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'd like to turn the call over to Jessica Kourakos, Head of Investor Relations. Ms. Kourakos, please go ahead. .

Thanks, Chris. Good morning, and thank you for joining us for Rockwell Automation's Fourth 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 in our call today will reference non-GAAP measures. Both the press release and charts include reconciliations of these non-GAAP measures.

A webcast on this call will be available at our website for replay for the next 30 days. .

For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. Additional information and news about our company can also be found on Rockwell's Investor Relations Twitter feed using the handle at InvestorsROK, that's @InvestorsROK..

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 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. Let's turn to our quarterly results on Slide 3. .

We saw another quarter of exceptional demand across all 3 business segments. Total orders surpassed $2.2 billion and grew 40% over the prior year, reflecting a very strong demand pipeline across our portfolio of core automation and digital transformation solutions.

Total revenue of over $1.8 billion grew 15%, with additional sales that shifted into fiscal '22 due to supply chain headwinds. .

Organic sales grew 13% versus prior year. We had very strong growth in core automation and Information Solutions and Connected Services grew double digits in both orders and revenue. This performance was led by strong demand for software and cybersecurity services. .

Turning to ARR. We continue to make significant progress to drive recurring revenue. Our ARR grew organically by over 18%. And including our recent acquisition of Plex, now accounts for over 8% of total sales. Segment margin of 18% came in line with our expectations with the execution of planned investments in Q4. .

I'll now comment on our top line performance by business segment. Intelligent Devices organic sales increased 15% versus prior year, even with significant headwinds from supply chain. From the orders perspective, this is the fourth consecutive quarter of record order intake in this segment with orders 30% above fiscal 2019 levels.

We continue to see significant strength across the automation portfolio and share gains, particularly evident in motion, led by our independent cart technology. .

Software & Control organic sales grew 14%, led by strong demand across the segment, including double-digit growth in Logix. Orders grew approximately 50% year-over-year, once again showing great momentum across the software control, visualization and network portfolios. .

In Lifecycle Services, organic sales increased 7% versus the prior year and increased 2% sequentially even with some projects delayed as a result of component availability. Lifecycle Services book-to-bill of 1.09 was well above seasonal Q4 levels. Total company backlog of $2.9 billion grew by over 80% year-over-year.

Over 40% of backlog is related to our Lifecycle Services business. .

Turning to Information Solutions and Connected Services, which represent many of Rockwell's newest digital revenue streams. We had another great quarter. Recent orders included a number of meaningful software and infrastructure as a service wins.

One of the more notable wins in the quarter was with Ardagh Group, one of the world's largest sustainable packaging companies. The company had placed a $1 million order for fixed software in Q3 to reduce unplanned downtime. Ardagh, like a lot of manufacturers, is trying to respond to a sharp increase in demand.

By Q4, as the relationship developed, we pulled through an additional $4 million purchase of core automation products showcasing the tremendous synergy resulting from our new software capabilities and intelligent devices.

With their ARR growing 45% and over 470 new fixed customers added in just the last 9 months, I'm very happy with the contributions Fiix has been able to make to our overall business. .

We also had a great win with one of the world's largest food and beverage companies in 2 key application areas.

The first win is in the area of predictive analytics, where our Kalypso Digital Consulting business will combine our FactoryTalk innovation suite with our automation technology to provide real-time monitoring and analytics for their manufacturing environment. .

The second application is in the area of sustainability, where our software and automation technology will be used to help monitor water, air, gas, electricity and steam usage to develop real-time KPIs that further reduce their carbon footprint and drive quantifiable production outcomes. .

Kalypso continues to play a very important role within Rockwell and is spearheading some of the most exciting digital transformation projects in all of manufacturing. Our customers are recognizing Rockwell's expanding capabilities to converge IT and OT and be a strong partner throughout the digital transformation journey.

In fact, we announced yesterday that we are adding to Kalypso's capabilities with our acquisition of AVATA, which will strengthen and expand their supply chain solutions domain expertise. .

This expertise, combined with our operations management software, and that of our partners, drives great outcomes for our customers. We are very excited to be expanding our presence in the connected supply chain since it is such a critical high-growth area. .

We also accelerated our FactoryTalk SaaS offering with the acquisition of Plex in September. The integration is going well, and we look forward to showcasing the entire FactoryTalk software offering, including Plex at our upcoming Investor Day on November 10 in Houston. We hope to see you there. .

I'd also like to highlight the increasing traction we are seeing with our PTC partnership. Our sales force is seeing the number and size of engagements growing. The capabilities and versatility of the combined solution is a great way to win, with both existing customers and new ones all over the world.

A number of the wins we saw this quarter were in diverse industries around the world. We're happy with this partnership and think it's a great part of our software portfolio. .

Let's now turn to Slide 4, where I'll provide a few highlights of our Q4 end market performance. We had great performance in our Discrete Industry segment with roughly 15% sales growth.

Within this industry segment, automotive sales grew about 15%, led by an increase in EV capital project activity, including a strategic win at Magna, one of the top Tier 1 auto manufacturers delivering EV content for GM and Ford. Semiconductor was strong, growing 20% off of a very good quarter last year.

E-commerce performance was also exceptional with sales growing approximately 30% versus a strong prior year. .

Turning now to our Hybrid Industry segment. The verticals in this segment also had a terrific quarter. Food and beverage grew about 15%, led by strong greenfield and brownfield project opportunities in North America and EMEA as well as strong double-digit OEM demand. .

Life sciences grew over 15% in Q4, and remains one of our top growth verticals. We see continued growth in the overall life sciences market and evidence that we are taking market share. Once again, our fastest-growing vertical in the Hybrid segment was tire, which was up about 35% in the quarter.

Process markets grew over 10%, with strong sequential and year-over-year growth in oil and gas, especially in our Sensia JV. .

In summary, we are clearly seeing very strong growth across Discrete and Hybrid segments as well as improving oil and gas trends. .

Turning now to Slide 5 and our Q4 organic regional sales performance. North America organic sales grew by 16% versus the prior year with strong double-digit growth across all 3 industry segments. EMEA sales increased 7%, driven by strength in food and beverage, tire and metals. .

Sales in the Asia Pacific region grew 12%, with broad-based growth led by EV, semiconductor and mining. In China, we saw double-digit growth, driven by strength in mining, life sciences, tire and EV. .

Let's now turn to Slide 6 to review highlights of fiscal '21. Record orders of $8.2 billion grew 26%. Reported sales grew 11%, even with supply chain constraints. Organic sales grew almost 7%. IS/CS revenue exceeded $500 million at year-end and grew double digits organically.

Adjusted EPS grew 20%, and we, once again, generated significant cash flow due to our very profitable financial framework, strong focus on productivity and financial discipline. .

At the same time, we made significant investments in our future to accelerate profitable growth. That included organic investments as well as inorganic investments. In fiscal '21, we accelerated funding of software development projects and deployed approximately $2.5 billion towards inorganic investments.

At the same time, we returned to $800 million back to shareowners in the form of dividends and buybacks. .

Turning to Slide 7. You can see how these investments and our strong order momentum and backlog are helping to accelerate our top line performance heading into fiscal '22. Our new fiscal '22 outlook expects total reported sales growth of 17.5%, including 15.5% organic growth versus the prior year.

These projections take into account our latest view of supply chain constraints. We have the people, supplier commitments and plant capacity to support this growth, but we will no doubt need to continue to manage new challenges as they emerge in this highly dynamic environment. .

We expect double-digit growth in both core automation as well as Information Solutions and Connected Services. Acquisitions are expected to contribute 2 points of profitable growth. We are increasing our margin expectations to 21.5%, up 150 basis points over the prior year.

Our new adjusted EPS target of $10.80, at the midpoint of the range, represents about 15% growth compared to the prior year. .

I should add that we expect another year of double-digit annual recurring revenue growth, including our recent Plex acquisition, which adds approximately $170 million to our ARR totals in fiscal '22. .

A more detailed view into our outlook by end market is found on Slide 8. I will go into the details on this slide, but as you can see, we continue to expect broad-based organic sales growth in fiscal '22. .

With that, let me now turn it over to Nick, who will elaborate on our fiscal '21 results and financial outlook for fiscal '22.

Nick?.

Thank you, Blake, and good morning, everyone. I'll start on Slide 9, fourth quarter key financial information. Fourth quarter reported sales were up 15% over last year. Q4 organic sales were up 12.6%, and acquisitions contributed 1 point to total growth. Currency translation increased sales by 1.5 percentage points. .

Segment operating margin was 17.9%, in line with our expectations. The 230 basis point decline was primarily related to higher plant investment spend, the reversal of temporary pay actions and the restoration of incentive compensation partially offset by the impact of higher sales..

Corporate & Other expense was $33 million. The year-over-year increase was from deal costs associated with the Plex acquisition. Adjusted EPS of $2.33 was better than expected and grew 21% versus the prior year. I'll cover a year-over-year adjusted EPS bridge on a later slide. .

The adjusted effective tax rate for the fourth quarter was negative 3%, much lower than expected, compared to 15% in the prior year. The lower-than-expected rate was related to the cumulative impact of several onetime discrete items recognized in the current quarter. .

Free cash flow performance was in line with our expectations. We generated $160 million of free cash flow in the quarter. The free cash flow generation includes higher levels of working capital in the current year to support our increasing revenue and build inventory in anticipation of the accelerated revenue levels in fiscal year '22. .

One additional item not shown on the slide, we repurchased 200,000 shares in the quarter at a cost of $61 million. For the full year, our share repurchases totaled $301 million, in line with our July guidance. On September 30, $552 million remained available under our repurchase authorization. .

Slide 10 provides the sales and margin performance of our 3 operating segments. Organic sales of both Intelligent Devices and Software & Control were up double digits. Lifecycle Services organic sales were up sequentially and up 7% year-over-year, led by oil and gas, life sciences and food and beverage.

All segments saw strong double-digit growth in orders. .

Compared to last year, Intelligent Devices margins were up 100 basis points on higher sales. This segment did see higher input costs both year-over-year and sequentially. However, these costs were largely offset by price.

Segment margins for the Software & Control segment declined 330 basis points compared to last year, with higher planned investment spend, partially offset by higher organic sales. This segment benefited from positive price cost in the quarter. .

Lifecycle Services segment margin was 8.1% and declined 820 basis points driven by the reversal of temporary pay actions, the reinstatement of incentive compensation as well as unfavorable mix, partially offset by higher sales. .

The next slide, 11, provides the adjusted EPS Walk from Q4 fiscal '20 to Q4 fiscal '21. As you can see, core performance was up about $0.70 on a 12.6% organic sales increase. Approximately $0.10 was related to nonrecurring accelerated investments that we announced earlier this year. These investments are mostly in our Software & Control segment. .

The reversal of temporary pay actions and restoration of incentive compensation contributed negative $0.45. Acquisitions were a $0.15 headwind due to the deal costs associated with the Plex acquisition. As previously noted, our lower adjusted effective tax rate contributed $0.40. .

Slide 12 provides a walk from our Q4 midpoint in our July guidance to our actual Q4 adjusted EPS results. We usually don't provide this information, but I wanted to show how the quarter played out relative to the midpoint of what we had guided back in July. .

The unforeseen impact of the Delta variants in Southeast Asia added incremental pressure to the supply chain, but the impact of the volume miss of $0.40 was mitigated to lower incentive compensation, further productivity and a favorable mix, all of which contributed $0.35.

As previously noted, a more favorable tax rate benefited our EPS versus guidance by $0.25. .

Moving to Slide 13, product order trends. This slide shows our average daily order trends for our products, which includes our software portfolio. As a reminder, the trends shown here account for about 2/3 of our overall sales. Order intake was broad-based and improved sequentially for the fifth consecutive quarter.

Q4 product order levels grew at about 40% versus the prior year and are well above pre-pandemic levels as customers are increasingly interested in investing in our core automation and software, both of which are essential to drive the outcomes that come from digital transformation. .

Slide 14 provides key financial information for the full year fiscal '21. Reported sales grew 10.5%, including over 1 point coming from acquisitions. Organic sales were up 6.7%, led by double-digit growth in our Hybrid and Discrete end markets and improving process verticals.

Full year segment margins remained at about 20%, including close to $30 million of onetime accelerated investments, mostly in our Software & Control segment. R&D expense was up 14% compared to fiscal '20, and R&D as a percent of sales increased further to 6% of sales in fiscal '21. .

Our core automation, which excludes the impact -- excuse me, our core conversion, which excludes the impact of acquisitions, currency and our accelerated onetime investments, was 34%. Corporate & Other was up just over $20 million, mostly related to acquisition costs associated with the Plex acquisition. Adjusted EPS was up 20%.

A detailed year-over-year adjusted EPS Walk can be found in the appendix for your reference. .

Free cash flow performance remained strong and was in line with our July expectations. Free cash flow conversion was 103% of adjusted income. Finally, ROIC remained well above our target of over 20%. .

For the year, we deployed about $3.3 billion of capital towards acquisitions, dividends and share repurchases in fiscal '21. Our capital structure and liquidity remains strong. .

Let's move on to the next slide, 15, guidance for fiscal '22. As Blake mentioned, we are expecting sales of about $8.2 billion in fiscal '22, up 17.5% at the midpoint of the range. We expect organic sales growth to be in the range of 14% to 17% and about 15.5% at the midpoint of our range.

This outlook includes our latest assumptions on supply chain constraints. .

We expect full year segment operating margins to be about 21.5%. We expect positive price/cost for the full year from the additional price increase we implemented this month. At the midpoint of our guidance, assumes full year core earnings conversion of between 30% and 35%.

We believe we are in the early stages of a cycle of sustained growth and are making investments to fuel this growth in '22 and beyond. Our fiscal '22 segment margin and core conversion outlook includes our plan to increase R&D and other growth-related investments by double digits. .

We expect the full year adjusted effective tax rate to be around 17%. We do not anticipate any material discrete items to impact tax in fiscal '22. This rate is under current tax law. Should tax laws change, we would provide an updated outlook with the impacts from these changes. .

Our adjusted EPS guidance is $10.50 to $11.10. This compares to fiscal '21 adjusted EPS of $9.43. At the midpoint of the range, this represents 15% adjusted EPS growth. I will cover a year-over-year adjusted EPS Walk on the next page. .

From a calendarization viewpoint, based on our current supply chain availability, we expect our first quarter sales to be relatively flat compared to our Q4 of fiscal '21. Following the first quarter, we expect sequential sales to improve over the balance of the year.

We expect segment margins and the adjusted EPS to decline sequentially in Q1 and then improve throughout the year in line with our sales volume and the timing of price increases. We anticipate recent price increases to having more substantial benefit in subsequent quarters given the timing of when customer agreements are renewed throughout the year. .

Also as a reminder, fiscal '21 Q1 included a nonrecurring $0.45 gain related to the settlement of a legal matter. Finally, we expect full year fiscal '22 free cash flow conversion of about 90% of adjusted income.

This reflects a $155 million bonus payout for the fiscal '21 performance, $165 million of capital expenditures and funding higher levels of working capital to support higher sales. Our working capital is targeted to be aligned with our historic amount of about 12% of sales. .

A few comments -- additional comments on fiscal '22 guidance. Corporate & Other expense is expected to be around $125 million. Net interest expense for fiscal '22 is expected to be about $115 million. And finally, we're assuming average diluted shares outstanding of about 117.5 million shares. .

The next slide, 16, provides the adjusted EPS Walk from fiscal '21 to fiscal '22 guidance at the midpoint. Moving from left to right, core performance is expected to contribute $2.15. This includes the benefit of higher organic sales. We anticipate price realization will exceed input cost inflation by about $0.10.

Our pricing philosophy is built on the high value that we bring our customers. In light of increasing input costs, we have taken several price adjustments this year to mitigate, and we are prepared to take additional price actions as needed. .

The removal of the onetime accelerated investments made in fiscal year '21 will be about a $0.20 benefit. The onetime gain from a legal matter that was settled in the prior year is a $0.45 headwind. Plex will be a $0.15 tailwind in fiscal '22, including the impact of incremental interest.

We have included further information showing the impact of Plex in both fiscal '21 and fiscal '22 in our appendix. No real significant changes to what we showed in July. We expect about a $0.05 impact coming from share dilution, and the higher tax rate is expected to be about a $0.75 headwind. .

Moving on to the next slide, 17, I'll make a few comments on our capital deployment framework. Our long-term capital deployment priorities remain the same. Our first priority is organic growth. After that, we focus capital deployment on inorganic activities.

And then we focus on capital returns to shareholders, through our dividends and then share repurchases. .

In addition to our organic and inorganic investments, our capital deployment plans for fiscal '22 include a focus on delevering, dividends of about $520 million and share repurchases of $100 million. .

In summary, our guidance assumes a combination of order and backlog growth that drives 15.5% organic sales at the midpoint and reaches the total sales of over $8 billion. We continue to offset inflationary pressures through additional price actions yielding segment margins of 21.5%.

We expect adjusted EPS growth of 15% and continued strong free cash flow. .

With that, I'll turn it over to Blake for some closing remarks before we start the Q&A. .

Thanks, Nick. As we look forward to fiscal '22, strong order trends and record backlog underpin a robust top line outlook. We are making investments in our capacity, technology and people to support our future growth.

Our people delivered great results this year, and I want to take a moment to recognize their tremendous work during especially challenging times. .

As the world recovers, investments in automation and digital transformation have never been more top of mind. Nobody is better positioned to help industrial customers be more resilient, agile and sustainable. As many of you will see at our upcoming Investor Day, we're taking manufacturing to a whole new level and look forward to a great year ahead. .

Let me now pass the baton back to Jessica to 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. Chris, let's take our first question. .

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

What are your customers saying? Like when you think about kind of the issue here with not just labor, materials and kind of cadencing projects, I mean it seems like every day we see some sort of multibillion-dollar announcement. But there's also that reality that there's just so many integrators and other folks who can get this stuff done.

So I know your guide for fiscal 1Q is relatively conservative, but you have things snapping back right after that.

What are your customers saying, at least, about their ability or what they think their ability to, at least, get projects done on time today looks like?.

Well, sometimes it's useful to look at our own plans as a manufacturer in our own right. And our investments, I think, are broadly indicative of what a lot of customers in different industries are doing.

They're looking to make sure that they have the capacity to meet the current demand but also looking to get in place the capacity punch new lines of business and find new ways to win, and that's language that we've used, but we're hearing that from a lot of our customers as well. .

So in some cases, it's just meeting the capacity demands. When we look at semiconductor, and when we look at life sciences in some of these areas, it's to meet current capacity in well-known areas. In other cases, people are looking to launch new lines of business with EV probably being the best known of that.

They're very eager to take delivery of our products. And one of the things that we have is the intimacy through our own salespeople as well as through our distribution of line of sight to these projects that are driving the demand and when they're needed.

So we're not just guessing when they might need these products, we know what projects they're going into and when those projects are expected to start. .

To be sure, there's certainly some delays in those projects that our customers are seeing, but they're trying to get these -- this capacity up and running just as soon as possible. .

Yes. That makes a lot of sense. And how do you think about -- I mean are you -- I assume your pricing -- your -- you have tremendous pricing power right now? I mean there has to be somewhat a shortage in the industry overall. Is that -- you talked just about price and then I'll pass it on. .

Yes. I'll make a couple of comments, and then Nick can add to that as well. I mean we're looking at expanding margins in the coming year taking share in some important industries and product areas and building the foundation for the future, and we're doing it with select pricing increases. .

I think one of the things that bears mentioning is the tools that we've implemented for pricing have dramatically improved over the last couple of years. So pricing can be a real science with a lot of analytics.

And I think we've significantly upgraded the tools and the talent so that we can get price where the market bears that, but also where we can reserve the right to be selectively aggressive to win share.

Nick?.

Yes, I'll just add a couple of things, Scott. Our pricing philosophy is built on this high value we are bringing to our customers. And what we're seeing with increasing input costs, we have taken several price adjustments in fiscal year '21.

And we're prepared to take additional price actions as needed if input costs increased more than what we're anticipating at this point. So we do command premium prices in the market. It's reflected in our margins. And we continue to focus on the value we are creating for our customers and the relationships we have there. .

Our next question is from Andrew Obin with Bank of America. .

You highlighted ARR of plus 18% in the quarter.

Can you just talk about what are the key drivers? And how should we think about this strong exit rate into '22?.

Yes. So very happy with the development of our ARR, both in terms of the percentage growth and then the step change that we received from acquisitions like Plex. And -- so we're currently looking at an ARR of over 8% of the company's total, and we're continuing on that path. .

If you think about the main elements of ARR in the company, it starts with software, software subscriptions, software delivered as a service and the associated technical support which is also delivered as a contract either bundled with the software or as a separate subscription or software that's still being sold as a perpetual license. .

But we also have some interesting additional areas, cybersecurity infrastructure as a service. So our industrial data center that comes its hardware with the software and the services bundle to be able to monitor network traffic on-premise has been a great offering that we've had.

It's a good business in its own right, and it also pulls through a lot of additional opportunities because it's a different set of decision makers. .

So those are really the primary areas, and we continue to look to expand with the opening of our new software this year to be able to offer additional services that are bought as a subscription as we develop and release organically developed software that's sold as a service that's running in the cloud.

I'm very happy with the robust outlook for growth of existing offerings plus new product introductions, a number of which you'll see next week at Automation Fair. .

So I guess, we'll wait until the Analyst Day to hear more about that.

But can you just highlight oil and gas improvement? Can you just give more detail by end market, especially North America? I'm looking at sort of upstream, midstream, brownfield, greenfield, just a little bit more color there?.

Yes. So we did -- we were encouraged by the development of oil and gas in the fourth quarter and the outlook for fiscal '22. Our oil and gas is about 60% -- it's about 60% in upstream, with most of the remainder in midstream. So we're not really doing a whole lot in the downstream side.

We do provide power control products and MAVERICK is doing work downstream often with our safety offering. But the majority of our business is in the upstream, and we were happy to see both sequential and year-over-year growth. In the fourth quarter, we saw particularly strong orders from Sensia and the growth was contributed to by all of the regions.

.

Our next question is from Jeff Sprague with Vertical Research. .

I'm sorry. You got me there now. Just a couple of questions.

Just first on price, I don't know if you said it, but could you be specific on the amount of price you actually achieved in 2021? And what's embedded in 2022? We see the positive price/cost spread, obviously, of $0.10, but I'm curious on the actual nominal price capture involved here?.

Yes, Jeff, we had a little over 1% price growth in fiscal year '21, and we're projecting an approximately 2% net price growth in '22. However, I will be quick to caution that is based on our current level of cost increases.

We are prepared to increase that more if we see additional cost increases coming in that we haven't anticipated in our latest price adjustments. .

And then also, I guess, investment spend would be embedded in the core number. But I think you said, Nick, you're growing at double digit.

Are you growing at actually less than sales growth? I wonder if you could just kind of speak to what the actual rate of growth is? Actually, is it a tailwind inside that core number?.

Yes. Jeff, that is accretive to our margins because it's not growing at the same pace as our sales, but it is in the -- as I said, double digits. It's from the low double digits. And Jeff, just to put some color on it, we see ourselves in the early stages of a cycle of sustained growth.

And we are making investments in '22 to fuel that growth both in '22 and then beyond. And so we are increasing our spending in '22 on R&D and other growth-related investments. .

Some of the places we're investing, Jeff, we're investing in some key products and software development projects, mostly in Software & Control. We're investing in customer-facing selling resources, and the addition of some travel and customer-facing expenses that had gone down during the pandemic.

And we're also expanding investments in our plant capacity. So those are some of the big areas, Jeff, where you're seeing investment spend increase in '22. .

And I'm sorry, if I could just squeeze one more in. Nick, could you just elaborate a little bit more on Q1? I mean actually, it would be normal for Q1 sales to decline sequentially, I think, and you have them flat. So the idea that EPS may decline sequentially does just jump out a little bit.

Maybe just elaborate what's going on with price cost or other things to drive to that outcome in the quarter?.

Yes, Jeff, what we are seeing is our Q1 sequential with Q4, that's really based -- from a revenue standpoint, it's based on what we are anticipating from supply chain constraints and that, that will be keeping our revenue flat as we move from Q4 into Q1. .

From a margin standpoint and an EPS perspective, some of our price increases that we have implemented will be impacting the later quarters of '22 more than they will be impacting the first quarter of '22.

So part of what I'm sharing, as I say, what we expect for margin in the first quarter of '22 is impacted by the timing of price increases -- impacting our revenue and our margins as we go through the year. We also expect that cost increases from a year-on-year perspective will be most pronounced in our first quarter.

And then from an EPS perspective, I will just point out first quarter of last year, we had a $0.45 gain from a legal settlement, and that will not be repeating. .

Our next question is from Josh Pokrzywinski with Morgan Stanley. .

And just first question, I guess, on the backlog. Like you talked about it several times kind of a source of strength in the next year.

How much of the growth is really kind of catch up or conversion of maybe this excess or elevated backlog versus maybe commentary on the underlying end markets?.

So as we talked about backlog of $2.9 billion is at a huge level. And we said about 40% of that is Lifecycle Services, reflecting the strengthening dynamic of our longer cycle project business, which includes a high process content.

And then you, of course, have the product backlog that's being built by those enormous order quarters in Intelligent Devices and also in Software & Control. .

So we have a huge tailwind coming from that, but we see continuing demand. The demand remains strong coming in. And so it really is a mix, but the sharply increased sales in '22 is due to strength and secular tailwinds, let's say, investment themes and a number of the industries that we're serving.

And just in general, as people are building in resilience and agility into their basic operations, we think that, that is part of what's being reflected in our orders intake and the subsequent sales growth in '22. And we're making the investments to be a beneficiary of those trends beyond '22 as well. .

Okay. And then maybe just a coincidence, but everything from like an end market perspective, up 15% is pretty strong, but also strangely level, I guess, on one hand, maybe a good economic indicator, but also says that nothing at the end market basis is sort of standing out.

Is there anything that can sort of be added to that? Or anything maybe at the product level that tells a different story?.

Sure. I think if you go 1 level deeper in some of those end markets, in automotive, obviously, EV investment for capital projects is coming out. And so that's at a high level. You look at life sciences, there's obviously the work there associated with COVID treatments and vaccines. .

We're a little surprised by the uniformity, but I think each one has its own story. Oil and gas, we love it to be part of the pack again, so to speak. So I think if you go through each one, you can see that. And then obviously, there's some regional variation as well. .

Our next question is from Julian Mitchell with Barclays. .

Just wanted to follow up on the free cash flow topic. Nick, I know you made some comments around that in the prepared remarks, but the free cash flow, I think, is guided about $1.1 billion. That would imply the same free cash flow dollar number for sort of 5 years in a row now.

So I just wondered if there's something maybe in the business mix as you're shifting towards more ARR or more software-focused that's becoming a drag on the cash flow near term as the business model sort of shifts? Or do you just view it as each year, there's some onetime headwinds that are kind of keeping that free cash flow sort of stuck at that number, even as the sales and adjusted profit is growing?.

Yes. Julian, the biggest story in the 90% free cash flow conversion for us in '22 is really the higher revenues and that's -- and the working capital that we're putting in place to go with those higher revenues. That's the single biggest thing. .

Secondary things that we are seeing, Julian, are the payout of our bonus in '22 related to the '21 performance. And then we're also increasing our CapEx investment in light of the higher demand for our products. But no, in terms of our mix and anything going on from that perspective, that's not really having an impact, Julian. .

Understood. And then just trying to follow up on the topic of sort of backlog and conversion. So I think your backlog is worth about 1/3 of your fiscal '22 revenue guide. And you said it was $2.9 billion, your guide is 8 2.

Just wondered sort of as you look at sort of backlog conversion today, is the main assumption that it's slower right now because of supply constraints, that conversion into revenue then accelerates from January, February and also your incoming orders pace continues to grow over the balance of the year.

Is that the sort of the way to think about backlog and orders?.

In a word, yes. That's right. And I should mention the quality of the backlog, we think, is good since it's a higher percent of products than you would normally expect in terms of the traditional split of our backlog because of the longer lead times with some of those products.

Our next question is from Steve Tusa with JPMorgan. .

Just on this topic of investment spend. I think you guys have this like a bucket of like $2 billion that you use on the P&L to talk about investment spend. I think you threw in CapEx in the discussion with maybe Jeff it was.

What is that $2 billion going to grow this year? And then what is the number net of the decline in onetime? So if you include the onetime impact, what is the year-over-year growth or absolute headwind, however you want to talk about it, on that $2 billion of investment spend that typically runs through the P&L?.

So Steve, we had approximately $30 million of onetime spend that we did in fiscal year '21. That's not repeating. Then to our total fiscal year '22 of the roughly $2 billion of investment spend, that's what we're saying is going up double digits in '22, low double digits actually.

So there's a little over $200 million of increase there in investment spend. .

Parts of the bridge that you want to call out on that on this front, whether it's some of the incentive comp or -- sorry, it was on a call earlier, you may have highlighted it, but anything else in the bridge moving around?.

We have some onetimes that impacted us in fiscal year '21 that we're pointing out that those will not repeat. Also, the tax rate is based on current tax law. If this tax law does change, we would update what we expect for that. But Steve, those are a couple of the things I'd just point out. .

Our next question is from Andy Kaplowitz with Citigroup. .

Blake, this is your third quarter in a row with orders of $2 billion or more, and they've continued to go higher without larger projects this quarter.

I know we've asked you this before, but do you get any sense that some of the strength has been customers getting in mind or double ordering? And given it still seems early your process automation recovery and the inorganic additions you've made at the company, is it reasonable to think that orders can maintain or even grow from these levels over the next few quarters?.

Yes. So in Q4, there certainly were some pull-ins in the quarter. But as we talk to our sales force and distribution, we think it's well under 10% of the total. So we think the vast majority of what we're seeing is underlying demand, and it's broad-based across multiple industries. .

So we do believe, and we're seeing this into October. We continue to see strong demand coming from customers as some of these secular tailwinds that we've talked about, and you pick the industry, are investing, whether it's in transportation or food and beverage, life sciences.

Chemical is expected to have decent growth in the coming year for building chemicals and packaging chemicals. .

So you can see it from a variety of places. And so we're very optimistic about continued order growth in the year, particularly because we're talking to customers about new things, new capabilities that 24, 36 months ago, we didn't have in our portfolio.

But there's a pretty significant expansion of what we can talk to customers about in all 3 of our business segments. .

And Blake, I wanted to follow up on some of the comments you made on EV. Obviously, during the quarter, there were several additional announcements of planned CapEx by some of your customers, EV battery facilities. And you mentioned that your EV business led 15% automotive growth, despite big production declines from many of your customers.

So can you give us more color into what your for EV-related business in FY '22? We know you're seeing automotive up mid-teens.

And how much of that is just auto build recovery versus what could be the opportunity for you in EV?.

Yes. I think the majority of it is getting our new models on the road. That's how where these traditional brand owners are getting out there with EV and how the start-ups stay in business, getting a return on the investments that have been made in them.

For scale, you think about automotive being about 8% of Rockwell's total business with EV about 1/4 of that, so about 25%. And we expect over multiple years EV and associated battery are going to be a strong driver of growth for us. .

And that's around the world. I mean you look at the wins that we're getting in China associated with battery and EV. And it's clearly a calling card for us. We look at the wins, the opportunities that we have with Plex in the Tier providers. All of these things, I think, are positive for us. .

Our next question is from Markus Mittermaier with UBS. .

I wanted to come back to backlog and pricing, if I could, and link the 2.

I wonder sort of how much ability you have in the existing backlog to adjust prices there if need be?.

Markus, the significant majority of our backlog, we are not repricing. There is a relatively small portion of our backlog that has more dynamic prices that we can adjust. So we are not changing the prices in our product backlog. .

But as Blake mentioned earlier, when we look at our total backlog and as we work through some of that in '22, it's favorable. It's favorable in terms of the mix that we're seeing there. So we don't expect it to be dilutive. We actually expect it to be accretive to us in '22. .

That's helpful. And then, Blake, you've mentioned share gains in motion.

I wonder if you could elaborate a little bit on that, which regions, which product categories and what's the ultimate driver there?.

So I mentioned motion control, and we're seeing share gains from a couple of places. First of all, our traditional products that are controlling the motion of a more traditional motor, we have some very strong products there and they're fit in an overall integrated control and information architecture are doing very well.

We had some product releases of organically developed products last year that get to the more price-sensitive markets like China, and we've seen some good uptick in our kinetics products there. .

But an area that we've talked, especially about in the last few quarters, is independent cart technology.

And so it's linear motion control and due to its ability to save space on machinery acceleration and deceleration rates, the integration as part -- a fundamental part of the machinery really gives us a very differentiated offering in a variety of industries around the world. So it can be used in power transmission in vehicles.

It can be used in tire building, in packaging, or food and beverage and life sciences. There's even some interesting applications that we're working on in mining. .

And so it's very versatile set of technology. We bought 2 small companies to get into that to complement actually a technology we've had for many years, and then we'll continue to invest and build it into the overall automation architecture. So we're very happy with the growth that we're seeing there, which continues at strong double digits. .

Operator, we'll take one last question. .

Certainly. Our final question is from Noah Kaye with Oppenheimer. .

Certainly, the acquisition of AVATA seems very timely with supply chain management challenges that seem ramping across the industries. And like you've often talked about Rockwell's own manufacturing journey being a great test case for customers.

Curious, how do you think say, having AVATA and the ability to manage supply chain and the cloud solution? How might that impact or be able to impact you going forward just to gain increased control and visibility of your own supply chain? And how do you see it benefiting the customers?.

Well, we're excited about using the technology in our own operations. So we've got a pretty good system on the floor and taking that data into information systems today.

But one of the real excitement for a big company like Rockwell in a cloud-based solution is the ease of implementation for the same reasons that small- and medium-sized businesses like it because they may not have an IT department to be able to manage a big fleet of computers in their plants. .

The ability to have a cloud-based approach is exciting when we make new acquisitions. When we open more agile plants around the world, the heavy lift that would come with more traditional systems may not be what's most appropriate. .

On the other hand, we're going to continue to do well with our on-prem MES offering because you have a lot of companies, particularly those in regulated industries that cannot change quickly. They need to have the ability to maintain a system with no change for many years. And so that on-prem system can be very helpful there.

And so we see the 2 coexisting for a long time to come. .

That's helpful. And then just curious if you can comment on any potential shifts in customer spending from CapEx to OpEx? You mentioned Sensia seems to be recovering.

Wondering, as many of the customer base, particularly on the process side, are being relatively disciplined with CapEx investments, whether this is a significant transition you're seeing? And any potential wallet share gains as a result?.

Well, we think in Sensia for oil and gas, we think the fundamental value proposition is still as strong as when we entered into it. And we are seeing that reflected in our orders.

In mining, as you said, those companies are being disciplined with their capital spend, even with super high commodity prices, we haven't seen a dramatic increase in the release of funds for big capital expenditures. .

Some of that's going to have to come because they only stay in business by having the ability to efficiently bring the resources to market. And we're talking to them about quotes. There's activity there, but we haven't seen it manifest itself yet. I did mention earlier, chemical is a process vertical.

But we do see good growth in the teens over the year, and it's for things like construction resins as well as chemicals used in packaging because people are still getting lots of products and boxes delivered to them. .

Yes. This concludes the Q&A session. I'd like to turn the call back over to Ms. Kourakos for any closing remarks. .

Thanks, Chris. Thanks, everyone, for joining us. We look forward to seeing you next week, hopefully, and have a great day. .

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