Q2 2021 Regal Beloit Corp Earnings Call
[music].
Good day and welcome to the Regal.
Second quarter 2021 earnings conference call, all participants will be unless the only mode shutting any assistance. Please sit in a conference specialist by personal historically followed by zero.
After today's presentation there'll be an opportunity to ask questions.
To ask a question you May press Star then 1 on your telephone keypad to charter.
<unk> Washington, Please press Star then 2.
Please note this event is being recorded.
Now I'd like to turn the conference over to Mr. Robert Barry Vice President of Investor Relations. Please go ahead.
Great. Thanks, Ian and good morning, everyone and welcome to Regal Beloit second quarter 2021 earnings call joining me today.
Charger cooler 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 the statements made on 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 the forward looking statements relative factors that could cause actual results differ materially from projected results. Please refer to today's earnings release, and our SEC filings on slide 3 we state that we are presenting certain non-GAAP financial measures in this presentation we.
Today on these are useful financial measures to provide you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods and in the same manner as management. Please read this slide for information regarding these non-GAAP financial measures and please see the appendix for reconciliations of these measures to.
We believe with comparable measures in accordance with GAAP.
On slide 4 we provide some additional disclosures related to the planned merger with Brexit or TMC business.
And on Slide 5 let me briefly review the agenda for today's call Lewis will lead off with his opening comments and an overview of our <unk> results.
Rob <unk> will then provide our second quarter financial results in more detail and discuss our 2021 guidance. Lewis will then come back to provide an update on our planned merger with Rexnord PMC. We will then move to Q&A after which Louis will have some closing remarks and with that I will turn the call over to Lewis.
Great. Thanks, Rob and good morning, everyone.
Thanks for joining us to discuss our second quarter earnings and to get an update on our business and thank you for your interest in Regal.
Building on the solid momentum we had in first quarter.
Regal delivered accelerating.
Top line growth significant margin gains and strong free cash flow in the second quarter on.
Organic growth was 37% and adjusted operating margin rose nearly 500 basis points, resulting in a 140% adjusted EPS growth.
Which is the second quarter in a row debt, we achieved record results.
I am also incredibly pleased to report that based on our second quarter performance and the margins implied in the 2021 guidance, we shared last night.
That we are hitting our operating margin.
B engine target under our 300 in 3 plan well ahead of schedule.
As a reminder, at our March 2020, Investor Day, we outlined a plan to raise our adjusted operating margin by 300 basis points over 3 years.
<unk> using 2019 as a baseline.
Many factors allowed us to outperform our 300 in 3 goal.
But I believe Regal focus on 80, 20 principles as chief among them.
Underlining the strength of this perf.
<unk> expense is that it was achieved while confronting steep inflationary headwinds.
Gathered supply chain disruptions and lingering COVID-19 impacts.
I believe demonstrating very strong execution by our global Regal team.
So before getting into.
Form and detail on our second quarter results.
I want to thank all my Regal colleagues around the world for their hard work and resource from this as they remain focused on serving our customers.
Executing on our restructuring plans and cultivating new growth opportunities.
More day I'm also pleased to report that Regal continues to mature at various growth initiatives and while recovering end markets boosted our growth rate.
<unk> also continued to achieve share gains.
In all of our segments during the second quarter.
I want to emphasize.
<unk> that we are definitely gaining momentum and share through our focused approach in the industrial powertrain, which I have an example of in the next slide.
In addition to a great second quarter I'm excited to update you on our planned merger with rexnord.
Nord PMC.
With all required regulatory approvals now obtained and efforts by our dedicated integration plan planning team well underway.
We are on track to likely close in late third quarter or early fourth quarter of this year.
I'll come back with a more detailed update on the merger later in the call.
Turning to our results I think our standout positive in second quarter was regal delivering 37% organic top line growth.
With all 4 segments contributing.
Essentially all of our market.
Air supported this positive performance.
Because COVID-19 distorts the comparisons with 2020, it's notable that our sales in the second quarter were up almost 4% versus 2019.
A few highlights by vertical include our unit material handling.
Handling business, which was up nearly 30%.
Our alternative energy business within Pts posted posted revenue that was a multiple of the level seen in the prior year.
In our North America residential HVAC business was up over 40% in the quarter.
And notably we started to see better momentum in our commercial HVAC business and expect the non resin market, which represents about 12% of Regal sales to be a nice source of growth for us in 2022.
Regionally, our China business.
Also a very strong contributor up more than 60% in the quarter.
Our China team continues to execute at a high level capitalizing on recovering end market demand, while also driving nice share gains.
While 30%.
7% organic sales growth will be hard to beat.
I'm confident we will continue to see strong momentum in the back half given the strong order rates in the second quarter and as we entered the third quarter.
Orders in second quarter were up 57% on a daily basis and are tracking up.
<unk> was a mid twenties pace in July.
Our orders were up 22% versus second quarter 2019.
Notably, we think strengthen our residential HVAC and pool pump businesses is set to continue through the second.
Have we.
Which is an improvement versus our more cautious stance on these markets when we spoke last quarter.
This strength is driven by robust orders in our sizable backlog our sense that underlying demand remains healthy.
A regulatory change in our pool business.
And on the HVAC channel in particular remaining under stock.
In fact, the restock in resi HVAC, we had anticipated in the first half of this year may be deferred to the first half of 2022, as we and the market balance accelerated.
And supply.
We also see momentum building in our later cycle general industrial business and in the food and beverage and hospitality markets among others as we move into the back half and look ahead to 2022.
Rob will share more thoughts.
What's on the cadence of recovery in our end markets later in the call.
Turning to margins Regal posted a record 14% adjusted operating margin in the quarter.
The addition of sizeable volume gains a steady cadence of progress on our 80.
<unk> productivity initiatives.
Executing our multiyear restructuring program and gains from our efforts around lean resulted in significant second quarter margin expansion.
Regal as adjusted operating margin Rose 460 basis points versus.
The prior year's second quarter, and is up 300 basis points versus the second quarter in 2019.
As I noted earlier the strong margin performance is happening despite facing supply chain challenges.
Mainly in certain electronic component.
And significantly.
It can inflationary pressures.
This is where 80.20 is really helping us make better strategic pricing decisions and allocate resources to our highest value opportunities.
And along with our hedge programs and by our hedge strategy and our teams executing a wide range.
<unk> of mitigating strategies with urgency and discipline I am pleased that Regal was able to achieve price cost neutrality in the quarter.
Before turning it over to Rob I would like to share more detail about our significant order we received in the quarter in our Pts business, which highlight.
The power of offering an integrated powertrain solution and how Regal is leveraging its technology leadership and application expertise to create value added solutions for our customers.
In this example, our customer is a leading player.
Highlight source recovery market.
Which essentially turns waste into energy as a replacement for coal.
The customer was designing our next generation product and was looking for shorter lead times.
Proved ease of installation and real time monitoring and support functionality.
Our Regal solution pictured here integrates our motor.
A series of critical components, along the industrial powertrain.
And our perceptive remote monitoring sensor technology to create a solution that meets all of the customers' needs. While also lowering net material.
Material content and is expected to save the customer up to $1 million annually.
This custom solution is as an example of how regal ability to sell an integrated solution of powertrain and Iot enabled sensing component created.
On a superior value for our customer.
<unk> capability in this regard are strong.
And we will be enhanced materially with the addition of rexnord PMC and reinforces our confidence in the cross marketing synergies that underpin our strategic rationale.
Now we're doing the merger with PMC in the first place.
With the addition of Rexnord PMC will be able to do this in a wider array of applications and an expanded set of end market.
And now I'll turn the call over to Rob who will take you through.
Through the financials in more detail and discuss our guidance before I come back to update you on the rexnord merger.
Thanks, Louis and good morning, everyone.
As you can see real had very strong results in Q2.
Now, let's discuss our results by segment and then I'll walk through.
This guidance, including some high level thoughts on end market outlooks for this year and for 2022.
Starting with power transmission solutions or Pts organic sales in the second quarter were up 33, 1% from the prior year on broad based strength, but with particularly.
Really strong performance in the alternative energy and U S General industrial markets and in our conveying business.
Pruning actions were approximately 280 basis points of top line headwind in the quarter on.
Operating margin in the quarter for Pts was 19, 4% up 5.
Our lane 80 basis points compared to the prior year a record level for this segment for the second quarter in a row and above our expectations.
Orders in Pts for the quarter were up nearly 40% and are tracking up mid thirties and July both on a daily basis.
Order.
500 in the second quarter and in July was broad based.
Turning to climate solutions organic sales in the second quarter were up 43, 4% from the prior year, which was slightly above our expectations.
The increase was primarily driven by our.
Our North America residential HVAC business further demand recovery in Europe, and continued strength in the general industrial and commercial refrigeration end markets.
Pruning actions or approximately 350 basis points of top line headwind in the quarter.
The adjusted operating margin in the quarter for climate was 18, 4% up 600 basis points versus the prior year period.
Strong volumes favorable mix and continued cost reductions, we're all margin tailwind.
While our 2 way material price formulas.
Continued to lag material inflation in the quarter, we saw non contracted price increases helped bridge. The gap. So that we ended in a neutral price cost position for the quarter.
We continue to anticipate that price actions under our 2 way material price formulas will catch up.
In the third quarter.
Orders in climate for the second quarter were up 80% on a daily basis on broad based strength.
Orders in July are pacing up high teens.
For residential HVAC in particular orders in the second.
During the we're up over 60% on a daily basis, and while that pace has moderated slightly in July based on our current backlog and what we're hearing from our OEM customers.
Our assessment is that end user demand remains healthy.
Our view that the channel is still largely.
Quarter under stocked position and we anticipate.
Healthy growth rates in our residential HVAC business for the remainder of this year. Despite the tougher back half comps note debt. This is a positive revision versus our prior view.
Turning to commercial systems.
Organic sales in the second quarter were up 49, 6% from the prior year.
Strength in the quarter was broad based but was particularly good in the North America General industrial end market in our pool pump business and in China.
Notably sales in pool pump, we're up almost 50.
80% in the second quarter benefiting from strong consumer demand healthy sales of new products that are supporting share gains and some restock activity.
We think the outlook for pool remains healthy aided by the same drivers and we now expect healthy growth in this business for the remainder of this year even as.
As comps toughen.
80, 20, pruning was a 140 basis point headwind in the quarter.
The adjusted operating margin in the quarter for commercial systems was 11, 6% up 560 basis points compared to the prior year.
This margin was up primarily.
Merely due to favorable volume and mix our teams have done a great job managing through the ongoing freight and logistics challenges to minimize the impact to the business.
Orders in commercial for the quarter were up nearly 70% on a daily basis, reflecting broad based strength.
For July orders.
<unk> are tracking up high twenties also on broad based strength.
And industrial systems organic sales in the second quarter were up 15, 2% versus the prior year.
The segment saw strength in the data center market and improving demand in the North America General industrial market.
Pruning actions during the quarter were approximately 190 basis points of top line headwind.
The adjusted operating margin in the quarter for industrial was 2.3% while volume cost reductions and mix were all tailwind for industrial in the quarter the business encountered larger than anticipated disruptions in Mexico.
So supply chain and also faced Covid related headwinds in India that resulted in a 6 week closure of the facility.
We are happy to report that this site has once again fully operational.
While these temporary unexpected setbacks may have delayed some of the efficiency gains we expected from transitioning to our new.
Our next Terramax platform, we firmly believe that the structural changes we have put in place that industrial and are continuing to implement will enable this business to achieve meaningful profit improvement with and then within the next 12 to 18 months.
As we look ahead to the remaining quarters of 2021.
New Tech, we believe industrial can deliver margin progress versus the first half and we would expect performance at a mid single digit level for the back half of 2021.
Orders in industrial for the quarter were up approximately 45% on a daily basis with order rates in July tracking in the mid to high single.
With on broad based strength.
On the following slide we highlight some key financial metrics for your review a couple of notable highlights first our free cash flow of $74 million or 90% of adjusted net income is a strong result that reflects some incremental pressure on working.
Capital given the higher volumes.
Even so we continue to expect cash conversion above 100% for the year.
Second we further delever the balance sheet and ended the quarter with net debt to adjusted EBITDA of <unk> 7 times.
Moving to the outlook.
With 2 quarters.
<unk> digit hind us and COVID-19 related impacts significantly diminished we are in a position to provide annual guidance. We expect 2021 adjusted diluted earnings per share in a range of $7.8.72.
<unk> thousand $9, which would represent growth of 53% year over year at the midpoint.
This implies revenue growth in the high teens.
At the bottom of this page we've included some additional assumptions that can be used when modeling 2021.
Furthermore, and consistent with what we previously communicated we expect to take actions in 2021 that will result in annualized.
<unk> b cost savings of $25 million.
Of which we achieved roughly $6 million in Q2 and for modeling purposes, I would assume the remainder of roughly $13 million occurs ratably during the year.
On the next slide and as Louis highlighted in his opening remarks.
<unk>, we wanted to provide an update on our 303 initiatives, we laid out at our Investor day in March of last year.
The many changes we've implemented over the past couple of years have resulted in hitting that goal in less than 2 years.
While improved volume has certainly contributed to hitting these goals this year.
Mark if you compare our sales results to 2019 levels Youll.
Youll find growth largely aligned with the assumptions we included in our Investor day projections.
The key drivers of our margin improvement include the decentralization of the business driving increased accountability and P&L.
<unk> chip at every level of the organization a focus on 80.20, Utah.
Utilizing policy deployment to affect strategic initiatives and drive above planned performance.
The Regal business system, and executing and exceeding our cost out opportunities in the areas of footprint.
Owners product rationalization and best value country sourcing.
While we are not planning to update our Investor day targets. At this time, we still have line of sight to continued modest margin improvement through the cycle.
We see this as great momentum as we move closer to the successful merger with rexnord.
<unk>.
Before turning it back over to Louis.
I wanted to spend a few minutes sharing some details on our end market exposures. We thought this would be helpful. As you start to develop estimates for post 2021 growth rates a.
A few things I think are worth highlighting on this slide.
1 roughly half of our sales are into the consumer general industrial and non residential construction end markets, which represent approximately 21%, 19% and 12% of our sales respectively.
Second the other 50% of our sales are.
Pmt's into a diverse array of end markets.
Third while our residential HVAC and residential pool markets tend to garner outsized attention from the investment community. These markets represent only about 25% of our sales with residential pool being.
4%.
We classify these sales mostly in the consumer end market plus modest exposure to residential new construction consistent with demand for these products be mostly replacement driven.
Lastly.
As we think about where we are in the cycle for our principal end.
Markets, we expect that roughly 30% have not started to recovery cover or only in the earliest stages of recovery and so we're unlikely to see a materially.
<unk> uptick in demand until 2022.
These include our sales into the nonresidential.
And market hospitality much of food and beverage oil and gas and the more capital spending driven parts of general industrial.
We also believe our exposures in alternative energy and data center, while posting strong growth in 2020 and 2021.
<unk> ample runway to continue growing at very healthy rates in 2022 as well.
To be clear, we expect all of our markets to be strong in 2022, but we are highlighting market, we expect to accelerate since they will still be rebounding.
For reference.
<unk> I'll add that rexnord PMC business has roughly 15% of its sales into the aerospace end market, plus 6% into non res and 20% into food and beverage and so we also see significant opportunities for accelerating end market demand to benefit that business.
In 2022.
Beyond end market tailwind as you know we have spent a lot of time over the last 2 years, making investments and structural changes in the business that will enable more robust outgrowth and we expect to see increasing benefits from these efforts in the coming years income.
<unk> <unk> in 2022.
And now I will turn the call back over to Louis.
Thanks, Rob.
I'd like to spend a few minutes updating you on our planned merger with Rexnord PMC business.
First as I mentioned earlier, we now have all.
All required regulatory approvals needed to close.
1 key remaining step is shareholder approval of both Regal and Rexnord, and we announced last week debt. Our special shareholder meeting is scheduled for September 1.
In light of this information.
We now expect the transaction to close sometime in the second half of 2021.
The precise timing will depend on the IRS letter ruling.
But late in the third quarter or early in the fourth quarter seem most likely.
Second our dedicated integration planning team is working diligently to ensure we hit the ground running on synergy realization when we close.
And I feel very good about the team's efforts on this front and.
And we remain highly confident we will meet or exceed our estimates.
For synergies.
Third.
While we are not providing an update regarding the private letter ruling from the IRS that is being sought in connection with this transaction I will note.
As more fully described in the proxy statement, we filed with the SEC on July 21.
We believe that based on recent share ownership information and assuming.
Receipt of the IRS private letter ruling we are still on track to be within the dividend range provided when we announced the transaction in February.
With the mid point of roughly.
The $100 million.
Lastly.
With the strength of Regal as 2021 anticipated performance.
And the strength of the Rexnord PMC performance as communicated by Rexnord last week.
We are fueling even more confident.
Timing of this merger and the opportunity for shareholder value creation.
As a result, we are raising our estimated pro forma adjusted sales and EBIT dollar estimates for 2022.
We now expect approximately 5 billion.
And pro forma revenue versus $4.5 billion, when we announced the transaction.
And we now expect adjusted EBITDA in excess.
Of $1 billion.
Up from approximately $940 million commute.
You indicated in February.
In addition, while we're not raising our estimated synergies or.
We're quantifying the cross marketing synergies.
Identified.
Wins like the 1 we shared earlier with the resource recovery OEM.
Take us more confident about the enhanced value proposition, we will have post closing.
Being able to sell customers a complete integrated industrial powertrain solution.
Across a wider.
Gray of applications and end market.
Will meaningfully help new regal grow above market.
And was a central strategic consideration for us pursuing the merger in the first place.
And with that I'll turn it back over to the operator, operator, we are now ready to take questions.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your telephone keypad.
Curious on Speakerphone, please pick up your handset before pressing on the keys.
To withdraw your question. Please press Star then 2 at this time, we will pause momentarily with similar roster.
And it looks like our first question comes from Mike Halloran of Baird. Please proceed.
Hey, good morning, everyone.
Good morning, Michael.
So let's start on the margin side, obviously really good job this quarter and well to the flow.
The last couple of years I guess.
But could we talk a little bit more about that.
The debt the Pts margins on those were quite the jump here, maybe some little bit more detail on what the big factors were that were driving that jump, but maybe more importantly, how should I think about sustainability.
On a forward basis at that margin run rate is this the right run rate to think about or is there some puts and takes on there.
We need to think about on a forward basis.
Yeah, Let me, let me start with that Mike first of all I think our Pts business is performing incredibly well firing on all cylinders, it's really driven they've embraced 80, 20 incredibly well not only from the standpoint of.
SKU reduction footprint rationalization, but also then leveraging.
The industrial powertrain and focusing our efforts on on gaining share and growing.
So I would tell you. Although we are seeing in the second half that we'll see a little bit of balance these margins.
<unk> are sustainable and we will actually improve further.
So we've got a high 30% gross margin business.
And that.
Actually then with the combination with rexnord PMC will be will be taking them over for it yes.
Yeah, and I would just add to Mike for a second on that 1.
On <unk>.
Certainly some mix impacted the quarter in terms of some of the key drivers that we highlighted during the call that we're in my remarks in terms of solar in material handling in particular that were.
Nice margin drivers for us on.
As you look out for the remainder of the year.
While we do see that these are largely sustained margin rates, we don't expect them to continue quite at the rate that we saw as we exited the second quarter, but certainly above historical levels and and so still very nice improvement.
Okay. Thanks for that appreciate it follow up here than just.
More broadly as you think about the margins.
Impressive that price cost neutral on the quarter, considering all the headwinds out there in <unk>.
Considering the timing of when the material price formulas kind of normalize so its youre looking towards the back half of the year here, maybe just a little deeper discussion on how you think that price cost equation.
Starts layering out through the year as maybe some of this catch up materializes.
And depending on inflation factors.
Sure.
No.
It really is nice to see that we were able to get to as you point out achieved price cost neutrality in the first half now and we're still saying that we.
We expect to be on price cost neutral for the back half now.
In our in our climate and commercial businesses in particular, we're still catching up on our 2 way material price formulas and we do expect those to largely catch up in the third quarter.
Also as it relates.
<unk> 2 additional inflation flowing through we do expect additional inflation to flow through the business that we as we.
Enter the second half or as we move through the second half. However, we feel confident in our ability on the new honestly, it's a new way of and muscle that we have now and discipline within the team to be able to.
At a price that we will be able to offset that and remain neutral as I said in the second half. So it's not easy that's for sure, but it's a little easier. When you are you or your customers expect it they know the inflation. There. The competitors are generally are following and you know 80.20 is really helping us make these strategic.
Capturing decisions now so.
Sometimes you have to go to your customers more than 1 they get the price and that's what the teams are doing today and we're managing through this which is why we achieved what we did in the second quarter and I would expect that they will actually be the cases, we missed the rest of the year.
I appreciate it gentlemen, thank you.
Thanks, Mike.
Our next.
Price and comes from Jeff Hammond of Keybanc markets.
Okay.
Can you hear me.
Yeah, Good morning, Jeff Okay.
So just on I noticed in the presentation, you mentioned buyback and my understanding I think youre precluded, but it.
It just doesn't seem like the market is giving you.
Kind of full credit here for what you're executing on internally in the portfolio change in.
Just wondering how you're thinking about buyback and how quickly you can kind of stepping on once the deal closes.
Sure you know.
You are right, we have been somewhat limited on what.
What we can do between now and the market closed but.
Big picture, we're not averse to stock purchases and we do plan to maintain a balanced approach to capital deployment. Once we get past the close so that's the way, we're thinking about it and and and we're not coming off that position. So we can get back into buying back stock and we decided.
So.
Afterwards, we can we can be more precise on timing of course after the close.
And Jeff I appreciate you acknowledging the stock performance, because we certainly see it as well, but our team is.
Solely focused on driving stronger more profitable growth and improving our.
Our overall performance and so that's where our focus is we think we're doing a nice job in.
With the merger with Rexnord will become even stronger as a company and.
That will be recognized for and will be recognized for that performance.
Okay, Great and then.
So you gave the guidance on on a high teens growth.
Are there any segments that are going to be notably above that or below that you gave a lot of good detail on the order trends, but just just trying to get a sense of any outliers within that growth rate.
Sure, Jeff the way I think about.
It is in this order.
From highest to lowest and that's from a segment perspective as we work through the back half of the year I would say the highest on.
Growth that we would expect will be coming through on the commercial segment, followed by climate, then Pts and lastly, industrial.
Quarter is the way I would look at the back half.
Okay. That's helpful. And then just a quick last 1 you mentioned.
The supply chain issues in industrial in Mexico, and I'm, just wondering what's unique about that you got a lot of facilities in Mexico, and the other businesses as well and just trying to understand that better.
And that yes, if you remember, Jeff we've been going through a transition.
We've established a new product offering our terramax product, which is being <unk>.
Ramping up in Mexico, but we also because of the tariffs that were put in place we transitioned a significant amount of production.
From China into Mexico, and so on the supply chain is a little bit more deeply rooted in China and we are doing more work to localize that in the north American market and so as compared to some of our other businesses I still say that core advantage.
Duction and differentiator of Regal is our global supply chain and our global manufacturing footprint.
But I remind you that was true for every business, except for industrial that was producing almost completely out of China and India and so this is why its having now with.
Establishing that capability in Mexico is having a little bit more pressure on the industrial business than the others.
Okay.
That's very helpful. Thanks.
Yes, Thanks, Jeff.
Our next question comes from Christopher Glynn of Oppenheimer. Please proceed.
Thanks, Good morning.
Good morning.
Lots of praise for the momentum.
Despite incorporation here I did want to ask about the.
Gross margin down not quite a couple of points sequentially.
Price cost went from.
Slight positive to neutral.
Growth also brought into maybe you had rich mix spearheading growth Lauren.
First quarter.
Just curious thoughts around that in the second half gross margin.
Yes.
I'll kick it up there and thanks for the comments, we do feel like we're gaining momentum and Thats good news.
We are gross margin driven organization, we talked about gross margins constantly.
Yes gross margins there are only down about 100 basis points from Q1 to Q2.
So not not.
The 200 that you referenced but nevertheless still.
Down certainly mix has an impact but really the main impact is.
On the inflationary aspect and.
Price cost neutrality.
So at a certain point youre not able to get the full level of leverage.
A neutral price cost in.
And that was really the major headwind I will say that the fact that 1 of our facilities in India and our industrial business was shut down for 6 weeks that was definitely burdensome that facility. Fortunately is back up and running although.
Just because of the situation in India.
50% production.
Per shift and 50% on second but we're still we're now back to 100% production and then our comments around the supply chain in Mexico for industrial certainly had some influence as well, but the main driver. The main driver is material.
Inflation in neutrality on price coffee.
Okay. Thanks, and then.
On the SG&A do you see the first half run rate is.
Pretty pretty stable, maybe tick up just a bit in the back half.
Yes, I think there'll be a little bit of an uptick but not much we're still.
We're still working debt teams are managing SG&A very tightly.
And so we do.
Do expect that SG&A should remain fairly close to what we saw on the first half slight uptick but not much. So I would expect that to be a nice source.
As we move into the second half.
Okay, and a lot of companies talk about lean discretely Youre <unk>.
80, 20, just curious does the lean principles kind of roll up into your 80.20 paradigm.
You know I'll say it this way we call it the original business system.
I know many companies state that as well, but 80% <unk> is our steering wheel it directs us to where we need to.
As.
Leanne gets us our focus on process and driving waste overburden and variation out so we can be more efficient and productive they go hand in hand.
At Regal and I'll tell you I couldnt be more proud of the momentum our team is gaining.
Across Regal.
Driving lean on <unk>. So you will see more benefit from that in the future from Regal.
Thank you.
Yes. Thanks.
Our next question comes from Charlie or Joe Ritchie of Goldman Sachs. Please proceed.
Thanks, Good morning.
Morning, Joe.
Hey, guys so kudos on on.
On the accomplishments, particularly on the margins and being able to do that in such a short time period.
What's really really stands out to me is the fact that industrial is still sitting at low single digit margin and I think you guys have kind of called.
Everyone.
11% entitlement longer term and you were still able to achieve those margins. So I guess my question is as Youre thinking about the path forward for industrial.
1 do you still believe the 8.8% to 11 is the right entitlement and then secondly.
How do we get there.
Yes.
We do still feel that <unk> has the right entitlement.
Is going to take a little bit longer than we anticipated because of the.
The impacts on the headwinds of this first quarter so.
With the Covid related disruption in India that had a pretty significant impact.
And then the supply chain infrastructure.
Challenges.
Being the main implied Q2, we believe though that going forward with our efforts to.
Install our <unk> product line out of Monterrey, and then our folk.
In the supply chain of reducing our overall cost and logistics of getting material into Mexico to build into the marketplace, and then better managing and based on a long way, but continuing to better manage our gross margin and $8.20 efforts, we have a path.
To 8% to 11%.
The stumble on second quarter certainly.
Is that process down a bit, but we feel really confident in our ability to continue to recover.
We believe mid <unk>.
Single digit operating margins in the second half of this.
This year.
Strengthening into 2022.
Great.
That's helpful context, Thanks, Louis and then I guess my follow on.
On slide 16, laying out like where your where your end markets are I mean on.
Obviously pretty bullish.
30% are just starting to inflect and Youre still expecting positive growth for all of them in 'twenty 2.
Just maybe if I was just thinking about the residential HVAC piece, which is going to face some pretty tough comps like I guess, what gives you the confidence that that piece of your business can grow in 2022.
I mean, a couple of things certainly for the rest of this year price is going to be a benefit our Oems have come out with a pretty bullish perspective, but beyond 2021, we would say that there will still be strength in <unk>, new construction, we believe that.
The work from home.
Initiatives and therefore reinvestment back in the home will be nothing but an uplift in continued momentum for US and then lastly, with the infrastructure.
Bill probably being passed we think theres going be some.
Stimulus tailwind as well so do we think it's going to be elevated growth no I think we'll be back to a normal growth level.
In 2022, but we still feel pretty strong.
That.
The market will continue into 'twenty 2.
Okay great.
Yes.
Thank you. Thank you.
Yeah.
As a reminder, if you have a question. Please press Star then 1.
Next question on it's going to come from Nigel Coe of Wolfe Research. Please proceed.
Thanks, Good morning.
This is my last quarter of Regal Beloit Infinera. So.
Thanks, Scott just maybe Lewis.
Just talk on what you considered to be normal growth rates I mean, I think it's a little bit different to what we've been used to in the past to Regal. So that'd be sort of a follow on question that Jones, but on the margin targets getting that your body is great, but when you take a step back.
What kind of went better versus plan certainly wasn't going.
On <unk>.
He wasn't input costs, so what kind of what did you overdrive versus your original targets.
So I think there's 2 questions there Nigel and thank you for your comment and it is.
We're very excited about the merger with the rest of our PMC and it's going to transform.
Future of Regal and rexnord P&C for that matter. So thank you for acknowledging that.
So from a.
How do we think about growth going forward.
I view, our teams are doing a phenomenal job building the muscle needed to outgrow our market our internal goals.
Our debt outgrow our markets by 50% now.
<unk> heard me say in the past that I like to shoot for the Moon. So I end up on the roof, because if you shoot from the group.
Not move at all our team is getting our arms around.
How do we outgrow.
Gained some nice share.
This year in every segment.
Back to the comp question on resi HVAC debt that we had on the last question.
We believe debt 22 is going to be strong because we're also gaining some share there and so these are benefits for regal. So the way I'd think about it is.
Sure. They do expect market growth and then we will outgrow those markets by.
At least.
On a positive up to 50% that's our focus now from a gross margin perspective or a margin perspective.
Net and better.
I will tell you 80.20.
<unk> direct SaaS it points us, where we need to spend our energy and effort and it's all around where we'll be able to provide more value to our customer, but also get the return of value as well.
That has been a major driver I will also say the restructuring efforts, especially in our Pts business.
Our slightly are performing slightly better than we originally anticipated and that has been a boon for Pts and that's why I'm.
Again, they're hitting on all cylinders and I believe we have a clear path, especially with rexnord PMC to get our gross margins there into the <unk>.
So.
That's how I would think about it Nigel hopefully that helps.
Thats helpful. Thanks.
And then on the <unk>.
Yes.
<unk> seen significant sort of.
2020 impact too.
Revenues on I know this is a continuous process and will probably continue but where do you see that impacts landing in 2022 do you think we down so sort of a more normalized level or do you still think we're going to be doing some heavy lifting on the on the revenue portfolio.
I'm going to speak.
Really just to Regal.
Regal right now and I think that's the point of your question Nigel I would tell you probably on the certainly I would expect slightly lower than 2 but I would say still between 1 and 2.
No.
No negative to the past, but what we think is value today.
<unk> is quite different and so I still think we have a runway on 2020 and part of that runway means that we will prune.
Some business in order to achieve better performance and to put our focus on our highly valued customers.
<unk>.
We're not we're not going to be down to zero.
Zero in 2002, I would say 1 slightly above 1 is how I would think about it.
Okay and then my final question.
You referred to the regulatory change in the pool market, which I assume is the variable speed pump.
Regulation, which went effective on the 19th of July So we are beyond that point.
I think there is a little bit maybe causing some concerns that perhaps as a pre buy and then there might be a bit of an air pocket. It doesn't sound like you've seen that maybe just confirm them.
The demand in the market is strong.
Whether it's work from home and greater investment in.
Activities at the home.
<unk>.
Also we are hearing.
Contractors are by hiring more in it.
It takes it takes.
Multiple quarters to get a pool put into your backyard, we see the demand very strong and so no. We don't think theres going to be a major concern about the pre buy.
I will tell you that we feel really good about our new solution going into that space.
We will be the leader in the market with a.
On a higher efficiency lower noise solution in a smaller footprint and we believe we will gain some share from this exercise.
And so I couldnt be more excited about now remember Paul is only 4% residential pools, only 4% of Regal, but thats still everything's material and 4% is good and we look forward to continued strength through H 2 of this year and we believe.
Although.
More modern.
There will be growth in 'twenty, 2 as well.
Yes, 4% from NFL.
Percentage is a meaningful number but thanks for the detail and good luck with getting an excellent P&C claims.
Yes, thank you very much.
Alright and at this time this concludes our question.
And on answer session I would now like to turn the conference back over to Mr. Louis Pinkham for any closing remarks.
Thank you operator.
Having delivered a strong second quarter and with great momentum entering the third.
Plus our plan to close the rexnord merger shortly.
I've never been more excited.
Moderate about Regal as future.
We're continuing to transform our cost structure, and we're making progress building regal growth muscle in many cases by leveraging our technology expertise to address rising demand for more energy efficient products and solutions.
The addition of Rexnord PMC and the combined organizations enhanced ability to deliver leading industrial powertrain solutions should only brighten our growth prospects further.
I look forward to keeping you updated on our progress towards the close of the merger and on.
On all the transformation initiatives underway at Regal.
Thank you again for joining us today and for your interest in Regal.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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