Good day. And welcome to the Regal Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there’ll be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Robert Barry, Vice President of Investor Relations. Please go ahead.

Great. Thanks, Ian. Good morning, everyone. Welcome to Regal Beloit’s second quarter. 2021 earnings call. Joining 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’d 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 differ materially from projected results, please refer to today’s earnings release and our SEC files. On slide three, we stated 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 the 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. On slide four, we provided some additional disclosures related to the planned merger with Rexnord PMC business. And on slide five, let me briefly review the agenda for today’s call. Louis will lead off with his opening comments and an overview of our 2Q results. Rob Rehard will then provide our second quarter financial results in more detail and discuss our 2021 guidance. Louis will then come back to provide an update on our planned merger with Rexnord PMC. We will then move to Q&A. After which, Louis will have some closing remarks. And with that, I will turn the call over to Louis.

Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our second quarter earnings and to get an update on our business and thank you for your interest in Regal. Building on the solid momentum we had in first quarter, Regal delivered accelerating topline growth, significant margin gains and strong free cash flow in the second quarter. Organic growth was 37% and adjusted operating margin rose nearly 500 basis points, resulting in 140% adjusted EPS growth, which is the second quarter in a row that we achieved record results. I am also incredibly pleased to report that based on our second quarter performance and the margins implied in the 2021 guidance we shared last night, that we are hitting our operating margin expansion target under our 300-in-3 plan well ahead of schedule. As a reminder, at our March 2020 Investor Day, we outlined a plan to raise our adjusted operating margin by 300 basis points over three years using 2019 as a baseline. Many factors allowed us to outperform our 300-in-3 goal, but I believe Regal’s focus on 80/20 principles is chief among them. Underlining the strength of this performance is that it was achieved while confronting steep inflationary headwinds, scattered supply chain disruptions and lingering COVID-19 impacts. I believe demonstrating very strong execution by our global Regal team. So before getting into more detail on our second quarter results, I want to thank all my Regal colleagues around the world for their hard work and resourcefulness, as they remain focused on stirring our customers, executing on our restructuring plans and cultivating new growth opportunities. I am also pleased to report that Regal continues to mature its various growth initiatives and while recovering end markets boosted our growth rate, Regal also continued to achieve share gains in all of our segments during the second quarter. I want to emphasize that we are definitely gaining momentum and share through our focused approach in the Industrial Powertrain, which I have an example of in the next slide.

Turning to our results, I think, a standout positive in second quarter was Regal delivering 37% organic topline growth with all four segments contributing. Essentially all our markets supported this positive performance, because COVID distorts the comparisons with 2020, it’s notable that our sales in the second quarter were up almost 4% versus 2019. A few highlights by vertical include our unit material handling business, which was up nearly 30%, our alternative energy business within PTS posted revenue that was a multiple of the levels seen in the prior year and our North America Residential HVAC business was up over 40% in the quarter. And notably, we started to see better momentum in our Commercial HVAC business and expect the non-res end market, which represents about 12% of Regal sales to be a nice source of growth for us in 2022. Regionally, our China business was also a very strong contributor, up more than 60% in the quarter. Our China team continues to execute at a high level, capitalizing on recovering end market demand, while also driving nice share gain. While 37% organic sales growth will be hard to beat, I am confident we’ll continue to see strong momentum in the back half, given strong order rates in the second quarter and as we entered the third quarter. Orders in second quarter were up 57% on a daily basis and our tracking up at a mid-2020’s pace in July. Our orders were up 22% versus second quarter 2019. Notably, we think strength in our Residential HVAC and pool pump businesses is set to continue through the second half, which is an improvement versus our more cautious stance on these markets when we spoke last quarter. This strength is driven by robust orders and a sizable backlog, our sense that underlying…

Thanks, Louis, and good morning, everyone. As you can see, Regal had very strong results in Q2. Now, let’s discuss our results by segment and then I’ll walk through our latest guidance, including some high level thoughts on end market outlooks for this year and for 2022. Starting with Power Transmission Solutions or PTS, organic sales in the second quarter were up 33.1% from the prior year on broad-based strength, but with particularly strong performance in the alternative energy and U.S. general industrial markets, and in our conveying business. Pruning actions were approximately 280 basis points of topline headwind in the quarter. Operating margin in the quarter for PTS was 19.4%, up 580 basis points compared to the prior year, a record level for this segment for the second quarter in a row and above our expectations. Orders in PTS for the quarter were up nearly 40% and are tracking up mid-30s in July both on a daily basis. Order strength in the second quarter and in July was broad-based. Turning to Climate Solutions, organic sales in the second quarter were up 43.4% from the prior year, which was slightly above our expectations. The increase was primarily driven by our North America Residential HVAC business, further demand recovery in Europe, and continued strength in the general industrial and commercial refrigeration in markets. Pruning actions were approximately 350 basis points of topline headwind in the quarter. The adjusted operating margin in the quarter for Climate was 18.4%, up 600 basis points versus the prior year period. Strong volumes, favorable mix and continued cost reductions were all margin tailwinds. While our two-way material price formulas continuing to lag material inflation in the quarter, we saw non-contracted price increases help bridge the gap, so that we ended in a neutral price cost position…

Thanks, Rob. I’d like to spend a few minutes updating you on our planned merger with Rexnord’s PMC business. First, as I mentioned earlier, we now have all required regulatory approvals needed to close. One key remaining step is shareholder approval of both Regal and Rexnord, and we announced last week that our special shareholder meeting is scheduled for September 1. In light of this information, we now expect the transaction to close sometime in the second half of 2021. The precise timing will depend on the IRS letter ruling, but late in the third quarter or early in the fourth quarter seem most likely. Second, our dedicated integration planning team is working diligently to ensure we hit the ground running on synergy realization when we close and I feel very good about the team’s efforts on this front and remain highly confident we’ll meet or exceed our estimates for synergies. Third, while we are not providing an update regarding the private letter ruling from the IRS that is being sought in connection with this transaction. I’ll note, as more fully described in the proxy statement we filed with the SEC on July 21st, we believe that based on recent share ownership information and assuming receipt of the IRS private letter ruling, we are still on track to be within the dividend range provided when we announced the transaction in February with a midpoint of roughly $300 million. Lastly, with the strength of Regal’s 2021 anticipated performance and the strength of the Rexnord PMC performance as communicated by Rexnord last week, we are feeling even more confident in the timing of this merger and the opportunity for shareholder value creation. As a result, we are raising our estimated pro forma adjusted sales and EBITDA estimates for 2022. We now expect approximately $5 billion in pro forma revenue versus $4.5 billion when we announce the transaction and we now expect adjusted EBITDA in excess of $1 billion, up from approximately $940 million communicated in February. In addition, while we’re not raising our estimated synergies or quantifying the cross marketing synergies we’ve identified, wins like the one we shared earlier with the resource recovery OEM make us more confident about the enhanced value proposition we will have post-closing. Being able to sell customers a complete, integrated Industrial Powertrain solution across a wider array of applications and end market will meaningfully help new Regal grow above market and was a central strategic consideration for us pursuing the merger in the first place. And with that, I’ll turn it back over to the Operator. Operator, we are now ready to take questions.

[Operator Instructions] It looks your first question comes from Michael Halloran of Baird. Please proceed.

Hey. Good morning, everyone.

Good morning, Mike.

So, let’s start on the margin side. Obviously, really good job this quarter, for the last couple of years, I guess. But could we talk a little bit more about the PTS margins? Those were quite the jump here. Maybe some -- a little bit more detail on what the big factors were that were driving that jump and maybe more importantly, how should I think about sustainability on a forward basis at that margin run rate? Is it the right run rate to think about or is there some puts and takes in there that we need to think about on a forward basis?

Yeah. Let me start with that, Mike. First of all, I think our PTS business is performing incredibly well, firing on all cylinders. It’s really driven. They’ve embraced 80/20 incredibly well, not only from the standpoint of SKU reduction, footprint rationalization, but also then leveraging the Industrial Powertrain and focusing our efforts on gaining share and growing. And so, I would tell you, although, we are seeing in the second half that we’ll see a little bit of balance, these margins are sustainable and will actually improve further. And so we’ve got a high 30s gross margin business that especially then with the combination with Rexnord PMC we’ll be taking them over 40.

Yeah. And I would just add, Mike, for a second on that one. Certainly, some mix impacted the quarter in terms of some of the key drivers that we highlighted during the call that were in my remarks, in terms of solar and material handling, in particular that were nice margin drivers for us. As you look out for the remainder of the year, while we do see that these are largely sustained margin rates, we don’t expect them to continue quite at the rate that we saw as we exited the second quarter, but certainly above historical levels and so still very nice improvement.

Okay. Thanks for that. Appreciate it. A follow-up here then just more broadly as we think about the margins, pretty impressive that price cost neutral in the quarter considering all the headwinds out there and considering the timing of when the material price formulas kind of normalized. So as you’re looking towards the back half of the year here, maybe just a little deeper discussion on how you think that price cost equation starts layering out through the years, maybe some of this catch up materializes and depending on inflation factors?

Sure. It really is nice to see that we’re able to, as you point out, achieve price cost neutrality in the first half now and we’re still saying that we expect to be price cost neutral for the back half. Now, in our Climate and Commercial businesses in particular, we’re still catching up on our two-way material price formulas and we do expect those to largely catch up in the third quarter. Also as it relates to additional inflation flowing through, we do expect additional inflation to flow through the business as we enter the second half or as we move through the second half. However, we feel confident in our ability and the new -- honestly, it’s a new way of and muscle that we have now and discipline within the team to be able to capture price that we will be able to offset that and remain neutral, as I said, in the second half. So, it’s not easy, that’s for sure. But it’s a little easier when your customers expect it, they know the inflation is there, the competitors are generally are following and 80/20 is really helping us make these strategic pricing decisions now. So sometimes you have to go to your customers more than once to get the price and that’s what the teams are doing today. And we’re managing through this, which is why we achieved what we did in the second quarter and I would expect that to largely be the case as we move through the rest of the year.

Appreciate it, gentlemen. Thank you.

Thanks, Mike.

Thanks.

Our next question comes from Jeff Hammond of KeyBanc Markets. Please proceed.

Can you hear me?

Yeah. Good morning, Jeff.

Oh! Hey. So, just on -- I noticed in the presentation you mentioned buyback, and my understanding, I think, you precluded. But it just doesn’t seem like the market is giving you kind of full credit here for what you’re executing on internally and the portfolio change. And I am just wondering how you’re thinking about buyback and how quickly you can kind of step in once the deal closes?

Sure. As you’re right, we have been somewhat limited on what we can do between now and the merger close. But big picture, we’re not averse to stock purchases and we do plan to maintain a balanced approach to capital deployment once we get past the close. So that’s the way we’re thinking about it and we’re not coming off that position. So we can get back into buying back stocks we decide to do so afterwards. We can be more precise on timing, of course, after the close.

And Jeff, I appreciate you acknowledging the stock performance, because we certainly see it as well. But our team is solely focused on driving stronger, more profitable growth and improving our overall performance. And so, that’s where our focus is. We think we’re doing a nice job and with the merger with Rexnord, we’ll become even stronger as a company and that will be recognized for -- and will be recognized for that performance.

Okay. Great. And then so you gave the guidance on the high-teens growth. Are there any segments that are going to be notably above that or below that? You gave a lot of good detail on the order trends? But just trying to get a sense of any outliers within that growth rate?

Sure, Jeff. The way I think about it is in this order, from highest to lowest and this from a segment perspective as we work through the back half of the year. I would say the highest growth that we would expect would be coming through on the Commercial segment followed by Climate, then PTS, and lastly, Industrial in that order is the way I look at the back half.

Yeah. If you remember, Jeff, we’ve been going through a transition. We’ve established a new product offering, our TerraMAX product, which is being ramping up in Mexico. But we also because of the tariffs that were put in place, we transitioned a significant amount of production from China into Mexico. And so the supply chain is a little bit more deeply rooted in China and we are doing more work to localize that in the North America market. And so as compared to some of our other businesses, I’d still say the core advantage of and differentiator of Regal is our global supply chain and our global manufacturing footprint. But I remind you that was true for every business except for industrial that was producing almost completely out of China and India. And so, this is why it’s having -- now with establishing that capability in Mexico it is having a little bit more pressure on the industrial business than the others.

Okay. That’s very helpful. Thanks.

Yeah. Thanks, Jeff.

Our next question comes from Christopher Glynn of Oppenheimer. Please proceed.

Thanks. Good morning.

Good morning.

Good morning.

A Lot of praise for the momentum despite incorporation here, I did want to ask about the gross margin down quite a couple of points sequentially. I know price cost went from slight positive to neutral. But I think growth also broadened too, maybe you had rich mix spearheading growth more in the first quarter. Just curious thoughts around that in second half gross margin?

Yeah. I’ll kick it up there and thanks for the comments. We do feel like we’re gaining momentum and that’s good news. We are a gross margin driven organization. We talk about gross margins constantly. Yes, gross margins, they’re only down about 100 basis points from Q1 to Q2, so not the 200 that you referenced. But nevertheless, still down. Certainly, mix has an impact. But really the main impact is the inflationary aspect and price cost neutrality. And so at a certain point, you’re not able to get the full level of leverage from a neutral price cost and that was really the major headwind. I will say that the fact that one of our facilities in India in our Industrial business was shut down for six weeks. That was definitely burdensome. That facility fortunately is back up and running. Although, we -- just because of the situation in India, 50% production on first shift and 50% on second, but we’re still -- we’re now back to 100% production. And then our comments around the supply chain in Mexico for industrial certainly had some influence as well. But the main driver is material inflation and neutrality on price cost.

Okay. Thanks. And then on SG&A, do you see the first half run rates is pretty stable, maybe tick up just a bit in the back half?

Yeah. I think there will be a little bit of an uptick but not much. We’re still working -- the teams are managing SG&A very tightly and so we do expect that SG&A should remain fairly close to what we saw in the first half, slight uptick, but not much. So I would expect that to be a nice source as we move into the second half.

Okay. And a lot of companies talk about Lean discretely, your parlance is 80/20, just curious, does the Lean principles kind of roll up into your 80/20 paradigm?

So, I’ll say it this way. We call it the Regal Business System and I know many companies state that as well. But 80/20 is our steering wheel. It directs us to where we need to focus. Lean gets us our focus on process in driving waste overburden and variation out, so we can be more efficient and productive. They go hand in hand at Regal. And I’ll tell you, I couldn’t be more proud of the momentum our team is gaining across Regal with driving Lean and 80/20. So you will see more benefit from that in the future from Regal.

Thank you.

Yeah. Thanks.

Our next question comes from John -- Joe Ritchie of Goldman Sachs. Please proceed.

Thanks. Good morning, everyone.

Good morning, Joe.

Good morning, Joe.

Hey, guys. So kudos on the accomplishments, particularly in the margins and being able to do that and in such a short time period. I guess, what’s really -- what really stands out to me is the fact that Industrial is still sitting at low single-digit margins, and I think, you guys have kind of called out an 8% to 11% entitlement longer term and you were still able to achieve those margins. So, I guess, my question is, as you’re thinking about the path-forward for Industrial. One, do you still believe 8% to 11% is the right entitlement, and then, secondly, how do we get there?

Yeah. No. We do still feel that 8% to 11% is the right entitlement. It’s going to take a little bit longer than we anticipated, because of the impacts and the headwinds of this first quarter. So with the COVID-related disruption in India, that had a pretty significant impact and then the supply chain challenges being the main impact of Q2. We believe, though, that going forward with our efforts to reinstall our TerraMAX product line out of Monroe and then our focus in the supply chain of reducing our overall cost and logistics of getting material into Mexico to build into the marketplace and then better managing. And they’ve come a long way, but continuing to better manage our gross margin and 80/20 efforts, we have a path to 8% to 11%. The stumble of second quarter certainly slows that process down a bit, but we feel really confident in our ability to continue to recover with. We believe mid single-digit operating margins in the second half of this year and strengthening into 2022.

Great. No. That’s helpful context. Thanks, Louis. And then, I guess, my follow-on, on slide 16 laying out like where your end markets are? I mean, obviously, pretty bullish that 30% are just starting to inflect and you’re still expecting positive growth for all of them in 2022. I guess just maybe if I was just thinking about the Residential HVAC piece, which is going to face some pretty tough comps. Like, I guess, what gives you the confidence that that piece of your business can grow in 2022?

Yeah. I mean a couple of things. Certainly, for the rest of this year, prices are going to be a benefit. Our OEMs have come out with a pretty bullish perspective. But beyond 2021, we would say that there will still be strength in resi new construction. We believe that the work-from-home initiatives, and therefore, reinvestment back in the home will be nothing but an uplift and continued momentum for us. And then, lastly, with the infrastructure bill probably being passed, we think there’s going to be some stimulus tailwinds as well. So do we think it’s going to be elevated growth? No. I think we’ll be back to a normal growth level in 2022, but we still feel pretty strong that the market will continue into 2022.

Okay. Great. Thanks, guys.

Thank you.

Thank you.

[Operator Instructions] Next question is coming from Nigel Coe of Wolfe Research. Please proceed.

Thanks. Good morning.

Good morning.

This might be the last call of Regal Beloit end of an era. So just maybe…

Okay.

… Louis, just talk about what you consider to be normal growth rates, I mean, I think, it’s a bit of a different to what we’ve been used to in the past at Regal. So there’ll be sort of a follow-on question to Joe’s. But on the margin targets, getting there a year early is great, but when you take a step back, what kind of went better versus planned? It certainly wasn’t volumes. It certainly wasn’t input costs. So what’s kind -- where did you overdrive versus your original targets?

Yeah. So, I think, there’s two questions there, Nigel, and thank you for your comments and it is -- we’re very excited about the merger with Rexnord PMC and it’s going to transform the future of Regal and Rexnord PMC for that matter. So thank you for acknowledging that. So, from a -- how do we think about growth going forward? I view our teams are doing a phenomenal job of building the muscle needed to outgrow our market. Our internal goals are to outgrow our markets by 50%. Now you’ve heard me say in the past that I like to shoot for the moon, so I end up on the roof, because if you shoot for the roof, you’ll not move at all. Our team is getting our arms around how do we outgrow. I mean, we’ve gained some nice share this year in every segment. I mean, back to the comp -- question on resi HVAC that we had in the last question. We believe that 2022 is going to be strong, because we’re also gaining some share there and so these are benefits for Regal. So the way I’d think about it is, expect market growth and then we will outgrow those markets by at least positive up to 50%, that’s our focus. Now from a gross margin perspective or a margin perspective and what went better. I’d tell you 80/20 is our life. It directs us. It points us where we need to spend our energy and effort. And it’s all around where we’ll be able to provide more value to our customer, but also get the return of value as well. That has been a major driver.

Yeah. It does help. Thanks. Thanks, Louis. And then on the 80/20, you’re still seeing significant sort of impacts to revenues and it was about 2 points of sort of 80/20 impacts to revenues. And I know the -- this is a continuous process and it will probably continue. But where do you see that impact landing in 2022, do you think we’re down to a sort of a more normalized level or do you still think we’re going to be doing some heavy lifting on the revenue portfolio?

No negative to the past, but what we think is value today is quite different and so I still think we have runway on 80/20. And part of that runway means that we will prune some business in order to achieve better performance and to put our focus on our highly valued customers. So we’re not going to be down to zero in 2022. I’d say 1 -- slightly above 1 is how I would think about it.

Okay. And then my final question is, you referred to the regulated change in the pool market, which I assume is the variable speed pump regulation, which went effective on the 19th of July, so we’re beyond that point. I think there’s a little bit maybe some concerns that perhaps there’s a pre-buy and then there might be a bit of an air pocket, it doesn’t sound like you’ve seen that, maybe just confirm that?

The demand in the market is strong, whether it’s work-from-home and greater investments in activities at the home. Also, we’re hearing that contractors are hiring more and it takes multiple quarters to get a pool put into your backyard. We see the demand very strong. And so, no, we don’t think there’s going to be a major concern about the pre-buy. I will tell you that we feel really good about our new solution going into that space. We will be the leader in the market with a higher efficiency, lower noise solution in a smaller footprint and we believe we will gain some share from this exercise. And so I couldn’t be more excited about -- now, remember, pool is only 4% -- residential pool is only 4% of Regal, but that’s still, like, everything’s material and 4% is good and we look forward to continued strength through H2 of this year. We believe although more moderated, there will be growth in 2022 as well.

Yeah. 4% when it’s up 50% is a meaningful number. But thanks for the detail Louis and good luck with getting an excellent PMC close.

Yeah. Thank you very much.

All right. At this time, this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Louis Pinkham for any closing remarks.

Thank you, Operator. Having delivered a strong second quarter and with great momentum entering the third, plus our plan to close the Rexnord merger shortly, I’ve never been more excited about Regal’s future. We’re continuing to transform our cost structure and we’re making progress building Regal’s growth muscle in many cases by leveraging our technology expertise to address rising demand for more energy-efficient products and solutions. The addition of Rexnord PMC and the combined organization’s enhanced ability to deliver leading Industrial Powertrain solutions should only brighten our growth prospects further. I look forward to keeping you updated on our progress towards the close of the merger and on all of the transformation initiatives underway at Regal. Thank you again for joining us today and for your interest in Regal.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.