Regal Rexnord Corporation

Good day and welcome to the Regal Rex Nord Corporation fourth quarter 2021 earnings conference 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 a touchtone phone. 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, Vice President of Investor Relations. Please go ahead.

Great. Thank you, Operator. Good morning, and welcome to Regal Rec Nord's fourth quarter 2021 earnings conference call. Joining me today are Louis Pingham, our Chief Executive Officer, and Rob Rayhart, 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. During the slide four, let me briefly review the agenda for today's call. Louis will lead off with his opening comments. Rob Reihard will then provide our fourth quarter financial results in detail and discuss updates to our 2022 guidance. We will then move to Q&A, after which Louis will have some closing remarks. And with that, I'll turn the call over to Louis.

Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our fourth quarter earnings and to get an update on our business. And thank you for your interest in Regal Rexnord. While the fourth quarter continued to present many challenges, in particular around inflation and supply chain disruptions, our Regal Rexnord team met these challenges head on and delivered solid results. In the quarter, Regal Rexnord posted robust 11% organic top line growth, achieved positive price costs for the enterprise, exceeded the midpoint of our earnings per share target range, and delivered strong free cash flow. We closed the year with a balance sheet that is 1.3 times levered on a pro forma basis, which gives us lots of optionality around capital deployment. Furthermore, with our fourth quarter orders up about 30%, And up mid-20s in January, we ended 2021 with a record backlog and, as a result, have a very healthy top line potential in 2022. These strong results are the product of disciplined execution, strong adherence to 80-20 principles, price discipline, and targeted over-management of our toughest challenges, in particular, supply chain consistency, logistics, and inflationary pressures. In one sign of our team's success navigating these challenges, I am extremely proud to share that Regal Rexnord was recently named Supplier of the Year by one of our large OEM customers. I believe the award reflects our strong service during a challenging time, which is fantastic. But what made me even more excited was our customer-siting alignment on our values, and in particular, on our value of diversity, engagement, and inclusion, and on our value of innovation with purpose, creating products and solutions that are purposeful for our customer, and through a consistent focus on improving energy efficiency, products and solutions that are purposeful for our planet. This news and our fourth quarter performance mark a consistent close to a year characterized by tremendous progress transforming our business into a stronger performing, higher margin, faster growing, more cash generative, and higher return global enterprise. So before going any further, I want to thank all of our Regal Rexnord associates around the world. Our strong performance at its core is about our nearly 30,000 talented associates, their disciplined execution, leveraging their individual skills and diverse perspective, always guided by our Regal Restored values, to act with urgency to serve our customers and meet our financial commitments. Let's also not forget that during fourth quarter, we closed a transformational merger with Rexnord's process and motion controls business and completed the acquisition of Arrowhead Systems. And while we are only one quarter in working jointly with PMC, now the motion control solution segment, and have owned Arrowhead for only a couple of months, I'm extremely pleased with the positive momentum we're already seeing behind our integration and synergy activities. In fact, as we've conducted monthly operating reviews with our new associates from PMC and Arrowhead, many have remarked that it feels like we've been operating as one Regal Rex Nord team for many years. This great cultural fit is the main reason I remain confident that synergies from these transactions can add materially to our future margin, free cash flow, and organic growth profile. As we have discussed before, the cornerstone of our MCS sales synergies are the significant benefits we see from being able to offer our customers an integrated industrial powertrain solution. That is, our motors plus the critical power transmission components that connect the motor to whatever it is powering. And we believe this value proposition will become even more compelling as we leverage data collected from all the key powertrain components and use that data to optimize the system's performance through perceptive intelligence. So I'd like to provide a brief update on our continued progress pursuing powertrain opportunities. Our engineering teams have been hard at work on how to optimize performance of the greatly expanded scope of powertrain solutions we are now able to provide by leveraging the legacy PTS and PMC portfolios in conjunction with our motors. This clearly will be a multi-year journey, but even so, we have already seen some accelerated advances. In parallel, our sales teams have been actively speaking with our customers about the benefits of procuring integrated powertrain solutions, and I'm excited about the number and quality of these conversations. To shed some light on what I'm referring to, this slide provides examples of powertrain solutions we are working on. All of these are active projects with actual customers and are in the development or quoting phase. In each example, we have noted the principal components included in the solution, as well as some of the key benefits each can provide to our customer. You'll notice a diverse array of benefits, including energy efficiency, greater reliability, and optimized performance. As our powertrain efforts continue to advance, We'll keep you updated on our progress, including quantifying the revenue impact we expect to see from selling these solutions. Now, where we have been seeing more immediate merger-related benefits on the top line is in cross-selling activities, which are just getting started and are expected to ramp meaningfully as 2022 unfolds. We'll look to quantify these benefits as our efforts mature, but I think it's fair to say that from cross-selling alone, we'd expect sales of at least $10 million in the first year and at gross margins that are accretive to the enterprise. Before I share some thoughts on our 2022 outlook, I'd like to make a couple high-level comments about the operating environment. As you know, we and many others have been confronting a host of inflation and supply chain challenges through most of 2021. And on the whole, I believe we've been navigating through them as well as, and in some cases, a little better than our peers, which has helped us gain some share and likely also boosted our ability to manage price. However, as we close 2021, I would say these challenges intensified. Freight congestion at the porch was particularly acute in the fourth quarter. Freight inflation has stepped up meaningfully as well. And labor availability has become more of a challenge for some of our businesses, especially in the United States. We believe a resurgence in COVID cases with the highly transmissible Omicron variant has been a factor intensifying all of these headwinds. Now, the good news is an incredibly healthy demand environment, which you can see in our order rates and a healthy backlog. So we feel good about top-line prospects. Very good, actually. But in the last couple months, our visibility has diminished around how quickly we'll be able to work down the backlog and around certain costs associated with serving this demand, most notably freight and labor costs. although we believe these peaked in fourth quarter of 2021. As a result, we decided to take a slightly more conservative approach when updating our 2022 guidance. At a high level, we're adjusting the top line to reflect our strong orders and record backlog, while retaining some caution around supply chain constraints. From a margin perspective, We're factoring some incremental pressure related to non-commodity inflation, in particular labor and freight. And with that, I'll turn it over to Rob.