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.