Regal Rexnord Corporation

Good day, and welcome to the Regal Rexner 4th Quarter 2024 Earnings Conference Call. All participants will be in a 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 touch-tone phone. 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 Robert Berry, Vice President of Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, and welcome to Regal Rexnord's fourth 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 files with the SEC, which are available on the RegalRexNord.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 4Q performance, and discuss a recent announcement in our aerospace business. Rob Rahart will then present our fourth quarter financial results in more detail and outline our 2025 financial guidance. After that, we'll move to Q&A, and then Louis will be back with some closing remarks. With that, I'll turn the call over to Louis.

Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our fourth quarter results and to get an update on our business and for your continued interest in Regal Rechnort. Before we dig into the material on this slide, let me share a few high-level thoughts on our performance in the fourth quarter. Our fourth quarter performance reflected strong, controllable execution by our team with notable progress on our outgrowth initiatives, synergy realization, gross margin expansion, orders acceleration, and debt reduction. However, markets continued to provide challenges which were larger than we expected for the quarter. Some notable highlights include IPS continuing to deliver clear signs of outgrowth plus healthy margin expansion. AMC exceeded its fourth quarter revenue target and achieved high single-digit order growth. And PES made tremendous progress ramping capacity in residential HVAC with that vertical growing at a low 20% rate in the quarter. So, before continuing, I want to take a moment to thank our 30,000 Regal Rights and Order Associates for their consistent hard work and disciplined controllable execution. Despite strong execution by our team, a number of our key end markets saw sustained or incrementally weaker demand in the quarter, which included atypically high end-of-year customer push-outs. In particular, global general industrial markets remained challenged, and the machinery and off-highway market while only about 4% of total Regal Rexnard sales stepped down significantly, impacting IPS and AMC. On a regional basis, we saw the most significant incremental pressure in China, though encouragingly, our core North American business was, in aggregate, nearly flat. The higher customer pushouts impacted all three segments, though especially IPS. Fortunately, we believe we have line of sight to this pushed out spend returning in 2025, and so we would not interpret these actions by our customers as signs of weakening markets. In fact, as an enterprise, we believe we are actually starting to see a more sustained net inflection in our business momentum, evidenced by our accelerating orders performance. with all segments contributing. While it is too soon to tell if the order acceleration will be sustained throughout the year, this improving orders momentum, which continued into January, makes us cautiously more optimistic about our growth prospects in 2025. Rob will share more on our 2025 outlook in his section. let me provide some specifics on our fourth quarter performance, starting with sales. Our sales in the quarter were down 1.4% versus the prior year on an organic basis, with PES growing slightly. Orders in the quarter on a daily basis were up 4.4%. Notably, orders in AMC were up nearly 9%, with IPS orders up nearly 4%. PES orders also grew modestly, largely driven by pre-buy dynamics in Resi HVAC, partially offset by weaker global general commercial markets. While, in general, our orders remain weighted to longer cycle bookings, This growth gives us confidence that we will see better top-line performance as 2025 unfolds. In January, daily organic orders were up 1.4%, which aligned with our expectations for orders in the month. Despite fourth quarter top-line pressure, margins in the quarter remained healthy. Our adjusted growth margin was 37.1%, up 60 basis points versus the prior year, excluding industrial systems. For the full fiscal year, our adjusted gross margin was 37.8%, up 210 basis points versus the prior year, excluding industrial, and we believe we are firmly on track to achieve our targeted annual run rate gross margin of 40% exiting this year. Our progress on growth margin was aided by exceeding our 2024 cost synergy goal during the quarter, bringing our annual synergies recognized to $101 million for the year, ahead of our $90 million goal. Adjusted EBITDA margin was 21.7%, down 80 basis points versus the prior year, excluding industrial systems on lower volumes, weaker mix. FX pressure, and some growth investments, much of which was offset by synergy benefits. A notable margin bright spot was IPS, which achieved an adjusted EBITDA margin of 26% in the quarter, up two points versus the prior year. Adjusted earnings per share in the quarter were $2.34, up 2.6% versus prior year. Lastly, we generated $185 million of adjusted free cash flow in fourth quarter, which contributed to Regal paying down $205 million of debt. For the full year, we paid down $938 million of our debt, exceeding our goal. Cash generation and debt pay down are an important part of our long-term value creation story. which was clear by our performance in 2024. In summary, a quarter characterized by persistent market headwinds and rising FX pressures, but also encouraging order performance and continued solid controllable execution by our teams. Next, I'd like to share an exciting development related to one of our key growth initiatives, which is to leverage the scale and scope of our Regal Resnord portfolio to provide differentiated customer value propositions. During the fourth quarter, we announced a partnership with Honeywell Aerospace to provide solutions for the advanced air mobility market, sometimes referred to as electric vertical takeoff and landing, or eVTOL aircraft. Initially, the partnership will focus on Regal Rexnord providing electromechanical actuator solutions, a representative example of which is pictured on the right-hand side of this slide. As our partnership with Honeywell evolves, we believe it has the potential to expand beyond its initial focus to other technology and product advancements in the aerospace market. There are a number of notable factors that we believe position us to be a valuable partner to Honeywell, which are listed on the left-hand side of the slide. First is our long-standing heritage in the aerospace business. Second is the depth and breadth of our portfolio. The combination of our legacy Regal, Rechnord, and Ultra aerospace businesses created a critical mass of component breadth, which now allows us to offer more value-added solutions. As you can see in the picture, electric actuators for the advanced air mobility market comprise many of our components, which we are able to engineer into a value-added system. The value pot for customers and for Honeywell is about improving quality and reliability through an integrated system optimized for performance. along with making it easier to do business with Regal Rational by being able to procure one system versus multiple components. Next is our subject matter expertise in aerospace. We have a strong track record as a tier one component supplier, which allows us to interact with customers as a trusted advisor and lead discussions with a technology focus. Finally, Our significant global manufacturing capabilities means that we can produce at scale with consistency and reliability. The growth outlook for the eVTOL market is strong, and we are confident in our ability to provide quality solutions at scale. Our partnership with Honeywell is consistent with our strategy of moving up the value chain and selling more value-added solutions to our customers. These were themes we discussed at our September investor day, and we are pleased to be making progress executing on this strategy. Beyond the strategic validation, we are also very excited about the significant growth potential we see in the advanced air mobility market more broadly. Industry forecasts for AAM unit growth are compelling, estimating 2,000 aircraft per year by 2030 with potential regal risks nor addressable ship set content of $220,000 per plane. To be clear, this is an external market forecast and not related to our Honeywell partnership specifically, though we do believe Honeywell is positioned to be a meaningful player in the AAM market. Even at a fraction of these anticipated growth rates, AAM has the potential to be a needle-moving growth opportunity for Regal Rexnord. My congratulations to our AMC Aerospace team for securing this highly compelling partnership. And with that, I'll turn the call over to Rob.

Thanks, Louis, and good morning, everyone. I'd also like to thank our global team for their hard work and disciplined execution in the quarter. Let's review our operating performance by segment. Starting with Automation and Motion Control, or AMC, net sales in the fourth quarter were down 2.3% to the prior year on an organic basis, but modestly ahead of our expectations. The decline reflects continued weakness in the general industrial and discrete automation, which was partially offset by strength in the food and beverage and aerospace and defense markets. The inflection to healthy, positive sales growth in food and beverage is a noteworthy positive after a sustained period of pressure in that end market. Within discrete automation, the shorter cycle business showed sequential improvement but remains below the 2019 levels that we would consider a more normal level of demand. And while longer cycle orders remain quite strong, those orders have delivery dates weighted to the back half of 25 or into 2026. AMC's adjusted EBITDA margin in the quarter was 21.6%, which was below our expectations on weaker mix, particularly within discrete automation, as well as larger than expected foreign exchange pressures. Orders in AMC in the fourth quarter were up 8.8% versus prior year on a daily basis. Third quarter in a row of positive orders. Booked bill in the fourth quarter for AMC was 1.05, which is significantly more favorable than the 0.92 we saw exiting 2023. We are encouraged by the positive order momentum we have been seeing in AMC over the past three quarters, which gives us increased confidence this business is poised to inflect a positive sales growth, which our current outlook assumes starts to occur in the back half of this year. I'll elaborate on AMC's outlook later in my remarks. January orders for AMC were up about 6% on a daily basis. Turning to Industrial Powertrain Solutions, or IPS, net sales in the fourth quarter were down 1.9% versus the prior year on an organic basis. The decline reflects particular weakness in the machinery off-highway market in general industrial and metals and mining, partially offset by strength in energy and marine markets. We estimate that cross-marketing synergies also continue to contribute a couple points of outgrowth in the quarter, helping us outperform in what remains a down market. Despite continued outgrowth momentum, fourth quarter sales in IPS were below our expectations. most notably due to a significant incremental weakness in the machinery off-highway market, in addition to last-minute end-of-year customer pushouts that we saw in a number of end markets. That said, we see this dynamic as more timing-related. Notably, excluding the impact of these late-December pushouts, IPS would have been slightly ahead of its sales target midpoint for the quarter. adjusted EBITDA margin in the quarter was 26%, up 200 basis points versus the prior year, aided mainly by synergies. Borders in EPS on a daily basis were up nearly 4% in the fourth quarter, and we believe reflects further outgrowth in what remained down in markets. Book-to-bill in fourth quarter for IPS was 1.0. In January, orders on a daily organic basis were up nearly 2%. Turning to power efficiency solutions, or PES, net sales in the fourth quarter were up slightly versus the prior year on an organic basis, which was below our expectations. The result reflects strong growth in residential HVAC and, to a lesser extent, in pool and in commercial HVAC in North America, which was offset by significant weakness in the general commercial market, especially in China and commercial HVAC outside North America. As we shared last quarter, it was our intention to make significant progress ramping our capacity in residential HVAC so we could serve our customers ahead of the year-end A2L regulatory transition. We are pleased to see that the PES team made great progress on this front. which allowed us to support our customers and deliver low 20 sales growth in the residential HVAC business for the quarter. Let me also provide some incremental color on the general commercial market, where we experienced incremental weakness in the quarter. This part of the business sells general purpose motors into a range of markets, many with general industrial characteristics, and so tends to correlate with the ISM. Activity here has been weak, but slowed notably in December, especially in China and Europe, to a degree we were not expecting. Despite these market pressures, based on third-party market data, we gained share in our primary North America market in 2024. Turning to segment margins, the adjusted EBITDA margin in the quarter for PES was 15.3%. which was below our expectation on lower volumes, larger than expected FX headwinds, and some temporary labor efficiencies as we prioritized ramping capacity with urgency to best serve our residential HVAC customers ahead of the refrigerant transition. Relative to prior year, the PES margin was down on lower volumes, FX-related pressure, and temporarily higher labor costs. Shifting to orders, orders in PES for the fourth quarter were up 1% on a daily basis, Notably, orders in Resi HVAC were up over 20% in the quarter, leading us to build some backlog in Resi while orders in commercial HVAC and general commercial were down. Book to bill in the quarter for PES was 0.97. Similar to what I discussed for AMC, this business is exiting the year in a stronger position versus where it was a year ago exiting 2023. Daily orders for PES in January were down 3.4%. While we expected a modest decline due to the A2L transition, we actually saw strength in residential HF orders in the month, which were up 3% on strength in furnace. January is also being weighed down by lapping a large project order in January 2024, absent which monthly orders in January would have been roughly flat. We view this favorably. given the degree of activity that was pulled forward ahead of the end of year A2L transition. On the following slide, we highlight some additional financial updates for your reference. Notably, on the right side of this page, you will see we ended the quarter with total debt of approximately $5.46 billion and net debt of $5.06 billion. We repaid approximately $205 million of gross debt in the quarter and $938 million for the year ahead of our plan. Of further note, we ended the year with variable rate debt of roughly $450 million, representing approximately 8% of our total debt outstanding, which we expect to have repaid by the end of this year. Adjusted free cash flow in the quarter was $185.3 million, which was primarily deployed to debt reduction. We plan to continue deploying the majority of our free cash flow to debt reduction in 2025. Turning to the outlook, let me walk you through our principle 2025 guidance points, which are specified in the table on the right side of this slide. Starting with sales, our 2024 sales were just over $6 billion, excluding the industrial business that we sold in April of 2024, bridges to a go-forward 2024 sales level of $5.88 billion. Our 2025 guidance midpoint assumes a similar level of sales, factoring roughly flat organic growth and a modest headwind from FX. Our flat organic assumption embeds modest in-market pressure offset by about one point of outgrowth. Lastly, we expect sales to be slightly back half-weighted at roughly 1% above the first half level. For reference, our book-to-bill entering 2024 was 0.93 versus 1.0 this year as we enter 2025. So we do believe a year later we are better positioned to grow. From an EBITDA margin perspective, our target is 23% for the year, which is about a one-point improvement compared to our 2024 performance, excluding the industrial business. The principal drivers in the margin bridge are $54 million of incremental synergies plus productivity initiatives, net of a roughly $20 million FX profit headwind. We expect EBITDA margins to improve as we progress through the year on volume, cost energy realization, productivity, and mix in AMC. We assume the fourth quarter margin approaches 25%, aligned with the targets we presented at our last Investor Day. We're also sharing the relevant below-the-line modeling items. Notably, we expect a benefit from lower interest expense worth just over $50 million, reflecting progress paying down our debt during 2024 and anticipated meaningful further debt reduction this year. This alone is worth about $0.60 of EPS growth in 2025. You will also see that our effective tax rate is now expected to be 22.5%, down from our prior mid-term base case assumption of 24%. This is due to identifiable tax benefits we expect in the year. While we are working on opportunities to more permanently lower our effective tax rate, for now, investors should assume a 23% rate in 2026 and beyond. These assumptions result in a diluted adjusted EPS midpoint estimate of $10 per share and an EPS guidance range of $9.60 to $10.40. At the midpoint, this outlook delivers approximately 10% adjusted earnings per share growth versus the prior year. We expect adjusted free cash flow to be approximately $700 million this year. representing a roughly 12% free cash flow margin. We expect the growth in free cash flow over 2024 to be achieved through a combination of trade working capital improvements, particularly inventory, higher EBITDA, which includes a $54 million benefit from synergies, lower cash restructuring, and lower cash interest. We expect our annual run rate cash flow to be approximately $900 million exiting 2025. This is below our prior target of $1 billion due to lower volumes relative to prior expectations. However, we remain on track to reduce our net leverage to roughly three times exceeding this year as all available free cash flow will be prioritized towards paying down debt. Finally, as noted at the bottom of this slide, our guidance does not consider the impacts of potential Mexico or Canada tariffs. The impacts of the recently implemented China tariffs, while immaterial, are considered in our outlook. On this slide, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for the first quarter and for the full year. I would flag that we expect the first quarter to be the low point for the year from a sales margin and EPS perspective, with anticipated sequential improvements thereafter tied to top-line benefits associated with our building positive orders momentum, further synergy gains, and ongoing debt reduction. As I wrap up my prepared comments, I would like to reiterate that while we are cautiously optimistic entering 2025, we are remaining measured in our approach to guidance. We are using current market conditions to set our expected guidance range, and as discussed, we see a stronger second half versus the first half based on current order trends and backlog characteristics. Although we are entering 2025 with a stronger book bill than prior year, we are still not quite seeing sustained strength in the ISM and general industrial metrics. That said, our teams are energized by the progress we have made transforming this business, by the potential we see in our portfolio, and by our ability to profitably outgrow our market in 2025. And with that, operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your hands up before pressing the keys. To withdraw your question, please press star, then 2. The first question comes from Jeff Hammond from KeyBank Capital Markets. Please go ahead.

Hey guys, this is Mitch Moore on for Jeff. I guess my first question, should we think of the upside to synergies in 2024 as pull forward of the sales synergies or upside to the total opportunity? Then if you could just level set us on the incremental synergies in 2025.

Yeah. So the, the, The synergies that we realized earlier than anticipated are pulled forward from 2025, but our goal for 2025 is $54 million, which would be a reduction from the $65 million we had presented previously. So it's not incremental synergies overall, but rather just we got them a bit earlier than originally anticipated.

Okay, that's helpful. And then maybe if you could just level set us on your manufacturing footprint in Mexico with all the tariff talks and then just risks associated with tariffs and how do you expect to navigate them if they happen? Thanks.

Yeah, so we certainly have a strong position in Mexico with about a little over 30% of our direct labor workforce in Mexico. You know, from a tariff perspective, We're clearly tracking this very closely, but there's still quite a bit of uncertainty. Nevertheless, in the last quarter, we stood up a cross-functional team to focus on tariffs, assessing the various impacts and to try to be best prepared if they get implemented, hence the reason why with the China tariffs, we feel we'll be able to absorb that fairly easily. With regards to Mexico in particular, If Terex gets put in place, we'll have to leverage our flexible global manufacturing footprint and supply chain. We'll continue to push operational efficiencies, and then we'll continue to implement a variety of cost-saving measures. But in addition, a large part of our approach will likely have to be implementing price actions across the broader product lines. I will tell you that... Our strategy for a while has been in region for region and supply redundancy. And so we have quite a few levers to pull. One example of that is five years ago with regards to our China supply chain, we were pretty embedded with China globally and now China stands on its own. And again, why we feel that the China tariffs are fairly immaterial. And I'd also say, you know, we have a muscle here. We've done this before. When the tariffs were put in place five or six years ago, we took actions in our industrial systems business. We relocated production. We passed on price as a headwind. And in the end, over, you know, a midterm timeframe, we were able to get our margins right back to where they needed to be. So we feel as though we're confident that Whichever direction the administration goes, we'll be able to manage through it effectively. Okay, great.

Thanks for the questions. Thank you.

The next question comes from Kyle Menjes from Citigroup. Please go ahead.

Thank you. I just wanted to dive deeper into the outgrowth you're seeing. It sounds like a lot of it's in IPS. I guess just what's giving you some of that success driving the outgrowth and competence in one point of outgrowth in 2025? Yeah.

Yeah, a lot of it is in IPS, but it's also in AMC and partially in PES. So let me walk backwards. So PES, it's all about our new products and our move more into air moving. We're getting some nice momentum with our fan filter units in clean rooms and data centers. And so we feel really good around the vitality. And as you know, vitality, as we talked at Investor Day, is really important to us. When we go to AMC, it's all around these integrated solutions and being able to move up the value chain to provide better solutions to our customer. Now, we talked about the eVTOL on this call. That's a little bit more longer term, but short term, we're working on many programs in AMC, and definitely we're seeing it in the order rates and the growth of the order rates. Finally, it is IPS. And IPS, it's all about the industrial powertrain. And it's a very, very similar story that I talked about with AMC. Our funnel for the industrial powertrain solution system, total integrated system, is up roughly double last year. Remember, our scale and scope provides us the strongest go-to market in the industry. We're also seeing significant benefit around the cross-sell. You know, if you look at cross-sell today, only 19% of our customers buy more than one of our product categories. And if you could just double that cross-sell, that's an incremental $150 million of revenue for us. And so this is where we get confidence around the – roughly 100 basis points of outgrowth for 2025.

And I guess following up on that, just where are you, within IPS especially, just where are you seeing some early wins with the cross-selling and then just opportunities you see in 2025 to drive additional cross-selling? Thank you.

Yeah, so we're seeing it mostly with OEMs, but we're also seeing it in project work. So One example of it is a mining project in Southeast Asia where we would normally sell components, but we're selling an integrated system with the motor, the gear drive, and a shaft with couplings and bearings. That project is going to be worth over an 18-month period of mid-teens millions. And so this is the kind of opportunities that we're seeing today that we're winning that's going to allow us to what we feel accelerate the IPS sales growth.

Great. Thank you, guys. Yeah. Thanks, Kyle.

The next question comes from Mike Halloran from Baird. Please go ahead.

Hey, good morning, everyone. Hey, good morning, Mike. Yeah, so... Maybe this is more like two questions, but I just kind of want to make sure I have my hands around how you're thinking about sequential cadencing through the year. You know, the first quarter here, obviously the low watermark, as Rob talked about in the prepared remarks. You know, syncing that with the order cadencing, I think, is a question I'm getting a lot from folks. Just you've seen a couple positive order quarters. First quarter guy's a little softer. Back half gets better. Maybe just talk through that cadence and what is it about the first quarter that's so challenging and then trends seem like they're not that different from an order book perspective, but why do you think that these things just keep getting pushed out, confidence? Basically, just kind of help a little bit more with that cadence and

Yeah, you know, hey, Mike, thanks for the question. And I think the question is an important one for us to clarify even further. So, you know, first quarter is typically the low mark for us. And on top of that, we will have PES pressure because of the A2L that was pulled forward into Q1 – I'm sorry, into Q4. Although I feel – A little bit better that we saw about 3% in orders in the residential HVAC business in January, but we are forecasting that residential HVAC is down in the first quarter. And that overall is what's putting a bit of pressure. And then it's AMC. And most of the project, sorry, most of the order work we're seeing are longer cycle projects. And that improved position is helping us give confidence to the second half. So, you know, AMC saw roughly 9% of orders in the quarter. But if you look at the beginning of this year at the shippable backlog in our backlog for the second half, for factory automation in particular, it's double where we were entering last year. And so it's those longer cycles that are more weighted to the second half that are giving us confidence. And, you know, as Rob said, we're entering this year with a book bill of about slightly round one versus .93 of last year. But a lot of those orders are more weighted to the second half. And by the way, the weighting to the second half and a lot of it in factory automation is Where we have a bit stronger margins is also why we feel good about the margin profile of the second half or feeling more confident about the margin profile of the second half. So hopefully that was helpful, Mike.

No, that was. And if you look back at the history, and I know you guys have piecemeal a handful of companies together, so this might be a little harder to see. Is this unusual, right? Because normally you get kind of short cycle business that leads the long cycle business to you know, this feels a little unique in that you might actually have the short cycle recovery and the long cycle businesses at the same time, not cadence. I'm just kind of curious how this would track versus what you've seen historically.

Yeah, Mike, I don't really think I have a solid answer because we haven't made that compare, but I don't think it's an easy compare because in particular what's driving this is factory automation. And as you well know, factory automation has had a lot of pressure last year, which was still based on the COVID overhang. What is driving a big piece of this longer cycle of project work, though, is the defense work and the aerospace work that we're well positioned in, and we're seeing that really fill into the second half. So hopefully that comment helps with how we're thinking about it.

No, that's fair. And then just one quick clarification. Could you just talk through the free cash flow assumptions one more time, 700 this year. I think you said the exit rate was 900. Is 900 the rough thought process for 26 at this point? And maybe just talk through the puts and takes on what the changes are and how to think about leverage as you're over that similar timeframe.

Sure. So, yeah, the 900 is the 2026 thought at this time. I mean, to get to the 700 from the over 500 – This year, I think you can look at it as you've got your EBITDA contribution, and then you've got your cash interest that's going to give you about $50 million. Your cash tax is about $40 million. Working capital, about $50 million. And cash restructuring, another $50. So when you add that up, you get about that $200 million between the $500 and $700 to bridge to $25. And then you go into $26. then we would expect that, you know, maybe another $75 million on cash interest to help you out, as well as about $50 million on cash restructuring, offset a bit with some working capital. We won't get as much in 26, but the remainder will pretty much be in the EBITDA contribution to get you to the $900. Hopefully that helps.

Nope, that's great. That's great. And then the leverage is assumed then by the end there?

Yes. We're thinking we'll be about three times by the end of this year, which means we should be about two and a half middle of next year.

Perfect. Thanks, everyone. Appreciate it. Yeah, thanks, Mike.

The next question comes from Julian Mitchell from Barclays. Please go ahead.

Hi, good morning. Maybe just trying to stick to two questions. So my first one would just be trying to understand a little bit better the dynamics embedded for PES this year. You know, if I look at the sort of sales guides, for example, you know, you've got a Q1, which is starting out... You know, flat to up sort of year on year, the full year down, low single digits year on year. So I understand it's sort of a sequential hit from the A2L in the first quarter and then sort of a year on year hit in the fourth quarter probably. But if you could flesh out kind of how we should think about the seasonality of the sales and earnings for PES this year, because it is a bit of a sort of abnormal start and finish, perhaps.

Yeah, Julian, let me kick this one off. So, first of all, in the first quarter, you laid it out pretty well. I mean, you do have that impact from the A2L transition. And then just the weakness in general commercial that we talked about and non-U.S. commercial expense. So that is absolutely the top line noise and headwind for PES and Q1. As you move through the year, though, you know, we do believe that, you know, red VHVAC should improve from the first quarter rates. And so that incrementally improves as you move through the year, maybe down like low single digits for the year. and then flattish on commercial HVAC through the year overall. Again, stronger in North America, continued weakness in China and Europe, but flattish overall. And then general commercials down about low single digits, but incrementally improves quarter over quarter, which also improves your mix and provides better margin benefit. So hopefully that helps a bit.

Yes, thanks very much. And then just my second question would be around the kind of earnings seasonality, I suppose, through the year. So I think Q1 is about, I think, 21% of the full year's EBITDA. Wondered if that was kind of EPS should be a similar trend. share of the year or there's something moving around below the line? And when we think about kind of first half seasonality, are we thinking kind of EBITDA or EPS is like a mid-40s share of the year?

Well, your earnings are going to improve through the year as you pay down your interest expense. And so we have you know, plan to pay that down by, you know, $50 million in the year. So that gets incrementally better as you move through the year. Your tax rate is relatively consistent as you move through the year. So those are the below the line drivers, if you will. And then just the sequential improvement in EBITDA, especially in back half versus first half and related margins is fairly significant as mix improves in the back half of the year. especially as factory automation becomes a greater percentage of the mix in the AMC segment. And then finally, synergies do accrue through the year. The $54 million continues to accrue by quarter, and so that will also weigh in on the progression.

Great. Thank you.

Got it. Thanks, William.

The next question comes from Tim Thien from Raymond James. Please go ahead.

Hi. Good morning. Thank you. Yeah, just a follow-up on IPS as you think about kind of the outlook that you've provided for 25. And I'm just curious, you know, thinking about these push-outs that impacted you in the fourth quarter, but then it looks like the implied impact and I know there's probably a bigger currency impact, but the decline change in the first quarters is a bigger step down. So I'm just trying to marry that push-out comment with what looks to be a little bit more traction from an order perspective, both in the quarter and then what you flagged for January relative to that step down in the first quarter. And then maybe I guess part B of the question is just, With distribution being such a big component of that business, the kind of flattish year-over-year number stood out because I think at least the messaging from the public distributors is a bit more optimistic. So maybe just your comments on those two parts, again, just focusing on the IPS business. Thank you.

Yeah, so, hey, Tim, thanks for the question. I'm going to try to go backwards with your question, though, answer the second first, which is you're right, about 50% of our business does go through distribution. But listen, I think overall, our guidance and forecasting for this year is measured. We're going to be measured. We want to make sure that we're coming out and have the ability to execute and perform well. in 2025 well. And so that's really how I want to answer the second part of the question. The first part of the question, though, is all around IPS. And we're pleased with the order rates of IPS. We're winning some nice projects. I talked about one, which was a mining application that will ship over 18 months. That 4% growth in Q4 is continuing momentum. However, when you look at uh, Q4 push out, the majority of the push out actually came from IPS, 25 million, 15 million came from IPS. A lot of the loading of our orders right now are longer, uh, scheduled. They're scheduled into the second half of the year, even for IPS. And so that's why you see, um, uh, first quarter being a little bit lighter in IPS, but the, the backlog is building and giving us confidence in, uh, a step progression through the year. But again, I'll add and I'll end with a comment of we're being very measured in our approach to forecasting top line for 2025.

It makes sense given what we've endured the last couple of years. I get it. Thank you, Lewis.

Yes. Thanks, Tim.

The next question comes from Nigel Coe from Wolf Research. Please go ahead.

Thanks. Good morning. I apologize if maybe you've covered this topic already because I've been struggling to cause. But within PES, obviously, you've had these headwinds from the non-US commercial HVAC and the kind of broader commercial refrigeration. So just wondering what the visibility is for improvements in there. And I don't know if you can be more specific in terms of what you're assuming for residential HVAC in the first half of 2025.

Yeah, so, Nigel, thanks for the question. You know, we believe that general commercial in PES is very well linked to ISM. And so as ISM starts to strengthen, we think North America will benefit. We do not see any strengthening in Europe or China at this time. And so that's really the most of the visibility. As you well know, our PES segment is our shortest cycle business, and our backlog is only – You know 60 plus days and so we're very reliant on Bookship there and but we're not we're not feeling real confident on outside the US And you know, I'm cautiously optimistic about the industrial space in the US, but we've got to see it sustained with We've got to see it sustained through ISM and And then with regards to residential HVAC, you know, Rob commented on this a little bit, and I appreciate your juggling calls, but hopefully I'll mirror what Rob said earlier, which was basically first quarter is weighted down by the A2L transition and the pull forward into Q4. Now, we feel a little bit confident, though, coming out of January because orders were up about 3% in resi HVAC. But we're expecting first quarter to be down and then successively improve or progressively improve as the year progresses.

Okay, that's helpful. And then just a couple of quick ones, a couple of rapid fire ones here. You called out FX pressure to margins in PES and I think in AMC as well. I just want to understand that a bit better because I would assume that the weaker peso, that that might help your margins across your manufacturing footprint in Mexico. And then can you just clarify if the AMC orders in January saw the short cycle businesses picking up at all?

Yeah, so I'll take the second half, and then we'll take Rob back to the first. Hey, so we saw a run rate of roughly 9%. on factory automation's short cycle orders over the last three months. And so with AMC being up about 6.3% in January, we do feel like it's gaining a little bit of strength. We're not ready yet to call it the short cycle factory automation piece, but we're certainly not at bottom. So we feel better there.

Yeah, so let me take the FX question. So you're right to assume that the peso moving above 20 certainly could be providing certain levels of benefit. However, for us, as you may recall, we do hedge certain currencies, pesos being one of them, to satisfy expenses. And so we've been hedging the peso for about six quarters. And so therefore... Our position on the peso at this time when these hedges settle is in an unfavorable position and will be, we expect, throughout the year, depending on what happens with the peso going forward. But as it sits today, it is in an unfavorable position. That's the reason that we're not seeing the benefit. Now, we do continue to layer hedges as we move forward for certainty. And as such, we should start to see the benefit coming through this year going into 2026. But at this time, we still expect to see headwinds in 25.

Okay, makes sense. Thanks, Rob. Thanks, Nigel.

The next question comes from Vivek Shree from Goldman Sachs. Please go ahead.

Hi, this is Vivek for Jorici. Thanks for the question. I want to start off with IPS. You had about 2% organic sales decline in fourth quarter, and that is after about 25 million pushouts. So like X pushout, there was some growth in IPS. So why should implied 1Q guidance, which is like down 2% to 6% organic, why should organic step down given orders were positive in fourth quarter and also in January period? plus pushout happened already in fourth quarter.

Yeah, Vivek, I appreciate the question. Let me just clarify one point. The pushout was $25 million for the entire enterprise, about $15 million for IPS, but I think your question still stands. And, you know, we have, if you think about visibility of backlog, we have greatest visibility in AMC, but there's still book shift that we have to get in any quarter. second to IPS, and third to PES. IPS, we're basing our forecast of Q1 based on what is shippable in our backlog and an assumption around bookship. And so that's the best way I can answer that right now. We absolutely feel like we've gained some nice momentum and shared growth in IPS, and that will continue through this year, that we're outgrowing our market But the way Q1 is coming together with what's in our backlog and our assumptions on book shift, there is pressure on the top line in Q1.

That's helpful. And then just on the exit rate for 2025, I think If I heard it right, you said 25% or so EBITDA margin in 4Q, which would imply like 300 plus basis points of margin expansion year on year. So number one, is my understanding correct that 4Q margin expansion is pretty steep? And then is most of it really driven by AMC and IPS as like higher margin discrete automation comes back there?

So the short answer is yes. It is definitely a mixed benefit as we exit the year, and we do expect to be exiting at close to that 25% rate, hence the comment. And yes, it does come through those two segments primarily. However, all segments we expect to improve through the year. Just most of the benefit we see coming through AMC and IPS.

Thanks.

Thanks for that.

The next question comes from Christopher Glenn from Oppenheimer. Please go ahead.

Hey, good morning, guys. I had a question about the free cash flow. You know, you had a cut on Outlook earlier in the year and then came in a little light. So just curious what some of the – you know, misses there involved? Are there any process improvements for modeling and executing free cash flow as we consider your initial guidance for 2025?

Yeah, it's a fair question, so thanks, Chris. I think if you look at the fourth quarter and how we finished the year, you know, EBITDA certainly was a contributor here. It came in lower than the guide, but it's really a story of trade working capital Some of it is related to timing on when those shipments occurred and the inability to collect based on our terms. We just see that as timing. We don't see it as any sort of an issue there within the quarter. Then there was an inventory position that we took as we entered the year in terms of what we believe we could reduce our inventory levels by. We made some strategic decisions through the year to invest a bit in inventory ahead of some of the tariff discussions, and so that was some of the reasons that we came off of the number. We didn't anticipate that at the time that we set our guide.

Okay. Do you feel like the incentives and compensation packages for operators are aligned well to give confidence in the 25 outlook?

We do, because one of the metrics that we measure our teams on is free cash flow specifically from trade working capital as an operating metric.

Okay. Thanks, Russ.

You got it.

Thanks, Chris.

This concludes our question and answer session. I would like to turn the conference back over to Louis Pinkham for closing remarks.

Thank you, Operator. and thanks to our investors and analysts for joining us today. As we look ahead to 2025, we are pleased with our forecast to grow earnings by 10% and are optimistic about our future. Our improving orders momentum is encouraging. We are working many initiatives to accelerate outgrowth with clear signs of progress in our IPS sales and our AMC orders results, and early signs in parts of PEF. We still have lots of margin self-help from synergies, and we believe our ability to generate cash remains strong and is poised to accelerate in 2025, which bodes well for debt pay down and, over time, robust upside from other forms of capital deployment. In short, We are confident that growing momentum behind our ample value creation opportunities is becoming a more dominant part of our Regal Resnord story. Thank you again for joining us today, and thank you for your interest in Regal Resnord.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.