Ladies and gentlemen, thank you for holding, and welcome to Rockwell Automation's Quarterly Conference Call. I need to remind everyone that today's conference call is being recorded. Later on the call, we will open up the lines for questions. [Operator Instructions]. At this time, I would like to turn the call over to Aijana Zellner, Head of Investor Relations and Market Strategy. Ms. Zellner, please go ahead.

Thank you, Abby. Good morning, and thank you for joining us for Rockwell Automation's fourth quarter and full year 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 Web site. 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 Web site for replay for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our Web site 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.

Thanks, Aijana, and good morning, everyone. Thank you for joining us today. Let's turn to our fourth quarter results on Slide 3. We delivered strong double digit growth this quarter, with both sales and adjusted earnings growing by over 20% year-over-year. Our solid execution and improving supply chain helped us exceed our Q4 expectations, resulting in double digit sales growth across all regions and business segments. With lead times significantly improving across our product lines, we were able to deliver products to customers faster than expected this quarter, contributing to over $2.5 billion in total sales. This record shipment reflects Rockwell's continued capacity investments, and demonstrates our organization's ability to scale for sustained growth. Total sales were up 20.5% versus prior year. Organic sales grew almost 18% year-over-year. Currency translation and acquisitions each contributed about a 1.5 of growth in the quarter. Consistent with prior quarters, the split of our sales by business segment, region and industry was largely driven by the composition of our backlog. In our intelligent devices business segment, organic sales increased 18% versus prior year with strong growth across all regions. Within this segment, Independent Cart Technology had another strong quarter, finishing this fiscal year with over 50% growth in sales. This offering continues to be an integral part of our advanced material handling and production logistics offering. We are excited about our latest addition to this differentiated portfolio with our acquisition of Clearpath Robotics, and I will cover some strategic highlights of this deal later on the call. Software and control organic sales grew 23% year-over-year. We continue to innovate in both the software and hardware portions of our architecture, with significant new offerings such as high availability, process IO, FactoryTalk optics, and FactoryTalk data mosaics. We are pleased with how our organic and inorganic…

Thank you, Blake, and good morning, everyone. I'll start on Slide 9, fourth quarter key financial information. Fourth quarter reported sales were up 20.5% over last year. Q4 organic sales were up 17.7% and acquisitions contributed 140 basis points to growth. Currency translation increased sales by 140 basis points. About 6 points of our organic growth came from price. Segment operating margin was 22.3% compared to 23.3% a year ago. The year-over-year decrease reflects the impact of higher sales volume and higher price being more than offset by higher incentive compensation, investment spend and restructuring actions. Adjusted EPS of $3.64 was above our expectations, primarily due to higher organic sales, partially offset by higher investment spend and incentive compensation. We also took a restructuring charge in the quarter of just over $20 million, which is expected to yield more than $40 million of benefits on an annualized basis. All-in, adjusted EPS grew 20% versus prior year. I'll cover our year-over-year adjusted EPS bridge on a later slide. The adjusted effective tax rate for the fourth quarter was 17%, slightly below the prior year rate. Free cash flow of $776 million was $417 million higher than prior year. Our strong free cash flow generation in the quarter was driven by higher income and reductions in working capital. As you know, due to supply chain volatility, we have seen working capital balances grow over the last couple of years. And we are pleased to see our action starting to bring working capital down. One additional item not shown on the slide, we repurchased approximately 200,000 shares in the quarter at a cost of $55 million. On September 30, $900 million remained available under our repurchase authorization. Slide 10 provides the sales and margin performance overview of our three operating segments. Blake discussed…

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

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

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

Hi. Good morning, guys, and Aijana.

Good morning, Scott.

Good morning, Scott.

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

Sure. So just for context, China's about 6% of our worldwide sales, so big manufacturing economy but relatively low exposure for Rockwell there. And we saw very strong sales in China for the year. But in China, the orders were lower. And that is the source of the cancellations that we did see. While our worldwide cancellations are roughly in line with what we've been seeing, China is the highest component of that. And I would say it's broad based. It's not one particular industry. We still see wins and investments in areas like EV, but the distributors that most of our products go to market through in China still have relatively high inventories and they're working that off.

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

Sure, Scott. So we launched the entity with at the time Schlumberger a few months before the pandemic, so that was in 2019. And the lower base that resulted from COVID shutdowns and the subsequent supply chain shortages along with a refinement of some of the original mix assumptions caused us to take the impairment. We've changed out the management team at Sensia. And we've seen the last couple of quarters of encouraging improvement. We have great orders, good backlog, and improving profitability. And so we expect over the next few years that Sensia will actually be quite a large contributor to the improved profitability in Lifecycle Services.

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

Thanks, Scott.

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

Good morning, everyone.

Hi, Andy.

Hi, Andy.

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

Sure. Thanks, Andy. So first of all, in terms of the orders development, we saw orders ramp up throughout Q4. And then we saw October orders up sequentially from that, and supportive of our view that Q4 was the trough. We expect orders to continue recovering throughout Q1 and building in Q2. So that's the view in terms of the orders development. And that's based on what we're seeing what I just described, as well as direct discussions with our end users and machine builders that have the largest contribution to our business. So we went and did a detailed analysis of their CapEx expectations, their OpEx expectations, what projects that we have the opportunities with. And that coupled with our own personal views and with our distributor feedback are all supportive of this shape of the order recovery curve. In terms of the mega projects, I don't know that that's going to contribute so much to the lumpiness. I think it's going to be a positive, additional amount of business that builds throughout fiscal year '24 and beyond. The majority of the projects that we're tracking, and we're tracking literally hundreds of projects that are incented by some of the recent stimulus, the majority of those projects have not made a decision or have not released the automation equipment. So when you look at those projects, certain equipment, which would probably include switchgear, things like that, would be led earlier in the project cycle with automation to follow after that. So we think that we're still in the early innings with respect to those mega projects. And our tracking processes and our early wins are very encouraging.

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

Yes. In terms of expectations by segment for fiscal year '24, we do expect that Lifecycle Services will be the most significant year-on-year margin expander. And to answer your question, we are highly competent in that based on the actions that we have taken in '23 and based on the outlook we have for that business in '24. On the opposite side, software and control, we saw outstanding growth in fiscal year '23, as we had strong execution on our backlog. And we expect that business to be the one with the lowest organic growth and then that will translate into lower year-on-year margin in our software and control business, primarily driven by that lower growth. And it happens to also be the segment where we're putting the majority of our incremental investments. From an Intelligent Devices perspective, that's one where we expect the margins year-on-year to be flat to up slightly. And that is with the impact of Clearpath in there. Clearpath is for this segment alone about 100 basis point headwind. And that will be impacting throughout the year. But we'll definitely be seeing that impact in Q1 in Intelligent Devices. And the actions that we've been doing in Intelligent Devices around our productivity and our investments in products, that's what's leading us to expect margins to be flat to up slightly.

I appreciate the color, guys.

Thanks, Andy.

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

Thank you. Good morning, all.

Hi, Jeff.

Good morning. I just want to come back to kind of orders and backlog. I'm just kind of confused by the comment that orders ramped during Q4, right? The ending backlog is 4.1 billion. You were guiding 4.5 billion to 5 billion. I know you pulled forward 100 million in sales, right? But maybe just bridge us on what happened other than that sales pull forward. How much of it was cancellations versus just kind of regular way order normalization, if there's a way to do that?

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

Yes. And, Jeff, just to go a little deeper in that, what we're seeing -- one of the dynamics we're seeing in Q4 and we expect to continue through Q1 as well is our channel partners, our distributors working to right size their inventory as we are seeing -- as they are seeing good reductions in our lead times. They're doing the right actions of bringing their inventory levels down. And that's resulting in lower orders being placed on us. And we expect that to continue through Q1. And we think Q2, as we -- and as we discuss with all of our distributors, Q2 is where that will start to change where the inventory levels at our distributors will be reaching the normal level that they expect. So partly I say that just to say, we don't really see this level of orders we're seeing now as normalized. We're seeing them the correct reaction to the actions they're taking to bring their inventory levels down.

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

And then maybe just on the guide. If I heard right, I think you said you're expecting positive organic growth in Q1. Obviously, you have a negative in your guide range. I would have thought if that negative were to happen, it would actually happen in Q1 with this order normalization. So maybe just kind of talk about your thought process of what gets you to the negative organic growth for the year versus being positive in Q1?

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

And, Jeff, to follow up on the one question about why Q1, why we think that will be low single digit growth? Yes. If we were only looking at the orders, your question would -- that would make sense why not negative. However, we also continue to have a 4.1 billion backlog that we're entering the year with. And so what we're seeing in our Q1 revenue is a combination of continued sales of some of that backlog coupled with the lower orders we're expecting in Q1.

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

Great. Thank you for the color.

Thanks, Jeff.

And we will take our next question from Andrew Obin with Bank of America. Your line is open.

Yes. Good morning.

Good morning.

Good morning, Andrew.

Maybe just to unpack this minus 2% growth rate limit further, historically, there's been a strong connection between CapEx and your sort of view of the growth rate. I'm sure you'll tell us a lot more about it at the Analyst Day in your new framework. I fully appreciate it. But what kind of macro do we need to see for minus 2% to manifest itself? Does this imply push outs of EV batteries? Could you just describe the macro environment behind the minus 2% [indiscernible] forecast? Thank you.

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

Got you. And just to follow up, ARR of 16%, which is pretty decent for an industrial software company, nice exit rate. So what kind of software growth is embedded? What kind of ARR assumptions are in your '24 forecast? Thank you.

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

Thanks so much.

Thanks, Andrew.

We will take our next question from Julian Mitchell with Barclays. Your line is open.

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

Julian, thanks for asking that question. Q1 organic growth year-on-year we think will be low single digits. On the margin question, Q1 of last year, we had a margin of 20%. We expect that to be lower year-on-year in fiscal year '24. And there's three things that are going to be mainly contributing to it being lower. One is our Clearpath acquisition and the impact that will have. The second is mix that we see a less favorable mix in the first quarter of the products that we will be selling. And we think we'll be having lower utilization in our factories as we're adjusting our production to these lower orders. And we think those three things in combination are going to be resulting in lower margin year-on-year.

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

Let me start with the Americas discussion and then Nick can follow up with a little bit on the book to bill. So the Americas actually outpaced the rest of the world with respect to orders. And we expect that to continue in fiscal year '24. We've talked about for a few quarters now based on shipping from backlog, in some case fairly aged backlog, that our distribution of growth by region and by industry segment is more a factor of the backlog than the current underlying demand. And you're correct that we do expect the highest growth region to be the Americas going forward. With respect to the impact of stimulus, we're still in the early innings there. The business that we're winning there is really just ramping up. We saw some good development in the second half of last year. But by far, there's more business to come based on the projects that we're tracking.

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

Great. Thank you.

Thanks, Julian.

And we will take our next question from Nigel Coe with Wolfe Research. Your line is open.

Thanks. Good morning, everyone.

Hi, Nigel.

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

Yes, we see the backlog stabilizing, I think I said this on the last quarter earnings call as well, that at 30% to 35% of annualized revenue is what we think is the normalized backlog level we will be at given the mix of our businesses that we have.

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

Correct.

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

Yes, I'll try to do those in reverse order. In terms of the things drawing down the margin in the fourth quarter, the two main things were our restructuring actions that had an outsized impact on the Lifecycle Services as well as the increased bonus expense that we were facing. Now as we flipped into '24, the bonus expense will be a tailwind to all businesses and Lifecycle Services margin will benefit from that. But also from the actions that we took in 2023, we think those will also be a propellant of Lifecycle Services margin expansion into '24. On the currency side, given our mix of businesses and what we're projecting, many of the currencies were just using what the current spot rate is going forward. In some currencies, such as the euro, what we will use is a group of banks and what they're expecting for a particular currency in the coming year. And so roughly 1.5% year-on-year benefit is coming from our expectations for currencies in fiscal year '24. And then in terms of the orders, we haven't been giving it by quarter. We did say orders were 8.2 billion for the full year. At the midpoint of the year, we had said they were 4.8 billion. And therefore, we're at 3.4 billion in the second half of the year. The third quarter was above that average, the average of 1.7 was above that. Fourth quarter was slightly below that level. So we saw from Q3 to Q4, it goes down further. But we haven't been giving it by quarter what our orders are.

Okay. Thanks, Nick, helpful.

We will take our next question from Steve Tusa with JPMorgan. Your line is open.

Hi. Good morning.

Good morning.

Hi, Steve.

Just on the bridge, can you just maybe -- the incentive comp is a big tailwind, it make sense. It was a headwind this year. Can you just maybe help us with how that breaks out in the first and second quarter here? What type of tailwind you expect there?

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

Yes.

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

Wow, great detail. Thanks for that. On the orders, how much of the headwind were actual cancellations? I'm not sure I caught that earlier. What the actual cancellation number was?

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

Okay. One last one just on the bridge, the $0.25 of acquisition headwind is pretty big for the Clearpath business, given it's a relatively small revenue number. That's all kind of incremental investments you are making, or that's how much money the business is losing or what's driving that? So to heed, the $0.25 is a pretty big number.

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

Great. Thanks for the color, guys. Really appreciate the details.

Abby, we will take one more question.

Thank you. Our final question will come from Noah Kaye with Oppenheimer. Your line is open.

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

Yes. We are assuming that price growth will be slightly over 1% year-over-year. And in terms of input costs, we're expecting that to be very neutral year-over-year, causing the net price cost to be a little over 100 basis points accreted to margin.

Perfect. Thanks, Nick.

And ladies and gentlemen, that concludes our question-and-answer session today. I will now turn the call back to Ms. Aijana Zellner for closing remarks.

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

Ladies and gentlemen, at this time, you may disconnect. Thank you for your participation.