Regal Rexnord Corporation

And welcome to the Regal Rexnord fourth 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. Please note this event is being recorded. And now I would like 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 Recksonward's fourth quarter 2023 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob Rayard, 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, which we describe 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 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 and an overview of our 4Q performance. Rob Rahard will then provide our fourth quarter financial results in more detail and lay out our 2024 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.

Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our fourth quarter earnings, to get an update on our business, and for your continued interest in Regal Rationard. Our team ended 2023 on a high note. achieving fourth quarter adjusted diluted earnings per share of $2.28, in line with our guidance midpoint. We also delivered very strong adjusted free cash flow of $171 million, which exceeded our expectations, and we realized 40 basis points of adjusted EBITDA margin expansion on a pro forma basis, despite continuing to confront destocking, and end-market headwinds that weighed on our sales. For the year, the Regal Rexnord team delivered $683 million of adjusted free cash flow, firmly above our $650 million-plus commitment and nearly double 2022. This allowed us to make significant progress paying down debt and lowering our interest costs. Truly outstanding performance, much of it due to the team's disciplined execution on working capital. We also made significant progress on margins, with adjusted gross margins up 150 basis points versus prior year, and adjusted EBITDA margins on a pro forma basis were down 10 basis points versus prior year, even while facing market headwinds. There were many drivers of this strong margin performance, but a key contributor was our IPS and AMC teams achieving $65 million of cost synergies in 2023. They are on track to deliver another $90 million in 2024. The past year has also been one of transformational portfolio change for Regal Rexnord. We added Altra. while also reaching an agreement to sell the motors and generators businesses that comprise the majority of our industrial systems segment. We now have line of sight to the portfolio we plan to grow with going forward. It is one where our IPS segment, which will represent roughly 40% of our pro forma sales, has unrivaled scale and scope across the industrial powertrain market. a powerful advantage that should allow us to provide a differentiated offering and service levels to our customers, helping us grow. In 2023, we saw approximately $70 million of incremental sales from cross-marketing and the industrial powertrain subsystem solution, which beat our expectations by roughly 10%. We also now have a meaningful presence in motion control with our AMC segment representing roughly 25% of our pro forma sales, which has highly attractive secular growth characteristics, exceptional product and technology differentiation, and provides a platform to support strong organic and inorganic growth opportunities. In short, We are proud of all that we have achieved in the past year, but more importantly, extremely excited about our future prospects. Helping drive this progress, and poised to execute so much value creation in 2024 and beyond, is our dedicated global team of Regal Rex Nord Associates. For their hard work and disciplined execution, I want to thank them. For a strong fourth quarter, which capped off a very positive 2023. Turning back to our fourth quarter performance, sales in the quarter were up 29.2%, but down 6.9% on a pro forma organic basis as we continue to see D-stock headwinds and weaker end market demand, particularly in our PES segment and in our factory automation business within AMC. Orders in the quarter were down 6% on an organic daily basis. And while January was off to a somewhat stronger start, we expect first quarter orders to be down at a mid single digit rate versus prior year. Despite fourth quarter top line pressures, margins in the quarter were strong. Our adjusted gross margin came in at 35.7%, reflecting synergy gains 80-20 in lean actions, as well as some favorable segment mix. Our adjusted EBITDA came in at $346.5 million. This translates to roughly a $1.4 billion annual run rate and highlights how we have built scale and scope into what we believe is a sustainable competitive advantage. Adjusted EBITDA margin of 21.5% was up 40 basis points versus the prior year on a pro forma basis. That translates to a deleverage rate of 14.6%, solid performance by our team. Lastly, what I believe was the key highlight of the quarter, we delivered $171 million of free cash flow. resulting in $683 million for the year, aided by overdriving working capital improvements, in addition to the strong operational execution I have been sharing. We paid down $117 million of debt in the quarter, and our net debt fell by over $153 million. We remain laser focused on paying down our debt And I believe we can be close to three times levered at the end of 2024. Strong free cash flow is a fundamental attribute of our Regal Rexnord portfolio. It long has been, and we are accelerating it. With this strong free cash flow, we anticipate substantial value creation tied to capital deployment for many years to come. Shifting focus, you may recall that each quarter I've been spending a few minutes introducing our principal AMC businesses to help investors better appreciate how we are well positioned to accelerate profitable growth. This quarter, I would like to spend a couple minutes discussing micromotion, where we make small, ultra-high-performance motors, controllers, and encoders primarily for the medical, aerospace, and industrial markets. Our micromotion division grew 22% in 2023, and roughly 15 points of that growth can be directly tied to share gains, supported by a robust pipeline of new products and improved service levels. This is important because it reinforces the success that comes from being part of Regal Rest North. This division had relatively flat sales for more than five years, mainly due to operational obstacles. We rigorously applied the Regal Ration or business system, addressed capacity constraints, and improved service levels since the acquisition, which allowed the micromotion team to work down a significant backlog. Service levels that had once restrained growth have now become a competitive advantage and are helping the business take share. In addition, as part of our Regal Rex Nord business system, we have been investing in this business. And in only a few quarters, we accelerated key product launches and built a solid organic growth funnel to drive long-term growth. The Division's markets are also well-positioned to benefit from strong secular growth tailwinds tied to increased access to medical care, transition to battery-powered equipment, and making air travel more sustainable. In addition to leveraging our Micromotion Division's longstanding technology leadership and deep application expertise, we have been making meaningful investments in R&D to significantly raise our new product vitality. as our growth and outgrowth metrics demonstrate. We have solid momentum. Some examples of the innovations driving these results are pictured along the bottom of this slide. Starting on the left, our products for new medical injector pens, devices used for injecting medication under the skin. We have started providing customers with a complete drive subsystem solution, which includes a micromotor encoder gearing, and lead screw. Providing this solution makes assembling these pens easier for our customers while also helping to optimize their performance. Orthoscopic shavers are highly engineered surgical tools used to perform orthoscopic surgeries by cleaning and removing soft tissues between bone joints. Our durable, high-precision motor at the heart of this device has doubled the product life as compared to competing products. The bone mill application contains our unique micromotor developed for a customer that wanted to shift from a manual to an automated device. This required a precisely controlled power output range and an ability to withstand autoclaving. A combination of attributes that our competitors were not able to provide. This is a great example where our application expertise plus our broader high precision motor and controls technology resulted in a highly value add and differentiated product. Lastly, battery torque wrenches are used in industrial applications where precise application of torque is critical. Our next generation solution is a micromotor that meets all standard performance criteria, but is also 50% faster, 15% lighter, 5% smaller, and 20% more energy efficient than the next leading competitor. So stepping back, when I consider this division's robust new product pipelines, And the progress we have made on operational excellence and service levels, I see a business well positioned for strong and accelerating outgrowth with confidence that we will grow at high single digits or better for the next few years. With that said, I will now turn the call over to Rob to take you through our fourth quarter segment financial performance and discuss our 2024 guidance.