Regal Rexnord Corporation

Good morning and welcome to the Regal Rexner third 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, Investor Relations. Please go ahead.

Great. Thank you, Alan. Good morning, and welcome to Rico Rexnord's third quarter 2023 earnings conference call. Joining me today are Louis Pingham, our chief executive officer, and Rob Reihard, our 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, we described in greater detail in today's press release and in our reports filed with the SEC, which are available on the regalrexnord.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 have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in the presentation materials. Turning to slide four, let me briefly review the agenda for today's call. Louis will lead off with his opening comments and an overview of our 3Q performance. Rob Reihard will then provide our third quarter financial results in more detail and provide an update to our 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 third quarter earnings, to get an update on our business, and for your continued interest in Regal Brexnord. Our third quarter can be characterized by strong, controllable execution against an end market backdrop that became weaker than we expected in the quarter, causing us to fall short of our sales and earning expectations for the quarter and for the year. Our strong execution is most evident in our cash flow performance, we generated $162 million of free cash flow in the quarter, keeping us firmly on track to hit our target of at least $650 million for 2023, even with the lower sales and EBITDA expectations. What we generated in Q3, plus some cash on hand, allowed us to pay down $185 million of debt which is further lowering our interest expense forecast. Our team also delivered roughly flat adjusted EBITDA margins down 10 basis points versus prior year on a pro forma basis as our top line fell by 8.5% on a pro forma organic basis, implying a deleverage rate of 22% We also made significant progress rebalancing the portfolio towards our most profitable growth opportunities by reaching an agreement to sell our industrial motors and generators businesses for cash proceeds of $400 million, which is on track to close in the first half of 2024. Adjusting for this sale. our enterprise gross and EBITDA margins should rise by over 100 basis points. And because we intend to deploy all net proceeds to debt reduction, we should be able to accelerate our balance sheet deleveraging. At the same time, We believe our associates in these businesses will benefit by joining an organization that is more aligned with a growth strategy in global industrial motors and generators, which should allow them to excel in the future. We have clearly transformed our portfolio with gross margins four years ago in the mid-20s to achieving mid-30s gross margins today and a clear path to 40% gross margins, which will be helped by the industrial sale. As much as I am pleased with our controllable execution in the third quarter, I am disappointed that our financial performance is falling short of prior expectations, a dynamic largely explained by weaker end markets. Our sales in third quarter were up 24.5% all in, but down 8.5% on a pro forma organic basis. Four of our top five end markets, representing roughly 50% of our sales, were weaker than expected. This weakness was also apparent in our order rates, which on a daily pro forma basis were down 10 percent in the quarter. We did face a fairly challenging 24 percent two-year stack to compare on orders, but performance was below our expected mid-single-digit decline. Normalizing global supply chains continued to impact orders, but a more cautious channel And in some cases, weaker end-user demand were also factors. Our orders and sales performance resulted in a quarter-end backlog that remains above our normal levels in IPS and AMC, with PES levels now close to what we would consider normal. Book bill was 0.94 in the quarter. In October, we did start to see early signs of improvement in our order rates, particularly in IPS, which saw modest year-over-year growth and sequential growth in PES and AMC. This makes us cautiously optimistic that we may be approaching an inflection point. Though an improvement versus what we saw in the third quarter, our current guidance assumes fourth quarter orders are flattish to slightly down versus prior year. Despite third quarter top line pressures, margins in the quarter were strong. Our adjusted gross margins came in at 34%. The third quarter adjusted EBITDA margin was 20.6%, down 10 basis points versus the prior year on a pro forma basis. Two of our segments also achieved nice year-over-year adjusted EBITDA margin expansion. PES was up 310 basis points to 19.7%. And pro forma margins at AMC rose 130 basis points to 24%. Drivers include price cost, improved operational efficiencies, various 80-20 initiatives, and disciplined cost management by our teams. Where we struggled in the quarter was IPS, which saw margins fall 330 basis points versus prior year. The principal driver was mixed pressure, much of it tied to short cycle weakness in the higher margin aftermarket channel. But another factor also emerged during the quarter, which relates to PMC footprint synergy realization. Those who have followed us for some time know that we like to set ambitious operational targets and then work with discipline and urgency to achieve them. I think our track record on margins in particular demonstrates our ability to execute in this manner. However, during the quarter, we decided to incur higher costs to minimize customer disruptions related to our footprint actions. This decision is resulting in some temporary pressure to IPS margins, but to be clear, There is no change to the permanent reductions to our cost structure that our PMC, or for that matter, our ultra-footprint synergy actions are expected to bring. Rob will elaborate on this topic a bit further in discussing segment performance and our updated outlook. However, in total, I am pleased with our team's performance in the quarter, and I want to thank all of our associates for their disciplined execution in a tougher end market environment, and for their hard work and dedication to making Regal Rexnord stronger every day. Shifting focus. You may recall that each quarter I have been spending a few minutes introducing our principal AMC businesses to help investors better appreciate how we are well positioned to accelerate profitable growth for many years to come. This quarter, I'd like to spend a couple of minutes discussing aerospace and defense. Our A&D division, which grew 27% in Q3, sells highly engineered components used in commercial aerospace, air and land-based defense, helicopter, and space exploration applications. These markets are positioned to benefit from strong secular growth tailwinds tied to making air travel more sustainable, to countries addressing rising geopolitical risk, and to our OEM customers prioritizing suppliers with lower risk supply chains. In the realm of aircraft sustainability, we see greater electrification of commercial and military aircraft, the introduction of alternative fuels, and increased use of hybrid propulsion systems. As global geopolitical tensions rise, countries are enhancing their domestic defense capabilities, which is driving demand for our defense products. And in the wake of recent periods of global supply chain disruption, customers are shifting their business to supplier partners with better-managed, lower-risk supply chains. All of these trends play to Regal Resnort's strength. We have been making meaningful investments, in R&D, in engineering, and in talent to significantly raise our new product vitality and production capacity and thereby ensure we are well positioned to continue addressing our customers' needs effectively. I am pleased to share that we have solid momentum. As you can see on the slide, our aerospace business sales are tracking up 20% in 2023. And roughly one quarter of this growth reflects outgrowth tied to the new product investments the business has been making. Through the combination of our legacy Regal Aerospace business with that of Rexnord PMC and now Altra's aerospace businesses, we have a more comprehensive product portfolio and a scalable global platform and footprint to expand from selling components to also providing vertically integrated electromechanical motion control solutions. Today, after only a couple of quarters since the transaction closed, the combined Regal Rexnord A&D businesses have a robust funnel of synergistic bid opportunities. When it comes to our ability to provide differentiated service levels to our customers, our manufacturing footprint and supply chain are increasingly a competitive advantage at a time when such reliability is critically relevant to customers. To this end, we recently completed construction of a state-of-the-art manufacturing facility in Chihuahua, Mexico. We're tapping into highly skilled local labor pools in a region that has become an aerospace center of excellence for many of our customers, expanding our capacity to address rising demand while improving our service levels and increasing the value we can offer to our customers. I should add, the facility also incorporates a range of state of the art energy and water efficiency features in its design, supporting our commitment to be good corporate stewards of the environment. So when we step back and connect the dots on the power of our A&D portfolio, differentiated, highly engineered products, deep domain expertise, longstanding customer relationships, and opportunities to leverage the combined capability of Regal Rexnord's total portfolio, we see a business position for strong outgrowth into the foreseeable future. And with that, I will now turn the call over to Rob to take you through our third quarter segment financial performance and discuss our latest guidance.