Rockwell Automation Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

There are 12 speakers on the 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 in the call, we will open up the lines for questions. At this time, I would like to turn the call over to Jessica Kurekos, Head of Investor Relations. Ms.

Operator

Kurekos, please go ahead.

Speaker 1

Thanks, Chris. Good morning, and thank you for joining us for Rockwell Automation's Q4 fiscal 2021 earnings release conference call. With me today is Blake Moret, our Chairman and CEO and Nick Gangstadt, our CFO. Our results were released earlier this morning, and the press release and charts Have been posted to our website. Both the press release and charts include, and our call today will reference, non GAAP measures.

Speaker 1

Both the press release and charts include reconciliations of these non GAAP measures. A webcast on this call will be available at that website for replay for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. Additional information and news about our company can also be found on Rockwell's Investor Relations Twitter feed using the handle investorsrock. Before we get started, I need to remind you that our comments will include statements related to the The future results of our company and are therefore forward looking statements.

Speaker 1

Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in our SEC filings. So with that, I'll hand the call over to Blake.

Speaker 2

Thanks, Jessica, and good morning, everyone. Thank you for joining us today. Let's turn to our Quarterly results on Slide 3. We saw another quarter of exceptional demand across all three business segments. Total orders surpassed $2,200,000,000 and grew 40% over the prior year, Reflecting a very strong demand pipeline across our portfolio of core automation and digital transformation solutions.

Speaker 2

Total revenue of over $1,800,000,000 grew 15% with additional sales that shifted Into fiscal 2022 due to supply chain headwinds. Organic sales grew 13% versus prior year. We had very strong growth in core automation and information solutions and connected services grew double digits in both orders and revenue. This performance was led by strong demand for software and cybersecurity services. Turning to ARR, We continue to make significant progress to drive recurring revenue.

Speaker 2

Our ARR grew organically by over 18% And including our recent acquisition of Plex now accounts for over 8% of total sales. Segment margin of 18% came in line with our expectations with the execution of planned investments in Q4. I'll now comment on our top line performance by business segment. Intelligent Devices organic sales Increased 15% versus prior year, even with significant headwinds from supply chain. From an orders perspective, And above fiscal 2019 levels, we continue to see significant strength across the automation portfolio And share gains, particularly evident in Motion, led by our independent cart technology.

Speaker 2

Software and control organic sales grew 14%, led by strong demand across the segment, including double digit growth in Logix. Orders grew approximately 50% year over year, once again showing great momentum across the software, Control, visualization and network portfolios. In Lifecycle Services, organic Sales increased 7% versus the prior year and increased 2% sequentially, even with some projects delayed as a result of component availability. Lifecycle Services' book to bill of 1.09 was well above seasonal Q4 levels. Total company backlog of $2,900,000,000 grew by over 80% year over year.

Speaker 2

Over 40% of backlog is related to our Lifecycle Services business. Turning to Information Solutions and Connected Services, Which represent many of Rockwell's newest digital revenue streams. We had another great quarter. Recent orders included a number of meaningful Software and Infrastructure as a Service Wins. 1 of the more notable wins in the quarter was with the RDAG Group, One of the world's largest sustainable packaging companies.

Speaker 2

The company had placed $1,000,000 order for fixed software in Q3 To reduce unplanned downtime, RDA, like a lot of manufacturers, is trying to respond to a sharp increase in demand. By Q4, as the relationship developed, we pulled through an additional $4,000,000 purchase of core automation products, showcasing the tremendous synergy resulting from our new software capabilities and intelligent devices. With their ARR growing 45% and over 470 new fixed customers added in just the last 9 months, I'm very happy with the contributions FiX has been able to make to our overall business. We also had a great win with 1 of the world's largest food and beverage companies in 2 key application areas. The first win is in the area of predictive analytics, For our Calypso digital consulting business, we'll combine our factory talk innovation suite with our automation technology to provide real time monitoring and analytics for their manufacturing environment.

Speaker 2

The second application is in the area of sustainability Our software and automation technology will be used to help monitor water, air, gas, electricity and steam usage to develop real time KPIs that further reduce their carbon footprint and drive quantifiable production outcomes. Calypso continues to play a very important role within Rockwell and is spearheading some of the most exciting digital transformation projects in all of manufacturing. Our customers are recognizing Rockwell's expanding capabilities to converge IT and OT and be a strong partner throughout the digital In fact, we announced yesterday that we are adding to Calypso's capabilities with our acquisition of Avada, which will strengthen and expand their supply chain solutions domain expertise. This expertise, Combined with our operations management software and that of our partners drives great outcomes for our customers. We're very excited to be expanding our presence in the connected supply chain since it is such a critical high growth area.

Speaker 2

We also accelerated our FactoryTalk SaaS offering with the acquisition of Plex in September. The integration is going well And we look forward to showcasing the entire FactoryTalk software offering, including Plex, at our upcoming Investor Day on November 10 in Houston. We hope to see you there. I'd also like to highlight the increasing traction we are seeing with our PTC partnership. Our sales force has seen the number and size of engagements growing.

Speaker 2

The capabilities and versatility of Combined solution is a great way to win with both existing customers and new ones all over the world. A number of the wins we saw this quarter were in diverse industries around the world. We're happy with this I think it's a great part of our software portfolio. Let's now turn to Slide 4, Well, I'll provide a few highlights of our Q4 end market performance. We had great performance in our discrete industry segment with roughly 15% Within this industry segment, automotive sales grew about 15%, led by an increase in EV capital project activity, Including a strategic win at Magna, 1 of the top Tier 1 auto manufacturers delivering EV content for GM and Ford.

Speaker 2

Semiconductor was strong, growing 20% off of a very good quarter last year. E Commerce performance was also exceptional, with sales growing approximately 30% versus a strong prior year. Turning now to our hybrid industry segment, the verticals in this segment also had a terrific quarter. Food and beverage grew about 15%, led by strong greenfield and brownfield project opportunities in North America and EMEA, as well as strong double digit OEM demand. Life sciences grew over 15% in Q4 and remains one of our top growth verticals.

Speaker 2

We see continued growth in the overall life sciences market and evidence that we are taking market share. Once again, our fastest growing vertical in the hybrid segment was tire, which was up around 35% in the quarter. Process markets grew over 10% with strong sequential and year over year growth in oil and gas, especially in our Sensia JV. In summary, we are clearly seeing very strong growth across discrete and hybrid segments as well as improving oil and gas trends. Turning now to Slide 5 and our Q4 organic regional sales performance.

Speaker 2

North America organic sales grew by 16% versus The prior year with strong double digit growth across all three industry segments. EMEA sales increased 7%, driven by strength in food and beverage, tire and metals. Sales in the Asia Pacific region Grew 12% with broad based growth led by EV, Semiconductor and Mining. In China, we saw double digit growth driven by strength in mining, life sciences, tire and EV. Let's now turn to Slide 6 To review highlights of fiscal 2021, record orders of $8,200,000,000 grew 26%.

Speaker 2

Reported sales grew 11% even with supply chain constraints. Organic sales grew almost 7%. ISCS revenue exceeded $500,000,000 at year end and grew double digits organically. Adjusted EPS grew 20% and we once again generated significant cash flow due to our very financial framework, strong focus on productivity and financial discipline. At the same time, We made significant investments in our future to accelerate profitable growth.

Speaker 2

That included organic investments as well as inorganic investments. In fiscal 2021, we accelerated funding of software development projects and deployed approximately $2,500,000,000 Towards inorganic investments. At the same time, we returned $800,000,000 back to share owners in the form of dividends and buybacks. Turning to Slide 7, you can see how these investments in our strong order momentum and backlog are helping to accelerate our top line performance Heading into fiscal 2022. Our new fiscal 2022 outlook expects total reported sales growth of 17.5%, including 15.5% organic growth versus the prior year.

Speaker 2

These projections take into account our latest view of supply chain constraints. We have the people, Supplier commitments and plant capacity to support this growth, but we will no doubt need to continue to manage new challenges as they emerge in this highly dynamic environment. We expect double digit growth in both core automation as well as information solutions and connected services. Acquisitions are expected to contribute 2 points of profitable growth. We are increasing our margin expectations to 21.5%, up 150 basis points over the prior year.

Speaker 2

Our new adjusted EPS target of $10.80 at the midpoint of the range represents about 15% growth compared to the prior year. I should add that we expect another year of double digit annual recurring revenue growth, including our recent Plex acquisition, which adds approximately $170,000,000 to our ARR totals in fiscal 2022. A more detailed view into our outlook by end market is found on Slide 8. I won't go into the details on this slide, But as you can see, we continue to expect broad based organic sales growth in fiscal 2022. With that, Let me now turn it over to Nick, who will elaborate on our fiscal 2021 results and financial outlook for fiscal 2022.

Speaker 3

Nick? Thank you, Blake, and good morning, everyone. I'll start on Slide 9, 4th quarter key financial information. 4th quarter reported sales were up 15% over last year. Q4 organic sales were up 12.6% And acquisitions contributed 1 point to total growth.

Speaker 3

Currency translation increased sales by 1.5 percentage points. Segment operating margin was 17.9 percent, in line with our expectations. The 230 basis point decline Was primarily related to higher planned investment spend, the reversal of temporary pay actions and the restoration Corporate and other expense was $33,000,000 The year over year increase was from deal costs Associated with the Plex acquisition. Adjusted EPS of $2.33 was better than expected And grew 21% versus the prior year. I'll cover a yes bridge on a later slide.

Speaker 3

The adjusted effective tax rate for the Q4 was negative 3%, much lower than expected, compared to 15% in the prior year. The lower than expected rate was related to the cumulative impact of several one time discrete items recognized in the current quarter. Free cash flow performance was in line with our expectations. We generated $160,000,000 of free cash flow in the quarter. The free cash flow generation includes higher levels of working capital in the current year to support our increasing revenue And build inventory in anticipation of the accelerated revenue levels in fiscal year 'twenty two.

Speaker 3

One additional item not shown on the slide. We repurchased 200,000 shares in the quarter at a cost of $61,000,000 For the full year, our share repurchases totaled $301,000,000 in line with our July guidance. On September 30, dollars 552,000,000 remained available under our repurchase authorization. Slide 10 provides the sales and margin performance of our 3 operating segments. Organic sales of both Intelligent Devices and Software and Control were up double digits.

Speaker 3

Lifecycle Services organic sales were up sequentially And up 7% year over year, led by oil and gas, life sciences and food and beverage. All segments saw strong double digit growth in orders. Compared to last year, Intelligent Devices margins were up 100 basis points On higher sales, this segment did see higher input costs both year over year and sequentially. However, these costs were largely offset by price. Segment margins for the Software and Control segment declined 3.30 basis points compared to last year, with higher planned investment spend, partially offset by higher organic sales.

Speaker 3

This segment benefited from positive price cost in the quarter. Lifecycle Services segment margin was 8.1% And declined 8 20 basis points driven by the reversal of temporary pay actions, the reinstatement of incentive compensation EPS walk from Q4 fiscal 2020 to Q4 fiscal 2021. As you can see, Core performance was up about $0.70 on a 12.6 percent organic sales increase. Approximately $0.10 was related to non recurring accelerated investments that we announced earlier this year. These investments are mostly in our Software and Control segment.

Speaker 3

The reversal of temporary pay And restoration of incentive compensation contributed negative $0.45 Acquisitions were a $0.15 headwind due to the deal costs associated with the Plex acquisition. As previously noted, our lower Adjusted effective tax rate contributed $0.40 Slide 12 provides a walk From our Q4 midpoint in our July guidance to our actual Q4 adjusted EPS results. We usually don't provide this information, but I wanted to show how the quarter played out relative to the midpoint of what we had guided back in July. The unforeseen impact of the Delta variance in Southeast Asia added incremental pressure to the supply chain, But the impact of the volume miss of $0.40 was mitigated to lower incentive compensation, further productivity And a favorable mix, all of which contributed $0.35 As previously noted, a more favorable tax rate benefited our EPS versus guidance by $0.25 Moving to Slide 13, product order trends. This slide shows our average daily order trends for our products, which includes our software portfolio.

Speaker 3

As a reminder, the trends shown here accounts for about 2 thirds of our overall sales. Order intake Was broad based and improved sequentially for the 5th consecutive quarter. Q4 product order levels grew at about 40% versus the prior year and are well above pre pandemic levels as customers are increasingly interested In investing in our core automation and software, both of which are essential to drive the outcomes that come from digital transformation. Slide 14 provides key financial information for the full year fiscal 2021. Reported sales grew 10.5%, including over one point coming from acquisitions.

Speaker 3

Organic sales were up 6.7% led by double digit growth in our hybrid and discrete end markets and improving process verticals. Full year segment margins remained at about 20%, including close to $30,000,000 of one time accelerated Mostly in our Software and Control segment. R and D expense was up 14% compared to Fiscal 'twenty and R and D as a percent of sales increased further to 6% of sales in fiscal 'twenty one. Our core automation, which excludes the impact excuse me, our core conversion, which excludes the impact of acquisitions, currency And our accelerated one time investment was 34%. Corporate and other was up just over $20,000,000 mostly related to acquisition costs associated with the Flex acquisition.

Speaker 3

Adjusted EPS was up 20%. A detailed year over year adjusted EPS walk can be found in the appendix for your reference. Free cash flow performance remains strong and was in line with our July expectations. Free cash flow conversion was 103% Of adjusted income. Finally, ROIC remained well above our target of over 20%.

Speaker 3

For the year, we deployed about $3,300,000,000 of capital towards acquisitions, dividends And share repurchases in fiscal 'twenty one. Our capital structure and liquidity remains strong. Let's move on to the next slide, 15, guidance for fiscal 2022. As Blake mentioned, we are expecting sales of $8,200,000,000 in fiscal 'twenty two, up 17.5% at the midpoint of the range. We expect organic sales growth to be in the range of 14% to 17% and about 15.5% at the midpoint of our range.

Speaker 3

This outlook includes our latest assumptions on supply chain constraints. We expect full year Segment operating margins to be about 21.5%. We expect positive price cost for the full year From the additional price increase we implemented this month, at the midpoint of our guidance Assumes full year core earnings conversion of between 30% 35%. We believe we are in the early stages of a cycle of sustained growth and are making investments to fuel this growth in 'twenty two and beyond. Our fiscal 'twenty two segment margin and core conversion outlook includes our plan to increase R and D and other growth related investments by double digits.

Speaker 3

We expect the full year adjusted effective tax rate to be around 17%. We do not anticipate any material discrete items to impact tax in fiscal 2022. This rate Is under current tax law. Should tax laws change, we would provide an updated outlook with the impacts from these changes. Our adjusted EPS guidance is $10.50 to $11.10 This compares to fiscal 2021 adjusted EPS of $9.43 At the midpoint of the range, this represents 15% adjusted EPS growth.

Speaker 3

I will cover a year over year adjusted EPS walk On the next page, from a calendarization viewpoint, based on our current supply chain availability, We expect our Q1 sales to be relatively flat compared to our Q4 of fiscal 'twenty one. Following the Q1, we expect sequential sales to improve over the balance of the year. We expect segment margins and the adjusted EPS to decline sequentially in Q1 and then improve throughout the year in line with our sales volume and the timing of price increases. We anticipate recent price increases to having more substantial benefit in subsequent quarters given the timing of when customer agreements are renewed throughout the year. Also as a reminder, fiscal 2021 Q1 included a non recurring $0.45 gain related to the Settlement of a legal matter.

Speaker 3

Finally, we expect full year fiscal 'twenty two free cash conversion of about 90 percent of adjusted income. This reflects a $155,000,000 $1,000,000 bonus payout for the fiscal 2021 performance, dollars 165,000,000 of capital expenditures And funding higher levels of working capital to support higher sales. Our working capital is targeted to be aligned with our historic amount of about 12% of sales. A few comments additional comments on fiscal 'twenty two guidance. Corporate and other expense is expected to be around $125,000,000 Net interest expense for fiscal 2022 is 117,500,000 shares.

Speaker 3

The next slide, 16, provides the adjusted EPS walk From fiscal 2021 to fiscal 2022 guidance at the midpoint. Moving from left to right, Core performance is expected to contribute $2.15 This includes the benefit of higher organic sales. We anticipate price realization will exceed input cost inflation by about $0.10 Our pricing philosophy is built on the High value that we bring our customers. In light of increasing input costs, we have taken several price adjustments this year To mitigate and we are prepared to take additional price actions as needed. The removal Of the one time accelerated investments made in fiscal year 2021 will be about a $0.20 benefit.

Speaker 3

The one time gain from a legal matter that was settled in the prior year is a $0.45 headwind. Plex will be a $0.15 tailwind in fiscal 2022, including the impact of incremental interest. We have included further information showing the impact of Plex in both fiscal 'twenty one and fiscal 'twenty two in our appendix. No real significant changes to what we showed in July. We expect about a $0.05 impact coming from share dilution And the higher tax rate is expected to be about a $0.75 headwind.

Speaker 3

Moving on to the next slide, 17, I'll make a few comments on our capital deployment framework. Our long term capital deployment priorities remain the same. Our first priority is organic growth. After that, we focus capital deployment on inorganic activities And then we focus on capital returns to shareholders through our dividend and then share repurchases. In addition to our organic and inorganic investments, our capital deployment plans for fiscal 2022 include a focus on delevering.

Speaker 3

Dividends of about $520,000,000 and share repurchases of $100,000,000 In summary, our guidance assumes a combination of order and backlog growth that drives 15.5 percent organic sales at the midpoint And reaches the total sales of over $8,000,000,000 We continue to offset inflationary pressures through additional price actions, Yielding segment margins of 21.5%. We expect adjusted EPS growth of 15% and continued strong free cash Well, with that, I'll turn it over to Blake for some closing remarks before we start the Q and A.

Speaker 2

Thanks, Nick. As we look forward to fiscal 2022, strong order trends and record backlog underpin a robust top line outlook. We are making investments in our capacity, technology and people to support our future growth. Our people delivered great results this year, and I want to take a moment to recognize their tremendous work during especially challenging times. As the world recovers, Investments in automation and digital transformation have never been more top of mind.

Speaker 2

Nobody is better positioned to help industrial customers Be more resilient, agile and sustainable. As many of you will see at our upcoming Investor Day, We're taking manufacturing to a whole new level and look forward to a great year ahead. Let me now pass the baton back to Jessica to begin the Q and A session.

Speaker 1

Thanks, Blake. Before we start the Q and A, I just want to say that we would like to get to as many of you as possible. So please limit yourself Thank you. Chris, let's take our first question. Certainly.

Operator

Our first question is from Scott Davis with Melius Research. Your line is open.

Speaker 4

Good morning, everybody.

Speaker 2

Good morning.

Speaker 3

Hey, Scott.

Speaker 4

Good. What are your customers saying? Like when you think about kind of the issue here with not just labor, but materials and kind of cadencing projects, I mean, it It seems like every day we see some sort of multibillion dollar announcement, but there's also that reality that there are just so many integrators and other folks who can get Stuff done. So I know your guide for fiscal 1Q is relatively conservative, but you have things snapping back right after that. What What are your customers saying at least about their ability or what they think their ability to at least get projects done on time today looks like?

Speaker 2

Well, I think sometimes it's useful to look at our own plants as a manufacturer In our own right. And our investments, I think, are broadly indicative of what a lot of customers in different industries are doing. They're looking to make sure that they have the capacity to meet the current demand, but also looking to get in place The capacity to launch new lines of business and find new ways to win and that's language that we've used, We're hearing that from a lot of our customers as well. So in some cases, it's just meeting the capacity demands. When we look at Semiconductor, and when we look at life sciences, in some of these areas, it's to meet current capacity in well known In other cases, people are looking to launch new lines of business with EV probably being the best known of that.

Speaker 2

We're very eager to take delivery of our products. And one of the things that we have is the intimacy Through our own sales people as well as through our distribution of line of sight to these projects That are driving the demand and when they're needed. So we're not just guessing when they might need these products. We know what projects They're going into and when those projects are expected to start. To be sure, there's certainly some delays in those projects that our customers are seeing, but they're trying to get this capacity up and running just as soon as possible.

Speaker 4

Yes, that makes a lot of sense. And how do you think about I mean, are you I assume your pricing you have tremendous Pricing power right now, I mean there has to be some semblance of shortage in the industry overall. Is that you talk just about price and then I'll pass it on.

Speaker 2

Yes. I'll make a couple of comments and then Nick can add to that as well. I mean, we're looking at expanding margins in the coming year, Taking share in some important industries and product areas and building the foundation for the future And we're doing it with select pricing increases. I think one of the things that bears mentioning is the tools That was implemented for pricing have dramatically improved over the last couple of years. So pricing can be a real science with a lot of analytics.

Speaker 2

And I think we've significantly upgraded the tools and the talent so that we can get price where the market bears that, But also where we can reserve the right to be selectively aggressive to win share.

Speaker 3

Nick? Yes. I'll just add a couple of things, Scott. Our pricing philosophy It's built on this high value we are bringing to our customers. And what we're seeing with increasing input costs, we have taken several price adjustments in fiscal year 2021.

Speaker 3

And we're prepared to take additional price actions as needed if input costs increase more than what we're anticipating at So we do command premium prices in the market. It's reflected in our margins. And we continue to focus on the value we are Creating for our customers and the relationships we have there.

Speaker 4

Okay. Good luck, guys. Thank you. See you next week.

Speaker 2

Thank you.

Operator

Our next question is from Andrew Obin with Bank of America. Your line is open.

Speaker 5

Hi, good morning.

Speaker 2

Hi, Andrew.

Speaker 5

You highlighted ARR of plus 18% in the quarter. Can you just talk about what are the key drivers and how should we think about the strong exit rate into 'twenty two?

Speaker 2

Yes. So very happy with the development of our ARR, both in terms of the percentage growth And then the step change that we received from acquisitions like Plex. And so we're currently looking at an ARR Over 8% of the company's total, and we're continuing on that path. If you think about the main elements ARR in the company starts with software, software subscriptions, software delivered as a Service and the associated technical support, which is also delivered as a contract either bundled with the software Or as a separate subscription for software that's still being sold as a perpetual license. But we also have Some interesting additional areas, cyber security infrastructure as a service.

Speaker 2

So our Industrial data center, that comes, it's hardware with the software and the services bundled to be able to monitor network traffic On premise has been a great offering that we've had. It's good business in its own right, and it also pulls through A lot of additional opportunities because it's a different set of decision makers. So those are really the primary areas and we continue to look to expand With the opening of our new SOC this year to be able to offer additional services that are bought as a subscription, As we develop and release organically developed software that's sold as a service that's running in the cloud, I'm very happy with the robust outlook for growth of existing offerings plus new product introductions, A number of which you'll see next week at Automation Fair.

Speaker 5

So yes, we'll wait until the Analyst Day to hear more about that. But can you just I like oil and gas improvement. Could you just give more detail by end market, especially North America? I'm looking sort of upstream, midstream, Brownfield, Greenfield, just a little bit more color there. Thank you.

Speaker 2

Yes. So we did we were encouraged by the development of oil and gas In the Q4 and the outlook for fiscal 2022, our oil and gas is about 60% Tarek is about 60% in upstream, with most of the remainder in midstream. So we're not really doing a whole lot In the downstream side, we do provide power control products and Maverick is doing work downstream, often with our safety offering. But the majority of our business is in the upstream and we were happy to see both sequential and year over year growth. In the Q4, we saw particularly strong orders from Sensia and the growth was contributed to by all of the regions.

Speaker 5

Thank you very much.

Speaker 2

Thank you, Andrew.

Operator

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

Speaker 6

I'm sorry, you got me there now. Hey, just a couple of questions. Just first on price, I don't know if you said it, but could you be specific on The amount of price you actually achieved in 2021 and what's embedded in 2022, we see the Positive price cost spread, obviously, of $0.10 but I'm curious on the actual nominal price capture involved here.

Speaker 3

Yes, Jeff. We had a little over 1% price growth in fiscal year 2021, And we're projecting an approximately 2% net price growth in 2022. However, I will be quick Caution, that is based on our current level of cost increases. We are prepared to increase that more If we see additional cost increases coming in that we haven't anticipated in our latest price adjustments.

Speaker 6

And then also, I guess, investment spend would be embedded in the core number. But I think you said, Nick, you're growing at double digit. Are you growing at actually less than sales growth? I wonder if you could just kind of speak to What the actual rate of growth is actually? Is it a tailwind inside that core number?

Speaker 3

Yes. Jeff, that is accretive To our margin, it's not growing at the same pace as our sales, but it is in the in, as I said, double digits. It's in the low double digits. And Jeff, just to put some color on it, we see ourselves in the early stages of a cycle of sustained growth 2022 to fuel that growth both in 2022 and beyond. And so we are increasing our Spending in 'twenty two on R and D and other growth related investments.

Speaker 3

Some of the places we're investing, Jeff, We're investing in some key products and software development projects, mostly in software and control. We're investing in And the addition of some travel and customer facing expenses that have gone down during the pandemic. And we're also expanding investments in our plant capacity. So those are some of the big areas, Jeff, where you're seeing Investment spend increased in 2022.

Speaker 6

And I'm sorry, if I could just squeeze one more in. Nick, could you just elaborate a little bit more on Q1? I mean, actually, it would Normal for Q1 sales to decline sequentially, I think, and you have them flat. So the idea that EPS may decline sequentially. It does just jump out a little bit.

Speaker 6

Maybe just elaborate what's going on with price cost or other things to drive to that outcome in the quarter?

Speaker 3

Yes. Jeff, what we are seeing is our Q1 sequential with Q4, That's really based from a revenue standpoint is based on what we are anticipating from supply chain constraints and that that will be keeping our revenue Last as we move from Q4 into Q1. From a margin standpoint and an EPS perspective, Some of our price increases that we have implemented will be impacting the later quarters of 'twenty two more than they will be impacting The Q1 of 2022. So part of what I'm sharing as I say what we expect for margin in the Q1 of 22 is impacted by the timing of price increases impacting our revenue and our margins as we go through the year. We also expect that cost increases from a year on year perspective will be most Pronounced in our Q1.

Speaker 3

And then from an EPS perspective, I will just point out Q1 of last year, we had a $0.45 gain From a legal settlement and that will not be repeated.

Speaker 7

Thank you.

Speaker 8

Thanks, Jeff.

Operator

Our next question is from Josh Pokrzywinski with Morgan Stanley. Your line is open.

Speaker 4

Hey, good morning, guys.

Speaker 3

Hey, Josh. Hey, Josh.

Speaker 2

On backlogs, like you talked about it several times, it's kind of a source of strength in the next year. How much of the growth is really Can I catch up or conversion of maybe this excess or elevated backlog versus And maybe commentary on the underlying end markets? So as we talked about backlog of $2,900,000,000 It's at a huge level. And we said about 40% of that is lifecycle ceramic of our longer cycle project Business, which includes a high process content and then you of course have the product Backlog that's being built by those enormous Order quarters in Intelligent Devices and also in Software and Control. So we have a huge tailwind coming from that, but we see continued strong coming in.

Speaker 2

It's a mix, but the sharply increased sales in 2022 Is due to strength and secular tailwind of the industries that we're serving And just in general, as people are building in resilience and agility into their basic We think that, that is part of what's being reflected in our We're making the investments to be a beneficiary of those trends beyond 2022 as well.

Speaker 9

Okay. And then maybe it's

Speaker 2

just a coincidence, but everything from like an end market perspective up 15% It's pretty strong, but also strangely level. I guess, on one hand, maybe a good economic indicator, but also anything that could sort of be added to that or anything maybe at Product level that tells a different story? Sure. I think if you go one level deeper in some of those end markets, In automotive, we expect that to be a good time for capital projects is coming out, and so that's at a high level. You look at life sciences, there's obviously the work there associated with COVID treatments and Thanks.

Speaker 2

We're a little surprised by the uniformity, but I think each one has its own story Oil and Gas, we love it to be part of the pack again, so to speak. So I think if you go through each one, You can see that. And then obviously, there's some regional variation as well. So

Speaker 4

Got it. That's helpful. That's all I got.

Speaker 2

Thanks, Josh.

Operator

Our next question is from Julian Mitchell with Barclays. Your line is open.

Speaker 8

Hi, good morning. Just wanted to follow-up on the free cash flow topic. Nick, I know you made some comments around that in the prepared remarks, but the Free cash flow, I think, is guided about €1,100,000,000 That would imply the same free cash flow Dollar number for sort of 5 years in a row now. So just wondered if there's something maybe in the business mix as you're shifting It's more ARR or more software focused that's becoming a drag on the cash flow near term as the business model Sort of shifts? Or do you just view it as each year there's some one time head And the way that's kind of keeping that free cash flow sort of stuck at that number even as the

Speaker 3

Yes. Julien, the biggest story in the 90% free cash flow conversion for us in 2022 It's really the higher revenues and that's and the working capital that we're putting in place to go with those higher revenues. That's the single biggest thing. Secondary things that we are seeing, Julian, The payout of our Bonus in 2022 related to the 2021 performance. And then we're also increasing our CapEx investments in light of the Higher demand for our products.

Speaker 3

But no, in terms of our mix and anything going on from that perspective, that's not really having an impact, Julien.

Speaker 8

Understood. Thank you. And then just trying to follow-up on The topic of sort of backlog and conversion, so I think your backlog is worth about a third of your fiscal 'twenty two Revenue guide, and you said it was €2,900,000,000 The guide is €8,200,000,000 Just wondered sort of As you look at sort of backlog conversion today, is the main assumption that it's slower right now because of Supply constraints, that conversion into revenue then accelerates from January, February and also your incoming orders pace Continues to grow over the balance of the year. Is that the sort of the way to think about backlog and orders?

Speaker 2

In a word, yes, that's right. And I should mention, the quality of the backlog, we think it's good since it's a Higher percentage of products than you would normally expect in terms of the traditional split of our backlog because of the Longer lead times with some of those products.

Speaker 8

Perfect. Thank you very much.

Speaker 3

Thank you.

Operator

Our next question is from Steve Tusa, JPMorgan. Your line is open.

Speaker 10

Hi, good morning.

Speaker 2

Hey, Steve.

Speaker 10

Just on this topic of investment spend, I think you guys have this like bucket of like 2,000,000,000 That you use on the P and L to talk about investment spend. I think you threw in CapEx in the discussion with maybe Jeff, it was. What is that $2,000,000,000 going to grow this year? And then what is the number net of the decline in one time? So if you include the one time impact, What is the year over year growth or absolute headwind, however you want to talk about it, on that $2,000,000,000 of investment spend that typically runs through the P and L.

Speaker 3

So Steve, we had approximately $30,000,000 The one time spend that we did in fiscal year 2021, that's not repeating. Then to our total fiscal year 2022 of the roughly $2,000,000,000 of investment spend. That's what we're saying is going up double digits in 'twenty two, low double digits actually. So there's A little over $200,000,000 of increase there in investment spend.

Speaker 10

Okay, got it. And then any other parts of the bridge Did you want to call out on that on this front, whether it's some of the And if comp

Speaker 6

or sorry, I was on

Speaker 10

a call earlier, you may have highlighted, but anything else in the bridge moving around?

Speaker 3

We have some one times that impacted us in fiscal year 2021 that we're pointing out that those will not repeat. Also, the tax rate is based on current tax law. If tax law does change, we would Great. What we expect for that. But Steve, those are a couple of the things I'd just point out.

Speaker 3

Okay, great. Thanks a lot.

Speaker 2

Thanks, Steve.

Operator

Our next question is from Andy Kaplowitz with Citigroup. Your line is open.

Speaker 11

Hey, good morning, guys. Hey, Andy. Blake, this is your Q3 in a row with orders of $2,000,000,000 or more and they've continued to go higher without larger projects this quarter. I know we've asked Before, but do you get any sense that some of the strength has been customers getting in line or double ordering? And given it still seems early in your process automation recovery And the inorganic additions you've made at the company, is it reasonable to think that orders can maintain or even grow from these levels over the next few quarters?

Speaker 2

Yes. So in Q4, there certainly were some pull ins in the quarter. But as we talk to our sales force and distribution, Yes, we think it's well under 10% of the total. So we think the vast majority of what we're seeing is underlying demand And

Speaker 9

it's broad

Speaker 2

based across multiple industries. So we do believe and we're seeing this into October, We continue to see strong demand coming from customers as some of these Secular tailwinds that we've talked about and you pick the industry, are investing, whether it's in transportation or Beverage, life sciences, chemical is expected to have decent growth in the coming year for Building chemicals and packaging chemicals. So you can see it from a variety of places. And so we're very optimistic about continued order growth In the year, particularly because we're talking to customers about new things, new capabilities that 24, 36 months ago, we didn't have in our portfolio, but there's a pretty significant expansion of what we can talk to customers about in all three of our business segments.

Speaker 11

And Blake, I want to follow-up on some of the comments you made on EV. Obviously, during the quarter, there Several additional announcements of planned CapEx by some of your customers, EV battery facilities. And you mentioned that your EV business led 15% automotive growth despite big production declines from many of your customers. So could you give us more color into what you're expecting for EV related business in FY 'twenty two, we know you're saying automotive up mid teens and how much of that is just auto build recovery versus what could be the Martini for Univ.

Speaker 2

Yes. I think the majority of it is getting new models on the road. That's how these Traditional brand owners are getting out there with EV and how the startups stay in business, getting a return On the investments that have been made in them, for scale, you think about automotive being about 8% of Rockwell's total business With EV, about a quarter of that, so about 25%. And we expect over multiple years, EV and associated battery are going to be a strong driver of growth for us, and that's around the world. I mean, you look at the Wins that we're getting in China associated with battery and EV, and it's clearly a calling card for us.

Speaker 2

We look at the wins With our MES software, the opportunities that we have with Plex in the tier providers, All of these things I think are positive for us.

Speaker 11

Appreciate it, Blake.

Speaker 2

Yes, thanks.

Speaker 5

Our

Speaker 9

Hey, good morning. I wanted to come back to backlog and pricing, if I could, and link the 2. I wonder sort of how much agility you have in the existing backlog So adjust prices there if need be?

Speaker 3

Marcus, the significant majority of our backlog, We are not repricing. There is a relatively small portion of our backlog that has more dynamic prices that we can adjust. So we are not changing the In our product backlog. But as Blake mentioned earlier, when we look at our total backlog and as we work Through some of that in 2022, it's favorable. It's favorable in terms of the mix that we're seeing there.

Speaker 3

So we don't expect it to be dilutive. We actually expect it to be accretive to us in 2022.

Speaker 9

That's helpful. Thanks. And then, Blake, you've mentioned share gains in motion. I wonder if you could elaborate a little bit on that, which region, which Product categories and then what's the ultimate driver there?

Speaker 2

So I mentioned motion control and We're seeing share gains from a couple of places. First of all, our traditional products that are controlling the motion of a More traditional motor, we have some very strong products there and they're fit in an overall Integrated control and information architecture are doing very well. We had some product releases of organically developed products Last year, I'd get to the more price sensitive markets like China, and we've seen some good uptick in our Kinetics Products there. But an area that we've talked especially about in the last few quarters is independent card technology. And so it's Linear motion control and due to its ability to save space on machinery, the acceleration and deceleration rates, the integration As part a fundamental part of the machinery really give us a very differentiated offering in a variety of industries around

Speaker 8

So it

Speaker 2

can be used in power transmission, in vehicles, it can be used in tire building, in packaging And for food and beverage and life sciences, there's even some interesting applications that we're working on in mining. And so it's very versatile Set of technology, we bought 2 small companies to get into that to complement actually a technology we've had for many years. And then we'll continue to invest and build it into the overall automation architecture. So we're very happy with the growth That we're seeing there, which continues at strong double digits.

Speaker 1

Operator, we'll take one last question.

Operator

Certainly. Our final question is from Noah Kaye with Oppenheimer. Your line is open.

Speaker 7

Thanks for taking the question. Certainly, the acquisition of Avada, it seemed very timely with supply chain management, Challenges that seem ramping across industries and Blake you've often talked about Rockwell's own manufacturing journey being a great test case for customers. Curious, how do you think, say, having Innovana and the ability to manage supply chain in Cloud Solutions. How might that impact or be able to impact you going forward just to gain increased control and visibility over your own supply chain? And how do you see it benefiting the customers?

Speaker 2

Yes. Well, we're excited about using the technology in our own operations. We've got a Pretty good system on the floor and taking that data into information systems Dave, one of the real excitements for a big company like Rockwell in a cloud based solution is the ease of implementation for the same reasons That small and medium sized businesses like it because they may not have an IT department to be able to manage a big fleet of Computers in their plants, the ability to have a cloud based approach is exciting when we make new acquisitions. So when we open more agile plants around the world, the heavy lift that would come with more traditional systems May not be what's most appropriate. On the

Speaker 1

other hand, we're going to

Speaker 2

continue to do well With our on prem MES offering, because you have a lot of companies, particularly those in regulated industries, That cannot change quickly. They need to have the ability to maintain a system with no change For many years and so that on prem system can be very helpful there. And so we see the 2 coexisting for a long time to come.

Speaker 7

Thanks. That's helpful. And then just curious if you can comment on any potential shifts in customer spending from CapEx to OpEx, you mentioned Sensia seems to be recovering. Wondering as many of the customer base, particularly on the process So I'd be relatively disciplined with CapEx investments, whether this is a significant transition you're seeing and any potential wallet share gains as a result.

Speaker 2

Well, we think in Sensia for oil and gas, we think the fundamental value proposition is still as strong as When we entered into it and we are seeing that reflected in our orders, in mining, as you said, Those companies are being disciplined with their capital spend, even with super high commodity prices. We haven't seen a dramatic increase in the release of funds for big capital expenditures. Some of that's going to have to come because they only stay in business by having the ability to efficiently Bring the resources to market, and we're talking to them about quotes. There's activity there, but we haven't seen it manifest Itself yet. I did mention earlier, chemical is a process vertical, but we do see good Growth in the teens over the year and it's for things like construction resins as well as Chemicals used in packaging because people are still getting lots of products in boxes delivered to them.

Speaker 7

Okay, perfect. Thanks and looking forward to next week.

Speaker 2

Yes, we'll see you there. Operator?

Operator

Yes, this concludes the Q and A session. I'd like to turn the call back over to Ms. Karakos for any closing remarks.

Speaker 1

Thanks, Chris. Thanks, everyone, for joining us. We look forward to seeing you

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Earnings Conference Call
Rockwell Automation Q4 2021
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