Rockwell Automation, Inc. (ROK) Q3 2026 Earnings Report, Transcript and Summary

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.

Thank you, Julianne. Good morning, and thank you for joining us for Rockwell Automation's Third Quarter Fiscal 2026 Earnings Release Conference Call. With me today is Blake Moret, our Chairman and CEO; and Christian Rothe, our CFO. Our results were released earlier this morning, and the press release and charts are available on our website. These materials as well as our remarks today will reference non-GAAP measures. Reconciliations of these non-GAAP measures are included in both the press release and charts. A replay of today's webcast and a transcript of our prepared remarks will be available on our website at the conclusion of today's call. Before we begin, please note that our comments today include forward-looking statements regarding the expected future results of our company. Our actual results may differ materially due to a wide range of risks and uncertainties described in our earnings release and SEC filings. So with that, I'll hand it over to Blake.

Thanks, Aijana, and good morning, everyone. Before we turn to our third quarter results on Slide 3, I'll make a couple of initial comments. We delivered a strong quarter with double-digit year-over-year growth in sales and earnings exceeding our expectations. This sustained momentum underscores Rockwell's strong position in North America and growing penetration in new end markets, an accelerated pace of new product introduction, our unmatched partner ecosystem and the team's disciplined execution. We continue to see strong demand across Semiconductor, Data Center, E-commerce & Warehouse Automation. While we are not yet seeing a pickup in CapEx across Food & Beverage and parts of process, we are seeing early signs of renewed project activity in Automotive and Life Sciences. Customers are increasingly turning to Rockwell's differentiated portfolio of hardware, software and services to adapt to changing market dynamics from GLP-1 related investments and evolving food and beverage demand to AI-driven data center growth and new opportunities across energy storage, defense and advanced manufacturing. I'm proud of how our team continues to execute amid geopolitical volatility, trade uncertainty and persistent inflation. The Rockwell Operating Model helps us drive operational excellence, serve customers and invest for the future. Those principles are on full display at our Singapore manufacturing facility, which was recently named the World Economic Forum Lighthouse for its leadership in digital and AI-enabled manufacturing. Turning to our third quarter results on Slide 3. Q3 sales came in above our expectations. Reported sales were up 8% and organic sales were up 10% with the impact of the Sensia dissolution decreasing sales by 3% and currency contributing about 1% of growth. Products continue to outperform our longer-cycle solutions business as smaller modernization projects across most industries drove the majority of our growth in the quarter. The verticals seeing the strongest capital investment, including Semiconductor, Data Center and E-commerce & Warehouse tend to be more heavily weighted toward our product and software offerings. Our Intelligent Devices organic sales grew 10% year-over-year with broad-based growth across all product lines. New offerings such as PointMax I/O, additional PowerFlex drives and FLEXLINE motor control centers are seeing strong adoption, particularly in E-commerce & Warehouse Automation and process industries. We also delivered double-digit growth in our Production Logistics business with strategic wins across Food & Beverage, Semiconductor and Life Sciences. Software & Control organic sales were up 18% versus prior year, driven by another quarter of strong double-digit growth in Logix. Lifecycle Services organic sales were down 2% versus prior year, generally in line with expectations. Book-to-bill in this segment was 0.97. While customer engagement remains healthy, growth in this segment continues to be constrained by the lack of capital spending recovery in Food & Beverage and certain process industries where many of our Lifecycle Services offerings are deployed. Organic annual recurring revenue grew 6% in the quarter, below our expectations. High single-digit software growth was partially offset by the slower growth in recurring Lifecycle Services. While services growth was softer than expected, we continue to add important ARR wins across our customer base. A great example is Unilever, which expanded its cybersecurity program to additional sites. The engagement combines our threat detection and secure remote access software with managed cybersecurity services to provide continuous monitoring, secure connectivity and protection of critical manufacturing operations. Enterprise operating margin of 22.3% and adjusted EPS of $3.49 were up double digits versus prior year, led by strong volume and favorable mix. Moving to Slide 4 for Q3 industry highlights. Our discrete sales grew high teens year-over-year, led by strong double-digit growth in Semiconductor, Data Center and E-com & Warehouse. Within discrete, Automotive sales were up low double digits versus prior year, marking another quarter of better-than-expected performance. Customers continue to prioritize investments in productivity, quality and asset utilization. While tariffs and geopolitical uncertainty continue to delay large greenfield projects, modernization spending remains strong. A great example is Convergix, a global system integrator who chose Rockwell's Emulate3D digital twin software to model a complex conveyance system. The solution is helping reduce project risk, accelerate commissioning and bring production online faster. Another notable win in Q3 was with a large automotive brand owner, where Rockwell's end-to-end automation portfolio was selected to improve operational efficiency and accelerate the launch of future vehicle programs across multiple global plants. E-commerce & Warehouse Automation sales were up 30% year-over-year with continued strong performance across regions and customer segments. Semiconductor delivered another strong quarter, driven by increased activity from several leading equipment manufacturers and chip makers, including continued investment tied to AI infrastructure. Data center remained a strong growth market in the quarter. Customers continue to invest in the power, cooling, automation and control systems required to support increasingly complex and energy-intensive facilities. This creates further opportunities across our hardware, software and services portfolio. Turning to our hybrid industries. Sales in this segment grew mid-single digits with good growth across all major verticals. Food & Beverage sales were up mid-single digits, led by growth in North America. While we have yet to see an inflection in large capital projects here, customers continue to invest in modernization and digital transformation initiatives across protein, dairy, fiber and nonalcoholic beverage applications. Sales in our Life Sciences vertical were up 10% in Q3 with broad-based growth across all regions and continued improvement at both machine builders and end users. In addition to favorable end market demand, we continue to expand our position through competitive wins. An important win in the quarter was with a leading pharmaceutical and biotech contract development and manufacturing organization who chose Rockwell's integrated process control and MES platform to standardize drug substance manufacturing across its operations. Moving to process. Our sales here were up high single digits, led by growth in Energy, Metals and Chemicals. Energy sales were up high single digits in the quarter with customer spending focused on brownfield expansions, asset modernization and production optimization. We also continue to see healthy activity across LNG, midstream, power infrastructure and offshore markets, supported by rising energy demand and the ongoing build-out of power capacity for data center and electrification. Mining sales were down mid-single digits, reflecting measured capital deployment across the industry and some project timing delays, specifically in Latin America. With that said, customers continue to invest in productivity, autonomy and digital transformation as demand for critical minerals continues to grow. Moving to Slide 5 for our Q3 organic regional sales. Similar to last quarter, we saw good year-over-year growth across most of our regions. North America was our strongest region in the quarter with 12% year-over-year growth, and we continue to expect it to be our fastest-growing region for the full year fiscal 2026. Let's now turn to Slide 6 to review our fiscal 2026 outlook. With 3 quarters behind us, customer investment is broadening across more of our end markets. While we have yet to see a broad-based recovery in large capital projects, we are confident Rockwell is best positioned to capitalize as spending accelerates. In the meantime, we'll continue to operate with discipline and prudence in what remains a very dynamic environment. We now expect both our reported and organic sales growth to be in the 7.5% to 9.5% range for the year. At the midpoint, reported sales growth includes approximately 150 basis points of favorable currency translation, offset by the impact of the Sensia dissolution. Our full year sales midpoint of 8.5% assumes modest sequential growth in Q4 driven by the typical seasonal uptick in our longer-cycle businesses within Lifecycle Services and Intelligent Devices. We expect organic annual recurring revenue to grow mid-single digits. We continue to expect our enterprise operating margin to be 21.5%, up 260 basis points from last year. And we now expect our adjusted EPS to be $13.15 at the midpoint, representing about 25% growth versus fiscal 2025. Finally, we continue to expect free cash flow conversion of 100% in fiscal year '26. I'll now turn it over to Christian for more detail on our Q3 and financial outlook for fiscal '26. Christian?

Thank you, Blake, and good morning, everyone. Let's go to Slide 7, third quarter key financial information. As Blake mentioned, our third quarter organic sales were up 10% versus prior year. Price contributed approximately 1% to growth. Our enterprise operating margin expanded 280 basis points year-over-year, driven by higher sales volume and favorable mix, partially offset by negative price/cost. As expected, the dissolution of Sensia had a positive impact of about 40 basis points on enterprise operating margin. Gross margins expanded 70 basis points year-over-year to 49.5%, driven by higher volume, favorable mix and a margin benefit from the Sensia dissolution. The Sensia dissolution was effective on April 1 of this year and as expected, was completed smoothly and on schedule. Excluding the year-over-year impact of the divested businesses in Q3, gross margins expanded slightly year-over-year. SG&A was up less than 1%, giving us solid P&L leverage on our baseline spending and engineering and development increased 5% as sales growth was faster than our engineering and development spend. However, E&D still represented about 8% of sales in the third quarter. We continue to expect E&D to be about 8% of sales for the full year. Our adjusted effective tax rate in the quarter was 19.2%, slightly lower than our expectations. We continue to expect an adjusted ETR of 19.5% for the full year. The broadening strength in our business that Blake highlighted drove another quarter of outperformance with Q3 adjusted EPS of $3.49, up more than 20% year-over-year. Free cash flow in Q3 of $654 million was above our expectations. It was $165 million higher than the prior year, primarily due to higher pretax income driven by our strong Q3 results and good working capital management. Now on to Slide 8 for the sales and margin performance of our 3 operating segments. Intelligent Devices margin of 20% increased by 120 basis points year-over-year, lower than we expected. The higher year-over-year sales, favorable currency and mix were partially offset by inflation. Year-over-year segment incrementals landed at 30%. Software & Control margin of 34.8% was up 320 basis points versus prior year and was higher than our expectations, driven by strong sales volume, partially offset by inflation. This segment saw year-over-year incrementals of about 50%. Lifecycle Services margin of 15.1% was up 180 basis points year-over-year, in line with expectations. Lifecycle Services had another quarter of good project execution and productivity and segment margin benefited from the dissolution of Sensia. These were partially offset by lower sales volume. Total Rockwell incremental margin was in the high 50s year-over-year in Q3 on an as-reported basis and over 40% on an organic basis. This is our fourth consecutive quarter of incrementals above 40%. Let's move to the next slide, 9, for the adjusted EPS walk from Q3 fiscal 2025 to Q3 fiscal 2026. Year-over-year, core performance had an impact of $0.65 in Q3. Our core performance was driven by volume, mix and productivity, partially offset by price/cost. Core price/cost was unfavorable in the quarter, reflecting rising costs and the timing of price increases. We implemented a price increase late in Q3 that will be realized in Q4. The team still delivered strong margins and healthy incremental conversion in the quarter, demonstrating the strength of our operating model. We continue to expect positive price/cost both for the full year and in Q4. Tax was a $0.20 headwind, largely due to BEPS Pillar Two. All other items had a $0.09 positive impact on our adjusted EPS. Moving on to the next slide, 10, to discuss our guidance for the full year. We are increasing both our reported and organic revenue guidance to a range of 7.5% to 9.5% or 8.5% at the midpoint. This is up 150 basis points from our prior guidance. This increase reflects the outperformance we saw in the quarter and higher growth expectations for Q4. Our third quarter results and full year guide do not include any impact from expected IEEPA refunds or claims resulting from the Supreme Court decision. Turning to Slide 11. We are increasing our adjusted EPS guidance range to $13 to $13.30. The new midpoint of $13.15 per share is up $0.35 from the midpoint of our prior guide. For the full year, we still expect about 250 basis points of price realization with about 100 basis points from tariff-related pricing and about 150 basis points from underlying price. We remain on track for tariffs to be EPS neutral in fiscal 2026 with pricing offsetting the associated costs. This updated guide continues to reflect our expectations for full year incrementals of greater than 50% on an as-reported basis and high 40s on an organic basis. These strong incrementals are driving 260 basis points of expansion in enterprise operating margin year-over-year. Specific to the fourth quarter, we expect total company reported sales to be up low single digits sequentially with approximately flat enterprise operating margin compared to Q3. This is due to higher inflation and an unfavorable mix with configure-to-order and solutions sales hitting their normal seasonal peak. Intelligent Devices segment margin should be up slightly from the third quarter on modestly higher sequential volume. We expect segment margin in Software & Control to be lower sequentially on flat sales as inflation on items like memory hit here the hardest. For Lifecycle Services, we expect segment margin to be flat from the third quarter on higher seasonal sequential revenue. For the full year, we expect Intelligent Devices reported revenue to grow in the low double digits with segment operating margin of around 20%. For Software & Control, reported revenue should grow in the high teens with segment margin in the low 30s, up several hundred basis points year-over-year. For Lifecycle Services, we expect reported revenue to decline about $150 million year-over-year, driven by the Sensia dissolution and some of the ongoing longer-cycle headwinds Blake discussed. We still expect Lifecycle segment operating margin to be flat to slightly up year-over-year. For your models, CapEx for fiscal 2026 will come in at about 3% of sales. A few additional comments on fiscal 2026 guidance for your models. We expect Corporate and other expense to be around $115 million. Net interest expense for fiscal 2026 is targeted at about $120 million. During the quarter, we repurchased about 300,000 shares at a cost of about $150 million. We expect approximately $850 million in repurchases for the year. And we're now assuming average diluted shares outstanding of about 112.2 million shares. To summarize, while inflation remains a headwind, the Rockwell team has done a good job of managing through it by driving top line growth, securing component availability and mitigating cost pressure through pricing, productivity and disciplined spending. Combined with the core principles of the Rockwell operating model, these actions are driving double-digit year-over-year earnings growth and enterprise operating margin expansion of several hundred basis points year-over-year. Really proud of this team. With that, I'll turn it back to Blake for some closing remarks before we start Q&A. Blake?

Thanks, Christian. I'm pleased with our progress through the year with the fiscal year '26 top line guide at the higher end of our midterm growth framework and enterprise operating margin developing well. Customers are excited about the accelerated pace of new product launches, which is having a meaningful impact on our results. An Automation Fair is coming to Boston in November, where Rockwell and our partners will showcase even more offerings and innovation. Registration opens tomorrow. I continue to be proud of how our team is driving execution and customer service and how they're maximizing the impact of our investments on longer-term profitability and growth. Aijana will now begin the Q&A session.

Thanks, Blake. [Operator Instructions] With that as a quick follow. Julianne, let's take our first question.

[Operator Instructions] Our first question comes from Scott Davis from Melius Research.

Numbers look pretty solid overall. I got a little confused on the price comments. Maybe, Christian, you could help out a little bit. It seems like you guys have been running at about 1% of price positive. Now you're talking about getting, I think, another 1% and then another 1.5% on top of that for tariffs. Maybe I didn't hear that right. Just walk us through that, just a, to check my math, and b, is this an 80/20 initiative that you're able to drive some incremental price? Are the tariff price increases actually separate and they come off as soon as tariffs come up? Kind of how to mechanically do you guys manage this?

Yes, sure, Scott. I appreciate the question. So we typically give a view on price for the full year at the outset of our guide for the beginning of the year, and then we kind of give updates as we go through. So we've always been calling out about 250 bps -- 200 to 250 bps of price for the full year 2026. 100 bps of that is coming from tariff-based price, 150 bps is coming from underlying price. In the third quarter, we started to lap some of the comps on tariff-based price. So the tariff-based price side was 1% and underlying price was close to 0. Now a lot of that has more to do with the timing of when our price increases have gone through. So we did an inflationary-based price change that happened in Q3. We're going to see that come through in the fourth quarter. That all is consistent with what we're expecting for the full year, that 250 basis points of total price. That tariff-based price, just to make sure we're on the same page around that. I know we talked about this message before, but tariff-based pricing is really there to create EPS neutrality around tariff-based cost. And so that's the -- it's not really all that incremental as far as the conversion goes. So I just wanted to note that for you.

Yes. No, that clears it up. And just quickly on Plex. I haven't heard you mention Plex in a while. Where are we on the deal model on that asset? And how are you guys feeling about it?

Yes, feeling good about Plex. Plex was part of the software ARR that was at the higher end, high single digits. Plex continues to add new logos, automotive tier suppliers, consumer, which -- at the very beginning, that was one of the fundamental hypothesis is that we could use our existing market access to help Plex expand into consumer-packaged goods, and that's exactly what we've done. Very profitable, new functionality, the embedding of agentic AI throughout in various of the modules work, and this is especially exciting to me personally, work to integrate Plex and the traditional MES with fleet management from our mobility, from mobile robots. And so you hear a lot going on about orchestration, and we've got a great head start by having a really fantastic cloud-native MES system with fleet management. So again, Plex is part of the software ARR that was up high single digits in the quarter.

Our next question comes from Andrew Obin from Bank of America.

Just maybe a broader, bigger picture question on inflation and pricing. As you look over the next 6 to 12 months, what's going to get better, right? Because labor costs probably not going down. I think the semiconductor supply chain is not going to get better. I think raw materials remain in flux. And how do you adapt to this environment? So maybe your thoughts on inflation and what sort of structural countermeasures can you do because it seems like you guys are going to be in this inflationary growth environment for a while.

Yes. Andrew, it's a good question. And for sure, inflation is a dynamic environment right now, started with memory earlier this fiscal year for us. And it's continuing to expand. Data centers definitely and data center demand is impacting a number of things, memory being the biggest one, but there's a number of other aspects that are coming with it. So first of all, from a -- #1 issue is let's make sure we can ship product. So that means let's make sure we have the components and we have good availability. The supply chain team has been on this all year long. So they have done a really good job of putting us in a good spot to be able to continue to produce our product. And so that is not impacted. Now that being said, the cost side is -- again, the inflation continues to be an item that is a growing headwind for us. At the first quarter call, I talked about it being a single-digit millions kind of headwind. Second quarter call, it was a double-digit million headwind. This call, I'll tell you that it's still double-digit million headwind for the second half here that we're experiencing, and it's a higher number than what we had last quarter. So it is, in fact, increasing. Now all that being said, we are in a position that we can go and get price to offset that. We have a lot of productivity actions that continue to occur inside the organization. And there's a lot of other aspects that are -- that can continue to work in our favor. Probably the biggest one is that we are in a growing volume environment, which does provide us the opportunity to go back and recapture some of the areas that we think we have savings on direct material, negotiation with suppliers, not necessarily on the ones that are impacted by inflation so much, but we do have an opportunity to continue to work really hard on the direct material cost. So the team is doing a good job with that. As we turn the page and we start thinking about next year, it's tough to know exactly what we're going to expect with regard to inflation because, again, it's not one of those that we're expecting to stabilize anytime soon. But we will continue to react to it, try to get ahead of it with regard to the supply chain and making sure we have the product in place, and we'll take pricing actions as appropriate.

So Christian, maybe just a few additional comments to that. Andrew, you asked structurally about what are we doing. Fortunately, we're actually able to take advantage of some of the structural changes that we incorporated during the supply chain shortages a few years back. A lot of that has to do with really good coordination with our channel partners because pricing for products largely goes through distribution. So moving to a fixed discount methodology for faster realization of price, more frequent price changes, we're in an environment like this, internally making progress on alternate sources of some material so that we can introduce some competition into the mix, those things are helping us well in the current environment.

And just maybe a question on Lifecycle Services. I would have thought that as you're starting to see a pickup in organic growth, the installation business would pick up. Is it really driven mostly by these large CapEx projects that are still on the come? What's missing on the services ARR?

Sure. Yes. I think what we're seeing as we look at delays in the projects, we went deeper on that to look at the specific reasons given by customers. Overall, it's a cautious approach to deploying capital. It's a desire to delay things that are important, but perhaps not urgent in their eyes. We're seeing high levels of decision authority for greenlighting some of these projects. In certain cases, funding constraints, that was a specific issue with capital projects in LatAm that we saw. So there's nothing earth-shattering. Terms and conditions. I've mentioned that before, as people in such a volatile environment with respect to tariffs and inflation, they want to make sure that the cost side of their business case is solid. And in some cases, they're looking to take a card, so to speak, to be able to try to find a little more certainty in these situations. So it's a number of things and some of the factors are similar for the CapEx projects as they are for the lower ARR in services. Some of the root cause goes back to which industries are deploying capital and which are staying put. Food & Beverage is one that we've given as an example, which is a traditionally strong contributor to both Lifecycle Services CapEx projects as well as ARR with programs like cybersecurity.

Our next question comes from Andy Kaplowitz from Citigroup.

Christian, last quarter, you mentioned that book-to-bill was a bit over your normal range. Was that still the case in Q3? And would you say that you have more backlog coverage than usual at this point going into Q4? And then it seems like you're seeing some more unlock of larger CapEx projects now in larger markets such as Auto and Life Sciences. Why those markets? Maybe you could elaborate on the improvement you're seeing in those markets.

Yes. So on the book-to-bill question, we called it out last quarter because it was just slightly above our normal corridor. And so that number we called out was, for the first half, we were expecting it to be back inside -- in fact, for the first half, it was inside the corridor, and that we were expecting for the remainder of the year was going to be inside the corridor. Q3 was inside of that corridor. So generally, we feel just fine about the development of our orders. It's consistent with what we're seeing on the sales side as well. So all in all, the book-to-bill is in good shape.

Yes. And Andy, regarding Automotive and Life Sciences, I am proud and happy to report that we saw a strengthening -- a renewed strengthening in those. Obviously, those are not related to data center spend, which is encouraging to see the broad-based nature of it. Automotive, we are seeing some green shoots of new projects. We've talked before about automobile manufacturers previously taking a pause as they shifted back from the surge in electric vehicle spending to recognizing that customers are still buying hybrid as well as internal combustion engine propelled vehicles. And we've seen some good projects. I mentioned one from a large OEM. And we've seen some really important competitive wins in terms of standardizations on Rockwell's architecture that's pretty exciting, and these are around the world as well. In Life Sciences, we've talked about that as a multiyear trend. Obviously, there are some specific marquee programs such as rollout of GLP-1 drugs, oral solid dose variants of GLP-1 is an important innovation that's driving a lot of need for additional automation. Our MES had some important competitive wins in drug substance. So we've been used -- for a long time in other parts of Life Sciences manufacturing, we're seeing increasing competitive wins in drug substance, which is pretty exciting. So we like those wins, and we think those are sustainable growth vectors. I'll mention as well, we talked about 10% organic growth in the quarter. If you took everything out that was related to data center, our organic growth would still have been 8% in the quarter, and that's a good number.

Very helpful, Blake. And then maybe just on sort of the overall Data Center ecosystem business. Maybe update us on the sort of trend to trade the sort of commercial controllers for industrial PLCs, like how much that's helping Logix? And overall, like you've been very focused on the penetration into e-commerce. So maybe talk to us about -- obviously, you raised the estimates for the end markets, but how much of this is Rockwell penetrating versus the end markets continue to be strong?

Yes. I think you can look at additional share growth in the data center applications on top of a continually strong growing fundamental in terms of overall data center opportunities. To recap, 3 main areas of data center participation for Rockwell. There's the power distribution through our modular CUBIC design. This was the acquisition of the Danish company we made a few years ago. There is our participation in -- with the chiller manufacturers in terms of power control. So think motor control centers, big drives, medium-voltage drives with the chiller OEMs. And then there's the work that Logix is being increasingly used for primarily in the central utility plant. And so this is control of energy monitoring, it's emergency power, backup generator controls. Logix has inherent redundancy and safety characteristics that you can't get in the traditional distributed digital controller DDC units. And so we're seeing increasing standardization on those units by the hyperscalers as well as the contractors as they're trying to put together modular, very repeatable designs that increase the speed to capacity.

Our next question comes from Chris Snyder from Morgan Stanley.

So I was following up on some of the commentary earlier that larger scale capital projects remain sluggish. So even despite that, the company has been able to generate very strong growth this year, almost 10% and healthy orders with the strength obviously being driven by the short-cycle side, whether it's investments in efficiency or brownfield. So I guess the question is, when you look at how the orders have developed or customer conversations into '27, how do you see these 2 respective sides of the business tracking? Do you think the short cycle can sustain the momentum we're seeing? Do you think there's reasons to believe that the large project business can show positive rate of change? Any color on that would be helpful.

Sure. Let me give some just general comments about trends as we look at fiscal year '27. Look, tailwinds, broadening of the growing verticals that we've been talking about, we don't see a reason that those are going to slow, which includes many that you're talking about. But it's not just short cycle. Energy was up high single digits. So there is contribution from process, which is to say that I don't think you can label that we're at a specific point in the traditional cycle that traditionally, you'd see short-cycle packaging, discrete followed a couple of quarters by longer-cycle process. I think the continued reverberations from COVID and supply chain shortages still have some impact. Data center makes its own weather, so to speak, which has an impact with the requirements for power to support data center. So I think it's hard to pin a specific point in the cycle on where we are, but we're very happy to see the contribution across different verticals in discrete, hybrid and process. We expect data center to keep on keeping on. We are happy with the renewed investments in Automotive and Life Sciences. Home & Personal care within consumer packaged goods was actually good in the quarter. Labor costs and shortages are going to continue to drive customer investment in automation as America continues to be interested in bringing more manufacturing on board. That only happens in a durable way with the thoughtful combination of trained and engaged workforce with the kind of technology that we offer. New product introductions to continue to take share. We talked about that before. Productivity is going to be as important as ever. And you can bet that as we're going into the year, it's going to be a continued aggressive productivity that's driven a lot of our recent success, and we're going to keep doing that. Pricing actions, Christian talked a little bit about that, and we continue to look at ways to further tune our ability to maximize price. And these are going to be needed because as Christian talked about, inflation is not going to go away. We are going to continue to expect tariff volatility, hope for the best, but plan for continued volatility there. And then geopolitical uncertainty is not likely to clear up soon. So that's kind of the headwinds and tailwinds that we see, but we like our position in the market.

I really appreciate that. And then maybe following up with a shorter-term question on Q4. I think you said margins flat sequentially. And I was just wondering, are there headwinds coming through that we should be aware of? Because typically, you see the margin step up on the higher volumes sequentially into Q4. And then this year, it feels like, in particular, we're going from price/cost negative in Q3 to positive in Q4, which I would think is just an incremental tailwind to that margin ramp. So just anything to call out as we kind of think about that Q3, Q4 margin progression?

Yes, Chris, thanks for that. So yes, the sequential side, it really, we're talking about in that sequential low single-digit up. It's all coming for the most part from the solutions project configure-to-order side of the business. That will have a negative impact from a mix perspective. And then on top of that, the inflation is still coming. And so we're expecting that inflation is going to continue to be even sequentially a drag against us. And so yes, the volume is going to be there, but it's going to be offset somewhat by the mix and the inflation side. So that's why we're talking about the sequential enterprise operating margin being flattish.

Our next question comes from Jeff Sprague from Vertical Research Partners.

My question kind of rhymed a little bit with one you just answered, but I was wondering if we could maybe just put a finer point on what the price cost headwind was in Q3 and specifically what you were expecting in Q4? And just trying to get a sense then, Christian, if you're taking this question, I assume you are, like how do we think about how you're jumping off into 2027 from a price/cost basis based on that Q4 answer?

Sure. Jeff, I do -- the price cost side, obviously, we had -- we're calling it out that it was a headwind for us in Q3. We do expect that's going to be an area that should be positive for us in Q4, but it is against a rising inflation. So probably not going to dimensionalize exactly what the numbers were in the quarter, just to let you know, though, that in Q3, just to give that as an example, when we break out that core growth that we had year-over-year, volume was the biggest driver, mix was the second biggest driver, and there was just a small partial offset that happened from the price/cost negativity. So when we turn to the next quarter, again, we expect it's going to -- price/cost is going to be positive for us in the year-over-year. That's the important aspect. The sequential side, yes, we're expecting we're going to make some good progress with the price coming in, but the inflation is going to be higher still yet.

And I guess that implies then volume in Q4 is not as robust as what we saw in Q3, if I'm interpreting that correctly?

I think it's -- you got to think about it from the mix side that's happening there, too. So when you have sequentials that with Software & Control, we're calling out flat sequentially, there will be some pricing in there sequentially. So the volume is going to be a tick less. But at the same time, we're still talking Software & Control being up teens year-over-year and expansion of margins by nearly 200 basis points on the segment margin for Software & Control. And obviously, those are tough comps that we're talking about in the fourth quarter. That is our toughest comp of the year in Q4.

Our next question comes from Andrew Buscaglia from BNP Paribas.

I wanted to touch on -- along those lines -- that line of questioning, Software & Control margins. You've done a lot of good work this year and you get those margins up even higher and organic growth has really picked up, but you're running into some pretty tough comps in 2027 and a really high bar for margins. I know you don't want to give 2027 guidance, but can you set us up for how you're thinking about Software & Control as we move into next year, just given the high bar we're looking at?

Sure. I'll make a few general comments about its position in the market, and then Christian can add some additional detail to that. But we're only just now getting to and through the units of controllers shipped that we were at pre-COVID. So there was a lot of volatility over the last 6 or 7 years. And so we're going to exceed the unit volume in Logix controllers, which drives a lot of the Software & Control performance this year. And so we're happy about that. But think about the underlying market growth, natural market growth that would have existed had it not been for these exogenous events that we get to plus gaining market share in these areas. And we do think that we're gaining market share in controllers. So while we're very happy with the growth and the performance, which doesn't just happen passively, it happens by innovative new designs and managing costs and deploying investment to the areas that we, with our knowledge of the market, believe are going to yield the greatest growth, there's a lot of opportunity. We're not hitting anything close to an asymptote of where we're not going to be able to continue to grow and to perform from a profitability standpoint.

And then specific around Software & Control margins, yes, it's been a great story, right? The last 2 years has generated a lot of expansion in the Software & Control margins. And that's been predominantly driven by the volume side. Price has certainly been a big help. As we start thinking about 2027 and the setup on it, yes, the memory cost and inflation is going to hit that business hardest. There are pricing actions that we have taken. We'll continue to evaluate that. And as Blake had mentioned, we'll be dynamic around our response around that. The key, though, is that when we're talking about mid-30s almost segment operating margins and you're thinking about the pricing changes, to be able to get margin expansion off of the price alone, that's really hard to do when you're talking about that kind of inflation. At the same time, volume should be a help for us. We're -- it's early to give a view on where we exactly think we're going to be for '27. Obviously, that will be a quarter from now, we'll give that initial outlook. But we're talking about low 30s for total segment operating margin for Software & Control for the full year 2026. I think we have the opportunity to continue to build off of that.

Okay. Yes. And the other question I had was around kind of your 2 problem areas or weaker areas, Automotive and Food & Beverage are a big chunk of your sales, but both are indicating higher growth this quarter. I'm wondering how much of that is easy comps or true demand picking up in either one of those markets?

Yes. I think you should look at that as a positive read on demand as well as our offering. So Automotive in the teens is a good result. It's a good result last quarter as well, and we cited renewed -- some renewed project activity there. I'm not ready to call that the flood gates are open, but we've seen some nice wins beyond modernizations in new projects. The thing that drives the most spend in Automotive through the cycle is model changes. And as people are re-centering on hybrid and internal combustion vehicles that we're seeing some great wins as some of the big brand owners have standardized on our designs outside of our traditional end customers. Food & Beverage is our single biggest vertical. And even without CapEx, we're seeing mid-single-digit growth. So that's not bad where there is another gear to be had, so to speak, if CapEx does pick up there. And we're doing that through our domain expertise, our offering. And so people are going to continue to want to eat. And so we think it's a good long-term market to have such a strong position in.

Our next question comes from Noah Kaye from Oppenheimer.

Maybe we could sort of level set on where we're at in the production logistics growth strategy. We're some time now into the OTTO integration. You've continued to launch more offerings for orchestration production logistics. It feels like some increased wallet share capture is driving some of the outgrowth that we're seeing. But would just sort of love an update on how you see the integration and what the growth prospects look like?

Sure. I really like our position in so-called production logistics. In addition to the people who make their living moving parcels or packages around, production logistics as a part, especially of consumer packaged goods, is being seen by the customers as a really important and maybe previously overlooked area of additional productivity for them as they've added a lot of fixed automation in the make line, if you're making shampoo or packaging bread or what have you, but bringing the material, the packaging material, the components to the line and taking it away to the loading dock or into the warehouse, that's really where production logistics is focused in those areas. Independent cart technology plays a role in that. We're having a good year with iTRAK and MagneMotion. The autonomous mobile robots will see another year of strong double-digit growth. We continue to work on the profitability there, and we expect that we'll be profitable in Clearpath in the fourth quarter. But in addition to the consumer areas, you also see opportunities for this in semiconductor, for instance, with wafer transport in operations that previously used forklifts to take material over long distances. You see it in Life Sciences opportunities there. So we really think that we have the portfolio to be able to address this across multiple industries. And one of the things that's important is to make sure commercially, we have the right coverage in these areas. And so we've spent some time looking at making sure that the customers who are most interested in this have good commercial coverage by us and our partners. So it's a good area. I think to your question, we're early in the growth opportunity in production logistics, and we continue to build it out.

And then just a follow-up question on CapEx trajectory. We're coming in around 3% of sales for the year here, as you said in your remarks. I think talking in the past about this potentially stepping up to 4% in coming years, you talked about the $2 billion of investments that you're making. Can you maybe just give us a refresh on the trajectory there? Should we be gearing up for that sort of 4%, that step-up next year?

Yes. So we are expecting that next year we're going to be spending more CapEx than this year. But I do think we're still going to stay in that 4% or so. We do have greenfield project, obviously, that's happening in New Berlin, Wisconsin, will start making investments at pace as we turn and look at '27 that will take us into '28 as well. Now important, ROIC for us has actually recovered nicely. So even with that higher investment level, we still feel like that the trajectory is going to be good with ROIC. EBITDA is continuing to grow. So we're really liking the returns that we're getting right now on the legacy part of the organization, but also the investments that we're looking at for the future, we're feeling like they're going to have really strong ROI that's going to continue to be accretive to the organization.

Julianne, we well take one more question.

Certainly. Our last question today will come from Joe Ritchie from Goldman Sachs.

So just a lot covered today. I just have one question just around the S&C margins in the fourth quarter. So I think if I'm doing the math right, you're essentially forecasting 4Q S&C margins to be below 30%, so call it somewhere in the high 20s. I'm just wondering, is it possible to help bridge that, right? I know that there's -- you talked a little bit about price/cost. You talked a little bit about mix, but I'm just having a hard time bridging the sequential decline from 3Q to 4Q.

No, we actually are -- we're not looking at it to be in the 20s in Q4. We're looking at it to be in the low 30s, that number actually is going to be probably closer to, let's say, 33-ish, which is about what the average is going to be for the full year, I think, if I'm looking at the numbers correctly. So yes, and again, that sequential side is really more of the inflation coming in with the volume or the top line being flat. So that's really how the math comes together.

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

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