Regal Rexnord Corporation

Hello, and welcome to the Regal Beloit third quarter 2020 earnings call. All participants will be in listen-only mode. Should you need assistance, please seek dual conference specialists for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To throw your question, please press star then two. Please note, today's event is being recorded. And now I'd like to turn the conference over to your host today, Robert Berry. Mr. Berry, please go ahead.

Great. Thank you, Keith. Good morning, everybody. Welcome to Regal Beloit's third quarter 2020 earnings conference call. Joining me today are Louis Pinkham, our chief executive officer, and Rob Rehart, 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 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. Then Rob Rayhart will provide our third quarter financial results in more detail, discuss our fourth quarter guidance, as well as share some high-level thoughts on 2021 and on potential election impacts. We will then move to Q&A, after which Louis will have some closing remarks. Now, I will turn the call over to Louis.

Thanks Rob. And good morning, everyone. Thanks for joining us to discuss our third quarter earnings and to get an update on our business. And thank you for your interest in Regal. For the second quarter in a row, this unprecedented global pandemic weighed on our orders and sales, impacted some of our key manufacturing operations and supply chain, and further tested the endurance of our associates. So before getting started, I'd like to thank all my Regal colleagues around the world for their hard work and resourcefulness as they remain focused on serving our customers while remaining disciplined about keeping our workplace safe. While many of our end markets remain challenged in the third quarter, I am encouraged that a number of bright spots also started to emerge, which we hope will prove sustainable. Order rates for the company turned positive in August and have remained so through October, with notable material improvements in our North America residential HVAC business, which saw orders up 27% in September and app tracking up 22% in October, while orders in our pool pump business rose 32% in the third quarter, and are tracking up nearly 38% to date in October. In addition, two of our businesses, climate and commercial, returned to positive top-line growth in the quarter, nicely exceeding our expectations. While industrial was nearly flat and PTS narrowed its year-over-year rate of decline materially versus last quarter, with the recovery in North America's short cycle industrial showing early signs of momentum, but upside on that front still ahead of us. We also made significant further progress on our 80-20 initiatives and on executing our multi-year restructuring program, which, as you may remember, we defined before the pandemic arose. Our cost-out plans are firmly on track. Indeed, Despite seeing our top line decline just under 2% in the quarter as COVID impacts remain, Regal's adjusted income from operations rose by over 19%. Contributing to that performance, our adjusted gross margin was up 300 basis points versus prior year. If we meet or exceed our fourth quarter adjusted EPS guidance midpoint, will actually deliver EPS growth this year, despite the pandemic. Our CFO, Rob Rehard, will share some initial thoughts on how we're thinking about 2021 later in the call. But on the margin front, I'm pleased to say we see some indications that the pace and scale of our cost-out opportunity may allow us to deliver ahead of schedule on our goals shared at Investor Day to achieve 300 basis points of adjusted operating margin expansion in three years, or by 2022. Beyond margin, the story on cash flow is consistent. We generated $111 million of free cash in the third quarter for a conversion rate of over 170%. Progress with gaining share also remains evident in key parts of our portfolio in data center, alternative energy, China commercial markets, and perhaps most notably in our mod sort unit material handling business where our innovative conveying solution is gaining traction in last mile package sorting and distribution applications. Our ModSort team is also a great example of how Regal is using technology outside of our product development function, such as for marketing and lead generation. ModSort booked a nearly $2 million order during the third quarter, which originated with an end user's web search earlier in the quarter. improved digital customer experience activities have and will continue to receive significant investment at Regal. To me, the message this performance sends is very clear. We are structurally improving this business, and I couldn't be more proud of our Regal associates who are learning, adapting, and acting with a sense of urgency to drive these changes. As I have stated on prior calls, at Regal, safety always comes first. As the pandemic's duration has tested our focus and resolve, I can assure you that our Regal associates around the world remain disciplined about balancing the need to produce our essential products while keeping our workplaces safe. From an operational standpoint, all of our facilities are currently functional, though our capacity levels in Mexico are still not quite where we'd like them to be. Conditions in Mexico seem to improve steadily during the third quarter, with almost all of the states where Regal has operations moving to the lower risk yellow category in the Mexican government's color coding system for defining risk and regulating permissible activities. But in the last couple of weeks, several of these states have moved back to orange and one state to red. These changes typically result in more of our associates needing to remain out on a government mandated health decree. We were down to having only about 2% of our workforce in Mexico out on health decrees at the end of the third quarter. But as of today, that level has increased to roughly 4%. Of course, We are monitoring this daily and leveraging our global manufacturing network to best service our customers. Shifting to orders. Declines of 6% in July turned to growth in August and September, which saw orders up 4% and 2%, respectively. October with a few days remaining in the month, is tracking up roughly 11%. We are seeing strength in North American residential HVAC, pool pump, and data center markets, with order rates in our PTS segment just starting to show signs of better momentum as the North America short cycle general industrial end markets begin to recover. Consistent with recent data points, such as the ISM order rates and capital goods orders, we see potential upside to recent order trends if restocking and PTS starts to occur in any meaningful way. For now, our best estimate is that stronger momentum starts to occur in early 2021, but many moving pieces remain regarding end-user confidence and activity levels. Rob will share additional order details by segment in his remarks shortly. Before concluding, I would like to discuss a couple of recent developments of investor interest. First, I'm very pleased that in September we published our latest sustainability report. The report reaffirms Regal's commitment to increasing the energy efficient benefits our products bring to our customers and to society, while reducing the impact of our manufacturing processes on the environment, and also meaningfully contributing to the communities where our associates live and work. My mandate to the team working on this year's sustainability report was to raise transparency around our ESG products and initiatives, and in particular, do so by including more data. And I believe our team delivered. That said, one of the report's themes is Regal being on an ESG journey. So while I am pleased with how our efforts around sustainability, governance, and social responsibility have been advancing, there's much more we can do and will do. In particular, I'm challenging our business leaders to further refine their sustainability strategies and to create more specific roadmaps for driving year over year improvement on a select few business relevant metrics. I'd encourage you to read the report. The next topic I'd like to cover is our portfolio. We're always evaluating our portfolio of businesses for their fit with Regal's long-term strategic objectives around growth, margins, and return on capital. Indeed, At our investor day back in March, we had alluded to a cadence of portfolio review to ensure such alignment. With COVID, our focus has rightfully been elsewhere. But having just come out of an annual strategy review discussion with our board, we are refreshing our evaluation of our portfolio. We made a lot of changes since I joined the company roughly 18 months ago. including bringing on new leaders at over half of the 22 businesses that sit behind our four segments and adding many new members to our executive leadership team. We also decentralized, pushing operating control out to the businesses, rigorously started applying 80-20 principles to improve margins and growth, added P&L transparency down to the plant level, reorganized many of our go-to-market efforts, and are increasing our investment and focus on innovative, sustainable products that solve our customers' challenges. And frankly, I've had a chance to personally get to know our businesses more intimately. So with the benefits of time, many fresh eyes, and much more granular data, we think taking a fresh look at the portfolio would be valuable. The last topic on which I'll share some thoughts is indoor air quality or IAQ because it's getting a lot of attention with our customers and with investors. We believe it's early days on the IAQ front, but to the extent it gains traction, I think Regal has a large role to play and we're investing to ensure we're there for our customers as they help end users with IAQ solutions. First, Many of the IAQ initiatives being discussed involve stronger filtration and more frequently exchanging indoor for outdoor air. Both of these upgrades require more powerful motors, and if customers want to at least maintain the energy efficiency levels they saw before making any IAQ enhancements, these stronger motors will also need to be more efficient. Addressing these needs is right in Regal's technology sweet spot. Second, Regal is already in the market with a blower product that helps introduce outdoor air into an office, classroom, and restaurant. The Regal advantage is how we integrate the blower components, the motor, the wheel, the housing assembly, into more of a plug and play offering. which accelerated the OEM's design cycle, expediting time to market, and reducing development costs. We think this lead time advantage will be critical as property owners seek expedited upgrades to their buildings so tenants can feel safe inside. We're also testing a patented UV light solution, which involves introducing a UV light strip into one of our blower housings. This system contains the UV light in the blower housing while continuously cleansing airborne pathogens from the air flowing through it. We believe this compact solution, which is easy to integrate with existing systems, will be great for the retrofit market. Other products are also in the works, but I think these are a couple representative examples of what we're doing. The last point I'll make on IAQ is that it's an opportunity for Regal to leverage its technology expertise to be there for our customers as they seek to address evolving customer needs and to do so in an expeditious and cost-effective manner. This is how Regal will win with our customers. And with that, I'll turn it over to Rob, who will take you through our third quarter results in more detail. and share our reintroduced guidance for fourth quarter and 2020.