Rockwell Automation Q1 2023 Earnings Call Transcript

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. [Operator Instructions] At this time. I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead.

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

Thank you, Julianne. Good morning, and thank you for joining us for Rockwell Automation's First Quarter of Fiscal 2023 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.

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Thanks, Aijana, and good morning everyone. Thank you for joining us today. Let's turn to our first quarter results on Slide three. I'm pleased with our team's exceptional focus and execution as we delivered another quarter of strong growth and profitability. Organic sales and earnings were both up year-over-year, and better than we expected this quarter. Rockwell has continued investments in resiliency and agility, along with the gradually improving supply-chain environment helped more than offset many of the headwinds we faced heading into Q1. Orders and backlog were up sequentially in the quarter. Order cancellation rates were flat to prior quarter and remain in the low-single digits through January. We are encouraged by the continued strength of our end-user demand across all business segments and regions. Total sales grew almost 7% versus prior year. Organic sales were up 10% year-over-year, better than our expectations despite a very dynamic supply-chain environment.

Currency translation reduced sales by 4%, and acquisitions contributed about a point of growth this quarter. Consistent with our prior assumptions, the split of sales by business segment, region and industry was impacted by access to specific electronic components and the composition of our backlog. In the Intelligent Devices business segment, organic sales increased about 7% versus prior year with growth in all regions and product lines. We had another quarter of remarkable order growth in our independent cart technology business, driven by large multi year deals across many industries including EV, material handling and semiconductor. I'll cover some of these strategic wins in a few minutes.

Software & Control organic sales grew almost 16% versus prior year. Better-than-expected growth was driven by our team's ability to quickly redesign and re-qualify certain logics products to secure additional component supply with the support from key suppliers. We also continued to see a gradual improvement in electronic component supply.

Lifecycle Services organic sales were up 10% year-over-year. Book-to-bill in this segment was a healthy 1.21 and was consistent across solutions, services and Sensia businesses. Information Solutions and Connected Services sales had another quarter of double-digit year-over-year growth. We are seeing a significant uptick here in large multi-site and multi year deals, both in software and services. One of our information Solutions wins this quarter was with a leading potato processing company where a combination of our Calypso digital consulting and enterprise analytics capabilities helped the customer increase throughput and reduce energy costs across multiple production lines. We are proud to be an important digital partner to this global company as they focus on doubling their revenue over the next five years.

Our recent software acquisitions continue to land us new logos across various industries and regions. These include Plex wins in metals, food and beverage and automotive and numerous enterprise asset management wins with Fiix's cloud-native offering in Asia, where we are leveraging the distribution network to amplify our sales with local customers.

On the connected Services side, we continue to build momentum with enterprise cyber security wins with customers across food and beverage, life sciences and consumer packaged goods, prioritizing their investments in resiliency of their operations. One of our key cyber wins this quarter was with one of the world's largest global consumer goods companies who chose Rockwell's differentiated portfolio of hardware, software and services along with the capabilities of our partner clarity to manage OT security at hundreds of their sites globally. This multi year deal will also contribute to our double-digit growth in annual recurring revenue. Q1 ARR grew 14%. Segment margin of 20% was up over 100 basis-points year-over-year and was better-than-expected. Adjusted EPS grew 15% year-over-year.

Let's now turn to Slide four to review key highlights of our Q1 end-market performance. All three industry segments saw strong year-over-year growth and were above expectations, consistent with the continued gradual improvement in electronic component availability. In our discrete industries, sales were up low-teens. Within discrete, automotive sales were up 25% versus prior year. We continue to win new and follow-on orders with both the brand owners and the supporting EV ecosystem including vehicle and battery OEMs and system integrators.

A good example of Rockwell's strong position in EV this quarter is our win with the leading battery supplier. Our independent cart technology was selected for the battery cell assembly and formation process to support Ford's Blue Oval greenfield plants in Kentucky and Tennessee. We talked about our strategic partnership with Ford at our Investor Day last November and we are excited about the progress we're making together.

Semiconductor sales grew over 20% versus prior year. This is another vertical where we are able to expand our offerings to new applications, including independent cart for wafer transport and logic-based automation for silicon carbide wafer manufacturing.

In e-commerce and warehouse automation, our sales were down low teens versus prior year. Some of our largest e-commerce customers are in the process of shifting their investment from greenfield to brownfield, and we expect continued investments in upgrading existing facilities, including next-gen sortation systems over the course of this fiscal year. One of our large multiyear wins in e-commerce this quarter was with CMC, a leader in smart solutions for sustainable packaging. Rockwell's Smart Machine Architecture which includes our full portfolio of hardware and software will help CMC produce its innovative on-demand packaging at scale.

Another important win in the quarter was with Phononic, a technology company focused on unique heating and cooling systems. This customer is working with our Calypso team to create the cloud and IoT infrastructure necessary to support Phononic's disruptive design for cold chain solutions and warehouse applications.

Moving to our hybrid industry segment. Sales in this segment grew low teens year-over-year, led by strong growth in food and beverage. Food and beverage sales were up over 15% versus prior year. As I mentioned earlier, we saw a number of large cybersecurity wins in this vertical, underscoring customers' focus on resiliency and security in their operations.

Life Sciences sales grew mid-single digits in the quarter. In addition to software, we saw a high number of cybersecurity wins in this end market this quarter, with several important wins coming from Europe. Tire was also up mid-single digits in the quarter.

Let's turn to process. This segment grew mid-single digits versus prior year, led by growth in metals and oil and gas. We rarely talk about our metals vertical, but we had an important sustainability win with Cornish Lithium, a pioneering mineral exploration and development company, who chose Rockwell's plant PAX process control system for its demo plan to convert lithium concentrate into high-grade refined lithium used for battery production. We are excited to partner with Cornish Lithium on this energy transition journey.

Turning now to Slide 5 and our Q1 organic regional sales. Similar to last fiscal year, our performance here is a reflection of electronic component availability rather than the underlying customer demand. North America organic sales grew 8% year-over-year. Latin America sales were up 6%. EMEA sales increased by over 13% and Asia Pacific was up 16%.

Let's now move to Slide 6, fiscal 2023 outlook. Given our Q1 performance, a record backlog and a gradually improving supply chain we are increasing our top line and bottom line outlook for fiscal 2023. While we are encouraged by the improving electronic component landscape, the macroeconomic environment is still very dynamic, and we continue to take a conservative approach in our operations. Our fiscal '23 guidance projects total reported sales growth of 12%. Organic sales growth of 13% at the midpoint assumes continued supply chain improvement. The majority of our fiscal '23 shipments are already in backlog.

We continue to expect acquisitions to contribute a point of profitable growth and currency to be a headwind of about 2 points. Nick will touch more on this later. ARR is still expected to grow 15%. Segment margin is expected to increase by over 100 basis points year-over-year. Adjusted EPS is expected to grow 17% versus prior year, and we continue to target 95% free cash flow conversion. Let me turn it over to Nick to provide more detail on our Q1 performance and financial outlook for fiscal '23. Nick?

[Nicholas Gangestad, Senior Vice President and Chief Financial Officer at Rockwell Automation]

Thank you, Blake, and good morning everyone. I'll start on slide eight, first-quarter key financial information. First-quarter reported sales were up 6.7% over last year. Q1 organic sales were up 9.9% and acquisitions contributed 80 basis-points to total growth. Currency translation decreased sales by four points. About seven points of our organic growth came from price. Segment operating margin expanded to 20.2% and was significantly higher than our expectations. The majority of our margin improvement versus our expectations was driven by the higher revenue from the redesign activity and improved electronic component availability that Blake discussed earlier.

The 110 basis point year-over-year increase in margin was driven by positive price cost and higher sales volume, partially offset by higher investment spend. Corporate and Other expense was $27 million, in line with our expectations. Adjusted EPS of $2.46 was ahead of our expectations and grew 15% versus prior year. I'll cover a year-over-year adjusted EPS bridge on a later slide.

The adjusted effective tax rate for the first quarter was 17.1%. This was in line with our expectations and aligned with our full year estimate of an 18% adjusted effective tax rate. Free cash flow of $42 million was $91 million higher compared to last year, driven by higher pretax income. As in recent quarters, working capital continued to grow sequentially. We expect one more quarter of working capital increases this year. We expect working capital balances to decline slightly in the second half of the year as our supply chain gradually improves.

One additional item not shown on the slide. We repurchased approximately 600,000 shares in the quarter at a cost of $156 million. On December 31, $1.1 billion remained available under our repurchase authorization.

Slide 9 provides the sales and margin performance overview of our three operating segments. Organic sales grew double digits in Software & Control and Lifecycle Services, with Intelligent Devices growing 7% year-over-year. As Blake mentioned earlier, orders grew sequentially in Q1 as we saw a healthy demand driven by continued strong project activity with our customers. We continue to see customer ordering patterns consistent with the longer lead times we have for portions of our portfolio. We expect further normalization of ordering patterns as lead times in different products improve.

Turning to margins. Intelligent Devices margin declined by 130 basis points year-over-year due to higher resiliency spend and an unfavorable currency impact, partially offset by positive impact from higher price cost. Segment margin for software and control increased 630 basis points compared to last year on positive price cost, the favorable year-over-year impact of Plex and higher sales. Life cycle services margin was roughly flat year-over-year. Similar to Q2 fiscal year '22, we expect lifecycle services margin to expand through the balance of the year.

The next Slide 10, provides the adjusted EPS walk from Q1 fiscal '22 to Q1 fiscal '23. Core performance was up $0.55 on a 9.9% organic sales increase. The impact of currency was a $0.15 reduction in earnings per share. This was slightly better than our expectations. The year-over-year impact was due to a stronger U.S. dollar. Incentive compensation was a $0.10 headwind, slightly more than our original plan and driven by our increased growth and earnings expectations for the year. Our higher adjusted effective tax rate was a $0.05 headwind and our reduction in outstanding shares added about $0.05.

Let's move on to the next slide, 11, guidance for fiscal '23. We are increasing our reported sales guidance to about $8.7 billion in fiscal '23 or 12% growth at the midpoint. We expect organic sales growth to be in a range of 11% to 15% or 13% at the midpoint of our range. We expect volume to be 9 points of growth and price to be 4 points of growth. This guidance takes into account our Q1 outperformance and is based on our current view of electronic component availability and the rate at which we can deliver on our backlog.

By quarter, we expect organic growth rates in Q2 and Q3 to be the highest of the year, with each up in the mid to high teens year-over-year, while Q4 revenue is expected to grow organically single digits. While we expect sales to be up sequentially in Q2, we expect margins to be similar to Q1 levels due to higher sequential spend on new product development, resiliency, and the timing of our annual merit increase. We now expect a full year currency headwind of 200 basis points, which is 50 basis points better than our previous guidance.

This updated outlook primarily reflects the strengthening of the euro against the U.S. dollar. We expect full year segment operating margin to be about 21%, up from prior guidance of about 20.5%. We continue to expect positive price/cost for the full year, with most of the favorability coming from the price actions we took in fiscal '22.

As expected, the majority of our year-over-year price cost benefit this year is coming in the first half of the year. Our updated guidance now assumes full year core earnings conversion of around 35%. We continue to expect the full year adjusted effective tax rate to be around 18%. We are increasing our adjusted earnings per share guidance to $10.70 to $11.50. At the midpoint of this range, this represents 17% adjusted EPS growth, up from the prior guidance of approximately 12% at the midpoint. We expect full year fiscal '23 free cash flow conversion of about 95% of adjusted income.

A few additional comments on fiscal '23 guidance. Corporate and Other expense is still expected to be around $120 million. Net interest expense for fiscal '23 is now expected to be about $130 million. We're assuming average diluted shares outstanding of 115.4 million shares. We've also included on Slide 12 an adjusted EPS walk from our previous guidance to our current guidance at the midpoint for your reference. With that, I'll turn it back over to Blake for some closing remarks before we start Q&A. Blake?

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Thanks, Nick. In this dynamic environment, we are positioning ourselves and our customers for a more resilient, agile and sustainable future. Automation has never been more important in solving our customers' biggest challenges. A large percentage of these global investments are being made in the U.S., where we have the strongest market share, the best channel and decades-long relationships.

Shoring is real for many of our most important verticals, and we see these investments along with the early benefits of the Inflation Reduction Act, reflected in our continued strong order rates. We are accelerating the pace of our innovation, including new product introductions across all key product platforms and our recent acquisitions. These were showcased at our very successful automation fair in Chicago, where we welcomed over 18,000 customers, partners and employees to an amazing demonstration of the value provided by Rockwell and our friends. I was also able to meet our new CUBIC team in Denmark a few weeks ago, and I am excited about the new opportunities to expand our sustainability portfolio with an increased presence in renewables, CUBIC's largest customer segment.

Importantly, I'm happy with how our culture is both embraced and enriched by our recent additions, and I'm excited to see how we deliver strong growth and new customer value together in the years to come. Aijana will now begin the Q&A session.

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

Thanks, Mike. 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. Julienne, let's take our first question.

Questions and Answers

[Operator]

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

[Scott Davis, Analyst at Melius Research]

Hey, good morning, Blake and Nick and Aijana.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Hey, Scott.

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

Good morning.

[Scott Davis, Analyst at Melius Research]

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Sure. Thanks, Scott. So we characterize the general landscape as generally improving and I think that's still the case. We use a lot of chips across our product lines and I think most notable for the quarter's results was our ability to mitigate this specific issue that we were concerned about affecting software and control when we talked last. We were able to move quick. We had good relationships with the involved supplier that helped us mitigate that risk. But in general, we're seeing chips improve across a broad landscape, but it's not going to happen overnight. And so we continue to work with those suppliers to improve the remaining constrained chips. And some of those are in software and control. Some of them are in intelligent devices. And then, of course, because Lifecycle Services uses products from both of those business segments, there's some secondary effects there as well. But the view is optimistic, but all it takes is one chip and a product to keep from being able to ship it. And so it's not all clear yet.

[Scott Davis, Analyst at Melius Research]

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yes, it's going to be uneven by different product lines. So we do have product lines in our portfolio that have pretty much returned to pre-shortage, pre-pandemic levels in terms of lead times. The majority of our product offering is still at elevated lead times. We still see OEMs placing big orders for more months of coverage for their machine needs than they would like to, than they will when we return to more normal lead times there. So it's still a factor, but it's improving, and we expect it to improve through the year.

[Scott Davis, Analyst at Melius Research]

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yeah, thank you.

[Operator]

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

[Andy Kaplowitz, Analyst at Smith Barney Citigroup]

Hey, good morning, everyone.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Hey, Andy.

[Nicholas Gangestad, Senior Vice President and Chief Financial Officer at Rockwell Automation]

Good morning, Andy.

[Andy Kaplowitz, Analyst at Smith Barney Citigroup]

Blake, as you started calendar '23, have you noticed any change in customer conversations around their capex plans in any of your end markets that concerns you? And then can you talk about how you're thinking about your backlog moving forward? Obviously, it continues to be unusually high. Given the current demand environment, does it seem likely at this point that you end FY '23 with still relatively high backlog that sets you up for a pretty strong '24?

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yeah, let me start with that one first, Andy. We're going to have far higher backlog at the end of fiscal '23 than traditional levels. That's clear. We saw sequential growth in backlog from Q4 to Q1. And with the demand that we're seeing, then we expect backlog to continue to be high as we head into fiscal year '24.

Now in terms of customers' capex behavior, the industries that we've highlighted as needing to make, let's say, once in a generation changes in their capacity, that's continuing. And we do track announced capex investments across the verticals that are important to us, and we continue to see high levels of investment in EV and battery. Semiconductor isn't on quite the same ramp up of quarter-over-quarter growth of new announcements but it's at a very high level even as that moderates. And as we've talked about, we're seeing increasing share of wallet in those fabs. So that's good news.

Food and beverage, we talked about some of the areas particularly of new value that they're investing in, probably a split of both capex and opex when they're looking at cybersecurity and some of the information solutions that we're adding. And energy continues to be a positive area where we expect for the full year, oil and gas is going to be double-digit growth for us.

[Andy Kaplowitz, Analyst at Smith Barney Citigroup]

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

[Nicholas Gangestad, Senior Vice President and Chief Financial Officer at Rockwell Automation]

Yeah, the guidance I gave last three months ago that we expect about 100 basis points of margin expansion through price cost, that holds. That's -- it's more or less almost exactly what we said then. The way we see it progressing through the year, we see the majority of -- in fact, the vast majority of that year-over-year change improvement happening in the first half of the year. We expected and we continue to expect approximately a little under 200 basis points of margin expansion in the first half of the year year-over-year on price cost and that moving down to about 50 basis points of expansion from price cost in the second half of the year. That's not a deterioration as it goes on, that's more a statement of the comps were going against in fiscal year '22. Going beyond that, in terms of price cost, now we're getting into '24 and I'm just not ready to be giving any guidance on how we're seeing price cost beyond that.

[Andy Kaplowitz, Analyst at Smith Barney Citigroup]

I appreciate it, Nick.

[Operator]

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

[Jeffrey Sprague, Analyst at Vertical Research]

Thank you. Good morning, everybody.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Hey, Jeff.

[Jeffrey Sprague, Analyst at Vertical Research]

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yeah, this is going to make us stronger for the future. The additional redundancy, the qualification of additional components, the work to design basically new bills and material with less constrained components with better suppliers to ensure that that flow is more resilient. Long term, that's going to be a net benefit to our overall supply chain. There is some overhead in terms of additional cost that's being directed towards those resiliency efforts, and that will wane over time. But currently, that does contribute to some of the additional costs that we're seeing. But we're already seeing the benefits. And I think mid and long term, that will also continue to be a real strength as we, like all our customers, are looking to increase their resiliency.

[Jeffrey Sprague, Analyst at Vertical Research]

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Sure. So Jeff, you asked about the IRA and what specifically are we seeing there. A couple of thoughts come to mind with that. One, we've showcased the work that we're doing with First Solar, including some of their greenfields, which they've stated were helped along by IRA funding for renewable energy. And so we're proud of the relationship we've had for many years with First Solar. We're doing the controls and now the digital twins in their facilities. They would not have introduced as many greenfield projects without IRA funding. And so that's an example where it helped them, which helps us because they're a good partner.

The second is some of the provisions in the IRA on U.S. manufacturing. When an automobile manufacturer builds a plant in the U.S., there's a higher probability that we're going to get large content because of our strong position here. And so that's also what's helping us as well. And again, it's the increased expense -- investment in the U.S. by the brand owners. But then when it comes to the U.S., for the reasons I talked about earlier and that you're well aware of, we have an unmatched position.

So for the second part of your question, semiconductor and what are we doing there? For a long time, our core strength has been in areas of facilities management and control systems. So that's controlling the temperature, the humidity, the cleanliness of the clean room environment. We've done that for a long time in Asia. And as more fabs are being built in the U.S., again, we're expanding that capability and share of wallet here. It's also in clean room process tools. And with some of the tooling suppliers, we've enjoyed a good relationship for a very long time. And that's a combination of hardware as well as our project management and engineer-to-order expertise.

More recently, cybersecurity has been a factor and has added millions of dollars of new business as we're helping harden these facilities to make them more resilient against cyber attacks. And the wafer transport that we've talked about a couple of times, that independent cart technology that we talk a lot about in EV and other industries, is really valuable here as well. And we're starting to win big multimillion dollar projects in several of the largest semiconductor companies in the world.

And then the final one that I mentioned was a silicon carbide becomes a scale technology. We're starting to use it in our own products. We're seeing some logic-based automation there, and that's exciting because they're using a standard architecture rather than a lot of the custom PC-based control systems that have characterized that industry for a long time. So hopefully, that gets at the heart of those questions, Jeff.

[Jeffrey Sprague, Analyst at Vertical Research]

It does. Thank you.

[Operator]

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

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Hi, good morning, guys.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Hey, Josh.

[Nicholas Gangestad, Senior Vice President and Chief Financial Officer at Rockwell Automation]

Hey, Josh.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yes, I think there's a blend of things going on. First of all, there is the investment in new technologies that all of the players in the industry like EV, have a real fear of missing out on. The idea that they're going to take a pause based on the macroeconomic concerns and let their competitors build out their fleets and be far ahead of them in terms of their ability to turn out hundreds of thousands of vehicles a year, they just can't wait. And so they're having to power through a still dynamic economic environment. And of course, that's EV and battery. I would say it's also semiconductor as well, where they have to build this capacity. In general, we're seeing across a broader spectrum of verticals the idea that automation is going to help them be more resilient and is going to enable greater productivity from their workforce. So it's not so much about the direct substitution of automation for labor, it's making that labor more productive. And I think that's a general trend that we're seeing across other of our verticals, food and beverage, pharma and so on. So we're seeing that. We're not tone-deaf to the concerns about the economy. And in terms of our own operations, when I talk about taking a conservative approach, we're watching that. We're prudently adding resources as needed to fuel new growth, but we're very aware of the macro. It's just not going to have as much of an effect on us in the current fiscal year because of a huge backlog that we have, and we're building backlog that's going to go well into '24 and beyond.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yeah, Josh, I wish I could construct an equation that would give you the percentages by vertical and give us our guide for us. But unfortunately, there's a huge amount of variability between the different industries, and of course, between greenfield, brownfield and so on. A lot of the brownfield-type investments are going to carry with it a higher percentage. Some of those are dedicated to the things that we offer in terms of automation and information management and the related services. The percentage spend for a new fab or a major new EV complex, it's going to be a small percentage of the total. And our job is to maximize the wins in our traditional value, but work really hard as we're doing in areas like semi and EV to add share of wallet, like we're doing with independent cart really in both of those as we're doing in software on the EV side and so on. So I hope that while that percentage of the total capex remains fairly low, it's high value, it's profitable and it's growing each year.

[Josh Pokrzywinski, Analyst at Morgan Stanley]

Very helpful as always, I'll get back in queue.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yeah, thanks, Josh.

[Operator]

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

[Julian Mitchell, Analyst at Barclays]

Hi, good morning. I just wanted to circle back to the margins as that was the main area of surprise I guess in the quarter. So I think, Nick, you talked about a 20% segment margin in the first half and sort of 22% in the second half. Is it life cycle services that's seeing that biggest kind of half-on-half ramp? And then also, any help you could give us on thinking about the Software & Control operating leverage? I think that averaged about 70% the last three quarters, so exceptionally high performance. How should we think about that on a sort of run rate ahead?

[Nicholas Gangestad, Senior Vice President and Chief Financial Officer at Rockwell Automation]

Yes, Julian, thanks for the question there. In terms of moving from roughly 20% margin in the first half of the year to 22% margin in the second half of the year, yes, Lifecycle Services is one of the bigger contributors to that step up as we see lifecycle services going up through the year. But we're expecting margin expansion in all of our segments year-over-year in fiscal year '23. Lifecycle services is a little bit over the total average for margin expansion that we're expecting. So that's how we're seeing it.

In terms of Software & Control, like Julian, just one of the things I just want to point out, as you look at some of the leverage that we're getting, if you're looking at the base, that was including what I was calling out a year ago of some of our incremental expenses related to Plex. So as an example, in our a little over 600 basis points of margin expansion year-over-year in the first quarter in Software & Control, there's about 200 basis points of that, that came from the year-over-year change in what we're experiencing in Plex as we're largely driven by some of those onetime expenses that we had in '22.

In terms of the overall leverage and conversion that we expect in Software & Control, we don't really give it down to that -- at a segment level like that. We -- you've often heard me talk about our 30% to 35% core conversion. That's more inclusive of everything. But as we grow software and control, we continue to expect that that's going to create margin enhancement. That's one of the things that we expect that will enhance our margin. It is also a business that is attracting more of our incremental growth investments as well as we put more investment in that. So Julian, that's just part of the balance I'd like you to keep in mind on that.

[Julian Mitchell, Analyst at Barclays]

That's very helpful. Thanks, Nick. And then maybe one just for Blake on the sort of process industry vertical. So I think you talked about mid-single-digit growth there in the first quarter, and you'll pick up steam as the year goes on. Is that just a function of kind of sort of faster backlog recognition in Process Industries as the year goes on? Is there any sort of particular vertical within process that you think will drive that pickup over the balance of the year versus what you saw in the first quarter?

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

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

[Julian Mitchell, Analyst at Barclays]

Great, thank you.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

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

[Julian Mitchell, Analyst at Barclays]

That's a good reminder. Thanks, Blake.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yep.

[Operator]

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

[Stephen Tusa, Analyst at JPMorgan Chase & Co.]

Hi, good morning.

[Nicholas Gangestad, Senior Vice President and Chief Financial Officer at Rockwell Automation]

Good morning, Steve.

[Stephen Tusa, Analyst at JPMorgan Chase & Co.]

Congrats on the execution on the quarter.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Thank you.

[Stephen Tusa, Analyst at JPMorgan Chase & Co.]

Just on the orders, maybe just a little bit more color. I mean it looks like the Lifecycle Services orders were up sequentially. You said that total orders were up sequentially. I mean any kind of frame of rough magnitude? I mean should we assume kind of modest sequential growth? Maybe just give us color on total book-to-bill. Was it in around that kind of 1.1 type of area? Maybe just a little bit more high-level color on where the orders landed.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yeah, the orders were strong. We continue to give the book-to-bill specifically for Lifecycle Services, which was at 1.21. And overall, for the company, as we talked about orders and backlog being sequentially up, meaning, obviously, orders were in excess of the shipments for the quarter, it's across the segments and it's across the regions as we see that continued demand. And we will see continued high backlog levels even with the strong shipments and the increased guide, we'll see very strong backlog at the end of '23 as we go into '24.

[Stephen Tusa, Analyst at JPMorgan Chase & Co.]

Okay. Like, up low singles for total order, something in that range?

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

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

[Stephen Tusa, Analyst at JPMorgan Chase & Co.]

Right. And the price embedded in those orders, I mean, to get from up -- I think you said 7% this quarter to up 4% in the year, it looks like that price is obviously decelerating. I mean the comps on price get tougher. Is the price in the orders somewhat similar to the price you're booking in revenues today? And are you pretty much booked when it comes to future price increases at this stage?

[Nicholas Gangestad, Senior Vice President and Chief Financial Officer at Rockwell Automation]

Yes, Steve, as far as the pricing, what the pricing that we're going to experience for the balance of fiscal year '23 is all -- or virtually all of it already baked into our backlog based on the orders that we have and the pricing we put in that. And that will be showing sequentially price improvement from what we're seeing right now, just based on how that backlog is playing out. In terms of the guide I'm giving for the full year, that is not representing an aspect of price starting to come down from the pricing level we're seeing in the first half. It's just a recognition of we had virtually no price growth in the first half of fiscal year '22, and then we had more significant price growth in the second half of fiscal year '22. So that change from is all based on comp, not on any kind of deceleration there.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yeah, and if I could just add to that, we did have an additional price increase in December, so in this fiscal year. And apart from the announcements of specific price increases, we've talked over the last year of being more agile in terms of getting the recognition of the prices by changing our methodology with customers and with the channel. And I would just say that's proceeding smoothly and with our expectations in terms of being able to be more agile as future price increases are introduced.

[Stephen Tusa, Analyst at JPMorgan Chase & Co.]

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yeah, as we talked about the new cancellation policy on orders, that's more of a hygiene type of issue. We didn't expect it to affect order patterns, and that's exactly our experience is that it did not have a significant impact on order patterns. But we got it in, and I think it's a healthy part of our processes.

[Stephen Tusa, Analyst at JPMorgan Chase & Co.]

Yeah, all right, thanks guys. I appreciate it.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Yes, thanks, Steve.

[Operator]

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

[Brendan Luecke, Analyst at Sanford C. Bernstein]

Good morning, guys. Thanks for taking my question.

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

Good morning.

[Brendan Luecke, Analyst at Sanford C. Bernstein]

So question, as you look through this current cycle for capex, how are you thinking about recurring revenues on the back end of the back of the -- of your expanded installed base?

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

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

[Brendan Luecke, Analyst at Sanford C. Bernstein]

Thank you.

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

Julienne, we'll take one more question.

[Operator]

Thank you. Our last question will come from Noah Kaye from Oppenheimer. Please go ahead, your line is open.

[Noah Kaye, Analyst at Oppenheimer]

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

[Blake Moret, Chairman and Chief Executive Officer at Rockwell Automation]

We see some pull forward that was in Q1 that was more a factor from the price increase. But even without that, we had orders that would have contributed to strong sequential growth. So any pull forward would not have had much to do with the cancellation policy, but there would have been some pull forward in Q1 that would have been a factor of the price increase that we introduced then. We are also seeing, as I mentioned in Q1, strong project activity with multi-site and multiyear deals. And that was significant in Q1.

[Noah Kaye, Analyst at Oppenheimer]

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

[Nicholas Gangestad, Senior Vice President and Chief Financial Officer at Rockwell Automation]

Yeah, I know I think that's a fair assumption. Like we clearly have seen some activity of what we think of increased activity as a result, but there still is some portions waiting to be clarified. And I think it's a very fair assumption to think that some of our customers are waiting to see what that clarity is. I know in our own case, we're doing more evaluation and waiting to what some of the provisions means to us. So I think it's fair to assume our customers are doing the same thing.

[Noah Kaye, Analyst at Oppenheimer]

Yes, very helpful. All right. Thanks so much.

[Nicholas Gangestad, Senior Vice President and Chief Financial Officer at Rockwell Automation]

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

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

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

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Aijana Zellner, Head of Investor Relations and Market Strategy
• Blake Moret, Chairman and Chief Executive Officer
• Nicholas Gangestad, Senior Vice President and Chief Financial Officer

Analysts

• Scott Davis, Melius Research
• Andy Kaplowitz, Smith Barney Citigroup
• Jeffrey Sprague, Vertical Research
• Josh Pokrzywinski, Morgan Stanley
• Julian Mitchell, Barclays PLC
• Stephen Tusa, JPMorgan Chase & Co.
• Brendan Luecke, Sanford C. Bernstein
• Noah Kaye, Oppenheimer Holdings Inc.