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.

Thanks, Louis, and good morning, everyone. As you can see from our first quarter results, Regal got off to a very strong start in 2021, achieving accelerating organic top-line growth, significant margin expansion, strong leverage rates of 42%, which nicely exceeded our targets, and healthy cash flow when considered in the context of our normal historic seasonality. And all of this was achieved in the face of significant headwinds from inflation, as well as continued supply chain frictions. In addition, with order rates accelerating meanfully as we enter the second quarter, we believe this strong operating momentum likely continues, leaving us optimistic about the remainder of the year. Now, let's discuss our results by segment, and then I'll walk through our latest guidance. Starting with commercial systems, organic sales in the first quarter were up 15.9% from the prior year. The result was driven largely by strength in China and Asia Pacific, in our large commercial applied HVAC business on a global basis, and in our pool pump business. Notably, sales in our commercial China business were up over 100% in the quarter. partially due to recovery markets but also strong share gains. In addition, sales in pool were up almost 20% in the first quarter, benefiting from strong consumer demand, healthy sales of new products, and some restock activity. We think the outlook for pool remains healthy due to solid underlying demand and further opportunities for restocking. The only notable headwind to growth in the quarter for commercial was a 160 basis point impact from our ongoing proactive pruning of low margin business as we continue to execute on our 80-20 initiatives. As a reminder, while our pruning initiatives post headwinds to the top line, they are also a factor contributing to margin expansion. The adjusted operating margin in the quarter for commercial systems was 11.7%. of 410 basis points compared to the prior year. This margin was up due to favorable volume, mix in productivity, partially offset by freight headwinds, and the previously referenced atypical port congestion. Operating leverage for commercial was 34% in the first quarter, a healthy level and slightly above our expectations. Orders in commercial for the quarter were up just over 20% on a daily basis, reflecting broad-based strength, though particularly in Asia. For April, orders were up almost 100%, also on broad strength, but with especially strong growth in pool. When evaluating our April order growth rates for all our segments, please keep in mind that April 2020 was our weakest order growth month last year, when we saw a decline at total recall of over 30%. In industrial systems, organic sales in the third quarter were up 1.5% from the prior year. The segment saw strength in China, India, and in the data center market, partially offset by modest declines in our longer and later cycle large commercial motors business. In our continuing efforts to improve the performance of this business, pruning actions were approximately 180 basis points of top-line headwind in the quarter. The adjusted operating margin in the quarter for industrial was 3%, up 190 basis points compared to the prior year. The margin improvement was driven by favorable mix, higher volumes, and continued cost reductions, partially offset by modestly negative net material costs. Operating leverage and industrial came in at a strong 40% in first quarter. While industrial's margins are still far from where we believe they can be, this segment's first quarter overall performance tracked in line with the forecast we shared during our last earnings call. While mixed tracked more favorably than we had anticipated, price-cost was slightly weaker. As we look ahead to the remaining quarters of 2021, we believe industrial can deliver moderate margin progress versus first quarter levels and would expect performance at a mid-single-digit level for the remaining quarters of 2021. Also, keep in mind that the industrial business benefited from lagged inflationary impacts in the first quarter that will largely catch up in the second quarter. While we expect to benefit from additional price realization in the second quarter, we do see this lag as a headwind. I will further remind you that industrial is levered to later and longer cycle industrial demand versus other parts of our portfolio, and so we would expect its recovery to lag our shorter cycle industrial businesses, such as commercial or PPS. Orders in industrial for the quarter were down 4% on a daily basis, but order rates for April inflected positively and accelerated to growth of 91% on broad-based strength, though led by India, China, and demand in our data center business. We're seeing the strength of the industrial recovery in Asia and are cautiously optimistic we'll see accelerating demand in our core U.S. business in the coming months. Turning to climate solutions. Organic sales in the first quarter were up 14% from the prior year. The increase was primarily driven by our North America residential HVAC business. which we'd attribute to a combination of favorable end-user demand plus some channel restocking. In addition, recovering demand in Europe and in the general industrial and commercial refrigeration end markets contributed to the segment's strong growth rate. Partially offsetting this strength was our proactive pruning actions worth approximately 300 basis points of top-line headwinds in the quarter. I'll provide a little more color on what we saw in residential HVAC. Borders in our North America residential HVAC business, which reflects products we sell into air conditioning and furnace markets, were up 21% on a daily basis in the first quarter, and were up almost 85% in April. We believe the strength reflects healthy underlying end-user demand, as well as channel restocking, and we see further positive momentum on both fronts as we approach the summer HVAC season. The adjusted operating margin in the quarter for climate was 18.2%, up 300 basis points versus the prior year period. Strong volumes, continued cost reductions, and favorable mints were margin tailwinds in the quarter, partially offset by headwinds tied to net material costs as two-way material price formulas continue to catch up with rising inflation. Even so, the climate segment leveraged at 40% in the first quarter. nicely above our target levels. Orders in climate for the first quarter were up 19% on a daily basis on broad-based strength, but particularly in our furnace business. Orders in April were up approximately 100%, also on strength across the segment, but with the Asia and Europe regions, along with North America furnace, being particularly strong. Turning to power transmission solutions, or PTS. Organic sales in the first quarter were up 1.8% from the prior year, inflecting the positive growth supported by delivering on project winds in aerospace, as well as strength in our conveying business and strong industrial demand in China. Headwinds in the quarter include project lumpiness in solar, along with moderating pressures in the oil and gas end market. To be clear, our solar business continues to see very strong demand, and we believe we are gaining share in this market. Operating margin in the quarter for PTS was 18.7%, up 300 basis points compared to the prior year, and a record level for this segment. Continued cost reductions, favorable price ups, and mints all contributed to the strong margin gain in PTS. Operating leverage in the quarter for PTS tracked at 108%, a reflection of this business now inflecting to positive growth while benefiting permanent restructuring actions. Orders in PTS for the quarter were up 25% and up nearly 70% in April, both on a daily basis. As in our other segments, order strength in the first quarter and in April was broad-based, but it's clear that shorter cycle restocking activity has started to occur as our channel partners gain confidence in the cycle. On the following slide, we highlight some key financial metrics for your review. A couple notable highlights. First, our free cash flow of $39 million for 59% of adjusted net income is a strong result in the context of normal seasonality, and we continue to expect conversion above 100% for the year. Second, we continue to deliver the balance sheet and ended the quarter with our net debt to adjusted EBITDA at 0.9 times, giving us ample balance sheet optionality. And now moving on to the outlook. So in the last quarter, we're providing an outlook for the current quarter. We expect second quarter adjusted diluted earnings per share in a range of $1.85 to $2.05, which would represent growth of over 100% year over year at the midpoint. This implies revenue growth in the high 20s and leverage of 30% to 35% as you move through the guidance range. 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 high single to low double-digit organic sales growth for the year, with particular strength in Q2 and Q3, and impacts from tougher compares in Q4. Second, 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. Third, as we communicated last quarter, we expect to take actions in 2021 that will result in annualized cost savings of $25 million, of which we achieved roughly $6 million in Q1. And for modeling purposes, I would assume the remainder occurs radically during the year. At the bottom of this page, we've included some additional assumptions that can be used when modeling 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 key stakeholders, our customers, our shareholders, and our fellow associates. Regal's results in the first quarter evidence very strong execution and material progress on our journey to structurally improving the through-the-cycle profitability of our business. And with that, I'll turn it back over to the operator. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Mike Halloran with Baird. Please go ahead. Hey, good morning, everyone.

Good morning, Mike. So first on the guidance here, just how to understand the 2Q thought process. It's a very strong 1Q. Typically, you see some kind of earnings ramp from 1Q to QQ. You know, guidance doesn't have a lot of it unless you're a little bit above towards the high end of the range. Maybe just help with some of those sequential puts and takes. How much of this is just conservatism given some of the supply chain price-cost dynamics? Is it price-cost? It doesn't seem like there's any concern really over the directional demand curve. So just some help on some of those puts and takes.

Yeah, so Mike, this is Louis, and good morning. Let me kick off. You know, I think the way you're packaging this makes sense. First of all, I think we've proven our credibility over the last eight quarters that we like to set an objective for the quarter that we can achieve and then hopefully, you know, overachieve. And so there's certainly a little bit of conservatism there. I don't think it's a normal quarter, though, certainly compared to the COVID period of last year. And this year is not going to follow normal seasonality. So I'm not so concerned about that. Certainly orders are coming into the quarter extremely strong. Orders were really strong in first quarter. And so we feel good about second quarter. Of course, we do have some headwinds in commodity inflation. Now, our teams are doing a fantastic job, one, in just how we hedge our materials. Then we have the benefits, the tailwind of material price formulas. And then our teams are doing a really nice job of managing 80-20 and going after price. And so we feel pretty solid about the price-cost ratio. at least being neutral for the quarter and certainly for the year. There are some constraints in the supply chain still, certainly logistics constraints. There's definitely electronics constraints. Our visibility to that, though, is that it won't impact us in Q2, or it will be a minimal impact, if anything. And then lastly, there's still COVID. You know, India is part of I think the strength of Regal, and I've said it before, is our global manufacturing footprint. But India is a big part of that footprint. Now, we do about $50 million of revenue locally, but it sources our global supply chain. And, you know, our thoughts go out to our Indian associates. They're dealing with personal challenges, for sure. And so we're a little concerned about COVID and certainly are working through this quarter. We're hoping that with the vaccines that are rolling out that COVID continues to get in the rearview mirror, but certainly India is a concern for us. So, you know, with all of those things, we feel good about our guidance for the quarter and, you know, a little bit conservative, but again, we want to achieve it or hopefully beat it.

That's all fair. Thank you for that. And then second one, just maybe some thoughts on inventory levels in the channel and given all the supply chain capacity constraints, is there a lot of channel inventory materializing today? And then I suppose related, is there any pull forward of demand or any pre-buying or people trying to get ahead of some of the supply chain constraints that you're seeing right now in the channel?

Yeah, I would say there's still quite a bit of room in the channel for inventory build. And so I certainly think that's helping some of the demand we're seeing. And I also believe, although we don't have any customer that's coming out specifically in stating this, but there's concern with the supply chain. So I wouldn't be surprised that some of the strength in our orders are being influenced by concerns in the supply chain. The fact that our orders are up 90% year over year or 9% sequentially, it's still a strong demand environment that we're in right now, which gives us some nice optimism for Q2 and certainly for the rest of the year.

Great. Well, I appreciate the time. Thanks, Louis.

Thanks, Mike. The next question will come from Jeff Hammond with KeyBank. Please go ahead. Hey, good morning, guys.

Good morning, John.

Hey, just want to come at the sequential a little bit differently. So you said April orders up 9% sequentially. Can you talk about where the greatest strength was sequentially in orders within the businesses and how that kind of flushes through to sequential revenue growth?

Yeah, so the strength sequentially is really coming majority from three of the segments. And it's really pretty solid and across the board in those three. It's PTS, climate, and commercial. And so that's what's giving us some good confidence in Q2 and the performance expectation of being in the 20 plus percent growth year over year in Q2.

Okay, great. And then, so incremental is 1Q, you know, north of 40%. Can you just talk about what's embedded in the 2Q guide and, you know, how much, you know, kind of haircut or caution you have around price costs within that?

Yeah, sure. No problem. So, first of all, you know, we do have, you know, expectations that we'll see margins in the range of about 30%. overall on the leverage side, the leverage about 30%. And the way that would break by each of the segments would be we would still expect PTS to come in on the high side, you know, 35% to 40%. And then the other businesses, you know, climate and commercial in around the 30% range as well as industrials. So each of those around 30%, maybe slightly below 30, and then 35 to 40 for PTS. Now, as far as price-cost and how we're thinking about price-cost, as Lewis mentioned, we do have certain segments that are more tied to inflation and material price formulas and the lag associated with that, those being both you know, climate and commercial. There's some of that as well in industrial, but the MPFs in climate are such that we are still catching up on them, but we do expect that we should get there within the second quarter. Within the commercial and industrial segments, we do see a little more pressure in those, and we have the benefit of the lag of inflation in the first quarter, which we do see now coming – will impact us in the second quarter. We have great price increases that we've announced, and we do expect to offset most of that with price. And as I said, and Lewis said, you know, we do expect to be price-cost neutral for Regal, and that's what's embedded within our guidance in the second quarter.

Okay. Thanks, guys.

I'll get back in queue. Great. Thanks, guys. The next question will come from Nigel Coe with Wolf Research. Please go ahead.

Thanks. Good morning, everyone. Hey, Rob, if I put in high single digits, low double digits, organic growth for 2Q with those incrementals, I come up with a bigger EPS number, but that's just math. So on your full year guide for high single digits, low double digits, organic growth, does that include the daily sales impact in 4Q, because I think you do have maybe four days fewer in 4Q versus prior year.

Yes, that would all be embedded in that assumption that we provided.

Okay, great. I just want to confirm that. Then on the PMT transaction, I mean, obviously we're on track for 4Q close, but what are the major stage gates we should look for in terms of regulatory approvals between now and then? And then if we snap the line today, if we close today, Would the transaction in terms of the dividend payment, et cetera, be materially different to what we heard back in January?

So, Nigel, I apologize. I got the first part of your question, but not the second. So let me answer the first part. You know, again, we're on schedule. We feel good about the, you know, fourth quarter closing period. Now, you asked about what are the milestones. you know, certainly regulatory. We did receive a U.S. antitrust clearance of the transaction. We've also received some clearances in certain non-U.S. jurisdictions. There's still a couple still outstanding. And we're writing foreign investment law clearances in some non-U.S. jurisdictions as well. Of course, we're waiting on the private letter ruling from the IRS. And then... You know, beyond that, I would tell you that we have further details in the Form S-4 that we'll be filing in the next couple of days. So hopefully that helps to answer the progress and the milestones on the transaction. But excuse me, Niall, just repeat the second part of your question.

Sure. It was really, Lou, about the transaction terms and the special dividend. Obviously, there's a lot of, you know, the overlapping shareholder base is is the key there. I don't know if you've got any updates or insight in terms of how that might have changed versus January, and whether it's a deal close today, whether there'd be a material change in that dividend.

Oh, okay, great. Yeah, you know, Nigel, we're not going to go into that detail. I'd tell you we're on path. Things are pretty consistent with what we announced when we announced the merger back in February. So, you know, I'd say everything's going as planned.

Okay. Thank you very much. Sure. Thanks, Nigel. The next question will come from Joe Ritchie with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone. Morning, Joe. So I'd like to tackle the 2Q growth guidance that you guys gave us of high 20s. If I look at that compared to, let's say, 2019, it still implies, like, you're down – you know, call it 5% to 10% versus 2019 levels. But if I think about your April order trends, and I fully respect the fact that you have an easy comp, if you normalize to that easy comp, you're still up, call it, you know, 30% versus 2019 levels. So I guess just I'm trying to understand like the level of conservatism just based on what you know today on even that high 20s type growth number that you've thrown out for the second quarter.

You know, I think this is becoming a common theme of the questions, Joe, and I understand why. We're seeing strong orders. You know, high 20s is a conservative approach that we feel good about achieving, even in light of perhaps some logistical challenges, minor logistical challenges and minor supply chain challenges. If orders continue at their current rate, I'd tell you it's likely going to be stronger. But, you know, again, credibility is important to us. We like to set reasonable, realistic, a little stretch, but reasonable, realistic goals and objectives that we can achieve or overachieve. So the point is well stated. It's probably a little bit conservative, but we feel good about the numbers right now.

One other thing, though, I would just – highlight here is we're also building in some room for some buy ahead on supply chain concerns. That has absolutely been something that we've been hearing from our customers and something that could have altered the 90% rate that we talked about.

Got it. No, that's helpful. And maybe just my follow on there. As you kind of think about the climate solutions business and you think about the trends, I think you called out North America furnace being really strong. I wouldn't think that you'd have any kind of like, you know, inventory build on the furnace side of the business. So I'm just curious, like, you know, what have you started to see already for the, you know, the HVAC side of the business and whether the cooling side of the business has started to pick up?

Yeah, so, Joe, here's how we're thinking about climate. It was a colder than expected first quarter, and that, therefore, we did not see the build of inventory that was anticipated. And there were some supply chain constraints, not with us, but with some of the other suppliers into that marketplace. So we absolutely believe that the inventory levels are not at a normal level yet, and that that is helping with some of this demand. And one of the OEMs indicated that the sell-through in the market in first quarter was more mid-teens, and yet our sales were in the 20s and our orders are in the 20s. So clearly there's an inventory build going on there. You know, the demand is there. No question. Any market related to consumer base, the demand is there. The fact that our orders are up, you know, roughly 83% in April, I guess roughly 83 is a little bit more exacting, but, you know, roughly 80% in April does give us some confidence that there's going to be continued strength in this space. And I would tell you again with the OEM saying mid-teens, high-teens sell-through in first quarter, there's clearly an inventory build going on.

Got it. That's helpful. Thanks, guys.

Sure.

Thanks.

Again, if you have a question, please press star, then 1. Our next question will come from Chris Dankart with Longbow Research. Please go ahead.

Hey, good morning, everyone. Thanks for taking the question. Lewis, I guess, excellent example earlier in the call. I guess, just kind of highlight, can you give us an update on the price for value initiatives, particularly within industrial? I mean, what inning are we in there? Is the industrial segment margin recovery kind of tracking in line with your internal schedule? Just any comments on the price for value in particular and kind of that margin progression a little bit longer term, perhaps?

Yeah, so we are gaining momentum on the industrial side. It's very much aligned with where we expected to be at this point. We are successfully transitioning to our TerraMax product line of industrial motors out of Mexico that are at a much better cost position as well as not dealing with the tariffs of product coming into China. So, you know, I feel really good about that team and what they're trying to do to position ourselves for possible accelerated growth. I would add to that, though, that when you look at the industrial drivetrain and where we're positioned in the industrial drivetrain, we are certainly a leader as well. So we're pricing for value and getting stickier with our solutions around a total offering to the customer. And so I feel really good about that being really early innings, like first inning, whereas the industrial margin improvement is more fourth, fifth.

That's super helpful. Thank you. Thank you. And then just kind of a touch up here. I guess any comment on the sales pruning headwind into the second quarter that looks similar to kind of what we saw in one cue here?

Yeah, I think you can expect something around the same range, about 200 basis points for real, would be pretty close to a level expectation going into second.

Got it. And if I could just sneak one more here, just thinking about working capital into the back half of the year, everyone's kind of readjusting expectations on just-in-time inventory, given all the disruption we're seeing. Just any comments on working capital use in the back half would be great.

Yeah, sure, Chris. The good news is that we still have a nice path here on inventory, and we're very focused on reducing working capital, and that inventory is the biggest lever that we have. Even with the volumes that we're seeing, we still have a nice path to see trade working capital as a source of cash this year in 21, and it is largely due to the inventory that we're talking about here. You know, some of the challenges that we've seen early in the year have been around, you know, some of the supply chain, some of that supply chain friction, you know, as we got through the first quarter, building a little bit of inventory there in certain areas, some of the port constraints. But that we see clearing, and we, as I said, we have a clear path. So working capital should be a nice source of cash for us.

Got it. Well, thanks for the color, guys, and congrats on the quarter here.

Thank you. Thank you for that.

This concludes our question and answer session. I would like to turn the conference back over to Louis Pinkham for any closing remarks. Please go ahead, sir.

Thank you, operator. Having delivered a stronger first quarter than expected with record-breaking 13.9% operating margin and entering the second quarter with solid order and revenue momentum, I'm excited about what 2021 holds for Regal. we still have so much opportunity to improve our profitability, while Rexnord PMC is expected to add significant momentum. All these factors should benefit our free cash flow, fund further growth investment, and deliver benefit for all our key stakeholders. And with increasing intention behind our plans to meet rising demand for more energy efficient products and solutions, Our growth strategy will be tied to a purpose bigger than Regal, doing our part to help our communities locally and environment globally. Thank you again for joining us today and 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.