Good day, and welcome to the Regal Rexnord First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Rob Barry, Vice President, Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, and welcome to Regal Rexnord's First Quarter 2024 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Chief Financial Officer. I'd like to remind you that during today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the regalrexnord.com website. On Slide 3, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors and we have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in these presentation materials. Turning to Slide 4. Let me briefly review the agenda for today's call. Louis will lead off with his opening comments and an overview of our 1Q performance. Rob Rehard will then provide our first quarter financial results in more detail and review our latest 2024 guidance. We'll then move to Q&A, after which, Louis will have some closing remarks. And with that, I'd now like to turn the call over to Louis.

Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our first quarter results to give an update on our business and for your continued interest in Regal Rexnord. Before discussing our first quarter performance, I'd like to acknowledge an important milestone on our Regal Rexnord transformation journey, which is the April 30 close on selling our Industrial Systems business. Completing that transaction is notable for a number of reasons. It allows us to focus on more durable, higher growth and higher-margin opportunities in our remaining segments. And it is generating attractive sale proceeds that allow us to accelerate paying down our debt. But it also marks the conclusion of our inorganic portfolio transformation. The evolution of the company's portfolio through merger, acquisition and divestment transactions has been highly intentional and a critical driver of our strategy to become a faster growing, higher margin and more cash generative enterprise. It began with the 2021 merger with Rexnord's approximately $1.2 billion process in motion control business and was followed by the 2023 acquisition of Altra with its approximately $1.9 billion in sales split between industrial power transmission and automation and motion control. Having closed on the Industrial Systems business, we now have our go-forward portfolio. It is a portfolio characterized by 50% of sales into markets with secular demand tailwinds, a product offering with mid-teens vitality higher than at any other point in our history and targeted to reach 25% in the next 2 years. Our offering today has more differentiated product with wider competitive moats and is nearly 75% weighted to automation and motion control and industrial power transmission. While our Legacy Regal Motors business, which 5 years ago was roughly 3/4 of our portfolio is now both more focused, more profitable and steadily evolving into a…

Thanks, Louis, and good morning, everyone. I'd also like to thank our global team for their hard work in the quarter and over the last few years, as we have been working diligently to transform our business organically and inorganically into a more durable and higher performing enterprise. Now let's review our operating performance by segment. Starting with Automation & Motion Control, or AMC, Net sales in the first quarter were up 96.9% to the prior year, reflecting the Altra acquisition. Pro forma for the Altra acquisition, organic sales were down 4.5% and aligned with expectations, reflecting strength in the data center, medical and aerospace end markets which was more than offset by weakness in global discrete automation markets. Adjusted EBITDA margin in the quarter was 22.5%, in line with our expectations. This margin is down 50 basis points versus prior year on a reported basis, which, as a reminder, is comparing to a period when we did not have Altra in our results. On a comparable pro forma basis, AMC's first quarter adjusted EBITDA margin was up 10 basis points versus the prior year period. The pro forma margin performance reflects pockets of strength in mix positive markets, including medical, aerospace and data center, synergy realization and good discretionary cost management, partially offset by lower volume. Orders in AMC on a pro forma daily organic basis, were down 2.7% in the first quarter. Orders continued to reflect weakness in our short-cycle discrete factory automation business. However, sequential orders were up approximately 6% with orders for longer cycle automation and for our aerospace business remaining particularly healthy and contributing to some backlog growth. Notably, book-to-bill in the quarter was 1.08, marking the first time in the last 4 quarters that we saw a book-to-bill above 1. However, April orders for…

[Operator Instructions].The first question comes from Mike Halloran with Baird.

So certainly I heard all Rob's remarks about seasonality 1H, 2H. But maybe, Louis, you could just talk to your confidence level in seeing that ramp into the back half of the year. And maybe frame it as what needs to happen to hit the high end of the guidance? And what does the market look like? And then similarly, at the low end of guidance, what kind of market are we seeing here? What kind of sequentials, however you want to frame it, are we seeing if we're at the low end of the revenue guidance?

Yes. So I appreciate the question, Mike. A couple of things here. First of all, if you look at first half, second half, it's about 48-52 split now. there's really two things that have to be true for us. And we based our forecasting on the best information we had at the time. For that 52% to be true, we need our PES sales to rebound and it's really the resi HVAC piece that must improve. Now our book bill coming out of Q1 was 1.1, which gives us a little bit of confidence on that. Our orders progressing through April at down 2% in the PES segment, and then just what we're hearing from the market, from our channels and OEMs will give us some confidence. But we're going to be cautious right now because although we feel more confident today than we've ever felt -- January was pretty strong as well, and then it weakened through the quarter. So we feel that we rightly positioned Q2 as still getting through the destock market headwinds and then with easier comps recovery in the second half. The same holds true for factory automation, but less or so, it has a lesser impact on our overall business. We feel really good about the order rates that we're seeing for the longer cycle piece of that business. Rob talked about our funnel being up 50%, our win rates being up significantly, which gives us confidence of the second half and into '25 in particular. But we do need to see book bill continue to progress at about the same pace we saw in April. So as long as that holds true, we feel good. Now the upside piece to your question. Is it a rebound in the resi HVAC business is stronger than what we're anticipating? And honestly, I'll tell you we're being cautious. And so we think that's the best way to position ourselves for right now.

And then as part of the mission statement update, you reiterated exit rate margin commentary. So if you could just talk about how that should play out over the next couple of years here from a linearity perspective. And then how tied to revenue that is versus how in-control it is with just your internal actions?

Yes. So a lot of it is just our internal actions. And so I think it's probably better to base it -- to build it off of '23 to give you an understanding of how we get there. So if you take '23 at 35% gross margins and 21% EBITDA, industrial lifts us by about 100 basis points on both GM and EBITDA. Synergies are about 250 basis points. And as you know, we've got $90 million of synergies this year and $65 million next year. And then about 1 point, 1.5 points from NPD 80-20 and mix. And I'd tell you that that's pretty straight line. Now all of that gets us to the 40% gross margins but we are reinvesting about 100 basis points back in R&D through that same period. And so that's how you get to the 25% EBITDA margins. Hopefully, that's helpful.

The next question is from Julian Mitchell with Barclays.

Maybe just wanted to sort of try and dial into the -- the sort of second half revenue guides for the industrial businesses, AMC and IPS. So it looks like you've got sort of a bigger back half increase, half-on-half of sales in AMC, perhaps versus what you have in IPS. So maybe just trying to understand what's sort of driving that big AMC step-up? I think another factory automation peer this morning is talking a lot about end of destocking, for example, is driving a big improvement in their half-on-half numbers. So just wondered kind of how you see that dynamic playing out in discrete automation and maybe why IPS has less of that second half ramp than AMC. That would be helpful.

Yes. So Julian, I think you're spot on. And so I'm going to answer IPS. We feel really good about the successes we've been seeing in our cross sale and our synergy growth. The reality of IPS is we feel like we got through the destocking in the second half of last year, maybe a little bit in the first quarter. And so we're not seeing nearly what we've seen certainly not in residential HVAC or discrete automation. And so that's why IPS, we feel really good about the position. We think our hypothesis of bringing these strong businesses together is playing out. Now Automations & Motion Control, again, I think you're spot on. Now I'd tell you, I agree, automation only makes up about 15%-ish of that segment. What's also lifting here is the strength in the other markets. Aerospace, we expect to be up in the second half year sequentially as well as year-over-year. Medical definitely sequentially in year-over-year as well as data center, sequentially in year-over-year, which gives us a little bit more confidence in that second half for AMC. But those are really the main drivers. But I'd agree with you that destock and discrete automation will help us a bit. And IPS is really just good execution, good performance of our commercial teams.

That's helpful. And then just -- I don't know how much color you could provide, but we've obviously got your second half implied guidance now and what you have for Q2. Just wondered if there was any color you could provide as to how we should think about earnings sequentially sort of through that second half. Are we thinking sort of sales and EBITDA margins up sequentially in both Q3 and Q4. Any thoughts to try and understand kind of that weighting in the second half for Regal as a whole?

Yes, Julian, this is Rob. I'll take that. We do expect that sequentially third quarter obviously, sequentially stronger than second quarter, but fourth quarter then builds again off of third. So we do see that sequential improvement as we move forward. And the same for margins as we move through third quarter and fourth quarter and associated then, of course, EPS building as we move into the fourth quarter. So you might expect seasonality-wise, we might see a little bit of a drop off in the fourth quarter. We're actually not forecasting that at this time. We're seeing it actually continue to build through the fourth quarter based on what we've talked about today.

And does that mean it's sort of an even weighting in that step-up or Q3 will always have a bigger one in terms of that step-up sequentially than Q4 is having?

Yes. Q3 would be a bigger step-up off of Q2 than Q4 over Q3.

The next question is from Jeff Hammond with KeyBanc Capital Markets.

So just on PES, I'm just trying to -- I mean, your commentary and I guess, how starkly weak it's been is maybe disconnected a little bit from the OEM. So I'm just trying to understand, how have you seen share shift? I know you picked up some share during COVID maybe because you had a closer supply chain. There's been some SEER changes and refrigerant changes. Are you seeing share shifts as these new models are coming out or are we under appreciating 80-20. Just level set us on share and just some of these kind of regulatory changes?

Yes. So Jeff, I appreciate the question. We feel good about our share position. We do not fuel like -- and to your point, we definitely gained some share during COVID. We think we've held on to much of it. Now with 80-20, this is the piece of the business where we have managed 80-20. We're no longer going to sell product at low margins. That's just not who we are. We sell value in our product and technology. And so we have seen some 80-20 pruning in this space, but that's really not a driver here. From a regulatory perspective, for sure, with the 2025 GWP regulations, we're working with all of our OEM customers. In some aspects -- in some perspective, they have to redesign their products to meet the requirements. And this tends to help us because they typically choose a more energy-efficient motor, and that should be a positive for us in the end. But I want to circle back a little bit to your initial part of your question, which was a disconnect with the views that are being stated right now. A couple of things I'd clarify. There's definitely some lack of clarity in the market. And I think we've had a few false starts. And I remind you that our HVAC OEMs. When they're talking about current situations, they're talking about consumer demand. And that's a bit of a lag from what we would see with demand. And in addition, some of that demand is going to be satisfied through stock levels. And in addition, I'd say to that, there's embedded price in their demand and unit volumes are still under pressure and is that -- as you know, we don't link to their price levels. And so all in, we're perhaps a bit more cautious just because -- again, January, we thought we're going to see a bit of a recovery. Honestly, fourth quarter, we were hearing from OEMs that we were going to see recovery. And so we're being cautious. April gives us a little bit of confidence. But again, 1 month does not make a trend. So a lot there, Jeff, but hopefully, that was helpful on how we're thinking about it.

Okay. Great. And then just IPS, I think you said mix was a positive and you thought that would step back. What in particular was driving the positive mix? And why don't you think it would continue? And then just within the kind of guide change on IPS margins. Is that better synergies? Or is there some mix in there as well?

Yes. So the mix was largely around, hey, we had fairly strong distribution versus OEM as we move through the first quarter. We don't see that same strength as we move into the second quarter. Synergies absolutely continue to build as we move through the year. We saw synergies of roughly $26 million in the first quarter and are on track to that $90 million. So continuing to build as we move through the year. So that's -- but the mix impact is really just not the continuation that we saw in the first quarter on that strong distribution versus OEM

The next question is from Nigel Coe with Wolfe Research.

Just another question on PES. I'm sorry about that. But [indiscernible] guide you embed, very little pick up Q-over-Q from 1Q to 2Q. And I think 2Q is normally a seasonally strongest quarter. So I understand Louis, you want to be very cautious, mix signal some customers. But is there anything you're seeing to maybe kind of inform that sort of view on 2Q [ of them ] want to be very cautious? And then my follow-on question with that would be, maybe some more details around the restructuring you called out for that segment?

Yes. Really, no. I feel like when we were here in October and then we were here in January, we were in similar situations. And so we're going to be cautious about our guide for this quarter. Now again, 1.1 book bill rate coming out of Q1, orders down 2% in April gives us some confidence. I wish we could have this conversation after May because then I'll have more confidence because again, I felt like I was in a similar situation in January. So we're going to be cautious here, make sure that we execute beyond that, that's really the view.

And then on the second part of your question there, we do have some restructuring savings that are embedded in the guide, and we don't typically comment on segment-level restructuring actions, but there's certainly a component. But a lesser component to the second quarter step up in margins versus what we expect in terms of, like you said, a little bit of volume, a little bit of volume goes a long way in terms of absorption, but also line of sight to some better mix coming through in the second quarter versus the first. So yes, restructuring actions will help, but it's not a big driver of the improvement going forward.

Okay. That's helpful. And then we've seen copper prices running pretty hard here. So I'm wondering if the NPS, which I think are mainly within PES, whether that's having some impact to your second quarter margin. I think there's been a lag on the recovery there anything to say on the NPS? And then as we unplug industrial from the guide, are there some stranded costs coming from industrial into the other segments?

Yes. So let me take those 2 pieces here. So first of all, from the copper coming through on the 2-way material price formulas, these are 2 way. We aren't seeing a lot of that yet, that there is still a lag there on the noncontracted business, which I know is not part of your question but we do hedge both copper and aluminum. So that's on the noncontracted side. So no, we aren't seeing a big impact from that as we move through the year, but are continuing to evaluate. On the -- your second question on stranded cost potentially. So the $0.15 that you see in the model that we provided in the presentation. It is simply dilution. There is a -- certainly a bit of stranded cost that we would estimate to be a little less than $5 million, which are partly covered by TSAs and which we believe we can take out in the next 12 months through our normal productivity actions.

The next question is from Walter Liptak with Seaport.

So I wanted to ask about the free cash flow for the year. And how -- we're going into a seasonally stronger period, how the cash flow might look for the second quarter? And then what are the puts and takes to getting to that free cash flow number?

Sure. Yes. So $700 million for the year, and you're specifically asking about maybe puts and takes on maybe working capital, how that progresses, the seasonality associated with inventory builds. I would expect that the cadence of our cash flow is customarily going to be, hey, you're going to start a little bit slower in the first quarter and build as you move through the year with most of your cash coming in the late third to fourth quarter. We do see that there is a headwind in working capital this year relative to last year. We saw almost $250 million of working capital benefit last year, and we might see about $50 million of that this year. That being said, the way that we bridge from last year to this year, if you will, if you think that we got almost about $660 million last year going to $700 million this year is we'll get a little bit out of EBITDA year-over-year. Our cash interest expense will come down, cash taxes will also be lower than last year, and then restructuring should come in a little bit lower. So when you kind of bridge last year to this year and there's about $40 million or so between the 2 years. Those are the kind of puts and takes on the bridge to get you to this year's cash flow.

So Louis, I wanted to ask you about the conveying products, and thanks for pointing out the $400 million in sales. I wonder if you could talk about the margins for that business? And if there's a difference between margins for component parts and systems versus design engineering? And are you doing any installation or integrated systems within that $400 million?

Yes. So I'll go a little backwards. So are we doing installation in project management? We are. It's not a big percentage of that business, but about 5%, and we're actually seeing that piece growing nicely. The margins of the overall business are actually above our average in that segment. And it's part of AMC, it's a solid business. Now it really depends on project by project. But our equipment side and our systems side are not that far off our component side for margins. So overall, a really solid business for us.

Okay. Great. And why is it that -- do you think that this part of the conveyors are growing faster than, say, the automation part of your business?

Well, this -- the conveying business is really linked to food and beverage and warehouse. And for sure, food and beverage and warehouse has been under pressure for the last couple of years, in particular, I should say, beverage and warehouse. And so we're seeing that rebounding as the year progresses and into next year. And then I'll emphasize one other point, which is with the acquisition of Arrowhead as well as our Industrial Powertrain Solutions, synergy, strategy of selling the entire industrial powertrain. It really fits into these markets well. And so we're winning more because of the total solution that Regal Rexnord is able to bring to bear.

The next question is from Joe Ritchie with Goldman Sachs.

I just want to really focus my questions on AMC. So clearly, like, there's a big part of the business that is going from inorganic to organic this upcoming quarter. And so I just want to make sure I'm dialing this in right? Like you guys are now looking at potentially like mid-teens down organic for the second quarter. And -- and is that -- so please correct me if I'm wrong there. And then also, is that kind of like where trend is on the business right now? And any color you can give us on the discrete automation side of the business would be helpful relative to that number.

Yes. So Joe, I appreciate the question. I would say you've also got to remember, there's a little bit of a stub period compare that puts a bit of a pressure on AMC. It really though the main pressure in AMC for us is discrete automation. And although we're seeing the order book feel better, it's really more second half than '25 weighted. And so that's putting pressure. But again, the segments or the markets that are accelerating our medical data center and Arrow, which gives us confidence in the second half of next year -- sorry, second half of this year.

That's helpful, Louis. And then I guess -- and just maybe just sticking with that last comment. So to get that those end markets are doing better, like in the end markets that aren't doing well, like is there anything from like a -- whether it's like negotiations or marketing qualified leads or any type of like kind of leading indicators that are helping you feel better about like the parts that aren't doing well bottoming?

Yes. So I would refer you back to some of the statements that Rob made earlier on. And so factory automation makes up about 35% in that segment. And our funnel is up 50%, our win rates up about 300 basis points. And our -- we're seeing a book bill in that segment coming out of first quarter of 1.08. So all of this is giving us more confidence in the second half. And so yes, that's really why we're guiding what we're guiding for second half sales.

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

Thank you, operator, and thanks to our investors and analysts for joining us today. I would like to conclude where I began with our evolved purpose. Through highly intentional actions, we have made tremendous progress transforming what had been Regal Beloit into the Regal Rexnord we are today. A powerful portfolio comprised of wider moat products serving a stronger mix of more durable secular markets. Our one global Regal Rexnord team is excited about the many opportunities this portfolio presents. And I am confident that we are better positioned than ever before to create a better tomorrow for all of our key stakeholders with sustainable solutions that power, transmit and control motion. And by doing so, we can achieve the win-win objectives of giving back to our communities and our planet in driving profitable growth. In short, tremendous opportunities for our associates, for our customers and for our shareholders and an exciting time for Regal Rexnord. Thank you again for joining us today, and thank you for your interest in Regal. Have a good day.

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