Regal Rexnord Corporation

Hello and welcome to the Regal Rexnerd first quarter 2023 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 from the question queue, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Robert Berry, VP, Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, and welcome to RegalRex Nord's first quarter 2023 earnings conference call. Joining me today are Louis Pinkham, our chief executive officer, and Rob Rehart, our executive vice president and chief financial officer. I'd like to remind you that during today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release, and then our reports filed with the SEC, which are available on regalrexnor.com. On slide three, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors, and we have included reconciliations between the non-GAAP financial information and the gap equivalent in the press release and in these presentation materials. Turning to slide four, 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 provide an update to 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 first quarter earnings, to get an update on our business, and for your continued interest in Regal Rexnord. Before getting into our first quarter results, I would like to spend a few minutes on our recent acquisition of Ultra, which we closed expeditiously on March 27th. I will begin by extending an enthusiastic welcome to our new Regal Rexnord colleagues who joined us from Ultra. We are extremely excited about how together, as part of a larger and strategically better positioned one Regal Rexnor team, we can accelerate our company's ongoing transformation into a faster growing and more profitable enterprise. For the second time in two years, we have thoughtfully deployed capital to affect a positive step change in our business. With so much progress in such a short period of time, I would like our key stakeholders to pause for a moment and take stock of what Regal Rexnord has become. One of the most impactful elements of our transformation is the evolution of our sales mix by application. As you can see in the chart on the left, the Regal Rexnord portfolio is now weighted to automation power transmission, and industrial powertrain solutions, which together represent over 60% of our sales. These are businesses with highly attractive growth and margin dynamics underpinned by differentiated technology that customers value. The remaining portfolio is a combination of air moving subsystems and motors, which after three years of 80-20 management, and targeted R&D investments is now an offering that is defined by differentiated technologies and sold to customers whose needs are well aligned with our value proposition. Another way to think about how the Regal Reckless portfolio has evolved is to consider its exposure to markets with secular growth tailwinds, illustrated on the middle chart. The exposure of the legacy portfolio plus ultra raises our exposure to secular growth markets to over 35%. If you also include the residential HVAC market with its consistent march towards higher minimum energy efficiency standards that require consistent innovation in motors, blowers, and total systems design, our secular exposure is just under 50%. Adjusting for the faster growth we foresee in these markets puts us on track to having over 50% of our sales generated in secular growth markets by 2025. In short, our market exposure today is inherently stronger than it was just a few years ago. The chart on the right illustrates our evolution by revenue. through the addition of Rexnord PMC, then Arrowhead, and now Ultra, along with organic growth in 2021 and 2022 of 17% and 9%, respectively. We are poised to be a $7 billion-plus enterprise this year. Regal Rexnord is now positioned to serve a wider range of customers and markets Do so with a broader portfolio of more technology-rich subsystems and digital solutions, and go to market with enhanced channel positions that support higher service levels for our customers. Said another way, our transformation allows us to start approaching customers as a trusted advisor, a dramatic evolution from our legacy market position as more of a component provider. Our customers are experiencing this evolution through our enhanced offering and service levels. Our shareholders will experience it through better organic growth, higher margins, and stronger free cash flow. Our associates will experience it as a member of a team that is expanding its most important customer relationships and is poised to more consistently win in the markets we serve. One way we plan to help investors better appreciate how Legacy Regal plus Ultra leads to growth acceleration is to spend a few minutes on each of our next several earnings calls introducing the product portfolios of our principal automation businesses. I will start this quarter with Cole Morgan, our factory automation and controls business. The Cole Morgan business designs and manufactures high-performance motion systems for applications that include factory automation, aerospace and defense, automated guided vehicles or AGVs, medical imaging, and robotics, among others. Its principal products, pictured on the right, include machine control hardware and software, plus highly engineered servo and stepper drives and motors. the business competes on its differentiated technology and precision engineering and focuses on customers in high-growth markets that have demanding performance standards. The fact that customers can count on Cole Morgan products to reliably perform to exacting specifications and do so consistently over time has created extremely sticky customer relationships and annuity revenue streams with attractive margins. We see so much opportunity to help a business like Cole Morgan grow faster. By leveraging the customer relationships, channel partners, and global sales organization of a $7 billion global enterprise, we plan to bring Cole Morgan's offering to new customers and leverage its technology in their wider variety of applications, including as part of subsystems that include other Regal Rex Nord products. A great example of where we are seeing such opportunities only six weeks in is in our aerospace business where the legacy Regal and Cole Morgan teams are already collaborating on how best to leverage our expanded portfolio with our customers. I look forward to updating you on our progress as we get further along, including once we define an outlook for ultra sales synergies likely later this year. Now let's turn to the first quarter. Last night, we reported results that delivered on our prior commitments. Organic sales declined by 4% in the quarter. while we did see pressure from destocking and pockets of weaker underlying demand in PES. We also saw strong growth in AMC and industrial and solid performance in our IPS segment, driven by continued strong price realization, broad-based tailwinds from new products, and rising industrial powertrain cross-selling synergies. The tailwinds we are seeing from our AMC and IPS teams executing PMC and Arrowhead sales synergies also bolsters my confidence in our enhanced growth prospects with Altra. Our adjusted EBITDA margins in the quarter were solid, coming in at 19.7%. in line with our previously stated expectations. When comparing these results to the prior year, it is important to remember that the annual cost roll provided a favorable impact in the prior year, but an unfavorable impact in the current year. Despite a modest top-line decline, we saw resilient margin performance tied to our ongoing 80-20 and lean efforts and merger synergies. Though perhaps the best example of our team's strong performance in the quarter is cash flow generation, underpinned by significant progress lowering working capital and inventory in particular. In a quarter that typically faces seasonal headwinds on free cash flow, we delivered $174 million. That allowed us to end the quarter with net debt to adjusted EBITDA of 3.96 on track with our expectations. We are putting a particular emphasis on inventory reduction and on free cash flow generation more broadly in order to deliver our balance sheet quickly. which includes tying a greater portion of our leaders' variable compensation incentives to this goal. In short, what gets measured gets done. We will remain laser focused on cash flow generation and debt reduction to achieve our post-24 target of less than 2.5. A solid start to 2023. 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 thank you to our Regal Rexnord associates around the world. Next, let's turn to orders. While our organic orders were down 9% in first quarter, this is slightly better performance than we anticipated. and resulted in a book to bill for the quarter just north of 1.0 and a marginal growth to our backlog. The stocking and market headwinds in our PES segment, in particular residential HVAC, pool pump, and certain short cycle industrial markets posed a significant headwind as expected. But performance elsewhere was, on the whole, a bit stronger and included positive momentum in markets such as aero, energy, marine, solar, and non-res construction. We see this dynamic continuing into second quarter, with destock and softer demand weighing on our consumer and short-cycle industrial markets but better performance in later cycle industrial, aerospace, energy, medical device, and non-res markets. We also continue to model better orders performance in the back half, especially in the fourth quarter, as D-stock headwinds likely abate, comps become easier, and our growth initiatives continue to gain momentum. These include progress towards our goal of doubling our new product vitality by 2025, our maturing 80-20 growth initiatives, and rising PMC plus early ultra cross-marketing synergies. The bottom line is our focus in 2023 and beyond will remain on controllable execution. Between our still ample backlog, a healthy new product pipeline, sizable M&A cost and cross-marketing synergies, significant ongoing 80-20 and lean initiatives, and accelerating improvement in our working capital metrics, we have so many opportunities under our control to create value for our key stakeholders. Executing this self-help is where our focus will be, regardless of what the macro does. And with that, I'll now turn the call over to Rob to take you through our first quarter performance and our updated outlook for 2023, which now includes Ultra.