Regal Rexnord Corporation

Good day and welcome to the Regal Beloit first quarter 2021 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by 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. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Robert Berry. Please go ahead, sir.

Great. Thank you, Operator. Good morning, everybody. Welcome to Regal Beloit's first quarter 21 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob Rayhart, 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 guaranteed since there are inherent difficulties in predicting future results and actual results. five input looking statements. For a list of factors that could cause actual results to differ materially from projected results, please refer to today's earnings relief and our MPC finals. 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 Rahard will then provide our first quarter financial results in more detail and discuss our second quarter guidance. We'll then move to Q&A, after which Louis will have some closing remarks. I would also like to highlight that Regal Management will be participating at three investor conferences in the second quarter, the Oppenheimer 16th Annual Industrial Growth Conference on May 5th, the Goldman Sachs Industrials and Materials Conference on May 11th, and the KeyBank Industrials and Basic Materials Conference on June 1st. All conference participation will be virtual. And with that, I would like to turn the call over to Lewis.

Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our first quarter earnings and to get an update on our business. And thank you for your interest in Regal. I think I can reasonably say that Regal had a great start to 2021. Our first quarter top line saw a step change in growth, accelerating to double digit levels. Adjusted operating margins continued to pose meaningful progress. rising over 300 basis points versus the prior year to a record level, aided significantly by a step up in our gross margins. Free cash flow also remains strong, allowing us to bring our net leverage ratio below one times and giving us the confidence to raise our quarterly dividend by 10%. We were also extremely pleased to see Regal acknowledged as a top supplier to one of our largest HVAC OEM customers. Congratulations to our Climate Solutions team. The highlight of the quarter, however, was Regal announcing a transformational merger with Rexnord's PMC business, which is poised to deliver best-in-class cost synergies while opening up new avenues for growth and delivering significant benefits for our customers, our shareholders, and our associates. All things considered, a great quarter for Regal. This strong performance is underpinned by the efforts of our global Regal team, and so before getting into much more detail on our results, I want to thank all my Regal colleagues around the world for their hard work and resourcefulness as they remain focused on serving our customers executing on our restructuring plan, and cultivating growth opportunities while continuing to battle COVID fatigue and maintaining our strict safety protocols to keep our workplace safe. Turning to our results, standout positive in first quarter was Regal delivering nearly 11% top-line growth, or 9.1% on an organic basis, with all four segments contributing, and two of them, climate and commercial, achieving organic growth rates in the mid-teens. Nearly all our end markets are contributing to this positive performance with only a couple of pockets of richness in demand for some of our larger late cycle industrial motors, as well as some temporary headwinds in solar related purely to project timing. which held back growth rates in PTS. A few notable highlights by vertical include performance in our North America residential HVAC business, which was up over 20% in the first quarter, plus continued positive momentum in pool pump, which saw growth rates in the high teens, and in unit material handling, which grew at a mid-teens rate. Regionally, our China business was a very strong contributor growing above 60% in the quarter. Our China team is executing at a high level, capitalizing on recovering end markets and driving nice share gain. While much of this top line strength is tied to resilience of the U.S. consumer and to recovering global end markets, we also see evidence that our 80-20 approach, combined with a strong focus on voice of the customer and Regal's technology leadership, are driving share gains across our business. We have a lot of work to do on this front as we make growth investments and build Regal's growth muscle, but I'm pleased to say that we are already seeing progress on outgrowth. In the near term, I have confidence that our strong top-line momentum should strengthen even further given accelerating order growth order rates during the first quarter and as we enter the second quarter. Orders in the first quarter were up 17% on a daily basis and up almost 90% in April as we're comping against COVID-pressured results of the prior year, coupled with recovering end markets and ongoing strength in residential HVAC, pool pump, alternative energy, data center and unit material handling markets, among others. Given the magnitude of the order growth on a year-over-year basis, It is also helpful to view order performance sequentially. Our daily orders for April were up 9% versus our average daily orders for the first quarter of this year. Turning to margins, Regal posted a record 13.9% operating margins in the quarter. The addition of improving volumes, a steady cadence of progress on our 80-20 initiatives, executing our pre-COVID multi-year restructuring program, and even some early gains from our efforts around lean resulted in significant first quarter margin expansion. Regal's adjusted operating margin rose over 300 basis points versus the prior year first quarter, supported by an adjusted gross margin of almost 200 basis points versus prior year, as well as healthy SG&A leverage. And I should note this performance is happening despite experiencing isolated logistics challenges, including severe congestion at the Port of Los Angeles and tie-ups in the Suez Canal. It's also worth mentioning that our margin progress in the first quarter occurred despite significant and rising inflationary pressures. Like many of our peers, we're seeing inflation on key commodities, including steel, copper, and aluminum. Certain key components, particularly electronics, are also in short supply. This is a situation we're monitoring very closely across all levels of the organization. Regarding inflation, we're using our hedge program and buy-ahead strategies, material price formulas, and thoughtfully implemented price increases guided by 80-20 to work towards price-cost neutrality for the year. I am very pleased to report that these approaches, coupled with the vigilance of our global teams, helped us achieve a net favorable price-cost position in first quarter. That said, we did realize some benefits in first quarter from the lag manner in which inflation impacts our P&L. And while we continue to expect price-cost neutrality for the year, we do think the timing and inflation headwinds versus the cadence of our mitigating tactics may result in slightly unfavorable price costs in a couple of our segments in Q2. But again, we are still targeting full-year neutrality for Regal, and I am confident in our team's ability to achieve this objective. From a supply chain perspective, we're taking a similarly disciplined approach And while there are scattered examples of component shortages or needing to pay premiums to ensure source component availability, this is a dynamic we're managing effectively. And as we sit here today, we do not anticipate any significant disruptions to our customers on this front. Turning briefly to COVID, I'm encouraged by the significant progress that has been made in the U.S. and in other key markets getting people vaccinated. And no doubt this progress is raising optimism about global economic prospects and creating positive momentum in many of our end markets. That said, COVID is far from over. It remains a risk in all of our markets, particularly in India and to a much lesser extent in Mexico. The rising infection rates in India are troubling and are presenting significant personal and professional challenges to our colleagues there. We're responding by adjusting our manufacturing plans in other locations, such as Mexico and China, as well as selectively building inventory where possible. We will continue to monitor this situation closely while providing support to our associates and their families in India. Before turning it over to Rob, I would like to provide an update on a couple of strategic fronts. Our plans announced in mid-February to merge with Rexnord's PMC business. We are making good progress towards closing, and our integration planning team is working diligently to make sure we can hit the ground running once closing occurs. And while there's still much to do, I'm happy to say our merger plans remain on track for a fourth quarter close. We believe this transaction will be transformational for Regal. building on the already robust set of organic opportunities we have, along with the significant improvements we have made in the operations of our business. We do not intend to make further comments on the PMC merger as we plan to file an S4 shortly, which will have a lot of additional information about the transaction. Lastly, I want to flag a subtle but meaningful refinement we made recently to our stated business purpose. which reads, we create a better tomorrow by energy efficiently converting power into motion. The change we made now specifies a focus on energy efficiency. Going forward, Regal will be more intentional about realizing the benefits that can arise at the intersection of growing demand for energy efficient products, Regal's strong and differentiated technology and Regal engineering resources, and a commitment to the larger purpose of doing our part to help the environment. To give investors a better sense of how we are helping our customers improve their operations and lower their energy and other resource consumption, I thought I'd share an actual customer example presented on slide six. This customer had a large distribution warehouse with oil leaks on its conveyor system due to steel failures in a competitor's gear drive. This cost the owner significant downtime. Regal was asked to help, and after thoroughly assessing the situation, in part by using our perceptive brand diagnostic tools, we replaced the faulty competitor's drives with Regal's Hub City Hera drive and Marathon motor. This solution runs significantly cooler given its higher efficiency, resulting in longer seal life and likely saving the customer over $200,000 annually in avoided downtime, replacement parts, and components. We also right-sized the conveyor motors, saving a quarter amp per motor which is expected to translate into significant energy savings for this customer worth $80,000 per year. This is a true win-win. Helping our customer realize substantial savings and higher productivity while driving more profitable growth and a stickier customer relationship. Regal strength in the industrial drive train. with deep system application knowledge and leading product solutions differentiates us in the motion control space. We see many opportunities to create similar win-win solutions by aligning our technological capabilities and energy-saving solutions with solving our customers' problems. We just kicked off our annual strategy process at Regal And more so than in the past, a very intentional focus on proactively creating the most energy-efficient products informed by voice of the customer is our focus. This pursuit of higher efficiency products and solutions is one of components of Regal's ESG journey, and our Regal team is excited to lead. I look forward to keeping you updated on our progress in the quarters and years ahead. And with that, I'll turn it over to Ross, who will take you through our first quarter results in more detail and discuss our guidance.