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spk00: 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.
spk03: 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.
spk11: 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.
spk07: Thanks, Lewis, and good morning, everyone. I'd also like to send my thanks to our global team for continuing to execute with discipline in what remains a very challenging environment. So now let's turn to our second quarter segment financial performance. Starting with our motion control solution segment, or MCS, Organic sales in the second quarter were up 6.4% from the prior year. The results reflect broad-based growth, but with particular strength in the general industrial, marine, and metals and mining end markets, partially offset by lapping prior year large project activity in alternative energy. As in recent quarters, supply chain disruptions continued to impact our ability to deliver, resulting in increased backlog and posing a headwind to the top line, a dynamic that continues to impact all of our segments. Adjusted EBITDA margin in the quarter for MCS was 26.4%, down 70 basis points compared to the prior year, factoring updated corporate cost allocations, higher freight costs, commodity inflation, FX headwinds and mix, largely offset by tailwinds related to favorable price realization, synergies, restructuring actions, and higher volumes. As expected, the segment posted a nice sequential improvement in margin, and we see this trend continuing in each of the remaining quarters of 2022, driven in large part by accruing synergies. Orders in MCS for the quarter were down approximately 3%. However, book to bill in the second quarter was slightly above 1.0. Turning to climate solutions, organic sales in the second quarter were up 14.8% from the prior year. The increase was driven by strength in North America residential HVAC and North America general industrial markets by positive price realization and by continued share gains in the quarter. The adjusted EBITDA margin in the quarter for climate was 17.1%, down 390 basis points versus the prior year period. Factors impacting this margin include commodity inflation, higher freight costs, supply chain-related frictions, and weaker mix, harshly offset by strong price realizations. As Louis mentioned earlier, the climate segment made some intentional, proactive decisions to over-serve certain high-value customers, which resulted in higher freight and component costs. Finally, while not a material impact in the quarter, there was a fire at one of our key suppliers of electronic components that occurred during the second quarter that further disrupted our access to components. While we have found alternative supply, this will have a moderate impact to the climate segment's results through most of the third quarter. All that said, we do see this as temporary. And while we still expect to see some continuation of this margin pressure into the third quarter, we fully expect to return to more normal margins for this segment in the high teens or low 20s as we transition to the fourth quarter. Orders in climate for the second quarter were down approximately 5% on a daily basis. However, book-to-bill in the second quarter was 1.0. Turning to commercial systems, organic sales in the second quarter were up 14.6% from the prior year. Growth in the quarter reflects strong performance in North America General Industrial and pool pump, and large commercial HVAC. Our commercial business also continues to achieve meaningful share gains tied to its digital investments. The adjusted EBITDA margin in the second quarter for commercial systems was 16.5%, up 70 basis points compared to the prior year, reflecting favorable price realization, partially offset by commodity, freight, and other non-material inflation, product mix, and costs associated with supply chain disruptions. Shifting to orders, segment orders for the second quarter were down 6%. However, book to bill in the second quarter was close to 1.0. In industrial systems, organic sales in the second quarter were up 9.4% versus the prior year. Principal drivers include strength and outgrowth in America's general industrial markets. The adjusted EBITDA margin in the quarter for industrial was 16.2%, an increase of 830 basis points versus the prior year period. We are extremely pleased with the performance at industrial, and after two quarters of significantly improved performance, feel this business has turned a corner and is on a sustainable path to stronger performance. As Louis mentioned, the team's persistent adherence to 80-20 principles and their continued deployment of lean tools have had a meaningful positive impact. That said, some of the business performance in the quarter does relate to temporary benefits associated with our annual cost roll, which are also likely to benefit the third quarter, and then to a lesser extent, the fourth quarter. These benefits aside, We believe the underlying operational performance of this business in 2022 is consistent with a low teens adjusted EBITDA margin. And we do expect further upside to those levels as improvements we are making to the business continue to gain momentum. Orders in industrial for the quarter were up approximately 14% and book to bill in the second quarter was 1.2. On the following slide, we highlight some key financial metrics for your review. A couple notable highlights. First, on the right side of this page, you'll see we ended the quarter with a net debt to EBITDA ratio of 1.5 times, or 1.4 times on a pro forma basis. Second, our free cash flow in the quarter was $91.6 million, which equates to a conversion rate of roughly 65%. While we are tracking a bit behind historical cash conversion levels as we close out the first half of the year, due to both the supply chain challenges and some intentional investments we made to better serve our customers, we continue to expect free cash flow conversion of over 100% for the year. We expect much of this improvement to come through inventory reductions in the third and fourth quarters. Finally, We spent $70 million on purchasing our shares in the second quarter, bringing our total spend on share purchases to roughly $184 million through the first half of this year, and now have $250 million remaining on our share purchase authorization. Moving to the outlook. We are raising our expectation for adjusted earnings per share to a range of $10.20 to $10.80, from our prior range of $10.10 to $10.70. The modestly higher range primarily reflects the impact of our strong second quarter performance along with our stock purchase activity. In addition, we are raising our expectation for organic revenue growth to high single digit from our prior range of mid to high. To be clear, Our underlying confidence in the outlook remains high, owing to the team's strong operation execution and the sizable tailwinds we're seeing from synergies, among other factors. Despite this confidence, we felt it was prudent to maintain the breadth of the guidance range to reflect a rising global macro risk. Assuming business conditions in the back half do not change materially from what we are seeing today, we would expect to come in a bit above the midpoint of our revised guidance range. I'll wrap up this call by saying that on the whole, we are very pleased with the Q2 results and our team's ability to execute in an extremely challenging environment. We are meeting all of our expectations with MCS and ASBU. And while the macro outlook has certainly become less certain, our outlook remains very positive, considering the tremendous amount of self-help we have in front of us on the growth, margin, and cash flow fronts. And with that, operator, we are now ready to take questions.
spk00: 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 are using a speakerphone, Please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Mike Halloran from Baird. Please go ahead.
spk05: Good morning, everyone. Good morning, Mike. First, Rob, could you clarify your industrial margin comments? It sounds like basically maybe a little more detail on why they're elevated here. And if I have it right, sequentially a little lower from where we are, 3Q, probably even a little lower in 4Q. But what you're trying to say is the margin trajectory into next year, we should be thinking about a low team's kind of EBITDA base is what we build off. Is that the right messaging? Yes.
spk07: Yeah, that's exactly the way to think about it. You know, we did get a bit of a benefit that's a little longer trending for the industrial segment versus other segments. And so we'll see that benefit continue through the third and then really taper off in the fourth. So the way you sized it up is exactly the way you should. We'll see that come down a bit in the third quarter. and then down to that low teens level in the fourth. And that's kind of the go forward expectation. Of course, we plan to continue to work on the underlying performance of the business and have great plans in place to improve upon that. But that should be from a modeling standpoint where you start.
spk05: Great. Thanks for that, Rob. And then maybe you guys could talk a little about the channel inventory as you see it across the segments and then How is backlog tracking? Have you been able to work that down at all as we sit here, or is there still some build that's happening sequentially?
spk11: Yeah, hey, Mike, this is Louis. Let me try to cover both of those. I'll take backlog first. Yeah, backlog did not come down in Q2. And as I commented, our book bill has been positive for seven quarters. And so, you know, that gives us some confidence in the strength of our growth and revenue, especially going into the second half, even in light of the macro uncertainties. Specific to channel inventory, you know, we're still seeing opportunities for restock in industrial distribution. There seems to still be strength there, no question. We have direct visibility to our distributors sell through, and there's definite strength. In Resi HVAC, this is more of a question of our supply constraints, especially driven by the electronics supply chain challenges that we have seen. And Bluntly got a little bit worse in Q2 because of the fire at one of our suppliers. And so there's definitely restock opportunity there. So, you know, those are the main two I would comment on and say we still have restocking that will go on through the end of this year.
spk05: Thanks, Louis. Thanks, Rob.
spk11: Appreciate it. Sure. Thanks, Mike.
spk00: The next question comes from Jeff Hammond of KeyBank. Please go ahead.
spk01: Hey, good morning, guys. Morning, Jeff. Great color and progress on industrial. That's good to hear. My question is on commercial because you seem similarly upbeat about that and just kind of maybe level set us on kind of how you think margins are trending there and what you think entitlement is for the commercial margins.
spk07: Sure, Jeff. This is Rob. Let me first give you the first part of that, which is kind of the margin trending, if you will. So we would expect, you know, coming out, so great performance on the margin side coming out of the second quarter in commercial. We'd expect to see that same level of margin performance for the commercial segment in both the third and the fourth quarters. And so we'll expect that, you know, them to end about, you know, mid-teens as you, for the year. But continue about the same trend that you saw in the second quarter.
spk11: Jeff, and I'll add on, you know, commercial, I've been saying for a number of quarters, commercial is our diamond in the rough. And I think we're proving that out. And they're doing a fantastic job, clearly an 80-20 mindset, driving digital customer experience to grow share. And I am really, really excited about the product and technology roadmaps that we're going to be emphasizing at our investor day on September 13th. This is a segment that I would say has been undervalued historically, and yet I think there's so much opportunity. And we're proving it out with the results so far this year. So thanks for that question.
spk01: Okay. And then just on MCS, can you just talk about how you're thinking about sequential margin progression given what sounds like, you know, synergy is kind of, you know, running ahead? Thanks. Sure, Jeff.
spk07: So for MCF, we would expect that margins continue to improve sequentially. So from, you know, jumping off of the Q2 endpoint, we would expect to see margin improvement in Q3 and then once again in Q4. Again, as you stated, mostly due to the strong execution by the team, but then Synergy is really kicking in, getting back to that $70 million exit rate we discussed as we first announced the business transaction.
spk01: Okay, great. I'll get back in queue.
spk07: Thanks. Thanks, Jeff.
spk00: Our next question comes from Joe Ritchie of Goldman Sachs. Please go ahead.
spk06: Thanks. Good morning, everyone. Good morning, Jeff. Thank you. I kind of want to parse out this margin bridge for industrial a little bit better. So as I look at it, I don't know, let's assume that you would have had kind of like low-teens EBITDA margins, right, if not for kind of like what you called out on the cost-roll impact. So I don't know, so maybe that impacts like $4 million to $5 million bucks. You got a little bit more volume leverage. DNA was a little bit lower. But you still also have like operational improvement that came through. So is that the kind of right framework, first of all, as I kind of think about the bridge year over year? And then secondly, maybe talk a little bit about the structural, you know, cost improvements that you're making in the business. Yeah.
spk07: Sure. So, first of all, on the framework that you laid out, yes, that is the way to think about it. Think about it as about $5 million of cost-for-all benefit that would take you down to kind of that low teens. which we say is more of the run rate, if you will, operationally for this business as we move through the remainder of the year. Now, don't forget, we're going to continue to get some of that cost roll benefit in the third quarter, so we would expect that we would see the elevated margins in the third quarter and then taper down to that low teens by the time we get to the fourth.
spk11: And then let me add on, Joe, specific to the performance improvement. And I would say it's absolutely structural, and it's a great example of what the Regal Rexnor business system is driving at Regal. And we haven't talked a lot about this, but, you know, it first starts with having the right discipline, talent, skills, driving discipline planning and thought that then drives discipline action. You know, bluntly, we have made significant changes in the leadership of this organization over the last two years, and they are driving with 80-20, focusing on our Quad 1 customers and products, to over-serve, and then we've done significant actions to improve the operational performance. As you know, this was the business that was most impacted by the China tariffs. We had the stand-up operational capabilities in Mexico. This was also where Regal Rexnord is highly differentiated because of our global manufacturing footprint. This was the business that was really still very China-centric. And so we stood up a facility in Mexico. That facility is being leaned out. And we're driving our tool sets to improve performance. And there's still more room to improve. And so I'll end again with emphasizing this is a great example of the Regal Rexnorg business system at work. And I couldn't be more proud of Regal. our RBS leadership and the industrial systems team.
spk06: Yeah, that's awesome to hear, Lewis. And I know that you also had a retirement announcement in the climate business. You know, I'm just curious, like, you know, I know that that has been pressured a little bit. You expected to kind of come right back in the fourth quarter. Maybe just talk a little bit about You know, you mentioned the fire, like obviously out of your control. How much of the pressure that you've seen so far has been exogenous versus maybe things internally that you think you could have done a little bit better?
spk11: Yeah, you know, I'd say the majority of it was external. When you think of what we were trying to do, we saw some significant impacts on spot buys in the quarter. COVID shut down our climate plant in China for six weeks, and so we had to transfer some production to Mexico, but not as efficient, and so, therefore, cost headwinds there as well. And then the supplier fire, which both hurt on MIPS, but also on expedited freight. And so it was a tougher quarter, but we opted to over-serve our customers. And so we took on some costs to be able to support their needs. I think that conscious decision in the end is strengthening our relationship with our customers. And the good news is that we've been able to course correct. We are getting some early receptivity on incremental price from our OEMs. And we expect to be in a stronger position by the end of the year and really have a very good plan to get there. So I'd say, again, back to the question, it was a tough externally impacted quarter for the climate business, but they're turning it around quickly. That's great. Thank you.
spk06: Sure.
spk00: Our next question is from Nigel Coe of Wolf Research. Please go ahead.
spk08: Good morning, everyone. I guess Julian is speechless. So on this cost role benefit for industrial, obviously very bullish commentary on the running margins. Is this the same impact that we had in commercial last quarter? And I'm just wondering if you could give us a quick sort of idiot's guide to cost role accounting. one-on-one, Rob, if you can give me a chance. But I just wanted to confirm that that's the same impact.
spk07: It is the same impact, and it impacts all of our businesses, where you're marking up your inventory and you get the benefit of that flowing through your P&L, essentially, I mean, in theory, until you have your prices get back to where they should be to cover off on inflation. And it depends, the time in which it takes to to run through that impact is dependent upon how fast your inventories turn. And so with the industrial segment, different from our others, the inventory turns slower, and therefore that impact is more delayed or lasts longer through the year. That's why it goes through the third quarter and a bit into the fourth before it finally burns off. So that's the way the cost roll works. But by the end of the year, it's all burned off in industrial. And as we said, we would expect our margins to reflect that as we exit the year in the fourth quarter in the low teens.
spk08: Understood. And then on the climate side, you mentioned the chip supply issue with the fire. If I've got this correct, I think that fire was at the end of March, if I'm not mistaken. So that was an impact you were dealing with for the whole quarter. Is that correct?
spk11: Yeah, it was actually early second quarter. So yes, that was an impact that we felt all quarter.
spk08: Okay, that's great. And then just my final question is really around this year change. Can you just remind us, as we step up from 14 to 15 SEER, how does that impact Regal specifically in terms of the kinds of motors and fan systems you're supplying to the OEMs?
spk11: You know, there's no question that there is fear requirements that drives to a more energy-efficient solution. And so, therefore, we'll continue the mix-up benefit of moving from induction motors, as you well know we've been moving away from, to more of our higher technology variable speed motors, which make up more than 50% of our mix today. In addition to that, we launched earlier this year our Frontier product solution, which is a solution that helps with compressor controls. That is a product expansion, and so this goes back to the new Regal Rex. We're very focused on singles and doubles of expanding our serve markets with new products. And this new product is an intelligent drive that helps to solve the higher SEER levels. And we've already signed on with one large OEM and are in talks with others. which will benefit us as well going into 2023. Quantifying that, I'm not ready to do yet. But what I can tell you is the SEER 2023 will definitely be a benefit for us, and you'll hear more about this from us at Investor Day. Great. Thank you. Sure. Thank you.
spk00: Our next question is from Walt Liptock of Seaport. Please go ahead.
spk10: Hey, thanks. Good morning. Good morning, Walt. I wanted to ask two questions. You called up the macro, and, you know, clearly things are showing some signs of slowing. And I want to understand if you saw anything in sort of the cadence of orders during the quarter into July or anything, you know, that would, you know, be a tell about any macro slowing in your business, canceled orders, etc.
spk11: Yeah, you know, nothing at this point that's material from a specific order perspective. No question from a year-over-year perspective, orders were slightly down. Book bill rates slightly down in second quarter from first quarter, but still greater than one. You know, overall, we're still seeing pretty healthy demand. But no question, you know, it's understandable of everything we read in the papers every day that there's increased caution. And so, by the way, that's part of the reason why we guided the way we did is increased caution for the second half.
spk10: Okay, sounds good. Are there benefits that we can think of for the second half or into 2023? And I'm thinking of... Some of the copper prices, industrial metals prices have been coming down. Is that going to help at all with the price cost?
spk11: Yeah, well, you know, 20% of the company is on material price formulas, and so that will map pretty closely. You know, there's usually a three- to four-month offset that should bring a little bit of benefit. You know, we're 19 quarters in now of price-cost positive or neutral, positive certainly for the last, you know, many quarters. And Regal has a history of being able to hold price. Now, we'll manage that and talk to customers one by one as we see commodity deflation. But, you know, our intent – because there's lots of other inflation we're dealing with, including labor, including freight, et cetera, is that we're going to drive to hold our price in the marketplace.
spk10: Okay, that sounds great. And maybe just the last one for me on the industrial. Yeah, it looks absolutely great to see those margins move up. And, you know, we can tell the enthusiasm that you now have, you know, the renewed enthusiasm for this business. As they gain momentum, could there be another step up that we see going into 2023? Yeah.
spk11: I mean, you know, how I would think about this is we're continuing to perform and drive 80-20 and lean, which is our regal direction, our business system. And pretty much every quarter we've had a little bit better, a little bit better, a little bit better. And I bluntly expect that. into 2023. Add to that that this tends to be a longer cycle market. And, you know, as Rob commented, our book bill was 1.2 in the quarter. And, you know, there will be leverage with that strength of volume, too. So, yes, I believe start with that baseline of low teams and then keep building from there.
spk10: Okay. Sounds great. Thank you. Sure.
spk00: The next question today comes from Chris Dankert of Loop Capital. Please go ahead.
spk02: Hey, morning. Morning. Thank you for taking the question. I guess kind of to circle back to that impressive book to build at Industrial, is that just the underlying strength in the market, or is there significant cross-selling pull-through with the MCS that you seem to allude to with the contract win that was highlighted early in the presentation? And if so, is there a way to kind of quantify that cross-selling benefit?
spk11: Yeah, it's a great question. So there's definitely cross-selling benefit. That industrial business is really a three to five horsepower or greater, and that fits on the industrial powertrain. We've said that cross-selling and the industrial powertrain would bring us a minimum of $10 million this year in revenue, and so a certain percentage of that will come from industrial, lesser from commercial. So, yeah, absolutely a benefit. But I would say what's the real driver of that growth are two, service improvement and regaining some share that we lost when we transferred production to Mexico two years ago. And secondly, we've got a really nice business in the data center market there, both with our generator business, but also our paralleling switch gear and automatic transfer switch business. And we are absolutely seeing solid growth in data center, and that's a secular market we want to continue to grow in. So, yeah, really, really overall pretty pleased with industrial systems, and we'll continue to drive performance there.
spk02: That's very helpful, Carl Lewis. Thank you. And then just any update on Arrowhead or maybe automation market trends more broadly and how those are benefiting Regal here?
spk11: Yeah, so, you know, we're really pleased with Arrowhead, and we call that business now Automation Solutions Business Unit. It's part of MCS. We definitely acquired that business because of its position in food and beverage. We want to drive growth with that business. I commented in my prepared remarks that we are on the path to hit double-digit growth in 2022, so feel really good about that. In addition, we are building out our product and technology roadmap there and feel like there's lots of opportunity to increase our served market, which, of course, we'll be talking about at Investor Day, and then also talking about the sales synergies of being part of a much larger organization like MCS. So overall, feeling good. Now, the food and beverage market, again, a good secular market that we feel will continue long-term growth. Certainly a big piece of Arrowhead as well as in the global beverage canned market with the palletizers and depalletizers. And, you know, when you look globally, pretty much every region is under capacity constraint with cans. And so that was part of the thesis of Arrowhead that was going to drive growth. Feeling solid, it's only 4% of MCS, but it's an important 4% of MCS, and it's part of a regal restructuring our portfolio and moving more to growth.
spk02: Gotcha. Well, thank you so much for that, Collin. Definitely looking forward to September here. Yeah, great. Thank you.
spk00: Our next question is from Julian Mitchell of Barclays. Please go ahead.
spk09: Hi, thanks. Good morning. Good morning, Louis. Good morning. Just wanted, Louis or Rob, to kind of circle back to the orders, color, and so forth, because your bookings, as you said, they were down modestly in Q2. You've raised, though, the organic sales guide for the year, and so feeling pretty good about the second half on sales. Does that tell us that sort of your bookings growth year on year in the second half, you know, it shouldn't be much worse than what you just saw in Q2? And I don't know if there's any color you could give on July trends in particular around that bookings rate.
spk11: Yeah, Julian, happy to give a little bit more color here. So I think you're spot on on the way to think about the second half in particular as compared to Q2, you know, relatively flat on orders, relatively flat. But we have a very big backlog and we're working through that backlog. And so therefore, with the strong execution out of Q2, And continued solid price attainment in our segments, we felt comfortable with increasing the guidance by $0.10. And as both Rob and I said in our prepared comments, If everything stays the same in supply chain, perhaps there might be a little bit of a beat to that midpoint. But right now, we're going to be cautiously conservative and go in with the guidance we've given.
spk09: Thank you. And then just looking at the second half, I know you don't guide quarterly, but is the right way to sort of think about it? You've got roughly 21% EBITDA margins dialed in for the year as a whole. It's a similar sort of 21% number for both Q3 and Q4, and then you just have that usual sort of seasonal revenue step down a little bit in Q3, a little bit more in Q4. Is that the right way to think about the sort of Q3, Q4 earnings and any other items you'd call out for the back half?
spk07: Yeah, Julian, this is Rob. The way I think about it is, like you said on the top line, certainly you get a bit of seasonality as you go from three to four. on the margin profile, absolutely we should see, you know, in that 21% plus range as we go through the third quarter, and then maybe in a bit of improvement as we enter the fourth, because that's when we'll realize more of those synergies that we have good line of sight to that will come through the MCS segment. So very good cadency. Q3 to Q4 for MCS is expected, which will drive a lot of that EBITDA margin performance as we exit the year.
spk09: That's very helpful. Thank you. You got it.
spk00: Again, if you have a question, please press star, then 1. Our next question comes from Jeff Hammond of KeyBank. Please go ahead.
spk01: Hey, guys. Just a quick follow-up on free cash flow. I think you said 100% conversion, you're running a little bit behind. Just wondering how long of a putt that is to kind of get to that conversion. That's pretty impressive in this environment.
spk07: Yeah, you know, Jeff, it is a bit of a long putt, but the good news is that we've got pretty good indication right now as we evaluate our inventories and have worked through the modeling in terms of how that inventory should become a source of cash in the back half of the year for us to get us to that 100%. And so feel really good about the modeling at this point, given everything that we see it as today. So it will likely mostly come from inventory reduction, just to be clear. And most of that will come late Q3 and then into Q4.
spk11: And, Jeff, I'll just add on, you know, from an operational perspective, hopefully we're gaining some credibility about being a plan, do, check, act company. And we have plans. And we're executing on them. Every one of our businesses. Certainly customer service, servicing our customer is a priority, but we are driving those plans on inventory and feel like we have a clear path to, like Rob said, achieve the free cash flow goal in 22. That's great. Thanks, guys.
spk05: Great. Thank you.
spk00: This concludes our question and answer session. I would now like to turn the conference over to CEO Louis Pinkham for final comments.
spk11: Thank you, Operator. And thanks to our investors and analysts for joining us today. Rest assured that our high-performing Regal Rexnord team is acting with discipline and urgency and in accordance with our Regal Rexnord values to bring value to our customers and deliver on our financial commitments. More broadly, we'll continue to execute on the many opportunities before us – new product development, digital, RBS, 80-20, making lean pervasive, sizable M&A synergies, and a tremendous opportunity tied to capital deployment, to name just a few. These keep me confident that the best days for Regal Rexnord remain firmly ahead of us. And I look forward to sharing this vision of what lies ahead in greater detail at our September 13th Investor Day at the New York Stock Exchange. I hope to see many of you there. Thank you again for joining us today and thank you for your interest in Regal Reckon Org.
spk00: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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