Q1 2021 Regal Beloit Corp Earnings Call
Good day and welcome to the Regal Beloit first quarter 2021 earnings 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'll be an opportunity to ask questions. You ask a question you May Press Star then one on your Touchtone phone.
And 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. Please go ahead Sir.
Great. Thank you operator, good morning, everybody welcome to renewable waste first quarter 'twenty One earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob <unk>, Our Vice President and Chief Financial Officer.
Before turning the call over to Louis I would like to remind you that statements made in this conference call that are not historical in nature are forward looking statements forward looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward looking statements from.
A list of factors that could cause actual results to differ materially from projected results. Please refer to today's earnings release.
Yes.
On slide three we are presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures to provide you with additional rooms.
Three for me.
And for helping investors understand and compare our operating results from here.
And in the same manner as management.
Please read this slide for information regarding these non-GAAP financial measures and please see the appendix reconciliations of these measures to the most comparable measures in accordance with GAAP.
Now let me briefly review the agenda for today's call Moodys will lead off with his opening comments, Rob and Mark will then provide our first quarter financial results in more detail and discuss our second quarter guidance. We will then move to Q&A after which Louis will have some closing remarks I would also like to highlight that Regal management moving.
Participating in three investor conferences in the second quarter. The Oppenheimer, 16th annual industrial growth conference on day to Goldman Sachs Industrials and materials conference on May 11.
Industrial basic materials conference on June 1st All conference participation.
And with that I would like to turn the call over to Lewis.
Great. Thanks, Rob and good morning, everyone.
Thanks for joining us to discuss our first quarter earnings and to get an update on our business.
Thank you for your interest in Regal.
I think I can reasonably say that Regal had a great start to 2021.
Our first quarter top line saw a step change in growth accelerating to double digit levels.
Adjusted operating margin continued to post meaningful progress rising over 300 basis points versus the prior year to a record level.
Aided significantly by a step up in our gross margin.
Free cash flow also remained strong, allowing us to bring our net leverage ratio below one times and giving us the confidence to raise our quarterly dividend by 10%.
We were also extremely pleased to see Regal acknowledged as a top supplier to one of our largest HVAC OEM customers.
Congratulations to our climate solutions team.
The highlight of the quarter, however, with Regal announcing a transformational merger with rexnord PMC business, which is poised to deliver best in class cost synergies, while opening up new avenues for growth and delivering significant benefits for our customers our shareholders and our associates.
All things considered.
<unk> quarter for Regal.
This strong performance is underpinned by the efforts of our global Regal team, so before getting into much more detail on our results I want to thank all my Regal colleagues around the world for their hard work and resourcefulness as they remain focused on serving our customers executing.
On our restructuring plan income.
Alternating growth opportunities, while continuing to battle, COVID-19 fatigue, and maintaining our strict safety protocols to keep our workplace safe.
Turning to our results.
<unk> positive in the first quarter was regal delivering nearly 11% top line growth or nine 1% on an organic basis with all four segments contributed and two of them climate and commercial achieving organic growth rates in the mid teens.
Nearly all of our end markets are contributing to this positive performance with only a couple of pockets of weakness in demand for some of our larger late cycle industrial motors as well as some temporary headwinds in solar related purely to project timing, which held back growth rates in PT.
Yes.
A few notable highlights by vertical including performance in our North American residential HVAC business, which was up over 20% in the first quarter plus continued positive momentum in pool from which saw growth rates in the high teens, and then unit material handling which grew at a mid.
Teens rate.
Regionally, our China business was a very strong contributor growing above 60% in the quarter.
Our China team is executing at a high level Catherine.
Capitalizing on the recovering end market and driving nice share gain.
While much of this top line strength is tied to resilience of the U S consumer and to recovering global end market. We also see evidenced that our 80 20 approach combined with a strong focus on voice of the customer and Regal technology leadership.
Are driving share gains across our business we.
We have a lot of work to do on this front as we make growth investments and build regal growth muscle, but I'm pleased to say that we are already seeing progress on our growth.
In the near term I have confidence that our strong topline momentum should strengthen even further given accelerating order growth order rates during the first quarter and as we entered the second quarter.
Orders in the first quarter were up 17% on a daily basis.
Almost 90% in April as we are comping against COVID-19 pressured results in the prior year, coupled with recovering end market and ongoing strength in residential HVAC.
Full path.
Turning to energy data center and unit material handling markets among others.
Given the magnitude of the order growth on a year over year basis. It is also helpful to view order performance sequentially.
Our daily orders for April were up 9% versus our average daily orders for the first quarter of this year.
Turning to margin.
Regal posted a record 13, 9% operating margins in the quarter.
The addition of improving volumes a steady cadence of progress on our 80 20 initiatives.
<unk>, our pre COVID-19 multiyear restructuring program and even some early gains from our efforts around lead resulted in significant first quarter margin expansion.
Regal is adjusted operating margin rose over 300 basis points versus the prior year first quarter supported by an adjusted gross margin up almost 200 basis points versus prior year as well as healthy SG&A leverage.
And I should note. This performance is happening despite experiencing isolated logistics challenges, including severe congestion at the port of Los Angeles, and tie ups and the Suez Canal.
It's also worth mentioning that our margin progress in the first quarter occurred despite significant and rising inflationary pressures like.
Like many of our peers, we're seeing inflation on key commodity, including steel copper and aluminum.
Certain key components, particularly electronics are also in short supply.
This is a situation we're monitoring very closely across all levels of the organization.
Regarding inflation, we are using our hedge program and buy a hedge strategy material price formulas and thoughtfully implemented price increases guided by 80 20 to work towards price cost neutrality for the year.
I am very pleased to report that these approaches coupled with the vigilance of the our global teams helped us achieve a net favorable price cost position in first quarter.
That said, we did realize some benefits in the first quarter from the lag manner in which inflation impacts our P&L and while we continue to express <unk>.
Price cost neutrality for the year, we do think the timing and inflation headwinds versus the cadence of our mitigating tactics may result in slightly unfavorable price cost and a couple of our segments in Q2.
But again, we are still targeting full year neutrality for Regal and I am confident in our team's ability to achieve this objective.
From a supply chain perspective, we're taking in a similarly disciplined approach and while there are scattered examples of component shortages or needing to pay premiums to ensure source component availability. This is a dynamic we're managing effectively and as we sit here today, we do not anticipate any.
Significant disruptions to our customers on this front.
Turning briefly to COVID-19.
I am encouraged by the significant progress that has been made in the U S and another key markets getting people vaccinated and no doubt. This progress is raising optimism about global economic prospects and creating positive momentum in many of our end markets.
That said COVID-19 is far from over it remains a risk in all of our markets, particularly in India and to a much lesser extent in Mexico.
Rising infection rates in India are traveling and are presenting significant personal and professional challenges to our colleagues there.
We're responding by adjusting our manufacturing plans and other locations, such as Mexico, and China, as well as selectively building inventory where possible.
We will continue to monitor this situation closely while providing support to our associates and their families in India.
Before turning it over to Rob I would like to provide an update on a couple of strategic price.
First our plans announced in mid February to merge with Rexnord PMC business, we're making good progress towards closing and our integration planning team is working diligently to make sure. We can hit the ground running once closing occurs.
And while there is still much to do I'm happy to say our merger plans remain on track for a fourth quarter close.
We believe this transaction will be transformational for Regal building on the already robust set of organic opportunities. We have along with the significant improvements we have made in the operations of our business.
We do not intend to make further comments on the PMC merger as we plan to file an S. Four shortly which will have a lot of additional information about the transaction.
Lastly, I wanted to lag, it's subtle but meaningful refinement, we made recently to our stated business purpose, which.
We create a better tomorrow by energy efficiently converting power and emotion.
The change we made now specify the focus on energy efficiency.
Going forward Regal will be more intentional about realizing the benefits that can arise at the intersection of growing demand for energy efficient products.
Regal strong and differentiated technology in Regal and engineering resources.
And our commitment to the larger purpose doing our part to help the environment.
To give investors a better sense of how we are helping our customers improve their operations and lower their energy and other resource consumption.
Thought I'd share and the actual customer example, presented on slide six.
This customer at a large distribution warehouse with oil leaks on its conveyor systems due to steel failures and our competitors gear drop.
This cost the owner significant downtime.
Regal was asked to help and after thoroughly assessing the situation in part by using our perceptive brand diagnostic tools.
We replaced the faulty competitors drives with rebuilds hub city, HERA dried and marathon motor.
This solution run significantly cooler given its higher efficiency, resulting in longer seal life and will likely saving the customer over $200000 annually in avoided downtime replacement parts and components.
We also right sized the conveyor motors saving a quarter app promoter, which is expected to translate into significant energy savings for this customer were $80000 per year.
This is a true win win.
Helping our customer realize substantial savings and higher productivity.
While driving more profitable growth in a stickier customer relationship.
Regal strength in the industrial drivetrain with deep systems application knowledge, and leading product solutions differentiates us in the motion control and control space.
We see many opportunities to create similar win win solutions by aligning our technological capabilities and energy saving solutions with solving our customers' problems.
We just kicked off our annual strategy process at Regal and more so than in the past a very intentional focus on proactively creating the most energy efficient products informed by voice of the customer is our focus.
This pursuit of higher efficiency products and solutions is one component of Regal ESG journey and our Regal team is excited to wheat.
I look forward to keeping you updated on our progress in the quarters and years ahead.
And with that I'll turn it over to Rob who will take you through our first quarter results in more detail and discuss our guidance.
Thanks, Louis and good morning, everyone.
And you can see from our first quarter results Regal got off to a very strong start in 2020, while achieving accelerating organic top line growth significant margin expansion strong leverage rates of 42%, which nicely exceeded our targets and healthy cash flow when considered in the context of our normal seasonality and all.
This was achieved in the face of significant headwinds from inflation as well as continued supply chain frictions.
In addition, with order rates accelerated meaningfully as we entered the second quarter. We believe this strong operating momentum likely continues leaving us optimistic about the remainder of the year.
Now, let's discuss our results by segment and then I'll walk through our latest guidance.
Starting with commercial systems organic sales in the first quarter were up 15, 9% from the prior year.
The result was driven largely by strength in China and Asia Pacific.
In our large commercial applied HVAC business on a global basis and in our business.
Notably sales in our commercial China business were up over 100% in the quarter.
Partially due to recovering markets, but also strong share gains.
In addition, Jonathan Poole were up almost 20% in the first quarter benefiting from strong consumer demand healthy sales of new products and some restock activity. We think the outlook for full remains healthy due to solid underlying demand and further opportunities for restocking.
The only notable headwinds to growth in the quarter for commercial was 160 basis point impact from our ongoing proactive pruning of low margin business as we continue to execute on our 80 20 initiatives.
As a reminder, while power pruning initiatives pose headwinds to the top line. They are also a factor contributing to margin expansion.
The adjusted operating margin in the quarter for commercial systems was 11, 7% up 410 basis points compared to the prior year.
This margin was up due to favorable volume.
Mix and productivity, partially offset by freight headwinds and the previously referenced atypical or congest.
Operating leverage for commercial was 34% in the first quarter, a healthy level and slightly above our expectations.
Orders in commercial per quarter.
Were up just over 20% on a daily basis, reflecting broad based strength those particularly in Asia.
Our April orders were up almost 100% also on broad strength, but with especially strong growth in pool.
When evaluating our or our April order growth rates for all our segments. Please keep in mind that April 2020 was our weakest order growth month last year. When we saw a decline at total regal of over 30%.
In industrial systems organic sales in the third quarter were up one 5% from the prior year.
The segment saw strength in China.
And in the data center market, partially offset by modest declines in our longer and later cycle large commercial motor systems.
In our continuing efforts to improve the performance of this business pruning actions were approximately 188 180 basis points of top line headwind in the quarter.
Adjusted operating margin quarter for industrial it was 3% up 190 basis points compared to the prior year.
The margin improvement was driven by favorable mix higher volumes and continued cost reductions, partially offset by modestly negative net material cost.
Operating leverage and industrial came in at a strong 40% in first quarter.
While industrial margins, our self operating we believe they can be this segment's first quarter overall performance tracked in line with the forecast we shared during our last earnings call.
While mixed track track more favorably than we had anticipated price cost was slightly weaker.
As we look ahead to the remaining quarters of 2021, we believe industrial and can deliver moderate margin progress versus first quarter levels and would expect performance and a mid single digit level for the remaining quarters of 2021.
Also keep in mind that the industrial business benefited from lagged inflationary impact in the first quarter that will largely catch up in the second quarter.
While we expect to benefit from additional price realization in the second quarter, we do see this lag of the headwind.
We'll further remind you that industrial is levered to later and longer cycle industrial demand versus other parts of our portfolio and so we would expect it's recovered a lag our shorter cycle industrial businesses, such as commercial or Etfs.
Orders in industrial for the quarter were down 4% on a daily basis.
But order rates for April inflected positively and accelerated to growth of 91% on broad based strength.
Total led by India, China and demand in our data center business.
We're seeing the strength of the industrial recovery in Asia and are cautiously optimistic we will see accelerating demand in our core U S business in the coming months.
Turning to climate solutions.
Organic sales in the first quarter were up 14% from the prior year. The increase was primarily driven by our North America residential HVAC business, which we attribute to a combination of favorable end user demand plus some channel restocking.
In addition recovery demand in Europe, and in the general industrial and commercial refrigeration end markets contributed to this segment's strong growth rate.
Partially offsetting this strength was our proactive pruning assets worth approximately 300 basis points of top line headwind in the quarter.
I'll provide a little more color on what we saw in residential HVAC.
Orders in our North America residential HVAC business, which reflects products, we sell in the air conditioning and furnished markets were.
Up 21% on a daily basis in the first quarter.
And we're up almost 85% in April we.
We believe the strength reflects healthy underlying end user demand as well as channel restocking and we see further positive momentum on both fronts as we approach this summer each tax season.
The adjusted operating margin in the quarter for climate was 18, 2% up 300 basis points versus the prior year period.
Strong volume continued cost reductions and favorable mix or margin tailwind in the quarter, partially offset by headwinds net material cost is two way material price formulas continue to catch up with rising inflation.
EBIT zone, the climate segment leveraged at 40% in the fourth quarter.
Likely above our target levels.
Orders in climate for the first quarter were up 19%.
On broad based strength.
<unk> revenue.
Yes.
Orders in April were up approximately 100% also on strength across the segment, but with the Asia and Europe regions, along with North America.
Strong.
Turning to powertrain emission solutions or Pts.
Organic sales in the first quarter were up one 8% from the prior year inflected to positive growth supported by delivering a project wins in aerospace as well as strength in our domain business and strong industrial demand in China <unk>.
Headwinds in the quarter include project Lumpiness in solar along with moderating pressures in net oil and gas and mark to be clear our solar business continues to see very strong demand and we believe we are gaining share in this market.
Operating margin in the quarter for Pts was 18, 7% up 300 basis points compared to the prior year and a record level for this segment <unk>.
Continued cost reductions favorable price cost and mix all contributed to the strong margin gains in Etfs.
Operating leverage in the quarter for Pts.
At 108%.
A reflection of this business now inflected to positive growth, while benefiting from our permanent restructuring actions.
Orders in Pts for the quarter were up 25% and up nearly 70% in April.
On a daily basis and in our other segments order strength in the first quarter and in April It was broad based but it's clear that shorter cycle restocking activity has started to occur and our channel partners being comped in the cycle.
On the following slide we highlight some key financial metrics for your review a couple of notable highlights first.
First our free cash flow of $39 million or <unk>, 59% of adjusted net income is a strong result in the context of normal seasonality and we continue to expect conversion above 100% per year.
We continue to continue to Delever the balance sheet and ended the quarter with our net debt to adjusted EBITDA at <unk> 99, and ample balance sheet Optionality.
And now moving on to the assets.
And I know last quarter, we are providing an outlook for the current quarter. We expect second quarter adjusted diluted earnings per share in a range of $1 85 to $2 five assets.
Which would represent growth of over 100% year over year at the midpoint.
This implies revenue growth in the high <unk> and leverage of 30%, 35% as you move through the guidance range.
Regarding the full year, while we're not prepared to provide detailed guidance at this point, we can share some high level performance expectations.
We would expect to see high single or low double digit organic sales growth for the year with particular strength in Q2, and Q3 and impacts from tougher compares in Q4.
Second as a reminder, the vast majority of the cost cutting we did in 2020 is resulting in permanent savings with the exception of $6 million.
Related to temporary pay cuts and furloughs in the second quarter.
Third as we communicated last quarter, we expect to take actions in 2021 that will result in annualized cost savings of $25 million.
Leslie.
Which we achieved roughly $6 million in Q1 and for modeling purposes, I would assume the remaining the remainder occurred randomly and during the year.
At the bottom of this page we've included some additional assumptions that can be used when modeling 2021.
Before moving to Q&A I want to once again, thank all of our Regal associates for everything they are doing to deliver for our key stakeholders, our customers our shareholders and our fellow associates Regal result in the first quarter, evidenced very strong execution and material progress on our journey to structurally improving.
And the through the cycle profitability of our business.
And with that I'll turn it back over to the operator, 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 one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two and at this time, we will pause momentarily to assemble our roster.
Okay.
And the first question will come from Mike Halloran with Baird. Please go ahead.
Hey, good morning, everyone.
Good morning, Mike.
So first on the guidance here just help me understand the <unk> thought process.
Very strong <unk>.
Typically you see some kind of earnings ramp from one two to QQ.
<unk> doesn't have a lot of it mature a little bit above towards the high end of the range, maybe just help with some of those sequential puts and takes how much of this is just conservatism given some of the supply chain price cost dynamics.
Is it price cost doesn't seem like there's any.
Concern really over the directional demand curve. So just some help on some of those puts and takes.
Yes, so Mike just Louis and good morning, let me kick off I think I think the way you are.
Packaging. This makes sense first of all I think we.
Sure.
We've proven our credibility over the last eight quarters that wed like to set in.
And objective for the quarter that we can.
Achieve and then hopefully over.
<unk> achieved.
There is certainly a little bit of conservatism there I don't think its a normal quarter, though certainly compared to the COVID-19 period of last year.
This year is not going to follow normal seasonality.
So I'm not I'm not too concerned about that certainly orders are coming into the quarter extremely strong orders were really strong in first quarter and so we feel good about the second quarter of course, we do have some headwinds.
Commodity inflation now our teams are doing a fantastic job one and just how we hedge our materials are and then we have the benefits tailwind our material price formulas and then our teams are doing a really nice job of managing 80 20 in going after price and so we feel pretty solid about the.
Price cost.
At least being net neutral.
The quarter and certainly for the year.
There are some constraints in the supply chain is still certainly logistics constraints, there's definitely electronics constraints are our visibility to that though is that it won't impact us in Q2, where it will be a minimal impact if anything.
And then lastly, there is still COVID-19.
India is part.
I think the strength of Regal and I've said it before is our global manufacturing footprint, but India is a big part of that footprint now, we do about $50 million.
Revenue locally, but it sources, our global supply chain.
And our thoughts go out to our associates.
We're doing with personal and challenges for sure and so we're a little concerned about COVID-19 and certainly are working through this quarter, we're hoping that with the vaccines that are rolling out that.
COVID-19 continues to get it in the rearview mirror, but certainly India is a concern for us so.
With all of those things that we felt we feel good about our guidance for the quarter and.
A little bit conservative, but again, we want to achieve it door hopefully beat it.
No. That's all fair. Thank you for that and then second one just maybe some thoughts on inventory levels in the channel and any.
Given all the supply chain capacity.
Constraints.
Is there a lot of channel inventory and materializing today, and then I suppose related is there any pull forward of demand or any pre buying or people trying to get ahead of some of these supply chain constraints that you're seeing right now in the channel.
Yes, I would say there is still quite a bit of room in the channel for inventory build.
So I certainly think thats, helping some of the demand we're seeing and I also believe although we don't have any customer that's coming out specifically in stating this but there is concern with the supply chain. So I wouldn't be surprised that some of the strength in our orders are being influenced.
<unk> spy concerns in the supply chain, but the fact that our orders are up 90% year over year or 9% sequentially. It's still a strong demand environment that we're in right now and which gives us some nice optimism for Q2 and certainly for the rest of the year.
Great well I appreciate the time thanks Louis.
Thanks, Mike.
The next question will come from Jeff Hammond with Keybanc. Please go ahead.
Hey, good morning, guys.
Good morning, Jeff.
Just wanted to come come at the sequential a little bit differently. So you said April orders up 9% sequentially can you talk about where the greatest strengths was sequentially in orders within the businesses and how that kind of flushes through to sequential revenue growth.
Yes.
The strength sequentially is really coming majority from three of the segments and its really pretty solid and across the board in those three.
<unk>, Pts and climate and commercial.
And so.
That's what's giving us some good confidence in Q2, and the performance expectation of being in.
The 20% growth year over year in Q2.
Okay, Great and then so incrementals <unk> north of 40%.
Can you just talk about what's embedded in the <unk> guide and.
How much.
Kind of haircut or caution you have around price cost within that.
Yeah sure no problem net so first of all we do have.
Expectations that we will see that margin in the range of about 30%.
Overall on the leverage side of the leverage by 30% and the way that would break by by each of the segments would be we would still expect Pts.
<unk> comment on the high side, 35% to 40% and then.
The other businesses.
On climate and commercial in around the 30% range as well as industrial so each of those around 30% maybe slightly below 30, and then <unk>.
35 to 44 Etfs.
Now as far as price cost and how we're thinking about price cost.
Lewis mentioned, we do have certain.
Segment that are more.
Mark.
Tied to inflation.
And material price formulas and the lag associated with that those being bulk.
Climate and commercial.
Some of that as well in industrial, but but the MTS and climate are such that we are still catching up on them, but we do expect that that we should get there within.
The second quarter within the commercial and industrial segment, we did see a little more pressure on us and we had the benefit of the.
The lag of inflation in the first quarter, which we do see now coming to will impact us in the second quarter, we had a great price.
The increases that we've announced and we do expect to offset most of that with price and as I said and Lewis said.
We do expect to be price cost neutral for Regal and that's what's embedded within our guidance in the second quarter.
Okay. Thanks, guys I'll get back in queue.
Great. Thanks, Jeff.
The next question will come from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning, everyone.
Hey, Rob if I put in.
That is a low double digit organic growth for <unk> with those.
Those incrementals I come up with a bigger EPS number.
This is Matt.
So.
Your full year guide for high single digit low double digit organic growth does that include the daily sales impact in <unk> I think you do have maybe four days.
And full key versus prior year.
Yes that would all be embedded in that assumption that we provided.
Okay great.
Net net on the PMT transaction I mean, obviously, we are on track for <unk> closed book.
One of the maintenance stage gates, we should look for in terms of revenue equivalents between now and then and then if the satellite today from closed today does with the transaction Tim in terms of the dividend payment sector being materially different from what we had back in January.
So Nigel I apologize I got the first part of your question, but not the second so let me let me answer the first part.
Again, we're on schedule we.
We feel good about the fourth quarter closing period now.
You asked about what are the milestones.
Certainly regulatory we did receive a U S antitrust clearance of the transaction. We have also received some clearances in certain non U S. Jurisdictions. There are still a couple of its still outstanding.
And we are rating foreign investment law clearances, and some non U S jurisdictions jurisdictions as well.
We're waiting on the private letter ruling from the IRS and then.
<unk>.
Beyond that I would tell you that we have further details in the form S. Four that will be filing in the next couple of days.
So hopefully that helps to answer the progress and the milestones on that transaction, but excuse me non ill.
Just repeat the second part of your question.
Sure.
There's many new about the transaction terms and the special dividend, obviously theres a lot of.
The overlapping shareholder base is.
Is the key that I don't know if you got any update or insight in terms of how that might have changed a bit in January whether it's in deal flow today, whether that'd be a material change from that dividend.
Hello, Okay, great, Yes, Nigel we're not going to go into that detail I would tell you we're on path.
Things are pretty consistent with what we announced when we announced that day.
The merger back on February back in February so.
I would say everything is going as planned.
Okay. Thank you very much.
Thanks Nigel.
The next question will come from Joe Ritchie with Goldman Sachs. Please go ahead.
Thank you and good morning, everyone.
Hey, Jeff.
So I would like to tackle the QQ.
Growth guidance that you guys gave us in Hy 'twenty.
If I look at that compared to let's say 2019, it still implies like Youre down call it 5% to 10% versus 2019 levels, but if I think about your April order trends in total.
We respect the fact that you have an easy comp.
If you normalize for that easy comp you scale up call it 30% versus 2019 level. So.
I guess just.
Trying to understand like the level of conservatism, but based on what you know today on even that high <unk> type growth number that you've thrown out for a second quarter.
Yes.
I think this is becoming a.
A common theme of the questions, Joe and I understand why we're seeing strong orders.
Hi, <unk>.
As a conservative approach that we feel good about achieving even in light of perhaps.
Logistical challenges minor logistical challenges and minor supply chain challenges.
If orders continue at their current weighted rate I would tell you it likely is going to be stronger but.
Again.
Credibility is important to us we like to set reasonable realistic little stretch, but reasonable realistic goals and objectives that we can achieve our overachieve. So.
The point is well stated, it's probably a little bit conservative, but we feel good about the numbers right now one other thing Joe I would just.
The highlight here is we are also building in some room from some buy ahead on supply chain concerns that has absolutely been something that we've been hearing from our customers and something that.
Yeah.
Could have.
Bolstered the 90% rate that we talked about.
Got it.
It's helpful and maybe my just my follow on there.
You kind of think about the climate solutions business and you think about the trends I think you called out North America forgets being really strong I wouldn't think that you would have any kind of like inventory build on the furnace side of the business.
Just curious like what have you started to see already for the per day.
The HVAC side of the business and whether that co inside of the business is starting to pick up.
Yes Sue.
<unk>.
No.
Curious, how we're thinking about climate.
It was a colder than expected first quarter.
And that therefore, we did not see the build of inventory that was anticipated and there were some supply chain constraints not with us, but with some of the other suppliers into that marketplace. So we absolutely believe that.
The inventory levels are not at a normal level, yet and that is helping with some of this demand and one of the Oems indicated that the sell through in the market in first quarter was more mid teens and yet our sales were in the <unk> and our orders are in the 2008. So clearly there is a there is an.
Inventory build going on there so.
Alright.
The demand is there no no question any market related to our consumer base. The demand is there. The fact that our orders are up.
Roughly 83% in April.
I guess, roughly 83 is a little bit more exhausting.
So.
Roughly 80% in April it does give us some confidence that there is going to be continued strength in this space and I would tell you again with.
The OEM, saying mid mid teens high teens sell through in first quarter. There is there is clearly an inventory build going on.
Got it that's helpful. Thanks, guys.
Sure. Thanks.
Again, if you have a question. Please press Star then one our next question will come from Chris Dankert with Longbow Research. Please go ahead.
Hey, good morning, everyone. Thanks for taking the question.
Louis I guess excellent example earlier in the call I guess, just kind of highlights that you can you give us an update on the price for value initiatives, particularly within industrial I mean, what inning are we in there.
Industrial segment margin recovery kind of tracking in line with your internal schedule just any comments on just the price per value in particular and kind of that margin progression a little bit longer term perhaps.
Yes.
We are gaining momentum on the industrial side, it's very much aligned with where we expected to be at this point, we are successfully transmission transitioning to our terramax production product line of industrial Motors out of Mexico net.
Much better cost position as well as not.
Dealing with the tariffs the product coming into China, So I feel really feel really good about.
And that team and what they're trying to do.
Two.
Positioning ourselves for a possible accelerated growth I would add to that though that when you look at the industrial drivetrain and where we're positioned in the industrial drivetrain.
Certainly a leader as well so we're pricing for value and getting stickier with our solutions around a total offering to the customer and so I feel really good about that being really early innings like first thing, whereas the industrial margin improvement is more.
For fourth bit.
Got it that's super helpful. Thank you. Thank you and then just kind of.
Touch up here I guess any comment on the sales pruning headwind into the second quarter that looks similar to kind of what we saw in <unk> here.
Yes, I think you can expect something around the same range about 200 basis points of our rail would be a pretty close to a level of expectations going into the second.
Got it and if I could just sneak one more here just thinking about working capital into the back half of the year everyone's kind of readjusting expectations on just in time inventory given all the disruption we're seeing just any comments on working capital use in the back half it would be great.
Yes, sure Chris So elastic day. The good news is that we still have a nice path year on inventory and we're very focused on reducing working capital and that inventories in the biggest lever that we have even even with the.
With the volume that we're seeing we still have a nice path to see.
Trade working capital as a source of cash this year and 'twenty, one and it is largely due to the inventory that we're talking about here.
Some of the challenges that we've seen early in the year have been around some of the supply chain some of that supply chain friction as we got through the first quarter, we built in a little bit of inventory there in certain areas. Some of the port constraints, but that we see clearing and we as I said, we have a clear path of working capital should be a nice corp.
Cash flow.
Got it well thanks for the color guys and congrats on the quarter here.
Thank you for that.
This concludes our question and answer session I would like to turn the conference back over to Louis Pinkham for any closing remarks. Please go ahead Sir.
Thank you operator.
Having delivered a stronger first quarter than expected with record breaking 13, 9% operating margin and entering the second quarter with solid order and revenue momentum I'm excited about what 2021 holds for Regal.
We still have so much opportunity to improve our profitability well rexnord PMC is expected to add significant momentum.
All of these factors should benefit our free cash flow fund further growth investment and deliver benefit for all our key stakeholders.
And with increasing intention behind our plans to meet rising demand for more energy efficient products and solutions our growth strategy will be tied to a purpose bigger than regal doing our part to help our communities locally and environment globally.
Thank you again for joining us today and for your interest in Regal and have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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