Regal Rexnord Corporation

And welcome to the Regal Rexnerd 2022 Second Quarter Earnings Conference Call. All participants will be in 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 touch-tone 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 VP of Investor Relations, Rob Berry. Please go ahead.

Great. Thank you, Operator. Good morning, and welcome to RICO-REXNORD's second quarter 2022 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob Rahard, 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 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. Turning to slide four, let me briefly review the agenda for today's call. Louis will lead off with his opening comments. Rob Rehart will then provide our second quarter financial results in more detail and discuss updates to our 2022 guidance. We'll 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 second quarter earnings and to get an update on our business. And thank you for your interest in Regal Rexnord. I am proud to report that despite a host of challenges related to various forms of inflation in the global supply chain, our Regal Rexnord team remains focused on factors under their control, resulting in strong second quarter performance. plus continued progress on many of our strategic growth and margin enhancement initiatives. The team's disciplined thinking and actions are apparent in our record results this quarter, which include 12% organic top-line growth, 280 basis points of gross margin expansion, and 230 basis points of EBITDA margin expansion. These margin gains were enabled in part by continuing to achieve a positive price-cost position. The results put us firmly on track to meet our earnings guidance commitment for the year, which, by the way, we have revised modestly higher. Also contributing to this strong performance in a meaningful way are our M&A synergies that continue to track favorably and on our current trajectory suggest material upside versus our original target on revenue and margin. This is a topic that we'll discuss in greater detail at our September 13th Investor Day. The quarter also continued to evidence clearly identifiable share gains supported by our digital investments, new products, and competitive service levels. Regal Rexnord is winning in the market, a result of the team's hard work and the many changes we have made in how we run this business. And on these fronts, there's much more to come. For this strong execution, pursued with a sense of urgency, as well as continued adherence to our Regal Rexnord values, I want to say a sincere thank you to our approximately 29,000 Regal Rexnord associates around the world. One highlight of the quarter I'm especially pleased with is the significant further progress we made improving our margins, particularly in our industrial systems segment. Key drivers here include the team's persistent adherence to 80-20 principles and the deployment of our lean tools, which together help the team focus on our highest value opportunities and drive a wide range of operational improvements in the business. These changes are structural and sustainable, and we think there's still additional upside to come. That said, This step change in industrial performance does also reflect the moderate temporary benefits that Rob will define in his section. In the meantime, a special shout out to our RBS leaders and the entire industrial team for putting this business on what is now a much firmer footing. I'd also like to say a few words about our commercial segment. We're an 80-20 mindset, our digital investment, and disciplined execution on gaining traction as evident in successive quarters of strong performance. The top-line strength is supported by good end market demand, but also very healthy share gains. While the segment's adjusted EBITDA margins are now firmly in the mid to high teens and still have a path to further upside. We're particularly optimistic about this segment's growth in margin prospects, given its expanding pipeline of differentiated, mixed-positive new products, something we'll also discuss in more detail at our Investor Day. Despite our stall in margin progress as an enterprise, we did experience some temporary pressure at climate. Several factors are at play here, including a variety of ongoing inflationary pressures and a supply chain that has impacted the mix of products we are able to ship, which this quarter was a headwind, but also decisions we made to over-serve some of our key customers, which helped our sales, but also caused us to incur higher costs for items such as expedited freight, and component supplier premiums. The good news is that these pressures should be temporary. The climate team expects its margins to track back towards recent historic levels in the high teens to the low 20s performance we expect by fourth quarter. Turning to orders. we saw some moderation as expected with enterprise orders down slightly for the quarter. However, we remain cautiously optimistic about our top-line prospects, especially given our strong backlog position, up more than 50% from the beginning of 2021 and 30% year-over-year, and the reality that our book bill rates have been greater than one for the last seven quarters, along with commentary from our customers across a range of end markets still largely positive. In addition, for certain of our end markets, such as aerospace, mining, ag, and non-res construction, there are signs of growing momentum. Lastly, I'd like to provide a brief update on our integration efforts at MCS. Frankly, I could not be more pleased with how the teams are executing. Cost synergies are tracking ahead of plan, and our pipeline of revenue synergies is growing, continuing to grow. Regarding the Arrowhead acquisition, our primary focus has been revenue growth And based on our current backlog and sales forecast, we are on track with the low double-digit growth expectation we had for this business in 2022. More broadly, as you know, one of our top strategic growth initiatives for the new Regal Rexnord is selling industrial powertrain solutions, which combine our motors with a range of critical power transmission components. that connect the motor to whatever it is powering. These, by their nature, are longer cycle sales, but our pipeline of opportunities is growing nicely, and we have also continued to see some early wins. One in particular is presented on slide six. Pictured on this slide is a Regal Rexnord powertrain solution that we recently sold to an automation OEM. The objective was to make certain production lines in the customer's facility safer and more efficient, both from an energy consumption and maintenance perspective. In response, we leveraged an internal team with engineering and application experience relevant to this customer's specific industry to develop a solution that addressed their needs. What the team designed, pictured here, were all Regal Rexnord products, including a marathon motor, a Rex coupling and gearbox, and one of our sterns brakes. The solution is powering a Rexnord hybrid mat-top chain riding on Rex bearings. the solution has been optimized to handle high loads and frequent weight variation, which are critical performance attributes for this customer. In addition, the customer's facility is highly optimized from a lean manufacturing perspective, and it was critical that our solution, when introduced into the manufacturing environment, contributed to further efficiency and performance gains. In this case, the team delivered on all fronts. Our solution has reduced the customer's line operating costs by about 13%, while also enhancing plant safety and productivity. This is a great example of how Regal Rexnord can leverage its differentiated domain knowledge and application engineering expertise to create optimized solutions for customers with demanding operating environments. This is just one example of the kinds of things currently in our pipeline. I look forward to sharing many more examples of how we're creating win-win opportunities for us and our customers by creating truly value added powertrains. In summary, The Regal Rectioner team is continuing to deliver very strong performance, and I remain confident that we still have ample opportunities ahead of us to keep improving. Rob will elaborate on this, but we are moderately increasing our guidance midpoint, balancing high confidence in our team's controllable execution with the many uncertainties characterizing the current operating environment. And with that, I'll turn the call over to Rob to take you through our second quarter performance in more detail.