Regal Rexnord Corporation (RRX) Q4 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Regal Fourth Quarter 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would like now to turn the conference over to Robert Barry, VP of Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, everybody. Welcome to Regal Beloit's fourth quarter 2020 earnings conference call. Thanks to everyone who is joining us again. As a reminder, today's earnings call is replacing our previously scheduled earnings call on February 18 of this year. With me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Vice President and Chief Financial Officer. Before turning the call over to Louis, I would like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our SEC filings. On slide three, we state that we are presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures to provide you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods and in the same manner as management. Please read this slide for information regarding these non-GAAP financial measures and please see the appendix for reconciliations of these measures to the most comparable measures in accordance with GAAP. Now let me briefly review the agenda for today's call. Louis will lead off with his opening comments. Rob Rehard, our CFO, will then provide our fourth quarter financial results in more detail and discuss our guidance, and then we will move into Q&A. After which, Louis will have some closing remarks. And with that, I will now turn the call over to Louis.

Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our fourth quarter earnings, and thanks for your interest in Regal. I'm sure many of you saw the news this morning announcing our plans to merge with Rexnord's Process & Motion Control segment through a Reverse Morris Trust transaction. I hope that all of you listened to our call earlier this morning discussing that transaction. If not, I encourage you to listen to the replay. We are extremely excited about this transaction and what it means for Regal. But to set expectations, the subject of this call will be our fourth quarter results and initial 2021 outlook. Before turning to our results, I want to begin by thanking all my Regal colleagues around the world for their hard work and resourcefulness, and for staying focused on serving our customers, while remaining disciplined about keeping our workplace safe as COVID-19 persists. We had a great fourth quarter, which capped a strong and truly transformational 2020 for Regal. And I can't thank our nearly 20,000 associates enough for a full year of very strong execution at a time when the pandemic was presenting a host of personal and professional challenges. Some highlights of our strong fourth quarter performance include a return to top line growth, leveraging that growth at 54%, well ahead of our 30% plus target, achieving another quarter of adjusted gross and operating margin expansion, posting free cash flow conversion of 175% and delivering year-over-year adjusted EPS growth of 42%. And despite the challenges of COVID in a global recession, achieving 5% EPS growth and 190% free cash flow conversion for the full year. Regarding fourth quarter, after several very challenging quarters, it was great to see Regal return to positive top line growth with our fourth quarter sales tracking up nearly 5% on an organic basis. Three of our four segments grew during the quarter with commercial up double digits organically. While the PTS business continued to see a modest decline of just under 2%, we have confidence that PTS will return to growth as 2021 unfolds and shorter cycle industrial markets gain momentum. As I look across our end markets today, roughly half are growing with the rest down modestly. Order rates also presented an improving outlook with fourth quarter ending at approximately 3%, and January, relatively strong at approximately 7%. We do think January got a boost from some buying ahead of price increases. But even putting that aside, we think underlying demand was strong and gives us great momentum as we start the year. Notably, our residential HVAC business in climate remains particularly robust, with orders up 16% on a daily basis in Q4. Pool also remains a notable bright spot. Orders in pool were up 12% on a daily basis in Q4. It's also worth mentioning that we saw very strong orders in China as that market continues to rebound. Orders in China on a daily basis were up 20% versus last fourth quarter, with particular strength in data center, general industrial and commercial HVAC markets. Beyond recovering market, our team in China has continued to see nice share gains in the agricultural market, and is also starting to see nice outgrowth in marine. Lastly, I want to highlight a really nice order win by our Nicotra Gebhardt air moving team in commercial. The team recently received an order from a large U.S. customer valued in the mid single-digit millions for a number of our fan filter units, which will be installed in a large data center, where air quality conditions must be precisely controlled. We won because in addition to meeting the jobs stringent technical specifications, Regal solution was a leader in energy efficiency and field service support. This order is also nicely accretive to Regal's gross margin and a reflection of how much the customer values our differentiated offering. This win is a great example of how Regal is focused on driving profitable growth by competing on superior technology and service levels, defined through voice of the customer, particularly in the realm of energy efficiency. It is also a good example of how we're gaining traction, selling products developed by historically Europe focused Nicotra into other regions around the world, which you may remember was one of our strategic growth objectives when we acquired this business in early 2018. Rob Rehard will share additional order details by segment in his remarks shortly. Moving down the income statement. We continue to see improvements tied to our 80/20 initiatives and our multi-year restructuring programs, which help drive our fourth quarter adjusted gross margin up 110 basis points versus the prior year. We've seen year-on-year gains in adjusted gross margin every quarter this year, something we're very pleased with, especially given the severe COVID-related volume headwinds we experienced throughout the year. We also realized improvements at the adjusted operating margin level, posting a year-over-year gain of 240 basis points in the fourth quarter, reflecting benefits of our restructuring actions, volume, mix and favorable net material costs. Taken together, we think this margin performance provides further evidence we're continuing to structurally improve the profitability of Regal. Indeed, as I mentioned last quarter, we're actually tracking a little ahead of our restructuring and margin expansion plans that we announced at our Investor Day back in March of last year, where originally we expected to achieve a cost structure that supported 300 basis points of margin expansion by the time we exited 2022. We now believe we can attain that cost structure one or two quarters earlier. On our portfolio, in addition to the transformational announcement we shared this morning, we have also continued to methodically review all our operations to assess their strategic fit for Regal. We recently completed the divestment of our Cairns motor services business in Australia. It's a small business, but its sale is operating income accretive, and I highlight as an example of how we're taking actions in response to our regular cadence of portfolio evaluations. Shifting to free cash flow, along the Regal strength. Performance in the quarter remained very healthy. We generated $108 million of free cash for a conversion rate of 175%. Our conversion rate for the full year approached 200%, and brought our net debt to EBITDA ratio down to only 1 times at year-end, very nicely positioning us from a balance sheet perspective as we move forward with the strategic combination we announced earlier today. Before turning over to Rob, I want to update you briefly on one of our share gain initiatives. Last quarter I shared some of what we're doing in the realm of Indoor Air Quality or IAQ, including work on a pathogen UV light solution. The system continuously cleanses airborne path unto pathogens. Since last quarter, we've now developed a market-ready air treatment system, which we're branding Genteq U Vantage [ph] to highlight the advantages of our unique UV light solution for cleansing air. The product has applications in the residential and commercial market. A white paper now in circulation provides details on the efficacy and safety of the product to reduce indoor pathogens, including COVID-19. Now we're testing, as validated by a third-party lab shows that in common applications, U Vantage reduces active airborne pathogen 15% to 50% faster than high-grade filtration alone. We see lots of potential for this product, even beyond COVID-19 as end users become more interested in keeping indoor air free of all kinds of pathogen. It's also a great example of how Regal plans to grow in competitive markets such as residential and commercial HVAC, developing new products driven by the voice of the customer that leverage our deep domain expertise and then executing with urgency. And with that, I'll turn it over to our CFO, Rob Rehard, who would take you through our fourth quarter results in more detail and share our guidance for first quarter, plus some high level thoughts on full year 2021.

Thanks, Louis. And good morning, everyone. I'll start by echoing Louis' comment about how good it feels to be reporting positive top line growth rates again, which tracked at nearly 5% on an organic basis in the fourth quarter. And with January orders strong, we're starting 2021 with great top line momentum. While COVID-related pressures remain, especially in parts of our Mexico operations, we think we're seeing light at the end of the tunnel. Beyond the top line, the team continued to execute on a variety of margin expansion initiatives, delivering 240 basis points of adjusted operating margin improvement in the quarter, supported by a 54% leverage rate, handily exceeding our target of 13% plus when growth resumed. Finally, the fourth quarter was another quarter of excellent cash flow conversion, which tracked at a 175%, and for the year, our conversion rate was 190%. Now let's dive into the segment results. Starting with Commercial Systems. Organic sales in the fourth quarter were up 10.1% from the prior year. The result was driven largely by strength in our pool pump business, which was up almost 30% in the quarter, in addition to ongoing gains in China and to a lesser extent, growth in North America, general industrial and commercial HVAC end markets. Momentum in pool remains strong, with Q4 orders up roughly 12% on a daily basis. An area of weakness in the quarter was our [Technical Difficulty] business, where second wave COVID impacts were a headwind. We also continue to confront isolated production challenges in our Mexico operations, but we feel we're making progress there. And despite these frictions, the business was able to deliver very strong growth. Finally, we show a roughly two point headwind from our ongoing proactive pruning of low margin accounts as we continue to execute on our 80/20 initiatives. As a reminder, while our pruning initiatives pose a headwind to the top line, they are also a factor contributing to market expansion. The adjusted operating margin in the quarter for Commercial Systems was 10.5%, up 300 basis points compared to the prior year. This market was up due to higher volumes, favorable net material cost and mix, partially offset by freight headwinds incurred as we worked to serve our customers expeditiously as possible during this COVID period. Orders in commercial for the quarter were up roughly 8% on a daily basis, reflecting fairly broad based strength, but particularly in pump and Asia, net of weakness in our commercial HVAC business, especially in Europe. For January, orders were up almost 11%, with broad-based strength. Now pool is starting to show some moderation. As a reminder, we're optimistic about momentum improving in pool in the back half of 2021 as new regulations that begin in July are set to drive greater adoption of variable speed motors. Regal also has a new pool product launching in advance that's specifically designed to help our customers to be better positioned in response to the upcoming regulatory change. In Industrial Systems, organic sales in the fourth quarter were up slightly versus the prior year. The segment saw a growth in the data center market and in China, but fairly modest, broad-based weakness and many other markets served and we continue notable pressure in oil and gas in markets. Pruning actions posed just under two points of top line headwind for this segment in the quarter. The adjusted operating margin in the fourth quarter for industrial was 1.9%, up 70 basis points compared to the prior year. Mix, continued cost reductions in our supply chain optimization actions in North America were tailwind in the fourth quarter. However, on the other side of the coin, we took a one-time inventory charge in the fourth quarter related to the final step in our strategic initiative, which we discussed at our Investor Day last year, whereby, we consolidated a number of legacy motor platforms onto a single, new, completely redesigned platform called TerraMAX, and moving production of that new platform to one facility in Mexico. While the impact of this charge was a bit above our initial estimate, the project was considered in our fourth quarter guidance. The new TerraMAX product introduction positions Regal to provide best-in-class, higher technology, valued solutions to our customers at a market competitive price. We remain excited about how this product will help improve our competitive positioning and margins in the industrial segment moving forward. In addition, during the fourth quarter, we encountered some restricted COVID-related disruptions at one of the industrial segment's, principal production facilities in Mexico, which resulted in heightened absenteeism and lower throughput. As we commented throughout 2020, all of our segments experienced COVID-related absenteeism in our Mexico operations to varying degrees. However, the Industrial segment was most impacted in the fourth quarter relative to the first three quarters of the year. While we've seen this situation starting to improve, we continue to expect lingering impact into the first quarter, which is included in our guidance. Orders for Industrial in the quarter were down approximately 7% on a daily basis, reflecting lumpiness of project activity in the data center market and continued softness in longer cycle industrial end markets. More encouraging, order rates for January were up 3% on broad-based strength. Turning to Climate Solutions. Organic sales in the fourth quarter were up 9.4% from the prior year. The increase was primarily driven by strong growth in our North America residential HVAC business, which we attribute to a combination of favorable end-user demand and channel restocking. HVAC orders in the fourth quarter were up 16% on a daily basis. We believe tailwinds from restocking are likely to continue because our discussion with customers suggest many parts of the channel are still not where they'd like to be on air conditioning inventory. Notably, we also started to see some early green shoots in commercial refrigeration, aided by the groceries market. We believe recovery in grocery and hospitality markets that support the refrigeration business will occur at a measured pace and will be tied to post COVID reopening activity. But it's still good to see this business back on growth and development [ph] The strength in residential HVAC was partially offset by a modest weakness in Europe and our proactive pruning actions, which were a three point headwind to sales in the quarter. The adjusted operating margin in the quarter for Climate was 18.7%, up 160 basis points compared to the prior year period. Strong volumes, favorable mix as we sell more subsystem and less strictly component products, and continued cost reductions were margin tailwinds, partially offset by higher expedited freight costs. Net material inflation was slightly unfavorable for the quarter in Climate. We expect to see this trend turn more favorable in the first and second quarters as benefits from our material cost formulas become more impactful. Notably, all our other segments were positive when it comes to net material costs in the fourth quarter, as was Regal overall. Orders in climate for the quarter were up 14% on a daily basis, largely on continued strength in North America residential HVAC, which was up 16%, along with some signs of recovery in Europe. Strength in Climate continued in January, where orders were up nearly 20% on a daily basis and aided by strength in our North America HVAC business, which saw orders up 25% on a daily basis as well as improving conditions in our commercial refrigeration business. I'd note that order rates in air condition are stronger than we'd expect at this time of the season, primarily due to the restocking dynamics I mentioned earlier. Also contributing to this dynamic are HVAC orders we booked in January for delivery in the second quarter, closer to the start of the cooling season. Turning to Power Transmission Solutions, or PTS. Organic sales in the fourth quarter were down 1.9% from the prior year, significantly narrowing the rate of decline versus last quarter. The organic decline reflects continued, albeit moderating pressure on the North America general industrial end market and in oil and gas, as well as lumpiness in the alternative energy market. Actions to improving lower-margin business were a roughly 70 basis point headwinds in PTS. On the positive side, we did see tailwinds for further gains in our ModSort unit material handling business, plus benefits from discrete product activity in the aero and midstream energy markets. Adjusted operating margin in the quarter for PTS was 17%, up 370 basis points compared to the prior year. Continued cost reduction and favorable net material costs more than offset volume-related pressures. As you've seen throughout 2020, we had undergone a significant transformation in the PTS segment. We've seen operating margin expansions of 190 basis points in the year despite sales remain down over 90%. Furthermore, operating profit dollars were up $3.8 million on a sales decline of roughly $72 million in the year. Orders in PTS for the quarter were down approximately 1% on a daily basis. We believe most end markets and PTS have stabilized, but during the quarter, distributors continued to order at or near demand versus restocking. However, in January, we started to see restocking with order rates up roughly 30% on a daily basis. We're optimistic that confidence is building in the channel and that we'll continue to see healthy order growth. That said, we believe some of the strength in January is tied to stocking in response to concerns about tightness in global supply chain, along with some customers buying ahead of anticipated price increases. On this slide, we highlight some key financial metrics we review. A few notable highlights. First, our strong free cash flow of $108 million or 175% of adjusted net income, bringing our conversion in 2020 to 190%. We also continued to delever the balance sheet with our net debt to adjusted EBITDA reaching one time at the end of the year. It's great to have such a strong balance sheet and a very healthy free cash flow outlook as we embark in the new strategic direction we announced earlier this morning. Moving on to the outlook. We're prepared today to provide an outlook for our first quarter and are cautiously optimistic that with COVID-19 impacts likely starting to moderate, we'll be in a better position to provide a full year outlook for 2021, when we report the first quarter. We expect first quarter adjusted diluted earnings per share in a range of $1.55 to $1.75, which would represent growth of roughly 26% year-over-year at the midpoint. This implies mid single digit revenue growth and improving leverage of 30% to 35% as you move through the guidance range. A few modeling considerations to keep in mind, first, we're assuming no material negative impacts from another way of COVID-19, second, we do expect relative weakness at industrial as we left some sizable projects in the prior year first quarter and also assume that some of the COVID-related pressure we saw in Mexico lingers a bit into the first quarter. We think operating margins for industrial are in the 2% to 4% range, are a good base case for that segment. Regarding the full year, while we're not prepared to provide detailed guidance at this point, we can share some high-level performance expectations. First, we'd expect to see mid single-digit organic sales growth for the year, with particular strength in Q2 and impacts from tougher compares in the fourth quarter. Second, as we've said before, we expect to see leverage rates in the 30%-plus range when growth has sustainably returned. Third, as a reminder, the vast majority of the cost-cutting we did in 2020 is resulting in permanent savings with the exception of $6 million related to temporary pay cuts and furloughs in the second quarter. Lastly, we expect to take actions in 2021 that will result in annualized cost savings of $25 million, which, for modeling purposes, I would assume, occur ratably starting the year. As Louis mentioned in his remarks, these additional actions, along with those plans for next year, should allow us to hit the margin targets outlined in our 303 margin enhancement program by mid-2022. I should also note that these margin goals are from Regal stand-alone. Any mix and synergy benefits associated with our plans to merge with Rexnord's PMC business will be additive to these targets. Finally, from an end market perspective, our top three, end markets of consumer, general industrial and non-residential construction, which represent roughly 20%, 20% and 15% of our total sales, respectively. As articulated last quarter, we believe the consumer market relevant to our products will remain fairly resilient in 2021. That said, we are aware of emerging concerns about maturing residential replacement cycle. And while we don't see evidence yet that this becomes a headwind in 2021, it is something that we'll be monitoring closely. Regarding the general industrial market, we expect it to recover progressively as 2021 unfolds, and we continue to see a sluggish non-residential construction market, in particular, for the roughly half of our exposure that is in the U.S. At the bottom of this page, we've included some additional assumptions that can be used when moderated in 2021. Before moving to Q&A, I want to once again thank all of our Regal associates for everything they are doing to deliver for our various constituents, our customers, our shareholders and our fellow associates. Our results in the fourth quarter showed very strong execution and further progress on our journey to structurally raise through the cycle profitability of our business. And with that, I'll turn the call back over to the operator. Operator, we're now ready to take questions.

[Operator Instructions] Our first question comes from Mike Halloran with Baird. Please go ahead.

Hey. Good morning, guys. Busy day.

Yeah.

So a couple of things here. One, a lot of content there, a lot of content today in general. So could you just kind of clarify the channel trends and the inventory trends as you look through your four pieces? I know the industrial - sorry, the PTS piece, you thought there might be a little pre-buying, maybe in little industrial. But could you just kind of go through all of those pieces? And how you think the channel fits, what inventory levels look like?

Yeah, I'm happy to do that, Mike. First of all, the PTS business, we're starting to gain and see some momentum in the channel. And so as Rob said, our January orders in PTS were 30%. And so after a relatively okay fourth quarter where orders were 2%, it was a nice highlight for us going into the year. Climate, I would tell you, there's still strength, and they're still filling the channel. And so the work from home phenomenon and the investments that are being made there are still pretty solid. On the pool side, so I didn't go to the commercial space, and pool is a pretty big space for us there. The OEMs are still pretty strong. This is seasonally though, a pretty quiet time, although pool in 2020 was very strong marketplace. And so we're down a little bit there, but as expected. And then, of course, as Rob commented, we've got the new pool regulation coming out in July and partner very closely with our OEMs, and that's why there's a bit more strength there, and we have a new product launching. On general industrial, still relatively sluggish, although, I would say that the prospects seem to be brightening. The ISM is greater than 50%, and we expect that, as I said with PTS, there's some short cycle restocking in the bearing business as well. And then industrial, the larger capital investments are still swamped. And so for our industrial business, orders being down in the quarter really because that longer cycle industrial market has not rebounded yet. So hopefully, that helps give the perspective on both the channels considering the market.

Yeah. So if I summarize that, though, the couple of areas where you pointed, there was some channel restocking going on, it doesn't sound like you think there's excess inventory in the channel that, that's more getting you back towards parity. Is that a fair characterization?

I would say, absolutely. We do not think there's excess inventory in the channel at this point and that - there's opportunity there.

And then on the price cost side, price cost positive in the fourth quarter. Maybe some thoughts on how you're thinking about it here moving forward. You've got some indexing relationships. You're putting in pricing in other areas. So just thoughts on how that works through the year, just at a high level. And if there's any lag impacts anywhere? Or this is a price cost positive thought process moving forward?

Sure, Mike, this is Rob. So we do think that we'll be neutral to slightly better. We could see climate remain modestly negative in Q1 and turned to positive Q2. That's where you're going to see the two way material price formulas and that lag that you're referring to which is generally about three to four months. But the good news is NPS far kicking in and - but commodity prices are also continue to be up side [ph]. So it's a bit of a moving target. And we do see that catching up very soon. Pricing elsewhere is better and in our non-contracted business and we also have some traction on some of our pricing initiatives. So overall, I'd characterize it as, we're expecting neutral to slightly positive, and that's the way we're entering the year.

And Mike, I'd just emphasize, 80/20 is helping us out a lot here. So - and so when we say that it's slightly beneficial in those other segments, it's really 80/20 in the way we're approaching product management at Regal today. We're managing price very closely.

That's super helpful. Last one here. With the transaction announcement earlier today, my suspicion is, the balance sheet usage over the course of the year is going to be pretty measured, given you have to figure out what the dividend looks like and just all the machinations there. Is that a fair thought process? Or should I be thinking about it differently?

No, Mike, I think that's the way to think about it. In terms of - we will continue - I will say we continue to be balanced in our capital allocation. We are still going to look for a disciplined approach here through organic investments, CapEx, R&D, dividend, opportunistic share purchases. And of course, we're still looking at potential bolt-on M&A from an inorganic standpoint. So we do see that we will continue to be balanced as we go through '21. And that's the way you should be thinking about it.

And so…

Go ahead. Go ahead. Sorry, go ahead.

The strength of our balance sheet, I think, gives us still some optionality even during this year. And so to just reinforcing Rob's comments, a one-time net EBITDA, it gives us that optionality that we will consider through the year, even knowing that we have a big transaction that will occur later in the year.

I appreciate it, everyone. That was what I was looking for. Congrats again on the announcement in the quarter.

Thanks, Mike.

[Operator Instructions] Our next question comes from Jeff Hammond with KeyBanc. Please go ahead.

Hey. Good morning, guys.

Morning, Jeff.

Just on the guide and the incremental. So I think fourth quarter, you had 54% incrementals on some growth. I think, that even includes the inventory charge. I'm just wondering why we're still thinking about kind of only 30% plus, and I know there's a plus on there, incrementals as we flip to growth in 2021?

Yes, Jeff. Rob here, again. I think the way to think about this is, we really did have some nice benefits as we exited the fourth quarter, especially from a mix perspective in the HVAC space in the pool space. Those are some of the really nice benefits that we saw. And they do tend to be a bit lumpy from that perspective and we wouldn't expect that same level mix going forward, especially in the first quarter. Not at this time at least. The other side of that is, we also have some nice price cost. And as you know, we are - we do say that we're going to be price cost favorable as we enter the first quarter or exit the first quarter. But not the same level that we saw in the fourth quarter. So just a couple of points there and why we may not see the same level of leverage going forward. But I will remind you that the range that we've provided has leverage up into the 35% range at the high end of the range. So still on the upper end from what we've guided to previously.

And Jeff, I'll just - couldn't agree more with Rob, and I'll just add the point that we like to set objectives that we're confident that we're going to hit. And then hopefully, we exceed a little bit as well.

And any aberrations in the PT margins, which were particularly strong on the good side that would normalize?

Again, our PT business has done a fantastic job in 2020 of driving 80/20, and accelerating their consolidation, their SKU rationalization and transforming the cost structure of that business. And so I would say, no, nothing in particular sticks out with regards to margins for the PTS business.

Okay. And just a clarification on the deal structure. Can you just talk about the range of shares that are going to be issued associated with the deal? I don't know, like just the split and then the dividend dynamic, I think you'd be issuing some additional shares, depending on the dividend, is that right?

Yeah, that's right. You know, let me give a little bit more detail. I mean it's a good question. In a typical RMT, there would be the 50-plus percent for Rexnord shareholders, 49.9% for Regal. In our case, we currently have a good, solid overlap of shareholders. And what this means - and currently, that overlap is roughly 25%. This means that we can meet the RMT threshold, a 50% plus for shareholders, including the overlap, while still having an economic ownership split of 61.4% for Regal and 38.6% for Rexnord shareholders pre-dividend. Plus a potential rightsizing dividend to Regal shareholders and a corresponding post-dividend ownership adjustment, which we're calling the adjustment mechanism, which is predefined and covers all circumstances in this deal. So I'll get into that in a little detail. The pre-dividend ownership is 61.4% for Regal, 38.6% for Rexnord, that is fixed. It does not change. What the adjustment mechanism does is to ensure that we meet the RMT threshold at closing, even as shareholder overlap may change between signing and closing. For IRS purposes, the overlap and the RMT threshold of Rexnord shareholders owning 50-plus-percent, including that overlap, is measured at closing. We do expect there to be a private letter ruling from the IRS. We will, of course, follow that as we measure the overlap at closing. So looking at all this. Considering Regal shareholder base and having had detailed discussion with our tax and financial advisers, we believe that the likely range of special dividend to Regal shareholders is between $100 million and $500 million at closing. And as you know, in the deck we presented that we picked the mid-point of $300 million to model. And so that's how we're approaching this. The mechanism is clear. It tells us how we define the dividend based on direction from the private letter ruling from the IRS. So hopefully, that gives you a little bit more clarity, Jeff, of how this will work.

Okay. So just to clarify, so the base split is the 61.4% to 38.6%, so you'd be - there'd be 26 million shares issued to, or so to the Rexnord shareholders?

Yes. That's right.

Okay. And then it will adjust based on the dividend structure. Okay. Thanks. I’ll get back in queue.

Thanks, Jeff.

Our next question will come from Chris Dankert with Longbow Research. Please go ahead.

Hey, morning.

Hey, Chris.

I guess as we head into 2021 here, are there any additional divestitures we should be thinking about? Or do we kind of work through a lot of the pruning actions as we think about the core portfolio here?

You know, and Chris, as you know, we really don't talk about divestitures until they - if and when they occur. We talked about the small motor service center in Cairns, Australia that we divested in Q4. I mean, we're talking a couple of million dollars of revenue, and it was losing money. There's not a lot of that in our portfolio anymore. We have taken good action on 80/20 over the last two years. We will continue on that path. But to have done actually divesting anything at this time, there's nothing specific in our planning. Of course, we're always evaluating our portfolio and what makes then best sense and where Regal is best as an owner. And of course, we'll keep you updated as well, Chris.

Understood. Understood. And then thank you for the color on the first quarter and then particularly on the margins. I guess it is because there's such a swing and a lot of moving pieces going on. How should we think about kind of Industrial Systems margin for 2021. Can we get to mid single, 6%, 7% margin in '21? Or is it really too early to kind of set goals that high?

Hey, Chris. This is Rob. Good question. We did spend a little bit of time on this during the call, but let me give you a bit of a perspective here. We do see some continued near term choppiness on project mix in the first quarter for industrial. And we're also seeing some lingering, near term COVID-related pressures in industrial into the first quarter. If you exclude the inventory charge, the operating margin industrial was closer to 5%, 6% in the fourth quarter. So that 2% is not - certainly not indicative of how we're tracking. For the first quarter, as I touched on the call, a range of 2% to 4% probably does make sense. And while we're not really providing any guidance outside of the first quarter, we do expect to improve from these levels, certainly as we move through the year. I'll tell you, Chris, that we feel that the framework we laid out at our Investor Day for 8% to 11%, still makes a lot of sense and remains independent of volumes. And we did say today that we would look to deliver on the 303 ahead of schedule. And so that acceleration of the margin progress also includes industrial. So we're very confident in our ability to bring this business to the level that we've articulated at Investor Day, and we've got a great path to get there.

Got it. Thanks so much.

Okay. Thanks, Chris.

This concludes our question-and-answer session. I would like to turn the conference back over to Louis Pinkham for any closing remarks.

Thank you, operator. To summarize, our fourth quarter results capped off what has been a challenging but also a transformational year for Regal, with margins and earnings up, strong free cash flow, and lots of groundwork laid to deliver stronger above market top line growth, all despite sizable COVID-related pressures. We're also starting 2021 with great momentum, both on an organic and inorganic basis. Organically, orders are strong. Our new product pipeline is healthy and expanding. Our restructuring plans are proceeding in our 80/20 and lean initiatives continue to ramp. We're extremely excited about the transaction we announced earlier today, which will meaningfully rebalance our portfolio towards the PT business, deliver top quartile cost synergies, and give the post-merger Regal an ability to deliver stronger above-market growth. We look forward to discussing our integration plans with you all in the future and providing more detail. I want to thank you for your interest in Regal, and have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.