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Rockwell Automation, inc (NYSE:ROK)
Q3 2021 Earnings Call
Jul 27, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for holding and welcome to Rockwell Automation's Quarterly Conference Call. [Operator Instructions] Later in the call, we will open up the lines for your questions.

[Operator Instructions]

At this time, I would now like to turn the call over to Jessica Kourakos, Head of Investor Relations. Ms. Kourakos, please go ahead.

Jessica Kourakos -- Head of Investor Relations

Thanks Rain. Good morning and thank you for joining us for Rockwell Automation's Third Quarter Fiscal 2021 Earnings Release Conference Call. With me today is Blake Moret, our Chairman and CEO and Nick Gangestad, our CFO.

Our results were released earlier this morning and the press release and charts have been posted to our website. Both the press release and charts include, and our call today will reference non-GAAP measures. Both the press release and charts include reconciliations of these non-GAAP measures. A webcast of this call will be available at 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. Supplemental information related to our new business segments can be also found in the Investor Relations section of our corporate website.

Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all our SEC filings.

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

Blake D. Moret -- Chairman and Chief Executive Officer

Thanks, Jessica and good morning everyone. Thank you for joining us today. Before I begin, let me first congratulate our Milwaukee Bucks for such an incredible season. Go Bucks.

Let me now take a moment to talk about a couple of key highlights in the quarter. First of all, I'm pleased to welcome Cyril Perducat as our new Chief Technology Officer. He succeeds Sujeet Chand who is retiring later this year after a long and very impactful career at Rockwell, and I'll talk more about his legacy in November. Cyril brings a wealth of automation and digital transformation experience to the role with great global experience and a passion for helping customers. His mindset and additional perspective will help drive even more value from the combination of our core automation, software and managed services offerings to provide positive outcomes for customers. We also announced the signing of a definitive agreement to acquire Plex Systems, which we expect to close in Q4 of this year. Plex is the leading cloud native, smart manufacturing platform operating at scale and it will be a big part of our FactoryTalk Software-as-a-Service offering. We look forward to showcasing its unique capabilities and integration into a complete production system at Investor Day during our November Automation Fair in Houston.

Now let's turn to our quarterly results on Slide 3. We saw another quarter of exceptional demand across our product portfolio. Total order surpassed $2 billion, reflecting the very strong demand pipeline. Total revenue of over $1.8 billion is a new record and grew 33%, including a 1.0 contribution from recent acquisitions, including ASEM, Kalypso and Fiix. Organic sales grew 26% versus prior year, despite significant supply chain challenges. The manufacturing supply chain continues to remain constrained due to increased levels of demand and persistent electronic component shortages. It's a dynamic situation that we are monitoring closely. Our global supply chain organization continues to navigate these challenges and is taking a variety of measures, investing in both short and long term strategies to increase our supply chain resiliency.

I'll now comment on our topline performance by business segment. Intelligent Devices, organic sales increased 29%, led by strong broad-based demand for our automation products. From an orders perspective, this is the third consecutive quarter of record order intake in this segment. Once again strong order growth in Motion was driven by our Independent Cart Technology offering, which saw over a 100% orders growth in the quarter. Independent Cart orders growth was broad-based and included strong wins in e-commerce and warehouse automation including Intralox, an important North American Material Handling OEM partner, which machines are supporting some of the largest e-commerce applications in the world. Intralox is leveraging our Independent Cart Technology and a high bottleneck area of their process was able to realize a 30% increase in sortation throughput.

Software & Control organic sales grew 32%, led by strong demand across the segment. Logix's sales grew over 40% versus the prior year and was our strongest major product family. Orders for the Software & Control business segment grew over 55% year-over-year showing strong momentum. The Lifecycle Services, organic sales increased 17% versus the prior year and increased 8% sequentially. Book-to-bill for the segment of 1.18 is expected to drive continued sequential sales improvement in this segment during the fourth quarter. Some company backlog grew by over 50% year-over-year.

Turning to profitability, segment operating margin of percent increased by 340 basis points versus the prior year, primarily due to higher sales. Adjusted EPS of $2.3, grew 75% and was above our expectations. Stronger sales and favorable mix, all contributed to our strong profit performance in the quarter as we continue to increase our business resiliency and make technology and people investments that set us up for a strong future. Turning to Information Solutions, and Connected Services, which represent many of Rockwell's newest digital revenue streams.

We had another great quarter. Organic sales and orders grew strong double digits, with contributions across a variety of end markets. Recent orders also include a number of meaningful software and infrastructure as a service wins with some of the world's most important food and beverage and life sciences manufacturers for example, Sinovac one of the largest pharmaceutical manufacturers in China, recently chose our PharmaSuite MES to help bolster production of their vaccines. We also had a great win with GE Renewable Energy on a greenfield project to develop a major power plant in Africa. Once operational, this hydro plant is expected to provide 30% of the country's energy demand while reducing annual power generation cost by $100 million. In addition to using our core automation products, our capabilities and industrial cyber security helped us win even greater share of this greenfield project

Kalypso also continues to play a very important role within our Connected Services offerings and lastly received PTCs Systems Integrator, Partner of the Year Award. This is in addition to Rockwell receiving PTC's Overall Partner of the Year Award, as we continue to see good synergies across the PTC Rockwell portfolio. Turning to Slide 4, at last next year's Investor Day we talked about how we are bringing our FactoryTalk software offering to the cloud. The SaaS offerings in three key areas. FactoryTalk Design Hub, FactoryTalk Operations Hub and our FactoryTalk Maintenance Hub.

The organic development of our FactoryTalk Design Hub is well underway and complements our best-in-class, Studio 5,000 software. With the addition of Plex, we will have a world-class, full scale FactoryTalk operations Hub, such a smart manufacturing platform includes one of the most advanced cloud native MES offerings available. As well as cloud native quality and supply chain management solutions. Capabilities like inventory management, supply chain optimization and track and trace are more critical than ever and we will have unmatched, on-premised and cloud native solutions. Last week, we also announced our partnership with Kessler, a leading provider of cloud-based traceability software. That will be a great complement to both our on-prem and cloud native supply chain offerings. The foundation of our FactoryTalk Maintenance Hub comes from last year's acquisition of Fiix, an AI enabled maintenance management platform with a cloud native offering that is sold a 100% on a subscription basis. Since the acquisition, we've seen accelerated growth with Fiix, including the addition of their first two customers with contributions of over $1 million of annual recurring revenue each. This quarter, Fiix revenue grew by over 40% both year-over-year and sequentially. And they've had an on average over 50 new logos per month since they've joined Rockwell. Fiix and Plex applications are highly complementary, with many opportunities for customers to further improve manufacturing productivity, product quality and asset utilization. In addition, we believe that Fiix's high velocity, go-to market model will provide additional revenue synergies in the years ahead.

As we mentioned on the call to announce the Plex deal. We are moving fast because manufacturers are picking up the pace of innovation and we have the opportunity to leap ahead with new value from highly scalable, easy to use and well integrated information solutions that build on our rock solid heritage, born in the world of real-time data.

Let's now turn to Slide 5, where I'll provide a few highlights of our Q3 end market performance. Figures are for organic sales. We had a great performance in our Discrete industry segment, with roughly 40% sales growth. Within this industry segment, automotive sales grew at about 50%, led by an increase in capital project activity. We estimate two-thirds of the capital projects we are winning are related to EV projects taking flight. For example, we had another win the Indian automotive supplier, Wipro PARI where our core automation technology will be used in an EV battery pack assembly line in one of North America's largest automotive brand owners. In semiconductor, we grew about 35%. We believe strong secular tailwinds, increasing capital spend and broadening share of wallet with customers are all driving our growth. We are raising our semiconductor growth outlook once again to high-teens for the year.

Another highlight within Discrete was our performance in e-commerce. With sales growing approximately 65%, versus prior year. This vertical has significant secular tailwinds with pure play e-commerce players as well as traditional retailers that are transforming their warehouses through automation. Turning now to our Hybrid industry segment, these verticals also had a terrific quarter.

Food and beverage grew over 30% and had the most significant outperformance relative to our expectations as customers prioritize investing in technologies that help them differentiate their offerings and maximize their growth. We believe we are taking share in this market. And that our technical and commercial strength is reaping dividends that should carry through into fiscal '22.

Life Sciences grew over 40% in Q3, was another great performer in the quarter. Life Sciences was our 4th largest industry in the quarter, not far behind automotive and we continue to believe we are taking share in this fast-growing vertical. Key wins included a highly competitive win for a large greenfield project with Butantan to fast track their COVID 19 vaccine production in Brazil. Here our PlantPAx control system, FactoryTalk Batch and PharmaSuite MES will enable a best-in-class paperless system so we're fully integrate with Batch controls and other equipment on the factory floor.

Our fastest growing vertical in the Hybrid segment was Tire, which was up about 60% in the quarter. Key wins included Toyo Tire group in Japan, where Rockwell was chosen as the automation standard for their plant in Serbia. Our core automation technology, our IoT ready architecture and strong MES capability were all critical factors in securing this key win. Tire has always been a strong industry vertical for Rockwell and our technologies are actively supporting our customers increasing investments, in innovation and production capacity. Process markets were up approximately 15% and were better than expected. This was the first quarter where we saw all of our major process industry verticals returned to positive growth, including oil and gas, which grew low single-digits versus the prior year and grew high single-digits sequentially.

Turning now to Slide 6 in our Q3 organic regional sales performance. North America, organic sales grew by 29% versus the prior year with strong double-digit growth across all three industry segments. EMEA sales increased 21%, driven by strength in Food and Beverage and Tire. Sales in the Asia Pacific region grew 23%, with broad-based growth led by Semiconductor, Life Sciences and Tire. In China, we saw double-digit growth driven by strength in Tire, Life Sciences and EV. We continue to expect growth in China will exceed the company average for the year, as our longer cycle businesses kick in. Latin America growth of 26% was led by Food and Beverage and Automotive.

Let's now turn to Slide 7 to review highlights for the full year outlook. Orders momentum in backlog are expected to drive strong sales growth in the balance of the year and into fiscal 2022. Our higher top line guidance is driven by improvements in our Hybrid and Process industry segments. Our new outlook for total reported sales growth is up 12% including 8% organic growth versus the prior year. We're seeing strong growth in both core automation as well as Information Solutions, and Connected Services. Acquisitions are contributing over 1 point of profitable growth. We are increasing our margin expectation to 20%. Our new Adjusted EPS target of $9.20 at the midpoint of the range, represents 17% growth compared to the prior year. This also includes $0.15 from transaction fees related to our pending acquisition of Plex. I should add that we expect double-digit annual recurring revenue growth in fiscal '21 with the Plex acquisition expected to add over $175 million to our ARR totals, next fiscal year.

A more detailed view into our outlook by end market is found on Slide 8. I won't go into the details on this slide. But as you can see, we continue to expect broad-based organic sales growth this year. With that, let me now turn it over to Nick who will elaborate on our third quarter performance and updated financial outlook for fiscal '21. Nick?

Nick Gangestad -- Chief Financial Officer

Thank you, Blake, and good morning everyone. I'll start on slide 9. Third quarter key financial information. Third quarter reported sales were up 33% over last year. Organic sales were up 26%. Acquisitions contributed 1 point to growth and currency translation increased sales by 5 points. Segment operating margin was 19.9%, an expansion of 340 basis points compared to Q3 of last year. Higher sales volume, a favorable mix and price, all contributed to our margin expansion. These factors more than offset higher incentive compensation, our planned investment spend, last year's pay reductions and higher input costs. Corporate and other expense was $29 million, slightly higher than last year, mainly driven by costs related to the pending Plex acquisition. The Adjusted Effective Tax Rate for the third quarter was 14.6% compared to 14.1% last year. Third quarter, Adjusted EPS was $2.31, above our expectations, primarily related to higher sales.

I'll cover a year-over-year Adjusted EPS bridge for Q3 on a later Slide. Free cash flow was $437 million or conversion of 161% in the quarter. Strong conversion in the quarter was driven by continued management of our working capital year-to-date, free cash flow conversion was 118% and free cash flow dollars was up 39% versus last year. One additional item not shown on the Slide, we repurchased 225,000 shares in the quarter at a cost of $60 million. For the full year, we have lowered our repurchase target from $350 million to $300 million in anticipation of our upcoming Plex transaction. At June 30, $613 million remained available under our repurchase authorization.

Slide 10 provides the sales and margin performance overview of our three operating segment. The Intelligent Devices segment had organic sales growth of 29% in the quarter. Segment margin was 21.9%, 500 basis points higher than last year. Mainly due to higher sales. This segment did see higher input costs both year-over-year and sequentially. However, these costs were largely offset by price. Once again -- we once again had strong orders performance in the quarter. Intelligent Devices orders grew approximately 65% led by North America and near demand software & Control segments, organic sales grew 32% in the quarter. Acquisitions contributed 3 points to growth. Segment margin was 25.2%, which was 270 basis points above last year. The margin benefit from higher sales, was partially offset by higher investment spend. These investments relate primarily to software development and additional sales resources to drive revenue growth in fiscal year '22 and beyond.

Software and control orders also grew strong double digits, led by Logix which grew double-digits in all regions. Organic sales of the Lifecycle Services segment grew 17% year-over-year, led by Life Sciences, Food and Beverage and Semiconductor. Acquisitions contributed about 1.5% of growth. Operating margin for this segment was 10.3%, an increase of 60 basis points compared to last year. This increase was primarily due to higher sales, partially offset by the reinstatement of incentive compensation. Third quarter book-to-bill performance for the Lifecycle Services segment was 1.18.

The next Slide 11 provides the Adjusted EPS walk from Q3 fiscal '20 to Q3 fiscal '21. Starting on the left, core performance had a positive impact of approximately $1.65, primarily due to higher sales and favorable mix. We did see higher input cost this quarter compared to a year ago, which we have been offsetting with targeted price increases throughout the year. Approximately $0.10 was related to non-recurring accelerated investments that we announced earlier this year. These investments are mostly in our Software & Control segment. Currency contributed about $0.05. Incentive compensation and the reversal of the temporary pay reductions was a year-over-year headwind of approximately $0.55, of which bonus was $0.40 and temporary pay actions $0.15. As a reminder there was no bonus expense in Q3 of fiscal '20. Acquisitions were about $0.05 diluted, as we expected.

Moving to Slide12, quarterly product order trends. This slide shows our average daily order trends for our products, which includes our software portfolio, the trends shown here account for about two-thirds of our overall sales. Order intake improved again this quarter. Q3 product order levels grew year-on-year as well as sequentially and are at an all time high. Particularly strong areas were in Logix and Motion. Not included on this slide, are orders for the Lifecycle Services segment, which were up double digits in the quarter both sequentially and year-over-year. The overall strong order performance resulted in total company backlog of over $2 billion, growing over 50% year-over-year.

This takes us to Slide 13, Updated Guidance. We are increasing our organic sales growth to 8%, which is a 1 point increase from the previous midpoint of 7%. We expect currency translation to now contribute about 2.5 points to growth. And we still expect acquisitions to contribute about 1.5%. In total, we are forecasting reported sales to be about $7.1 billion were up 12%. We have also updated the Adjusted EPS guidance to a new range of $9.10 to $9.30. This new range now includes about $0.15 of transaction fees related to the pending Plex acquisition.

I'll review the bridge from the prior guidance midpoint of $9.15 to the new midpoint of $9.20 on the next slide. Segment operating margin is now expected to be approximately 20%. This represents a 50 basis point increase from prior guidance and primarily reflects higher sales, partially offset by additional bonus expense. We continue to expect positive price cost for the full year. Our adjusted effective tax rate is still expected to be about 14%, the same as prior guidance. This includes a 200 basis point, annual benefit related to discrete items, which we expect to realize in Q4. We believe our normalized Adjusted Effective Tax rate is around 18%. Given our strong generation of free cash flow through the first three quarters, we are now projecting free cash flow conversion to be above 105% of Adjusted Income.

A few additional comments on fiscal '21 guidance. Corporate and other expense is expected to be about $135 million and now includes about $20 million primarily from the transaction related fees and expenses anticipated for the pending acquisition of Plex. Net interest expense for fiscal '21 is now expected to be about $95 million to $100 million and now reflects the expected incremental interest of about $5 million, related to new debt for the pending acquisition of Plex.

Finally, we're assuming average diluted shares outstanding of 117.1 million shares. This takes us to Slide 14. This Slide bridges the midpoints of our April Adjusted EPS guidance range to the midpoint of our new guidance.

Starting on the left, there is a higher contribution from core operating performance. Primarily due to the higher organic sales and increase in margin. The contribution from currency is now expected to be $0.05 higher compared to prior guidance. Next, given the increase in guidance, there is about a $0.15 impact from higher bonus expense. Full year bonus expense is now expected to be approximately $175 million. Given our projected full year performance, this bonus is higher than the initial fiscal year '21 target of about $115 million. For comparison, this was 0 for fiscal year 2020. Finally, we now have about a $0.15 impact coming from the pending acquisition of Plex, which we anticipate will close in Q4.

This brings the new midpoint of the guidance range to $9.20. Finally, a few more comments on Plex. Turning now to page 15. Plex will be reported in our Software & Control segment and be a part of our Information Solutions, and Connected Services portfolio of offerings. We are forecasting that in fiscal year '22 it will generate $175 million of ARR. $160 million of revenue, after the adjustment for deferred revenue and a neutral impact to earnings per share. About $0.35 of incremental EPS from operations is forecasted to fully offset the deferred revenue adjustment integration expenses and incremental interest expense. We expect fiscal year '23 revenues to be above $200 million with a meaningful contribution to EPS in fiscal year 23 we have included further details in the appendix on the financial impact of Plex in fiscal year '21 and '22.

With that, I'll hand it back to Blake for some additional comments.

Blake D. Moret -- Chairman and Chief Executive Officer

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

Jessica Kourakos -- Head of Investor Relations

Thanks, Blake. [Operator Instructions] Rain, let's take our first question.

Questions and Answers:

Operator

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

Julian Mitchell -- Barclays -- Analyst

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

Blake D. Moret -- Chairman and Chief Executive Officer

Hey, Julian. First just to round out '21 as far as operating leverage and we often at Rockwell talk about our core conversion. We see, full-year '21 being right in the range of the 30% to 35% core conversion that we often talk about. As far as thinking about the future, of course we'll say more about that in November, at our Investor Day. But like one way to think about it is -- there are several things. Nothing drives our operating margin like top-line growth and given our 30% to 35% core conversion. We think that's still a helpful way to think about it and that implies that we would expect our margins to expand next year, but of course I'm going to give -- will give more detail about that at our Investor Day in November.

Julian Mitchell -- Barclays -- Analyst

Perfect. Thanks very much. And then just, as we're thinking about the automotive end market within Discrete -- a very, very strong growth, 50%. I think you delivered in the third quarter year-on-year. Just wondered if you could update us, sort of as you're looking into '22, what portion of your backlog, perhaps if there is such a thing and also is related to EV. And how you think about the sustainability of that auto capex rebounds.

Blake D. Moret -- Chairman and Chief Executive Officer

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

Julian Mitchell -- Barclays -- Analyst

Great, thank you.

Blake D. Moret -- Chairman and Chief Executive Officer

Thanks, Julian.

Operator

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

Scott Davis -- Melius Research -- Analyst

Hey, good morning guys, and Jessica.

Blake D. Moret -- Chairman and Chief Executive Officer

Hey.

Jessica Kourakos -- Head of Investor Relations

Morning.

Scott Davis -- Melius Research -- Analyst

I'm kind of intrigued, just to follow up on Julian's question there, I mean what -- these EV projects, I mean how did they compare versus ICE and like complexity and scope and any different dynamics. Are there less suppliers, more suppliers, more competition, less competition. Just any additional color you can give there would be helpful, I think.

Blake D. Moret -- Chairman and Chief Executive Officer

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

Scott Davis -- Melius Research -- Analyst

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

Blake D. Moret -- Chairman and Chief Executive Officer

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

Scott Davis -- Melius Research -- Analyst

Excellent. Good luck, guys. Thank you.

Nick Gangestad -- Chief Financial Officer

Thanks.

Blake D. Moret -- Chairman and Chief Executive Officer

Thanks, Scott.

Operator

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

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Hi, good morning, team.

Blake D. Moret -- Chairman and Chief Executive Officer

Hi. Josh.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

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

Blake D. Moret -- Chairman and Chief Executive Officer

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

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's helpful and then just a follow-up on some of the moving pieces, on the cost side for you Nick. Yeah, I think last quarter maybe gave us some earlier quarters, there was a bit of a talk on some of the investments being kind of front-loaded for '21. Where maybe that's a bit more of a tailwind into '22. If we have to add up the investments and the Incentive Comp piece, is that something that levels out on a normalized basis or is there still some kind of catch-up or give back or do you start off next year in the plus call.

Nick Gangestad -- Chief Financial Officer

Yeah, Josh. In terms of our investments. For full-year '21, we expect our total investments to go up about 2% for the full year. And that's really more back-end loaded. I said last quarter that we expected year-on-year, the investments to go up between $90 and $100 million compared to the second half of '20, our best estimate now is it's going to go up $85 million year-on-year for the second half, so I'd call it more back-end loaded than front-end loaded, of our investments. And then in terms of investment spending next year. Josh, again it's early, but I don't see any reason to think that it would not be fairly evenly spread over the year. I don't, see any big seasonality impact in next year in our investment spend.

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Yes, Thanks.

Operator

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

Andrew Kaplowitz -- Citi -- Analyst

Hey, good morning guys.

Blake D. Moret -- Chairman and Chief Executive Officer

Hey Andy.

Andrew Kaplowitz -- Citi -- Analyst

Blake, I'm sure you don't want to give us too much in '22 at this point, but given orders are so much higher, and they keep trending up, what kind of confidence at this point do your order trends give you in delivering organic growth in FY'22, that could be close to '21 or at least at or above your 2 times industrial production target.

Blake D. Moret -- Chairman and Chief Executive Officer

Well, without saying too much about '22 until November, we are very positive on where we are, the orders momentum, the backlog that we expect to largely shift as we get closer to normal levels through the balance of the year. Our ability to compete and win in competitive projects across the world, across the verticals. I think it's a great setup and it should bode well for our growth and performance going into the next year and beyond.

Andrew Kaplowitz -- Citi -- Analyst

That's helpful. Maybe just focusing on Process markets, obviously you're seeing, especially in chemicals, given you monthly raise your '21 forecast from improved growth. But are you starting to see more significant improvement yet in oil and gas, what's your confidence level in sort of more of a typical later cycle recovery for Process as you go forward.

Blake D. Moret -- Chairman and Chief Executive Officer

Yeah. We continue to see optimism for oil and gas as it always seems to do lagging the early cycle Discrete businesses. But we grew year-over-year and sequentially in oil and gas. We expect another quarter of growth in oil and gas in the fourth quarter and while there's still a lot of uncertainty, these are projects around the world and we're continuing to watch COVID infections and those are continuing to be a concern for us. We think we're in a good spot with the oil and gas and some of the comments from some of the earlier cycle oil and gas operators, the people who are providing drilling technology as well as oilfield services, those generally lead the impact on our business by, say 6 or 9 months. And so we are optimistic that some of the early signs that we saw this quarter in oil and gas are going to persist and pickup.

Andrew Kaplowitz -- Citi -- Analyst

I appreciate it. Blake.

Blake D. Moret -- Chairman and Chief Executive Officer

Yeah, Thank you.

Operator

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

Unidentified Participant

Hi, good morning. I'm on for Nigel Coe. My question would be, looking at the investment section again. I was kind of looking at the $35 million tailwind and for the incentive it shows around $20 million for 2022.

Nick Gangestad -- Chief Financial Officer

In terms of the tailwind for '22. I mean we're -- I'm not yet in a position where we're sharing guidance on what we expect investment spend to be for '22. But -- and our total investment spend this year is in going up approximately 2%, very much like our -- what we've seen in prior years. As far as headwinds and tailwinds, I didn't quite catch all of that. But for instance, it would be more likely that our bonus is back in a more normal zone of what I talked about during earlier on this call. That's an example, but I wouldn't necessarily say investments will necessarily go down, or not repeat. The one exception is we had temporary investments, we've accelerated investments of $30 million, that is going exactly as we anticipated that $30 million in the second half of the year about $10 million of that we spent in the third quarter and $20 million, we're anticipating in the fourth quarter. Those will not repeat into '22 and we did those investments to accelerate our growth in '22 and then the last point is, as I've said earlier with Julian's question, it's our expectation that margins will be expanding in fiscal year '22.

Unidentified Participant

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

Blake D. Moret -- Chairman and Chief Executive Officer

Well, obviously we're seeing good sales rates that were above our expert expectations in Q3, and that led us to raise the guidance of organic growth at the midpoint, for this year and we expect that we'll be shifting the backlog, through the balance of '22 getting us closer toward more normal backlog levels backlog will be up in Q4, a little bit, but not as market an increase as we saw in Q3.

Unidentified Participant

Appreciate it. Thank you.

Blake D. Moret -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Stephen Tusa -- JP Morgan -- Analyst

Hey, good morning.

Blake D. Moret -- Chairman and Chief Executive Officer

Good morning, Steve

Stephen Tusa -- JP Morgan -- Analyst

Blake, thanks as usual for all the details, just wanted to maybe I might have missed the comment on Incentive Comp, what is normal just mechanically, what do you think is normal Incentive Comp kind of relative to the level that you're performing at this year?

Nick Gangestad -- Chief Financial Officer

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

Stephen Tusa -- JP Morgan -- Analyst

Okay. So just mechanically, we can assume that next year, you would get a $60 million tailwind from that?

Nick Gangestad -- Chief Financial Officer

I think that's a pretty fair assumption.

Stephen Tusa -- JP Morgan -- Analyst

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

Nick Gangestad -- Chief Financial Officer

In terms of the investments. Yeah, the $30 million you should think of that as something that we're not planning to repeat, but it's -- we still haven't given our guidance here, we're working through a lot of things of how we want to -- what we want to invest on in '22. But, yes your assumption of taking $30 million out of what we've done this year. That's the way we've been saying that, and I agree with that approach.

Stephen Tusa -- JP Morgan -- Analyst

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

Blake D. Moret -- Chairman and Chief Executive Officer

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

Stephen Tusa -- JP Morgan -- Analyst

Okay. I won't ask you for the date of that, that would be to follow up, but one more question for you just on this orders -- sorry, on the Plex deal. That's a pretty big growth number in '23, is there, something to do with the accounting around deferred revenues on that front because 30% seems to be a pretty dramatic acceleration as to where this company has been in the past. And then how much of their revenue is actually, pure MES, that's really kind of detached from their, kind of ERP core. And thanks for the detail, again.

Blake D. Moret -- Chairman and Chief Executive Officer

Yeah, we do so -- couple of things I'll start and Nick may have some additional comments. First of all, the the figure in '23 is after the Adjusted adjustments for deferred revenue that impact of revenue in '21 and '22. So you don't see the deferred revenue adjustment in '23. So we're not looking for 30% top-line growth in '23, but we will not be seeing the deferred revenue adjustments carrying into that year and then in terms of the mix of Plex and its offering -- something to offer a modular smart manufacturing platform and it has ERP, it has MES, it has quality management. It has supply chain and so particularly when you're talking to small and medium sized manufacturers. Now they don't have big centralized engineering resources to take a bunch of disparate software applications and hope that they nick together and so Plex offers an integrated suite of those modules. MES is a large portion of it. They had ERP and those other applications, I mentioned, but they've done some good work over the last couple of years to modularized their offerings, so that a customer isn't forced to buy what they don't want. We'll continue to support all these applications for the customers who've already bought them and we're going to be helping Plex as they expand the introduction of the offering, outside of the US, as well as to other industries like Food, Beverage and Pharmaceuticals. But they haven't had as much exposure to in the past.

Stephen Tusa -- JP Morgan -- Analyst

Got it.

Nick Gangestad -- Chief Financial Officer

And Steve just to make sure you're seeing that in the appendix. We've provided some additional detail breaking '22 for Plex and that shows the underlying revenue and then the deferred revenue adjustment, well actually a range on that, that we're anticipating that we provide that. So you can put it in context of how to think about that growth that we're showing.

Stephen Tusa -- JP Morgan -- Analyst

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

Operator

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

Noah Kaye -- Oppenheimer -- Analyst

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

Blake D. Moret -- Chairman and Chief Executive Officer

Sure. No, I know, well thanks for the question. Look on the day that we announced it. I got a lot of unsolicited feedback from both employees and customers that have developed relationships with over the years, and they were really excited, thrilled about what we were bringing in. They felt like it made great sense and it added, what we can offer to complement the core automation that they've been buying from us for years or in some cases where they're trying to decide who their digital transformation partner is. With this, what we have, and this is something we've talked about for a long time, an approach that meets customers where they are on their journey. We're still going to sell a lot of on-premise software and customers have made investments there, and they want to see a migration path and our MES orders and production center based in the US, continue to grow and those orders get larger. And we continue to see lots of runway for that software for customers who have decided they want an on-premise solution. But we have the opportunity for customers who have made the decision that they're going to start working with these applications with cloud native software and they're are ready to start working there to build on Plex' great customer base and introduce it to those customers who said they're ready to look at that as well. And so having that approach, it all comes back to that theme of an open approach where we're not forcing one philosophy down a customers throat and we're telling them we can meet them where they are on their journey. We'd like for that data to be coming from Rockwell core automation components, but as we've talked about before, a lot of the software, we fully expect is going to give us a way in, into competitive strongholds where we're not currently or lately supply, or the rather core automation and we're going to be providing the value at the software and then working on the automation piece of this as well. So it's going to be a both approach and we're thrilled about the new ways to win that Plex gives us.

Noah Kaye -- Oppenheimer -- Analyst

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

Blake D. Moret -- Chairman and Chief Executive Officer

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

Noah Kaye -- Oppenheimer -- Analyst

That's extremely helpful. Thanks so much.

Blake D. Moret -- Chairman and Chief Executive Officer

Yeah. Thanks, Noah.

Operator

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

Jessica Kourakos -- Head of Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Jessica Kourakos -- Head of Investor Relations

Blake D. Moret -- Chairman and Chief Executive Officer

Nick Gangestad -- Chief Financial Officer

Julian Mitchell -- Barclays -- Analyst

Scott Davis -- Melius Research -- Analyst

Joshua Pokrzywinski -- Morgan Stanley -- Analyst

Andrew Kaplowitz -- Citi -- Analyst

Unidentified Participant

Stephen Tusa -- JP Morgan -- Analyst

Noah Kaye -- Oppenheimer -- Analyst

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