Thank you for holding and welcome to Rockwell Automation’s Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. [Operator Instructions]. At this time, I would now like to turn the call over to Jessica Kourakos, Head of Investor Relations. Ms. Kourakos, please go ahead.

Thanks Rene. Good morning and thank you for joining us for Rockwell Automation's Third Quarter Fiscal 2021 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 at that website for replay for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. Supplemental information related to our new business segments can be also found in the Investor Relations section of our corporate website. 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 the call over to Blake.

Thanks Jessica and good morning everyone. Thank you for joining us today. Before I begin let me first congratulate our Milwaukee Bucks for such an incredible season, Go Bucks. Let me now take a moment to talk about a couple of key highlights in the quarter. First of all, I'm pleased to welcome Cyril Perducat as our new Chief Technology Officer. He succeeds Sujeet Chand who is retiring later this year after a long and very impactful career at Rockwell and I'll talk more about his legacy in November. Cyril brings a wealth of automation and digital transformation experience to the role with great global experience and a passion for helping customers. His mindset and additional perspective will help drive even more value from the combination of our core automation, software, and managed services offerings to provide positive outcomes for customers. We also announced the signing of a definitive agreement to acquire Plex Systems which we expect to close in Q4 of this year. Plex is the leading cloud-native smart manufacturing platform operating at scale and it will be a big part of our FactoryTalk software as a service offering. We look forward to showcasing its unique capabilities and integration into a complete production system at Investor Day during our November Automation Fair in Houston. Now let's turn to our quarterly results on Slide 3. We saw another quarter of exceptional demand across our product portfolio. Total orders surpassed $2 billion reflecting a very strong demand pipeline. Total revenue of over $1.8 billion hit a new record and grew 33% including a one-point contribution from recent acquisitions including ASEM, Kalypso, and Fiix. Organic sales grew 26% versus prior year despite significant supply chain challenges. The manufacturing supply chain continues to remain constrained due to increased levels of demand and persistent…

Thank you, Blake, and good morning everyone. I’ll start on Slide 9, third quarter key financial information. Third quarter reported sales were up 33% over last year. Organic sales were up 26%. Acquisitions contributed one point of growth, and currency translation increased sales by five points. Segment operating margin was 19.9%, an expansion of 340 basis points compared to Q3 of last year. Higher sales volume, a favorable mix, and price all contributed to our margin expansion. These factors more than offset higher incentive compensation, our planned investment spend, last year’s pay reductions, and higher input costs. Corporate and Other expense was $29 million, slightly higher than last year, mainly driven by costs related to the pending Plex acquisition. The adjusted effective tax rate for the third quarter was 14.6% compared to 14.1% last year. Third quarter adjusted EPS was $2.31, above our expectations, primarily related to higher sales. I’ll cover a year-over-year Adjusted EPS bridge for Q3 on a later slide. Free cash flow was $437 million or conversion of 161% in the quarter. Strong conversion in the quarter was driven by continued management of our working capital. Year-to-date, free cash flow conversion was 118% and free cash flow dollars was up 39% versus last year. One additional item not shown on the slide, we repurchased 225,000 shares in the quarter at a cost of $60 million. For the full year, we have lowered our repurchase target from $350 million to $300 million, in anticipation of our upcoming Plex transaction. At June 30th, $613 million remained available under our repurchase authorization. Slide 10 provides the sales and margin performance overview of our three operating segments. The Intelligent Devices segment had organic sales growth of 29% in the quarter. Segment margin was 21.9%, 500 basis points higher than last year,…

Thanks, Nick. Once again, strong order trends and record backlog underpin a robust top line outlook, and we have confidence in our team’s ability to navigate the supply chain challenges. And we continue to invest in our future. The combination of our software portfolio with our controllers, Intelligent Devices, and Lifecycle Services creates unique value for customers across Discrete, Hybrid, and Process end markets. Our momentum would not be possible without the tremendous efforts of our employees. I’d like to thank everyone at Rockwell, and particularly the people in our Integrated Supply Chain organization, who have done a great job managing pandemic challenges and now mitigating our sourcing constraints. We’re leveraging our own manufacturing expertise to help customers be more resilient, agile, and sustainable. Let me now pass the baton back to Jessica and we’ll begin the Q&A session.

Thanks Blake. Before we start the Q&A, I just want to say that 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. Rene, let's take our first question.

Thank you. [Operator Instructions]. Your first question comes from Julian Mitchell from Barclays. Your line is open.

Hi, good morning. I just wanted to understand, first of all, how we should be thinking about operating leverage over the let's say the next sort of 12 to 18 months, realizing the current quarter there is a heavy headwind from incentive compensation, and probably some headwinds as well from trying to manage supply chain constraints and component costs. Just wondered how quickly those sorts of items you think should fade as we move beyond this current fiscal quarter and when you look at the business mix, how we should think about sort of operating leverage, please?

Hey Julian, first, just to around out 2021 as far as operating leverage, and we often at Rockwell talk about our core conversion, we see full year 2021 being right in the range of the 30% to 35% core conversion that we often talk about. As far as thinking about the future, of course, we'll say more about that in November at our Investor Day. But like one way to think about it is, there's several things, nothing drives our operating margin like top line growth, and given our 30% to 35% core conversion, we think that's still a helpful way to think about it. And that implies that we would expect our margins to expand next year. But of course, I'm going to give -- we will give more detail about that at our Investor Day in November.

Perfect, thanks very much. And then just, as we're thinking about the automotive end market within Discrete, very, very strong growth of 50% I think you delivered in the third quarter year-on-year, just wondered if you could update us sort of as you're looking into 2022, what portion of your backlog, perhaps if there is such a thing in auto is related to EV, and how you think about the sustainability of that auto CAPEX rebounds?

Sure. Well, Julian, we think that about two thirds of the capital projects that we're currently seeing in automotive have EV content. And EV power train is quickly passing the power train business we're seeing for internal combustion engines as a part of the mix within automotive. And we see that trend continuing and probably accelerating as new entrants into the EV market, either the established brand owners and then the startups are bringing their products to market. And our sales are, of course, directly to those brand owners, as well as all of the tier suppliers, like Wipro Power that we mentioned a little bit earlier. So around the world, we're very positive, very bullish on our portfolio. And quite frankly, we think Plex is going to help that with tier suppliers, because that's one of their strengths, providing their smart manufacturing platform to tier automotive suppliers. So we see this trend continuing. And we're expecting strength going into the next fiscal year in order.

Great, thank you.

Thanks, Julian.

Your next question comes from Scott Davis from Melius Research. Your line is open.

Hey, good morning, guys and Jessica.

Morning.

I'm kind of intrigued just to follow-up on Julian's question there. I mean, these EV projects, I mean, how do they compare versus ice and like complexity, and scope? And, any different dynamics, like if are the less suppliers, more suppliers, more competition, less competition, just any additional color you can give there be helpful, I think?

Sure. For Rockwell, there's actually upside to an EV project versus a traditional internal combustion engine. So starting with the drive train, a lot of our independent cart technology wins for precision motion control have actually been on the battery and the drive train side, if you will, for EV where traditionally in internal combustion engines, Rockwell has had a smaller content. That may not be true for some of the other suppliers who have a traditional revenue stream for CNC or what have you, but we don't and so we're not losing business in that transition. It's a net positive for us. On the software side, the EV manufacturers are adopting right from the start MES software as a necessary element of their production scheduling system. And so whereas 10 years ago or so, it was seen as a nice to have, but not necessarily a requirement with these new facilities coming online MES is seen as a necessary part of the bill of material, if you will. And then you combine all the other pieces of putting a vehicle together, that remained the same. So you still have to stamp and paint metal, you assemble the components, you test them at the end of the line, and so on. And those are all applications that Rockwell has good offerings for. In terms of the competitive landscape, as you would expect, the usual suspects are there in terms of the traditional part of the vehicle manufacturing and assembly. On the battery and in the electric vehicle drive train, very heavy Asian content; China, Japan, Korea. And so I'd say it's even more international with a bias towards Asia in some of those new elements. And we've put together good teams for tracking and pursuing these projects that span across multiple countries.

That's really helpful. And you've increasingly become more bullish, like on independent cart, kind of almost every call here for the last year. Are there -- how does this scale out, I mean, could you actually do a full Amazon style kind of warehouse and independent cart, is that even possible, does it scale to that size?

There's lots more applications within say, an Amazon fulfillment center that can be accomplished through independent cart. Today, those pieces of their overall facility are typically being provided by multiple of our customers. So you don't see necessarily one single sub supplier to them, providing all of the conveyance and sortation, and so on. And so we're working with some of the big ones, of course, whose names you would recognize. But there's also a whole host of integrators and machinery builders with a good idea, though, that Amazon is bringing into their ecosystem. And so we're working with a lot of these smaller suppliers. And I would also add, this isn't just for the big e-commerce giants. Now, this is for the big box retailers who are also looking to automate their material handling, the Walmarts of the world are also looking at these solutions at their individual locations, where they're bringing in tremendous amounts of material to try to get in the right place more efficiently than ever before. But we see almost limitless opportunity just in the e-commerce area for additional adoption of independent cart. And as we've talked about, we see independent cart wins in other applications outside of e-commerce. We see it in Life Sciences, we see it and Food and Beverage Packaging, given scalability and flexibility that manufacturers could never see before. And then we have some, let's say, more unusual applications, like the one we talked about with the U.S. Navy a few quarters ago.

Excellent. Good luck, guys. Thank you.

Thanks Scott.

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

Hi, good morning to you.

Hey Josh.

Just a follow-up on I guess, what might be several questions on orders and backlog. Blake say you have another quarter here with pretty healthy order intake, you reference that that over 2 billion of backlog up a lot year-over-year, anything about this cycle or the complexion of Greenfield and Brownfield that you guys are seeing that would make that shippable over a longer period of time than usual, obviously, you guys have sort of a reputation for being more short cycle, but how is that evolving and over what timeframe would you view that backlog is sort of a shippable number?

Yeah, I would I would not look at this backlog as being longer-term shippable based on the mix of industries or projects. The longest backlog orders that we get are typically in solutions, and that's the part of the business that's actually getting a little bit slower to recover. So there's nothing in that mix that would indicate that these backlog increases are due to some, special case with respect to higher project content or what have you. It's really due to just the dramatic surge that we have seen and seen sustained over the last few quarter in orders, coupled with supply chain constraints. But we've given you the color about the individual verticals that it's coming from. And it's a great balance that, it has been across Discrete and Hybrid. And now, the process markets are starting to kick in a bit there.

Got it, it's helpful. And then just a follow-up on some of the moving pieces on the cost side for you Nick. I think last quarter or maybe some earlier quarters there was a bit of a talk on some of the investments being kind of frontloaded for 2021 to whether maybe that's a bit more of a tailwind to the 2022. If we had to add up the investments and the incentive comp fees, is that something that leveled out on a normalized basis or is there still some kind of catch up or get back where you start off next year in the plus column?

Yeah, Josh, in terms of our investments for full year 2021, we expect our total investments to go up about 2% for the full year. And that's really more back end loaded. I said last quarter, that we expected year-on-year the investments to go up between $90 million and $100 million, compared to the second half of 2020. Our best estimate now is it's going to go up $85 million year-on-year for the second half. So I'd call it more back end loaded than front end loaded up of our investments. And then in terms of investment spending next year, Josh, again it's early, but I don't see any reason to think that it would not be fairly evenly spread over the year. I don't see any big seasonality impacting next year in our investment spend.

Thanks.

Your next question comes from Andy Kaplowitz from Citigroup. Your line is open.

Hey, good morning guys.

Hey Andy.

Blake, I'm sure you don't want to give us too much on 2022 at this point, but given orders are so much higher and they keep trending up, what kind of confidence at this point do your order trends give you in delivering organic growth in FYI 2022, that could be close to 2021 or at least at or above your two times industrial production target?

Well, without saying too much about 2022 until November, we're very positive on where we are. The orders momentum, the backlog that we expect to largely shift as we get closer to normal levels through the balance of the year, our ability to compete and win in competitive projects across the world, and across the verticals. I think it's a great setup. And it should bode well for our growth and performance going into the next year and beyond.

That's helpful and maybe just focusing on process markets, obviously you're seeing especially in chemicals, giving you monthly raise your 2021 forecasts and some improved growth, but you're starting to see more significant improvement yet in oil and gas, what's your confidence level and sort of more of a typical later cycle recovery for process as you go forward?

Yeah, we continue to see optimism for oil and gas as it always seems to do lagging the earlier cycle Discrete businesses. But we grew year-over-year and sequentially in oil and gas. We expect another quarter of growth in oil and gas in the fourth quarter. And while there's still a lot of uncertainty, these are projects around the world and we're continuing to watch COVID infections and those are continuing to be a concern for us. We think we're in a good spot with oil and gas and some of the comments from some of the earlier cycle oil and gas operators, the people who are providing drilling technology as well as oilfield services, those generally lead the impact on our business by say six or nine months. And so we are optimistic that some of the early signs that we saw this quarter in oil and gas are going to persist and pick up.

Appreciate it Blake.

Yeah, thank you.

Your next question comes from Nigel Coe from Wolfe Research. Your line is open.

Hi, good morning. I'm on for Nigel Co. My question will be looking at the investment question again, I was still looking at the 35 million tailwind and for the incentive stores around 30 million for 2022?

In terms of the tailwind for 2022, I mean, we're not yet in a position where we're sharing guidance on what we expect investment spend to be for 2022. But our total investment spend this year is going up approximately 2%, very much like our -- what we've seen in prior years. As far as headwinds and tailwind, I didn't quite catch all of that. But, for instance, it would be more likely that our bonus is back in a more normal zone of what I talked about during earlier on this call. That's an example. But I won't necessarily say investments will necessarily go down or not repeat. The one exception is we have temporary investments, these accelerated investments with $30 million, that is going exactly as we anticipated. That's $30 million in the second half of the year, about $10 million of that we spent in the third quarter of $20 million we're anticipating in the fourth quarter. Those will not repeat into 2022 and we did those investments to accelerate our growth in 2022. And then the last point is, as I said earlier with Julian's question, it's our expectation that margins will be expanding in fiscal year 2022.

Got you. And another one was that in terms of the orders momentum, you mentioned, it's not as long cycle. Do you have any idea when the conversion will happen into sales?

Well, obviously, we're seeing good sales rates that were above our expected expectations in Q3. And that led us to raise the guidance of organic growth at the midpoint for this year. And we expect that we'll be shifting the backlog through the balance of 2022 getting us closer towards, more normal backlog levels. Backlog will be up in Q4 a little bit, but not as market increase as we saw in Q3.

Appreciate it. Thank you.

Thank you.

Your next question comes from Steve Tusa from J.P. Morgan. Your line is open.

Hi, good morning.

Good morning, Steve.

Thanks as usual for all the details. Just wanted to -- maybe I might have missed the comment on incentive comp, what is normal, just mechanically, what do you think is normal incentive comp, kind of relative to the level that you're performing at this year?

Yeah, Steve we started the year with our planned compensation, which is what we would consider our normal amounts of $115 million. Given our expectation of exceeding that performance, we're currently expecting total bonus expense this year to be approximately $175 million.

Okay, so just mechanically, we should assume that next year you'd get a $60 million tailwind from that?

I think that's a pretty fair assumption.

Okay. And then just for the investments, I mean, so should we kind of think about investments up 2 and then and then remove the 30 million, so is that kind of the profile for investments going forward, at least, for next year?

You know, in terms of the investments, yeah, the 30 million you should think of that is something that we're not planning to repeat. But we still haven't given our guidance here. We're working through a lot of things of how we want to, what we want to invest on in 2022. But yes, your assumption of taking 30 million out of what we've done this year, that's the way we've been saying that and I agree with that approach.

Okay, so something like it's like 60 million plus, the 30 million and then we have to kind of make up our minds on how much kind of the core investment account goes up and that's kind of the profile for those costs?

I think the best way is to look to November when we're going to be able to provide more detail for this.

Okay, I won't ask you for the date of that. That would be the follow up but one more question for you just on this orders. Sorry, on the Plex deal. That's a pretty big growth number in 2023, is there something to do with the accounting around deferred revenues on that front because 30% seems to be a pretty dramatic acceleration as to where this company has been in the past? And then how much of their revenue is actually like, pure MES that's really kind of detached from their kind of ERP core? And thanks for the details again.

Yeah, just so a couple of things. I'll start and Nick may have some additional comments. First of all, the figure in 2023 is after the adjusted adjustments for deferred revenue, that impact the revenue in 2021, and 2022. So you don't see the deferred revenue adjustment in 2023. So we're not looking for 30% top line growth in 2023. But we will not be seeing the deferred revenue adjustments carrying into that year. And then in terms of the mix of Plex’s offering. So they offer a modular smart manufacturing platform, and it has ERP, it has MES, it has quality management, it has supply chain. And so particularly when you're talking to small and medium sized manufacturers, now they don't have big, centralized engineering resources to take a bunch of disparate software applications, and hope that they knit together. And so Plex offers an integrated suite of those modules. MES is a large portion of it, they have ERP and those other applications I mentioned, but they've done some good work over the last couple of years to modularize their offerings, so that a customer isn't forced to buy what they don't want. We will continue to support all these applications for the customers who've already bought them. And we're going to be helping Plex as they expand the introduction of the offering outside of the U.S., as well as to other industries, like food and beverage and pharmaceuticals, that they haven't had as much exposure to in the past.

Got it.

Hey Steve, just to make sure you're seeing it in the appendix, we've provided some additional detailed breaking out 2022, for Plex and that shows the underlying revenue and then the deferred revenue adjustment or actually a range on that that we're anticipating. That we provide that so you can put it in context of how to think about that growth that we're showing.

Right. That's super helpful. Okay, thanks a lot.

We have one last question from Noah Kaye from Oppenheimer. Your line is open.

Good morning, thanks for taking the questions. I guess just following up on that, would love to hear some of the responses that you've been getting to the Plex announcement, both from the customer base and internally. And I think there have been some questions about on-prem versus cloud migration for a lot of these manufacturing customers. You've got another arrow coming in the quiver but you also have your own broad portfolio of offerings, some of which are, of course, legacy, and prime, and some of which are moving to the cloud. So can you just talk a little about the responses and what you think customers are going to be trying to figure out and how you think you can help them over the coming quarters and years?

Sure, Noah, thanks for the question. Look, on the day that we announced it, I got a lot of unsolicited feedback from both employees and customers that I've developed relationships with over the years. And they were really excited, thrilled about what we were bringing in. They felt like it made great sense and it added what we can offer to compliment the core automation that they've been buying from us for years or in some cases, where they're trying to decide who their digital transformation partner is. With this, what we have, and this is something we've talked about for a long time, an approach that meets customers where they are on their journey. We're still going to sell a lot of on-premise software. And customers have made investments there and they want to see a migration path. And our MES orders have production center based MES continue to grow and those orders get larger, and we continue to see lots of runway for that software for customers who have decided they want an on-premise solution. But we have the opportunity for customers who have made a decision that they're going to start working with these applications with cloud native software. And they're ready to start working there, to build on Plex’s great customer base and introduce it to those customers who said, they're ready to look at that as well. And so having that approach, it all comes back to that theme of an open approach where we're not forcing one philosophy down a customer's throat. And we're telling them, we can meet them where they are on their journey. We'd like for that data to be coming from Rockwell core automation components but as we've talked about before, a lot of this software we fully expect is going to give us a way in into competitive strongholds where we're not currently the supplier of the core automation. And we're going to be providing the value at the software and then working on the automation pieces as well. So it's going to be a bold approach and we're thrilled about the new ways to win that Plex gives us.

Okay, thanks, Blake. Let me ask one more question. I don't think it was addressed too much on this call, but you mentioned both in the press release and I think it in the prepared remarks, some of the supply chain constraints, and I was wondering if we can get a little bit more color around where you see the supply chain pressures really still manifesting for Rockwell internally, and what that looks like over the coming couple of quarters? But then also, if you can just touch on what impact this is maybe still having on demand, I mean, I got to imagine for any ops or production planner, is this reramp is like drinking from a firehose every day. And so just wondering to what extent you're seeing your customers demand or kind of CAPEX plans somewhat being held back by just the challenges of the ramping?

Sure. So in the quarter, we saw a little bit of an impact on supply chain in automotive, MRO. It was a small amount and we did not see that affecting capital projects or other industries. And we still believe that while this is something that our customers, operations, and supply chain organizations are going to continue to be working on for the foreseeable future, it's not going to crimp the supply going forward. And in fact, it's probably lessening with respect to automotive from what we may have seen earlier in the year. The part of the supply chain constraints that we're thinking about are in terms of converting our own backlog. And I've mentioned specifically that our supply chain organization, I think, is doing a terrific job navigating this, but it's not going to be over in the next quarter. We're going to continue to be dealing with these supply chain constraints for the foreseeable future and we're looking at how do we deal with these on a short term basis, but also on a longer term basis. And I would say electronic components are a piece of that. Some of this is, just simply brought on by the extremely sharp recovery in demand that we've seen, and that we continue to see in orders. But then there's also the labor and we have to make sure that we're a great destination for labor, in our plants, in our supply chain organization, in our development teams and so on across the organization. Because as you know, it's a very hard, it's a very active labor market right now. Again, I think we're doing a great job with that. We have really good collaboration across all parts of the organization to make sure that we're pulling together so that when people are considering Rockwell as a destination, that we come out on top. So it's those two areas, I would say, but again, in terms of the demand, we're really not seeing a significant dampening of demand brought on by our customers supply chain constraints.

That's extremely helpful. Thanks so much.

Yeah. Thanks, Noah.

Thank you. I would now like to turn the call over back to Ms. Kourakos.

Thanks Rene. Well, thanks everyone for joining us today. I know it's a very, very busy day for earnings, but we appreciate your interest and support and we'll see you all, we will see you soon.

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