Q3 2021 Regal Rexnord Corp Earnings Call
Good morning, and welcome to the Regal Rexnord third quarter 2021 earnings call all participants won't be in listen only mode should you need assistance. Please signal conference specialist by pressing star key followed by zero.
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Please note. This event is being recorded on Nordic.
To turn the conference over to Robert Barry Vice President of Investor Relations. Please go ahead.
Great. Thank you Anthony good morning, and welcome to Regal Rexnord third quarter 2021 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 the 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 <unk>.
Actual results could differ materially from those expressed or implied in forward looking statements for a list of factors that could cause actual results to differ materially from projected results. Please refer to today's earnings release, and our SEC filings.
On slide three we speak that we are presenting certain non-GAAP financial measures. In this presentation. We believe that 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.
Measures and please see the appendix for reconciliations of these measures to the most comparable measures in accordance with GAAP.
Turning to slide four let me briefly review the agenda for today's call Lewis will lead off with his opening comments, Rob <unk> will then provide our third quarter financial results in detail and discuss updates to our 'twenty one 2021 and 2022 guidance. Louis will then come back to discuss the acquisition of Arrow had systems, which we announced.
Today, we will then move to Q&A after which Louis will have some closing remarks and with that I'll turn the call over to Louis.
Thanks, Rob and good morning, everyone.
Thanks for joining us to discuss our third quarter earnings and to get an update on our business and.
And thank you for your interest in the new Regal Rexnord.
While unprecedented levels of inflation in severe supply chain disruptions are surely top of mind as they have been for Regal rexnord.
I'm, feeling upbeat, especially given our team's strong performance in the third quarter, along with strong market demand.
But also because of the tremendous progress we are making transforming riedel now regal rexnord into a higher margin faster growing more cash generative and higher return enterprise.
Despite many external headwinds in the quarter Regal Rexnord posted record operating margins and record earnings on a robust 16% organic top line growth.
Many factors drove this performance, but a couple of highlights include being modestly price cost positive in achieving market share gains across our portfolio.
And with our third quarter's orders up 27% and up at a low <unk> rate in October we are confident we will have that healthy top line momentum as we enter 2022.
We also closed a transformational merger with rexnord process <unk> motion control business.
Synergies from which should add materially to our margins free cash flow and the organic growth profile over the next few years, particularly as we begin to deliver the benefits of selling our customers an integrated industrial powertrain solution.
Which by the way has already started to happen.
I am also extremely excited to announce today our acquisition of Arrowhead.
Hi, Lee strategic bolt on that we expect to be accretive to adjusted EPS in year one.
To achieve an ROIC exceeding 10% before year five.
And which promises to open an array of growth vectors for our conveying business.
Both organic and inorganic.
I will discuss their head in more detail later on this call.
I will note, however that even after adding PMC and arrowhead our balance sheet remains very healthy at about one times levered and combined with our strong free cash flow gives us lots of flexibility to create more shareholder value from various capital deployment initiatives going.
Forward.
Before turning it over to Rob I wanted to spend a minute, saying thank you to all our Regal Rexnord associates around the world.
Our strong performance at its core is about talent, it's about our nearly 30000, Regal rexnord associates and their disciplined execution leveraging their individual skills and diverse perspectives.
<unk> dedication and hard work and acting with urgency for our customers.
Always guided by our Regal rexnord values.
On October 5th the day after we closed the PMC merger I.
And many Regal associates spent the day at the PMC headquarters in Milwaukee.
Now the headquarters of our combined PMC, and Pts business motion control solutions or Mcs.
We spent significant time walking every floor of our 10 story building meeting with hundreds of associates along the way.
That was a great experience on so many levels.
One of the things that excited me most with all the talk of $80 20 of customer segmentation of lean principles of SKU rationalization of the importance of diversity engagement and inclusion and of using data to make decisions.
Bluntly I was thrilled because this is the language of legacy Regal and of the new Regal Rexnord.
I think so many of our management tools 80, 20 prime among them are helping us navigate these choppy times, just a little bit better than our competition.
But it is the disciplined execution of our associates using these tools that is helping us succeed.
So again a sincere thank you to all our associates another welcome to our PMC and associates and I look forward to being able to welcome the approximately 300 Arrowhead associates to the Regal Rexnord team later this quarter.
And now I'll turn the call over to Rob who will take you through the financials in more detail and discuss our guidance after which I will be back to discuss arrowhead.
Thanks, Louis and good morning, everyone. As you just heard in Regal Rexnord had very strong results in Q3 and I'd also like to send my congrats to our global team for executing so well in the face of severe inflation and global supply chain disruptions.
Now, let's discuss our results by segment and then I'll walk through our latest guidance, which incorporates us owning the rexnord PMC business as of the merger closed on October 4th and assumes we will close arrowhead by the end of this year.
We will start with our legacy power transmission solutions or Pts segment to be clear. These results only reflect legacy Pts begin in beginning in the fourth quarter legacy Pts plus the rexnord PMC business formed our new motion control solutions segment or Mcs.
Organic sales for Pts in the third quarter were up 23, 7% from the prior year on broad based strength across every market served with particular strength in alternative energy North America General industrial and the <unk> business. In addition, the business had meaningful tailwind from share.
<unk>, including from our industrial powertrain solutions offering.
Pruning actions or approximately 290 basis points of top line headwind in the quarter.
Operating margin in the quarter for Pts was 18, 8% up 600 basis points compared to the prior year.
Strong performance aided by volume price and permanent restructuring actions.
Orders in Pts for the quarter were up 40% and orders for the New Mcs segment are tracking up over 30% in October both on a daily basis.
Okay.
Turning to climate solutions organic sales in the third quarter were up 14, 2% from the prior year the.
The increase was driven by broad based strength in all markets with particular strength in North America residential HVAC markets in EMEA and in North America General industrial markets.
The business also achieved nice market share gains, mostly in the North America HVAC distribution business in Europe and in Asia.
Pruning actions were approximately 180 basis points of top line headwind in the quarter.
The adjusted operating margin in the quarter for climate was 19, 4% up 230 basis points versus the prior year period.
A number of factors contributed to this strong performance, including the drivers I mentioned a minute ago, along with a continued shift to more energy efficient variable speed motors.
Permanent cost reductions and achieving modestly positive price cost also benefited climate margin in the quarter.
Orders in climate for the third quarter were up nearly 20% on a daily basis and are tracking at nearly the same pace in October.
Bolt on fairly broad based strength.
But with particularly healthy momentum in the EMEA and commercial refrigeration verticals.
Based on our current backlog and what we're hearing from our HVAC OEM customers. Our assessment is that end user demand remains healthy and that significant restock activity is still ahead of us and likely to occur in the first half of 2022.
Turning to commercial systems Org.
Organic sales in the third quarter were up 29% from the prior year.
Growth in the quarter reflects strength in North America General industrial markets and strong performance in large commercial HVAC products, especially in China.
We're also confident our commercial business is achieving some nice share gains, especially in the North America General industrial market.
80, 20 related fronting was at 220 basis point sales headwind in the quarter.
The adjusted operating margin in the quarter for commercial systems was 11, 5% down.
Down slightly compared to the prior year.
Continued headwinds from inflation, along with supply chain disruptions contributed to the year over year results.
Furthermore, while overall price cost was slightly favorable in the quarter. This had a dilutive impact on margins.
Orders in commercial for the third quarter were up 35% on a daily basis and are tracking up almost 20% in October.
And industrial systems organic.
Organic sales in the third quarter were up three 6% versus the prior year.
Principal drivers included strength in China, and improving momentum in the North American nonresidential construction and general industrial end markets, partially offset by lapping prior year large project activity in the datacenter market.
Pruning actions during the quarter were approximately 210 basis points of top line headwind.
The adjusted operating margin in the quarter for industrial was three 4% keep in mind that this segment's margins are highly sensitive to small dollar value shifts and operating performance.
Orders in industrial for the quarter were up approximately 14% on a daily basis.
Order rates in October are up at a low teens rate when excluding some large prior period project orders in the data center market.
On the following slide we highlight some key financial metrics for your review a couple of notable highlights first on the right side of this page. We further deleverage the balance sheet and ended the quarter with net debt to adjusted EBITDA of five times.
After factoring the impact of closing the merger with Rexnord PMC, along with the Arrowhead transaction announced today, we anticipate close which we anticipate closing during the fourth quarter, our net debt to adjusted EBITDA is expected to be roughly $1. One times as we exit this year of Fortinet lots of options.
Optionality.
Second our free cash flow of $108 million or 133% of adjusted net income is a strong result, and we continue to expect cash conversion above 100% for the year.
Moving to the outlook.
Lots of moving pieces here, but we've attempted to provide as much clarity as possible.
We are providing guidance for the fourth quarter of 2021 and initial annual adjusted EPS guidance for 2022.
Our outlook incorporates five factors.
One our latest expectations for for performance at our legacy Regal business to expected results for the Rexnord PMC business beginning in the fourth quarter, three PMC merger related impacts, including additional shares interest depreciation and amortization.
<unk> and our expected pros post merger tax rate.
Four impacts in 2022 related to the Arrowhead transaction that we announced today and five a new definition of adjusted earnings per share, which beginning with the fourth quarter of 2021 will be calculated adding back all amortization and stock based compensation expense on an after tax basis. In addition.
Additionally to the adjustments we have made historically.
We believe our new definition of adjusted EPS is consistent with what investors, sometimes referred to as cash EPS and going forward, we will be providing guidance and earnings commentary using this new definition of adjusted EPS.
It is also what we would expect to define the non-GAAP consensus value for our EPS, beginning with the fourth quarter.
Please also note that going forward, our discussions of operational performance will focus on adjusted EBITDA instead of adjusted operating income and our definition of adjusted EBITDA will now include adding back stock based compensation expense to help investors update their models for our new approach we're.
<unk> historic details by quarter on depreciation amortization and stock based compensation, our total Regal rexnord and by segment in the appendix to our third quarter press release and slide deck.
Now turning to the outlook for the fourth quarter of 2021, we expect total Regal retina rexnord sales to grow at a mid teens rate versus prior year.
And we expect to deliver adjusted earnings per share in a range of $1 97 to $2 27.
For reference the outlook, we're providing for the fourth quarter is consistent with our prior outlook for legacy Regal along with the prior outlook for legacy PMC provided by Rexnord.
To this we layer on PMC merger related impacts, including higher shares interest depreciation and amortization and a modestly higher tax rate and we now present the outlook. According to our updated definition of adjusted earnings per share.
For 2022, we now expect revenue of approximately $5 1 billion.
Adjusted EBITDA of approximately $1 1 billion and adjusted EPS in a range of $9 90, 510, $10 and 35.
Our outlook for 2022 is consistent with what we said previously regarding our expectations for revenue and adjusted EBITDA, which we expect it to be approximately approximately $5 billion and at least $1 billion, respectively, but now adds the impact of arrowhead.
Note that while we expect arrowhead to close sometime during the fourth quarter of this year from a guidance perspective, we do not add it to our P&L until January January one 2022.
So if we ended up closing earlier than that as we expect there could be a modest upward impact to our <unk> outlook.
Lastly, I'd like to reiterate that after giving effect to the merger with PMC and the acquisition of Arrowhead, we anticipate having a very healthy balance sheet with net debt to adjusted EBITDA anticipated approximately one one times at the end of 2021.
Okay.
Shifting focus to the table on the right hand side of this slide you will see that we provided a summary of our key guidance points for <unk> and for 2022, including the incremental impacts related to arrowhead.
At the bottom of this table, we also provide a number of modeling details.
Given all the merger related fluctuations to income statement items below EBITDA, we wanted to help investors align around how adjusted EBITDA bridges to an adjusted EPS value under our new definition for that metric.
And with that I will now turn the call back over to Louis to discuss Arrowhead.
Thanks, Rob.
I am very excited about arrowhead systems, becoming part of the new regional rexnord.
As you can see on slide 14.
After sales growing at a high teens rate over the last few years.
We believe the business is on track to generate roughly $100 million in sales in 2021.
What about evenly between the command subsystems, and Pelletizing and <unk>, which each represent about 40% of the total and the remaining 20% of sales from aftermarket parts and services.
For those who may be less familiar with Palletize. There's as the name suggests they automatically load or unload products onto or off a pallet and often operate in conjunction with a conveyor system as products are conveyed to or from them.
Regarding end markets Arrowhead is focused on selling to food and beverage producers with a heavy weighting to makers of aluminum beverage cans, which represented nearly 60% of 2020 sales with food consumer staples and other beverage applications each rep.
Presenting roughly 15% of the remaining sales.
These are very attractive end market, where we had been looking to gain more exposure for perspective, our Regal rexnord food and beverage exposure is about 9% and we expect it to reach a low double digit percentage of total sales by adding arrowhead.
Within beverage aluminum cans in particular are expected to rise in popularity from a strong secular shift away from single use plastic bottles.
Aluminum cans are lower costs for producers and are easy to recycle with extremely high recycling rates and yields which drives meaningful environmental benefits.
A big reason consumers increasingly prefer them.
We see this shift from plastic to aluminum continuing for some time and also gaining traction with packaging formats for a variety of other products outside of beverage such as personal care and home cleaning products.
Other defining features of Arrowhead, our strong research development and engineering capabilities and its core can bands in palletize their product.
<unk> deep domain expertise in the food and beverage and consumer staples industry.
Its products are differentiated and highly valued by its customers, which include many leading blue chip food beverage and personal care producers that have highly recognizable brands.
The unique value add of arrowheads products and services is evident in its long term customer relationships.
The top 10, averaging more than 20 years as well as its attractive gross margins, which had been running in the 33% to 34% range very consistently over time.
Arrow has adjusted EBIT margins have been in the high teens.
As many of you know the <unk>.
<unk> space is one that has interested regal rexnord for some time.
In addition to attractive secular growth drivers and many relevant verticals, including food and beverage E Commerce warehousing and metals and mining. We also see lots of opportunity to build on our original rexnord current capabilities selling campaign component.
And our very successful mazor transfer and diverted modules to serve customers in a more robust way by providing value added solutions and related aftermarket services.
By adding arrowhead, our sales from combining and related products services and solutions are expected to rise from about 19% of our motion control solutions segment to roughly 26% in 2022.
Turning to slide 15, I'll provide a little more color on the strategic rationale underpinning the transaction.
We've already discussed many of the end market secular trends and product and solution capabilities that support one or two.
Strong growth outlook.
We expect sales to grow at an organic low double digit rate or greater at least over our planning period.
The product portfolio is also very attractive.
Next our highly engineered differentiated valued by customers and create lots of opportunities by high margin aftermarket sales and services.
Notably the Arrowhead team launched a robust digitization effort several years ago that has added Iot and predictive maintenance capabilities that are a perfect fit with things we have been doing under our perceptive data collection and analytics platform.
Arrowheads products are also highly complementary with our rebuild rexnord portfolio and will help us build on our offering of components and modules to serve customers with more value added solutions.
From a financial perspective, the transaction metrics are attractive and consistent with our strict M&A criteria.
We are paying $297 million for Arrowhead, which does not include a separate tax benefit related to an asset step up that is worth a net $30 million in cash on a net present value basis.
We anticipate delivering at least $8 million in cost and revenue synergies by year three.
Plus have line of sight to an additional $4 million of cross marketing synergies looking a couple years further out.
Adding arrowhead is expected to be accretive to our adjusted EPS in year one.
And to achieve an ROIC exceeding 10% at least by year, five and likely sooner.
Finally, the conveying industry is highly fragmented so adding arrow hedged should help regal rexnord and build a platform for future organic and inorganic growth.
On Slide 16, you can see our current ruble rexnord offering on the left hand side, which includes a series of highly engineered components, including gear Motors are highly efficient integrated motor in gears solution tailored for conveying application.
That is another example of our powertrain offering.
Also pictured our Regal rexnord modest short transfer and divert our stations, which I'll discuss in more detail on the next slide.
On the right hand side is a sample of arrowheads products, which include <unk> <unk> a wide variety of convenience sub system as well as aftermarket services.
While being able to assemble an entire production line is not our play here.
I believe the product <unk> made clear that arrowhead will move us up the value chain into a more complex subsystem, which along with our existing offerings should allow redrow rexnord to offer more value added solutions as well as more sophisticated aftermarket services, including predictive.
Maintenance.
One area, where we see particular literally attractive opportunities around energy efficiency.
After HVAC systems and pump conveyance systems tend to be the largest users of electricity is in facilities that have them.
And increasingly end user customers are committing publicly to making their footprint more energy efficient often with a goal of net zero.
We envision being able to play a significant role on this front by leveraging our capabilities, creating industrial powertrain solution comprised of our motors and the relevant power transmission components that connect them to what the motors are powering.
In this case conveying sub systems and systems.
With our domain expertise in the conveying space.
Now greatly enhanced with Arrowhead, we expect to create more energy efficient solutions designed to address the specific needs of our combined customers.
Layering on the data collection and analysis, we do on perceptive on our perceptive platform.
Also enhanced by arrowheads, one market aftermarket and service capabilities in this area.
Should allow these solutions to become even more robust over time.
Moving to slide 17, I'd like to provide a little more detail about the particular opportunities, we see leveraging arrowhead along with our mod sort modules. Because this is where we see significant potential cross marketing synergies.
These modules can be easily integrated into an existing conveyor liner system.
Or whatever is being conveyed.
For example packages come down our central conveyor line and an e-commerce warehouse upon reaching the Mod short module can be steered offset whatever angle. The application requires intuit sortation, Ben or perhaps down in another conveyor line in the facility the.
The monitor of module is easy to integrate highly reliable quiet and safer than many conventional applications and conveys light items as light as a credit card with precision.
Which is invaluable to many customers as poly bag and lighter packaging in general is the trend.
Our monitor modules and Arrowhead are highly complementary from an end market perspective, the mod sort of offering is strong and the e-commerce and warehousing vertical where arrowhead has limited exposure.
On the flip side, Montserrat as some but rather limited exposure in the food and beverage market.
But as we have discussed other very attractive further calls across food and beverage and personal care are areas, where arrowhead has strong domain expertise and customer relationships.
While the end markets have limited overlap, we believe the product and services of Arrowhead and Mod sort are highly relevant in other each other's markets.
We also see opportunities to pull through our current Regal rexnord conveyor and conveyor related offerings through these channels.
So I hope. This gives you some perspective on why we are so excited to be bringing arrowhead and Regal rexnord together.
Arrowhead is another step in Regal rexnord is ongoing transformation.
It mixes us up into higher growth end market.
With differentiated highly valued products and gross margins consistent with these attributes.
Arrowhead is also a great example of innovation with purpose.
One of our Regal rexnord values, creating products and solutions that are purposeful for our customers and purposeful more our planet.
Growth and margin show arrowheads products are clearly purposeful for its customers.
And because many of its products support strong secular trends to more environmentally friendly packaging.
Arrowheads offering is clearly also purposeful for our planet.
In short Arrowhead is an example of where we are looking to take our business overall, so I couldnt be more excited.
And with that I'll turn the call back over to the operator, so Robyn I can take your questions.
Operator.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to some of our roster.
Our first question comes from Mike Halloran with Baird You May go ahead.
Hey, good morning, everyone and congrats on managing through all of these moving pieces here will be impressive.
Thanks, Brian Good morning.
Yes. Good morning. Thanks, So so first let's start on the capital allocation side.
Obviously the positive arrowhead.
<unk>.
The announcement, which you guys just spent a lot of great detail on also announced an uptick on the buyback plan here. So kind of a twofold question. One how are you thinking about the buyback plan and how aggressive are you willing to be and then secondarily what does the funnel look like beyond what was clearly a nice fit with the with this tuck in here.
Sure Mike Thanks for the question is Rob.
So as you know, we don't pre announce plans to do stock stock purchases, but but certainly we wanted to have the increased flexibility on this front.
For a while there as you know we were a bit limited on the buybacks that we could.
That we can be involved with through the merger timing and so therefore, we're a bit.
<unk> put on a bit of a pause there over the last six to nine months. However, now going forward. We do expect to go back to a more balanced approach, which absolutely includes buybacks and expect that to be part of our approach going forward and then I think from the from the M&A.
Standpoint in the funnel standpoint, I'll, let Louis chime in Yeah, Let me, let me add on there Mike as we said and have continued to say, we're going to be very disciplined in our approach.
Our funnels are strong we are looking at assets that make us stronger, but they have to meet a strategic need but also meet our financial metrics.
Being above 10% by year five EPS accretive.
Or one.
And they need to make a stronger and so I would tell you.
Our funnels are in a very good position.
Of course, we're very focused right now on the merger with PMC in achieving our integration synergies and I couldnt be more excited and proud of our teams were well on our path Arrowhead is another example of bringing on.
A great asset that's going to make us stronger and I'm, just and emphasize robs comments.
About the buyback the increase was was stated because it shows how the board and Rob and I feel.
The high confidence we have in the value creation that we have at Regal Rexnord right now and the opportunities to buy back so it will be balanced but.
We're really excited about where we are the <unk>.
The strength of our balance sheet and the opportunities coming forward.
Great answer and then secondarily kind of an open ended question here I haven't seen the order trends remained very good through October.
Based on the commentary it seems like the inventory replenishment side is still ahead of you.
But you also have a ton of challenges from an industry perspective, just managing through getting supply getting things out the door capacity constraints logistics everything right. So how are you thinking about the demand cadence and the sustainability of the demand cadence as we move forward from here.
And what the sustainable health it looks like a lot of the markets you serve.
Yes, so there was quite a bit there, Mike and honestly, it's what we deal with every day.
There are lots of constraints in the supply chain.
Certainly inflation going on in logistics constraints as well demand is strong demand is strong across all of our markets bluntly.
Australia, and southeast Asia, which is a small part of Regal rexnord has been a bit more effected by co bid over the last three to six months, but everywhere else is strong Europe has certainly rebounded.
All of our North American markets are strong.
From.
Inventory perspective, and restocking the supply chain constraints are challenging our ability to restock.
HVAC markets in particular.
Paul has a need for further restocking as well, but but bluntly there has been constraints in getting resources contractors for new full installations, and so we actually expect a little bit of a slowdown in full demand in fourth quarter because of that not because of the underlying demand but because.
Of the constraints and then our industrial markets are still restocking and so all of this tells US right now that we're going to go into 2022 with a strong tailwind.
Demand related so we're feeling pretty bullish going into 'twenty two as long as we can effectively manage the supply chain constraints and I couldnt be more proud of our teams and what they're doing every every one of our sites as a war room around them.
Supply chain issues.
It's the over management the disciplined over management that would ensure our success long term.
Thank you I appreciate it.
Sure. Thanks, Mike.
Our next question comes from Joe Ritchie with Goldman Sachs. You May go ahead.
Hi, Thanks, good morning, everybody and kudos as well.
Executing the transaction announcing another deal.
Thanks, Joe Good morning.
So Louis maybe maybe just kind of trying to parse out the guide I know theres a lot of moving pieces here and you guys give us the sales number at $5 1 billion for 2022.
It seems to imply mid single digit type organic growth.
My math right. So can you just maybe just give us a little bit more color on what's embedded from an organic growth perspective, and how youre thinking about pricing as well as a component to the full year guide.
Sure.
Joe.
We the topline guide at this point is a little premature the point of showing that summary was to say that we are being consistent in our communication.
Where we think we can go with the business. We're just starting our operating plans that will be meeting with all of our teams over the next three weeks and we will get more clarity so perhaps a little conservative on the top line to be blunt and so I don't really want to.
Elaborate on how we got to that number other than saying, we said that we would be at $5 billion of revenue roughly in 2022, and then with the addition of Arrowhead It takes us to five one so.
Hopefully that's a sufficient answer for you now will certainly elaborate on that much more as we give fourth quarter results, but let me talk about price cost for a second.
Again, I couldnt be more proud of our teams on how theyre managing price cost. There is no question. We're in an unprecedented inflationary periods and we're leveraging our 80 20 tools to ensure that we are pricing strategically, but ensuring that we're passing on price and not <unk>.
<unk> the full impact of inflation and in third quarter, we were price cost positive and we envision that continuing.
In fourth quarter and in 2022.
Got it that's super helpful. Maybe by quick follow on just to just to clarify on the on the synergies from the deal.
Are we still expecting $70 million to come through in 2022 or is that more kind of like a <unk>.
<unk> run rate number that youll hit by the end of the year just want to make sure I've got that.
Yeah 70 million is the annualized run rate that we're expecting at the end of 'twenty two but what I can tell you is our teams are targeting above that so that we are driving hard we are couldnt be more excited about the cost synergies opportunities with the merger and then again I can't when.
We talked about synergies I can't leave without saying.
We are thrilled as well around the cross marketing synergies. The two teams have come together in the first four weeks and identified lots of opportunities of how we are going to take like legacy PMC and legacy Pts products into multiple channels, how we're going to strengthen our industrial powertrain offering.
And our objective is to outgrow our markets by 50% with all of the cross marketing capabilities. So more to come with that again as we get into 2022.
Fourth quarter results, but I couldnt be more excited around synergies for Regal rexnord.
Great. Thank you.
Great. Thanks.
Our next question comes from Jeff Hammond with Keybanc you May go ahead.
Hey, good morning, guys.
Brian Good morning, Jeff.
So just on supply chain and the pinch points I guess, one you had talked last quarter about.
Being able to pick up market share or is that still the case and then.
Outside of industrial it didn't seem like there is really any.
Things getting worse or impacting results, maybe just level set us on that.
Yes, so so I would agree with you our teams are doing a phenomenal job of managing the supply chain I can tell you, though that everyone's burning the midnight oil has to be able to do that.
And it's been an unprecedented time. So maybe this is my third or fourth time thanking my team, but the team without that team we wouldn't be here and the performance was solid.
Thanks for that acknowledgment.
I do believe we are gaining some share on the on the margin no question, but gaining some share and that's all because of the hard work of those teams whether thats some share in our HVAC and combustion side of our business.
The move to more efficient higher technology variable speed motors and air handling solutions, gaining some share in our climate distribution as well as our climate.
European business.
On the commercial systems side, I couldnt be more excited about our digital customer capabilities. In this year that we are driving with our small and medium sized customers.
And the new product that we launched to meet the full regulations of 2021, it's highly differentiated more compact.
Better performance and at a better cost position in any one in the market today and we are gaining share and then lastly, our Pts business now our Mcs business doing a fantastic job with their tiger team around the powertrain.
And seeing some nice wins in conveying as well so all in all.
Yes.
The team is hitting on all cylinders, so really excited about where we are.
Okay, Great and then just.
On the 22, one I appreciate the early color and I know, it's early but.
Can you can you give us a sense of what you think the pro forma free cash flow generation of the business looks like.
Yes sure Jeff This is Rob Hey, we absolutely believe that the pro forma cash flow generation will be 100% conversion as we've as we've had with our legacy business, we expect that to continue going forward.
So that's where we are at this point of course again, we'll restate that it is still early days, but we're but we're working through that as we go through our annual planning process, which is upon us at this time and we will continue to update you as we as we get as we announced fourth quarter earnings and and and.
Talk about guidance again.
Okay. Thanks, guys I appreciate all the color.
Yes got it.
Our next question comes from Nigel Coe with Wolfe Research you May go ahead.
Thanks, Good morning.
Good morning.
Do you have a state wide last night with the delay at the results.
Some companies will do that try and highest stuff but.
It seems like the acquisition was probably the reason so thanks for that.
So again.
But kind of on train two is great.
I wanted to just dig into arrow had a little bit more.
The 18% still kg.
Without too much help from end markets. So I'm.
I'm just wondering the confidence on the low double digit type growth rates next three years. How does this is this a business account as much backlog gives me confidence.
In that number and then on the synergy side, it's $8 million seems like it might be.
Lenient sedative and I'm wondering is there a component input cost synergy.
I see.
Regal supplying components to Arrowhead, just wondering if thats public Sanjay.
Yes, sure. So a couple of lean so youre absolutely right. The whole reason why we waited until this morning, as we wanted to give the opportunity for <unk>.
Arrowhead team to be communicated to before the announcement went out so.
Nothing nothing.
Bluntly nefarious beyond that so.
Not no concerns.
<unk>.
This is a business that has seen significant growth and I would I would disagree with you slightly the fact that.
And the business lean is highly to aluminum cans that market.
There is a secular trend away from plastics to aluminum and actually there is a capacity constraint in the United States today, and aluminum cans, which will drive more demand for <unk>, <unk> and conveying systems, and so that that move towards more environmentally friendly solution.
Is going to be a benefit for this business going forward.
That to the fact that this business brings us.
Improved knowledge around control systems, and that we will be able to leverage our mod store into their markets and segments and then Conversely leverage their products and solutions into our markets and segments, that's going to be win win and then the last win win is exactly what you said, which is there are offered.
<unk> for us to leverage the.
Our product portfolio and the power transmission space to sell to Arrowhead, but also then to sell to arrowheads customers. So all of this as a benefit now with regards to the synergies.
You know how we like to work we like to set objectives that we can drive to and run too hard and achieved and beat so.
Certainly tell our team that we've got a little more to push there and but we feel good about the $8 million by year, three and the $12 million by year by year five.
Great. Thanks Louis.
And then just digging a little bit more on price cost.
Agree with Joe's math, it looks like mid single digit core growth is sort of like what the 5 billion reflects just wondering how much of that's just mechanically today could be priced as we wrap into 'twenty two and I'm. Just wondering if you just bring us up to speed on where we are with the NPS within climate. Thanks.
Yes, Sir Nigel let me, let me start with the last question with the NPS on climate. So.
Now caught up and we caught up in the third quarter late second early third quarter on the two way material price formulas within the climate segment in other parts of our business as well are now largely caught up again inflation continues to move in the wrong direction and it's there's always a three to four month lag, but but we're seeing.
The benefits of that as we exit the third and expect that to continue through the fourth which should be a nice tailwind as we move into 2022.
And so I think Nigel for that reason, we're not quite ready to give you any more specificity for 'twenty two on.
The impact of price or growth beyond what we've said.
Okay. Thanks, guys.
Okay.
Our next question comes from Walter Liptak with Seaport Research you May go ahead.
Hey, good morning, congratulations guys.
Thanks Welles.
Just wanted to ask a couple of them on.
The comments about 80 20, you sounded very positive it sounds like.
Everybody's speaking the same 80 20 languages.
And so.
We knew that.
As you announce the deal, but what does that mean for some of the synergies and especially for the cost savings.
I wonder if theres buckets of savings either around.
Factories or procurement or other things that 80 20 is going to.
Get a bigger lift.
Yes.
I wouldn't say so not yet I mean, we came into this with a very clear understanding that.
The former Rexnord PMC group in.
Legacy Pts group understood 80, 20, well and that was all modeled into our synergy planning I will tell you and it drives everything we do.
We talk about the Regal rexnord business system as being a bus and 80 20 is the steering wheel. It directs our all of our efforts whether its new product development.
Operational synergies or or purchasing synergies so.
At this point I wouldn't say, it's really had any change in the way, we're thinking about $120 million by year three.
<unk>.
A nice buffer for upside.
Okay great.
Just on the Arrowhead business.
I wanted to see if I can get a clarification are you selling to the food and beverage customers are you selling to systems integrators.
Is there a point at which.
Uh huh.
In conveyors, where you may be.
Constantly with with some of the installer somebody who are existing customers. Thanks.
Yes, so we're selling to both and.
Again our.
The arrowhead offering is the <unk>.
Zero overlap there.
Slight over half with campaign, but the reality is we're our customers are looking to us to provide more sub systems and this is why our mod sort has seen significant growth over the last two years two years ago, a quadrupled in revenue last year doubled in revenue.
Because our customers are looking for us to provide that sub system and arrowhead just strengthens that so we have modeled very little dis synergy with this acquisition we do.
See that as a concern.
Okay, great. Thank you for that.
Thanks, Rob.
Our next question comes from Christopher Glynn with Oppenheimer You May go ahead.
Thanks, Good morning, nice presentation today.
Hey, Thanks, Chris.
Yes, I wanted to talk about the share gain comments around the industrial powertrain offering wondering if we could get.
Some examples of specifications wins.
What maybe changes you're implementing in terms of go to market there.
Yes, sure Chris I'd be happy to.
We purposely left an example out of this earnings call because we knew we were doing go long but.
I'd encourage you to go back to the last two.
Where we gave some very specific examples, but where we're seeing wins is anywhere where.
For example, a warehouse.
Where there is a conveying system. There is an example that we've talked about historically around the customer was having challenges with there.
Gearing failing we went in with our application experience.
And we were able to identify that they oversize the motor and they had the.
Not the optimal gear solution, we gave them a solution that would save them money and has reduced their downtime significantly.
And we can put numbers behind every single one of those claims.
The customer will validate and so it's those types of examples where we're seeing wins bluntly are customers.
Don't have the level of engineering expertise and capabilities that they've had in the past, but we do because we know those products and those solutions and we know how best to put our motor with a gearing system with a.
Couplings and bearings and provide a full industrial powertrain and that's where we're seeing some wins so.
We'll make sure and we will continue to emphasize those benefits as we go forward.
Okay, Great and then a clarification on the positive price cost comments instead.
Actual margin rate or dollars.
That's on dollars. That's a dollar basis is actually dilutive to margins for us and to leverage if you just.
Because we're not the price that we're getting does cover the inflation dollars, but but again as I said.
As certainly dilutive to the margin.
Yes, Chris I'll, just add on there historically <unk> has been very focused on price cost neutral and being positive.
We are now focused on price cost positive because of that reason and so I couldnt be more proud of the team and their efforts in getting us in.
An improved price cost position in the third quarter.
Indeed.
Thank you.
Sure. Thanks, Chris.
Again, if you have a question. Please press Star then one our next question comes from Chris Dankert with Loop capital you May go ahead.
Hey, good morning, everyone.
I guess one of the very few areas.
I guess, how do we think about the cost actions going on in commercial and industrial obviously very challenged from a cost inflation perspective, just kind of can you give us an update on some of the structural actions that are going on there and kind of what we can expect in the next six to nine months here.
Yes.
So, let's let's take commercial and take them out very quickly because I'd say theyre performing very well.
No no.
<unk> that there is some.
Pressures, but the team is doing a great job of leveraging 80 20.
Rationalizing our products and solutions and making sure that we're getting.
Sufficient price.
I think you will continue to see solid performance out of commercial system.
Industrial.
It is it is our biggest challenge no question now you also know it is our lowest gross margin business and so when you have lower gross margins I mean, you have the higher material costs as a percentage of sales and so therefore.
Uh huh.
Higher impact of inflation, you add that with the fact that.
<unk> got global supply chain disruptions at a time when we launch a new product in a new manufacturing location in Mexico that still has a long supply chain right now and those delays are being realized in a tough top margin.
<unk> performance now.
We still see value creation for this segment, we still see a path to 8% to 11% as we discussed at our Investor day, but it's certainly delayed.
And so I would not expect any grand improvement in the fourth quarter, but we will continue to improve through 2022 and again our goal is to get this business to 8% to 11%.
I'll make one last point about the industrial business I realize the industrials EBITDA is 5% of Regal and will be less than 4% of Regal rexnord. So we talk about it because its a segment, but the reality is it has a small impact on the overall strong performance of Regal Rexnord.
Yes, thanks, so much for the color there much appreciate it.
Just a follow up I guess any update on the pruning actions.
You guys have been really taken.
Our focused approach to some of the cuts here I guess do we expect a prudent to kind of continue at the current rate for.
For the foreseeable future or should that kind of start to taper as we get into the new year would you expect.
Yes, no I'd tell you 80 20 is we.
That's the direction, we drive all of our discussions and so pruning will continue into 2022, it will moderate a bit but you know we are focused on the quad in the quad analysis, and so the quads or looked at once a quarter. They are trended and so a new quad is still going to show.
For example.
<unk>.
The fourth Quad, which is b customers NB products, and we're going to still have to take action on them because they don't belong.
With Regal rexnord, they need to be served they can be served through distribution, we need to move those customers onto a product and we need to grow with those customers or they don't belong.
So.
I do think it will moderate a bit Chris but youll continue to see US talk a lot about 80, 20 and pruning going forward.
Understood well be sure to send a fresh palette of five hour energy over that Biz Dev team here and congrats on the results of the deals here guys.
Yes, thanks, so much guys. Thanks.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Louis Pinkham for any closing remarks.
Thank you operator, and thanks to our investors and analysts for joining US today I Hope you got a better understanding of why despite so many external pressures confronting our business I.
I am excited about and confident in the future of Regal Rexnord.
These external pressures are real we are battling them daily but.
But we're also being disciplined about our execution on our organic growth and restructuring programs.
Pursuing PMC merger synergies and bedding, new capital deployment opportunities as we think about how best to leverage our clean balance sheet and strong cash flow to keep enhancing shareholder value.
Thank you again for joining us today and for your interest in Regal Rexnord have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.