Regal Rexnord Corporation

Good day, and welcome to the Regal Rexnord second quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists 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 the star or the one on your telephone keypad. To try your question, please press the star or the two. Please note, this event is being recorded. I would now 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 Rexnord's second quarter 2024 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob Reihard, our Chief Financial Officer. Before we begin, a note regarding the slide presentation. Due to a minor technical issue at our webcasting firm, those who are viewing our second quarter presentation slides on the webcast will need to manually advance the slides during the presentation versus our typical practice of auto-advancing them on our end. Moving to slide two, 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 rewilrexnord.com website. Also on this slide, 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 three, let me briefly review the agenda for today's call. Louis will lead off with his opening comments, an overview of our 2Q performance, and an introduction to our power systems business. Rob Rayhart will then present our second quarter financial results in more detail and review our latest 2024 guidance. We will 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 second quarter results, to get an update on our business, and for your continued interest in Regal Rexnord. Our team delivered a strong second quarter with outperformance on nearly every metric, and especially strong margin outperformance at IPS. So before I go any further, I want to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution, delivering strong second quarter performance while continuing to execute our many longer-term value creation drivers. Turning to our results in more detail, sales in the second quarter were down 7% on an organic basis, excluding industrial systems. As a reminder, we closed on the sale of industrial systems at the end of April, and so it is in our reported financials only for the first month of the quarter. Also recall that due to the timing of the ultra acquisition closing very late in the first quarter of 2023, we pushed five days of sales into last year's second quarter, And while immaterial to our annual performance, was a roughly two-point headwind to growth this quarter. Performance in the quarter continued to be impacted by weak end market demand and destocking in North America residential HVAC, weakness in commercial HVAC outside North America, and pressure in discrete factory automations. Orders in the quarter on a daily basis were down 1.5% excluding industrial, but up approximately 2% excluding a large atypical blanket order received in the pool business in the prior year period, which we see as a more relevant performance indicator for Regal. This positive inflection was led by AMC, which saw orders rise 12% versus prior year, followed by IPS orders, which were flat following eight quarters of declines. In July, daily organic orders were up roughly 5%, continuing to build on the momentum we saw in the second quarter. We read this order performance as encouraging signs that all our segments can deliver positive top-line growth in the second half. However, as Rob will elaborate, we now expect this second half ramp to occur at a slightly more gradual pace in the AMC segment versus what was factored into our prior forecast. Despite second quarter top line pressures, margins in the quarter were strong. Our adjusted gross margin came in at a record 38.1% excluding industrial. Adjusted EBITDA margin excluding industrial was 22.2% and reflects achieving $25 million of synergies in second quarter. We remain on track to achieve $90 million of synergies this year. Lastly, we delivered approximately $136 million of adjusted free cash flow in the quarter. That cash flow, along with proceeds from the industrial sale, enabled us to pay down approximately $481 million of gross debt in the quarter. which combined with our first quarter results equates to $618 million of debt repayments in the first half. We ended the quarter with net debt to EBITDA leverage at 3.6 times. Nice progress on delivering. We expect that our annual adjusted cash flow this year plus net proceeds from the industrial systems sale should enable approximately $900 million of debt paid out in 2024. In summary, a solid quarter of controllable execution by our team. Shifting to the next slide, each quarter I've been introducing one of our principal AMC businesses to help investors better appreciate how we are well-positioned to accelerate profitable growth. This quarter, I will cover power systems. As you can see on the left-hand side of this slide, this is about a $125 million business and has been experiencing very strong growth, posting a 25% compounded annual growth rate over the last three years, in large part due to its primary focus on the data center market, where the rapid adoption of AI plus ongoing growth in e-commerce, are fueling significant data center expansion. This is a U.S.-weighted business going to market under the Thompson brand. As we lay out on the right side of this slide, our principal products include paralleling switchgear and automatic transfer switches, along with a field services business. Our highly engineered products are used to provide standby and backup power in mission-critical applications, where even the briefest interruption of power supply can be disruptive to end users. Our services business helps our customers ensure 24-7 uptime, creates stickier customer relationships, and benefits Regal by creating a recurring revenue stream. The primary applications, Presented on the lower right are data centers, which comprise the majority of power system sales, along with smart manufacturing, medical, and critical public infrastructure, in particular water and wastewater management. Our power systems team is winning in these high growth markets for reasons we list on the lower left. At the top of the list is deep application expertise. We focus on some of the most complex power management challenges, such as in co-location data centers, where multiple customers each have unique power management needs. Our business is also differentiated by its best-in-class lead times, exceptional quality, and proprietary technology, most notably in our switchgear controllers that enable smooth load transitions and minimal transients required in sensitive applications. We are also investing for growth and see future share gains tied to new products, expanding our services footprint, augmenting our sales organization, and notably building on recent successes with our lean initiatives to scale up our manufacturing capacity, largely in best value regions. We believe that all of these attributes, along with our growth investments, should translate into at least low double-digit sales growth at enterprise accretive margins over our three-year planning period. In addition, our strong Thompson market position enables pull-through opportunities from our other businesses, including fan filter units, air moving solutions, and other products within the portfolio. This makes power systems a critical component of Regal Resnore's data center growth strategy. And with that, I'll turn the call over to Rob.