Regal Rexnord Corporation

Good morning and welcome to the Regal Rex Nord fourth quarter 2022 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 your telephone keypad. 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, Andrea. Good morning and welcome to Regal Rexnord's fourth quarter 2022 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 historic 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 filing. 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 see 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 Rayhart will then provide our fourth quarter financial results in more detail and discuss our 2023 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 continued interest in Regal Rexnord. Last night, we reported strong results that evidence our transformation continues to gain traction. Organic sales growth of slightly over 4% for the enterprise reflects continued share gains and strong price discipline, even as some of our end markets slowed. The share we are gaining continues to be supported by our digital and e-commerce investments, new products, and competitive service levels. This fourth quarter was also the eighth in a row of being price-cost positive, which along with sizable M&A synergies, NPD mix-up, and our ongoing 80-20 and lean efforts, drove 300 basis points of adjusted EBITDA margin expansion versus the prior year period. I was also pleased to see our cash flow performance improve in the fourth quarter, resulting in cash flow conversion of 165 percent. Despite this strong finish, we did fall short of what arguably was an ambitious goal for the year. While the supply chain is improving, during the quarter, it did continue to contain us, while making it costlier to maintain high service levels for our most valuable Quad 1 customers. In aggregate, a very strong finish to 2022. I think it is also important to acknowledge the first full year of Regal Rexnords. as we continue to manage our portfolio and drive significant shareholder value. Sales were up 37% versus 2021, with organic sales up 9% year-over-year. Adjusted EBITDA reached more than $1.1 billion. We achieved 33% adjusted gross margins right on track to our plans, And adjusted EBITDA margins improved 230 basis points from 19% to 21.3%. Solid overall results. And 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 Regal Rexnord associates around the world. Now, I do want to take a moment and comment a bit further on cash flow because I am increasingly optimistic about our cash flow outlook. In addition to the EBITDA growth we expect in 2023, plus strong gains over the forecast period, we also see a significant opportunity to reduce working capital and especially inventory, both as the supply chain continues to improve and as we further mature our 80-20 and lean efforts. Our teams are becoming more disciplined about how they manage working capital. Some of this is happening through IT and logistics investments, such as a new global freight scheduling software. Some is occurring through our M&A synergies. In addition, I am excited to announce that we added a new member to my leadership team, our Vice President of Strategic Sourcing, who is bringing over two decades of global sourcing and supply chain experience to Regal Rexnord, and who I am confident will help us improve our working capital performance, continue to expand our gross margins by lowering our input costs, and enhance the service level improvements that are helping us gain market share by reducing our lead times. In the spirit of what gets measured gets done, we are complementing this stepped-up focus on cash flow by making working capital performance and resulting free cash flow a larger component of our leadership's 2023 compensation, creating a stronger link between incentives and targeted performance. Cash flow is a critical driver of our values. But it becomes even more critical in the context of the leverage we've added to fund the Ultra transaction, and I can assure you that my team and I will be over-managing it. Turning to orders. We did see further pressure in the quarter, with daily organic orders down just over 10% on an FX neutral basis. This was not a surprise directionally, given softening macro indicators such as US and non-US PMIs, and what some of our large HVAC customers have been indicating on destocking. But it was weaker than we anticipated in terms of magnitude as we entered Q4, particularly in residential HVAC. We do expect order weakness to persist in early 2023, especially in the first quarter, when we face a tough compare. And with supply chain improvements plus heightened macro caution, our customers are likely reducing their stocking levels further. That said, we remain cautiously optimistic about our top line prospects. Not only do we have a diverse set of end markets with balanced early, mid, and late cycle exposures, But we continue to have an elevated backlog, still up nearly 50% versus early 2021 levels. And we expect significant tailwinds from new product launches in 2023. As a reminder, we aim to double our product vitality in the 2023 to 2025 time frame. We also have sizable self-help tailwinds from Rexnord PMC and Arrowhead synergies, both on cost and revenue, and then anticipate significant M&A synergy upside once we close Ultra. Rob will provide further detail on all the moving parts, plus our 2023 expectations for growth, margins, and earnings in his section. But the bottom line is that our focus in 2023 and beyond remains on controllable execution. Between our ample backlog, healthy new product pipeline, current and expected M&A synergies, and significant ongoing 80-20 and lean initiatives, we have a tremendous opportunity to create value for our key stakeholders, our customers, our associates, and our shareholders. and we believe this to be the case regardless of what the macro does. Shifting focus a bit, I'd like to provide an update on where we are with the Ultra transaction. Since announcing the acquisition on October 27th of last year, we secured financing for the transaction, saw approval of the deal by Ultra shareholders, and made nice progress on the regulatory front. We were very pleased with our early January financing activities, which involved raising $4.7 billion in three, five, seven, and 10-year unsecured notes. The offering was greater than four times oversubscribed, which helped us achieve interest rates that were over 100 basis points lower than assumed when we announced the transaction. On the regulatory front, The waiting period on our US HSR filing ended on January 12th, and a simplified regulatory review process was initiated in China in mid-January. China and other jurisdictional reviews remain in process, and we continue to expect that we will close the transaction in the first half of this year. We remain extremely excited about adding Altra to our Regal Rexnord team. We see tremendous opportunities to drive material cost and revenue synergies through this combination and create meaningful benefits for all of our key stakeholders. One of the many growth opportunities we envision with Altra is enhancing our industrial powertrain offering by adding certain capabilities that we lack such as clutches, and expanding narrower parts of the offering, such as in brakes. Meanwhile, our current powertrain team continues to see great momentum in the market. As a reminder, this cross-segment, cross-functional team is dedicated to selling integrated industrial powertrain solutions, and its focused efforts are driving strong momentum across selling these highly differentiated subsystems. Pictured on this slide is a recent powertrain win. In this case, our Regal Rexnord powertrains are running clarifying tanks that are critical components of a large municipal water treatment facility. Our content includes marathon motors, Rex and Hub City gearboxes, bulk couplings, and Rexnord bearings in addition to providing custom fabricated base plates and bearing pedestals. In aggregate, a seven-figure project win for the powertrain team. What the customer needed and we were able to provide is first, an integrated solution, and second, a solution that enhanced durability and energy efficiency. For our customer, This installation is over a $100 million project. So they were eager to lean on Regal Rexnord's application and powertrain expertise to provide these subsystems plus commissioning so they could free up time to focus on other aspects of the project. In other words, we made it easier for our customers. And at the same time, optimize the subsystem's efficiency and durability. On top of that, our team brought this highly customized solution together with best-in-class lead times, doing our part to help keep the broader project on schedule. What we love about these differentiated subsystem sales is that conversations with the customer are more strategic. more focused on our technical capabilities and on efficiency, making this powertrain subsystem an absolute win-win for the customer and for Regal Rush Nord. Plus, this win tees up other project opportunities and a strong MRO funnel for the future. And so, congratulations to our powertrain team for acting with urgency to deliver this great result. And with that, I'll now turn the call over to Rob to take you through our fourth quarter performance in more detail.