Regal Rexnord Corporation

Good morning and welcome to the Regal Rexner Corporation second quarter 2023 earnings 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 touchtone phone. Please note, this event is being recorded. I would like now 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 Rexnord's second quarter 2023 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob Reihard, our Chief Financial Officer. Before we get started, I'd like to note that we are experiencing some scattered blackouts in our area this morning. and in the event that we are disrupted during the earnings call, please know that we will rejoin the call shortly thereafter. We do thank you in advance for your patience in the event this disruption occurs. I would 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 in our reports filed with the SEC, which are available on the regalrexnor.com website. 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 GAAP 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 second 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'd like to turn the call over to Louis.

Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our second quarter earnings to get an update on our business, and for your continued interest in Regal Rechnord. The second quarter was an exciting one for the Regal Rechnord team. Our first full quarter together with our new colleagues from Altra. Bringing together Altra and Regal Rechnord marks another significant milestone on what, for the last four plus years, has been a steady journey of profound transformations. We have a simple but powerful concept at Regal Recs Nord for charting our path forward and for driving a continuous improvement mindset. In short, what we call our from-to. We are regularly challenging our businesses, functions, and associates to define their from-to. Where they are, current state, and where they plan to go, future state. and then identifying the investments, the initiatives, and the actions they must take to navigate that from-to journey. All, I should add, driven with an 80-20 prioritization mindset and supported by data. As I reflect on our RRX from-to and where we are today, I think about a legacy business that in 2020 had $2.9 billion in sales, which today has annual sales above $7 billion. A business where growth was stagnant to a business more focused on secular growth markets with significant focus on vitality, which we expect to double by 2025 after doubling from 2019 to 2022. A business that had adjusted gross margins about 27% now on track to be a 35% gross margin business this year with adjusted gross margins just over 35% in quarter two. A business that treated all products and customers equally to one that views customers, products, really all opportunities through an 80-20 lens. I could go on, but in short, a pretty dramatic from-to. The next steps on our transformation journey will be even more exciting, and I am pleased to share that through our first three months together with Altra, we are off to a great start. The teams have come together really well. Altra and Legacy Regal Rational are a great cultural fit. Operationally, The legacy ultra business had a great second quarter, which exceeded our expectations. By the way, so did legacy Regal. Integration activities and initial synergy actions are both well on track, and the teams have already started building a healthy pipeline of cross-marketing opportunities. In fact, we have already seen a few million dollars of wins just three months in. I look forward to sharing updates on our progress in future quarters and having you see the further benefits of the combination in our future results. In addition to all that we were doing with Ultra, our teams also executed a very solid second quarter with performance on sales and adjusted EBITDA both tracking modestly ahead of the expectations we laid out last quarter. Sales in the quarter were up 31.1% versus the prior year, or down 5.7% on a pro forma organic basis. For context, this moderate organic sales decline was against a two-year stacked compare of 40%. The organic sales decline is being driven by fully anticipated weakness in our PES segment markets, as residential HVAC and parts of the general commercial channel are facing weaker demand and destocking headwinds. Putting PES aside, our other segments, in aggregate, posted low single-digit organic growth, led by AMC. Turning to orders. Our daily orders were in line with our expectations, coming in down 12.7%. This performance should be considered in the context of a two-year stacked compare of 55% and is consistent with a normalizing global supply chain and a return to more typical customer stocking levels. Our orders and sales performance resulted in a quarter-end backlog that is approximately 65% above our normal levels with book bill at approximately 1.0 in the quarter and on a year-to-date basis. Margins in the quarter were strong. Our adjusted gross margin came in just over 35%. Margins continued to benefit from our 80-20 efforts and the launch of mixed positive new products. The second quarter adjusted EBITDA margin was 21.5%, up 50 basis points versus the prior year, or up approximately 80 basis points on a pro forma basis. Finally, free cash flow was a standout positive in the quarter, coming in at $176.3 million, up significantly from the prior year period, and continuing to reflect our team's focus on working capital management. The combination of our first half cash flow and deploying excess balance sheet cash allowed us to pay down $600 million in debt this quarter. In short, a very strong quarter and one that I think demonstrates solid execution by our teams. Whether it is executing our M&A integration and synergies or our base business performance, Everyone at Regal Restart is working very hard to advance our transformation by pursuing cross-marketing synergies, doubling our product vitality, raising our secular and market exposure, and continuing to drive 80-20 and lean. We are becoming a faster-growing, higher-margin, more cash-generative enterprise. I want to thank all our associates for their disciplined execution and and for their dedication to making Regal Rec Storage stronger every day. As I mentioned last quarter, one way we plan to help investors better appreciate how, together with Ultra, we are better positioned to accelerate profitable growth is to spend a few minutes introducing our principal AMC businesses. This quarter, I will discuss linear motions. Our linear motion division within the AMC segment, which includes the well-established Thompson, Nook, and Delavan brands, sells actuators and related highly engineered components that enable precision movement in machines, devices, and other applications. These are differentiated, technology-rich products that fit perfectly inside Regal Rexnord's broader portfolio of automation and power transmission components and subsystems. In this regard, the linear motion portfolio significantly advances our strategy of becoming a trusted advisor to our customers. On the right-hand side of this slide are examples of the end markets the linear motion business serves, including inter-logistics, medical, aerospace and defense, and agriculture, to name a few. The yellow arrows in each picture illustrate the kinds of precision movement our products enable, such as the automation of a packaging line or raising and lowering aircraft wing flaps. Some relevant common characteristics across these applications include an absolute need for reliability, often in harsh conditions, along with accuracy and precision. In short, our linear motion components are critical to the proper functioning of the applications in which they reside, and in many cases, to the safety of the applications users. As indicated on the lower left-hand side of the slide, our linear motion business has established itself as a leading provider through its track record of performance achieved by leveraging proprietary technology deep application expertise, and a strong channel and online presence that supports high customer service levels. Most of the businesses and markets also have strong secular growth tailwinds, some related to macro trends such as electrification, onshoring, and automating labor-intensive processes, and some to end market-specific factors such as growth in e-commerce or a rising global middle class that is driving demand for aircraft and agricultural products. The strength of our linear motion solutions and channels, plus the secular tailwinds I mentioned, supported a five-year organic growth taker for this business of roughly 6%. We believe that we can accelerate that growth going forward into the high single digits by exploiting significant cross-marketing opportunities, leveraging our Regal Restored Salesforce, and increasing our value add to customers by offering a broader portfolio of adjacent automation, power transmission, and high-efficiency electric motor solutions. I want to take a moment to emphasize the power of the broader Regal Restored portfolio. For example, in intralogistics, Legacy Regal already had a strong portfolio of power transmission and conveyance components and subsystems with strong and vast customer relationships in place. The addition of our linear motion portfolio, along with other precision motion solutions from other AMC divisions, enable a more complete and value-added offering, engineered to our customers' specific needs. Similar cross-marketing opportunities exist to an even greater extent in the aerospace and defense market, and next quarter we will dig deeper into AMC's now expanded aerospace business, which is approaching $350 million in annual revenue. Lastly, I'd note that our medical market exposure, which has been a priority for us to expand, has now reached 3% of Regal Restored sales. Our sales teams are discussing the power of the enhanced Regal Restored portfolio with customers, and using an 80-20 approach, they have focused on Quad One. While it is still very early days, and many of these initiatives are by nature longer sales cycles, we have already begun building a sales opportunity funnel and I am excited by what the teams are seeing. I hope this provides a little bit more color on how we believe the scale of Regal Restore can help accelerate growth in linear motion and how differentiated linear motion technologies enhance our ability to sell our broader power transmission, automation, and high efficiency motor portfolio. With that, I will now turn the call over to Rob to take you through our second quarter segment, financial performance, and discuss our latest guidance.