earlier this week, we completed the acquisition of the Danish company, CUBIC, a worldwide leader in modular systems for electrical panels. This acquisition will help expand the global REIT for our intelligent devices and will bring new customers and partners, including a broader market access in renewable energy and data centers. Let’s now turn to Slide 4 to review key highlights of our Q4 end market performance. All three industry segments grew double-digits this quarter driven by continued gradual improvement in the availability of electronic components. In our discrete industries, sales were up almost 20%. Within discrete, automotive sales were up 25% versus prior year. We had numerous wins this quarter with our customers continuing to invest in their global operations, whether it’s starting up a new factory, securing their network infrastructure, or upgrading existing facilities with cloud-native software. One of our key EV wins this quarter was with Hyundai Motors for their U.S. greenfield mega site in Bryan County, Georgia. Hyundai Motors has selected Rockwell as their controls partner for press, body, paint and general assembly. Semiconductor sales grew 30% year-over-year with several global wins this quarter. In addition to securing a sizable turnkey project in Asia with our proven facilities monitoring system, we had an important win here in the U.S. to provide flexible wafer transfers as part of this customer’s automated material handling system. Our Independent Cart Technology is being leveraged at scale to support this customer’s labor productivity and capacity goals. In e-commerce and warehouse automation, our sales were up high-single digits in the quarter. Even with the slowdown in new e-commerce fulfillment center investment, retailers continue to adopt our solutions for greater warehouse efficiency and throughput. Moving to our hybrid industry segment. Sales in this segment grew over 20%, led by growth in food and beverage, life sciences and eco-industrial. Food and beverage sales were up 20% versus prior year. Similar to last quarter, we continue to see a good pipeline of greenfield and brownfield projects at our key customers. In the quarter, we won several multi-site deals with some of the largest food and beverage companies with a healthy mix of intelligent devices, software and digital consulting and implementation services. Life Sciences sales grew over 35% in the quarter with continued customer investments in software, cybersecurity and modular process control. Tire was up 20% versus prior year, led by growth at our end user customers. This is another vertical where we are seeing an increase in greenfield projects in all regions. Turning to process. This industry segment grew mid-teens versus prior year, with growth in metals, chemicals and oil and gas. One of the wins in chemicals this quarter was with Bora Lyondell Basell Petrochemical, the joint venture between Lyondell Basell and Bora Enterprise Group. The customer chose our advanced analytics solution to help improve product quality and increase production capacity at their new polymer production plant in China. Turning now to Slide 5 in our Q4 organic regional sales performance. North America organic sales grew by 20% versus the prior year. Latin America sales were also up 20%, EMEA sales grew over 24%, and Asia-Pacific was up almost 18%. Let’s move to Slide 6, an update to our orders and backlog performance this fiscal year. Order cancellations continue to stay within our historical low-single digit range. Our orders of over $10 billion and record backlog of over $5 billion this year set the stage for another year of strong sales growth in fiscal year 2023. As we turn to Slide 7, let’s review highlights of fiscal 2022. We had another year of record orders with total orders of over $10 billion, growing 20% versus prior year. Reported and organic sales grew 11%, an impressive performance in light of all the challenges of the year. Information Solutions and Connected Services continue to meaningfully contribute to our growth with over $800 million in sales, growing double digits. ARR is also growing double digits and now accounts for more than 8% of our total revenue. Adjusted EPS was up 1% versus prior year. Excluding last year’s one-time items, adjusted EPS was up 11%. Free cash flow conversion of 61% was driven by higher working capital. Nick will cover this in more detail later. The investments we’ve made this year have strengthened the resiliency of our business model and position us for sustained growth in fiscal year 2023 and beyond. Let’s now move to Slide 8, fiscal 2023 outlook. With the size of our record backlog, our outlook for fiscal 2023 is predicated on the availability of components. Given continued supply chain volatility, we think a conservative approach is appropriate. Our fiscal 2023 guidance projects total reported sales growth of 9.5%. Organic sales growth of 11% at the mid-point assumes continued supply chain stabilization with 4 points of growth coming from price and 7 points coming from volume. We expect acquisitions to contribute a point of profitable growth and currency to be a headwind of about 2.5 points. ARR is expected to have another year of double-digit growth. We are projecting segment margin to expand by 60 basis points year-over-year. Adjusted EPS is expected to grow 12% versus prior year. And we target generation of over $1.1 billion of free cash flow next year with a return to a more normalized conversion of 95%. Let me turn it over to Nick to provide more detail on our Q4 performance and financial outlook for fiscal 2023. Nick?

Blake Moret:

Thanks, Nick. As we look to 2023, we are confident in our ability to execute our strategy. Our record backlog, underlying customer demand, and a more resilient operating model set the stage for a year of double-digit sales and earnings growth. As you heard today, we are continuing to invest for our future, including investing in attracting and retaining key talent. I would like to thank our people for their relentless commitment to solving the immediate needs of our customers while focusing on continued innovation and investment for the future. We are excited to share some of these innovations with you at our Investor Day in Chicago during Automation Fair later this month. We will be introducing an industry-first, cloud-native programming application for Logix, a new operator interface package, new I/O for process industries, on-machine motor control, and a host of other differentiated offerings that make this time a historic moment in Rockwell’s journey. Aijana will now begin the Q&A session.

Operator:

Thank you. [Operator Instructions] Our first question comes from Scott Davis from Melius Research. Please go ahead. Your line is open.

Blake Moret:

Hey, good morning.

Scott Davis:

Thanks for the detail. But can you give us a sense of inflection points and end markets, things that you’re expecting to get perhaps meaningfully better or meaningfully worse in your 2023 guide?

Scott Davis:

Good answer, Blake, or good thorough answer. When you get into the detail of auto. When you think about the spend – higher spend in EV and batteries, is there a certain negative offset in ice [ph] or is there some pent-up demand? I suppose just from the COVID lockdowns and such in that part of the world where there still needs to be some money spent, some color there would be helpful. Thanks.

Scott Davis:

Okay. I’ll pass it on. Thank you and best of luck.

Operator:

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

Blake Moret:

We can.

Andrew Obin:

Excellent. Just, can you just talk about maybe any one time items that you got to ship a third quarter that you’re not getting to ship in the first quarter? Other than normal seasonality, a price cost, but any specific market or geography that was particularly strong in the quarter, that sort of leading to very conservative forecast on mix and revenue in Q1? Thank you.

Blake Moret:

Yes. Nick, just to add to that, Andrew, the granularity of our analysis and out of our key suppliers, I should add continues to improve. And we think that had a bearing on Q3 and Q4 coming in as we expected in terms of the component supply. Working with these suppliers, we did identify a constraint in chip supply that will disproportionately affect offering control for a portion of Q1. The suppliers that we’re working with have a high say/do ratio. They have characterized the issue. We understand it. We’re working closely with them. But that’s embedded in the Q1 implied guide.

Blake Moret:

Yes. So, Nick will add some additional details to this. But we have about 60% of the full year in backlog. Typically, we have about a month. Most of our products are delivered off of a distributor shelf or very quickly from one of our factories either drop ship or through the distributor. And so having well over half the year of our shipments in the guidance in backlog is absolutely unprecedented. And you see the slide that we posted to kind of show the development of that across all three of our business segments.

Nick Gangestad:

Yes, Andrew, I don’t really have anything to add to that, that those comments about less than a month and greater than half a year, that’s really focused on our Software & Control and Intelligent Devices. I would call our Lifecycle Services a more normal. It’s slightly elevated backlog, but that’s a more normal type backlog. It’s the other two segments that have the extended amounts of backlog.

Nick Gangestad:

That is correct.

Operator:

Our next question comes from Jeff Sprague from Vertical Research. Please go ahead. Your line is open.

Blake Moret:

Hey, Jeff.

Nick Gangestad:

Yes. Most of your math make sense and aligns with how we’re thinking about it. We are expecting input cost inflation to continue in 2023, and that’s reflected. And again, about half of what we’re seeing at price, that’s accurate REIT that you’re making, Jeff. As far as the – where that inflation that we’re expecting, we’re expecting all or virtually all of it in electronic components, where we’ve been seeing that continue to go up, and we’re projecting that to continue to go up in fiscal year 2023. Things like logistics, we’ve seen some benefits more recently but we’re calling that closer to flat for next year because while we’re seeing some rate decreases, we’re also anticipating some extra fuel costs that will largely offset that on the logistics side. So in terms of the math on it, I think the only thing I’d point out is that price not only affects the numerator in that equation. It also affects the denominator as well. So adjusting both your – the income benefit but also the impact it has on revenue. That’s what I – that’s where I get to the 100 basis point impact on margin.

Nick Gangestad:

No. Our investment spend now – and you got to realize, Jeff, this is coming off a year where we increased our investment spend by 10% or a little over that. And now we’re planning in our plans this year about a 5% increase on top of that. So that brings us to the cadence throughout the year. I don’t see any big significant change in the cadence. When I was talking about the movement of spend, that’s really more a statement on Q1 of last year to Q1 of fiscal year 2023 that will be going up. Sequentially from Q4 to Q1, I don’t see our investment spend changing very much. That will stay at a pretty consistent level.

Operator:

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

Blake Moret:

Hi, Josh.

Blake Moret:

Yes, for sure. Let me just start by saying even with orders and shipments converging a bit in Q4, we still built backlog in Q4. And so we continue to expect significant backlog as we exit fiscal year 2023. We’re going to continue to provide orders information through the year. We think it’s an important point. But as we’ve been saying and as we’re now seeing as lead times in certain areas become – start coming down and our levels of customer service are increasing, we’ll see those orders and those shipments converge, but they remained well above pre-pandemic order rates. Nick?

Josh Pokrzywinski:

Got it. That’s helpful. And then just on the incremental margins. I think longer term targeting something a little bit higher and sort of a reference point last year. Do you expect those to accelerate? I guess, sort of the input cost environment and some of the 1Q noise around supply chain. But on the investment side, I guess, what changed or what are you guys seeing to accelerate that a little further here? Like is there a specific market or channel shortfall? Or what exactly should we kind of anchor to as the driver of maybe that slightly higher number?

Josh Pokrzywinski:

Yes. Or I guess more broadly, what’s driving the incrementals apart from the things that are kind of beyond your control?

Blake Moret:

Yes. Just to add a little bit more. I touched on some of the new product introductions that we’re going to be bringing out and that really are creating new streams of value for customers and investors for that matter. At Automation Fair, we’re going to be introducing a cloud-native programming package for Logic. This is going to be an industry first for a major programmable controller line. It’s a big deal. It went general availability, it went GA a few days ago. And this is the start of a whole new level of value for our customers for many, many years to come. A new operator interface package that came to us began really with our acquisition of ASEM, it was an extra benefit in addition to the hardware that we have from ASEM. That’s going to be at Automation Fair. A brand-new line of process IO, specifically for process industries, a major step in the areas that we’ve been talking about for a while now to add new process functionality to Logix control systems. On machine motion control with kinetics and PowerFlex, so these are things that customers have been asking for, for years. And we’re coming out now with these items and at the beginning of these new revenue streams. In areas like cloud native software, one of the most important things you get is continued innovation and releases to the market. With on-prem software, you’re often bound by annual or semiannual releases. And while we’ll continue to do that with our strong on-prem offering, continuing to innovate at a faster pace with these new cloud-native offerings is a whole new source value for us. And so some of that is embedded with those investment spending increases, along with the go-to-market to make sure that we’re getting the word out, and we’re in front of the customers we need to be.