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spk05: And welcome to the Regal Rex Nord 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 Barry, Vice President of Investor Relations. Please go ahead.
spk10: Great. Thank you, operator. Good morning and welcome to Regal Rex Nord'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 Rayard 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
spk04: 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 Rexnord. 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 de-stocking 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 Ultra while also reaching an agreement to sell the motors and generators businesses that comprise the majority of our industrial system 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 Reckonord 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 .2% but down .9% on a pro forma organic basis as we continue to see these 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 .7% reflecting synergy gains, 80-20 and 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 .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 over driving 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 Rechnord 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 micro motion where we make small ultra high performance motors, controllers, and encoders primarily for the medical, aerospace, and industrial markets. Our micro motion 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 Rechnord. This division had relatively flat sales for more than five years mainly due to operational obstacles. We rigorously applied the Regal Rechnord business system, addressed capacity constraints, and improved service levels since the acquisition which allowed the micro motion 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 Rechnord 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 micro motion division's long standing 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 auto-cleaving, 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 pipeline 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.
spk07: Thanks, Louis, and good morning, everyone. I'd also like to thank our global team for their hard work right up to year end to deliver a strong close to 2023 while continuing to drive the many initiatives we have underway to accelerate profitable growth. Now, let's review our operating performance by segment. Starting with automation and motion control, or AMC, organic sales in the fourth quarter, pro forma for the ultra acquisition, were down 3% to the prior year, reflecting strength in the aerospace, data center, and medical markets tempered by weakness in the global discrete automation and food and beverage markets. Notably, for the full year 2023, organic sales growth for the AMC segment is up .1% on a pro forma basis. Adjusted EBITDA margin in the quarter was .8% in line with our expectations and up 90 basis points versus the prior year period on a comparable pro forma basis. The margin performance reflects favorable price cost, pockets of strength in mixed positive markets such as data center, aerospace, and medical, along with synergy realization and good discretionary cost management. Orders in AMC on a pro forma organic basis were down just under 5% in the fourth quarter on a daily basis, a significant improvement versus recent quarters. For perspective, we expected orders to decline in the quarter versus prior year, driven by a couple of factors. One, as supply chains and lead times normalized, we have been addressing customer demand by working down an elevated AMC backlog. We made good progress on this front in the fourth quarter, though AMC's backlog still remains roughly 35% above normal, a factor we think bodes well for top line improvement as 2024 unfolds. Second, as anticipated when we reported third quarter, we continued to see softness in our short cycle discrete factory automation business. While short cycle automation orders stabilized in the quarter, which helped overall segment order rates, short cycle orders are still not growing and we do not expect to see growth in short cycle automation until later in 2024, consistent with our prior expectations. In January, book the bill tracked at roughly 1.14, with orders down approximately 5%. Turning to industrial powertrain solutions, or IPS, pro forma organic sales in the fourth quarter were down .5% versus the prior year, and slightly above our expectations. Growth in the quarter mainly reflects strength in the aerospace and energy markets, partly offset by weakness in alternative energy and the food and beverage markets. Adjusted EBITDA margin in the quarter for IPS was 24%. In line with our expectations and up 20 basis points versus the prior year on a pro forma basis. We are very pleased to see a nice sequential improvement in IPS's adjusted EBITDA margins. Margin performance in the quarter reflects tailwinds from synergies, along with continued discretionary cost management. Net of headwinds from lower volumes, weaker mix, and as anticipated last quarter, cost to maintain quality and service levels for our customers during a period of peak synergy related footprint moves. Pro forma organic orders in IPS were down .9% in the fourth quarter on a daily basis. In January, book the bill tracked at 1.16, and orders were up just over 1%. Turning to power efficiency solutions, or PES, organic sales in the fourth quarter were down 16% from the prior year, below our expectations. The shortfall in performance was driven almost entirely by continued channel destocking activity and weaker demand in the North America residential furnace market, which we attributed to warmer weather, higher than estimated channel inventories, and weaker underlying demand. We expect furnace to remain a headwind in the first quarter. While weather appears to have tracked more favorably in January, we think furnace destock pressure will remain, given channel inventories were quite elevated entering this year. The adjusted EBITDA margin in the quarter for PES was 18.1%, up 10 basis points versus the prior year period, and in line with our expectations. Key contributors to the PES margin performance were improved operational efficiencies, and a net of lower volumes. We also continued to selectively deploy 80-20 across the business to move away from lower margin business and focus the majority of resources on growing our most attractive Quad 1 business. As we reflect on 2023, we are very pleased with the disciplined execution of our PES team, which achieved relatively stable margins at a healthy high teams level, despite sizable top line headwinds. Shifting to orders, orders in PES for the fourth quarter were down just under 10% on a daily basis, booked a bill tracked at 1.2 in January, and orders were up just over 3%. While it is encouraging to see this inflection in PES orders, it is still early, and therefore we will remain conservative in our expectations until we see that these improved rates are sustainable. On the following slide, we highlight some additional financial updates for your reference. Notably, on the right side of this page, you'll see we ended the quarter with total debt of $6.38 billion down $117 million, and net debt of $5.7 billion down $153 million versus the end of the third quarter. Net debt to pro forma, adjusted EBITDA, including synergies, is now 3.8, and our interest coverage ratio is approximately 3.4. Adjusted free cash flow in the quarter was very strong, coming in at $170.9 million, and nicely above our expectations. For the year, we generated adjusted free cash flow of $683.1 million, nearly double the prior year level. Throughout the year, the teams continued to do a great job driving strong free cash flow performance, in particular, by lowering inventories, performance that has allowed us to make significant progress paying down our debt. Moving to the outlook. Since markets and D-stop dynamics remain volatile, and we are a fairly short-cycle business, we've set our initial 2024 outlook with incremental conservatism, and so biased our 2024 growth rate assumptions towards reflecting current in-market conditions. As you can see on this slide, we are introducing guidance for 2024 adjusted earnings per share to be in a range of $9.75 to $10.55, which implies a midpoint value of $10.15. Underpinning the guidance midpoint is an assumption that revenue is down slightly to prior year, to approximately $6.65 billion, and adjusted EBITDA margin is up just over 100 basis points versus the prior year, to approximately 22%. Note that this guidance factors a full year of performance for the industrial motors and generators businesses, which we announced late last year that we are selling, a transaction still on track to close in the first half of this year. The table on the right-hand side of this slide outlines these key guidance points, as well as the sales growth assumptions at the low and high end of our EPS range. Note that the primary difference between the low and high ends of our adjusted earnings guidance range is the assumption for top-line performance, which is also noted on this slide. For 2024, we also expected to generate at least $700 million of free cash flow. The combination of the cash flow we expected to generate this year, plus anticipated net cash proceeds from selling the industrial businesses, should allow us to pay down most of our variable rate debt in 2024, which in turn would lower our net debt to adjusted EBITDA ratio from 3.8 at the end of 2023 to approximately 3 at the end of 2024. Finally, at the bottom of the table includes assumptions to help investors model -the-line items. Once again, all of these modeling items factor a full year of performance for the industrial motors and generators businesses. On this slide, we provide more specific expectations for our first quarter and full year performance by segment. On revenue and adjusted EBITDA margin. Note that the performance indicated for these metrics is on a -over-year pro forma basis. For AMC, we anticipate a low to mid single digit sales decline in the first quarter, with margins up modestly. We expect modest growth in sales and margins for the year, implying incremental strength in the second half, mainly as our results in discrete automation are expected to improve. Overall, we see continued strength in the data center, aerospace, and medical markets within AMC, net of headwinds in factory automation and food and beverage. For IPS, we also expect a low to mid single digit sales decline in the first quarter in roughly flat margins. For the year, we expect sales to be down low single digits and for adjusted EBITDA margins to be up roughly 200 basis points. Broadly sluggish in markets, especially food and beverage and general industrial, are expected to weigh on top line performance, while tailwinds from synergies net of anticipated mixed pressure and select growth investments should drive nice margin gains. For PES, we anticipate a low double digit to low teens top line decline in first quarter. Largely tied to furnace de-stocking and weak underlying HVAC in markets. Margins are expected to be up roughly 300 basis points versus the prior year to a level in the mid teens, which is slightly below recent segment performance, mostly due to mix. For the year, we assume sales are flat and margins are up roughly 50 basis points. Within PES, we assume a low single digit decline in the RSI HVAC portion of the business on furnace de-stock and weak underlying in market demand. With first quarter down, second quarter up slightly, and the back half up mid single digits on the absence of de-stocking headwinds. We assume the commercial HVAC business is up slightly for the year, with growth in North America but declines in Europe. Lastly, for industrial, we expect a low double digit top line decline in first quarter, but stable margins versus the comparable prior year period. For the year, we expect low to mid single digit top line declines. However, we expect margins to be up slightly in the year. We assume ongoing cost actions and operational improvements will help to improve margins, despite top line headwinds tied to de-stocking and weak global industrial in markets. Before turning the call over to the operator for questions, I'd like to acknowledge that while 2023 challenged us with often significant in market and de-stocking headwinds, I think our teams did a great job executing many permanent structural improvements to our business, ranging from significantly enhancing our cost structure by executing synergies 80-20 and lean actions, to managing the significant portfolio transformation we achieved by closing the alter acquisition and announcing the sale of our industrial business. As we look ahead to 2024, our teams remain excited about the opportunities in front of us, controllable opportunities to drive significant margin upside, to meaningfully lower our leverage, and to advance our organic growth initiatives, many of which are tied to a healthy pipeline of differentiated and often more environmentally friendly new products. And with that, operator, we are ready to take questions.
spk05: Thank you very much. And we will begin the question and answer session. Reminding you that to ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your hands set before pressing the keys. And to withdraw your question, if need be, please press star, then two. At this time, we'll pause momentarily to assemble our roster. And our first question is coming from Mike Halloran from Baird. Mike, please go ahead.
spk09: Hi,
spk03: good morning, everyone. Morning, Mike. So first, just on the expectations laid out in the guidance and kind of what's changed here. Now, if I listen to comments, it sounds like conservative approach makes sense. You know, has anything really changed in your thought process over the last three months or so? It doesn't seem like it. I mean, if anything, you see a little better order start to the year, which you're just hesitant to roll through too quickly. And then related, how do you think about the sequentials through the year? Is there fundamental improvement embedded in the guidance as you get to the back half of the year? Or is this just constant easier, D-stock goes away and kind of relatively normal sequentials from here?
spk04: Yeah, Mike, great questions. Thank you. So first, what has changed? I'd say in fourth quarter, our teams performed extremely well. IPS in particular executed very nicely. We the margin lift is exactly what we expected. Really solid performance. AMC as well. Bit more headwind, though, for PES. And really, it was the residential HVAC, but the D-stock furnace that is extending beyond what we anticipated. And we believe that that will continue into 24 with residential HVAC, which is about 30% of that segment being down high double digits, so 15 to 20% in first quarter, and then improving through the year, but down overall for the year. So that would be the main surprise for us. And then as we think about the planning for 24, we expect our first half and second half sales levels to be weighted about 49%, 51% first half, second half, about a two and a half point spread. Now, the driver of that is we expect D-stocking to end in the first half, both in residential HVAC and in factory automation. And so then a slight uplift in the second half. We're not banking on a significant uplift in the second half, but that could be a catalyst for us if that changes. But right now, it's like I said, 49, 51-ish. Of course, that would mean for us first half sales growth would be down year over year and second half growth would be up year over year. Hopefully that helps.
spk03: No, it did. And then maybe stick to that factory automation piece. You know, that's one where you look back last quarter, the shorter cycle side was softer, but your project or at least the front log of opportunity was still really strong. Maybe you could talk about what you're seeing there and then what gives you the confidence in how you think about the back half of the year.
spk04: Yeah. So you kind of hit on the nail on the head with that with the way you described it. Sequentially, we saw orders improve in that factory automation business. A lot of the longer cycle, though, orders are stronger and so gives us confidence in the second half, although the shorter cycle did improve quarter over quarter, but not yet to a year over year improvement. And so we see the stocking continuing into the first half and then slightly rebounding in the second half. And that's really, again, the longer cycle orders and the stocking strengthening H2 for us.
spk03: Great. Really appreciate it.
spk04: Thanks, guys. Thanks, Mike.
spk05: And our next question comes from Nigel Coe from Wolf Research. Nigel, you may proceed.
spk09: Thanks. Good morning, everyone. Good morning. You have a really good colour. Thanks. And Rob, now you're given a quarterly guidance. There's no going back. So just sort of pick up on your assumptions around Resi HVAC. I know it's a subset of PES, which is a subset of your business. But the down for the full year, down volumes for the full year, I understand 1Q is driving that. But that seems a lot more conservative than perhaps your customers outlooks. And, for example, carriers, I think, guiding for mid to mid-term volume growth in 2024. So I would have thought that you would have performed the OEMs given the inventory destock you're lapping in 2023. So maybe just talk about what's informing your opinion on that outlook for 2023 and 2024. So, Nigel, I'm curious about the Q4. Are you seeing any benefits from the transition to 454B refrigerants, anything like that?
spk04: Yeah, so Nigel, it's a great question. And I tell you, the markets are still murky here. And when you think about how we entered Q4, we were expecting even more strength than we saw. And Furnished East Dock extended beyond Q4. And now we're saying first half. Until we see some good trends that would support volume growth in 24, we're not going to model that. We're going to take a prudent approach and plan for what we're seeing in the market today. Even what we're seeing in the market today, though, given what we're the first quarter forecast for us, we're going to need an uplift in the second half of about six points. So, could it be more? Maybe. So that would be upside for us. And when we see that trend, we'll certainly guide to it. But for now, we're not confident enough. And so we're not guiding beyond what I've already stated. And then specific to your question, sorry, Nigel, specific to your question on the GWP implementation, really, we're not factoring in any impacts to that transition at this time. We're not seeing any upside or benefit from it yet. And as you probably know, the final rule would require that you can't install anything manufactured after January 1st, 2025, after January 1st, 2025. That's going to put a lot of pressure on the supply chain. And so our guess is that the final rule will be modified so that you can install through January 1st, 2026 what's manufactured through January 1st, 2025. So right now, we're not expecting any major implications from the GWP implementation.
spk09: OK, that's great, Keller. Thanks, Lewis. And then on the 4Q restructuring, pretty heavy sort of restructuring investment in 4Q. Is that all M&A integration related or is there additional restructuring actions open above the PMC and ultra integrations? Just wondering if there's anything dialed in for over and above that $90 million of integration savings.
spk07: Yeah, so the restructuring and related in the quarter was really mostly around the integration type work that we're doing for IPS and AMC. There was some in PES, as we have done some product line setups associated with some of the other NOFA moves that we're doing there that were also embedded in the quarter. But aside from that, it's really all around integration activities.
spk09: OK, that's great. Thank you.
spk04: Great. Thanks, Heidel.
spk05: And we have a question now from James Piccarello from KeyBank. James, please go ahead.
spk01: This is actually Jeff Hammond. I don't know what happened. Can you hear me? Hey, Jeff. Good morning. Just on the EBITDA margins, I think you're guiding to 22. I think at a conference in the fall, you said, hey, we can get to 25 by 25. So, you know, big leap. But I understand, you know, industrial comes out. So I'm just wondering if you could level set us on, you know, one, your confidence in that 25 by 25, and two, what 24 would look like if you kind of, you know, took out industrial for the full year.
spk04: Yeah. So, Jeff, thanks for the question. The comment that was made in the fall was exiting 25. But nevertheless, we feel very confident in our ability to get to that 25 percent EBITDA margin. So the way to just do the math very quickly is 22 and 24. Industrial will actually help about 100 basis points of uplift. And so call it 23 and 24. We will expect another 65 million dollars of synergies in 25 and then assume some growth because we would expect 25 to start to rebound as our markets start to return. And then we'll continue to do what we do. We'll drive 80-20. We'll drive lean. I feel really good about our new product development and the mixed positive gross margins is a reminder. We expect to double our vitality coming out of 25 and show all of those things, plus a normalization of markets, in particular, short cycle industrial, resiHVAC. All of that gives us confidence in our ability to execute to a 25 percent EBITDA margin.
spk01: Okay. That's really helpful, Louis. You know, last quarter you called out some challenges with plant moves. And I'm just wondering, you know, one, what the impact was in 4Q and two, if you feel confident that's, you know, that's all behind you.
spk07: Yeah. You know, we did indicate that we had some costs that we expected at about $6 million at the time. We actually tracked closer to 4 million in the quarter. So below our initial expectations. And yes, those costs are now behind us. And we don't expect that to repeat as we move through 2024.
spk01: Okay. And then just last one on free cash. I think you were saying earlier, maybe 800 million of free cash flow for this year. I think you said 700. Is that just timing around working capital or maybe just speak to, you know, the upside around, you know, continuing to pull working capital out of the business?
spk07: Sure. First of all, you know, similar to the way we're approaching, you know, earnings guidance in 2024. We're being a big conservative in our free cash flow guidance as we start the year. But adding to that, you know, some of the decline is due to the outperformance we saw in 2023 around inventory reductions. You know, if you recall, we said we would expect about 200 to 225 million dollars in cash from inventory in 2023. And we actually ended the year with inventory related inflows about 255 million dollars. So significant improvement there from what we had originally thought. You know, again, we still expect another 50 million dollars in 24. But that is a bit of a year over year headwind. The other side, this is just our guidance, you know, is aligned now to the 700 million in addition to what I just talked about. I mean, when you when we think about, you know, cash here at the, you know, at our level, you know, we're also thinking about, you know, free cash flow, you know, per share. And that's about ten dollars. And, you know, our free cash flow yield is now, you know, over seven percent. And, you know, so we're cash is incredibly important to us. We're going to continue to drive that every year and pay down our debt. And but really, you know, from the standpoint of, you know, looking to, looking to drive an investment opportunity for us, you know, as we as we look at our business, we think that this is a compelling investment opportunity for our RRX. And based on what I just talked about, over ten dollars a share and a yield of over seven percent.
spk04: Great. Thanks, guys. Yeah, thanks, Joe.
spk05: We have a question now from Deepak Mathivanan from Barclays. Deepak, please go ahead.
spk06: Hi, it's Julian here. Just a quick question first off around maybe earnings seasonality. You talked about the revenue progression earlier in this call. But I guess if I'm thinking about the first quarter, it looks like maybe flattish EBITDA sequentially sort of, you know, three forty five to three fifty or something dollars company wide. And then just trying to understand sort of how do we think about the second quarter? You know, you classically get that nice sequential lift from PES. Maybe that's more muted this year for the well rehearsed Resi HVAC headwinds. So maybe just any help around, you know, how much of the year are we getting in the first half on EBITDA and anything moving around below the line aside from interest expense reduction through the year?
spk07: Yeah, you know, first of all, your first quarter, you know, I think you think about it maybe a little bit on the sequential side. It may be on a year over year pro forma flat from an EBITDA perspective with with margins, you know, roughly in line, you know, with with maybe 100 basis points on over on a pro forma basis versus prior year. So think about first quarter like that and then progression as we move through the year. So to your point, would we expect to see nice progression as we move into the second quarter? Yes, we would off of that first quarter. But we still expect, you know, growth rates to be down in the second quarter and not move to positive until we get to the back half. But we would absolutely expect to see progression from Q1 to Q2.
spk06: That's helpful. Thank you. And then just my second question would be around, you know, if we're trying to think about sort of IP Yes, you know, what's happening there, you've talked about that mixed headwind on the slides a bit. So maybe go into some detail there. And I guess when you're thinking about that sort of margin, you know, progression through the year, you know, you're sort of I think, flattish guide for Q1 on margins, decent increase for the year. So is that kind of assuming that the mixed headwinds, you know, dissipate through the year as it goes? Maybe just any help around that?
spk04: Yes, Julian, there's some mixed headwinds that dissipate, but a big driver is the synergies and the benefits from the synergies on the gross margins. That's where we're seeing 75, 80% of all of our synergies in the IPS segment. Teams are executing incredibly well on the footprint rationalization and the product line simplifications. And that's really the majority of the driver of the margin uplift in IPS in Q24.
spk06: That's great. Thank you. Our
spk05: next question comes from Vivek Sri from Goldman Sachs. Vivek, please go ahead.
spk08: Hey, guys, you got you got Joe from Goldman. How are you doing? Hey, good, Joe. Good to have you back. Yeah, yeah, thanks, guys. So, hey, I just want to I think that there's some confusion around the one Q guys. I'm just going to try to clarify it here. When you when you try to clarify it, you know, you're not going to be able to do it. You talk through pro forma Q4 margins and you baseline it in in both the in the IPS segment as well as the AMC segment. We're baselining off of an IPS margin of 24 six and we're and we're baselining off of an AMC margin of 22 four. Is that correct?
spk07: Yes, if you if you go back to the eight K about September eight to, you know, of twenty three. Yes, those would be the margins on a pro forma basis.
spk08: Got it. All right, Crystal. And then and then and then really just my only other question again, just more around like the guidance for the year. I was a little confused on the commentary around industrial. It sounds like industrial is in for the year, but then there's a debt pay down associated with with the proceeds from the industrial sale. So I just want to I want to make sure that I've clarified that is industrial in for the full year. And then are you assuming that the financing from the deal is also going to help pay down debt?
spk07: OK, great. And thanks for the question. We do assume motor generators business in that, you know, that comprises the majority of the industrial system segment contributes about 500 million on the top line in the year, fully embedded in our guidance, as well as about 40 to 45 million dollars of adjusted EBITDA in 2024. That is fully embedded on the full year basis in our guide. Now, while that is embedded in the guide, when we close the transaction, there will be proceeds from that transaction expected of approximately 360 million net of interest and sorry, taxes and fees. And so if you assume that you lose the 40 million or 45 million dollars or so of EBITDA and offset that by an equivalent, maybe 26 million dollars on an annualized basis of interest savings, the net impact to our guidance is a negative 10 cents or so. So depending on when the transaction closes, you can work from that back.
spk08: OK, wonderful. Great. Thank you very much. Great. Thank you.
spk05: And we now have a question from Christopher Glenn from Oppenheimer. Christopher, please proceed.
spk02: Thank you. Correctly identified. Nice to say. So, yeah, was curious, guys, just from end market perspective, what do you think the biggest kind of variables and opportunities you go from one queue into two queue are for, you know, demand and revenue? I don't know what the exact January orders comps the year of year sounds nice, but, you know, we can't correlate that to revenue. So, yeah, just kind of, you know, some of the subtleties that might be particularly interesting and key variables into the second quarter and markets.
spk04: Yeah, I mean, I think the drivers of our business by market that that could see some implication quarter to quarter, Chris, would be general industrial. With Reno right now, we're seeing some sluggish and machinery, some D stock. If that if that improves faster, that would see a bit of an uplift from from Q1 Q2. Really the same commentary around Rezzy HVAC that could show a nice uplift from Q1 Q2. Of course, we've got some really strong markets right now that we think are in continued great momentum. Medical data center aerospace are really strong. I tell you alternative energy, the incentives get fully figured out in the projects released, perhaps that could show a nice uplift Q1 Q2. That's how I would think about it between those two quarters.
spk02: Okay, great. Thanks. And, you know, as you're driving the organization hard, you know, what do you do when you know signs of strain pop up. You know, you got large organizations and you're doing a lot of work. The pro forma EBITDA margin growth was was great. And yeah, just curious about the strain risk as you drive the organization hard.
spk04: Hey, Chris, I think it's a great question. Thank you. You know, it's all about living by regal recs nor its values. We have a set of values and 35,000 associates worldwide that know them and live by them. And that's how we represent every day. We also over communicate. We did an employee survey in the second half of 2023 and there's opportunities for us to improve and there's opportunities that we're going to further leverage. And it's over communicating what our goals and objectives are and what it's going to take to achieve them and working with our teams to when there are challenges and headwinds to put forward mitigating plans. And so we're very planned to check act culture and we do that with our culture as well. And so we have a plan to improve and we'll work with our our organization worldwide to ensure that we're executing on that plan and partnering with everyone for great success.
spk02: Great thanks for that color.
spk04: Yeah, thank you.
spk05: Okay, we have one more question from Walter left tax from seaport Walter, you may not proceed.
spk04: A good morning, Walt. Perhaps you're on mute.
spk11: Oh, sorry about that. That's right now. Okay, yeah, sorry about that. Yeah, so very clear today. So thank you very much for that. But a couple of things just to clarify. So the timing, you're still saying for the industrial businesses in the first half. Like, you know, why is the, you know, what's the volatility around the calendar and when you close it.
spk04: You know, well, the process is proceeding nicely and as we expected and, you know, we guided first half previously and so we're we're on that path. We have most of our approvals at this point, but there are still a couple of you outstanding and so as those approvals come in, then we'll be able to close. So again, right on our expectations of a first half close.
spk11: Okay. Okay. And then, and then another little thing just, you know, you talked about how January was a little bit better but mid single digit declines. I didn't quite catch You know, if January starting to get a little bit better. Is it tough comps or is it, you know, things started turning down in February. Why, why is it going to be down mid single digit for orders.
spk04: Yeah, it's really visibility at this point. Well, you know, I would say one month does not make a trend. And if you recall, we were we started October a little strong and then in the end we ended fourth quarter down mid single digits. So we believe it's a prudent Approach to plan for orders down and if they if they do turn, of course, that will be a benefit for regal. But right now that's not what we're modeling.
spk11: Okay. All right. Great. Thank you.
spk04: Sure. Thank you. Thanks.
spk00: Well, And
spk05: this concludes our question and answer session. Thank you very much. I would like to turn the conference over to Louis Benkamp CEO for any closing remarks, please go ahead.
spk04: Great. Thank you, operator. And thanks to our investors and analysts for joining us today. As we embark on 2024 our team remains excited about the value creation opportunities in front of us. Even as certain of our end markets remain choppy, we will be focused on three key things. One, achieving our targeted $90 million of synergies to Delivering at least $700 million of free cash flow, which we expect to use in combination with the industrial motors and generators sale proceeds to reduce our debt and meaningfully shift the mix of our capital structure towards equity. And three, continuing to mature our many growth initiatives driving 80 20 better leveraging our scale and scope, especially in IPS and executing on our multi year pipeline of differentiated new product launches. In short, tremendous opportunities for our associates, our customers and our shareholders. Thank you again for joining us today and thank you for your interest in Regal Rechnard.
spk05: And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Enjoy the rest of your day.
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