Rockwell Automation Q4 2022 Earnings Report

Rockwell Automation EPS Results

• Actual EPS: $3.04
• Consensus EPS: $2.94
• Beat/Miss: Beat by +$0.10
• One Year Ago EPS: $2.33

Rockwell Automation Revenue Results

• Actual Revenue: $2.13 billion
• Expected Revenue: $2.12 billion
• Beat/Miss: Beat by +$10.30 million
• YoY Revenue Growth: +17.60%

Rockwell Automation Announcement Details

• Quarter: Q4 2022
• Date: 11/2/2022
• Time: Before Market Opens
• Conference Call Date: Wednesday, November 2, 2022
• Conference Call Time: 11:00AM ET

Rockwell Automation (NYSE:ROK) (NYSE: ROK) is a global provider of industrial automation and digital transformation technologies. The company helps manufacturers and other industrial organizations improve productivity, efficiency, safety and sustainability through connected hardware, software and services.

Its offerings include industrial control systems, programmable logic controllers, motor control and drives, sensors, safety products, industrial computers, networking equipment and information software. Rockwell Automation markets many of these products under brands including Allen-Bradley and FactoryTalk, while its services support system design, implementation, maintenance, cybersecurity and workforce training.

Founded in 1903 as the Compression Rheostat Company, the business became part of the Rockwell organization and adopted the name Rockwell Automation in 2002. The company serves customers across industries such as automotive, food and beverage, life sciences, energy, chemicals and general manufacturing, with operations and customers in North America, Europe, Asia-Pacific and other international markets. Blake Moret has served as Rockwell Automation’s chairman and chief executive officer.

Rockwell Automation Q4 2022 Earnings Call Transcript

Key Takeaways

• In Q4, Rockwell delivered 17.6% revenue growth to $2.1 billion, with 20.5% organic sales growth and 30% adjusted EPS growth year-over-year.
• The FY 2023 outlook forecasts ~9.5% reported and 11% organic sales growth, 12% adjusted EPS growth, a 60 basis-point margin expansion, and ~95% free cash flow conversion.
• Orders topped $10 billion and backlog hit a record >$5 billion with historically low cancellation rates, underpinning strong demand across all segments.
• Rockwell completed the Cubic acquisition, enhancing its intelligent devices portfolio and market access in renewable energy and data centers.
• Continued supply chain volatility is expected to persist into Q1, with component shortages particularly constraining the Software & Control segment.

Presentation

[Operator]

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

[Aijana Zellner, Head of Investor Relations at Rockwell Automation]

Thank you, Julianne. Good morning. Thank you for joining us for Rockwell Automation's Fourth Quarter Fiscal 2022 Earnings Release Conference Call. With me today is Blake Moret, our Chairman and CEO, and Nick Gangestad, 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. Both the press release and charts include reconciliations of these non-GAAP measures. A webcast of this call will be available on our website for replay 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.

[Aijana Zellner, Head of Investor Relations at Rockwell Automation]

Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all our SEC filings. With that, I'll hand it over to Blake.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Thanks, Aijana, and good morning, everyone. Thank you for joining us today. Let's turn to our fourth quarter results on slide three. We had a great finish to the fiscal year and delivered very strong operating performance. I'm proud of how our teams navigated this challenging year with continued supply chain volatility, significant inflation, and currency headwinds. Our Q4 results were in line with our expectations with organic sales and earnings both growing double digits year-over-year and sequentially. Orders came in as expected in the quarter. 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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Acquisitions contributed almost two points of growth this quarter. Currency translation reduced sales by about 5%, driven by continued strengthening of the U.S. dollar. As expected, we continued to see a gradual stabilization of global supply chain. Similar to last quarter, the split 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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Our independent cart technology business had a record year with both orders and sales growing over 35% year-over-year. Software and control organic sales growth of over 32% versus prior year was above expectations. Strong double-digit growth in View 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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Futaba has selected Plex Smart Manufacturing Platform for its 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 U.K.'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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

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 reach for our intelligent devices and will bring new customers and partners, including a broader market access in renewable energy and data centers. Let's now turn to slide four to review key highlights of our Q4 end market performance. All three industry segments grew double digits this quarter, driven by continued gradual improvement in the availability of electronic components. In our discrete industries, sales were up almost 20%.

[Blake Moret, Chairman and CEO at Rockwell Automation]

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 Motor Group for their U.S. Greenfield mega site in Bryan County, Georgia. Hyundai Motor Group 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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

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 LyondellBasell Petrochemical, the joint venture between LyondellBasell and Liaoning 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 five in our Q4 organic regional sales performance. North America organic sales grew by 20% versus the prior year.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Latin America sales were also up 20%. EMEA sales grew over 24%, and Asia-Pacific was up almost 18%. Let's move to slide six, an update to our orders and backlog performance this fiscal year. Order cancellations 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 seven, 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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

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 eight, 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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Our fiscal 2023 guidance projects total reported sales growth of 9.5%. Organic sales growth of 11% at the midpoint assumes continued supply chain stabilization, with four points of growth coming from price and seven points coming from volume. We expect acquisitions to contribute a point of profitable growth and currency to be a headwind of about 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. 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?

[Nick Gangestad, CFO at Rockwell Automation]

Thank you, Blake, and good morning, everyone. I'll start on slide nine, fourth quarter key financial information. Fourth quarter reported sales were up 17.6% over last year. Q4 organic sales were up 20.5%, and acquisitions contributed 1.9 points to total growth. Currency translation decreased sales by 4.8 points. Segment operating margin expanded to 23.3% and was in line with our expectations. The 540 basis point increase was driven by higher sales and positive price cost, partially offset by the negative impact from currency. Corporate and other expense was $35 million and in line with the prior year. Adjusted EPS of $3.04 was in line with our guidance and grew 30% versus the prior year. I'll cover a year-over-year adjusted EPS bridge on a later slide.

[Nick Gangestad, CFO at Rockwell Automation]

The adjusted effective tax rate for the fourth quarter was 17.8%. The year-over-year increase was related to the cumulative impact of several one-time discrete items recognized in the prior year. Free cash flow was $359 million and was up $200 million over the prior year, driven by higher pre-tax income. Working capital on a currency neutral basis grew 10% sequentially versus our plans for a 10% decline. Our planned inventory reductions did not materialize in the quarter due to the continued build of raw material and work in process waiting on critical components. The actions we put in place to right-size inventory are taking longer to implement in the current supply chain environment.

[Nick Gangestad, CFO at Rockwell Automation]

Our inventory days on hand at the end of the current year were close to 130 days versus a pre-pandemic average of 90-100 days. One additional item not shown on the slide, we repurchased approximately 300,000 shares in the quarter at a cost of $76 million. For the full year, our share repurchases totaled $301 million in line with our July guidance. On September 30, $1.3 billion remained available under our repurchase authorization. Slide 10 provides the sales and margin performance overview of our three operating segments. Total and organic sales grew double digits across all three segments, with software and control growing over 30% year-over-year. Backlog for all three segments grew sequentially and was up over 75% year-over-year.

[Nick Gangestad, CFO at Rockwell Automation]

Segment margins for the intelligent devices segment expanded to 22.3% on higher sales and positive price cost, partially offset by the negative impact from currency. Compared to last year, software and control margins were up over 10 percentage points, driven by higher sales and positive price costs, partially offset by negative currency impacts. Life cycle services segment margin was 10.7%, an increase 260 basis points versus prior year, benefiting from higher sales. Book-to-bill in the quarter was 1.02. The next slide, 11, provides the adjusted EPS walk from Q4 fiscal 2021 to Q4 fiscal 2022. Core performance was up $1.15 on a 20.5% organic sales increase. Approximately 10 cents were related to non-recurring accelerated investments that were made in the prior year. These investments were mostly in our software and control segment.

[Nick Gangestad, CFO at Rockwell Automation]

The impact of currency was a $0.25 reduction in EPS, which was about $0.10 worse than our expectations, reflecting the continued strengthening of the US dollar throughout the quarter. Incentive compensation was a $0.10 benefit. As previously noted, our higher adjusted effective tax rate was a $0.60 headwind due to prior year comps. Acquisitions, including the impact of interest, added $0.15, primarily related to the prior year Plex deal fees. Our reduction in outstanding shares added about $0.05. Slide 12 provides a walk from our Q4 midpoint in our July guidance to our actual Q4 adjusted EPS results. Other than currency, sales and profits in the quarter played out in line with our guidance. Currency impact on sales was about $25 million worse than we expected and $0.10 worse on EPS.

[Nick Gangestad, CFO at Rockwell Automation]

The impact from currency on EPS was offset by slightly lower incentive compensation and a more favorable adjusted tax rate. Strong organic sales growth and good execution delivered over 23% operating margin in the quarter. Slide 13 provides key financial information for the full year fiscal 2022. Reported sales grew 10.9% to $7.8 billion, including over 2 points coming from acquisitions. Currency negatively impacted sales by approximately $200 million or 2.7 points. Organic sales were up over 11% with growth balanced across all regions and business segments. Full year segment margin remained at about 20%. The benefit from higher volumes and lower incentive compensation was fully offset by higher wages and labor inefficiencies in our projects and in our plants caused by supply chain constraints.

[Nick Gangestad, CFO at Rockwell Automation]

Margins were also negatively impacted by negative price costs, primarily in the first half of the year. We increased our growth investments by double digits this year with a big focus on key product launches, new digital capabilities, increased sales force investments, and plant capacity expansion. Corporate and other was down $16 million, mostly related to acquisition costs associated with the Plex acquisition in the prior year. Adjusted EPS was up 1%. A detailed year-over-year adjusted EPS walk can be found in the appendix for your reference. Excluding the impact of the tax rate and the prior year one-time items, which included a favorable legal settlement and one-time accelerated investments, our adjusted EPS was up 11%. As discussed earlier, free cash flow performance was below our expectations with free cash flow conversion of 61%.

[Nick Gangestad, CFO at Rockwell Automation]

The $460 million decrease in free cash flow was driven by a 50% increase in working capital on a currency neutral basis, as well as the payment of the fiscal year 2021 bonus in fiscal year 2022. There was no bonus payment made in fiscal year 2021. Working capital as a percent of sales was 16% compared to 12% a year earlier. Return on invested capital was 15.2% for fiscal year 2022, and 16 points worse than the prior year, primarily related to higher invested capital and lower pre-tax GAAP income driven by our mark-to-market adjustments made on our PTC investment in both years. For the year, we deployed about $900 million of capital towards dividends, share repurchases, and inorganic investments in fiscal 2022. We also paid down debt by about $150 million.

[Nick Gangestad, CFO at Rockwell Automation]

Our capital structure and liquidity remain strong. Before I cover fiscal year 2023 guidance, let's turn to page 14. In fiscal year 2022, our backlog grew by over 75% year-over-year, including strong double-digit growth in each segment. Pre-pandemic, we had about one month or less of the following year's revenue in the backlog for software and control and intelligent devices. Our backlog now represents over 50% of our fiscal year 2023 sales guide for both of these segments. This unprecedented backlog coverage adds to our confidence in our revenue outlook. Our backlog also includes the benefits of price increases that were implemented throughout fiscal year 2022. Let's move on to the next slide, 15, guidance for fiscal year 2023.

[Nick Gangestad, CFO at Rockwell Automation]

We are expecting sales of about $8.5 billion in fiscal 2023, up 9.5% at the midpoint of the range. We expect organic sales growth to be in a range of 9%-13% and 11% at the midpoint of our range. This outlook includes our current backlog levels, our latest assumptions on supply chain stabilization, as well as continued price growth momentum. We expect full year segment operating margins to be about 20.5%. At the midpoint, our guidance assumes full year core earnings conversion of between 30%-35%. I'll cover a few more details on this on the next slide. We expect the full year adjusted effective tax rate will be around 18%. We do not anticipate any material discrete items to impact our tax rate in fiscal 2023.

[Nick Gangestad, CFO at Rockwell Automation]

Our adjusted EPS guidance is $10.20-$11. This compares to fiscal 2022 adjusted EPS of $9.49. At the midpoint of the range, this represents 12% adjusted EPS growth. I will cover a year-over-year adjusted EPS walk on a later slide. We expect full year fiscal 2023 free cash flow conversion of about 95% of adjusted income. This reflects $190 million of capital expenditures. We are planning for a reduction in our working capital days with a focus on inventory days on hand. Our working capital is targeted to be about 15% of sales, still above our historic amount of around 12% as the return to pre-pandemic supplier lead times is slow.

[Nick Gangestad, CFO at Rockwell Automation]

Finally, our projections include additional income tax payments of around $100 million related to the change in U.S. tax law that no longer allows for the immediate expensing of R&D. A few additional comments on fiscal 2023 guidance. Corporate and other expense is expected to be around $120 million. Net interest expense for fiscal 2023 is expected to be around $120 million. Finally, we're assuming average diluted shares outstanding of 115.1 million shares. Let's turn to slide 16. Given the continued supply chain volatility and many moving pieces, we wanted to provide a slide that lays out the tailwinds and headwinds that are included in our fiscal year 2023 guidance. From a top-line perspective, our 11% organic sales growth is supported by our higher backlog.

[Nick Gangestad, CFO at Rockwell Automation]

This includes about 7% from higher volumes due to general supply chain stabilization, low cancellation rates, and resiliency benefits coming from our redesign efforts done in fiscal 2022 and continuing in fiscal 2023. About 4% is coming from price growth, mostly tied to price actions that went into effect in fiscal 2022. We also have factored in about 1% inorganic growth for our recently completed acquisition of CUBIC. While the supply chain shows some signs of stabilization in Q4, there continues to be volatility along with a dynamic macroeconomic environment, including the unfavorable impact of currency. All of these factors have informed our sales guidance and range. On adjusted EPS, we expect margin expansion from increased volume and positive price growth. The net favorable impact of price cost on margins is about 100 basis points.

[Nick Gangestad, CFO at Rockwell Automation]

We also will benefit from a higher discount rate favorably impacting our pension expense, and we'll see about a $0.15 benefit from share repurchases. We continue to make investments in attracting and retaining key talent, as well as restoring our bonus payout back to 100%. Combined, these two items are around a 150 basis point headwind to our margins. While we do expect a positive price cost for the year, we are also factoring in continued inflation, primarily in electronic components. We expect our margins to be negatively impacted by unfavorable mix and currency. Combined, these two items will be a negative impact of around 150 basis points. We're expecting an adjusted effective tax rate of 18% or about a $0.20 headwind.

[Nick Gangestad, CFO at Rockwell Automation]

The next slide, 17, provides the adjusted EPS walk from fiscal 2022 to fiscal 2023 guidance at the midpoint for your reference, which I spoke to on the previous slide. From a calendarization viewpoint, we expect our second and third quarters to have the highest sales growth rates for the year, with each up mid- to high-teens year-over-year. We expect Q1 and Q4 to be in the single-digit growth range. Following the first quarter, we expect sequential sales to improve over the balance of the year. We expect segment margins and adjusted EPS to decline year-over-year in Q1. We see segment margins in the mid-teens for Q1, which is fully factored into our full-year view of 20.5%. In Q1, we are projecting a year-over-year margin decrease from increases in spend, unfavorable mix, and currency partially offset by positive price cost.

[Nick Gangestad, CFO at Rockwell Automation]

We are seeing margins improve sequentially following Q1, driven by higher volumes and continued positive price cost. Moving on to the next slide, 18, I'll make a few comments on our capital deployment framework. Our long-term capital deployment priorities remain the same. Our first priority is organic growth. After that, we focus capital deployment on inorganic activities, then we focus on capital returns to shareholders through our dividend and then share repurchases. In addition to our organic and inorganic investments, our capital deployment plans for fiscal 2023 include a focus on de-levering, dividends of about $540 million, and share repurchases of between $200 million and $300 million. With that, I'll turn it back over to Blake for some closing remarks before we start Q&A.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Thanks, Nick. As we look to 2023, we are confident in our ability to execute a 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're continuing to invest for our future, including investing in attracting and retaining key talent. I would like to thank our people for their relentless commitment to solving the immediate needs of our customers while focusing on continued innovation and investment for the future. We're excited to share some of these innovations with you at our Investor Day in Chicago during Automation Fair later this month.

[Blake Moret, Chairman and CEO at Rockwell Automation]

We will be introducing an industry-first cloud-native programming application for Logix, a new operator interface package, new IO for process industries, on-machine motor control, and a host of other differentiated offerings that make this time a historic moment in Rockwell's journey. Aijana will now begin the Q&A session.

[Aijana Zellner, Head of Investor Relations at Rockwell Automation]

We would like to get to as many of you as possible, so please limit yourself to one question and a quick follow-up. Thank you. Julianne, let's take our first question.

[Operator]

Thank you. As a reminder to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. Our first question comes from Scott Davis from Melius Research. Please go ahead, your line is open.

[Scott Davis, Founding Partner, Chairman, CEO & Lead Multi‑Industry Research Analyst at Melius Research]

Hey, good morning, guys, Blake and Nick-

[Blake Moret, Chairman and CEO at Rockwell Automation]

Hey, good morning.

[Scott Davis, Founding Partner, Chairman, CEO & Lead Multi‑Industry Research Analyst at Melius Research]

and Aijana.

[Nick Gangestad, CFO at Rockwell Automation]

Morning.

[Scott Davis, Founding Partner, Chairman, CEO & Lead Multi‑Industry Research Analyst at Melius Research]

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

[Blake Moret, Chairman and CEO at Rockwell Automation]

Scott, just working through the different industry segments, you know, we talk about continued investment within the discrete industry segment in EV and battery. I mentioned the Hyundai win, great win for us with the greenfield, and we continue to see both the established brand owners as well as the startups increase capacity in their EV fleets because they have to, otherwise they're gonna lose share, and they're not gonna be ready to meet growing consumer demand there. We see that continuing.

[Blake Moret, Chairman and CEO at Rockwell Automation]

We continue to see semiconductor moving forward, and even with, you know, a decrease in demand in the consumer markets, the trends remain that people are gonna try to make, you know, every product that they produce smarter, and there's gonna continue to be growth in semiconductor in consumer and certainly in the industrial markets that we participate in and automotive and so on. We see continued investment there and, as we talked about a little bit, we're playing an expanded role in semiconductor production, most specifically referenced by that material handling, that wafer handling win that we talked about on the call. We see warehouse automation continuing.

[Blake Moret, Chairman and CEO at Rockwell Automation]

I don't see a, you know, an immediate re-acceleration in e-commerce, but for retailers wanting to be more efficient in back of store and in their own warehouses, we continue to see good business there going forward into fiscal 2023. In the hybrid industry segment, food and beverage continues. A lot of that activity apart from, you know, a few of the greenfields that we're participating in, is actually productivity and resilience plays within existing facilities. This is one of the best areas for our cybersecurity offerings. The services that we're providing in assessing and remediating and monitoring these facilities is particularly attractive to a lot of these food and beverage and consumer packaged goods companies.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Pharmaceuticals, we continue to see the trends towards personalized medicine continuing on and within the hybrid industry segment, eco-industrial with renewables, and energy management, water treatment, that continues to be strong, I think, with good secular tailwinds. In process, oil and gas, we continue to see double-digit growth ahead for the Sensia joint venture. Obviously, there's a lot of interest in the U.S. expanding our ability to provide energy both for our own domestic needs as well as, you know, potentially more export. Along with traditional fossil fuels and helping them with their energy transition plans, and all of them, of course, have those plans, renewables as well.

[Blake Moret, Chairman and CEO at Rockwell Automation]

We've talked before about customers like First Solar that are continuing to build out their capabilities in renewables, and we're playing a strong role in that. You know, when we look at these verticals, we continue to see strength even in the face of you know, what are certainly some macroeconomic headwinds.

[Scott Davis, Founding Partner, Chairman, CEO & Lead Multi‑Industry Research Analyst at Melius Research]

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 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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yeah. Scott, you know, I think the brand owners are gonna continue to focus on their their profit makers, right? They've got their own sources of profit that are funding these new ventures. When you think of the trucks and, you know, the bigger vehicles, the luxury vehicles that are providing an outsized percentage of the profit, they're gonna be working to keep those areas strong through this. They're probably going to be very judicious when it comes to, you know, model changeovers and things like that. But in terms of keeping those plants up and running, that's a good read for us, with all the installed base that we have.

[Scott Davis, Founding Partner, Chairman, CEO & Lead Multi‑Industry Research Analyst at Melius Research]

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

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yeah. Thanks, Scott.

[Operator]

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

[Andrew Obin, Managing Director, Equity Research at Bank of America]

Hi, can you hear me?

[Blake Moret, Chairman and CEO at Rockwell Automation]

We can.

[Nick Gangestad, CFO at Rockwell Automation]

Yes, Andrew.

[Andrew Obin, Managing Director, Equity Research at Bank of America]

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

[Nick Gangestad, CFO at Rockwell Automation]

Yeah. The biggest swing we're gonna see, Andrew, is in our Software & Control segment, where in our fourth quarter, we saw good availability of components that were benefiting our results in the fourth quarter. As we work with our suppliers there, we are seeing a decline in our Software & Control in the first quarter. There's specific components that will be during part of the first quarter in even shorter supply, and that's part of what we're guiding in our statements about first quarter. This is really coming from our increase.

[Nick Gangestad, CFO at Rockwell Automation]

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

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yeah. Yeah. Nick, just to add to that, Andrew, you know, the granularity of our analysis and that of our key suppliers, I should add, continues to improve, and we think that had, you know, 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 software and control for a portion of Q1. The suppliers that we're working with have a high say-do ratio. They have characterized the issue. We understand it. We're working closely with them, but that's embedded in the Q1 implied guide.

[Andrew Obin, Managing Director, Equity Research at Bank of America]

Gotcha. Just to understand, in terms of your backlog and as you look into 2023, what percent of your revenue is underwritten at this point by the existing backlog, and how does it compare to sort of a normal year-end? Thanks so much.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yeah. Nick will add some additional detail to this, but we have about 60% of the full year in backlog. Typically, we have about a month. You know, most of our products are delivered off of a distributor shelf or very quickly from one of our factories, either drop-shipped or through the distributor. Having well over half the year of our shipments in the guidance, in backlog is absolutely unprecedented. You know, you see the slide that we posted to kinda show the development of that across all three of our business segments.

[Andrew Obin, Managing Director, Equity Research at Bank of America]

Right. Guys, yeah, sorry, Nick. Yeah.

[Nick Gangestad, CFO at Rockwell Automation]

Yeah. Andrew, I don't really have anything to add to that. Those comments about less than a month and greater than half a year, that's really focused on our software and 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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Just the real ability to ship is the gating factor.

[Nick Gangestad, CFO at Rockwell Automation]

That is correct.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Thank you.

[Operator]

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

[Jeff Sprague, Founder and Managing Partner at Vertical Research]

Hey, thank you. Good morning, everyone.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Hey, Jeff.

[Jeff Sprague, Founder and Managing Partner at Vertical Research]

Hey. I just wanted to try to deconstruct the bridge a little bit more if we could. In particular, just thinking about price cost, right? I think you talked about 100 basis point tailwind there. Nick, I guess the math that I'm doing here is 4% price is kind of like over $300 million, right? That's like $2 a share. To get price cost down to, call it roughly $1, then we'd be talking about cost being about half of what price is. That gets me to like $150 million benefit on price cost or maybe 200 basis points. I don't know if you agree with that math, but I'd just love some more color on what's going on in price, cost, and mix, and just how to really frame that number up a little bit more precisely.

[Nick Gangestad, CFO at Rockwell Automation]

Yeah. Most of your math makes sense and aligns with how we're thinking about it. We are expecting input costs inflation to continue in 2023, and that's reflected. Again, about half of what we're seeing of price, that's an accurate read that you're making, Jeff. Where that is, 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.

[Nick Gangestad, CFO at Rockwell Automation]

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. 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. Adjusting both the income benefit, but also the impact it has on revenue. That's where I get to the 100 basis point impact on margin.

[Jeff Sprague, Founder and Managing Partner at Vertical Research]

Great, thanks for that. Just a little bit more on Q1. You're pretty clear on the answer to Andrew's question about supply availability. Maybe just give us a little color on the cadence of investment spending. It always seems to be a bit of a parlor game every year figuring out how that's progressing over the year. It sounds like it's heavier in Q1 and then tapers off, but can you give us a little bit more color on how to think about that?

[Nick Gangestad, CFO at Rockwell Automation]

No, our investment spend now. You gotta realize, Jeff, this is coming off a year where we increased our investment spend by 10% or a little over that. Now we're planning in our plans this year about a 5% increase on top of that. 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'll stay at a pretty consistent level.

[Jeff Sprague, Founder and Managing Partner at Vertical Research]

Great. Thanks. I'll pass it on.

[Operator]

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

[Josh Pokrzywinski, Equity Analyst at Morgan Stanley]

Hi, good morning, all.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Hey, Josh.

[Josh Pokrzywinski, Equity Analyst at Morgan Stanley]

I guess first question on backlog conversion. You sort of touched on a little bit of it, but any sort of explicit view on, you know, whether or not you guys will be working down backlog or, you know, any view on how order rates, you know, kind of progress throughout the year? Like is that something that you're planning on dipping into as part of that volume growth? Or is the expectation that order rates kind of stay in this ZIP code and, you know, you kind of end up, you know, kind of flattish on the backlog situation? I know it's not a normal guidance item, but we're kind of in an unusual point in time.

[Blake Moret, Chairman and CEO at Rockwell Automation]

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

[Nick Gangestad, CFO at Rockwell Automation]

Yeah, I don't think I have much to add to what Blake said there. I think particularly in the second half of the year, if we started to see some reduction in the backlog, driven by reductions in our lead times, we would see that as healthy.

[Josh Pokrzywinski, Equity Analyst at Morgan Stanley]

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

[Nick Gangestad, CFO at Rockwell Automation]

The 5% increase that we're talking about in fiscal 2023, I just wanna make sure I'm answering the right question.

[Josh Pokrzywinski, Equity Analyst at Morgan Stanley]

Yes.

[Nick Gangestad, CFO at Rockwell Automation]

Yeah.

[Josh Pokrzywinski, Equity Analyst at Morgan Stanley]

Yeah.

[Nick Gangestad, CFO at Rockwell Automation]

So-

[Josh Pokrzywinski, Equity Analyst at Morgan Stanley]

I guess more broadly, what's driving the incrementals, you know, apart from the things that are kind of beyond your control?

[Nick Gangestad, CFO at Rockwell Automation]

Well, first on the investment spend, I would put that in a very normal range of growth for us from a historical perspective. It's the typical things that we've been investing in. We're investing in product development, we're investing in our SaaS capabilities, some of our enterprise digitization. We continue to invest in our sales force. As well as we've been doing some investment in plant capacity expansion, and we see that continuing to go. We're also investing in our own talent and the compensation that we are providing for the talent. That's all part of that roughly 5% increase in 2023.

[Nick Gangestad, CFO at Rockwell Automation]

Now, one of the big things, I said earlier that we have a core conversion that are in the 30%-35% range. That's in line with our financial framework that we've laid out. One of the bigger moving items in that is just the restoration of our bonus, that we had a noticeably less than planned bonus in fiscal year 2022. In this guide, we're planning for that to go back to our 100% level, and our core conversion, if we were to normalize for that, would be at 40%.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yeah. Just to add a little bit more, I touched on some of the new product introductions that we're gonna be bringing out, and that really are creating new streams of value for customers and investors for that matter. At Automation Fair, we're gonna be introducing a cloud native programming package for Logix. This is gonna be an industry first for a major programmable controller line. It's a big deal. It went GA a few days ago. You know, 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.

[Blake Moret, Chairman and CEO at Rockwell Automation]

It was an extra benefit in addition to the hardware that we have from ASEM. That's gonna 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 Kinetix and PowerFlex. These are things that customers have been asking for years, and we're coming out now with these items, and it's 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 semi-annual releases.

[Blake Moret, Chairman and CEO at Rockwell Automation]

While we'll continue to do that with our strong on-prem offering, continuing to innovate at a faster pace with these new cloud native offerings is a whole new source of value for us. Some of that is embedded with those investment spend increases, along with the go-to-market to make sure that we're, you know, getting the word out and we're in front of the customers we need to be.

[Josh Pokrzywinski, Equity Analyst at Morgan Stanley]

Got it. That's helpful. Thanks, guys.

[Operator]

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

[Julian Mitchell, Managing Director and U.S. Industrials Equity Research Analyst at Barclays]

Hi. Good morning. I just wanted to circle back maybe to some of the comments on the first fiscal quarter. I think you talked about 15% segment margins, you know, down from, I guess, 23% sequentially in Q4. You mentioned mix a couple of times. Is the point there that the software and control margins are down very heavily versus that kind of 8-point firm-wide average? You know, are we right in thinking it's around sort of $1.80-$1.90 of EPS in fiscal Q1? You know, there's nothing odd happening below the line or anything like that. Just wanted to clarify that a little bit on mix and the EPS.

[Nick Gangestad, CFO at Rockwell Automation]

Yeah, Julian. The biggest thing I'm talking about when I talk about mix is exactly what you referenced of our software and control. It was a noticeable help to us in Q4 with the 30% plus growth there. It will become a headwind to us in the first quarter because we expect it to be growing below the rest of the company average. That swing there will be part of what's happening. In terms of other things, like things with corporate other, with tax rate, I don't see anything out of the norm. Impacting us in Q1 disproportionately one way or the other versus the full year.

[Julian Mitchell, Managing Director and U.S. Industrials Equity Research Analyst at Barclays]

Got it. That sort of $1.80-$1.90 isn't a bad sort of starting point if you're down from the $2.10 a year ago of EPS.

[Nick Gangestad, CFO at Rockwell Automation]

Well, Julian, you're asking me to start to guide quarterly EPS guidance. I'm trying to give as much color as I can, but I haven't pegged an exact range for EPS for Q1. We tend to guide for the full year.

[Julian Mitchell, Managing Director and U.S. Industrials Equity Research Analyst at Barclays]

Yep

[Nick Gangestad, CFO at Rockwell Automation]

What we expect for EPS.

[Julian Mitchell, Managing Director and U.S. Industrials Equity Research Analyst at Barclays]

Understood. Thank you, Nick. Just my quick follow-up would be around the order intake. I think, Blake, you made some very positive comments around the overall environment. I guess, you know, ABB had talked about kind of a normalization of discrete automation orders by their customers as supply chains are easing and maybe slightly extended kind of times for the customers to place orders because of the macro. Kind of two different drivers maybe weighing on orders a little bit. I just wondered if Rockwell had seen, you know, either of those points affecting the order intake at all.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yeah. I think in the first with as lead times come in a bit and we're seeing that in certain of our product lines, you need less coverage, particularly if you're a machine builder. You don't need as many months of coverage of the products to complete your equipment. And so that's gonna reduce the size and maybe the frequency of those orders. You know, I think that is a positive trend because it means customer service is coming back to where we expect it to be. Graphically, you see a bit of that on some of the charts that we showed. In terms of customers with your second point, customers saying, "we don't really need it now," not seeing much of that.

[Blake Moret, Chairman and CEO at Rockwell Automation]

I can tell you that the calls I'm having with customers frequently are that they want their stuff. We're not seeing much at all in the way of customers saying, "ship it when you can." You know, "That stuff I ordered a few weeks ago, don't worry." I'm not getting those calls. That would be my characterization of what we're seeing.

[Julian Mitchell, Managing Director and U.S. Industrials Equity Research Analyst at Barclays]

Great. Thank you.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yeah. Thanks, Julian.

[Operator]

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

[Brendan Luecke, Multi Industrials Analyst at Bernstein]

Morning, all. Thanks for taking my question.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Morning.

[Brendan Luecke, Multi Industrials Analyst at Bernstein]

I just wanted to double-click on the cancellation trends. They've ticked up a little bit over the last couple quarters. I guess two questions here. You know, one, is there a root cause or is this just noise in the numbers? Two, just a point of clarification, the 1%, 2%, 3%, are these quarterly cancellation rates or is that an annualized rate?

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yeah. Those are quarterly rates, and I'd put them more in the noise category. I mean, these are rates that are low single digits. You know, they're well within the range of what we've seen historically.

[Brendan Luecke, Multi Industrials Analyst at Bernstein]

Okay. Excellent. Thank you.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yep.

[Operator]

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

[Steve Tusa, Managing Director at JPMorgan Chase & Co.]

Hey, guys. Good morning.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Morning, Steve.

[Steve Tusa, Managing Director at JPMorgan Chase & Co.]

On the end markets, can you give us a little bit of color around, you know, very strong sales growth, orders a bit less of a growth? Maybe just give us a little bit of color on the orders to the extent you know. You know, were there any end markets that were actually down or were they all up on orders?

[Blake Moret, Chairman and CEO at Rockwell Automation]

We don't provide specific information on incoming orders by industry. But, you know, based on the line of sight that we have with customers in these areas where we're working specifically with them on projects, you know, whether it's in pharmaceutical, you know, for getting new medicines to market, or it's new plants for EV like the Hyundai win or oil and gas wins that we see through Sensia, we've got pretty good line of sight to that incoming activity, and it remains robust. I mean, again, while the order rates have moderated a bit, they're still well above pre-pandemic levels in the verticals that I talked about during my tour in answer to Scott's question.

[Steve Tusa, Managing Director at JPMorgan Chase & Co.]

Got it. Then just on this, on the S&C margin, it's just a little bit like more lumpy than what we've heard from others. Is there anything in the rev rec, revenue recognition around the software businesses that's kind of moving these margins around at all that we have to consider for a business like this going forward that may have an influence on 4Q to 1Q? It's just the seasonality here for that business. Also, why wouldn't these supply constraints impact intelligent devices more if they were kind of based on more of the products?

[Blake Moret, Chairman and CEO at Rockwell Automation]

Sure. Let me start with that, and then Nick may have additional comment. You know, the software and control story is really around reduced volume. There's nothing in there with software rev rec. Plex continues to perform well. We didn't talk as much about it on the call, but we're very happy with the development of Plex, with the strategic value, the industrial Logix, as well as the financial performance of Plex. We will talk more about that during Investor Day in a few weeks. There's nothing there that's causing margins to be affected.

[Blake Moret, Chairman and CEO at Rockwell Automation]

It's more about the volume and the issue that I talked a little bit about is with the specific components that are disproportionately used in software and control, there's a reduced supply for a portion of Q1 that picks back up. Really that's, you know, we're giving a little bit more insight there, but that's what's causing the reduction, you know, after an over 30% year-over-year growth rate in the fourth quarter with software and control. As we've talked about often, all of our products are very highly impacted positively by increasing growth. We saw that manifested in Q4 with software and control, and we're seeing that moderate in Q1, and then with sequential growth from there through the balance of the year.

[Nick Gangestad, CFO at Rockwell Automation]

Yeah, Steve, one way we are still seeing, from a macro standpoint, general stabilization occurring from a supply chain perspective. What I'm pointing out, what we're seeing with software and control is some particular isolated incidences where we have this visibility of what's coming at us during the current quarter, and we just wanted to highlight that to you. It's not a general trend, it's something very specific and very short term.

[Steve Tusa, Managing Director at JPMorgan Chase & Co.]

Right. Not software. Not related to software, rev rec.

[Nick Gangestad, CFO at Rockwell Automation]

No.

[Steve Tusa, Managing Director at JPMorgan Chase & Co.]

Yeah. Okay. Okay. Thank you. Thank you.

[Operator]

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

[Andy Kaplowitz, Managing Director and U.S. Industrial Sector Head at Citi]

Good morning, everyone.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Hey, Andy.

[Andy Kaplowitz, Managing Director and U.S. Industrial Sector Head at Citi]

Blake, there's obviously concern out there regarding a slower global economy, but your orders, as you've talked about, have remained strong. Can you give more color into what your customers are telling you about their CapEx plans? We already talked about, you know, some of your more cyclical end markets outperforming, you know, the semis and autos. But how much do you think reshoring is helping you at this point? And where do you think we are in, let's call it the reshoring cycle, if you may?

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yeah. You know, I like talking about shoring rather than reshoring because it's really more about the U.S. being an outsized beneficiary of new CapEx as opposed to, you know, shuttering plants in China and, you know, other parts of Asia and bringing it back to the U.S. It's really about new lines of business, new capacity, filling out a little more of a local for local strategy that a lot of manufacturers are providing.

[Blake Moret, Chairman and CEO at Rockwell Automation]

I don't see anything with the current economic headwinds that would cause people to say, "Just kidding, let's go back to, you know, pushing manufacturing to other parts of the world and chase lower labor rates." I see, if anything, the U.S. continuing to be a beneficiary as people are trying to add redundant lines, as people are trying to get closer to their consumers so that they're not having to rely on, you know, 10,000 mile supply chains. We're gonna continue. One of the things I look at is our own plans as a manufacturer. What is Rockwell doing?

[Blake Moret, Chairman and CEO at Rockwell Automation]

We look at our CapEx that Nick talked about, which is up year-over-year for things that we feel like we need to do for the near term and also to sustain share gains going forward, and the continued investment in the U.S. We have a very important manufacturing that we're gonna continue in the U.S., because it's our biggest market and, you know, we continue to support manufacturing close to the consumer here just as we do in Europe and in Asia and in Latin America.

[Andy Kaplowitz, Managing Director and U.S. Industrial Sector Head at Citi]

Very helpful, Blake. Then can you give us a little more color to what you're seeing in process automation markets? It seems like you're forecasting a bit of an uptick in mining-related growth for 2023. You're still forecasting double-digit chemicals-related growth despite chemical-related companies having a more difficult time lately. What are your customers telling you there? Then given the latter cycle nature of life cycle solutions, should we expect a bigger margin tick up in that business in 2023, you know, versus the other segments?

[Blake Moret, Chairman and CEO at Rockwell Automation]

You know, we're expecting good things in fiscal year 2023. This is an area where even apart from the recent activity, the recent dynamics, backlog is very meaningful. When we look at backlog, for instance, in Sensia, it's very strong. It's an even higher number in terms of the percentage of revenue that's in backlog for fiscal year 2023 than the Rockwell Company average. That's typical because it's engineered solutions that take longer to plan and stage and design, commission and so on. We see that as a good read for oil and gas. There's activity in mining, and we've had some decent wins. I wouldn't call mining, you know, back at a torrid pace.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Metals is pretty good, and we don't talk as much about metals, but metals continues to be a big automation market, and especially with the release of some of the new high-performance drives, we've got better capacity, better capabilities than we've had in years for addressing that market. There's still some activity in forest products. In chemicals, and we talked about the win with Bora LyondellBasell, where you know, our continued enhancement of offerings with Logix-based control systems is gonna help us in chemicals. The new IO that we're gonna be introducing at Automation Fair is gonna be a major step up for chemicals as well.

[Blake Moret, Chairman and CEO at Rockwell Automation]

You know, those are some of the things going on there, and then in life sciences, you mentioned that really strong growth in the fourth quarter. We've talked about how life sciences is not as affected by the component shortages because so much of our business in life sciences is actually based on software and high-value services. From a macro standpoint, people wanna live longer, healthier lives, and personalized medicine is a way to help that objective, and that's something that we're particularly strong in.

[Andy Kaplowitz, Managing Director and U.S. Industrial Sector Head at Citi]

Appreciate the color.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yep.

[Aijana Zellner, Head of Investor Relations at Rockwell Automation]

Julianne, we will take one more question.

[Operator]

Thank you. Our last question will come from Phil Buller from Berenberg. Please go ahead, your line is open.

[Phil Buller, Director and Research Analyst at Berenberg]

Good morning. Thanks for the question. I'm keen to hear what level of safety buffer you've baked into this organic growth guide for the year. There was a bit of an overshoot this time last year. I appreciate that there's 60% of the year already in the backlog, but I guess I'm surprised to see an 11% midpoint given the macro. Anything you can share in terms of overall confidence levels or safety buffer would be great, and where that might reside, be that on the top-line assumptions or perhaps it's more in the margin side, which collectively give you the right confidence levels for the earnings for the year.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Sure. Well, let me start by saying that the overarching driver is what we have in backlog. Over $5 billion in backlog is unprecedented, and with continued strong order entry and with continued very low cancellation rates, that's the primary story. Now, in terms of the tone, I did mention during my prepared remarks that we feel like a conservative approach is appropriate. I'm not gonna dimension that or quantify that, but that was a deliberate comment in the prepared remarks.

[Phil Buller, Director and Research Analyst at Berenberg]

Got it. Thanks. Just as a bit of a follow-up or slight adjacency, really is the company's appetite for M&A at this point, be that large or small. I'm thinking more in the context of peers. We've now got Emerson, who are gonna have a lot of firepower, Schneider, who are looking to acquire the rest of AVEVA. Does M&A need to move higher on Rockwell's agenda from a competitive dynamics standpoint, or has your thinking evolved in terms of the need to participate more strongly in M&A? Thanks.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Well, we're very happy at the increased participation in M&A that we've demonstrated over the last few years, and more importantly, the way that it's helped add new value for customers as well as investors. We'll go into this in a little more detail in a couple of weeks at Investor Day. You know, first looking at the strategic fit with some well-defined priorities that we've talked about, and then the financial framework, we're very happy with the way that our M&A that we've already completed, most recently with the CUBIC acquisition and that we have in the funnel, will continue to strengthen us as a pure play automation provider.

[Blake Moret, Chairman and CEO at Rockwell Automation]

It's one of our strengths, and the market access that we have to provide new value from M&A immediately into all of the industry segments of discrete and hybrid and process is second to none. I'm happy with the way that we're positioned with M&A. We're gonna keep doing it. We have a strong balance sheet, and we've got a great track record of turning these acquisitions into real value.

[Phil Buller, Director and Research Analyst at Berenberg]

Great. Thanks.

[Blake Moret, Chairman and CEO at Rockwell Automation]

Yep.

[Operator]

We're out of time for questions today. I'd like to turn the call back over to Ms. Zellner for closing remarks.

[Aijana Zellner, Head of Investor Relations at Rockwell Automation]

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

[Operator]

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

Participants

Executives

• Aijana Zellner, Head of Investor Relations
• Blake Moret, Chairman and CEO
• Nick Gangestad, CFO

Analysts

• Andrew Obin, Managing Director, Equity Research at Bank of America
• Andy Kaplowitz, Managing Director and U.S. Industrial Sector Head at Citi
• Brendan Luecke, Multi Industrials Analyst at Bernstein
• Jeff Sprague, Founder and Managing Partner at Vertical Research
• Josh Pokrzywinski, Equity Analyst at Morgan Stanley
• Julian Mitchell, Managing Director and U.S. Industrials Equity Research Analyst at Barclays
• Phil Buller, Director and Research Analyst at Berenberg
• Scott Davis, Founding Partner, Chairman, CEO & Lead Multi‑Industry Research Analyst at Melius Research
• Steve Tusa, Managing Director at JPMorgan Chase & Co.