Regal Rexnord Corporation

And welcome to the Regal Rexnord first quarter 2024 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 your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Rob Berry, Vice President, Investor Relations. Please go ahead.

Great. Thank you, Operator. Good morning, and welcome to Regal Rexnord's first quarter 2024 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob Rehart, 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 realrextor.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 1Q performance. Rob Reihardt will then provide our first quarter financial results in more detail and review our latest 2024 guidance. We'll then move to Q&A, after which Louis will have some closing remarks. And with that, I'd now like to turn the call over to Louis.

Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our first quarter results, to get an update on our business, and for your continued interest in Regal Rexnord. Before discussing our first quarter performance, I'd like to acknowledge an important milestone on our Regal Rexnord transformation journey. which is the April 30th close on selling our industrial systems business. Completing that transaction is notable for a number of reasons. It allows us to focus on more durable, higher growth, and higher margin opportunities in our remaining segments. And it is generating attractive sale proceeds that allow us to accelerate paying down our debt. But it also marks the conclusion of our inorganic portfolio transformation. The evolution of the company's portfolio through merger, acquisition, and investment transactions has been highly intentional and a critical driver of our strategy to become a faster growing, higher margin, and more cash generative enterprise. It began with the 2021 merger with Rexnord's approximately $1.2 billion process and motion control business and was followed by the 2023 acquisition of Altra with its approximately $1.9 billion in sales split between industrial power transmission and automation and motion control. Having closed on the industrial systems business, we now have our go-forward portfolio. It is a portfolio characterized by 50% of sales into markets with secular demand tailwinds, a product offering with mid-teens vitality higher than at any other point in our history and targeted to reach 25% in the next two years. Our offering today has more differentiated product with wider competitive moats and is nearly 75% weighted to automation and motion control and industrial power transmission, while our legacy Regal Motors business, which five years ago was roughly three-quarters of our portfolio, is now more focused, more profitable, and steadily evolving into a motorized air moving subsystems business. All these characteristics are evident in our gross margins, which reach 37.4% in the first quarter on an adjusted basis, excluding industrial systems. This is more than 1,000 basis points of improvement versus 2019 levels, and while a few hundred basis points can be attributed to M&A mix, about seven points of that expansion is organic, a testament to the power of 80-20, to our sizable M&A synergies, to the Regal Rexnor business system, and to our heightened pricing discipline, among other factors. More important, however, is what we can achieve with this new portfolio going forward. A clear path to 4%, 40% adjusted gross margins, and to $1 billion of adjusted free cash flow on an annual run rate basis exiting 2025. or at least $1 billion in 2026, plus steadily improving revenue outgrowth versus what is now a richer mix of secular markets. In short, tremendous value creation opportunities for our shareholders, our customers, and our associates. Executing all of this portfolio change while continuing to improve our core operations has not been easy. So I want to pause and thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution, delivering step change improvements in our operations over a multi-year period. We really do have an excellent team. Now consistent with our evolved portfolio, we recently decided to update our business purpose. Our purpose is our North Star, the why our 30,000 associates around the world find meaning coming to work every day. It now reads, we create a better tomorrow with sustainable solutions that power, transmit, and control motion. Helping our customers, our communities, and our planet with the most sustainable solution remains core to how and why we operate. It is integrated into our strategy and embedded in our purpose. In some recent news on this front, we were very pleased to see our progress and contributions around sustainability recognized by Barron's, achieving a rank of 14 on its list of the 100 most sustainable U.S. companies. But the unifying characteristic of our go-forward portfolio is now all about motions. Our high-efficiency electric motors provide the power to create motion. A portfolio of highly engineered power transmission components and subsystems efficiently transmits motion to power industrial applications, while our automation offering controls motion in a wide variety of applications that range from factory automation to precision control in surgical tools. We expect to share a lot more about how we plan to harness the power of our evolved Regal Rexnor portfolio to accelerate profitable growth at an investor day we are hosting on September 17th in New York City. Now turning to our first quarter results. Our team delivered a strong first quarter despite some persistent and market headwinds. I would summarize first quarter as demonstrating strength and outperformance in IPS on the top line and with margins, net of continued end market headwinds in PES, with AMC tracking largely in line, allowing us to hold our full year adjusted EPS guidance aside from impacts related to selling industrial systems. Sales in the quarter were up 26.4% overall, but down 7.5% on a pro forma organic basis, or down 7.1% excluding industrial, as we continued to see weak end market demand in residential HVAC and factory automation. Pro forma orders in the quarter were down 4.3% on a daily basis, excluding industrial, and up 6% sequentially. While first quarter began with roughly flat orders in January, trends weakened during the quarter, entirely attributable to PES. Notably, book bill was approximately 1.1 in the quarter, the first time in four quarters that we had a book bill rate above 1. In April, our pro forma orders were down approximately 2%, trending better than the first quarter exit rate. Order growth rates in IPS and PES actually improved sequentially in April, but AMC saw some incremental pressure that we would attribute to order timing. Rob will share more detail in his session. Despite first quarter top line pressures, margins in the quarter were strong. Our adjusted gross margin came in at 37.4% excluding industrial, mainly reflecting our synergies, 80-20, and lean actions. Adjusted EBITDA margin of 20.5% was up 100 basis points versus the prior year on a pro forma basis, aided by delivering $26 million in synergies, which keeps us on track to achieve $90 million this year. Excluding industrial systems, our first quarter adjusted EBITDA margin was 21.5%, up 80 basis points versus the prior year pro forma level. Lastly, we delivered $65 million of adjusted free cash flow, a strong result in the seasonally softer first quarter. and are on track to deliver $700 million of adjusted free cash flow this year. We paid down $135 million of debt in the quarter. Our anticipated annual adjusted cash flow this year, plus net proceeds from the industrial systems sale, should enable over $900 million of debt pay down in 2024. All things considered, a solid start. to 2024. Shifting focus. You may recall that each quarter I've been spending a few minutes introducing one of our principal AMC businesses to help investors better appreciate how we are well positioned to accelerate profitable growth. This quarter I'd like to spend a couple minutes discussing our conveying business. As you can see on the left-hand side of this slide, this is about a $400 million business for us, and we expect it to grow at a high single-digit rate this year. Key brands are also listed, which are a valuable core asset because they signify quality and reliability, plus differentiated competencies in areas such as line speed and sustainability, focused on reducing water consumption, and energy efficiency. Conveying's focused markets, warehouse, beverage, and food, all benefit from secular tailwinds. We serve these markets by designing and manufacturing conveying modules and subsystems, including palletizers and depalletizers, along with a range of highly engineered components and subsystems, as well as project management and engineering services. While growth in conveying has been constrained in recent years on weakness in the beverage and warehouse and markets, our teams have been focused on outgrowth initiatives and they are making great progress. How we are winning share is summarized on the lower left-hand side of the slide. Increasingly, growth in conveying will be driven by selling powertrains. As a reminder, a powertrain is a solution that comprises the critical power transmission components that link a motor to the application it is powering, sold as one integrated subsystem. In the case of conveying, what is being powered are belts, conveyors, palletizers, and depalletizers. These are designed through cross-functional collaboration between our conveying business and the applicable teams across the business. The customer value prop is ease of doing business. and ability to outsource certain engineering functions, plus the greater reliability and performance that comes when we engineer the various pieces together into a unified system. On the bottom of this slide are some great examples of differentiated product solutions. First is our ModSort branded mobile flat sorter, which sorts products or packages in a warehouse or distribution center. This particular example leverages our core competency in high-speed conveying. It can sort 3,000 parcels per hour versus a more typical offering that has 30% to 40% lower sortation rates, thereby reducing the needs for manual labor and improving package handling efficiency. In addition to the ModSort module, This subsystem uses additional conveying components plus a Regal Rexnor motor gear and bearings. Next is run-dry belting, designed for beverage applications. The average beverage company uses four to seven gallons of water to produce a single gallon of its product, often in combination with soap, to create a lubricant that reduces friction, flushes away spills, dissipates heat, and reduces chain wear. The proprietary design of our run dry belting requires almost no lubrication. We eliminate the water needed for conveyor lubrication by up to 80 to 90 percent and enable 10 percent better energy efficiency by reducing the load on the drive system. The third product pictured is our clean top metal conveyor belt for the food industry. Here, our differentiated value prop is reliability and durability, which is enabled by our design and engineering approach. This product, used in a food production facility, has been proven to last six times longer than most competitors. I hope this gives you a better sense for why we see a robust growth outlook for our conveying business. While we think end markets increasingly will be a tailwind for us in the back half of 2024 and into 2025, the business is also doing so much more to accelerate its revenue outgrowth. And with that, I'll turn the call over to Rob.