Q4 2021 Regal Rexnord Corp Earnings Call
Good day and welcome to the Regal Rexnord Corporation fourth quarter 2021 earnings Conference call.
All participants will be in a listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star can you followed by zero.
After today's presentation there'll be an opportunity to ask questions.
To ask a question you May press Star then one on a touchtone phone to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I'd now like to turn the conference over to Robert Berry, Vice President Investor Relations. Please go ahead.
Great. Thank you operator, good morning, and welcome to Regal Rexnord fourth 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 actual results could differ materially from those expressed or implied in the forward looking statements for a list of factors that could cause actual.
Our results to differ materially from projected results. Please refer to today's earnings release, and our SEC filings on.
On slide three we state 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 financial 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 fourth quarter financial results in detail and discuss updates to our 2022 guidance. 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 Lewis.
Great. Thanks, Rob and good morning, everyone.
Thanks for joining us to discuss our fourth quarter earnings and to get an update on our business and thank you for your interest in Regal Rexnord.
While the fourth quarter continued to present, many challenges in particular around inflation and supply chain disruptions.
Regal Rexnord team met these challenges head on and delivered solid results.
In the quarter Regal Rexnord posted robust, 11% organic top line growth.
Chief positive price cost for the enterprise.
We exceeded the midpoint of our earnings per share target range and.
<unk> delivered strong free cash flow.
We closed the year with a balance sheet that is 1.3.
Three times Levered on a pro forma basis.
Which gives us lots of optionality around capital deployment.
Furthermore, with our fourth quarter orders up about 30% and mid Twenty's in January .
We ended 2021 with a record backlog and as a result have a very healthy topline potential in 2022.
These strong results are the product of disciplined execution strong adherence to 80, 20 principles price discipline and targeted over management of our toughest challenges in particular supply chain consistency logistics and inflationary pressures.
And one sign of our team's success navigating these challenges I am extremely proud to share that Regal Rexnord was recently named supplier of the year by one of our large OEM customers.
I believe the award reflects our strong service during a challenging time, which is fantastic.
But what made me even more excited it was our customers, citing alignment on our values and in particular on our value of diversity engagement inclusion and on our value innovation with purpose creep.
Creating products and solutions that are purpose built for our customer.
Through our consistent focus on improving energy efficiency products and solutions that are purposeful for our planet.
This news and our fourth quarter performance market consistent close to a year characterized by tremendous progress transforming our business into a stronger performing higher margin faster growing more cash generative and higher return globe.
<unk> enterprise.
So before going any further I want to thank all of our Regal Rexnord associates around the world.
Our strong performance at its core is about our nearly 30000 talented associates their disciplined execution leveraging their individual skills and diverse perspectives.
Always guided by our regional Rexnord values to act with urgency to serve our customers and meet our financial commitments.
Let's also not forget that during fourth quarter, we closed a transformational merger with <unk> process in motion controls business and completed the acquisition of the Arrowhead systems.
While we are only one quarter in working jointly with PMC now the motion control solutions segment and have owned Arrowhead for only a couple of months I'm extremely pleased with the positive momentum, we're already seeing behind our integration and synergy activities.
In fact, as we've conducted monthly operating reviews with our new associates from P&C and Arrowhead.
Many have remarked that it feels like we've been operating as one Regal rexnord team for many years.
This great cultural fit is the main reason I remain confident that synergies from these transactions tend to add materially to our future margin free cash flow and organic growth profile.
As we have discussed before the cornerstone of our Mcs sales synergies are the significant benefits, we see from being able to offer our customers an integrated industrial powertrain solution.
That is our motors plus the critical power transmission components that connects the motor to whatever it is power.
And we believe this value proposition will become even more compelling as we leverage data collected from all of the key powertrain components and use that data to optimize the systems performance through first step just intelligence.
So I'd like to provide a brief update on our continued progress pursuing powertrain opportunities.
Our engineering teams have been hard at work on how to optimize performance of the greatly expanded scope of powertrain solutions. We are now able to provide by leveraging the legacy Pts and PMC portfolios in conjunction with our motors.
This clearly will be a multiyear journey, but even so we have already seen some accelerated advances.
In parallel our sales teams have been able have been actively speaking with our customers about the benefits of procuring integrated powertrain solution and I'm excited about the number and quality of these conversations.
To shed some light on what im referring to this slide provides examples in powertrain solutions, we are working on.
All of these are active projects with actual customers and are in the development or quoting phase.
In each example, we have noted the principal components included in this dilution as well as some of the key benefits each can provide to our customer.
You will notice a diverse array of benefits, including energy efficiency, greater reliability and optimize performance.
As our powertrain efforts continue to advance we'll keep you updated on our progress, including quantifying the revenue impact we expect to see from selling these solutions.
Now, where we have been seeing more immediate merger related benefits on the top line is in cross selling activities, which are just getting started and are expected to ramp meaningfully as 2022 unfolds.
We will look to quantify these benefits as our efforts mature, but I think it's fair to say that from cross selling alone we'd expect sales of at least $10 million in the first year and that gross margins that are accretive to the enterprise.
Before I share some thoughts on our 2022 outlook I would like to make a couple of high level comments about the operating environment.
As you know, we and many others have been confronting a host of inflation and supply chain challenges through most of 2021 and.
And on the whole I believe we've been navigating through them as well as and in some cases, a little better than our peers, which has helped us gain some share and likely also boosted our ability to manage price.
However, as we close 2021 I would say these challenges intensified.
Freight congestion at the Port was particularly acute in the fourth quarter.
Inflation has stepped up meaningfully as well.
And labor availability and become more of a challenge for some of our businesses, especially in the United States.
We believe a resurgence in COVID-19 cases, with the highly transmissible Omicron variant has been a factor intensifying all of these headwinds.
Now the good news is an incredibly healthy demand environment, which you can see in our order rates and a healthy backlog.
So we feel good about top line prospects very good actually.
But in the last couple of months, our visibility has diminished around how quickly we'll be able to work down the backlog and around certain costs associated with serving this demand most notably freight and labor. Although we believe these peaked in fourth quarter of 2021.
As a result, we decided to take a slightly more conservative approach when updating our 2022 guidance.
At a high level, we're adjusting the top line to reflect our strong orders and record backlog.
While retaining some caution around supply chain constraints.
From a margin perspective, we're factoring some incremental pressure related to non commodity inflation in particular labor and freight.
And with that I'll turn it over to Rob.
Thanks, Louis and good morning, everyone.
You heard Regal Rexnord had very strong results in Q4.
But the team is also navigating headwinds on a number of front. So I'd also like to send my congrats to our global team for executing so well in this challenging environment.
Now, let's discuss our results by segment and then I'll discuss our guidance as a reminder, having closed the merger with Rexnord PMC. We are now discussing segment operating performance on an adjusted EBITDA basis.
We will start with our motion control solutions segment, our Mcs, which beginning in the fourth quarter of 2021 reflects the combination of our legacy power transmission solutions segment, our Pts our newly acquired Arrowhead business plus Rexnord P&C.
Organic sales for Mcs and the fourth quarter were up four 9% from the prior year on strength across most of our end markets, but with particularly healthy demand in the food and beverage general industrial and agricultural markets.
In addition, the business had a nice tailwind from share gains.
Partially offsetting these tailwind was pressure from lapping large prior year project activity and the China wind energy market.
Furthermore, and this can be said for all of our businesses supply chain disruptions continue to impact our ability to deliver resulting in increased backlog, but posing an additional headwind to the top line.
Lastly, our 80 20 related pruning actions or approximately 130 basis points of top line headwind in the quarter.
Adjusted EBITDA margin in the quarter for Mcf was 24, 5% up 10 basis points compared to the prior year with benefits from volume price and permanent restructuring actions, largely offset by impacts from supply chain disruptions and inflation, including freight labor and material.
Yes.
Orders in Mcf for the quarter were up approximately 30% and we're up at a mid <unk> rate in January both on a daily basis.
Turning now to climate solutions.
Organic sales in the fourth quarter were up 18, 4% from the prior year.
The increase was driven by broad based strength in almost all markets and with particular strength in North America residential HVAC market.
North America General industrial markets and in EMEA.
The business also continued to achieve nice market share gains. In addition price was a meaningful contributor to climate topline performance in the quarter, reflecting what is generally heightened price discipline for all <unk>, but also more specific segment specific tailwind related to catching up on.
Price under our two way material price formulas or NPS.
As you May remember dynamics related to NPS, our most significant in our climate segment.
Finally, pruning actions or approximately 70 basis points of top line headwind in the quarter.
The adjusted EBITDA margin in the quarter for climate was 19, 8% down 130 basis points versus the prior year period.
Factors impacting this margin include higher inflation, including freight supply chain related friction and negative mix.
Price cost was favorable in the quarter and helped to offset the continued impact of inflation. This dynamic was a drag on margins in Q4 and similar to what we've seen throughout the year.
Orders in climate for the fourth quarter or up high 20, and up roughly 7% in January both on a daily basis.
We continue to have healthy backlog in climate and messaging from our HVAC OEM customers remains very positive with tailwind from residential restock activity likely still mostly ahead of us.
Turning to commercial systems.
Organic sales in the fourth quarter were up 13% from the prior year.
Growth in the quarter reflects strong performance in large commercial commercial HVAC and North America General industrial markets.
We're also confident that our commercial business is achieving share gains in North America General industrial market aided by some of our digital investments.
Notably pricing was a meaningful contributor to top line performance in the quarter, while volumes were impacted by supply chain disruptions, specifically logistics challenges that that intensified as the quarter progressed and ended up being worse than we expected. These.
These pressures have bled into the first quarter, but we're continuing to work with urgency to identify and implement countermeasures.
To close out our topline discussion for commercial 80, 20 related pruning wasn't was a 180 basis point sales headwind in the quarter.
The adjusted EBITDA margin in the fourth quarter, our commercial systems was 11, 1% down 320 basis points compared to the prior year.
Despite a healthy topline headwinds from inflation mix and supply chain disruptions drove a net year over year margin decline.
When assessing commercials margin performance this quarter, it's important to understand that our commercial segment has experienced a disproportionate negative impact from supply chain and logistics headwinds. This is due partly to the segments above average exposure the seaborne freight compared to our other segment.
Not only has seaborne container inflation become particularly acute but mounting disruptions across our commercial segment supply chain have led us to book containers with shorter lead times at elevated spot rates, which has further raised our costs.
If there's a silver lining here is that much of this margin pressure is timing related and we believe this dynamic should become less severe supply chain frictions ease, enabling backlog reduction in shorter lead times between when products are shipped and when they are delivered which will likely occur over the next couple of quarters.
Actually we're already seeing some improvement in January .
Shifting to orders the demand environment for commercial remains very healthy with segment orders for the fourth quarter up mid twenties and January orders up approximately 8% both on a daily basis.
And industrial systems organic sales in the fourth quarter were up four 5% versus the prior year.
Tony actions during the quarter were approximately 320 basis points of top line headwind.
The adjusted EBITDA margin in the quarter for industrial was eight 9% up 230 basis points versus the prior year period.
Although we feel good about improved performance in industrial systems, especially due to the supply chain and logistics challenges. It is important to note that this business will see some quarter over quarter Lumpiness.
Orders in industrial for the quarter were up mid twenties and were up at a low teens rate in January both on a daily basis.
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 you will see we ended the year with a net debt to EBITDA ratio of one eight times, a one three times on a pro forma basis and consistent with our prior expectations.
Our free cash flow of $82 6 million.
Which resulted in a cash flow conversion rate of 289% or 118, 1% for the full year 2021.
Finally, we purchased $20 million of Powershares in the fourth quarter.
We have $434 million remaining on our $500 million share purchase authorization.
Now moving to the outlook.
We are raising our expectation for adjusted earnings per share to a range of $10 to $10 60.
From our prior range of $9 95 to $10 35.
The range assumes a mid to high single digit revenue growth rate, including the headwind from roughly two points of pruning.
Currency is expected to be a very modest headwind to sales.
In thinking about where to set our top line growth forecast, we tried to balance the competing dynamics of a very strong demand environment evidenced in our strong order rates and our record backlog with supply chain frictions that remained severe and in some cases have worsened plus labor availability challenges at some of our U S.
<unk>.
In addition.
Some of our plants and certain facilities at our suppliers has seen significant spikes in absenteeism that we believe are related to the latest COVID-19 variant, which has weighed on our output.
While we are consciously optimistic that conditions related to COVID-19 and the supply chain will improve as the year unfolds current conditions make us believe it is prudent to err on the side of conservatism as we start the year.
As a result, our outlook assumes we make only limited progress in 2022 towards working down our backlog.
From a margin perspective, our revised outlook factors, some incremental pressure on margins compared to our prior expectations.
The principal drivers of this heightened pressure or significant non commodity inflation in particular in labor and freight in addition to weaker absorption related to supply chain frictions, we model these dynamics being particularly challenging in the first quarter with moderate improvement system in subsequent quarters.
Regarding commodity inflation, we have started to see some leveling in the prices of our principal commodities steel copper and aluminum.
While this is encouraging we have not yet seen prices decline and our outlook assumes only modest tailwind from lower commodities in 2022.
At the bottom of this page we are providing modeling items that should help investors bridge from EBITDA down to net income and our adjusted earnings per share.
While we are choosing to err on the side of caution here as we start the year our confidence in this business remains extremely strong we have line of sight to additional margin upside through our synergy efforts disciplined cost saving initiatives and continued focus on 80 20 and lean.
We're gaining traction with our gross initial growth initiatives, especially our industrial powertrain cross segment initiatives and our clean balance sheet plus strong cash flows create material upside from capital deployment. The future is certainly bright.
And with that 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 one on you touched on phones.
If youre using a speakerphone please pick up your handset before pressing the keys.
At any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Okay.
The first question comes from Mike Halloran with Baird. Please go ahead.
Head.
Hey, good morning, gentlemen.
Hey, good morning, Mike.
Let's talk about the guidance a little bit just to make sure I understand the moving pieces here obviously, the the components of what are creating some sloping and the trajectory through the year make a lot of sense, but could you help frame how much how much pressure, we're seeing in the first quarter or give some sort of sense for what the earnings Kate.
<unk> should look like this year versus a normal year and then also maybe give some context for how youre thinking about sequential revenue trends through the year versus a normal year.
Sure. Mike. This is Rob let me first of all we should see improving revenues EBITDA and margins in the first quarter, absolutely, but to provide some directional guidance it might be best to look at how we see Q1 shaping up relative to the way. We ended Q4 or maybe more of a sequential view so from a top line perspective.
We would expect some slight improvement in Q1 relative to Q4 and this applies to all of our segments from an EBITDA margin perspective.
Its best to actually talk to that by segment. So first in commercial we would expect margins to return to rates that we saw in the first three quarters of 'twenty. One are just north of 15%.
And this is partially tied to some slight improvement in supply chain logistics, especially at the ports as well as the timing we discussed during the call.
Moving to industrial we would expect margins to approximate those that we saw in Q4, but possibly a little closer to our full year exit rate for industrial.
In climate, we would expect margins to move up slightly relative to Q4 as we address some of the electronic supply chain constraints that we talked about and then finally in Mcs, we'd expect margins to improve also a bit from Q4 as we start to realize more of the synergy savings anticipated as the year progresses.
And so when it comes to the sequential on the revenue side.
Certainly we will we will see revenues progressed as we move through the year.
Normally we're fairly flat.
In terms of.
Revenues and <unk>.
<unk>.
That cadence as we go through the year, but in this year in particular, the first quarter as those some of those logistics and supply chain challenges start to ease it will be a little lower in the first then we may have seen historically and then start to move up as we move through the subsequent quarters. So hopefully that helps.
No no that does help.
<unk> said.
In the pool side, a couple of areas, where maybe you have some tougher comps as you work through the year, maybe just some thoughts on how you think about the stability or sustainability of the underlying demand there. It sounds like backlog others are good it sounds like the customer conversations are good but well how do you think about sustainability of that and when you get to the back half of the year are there volume.
<unk> that could potentially materialize or or are the indications consistent positive growth there.
Yeah, Hey, Mike This is Louis I'm going to break that into two pieces and first HV AC and.
Realizing that residential HVAC makes up about 15% of Regal rexnord and commercial about 10.
So let's talk about residential and.
All of the all the nearer term growth drivers are positive and you're certainly probably track the Oems as well that have come out and felt the end market demand is strong we see it as well pricing is certainly going to help also especially as our material price formulas have caught up.
And then lastly, I would say.
We think about the restocking we absolutely have felt some challenges in the fourth quarter, and even third quarter, especially with the electronic supply chain and so some of the pressure we saw due to mix in Q4 should relieve itself over the next few quarters is that electronic supply chain balance.
Is out, but I'll tell Ya electronics is going to continue to be a headwind.
Headwind all year long.
With that said the longer term for residential you talked about the back half.
We believe that.
There will continued to be strength strength in raising new construction will help here as well as this.
Just the reality that with Covid, there's still significant work from home.
Activity and then lastly, I remind you that 2023, we will see a new seer rating up.
<unk>, which will be a benefit for Regal rexnord, especially as we're the leader in variable frequency and variable speed drive motor technology. So that's how I think about <unk> and so we think hvac's 2020, twos tend to be pretty solid.
Pool same for the most part end user demand remains.
Quite strong however, we did see in fourth quarter and we.
Absolutely expected it as well.
A bit of a slowdown.
Mostly because of supply chain disruptions and contractor availability and in fourth quarter of 'twenty. One there was tough compares now no longer term for 'twenty. Two we believe the demand profile is strong.
And as you know.
The 2021.
July 2021 regulation that requires all one one horsepower and above motors to be.
Variable speed is a benefit to Regal rexnord if for no other reason than our pricing levels on those products are quite a bit higher than our standard motor offering. So all in all we feel good about both HVAC and pool I will make one other point on pool, though pulls only 3% of our sales.
So it doesn't have as much influence clearly HVAC is a big part of our business.
And Lewis can you just also touch on the commercial piece in there.
Sorry, I missed I missed that thanks, yes, no. We are we see the commercial HVAC market strong this year gaining momentum through the year.
Definitely will be a tailwind for us and we've seen it in the order rates as well so.
It should be a strong commercial HVAC year for us.
Really helpful. Thanks for the color.
Sure.
The next question comes from Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, guys good.
Good morning, Jeff.
Hey, so.
You talked about the revenue some of the early revenue synergies that's great to hear I think your comments seem to suggest that the synergies. We are on track or ahead I'm just trying to get a better sense as is.
The part about it being ahead really just around the sale synergies coming faster or is there anything.
From a cost standpoint, that's that's different or better.
Yes.
Jeff This is Louis I'll take that one so from a cost synergy standpoint, Jeff I feel really confident that we're on path.
It will be as we expected to exit year, one at about a $70 million run rate.
Feel good about all areas the team is performing as expected.
From a cross selling synergies perspective.
We never came out with any guidance here and we're not ready we will likely at the towards the later in the year to come out with a more specific objective what I am seeing is really twofold. One is really excited about the industrial powertrain and our early discussions with Oems and identifying.
Opportunities and this is where I really believe that the fact that we are really the only north American supplier of that total solution and that we can optimize the operating capabilities of the individual components together because we in some cases better understand the application that our customers.
And we certainly better know our products and so bringing it together allows for improved optimization reliability and energy efficiency and that's a big driver.
What what I think the upside for us is the cross selling opportunity.
That has been a little bit more positive than we anticipated certainly so early as well in the process and this is simply Jeff the reality that.
There is significant overlap in distribution or the Pts in PMC, the former legacy businesses, but not on the OEM side, which is where the big premise for this this merger and it is absolutely a reality that we're now able to identify pull through opportunities.
The individuals.
Legacy business components to the others.
Customer base, and so that's where I'd say, we're seeing a little bit of upside that I am excited about.
Okay, that's great.
And then I just wanted to do that.
The order rates pretty helpful by segment I thought what stood out as the Mcs.
Kind of acceleration into January where the other ones, maybe normalized and I didn't know if that's.
It has to do with comps or what's different about kind of that acceleration in the huge really order rates in January .
For Mcs.
Yes, I mean this one is a pretty simple one.
It's all around aerospace and so we are seeing that market start to return.
Certainly getting orders.
Highly influencing the overall numbers.
<unk>, which we feel good about.
We like the aerospace market, we think long term, it's a growth market has certainly been challenged with with Covid over the last few years, but we think that's a good.
Market demand.
Okay. Thanks, so much guys.
Got it.
The next question comes from Nigel Coe with Wolfe Research. Please go ahead.
Thanks, Good morning, everyone.
Good morning Nigel.
Good morning, So just FYI that could.
Drop by your Booth at AHRI.
This weekend the <unk>.
System kind of empathy when he came through integration of the motive and <unk>.
Powertrain when it came through so we're seeing that.
Awesome.
Okay.
On the on the.
On sort of the price cost dynamic turns and in particular on the NPS.
Within the content business I'm, just wondering are we still below water on those MTF and Thats desktop things improved.
The first half of the year and any more color on the improvement you expect to see in commercial from <unk> to <unk>, that's quite a big jump at it just curious what's driving that.
Yes, so Nigel let me take that.
From a climate perspective.
The NPS it basically caught up.
Where we've had.
Opportunities, though is we did see some mix pressure in the fourth quarter and Thats strictly from the standpoint of the electronic supply chain being fairly constrained we absolute left business on the in the production lines that we could have shipped.
That the semiconductor supply chain was a bit more robust and so we're feeling good going into Q1 net margins.
Improved slightly because of the supply chain kind of working itself out and bluntly shouldn't take many quarters to work itself out but better than fourth quarter.
From a commercial side, it's really as simple as saying the log jam in the ports and the freight constraints had the impact on the margins the inflation and freight was significant if you pull out that inflation inflation from freight out of Q4.
We would have leveraged as we would've expected in Q4 in our commercial business in the mid <unk>.
And Thats what were expecting going into Q1 of 2022. So we have we have the absolute line of sight in that margin improvement in 'twenty two.
Okay. That's great and then my follow on is.
You alluded to the mix benefits from the CEO change.
At the end of this year. So as we go to <unk> in the Southern States can you, maybe just give a bit more color in terms of what that does for your opportunity set.
In the residential markets is there a significant uplift.
Mix from that one see a change.
Nigel I apologize.
My hearing clearly I'm not quite sure I understood. Your question could you could you please repeat it I apologize.
You mentioned.
The the CEO change.
<unk> is good news for Regal.
Looking for a bit more color there what does this kind of offer.
<unk> in terms of mix price point et cetera.
Sorry, I didn't hear C or without.
Hum.
No.
We're already starting working with the Oems clearly.
Development starts cigna.
Significantly in advance.
We actually have a new product that's going to be launched with one OEM in particular that will provide a nice margin step up.
To that 35% gross margin level that we'd like to see.
And this year.
Our requirements.
One senior level of step up.
As expected in 2023 that drives more variable speed motor requirements and so from a margin mix perspective, that's a benefit for us we are quite ready to quantify what all of that means for us yet.
Nigel but all in all it should be positive tailwind.
That's great color. Thank you very much.
Sure. Thank you.
The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.
Thanks, Good morning.
One clarification.
Clarification on backlog I think your guidance said just parcel backlog reduction expected this year so.
To what extent does that assume trend line orders.
Pretty sticky versus.
Some correction against maybe some early loading of orders.
And in recent quarters.
It's a great question, Chris actually.
And we expect.
The trend line of orders to be pretty consistent through the year why because the supply chain will continue to be.
Stressed.
And the demand continues to be strong. So do I think the backlog is elevated a bit because our lead times have extended and therefore I mean simply MRP is just driving more order rates I do but we also believe that our lead times will are and how.
<unk> started to see some decline in our lead time and yet our order rates continued to be strong. So our expectation is order rates were strong throughout the year.
Okay. Thanks, and then on the mid Forty's January orders boosted Mcs is debt.
Pure.
Pro forma organic orders period over period or is there some acquired backlog aspect to that.
No we tried to do an apples to apples comparison on that so.
Strength in orders and demand.
As I commented earlier, it's highly influenced by aerospace, but overall, we feel the demand profile in MTS continues to be strong in addition.
Although restocking did occur through 'twenty, one we're still in a process of restocking.
In that.
That market space So yes.
Yes.
January orders are solid for Mcs.
Okay, that's organic pro forma the three combined businesses.
Yes, that's correct.
Great Great and just a clarification on free cash flow.
Historically, you've guided.
Free cash flow to adjusted net income conversion.
You've switched to GAAP net income for the conversion metric, there's a wide divergence between your GAAP and your NII, obviously here so.
Just curious about that transition and guiding free cash flow.
Yes, we're still expecting free cash flow, even with you were to make the adjustment on the free cash flow side could exceed 100% for the year.
And so our calculation on that front.
Of course.
Excluding some of the onetime items there.
And we're not adding back amortization.
Our stock based comp like we would on the on the earnings side still be above 100%.
Adjusted net income.
Yes.
That's right great. Thank you.
Got it.
Great. Thanks.
The next question comes from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning.
Maybe.
Maybe just a first question around the net adjusted EBITDA margin.
I guess sort of.
Explain kind of the main sort of puts and takes relative to that prior 21% comment.
What do you think we're looking at now for 2022 and.
And the slope to get there.
Sounds like your Q1, EBITDA margins are up slightly perhaps year on year.
Just wondered about the pace of that slope kind of picking up in terms of margin expansion over the balance of 'twenty two.
Yes, it's a it's a great question so.
My expectation is is as you pointed out certainly we're going to see an uptick in margin in the first quarter, which I talked about here in the beginning.
And then we would expect that to continue to pace.
As we largely tied to the.
To the synergy savings along with the improvement in the supply chain that we're expecting as we go through the year not supply chain improvement, we're not expecting much on that quite frankly at least the first half of the year, and maybe even third and fourth quarter, but but but the synergy savings will absolutely be a paced change.
Throughout the year.
From that first quarter, and then pretty evenly paced as we March through the subsequent quarters.
Got it thank you and then.
When we're thinking about.
At least sort of organic sales trajectory and you talked about the mid high single digit.
Gross VCA dialed in.
Maybe help us understand a couple of different factors. One is just how much of a sort of price tailwind. There is in the revenue this year guided relative to what you'd seen in 2021.
And then any particular segment by segment dispersion in terms of that revenue growth rate in 'twenty two.
Yes, So let me let me take this this is Louis good morning.
You know the way I would think about it.
Is this way.
'twenty two.
We don't we don't we don't disclose price.
But from a perspective of start with the expectation of growth.
<unk>.
9%.
And go back and say, Okay. We're still on an 80 20 journey.
We do expect about 2% pruning in 2022.
We're excited about the new products, we're been working on the industrial powertrain as well as.
The cross selling initiatives and we believe that that's a point, maybe a little even more and so that would tell you that market price is about 7% to 9%.
Of that pricing is definitely a meaningful part of that seven but but again.
We won't disclose a specific number at this point.
The other thing to keep in mind is when you look at our backlog there is probably even a little bit more upside to that but.
But as Rob said earlier and the way we're thinking about the supply chain is there still pretty significant uncertainty. We don't expect significant improvement certainly not through the first half, perhaps a little towards the end of the year, that's putting pressure on our ability to do even more.
I believe the demand profile is strong.
And we're doing a nice job our teams are doing a very nice job of identifying new opportunities and.
Growing through share as well as new product and commercial initiatives.
Okay.
Great and then sort of the segment any sort of segment fleshing out sort of Mcs.
By segment, yes good.
Question.
I would tell you that the legacy.
Regal right the legacy Regal Beloit businesses other than Pts all about the same.
Mid mid to high single digits, and then Mcs on a pro forma <unk> basis, a little bit higher with the cross selling initiatives that we're driving.
Great. Thank you.
Okay.
The next question comes from Walter Liptak with Seaport Research. Please go ahead.
Hey, guys, thanks, and good morning.
Good morning wanted to ask you about the synergies and if you could just refresh us on.
The $70 million.
<unk>.
What.
You still have to go get this year to get to that $70 million and then in 2023 those synergies.
Yes, so so.
$70 million run rate coming out of 'twenty two.
What do we have to go get to achieve that at this point.
When we've talked about this broken down into three categories.
The first category is the organizational changes and coming out of 'twenty 'twenty. One we had executed on most of those and so that that's.
Thats guide going into Q1, starting a nice run rate.
Indirect material savings is on track and we feel good about that negotiating with with suppliers feel good there direct material. Yes, there is some <unk>.
Customer approvals.
Supply chain negotiation still ongoing but but on track.
The footprint rationalization is more weighted towards the end of next year in 'twenty three but all the planning is as we expected at this point. So we feel good at that that $70 million coming out of 2022.
Coming out of 2023, we're expecting $100 million.
Much more weighted to the supply chain excuse me much more weighted to the footprint rationalization activities and so that's that's where those really start to accelerate in 'twenty three planning feels really good though.
Well, so we're pretty confident on the cost side.
Alright that sounds great. Thank you.
And then.
I guess as you're as you're working on the synergies.
The cash flow is going to be coming through.
I Wonder if you could talk a little bit about.
About the Arrowhead acquisition and how that.
The integration is going and how.
Has your appetite for doing other deals in 2022.
Sure.
Arrowhead is going well.
We've owned the business for a couple of months now this was an opportunity for us to acquire into a space that are growing.
Prior to <unk>.
An accelerated rate.
18% CAGR over the last three years, we're forecasting 10% plus.
For us over the next few years.
That business. It also gives us quite a few vectors for us to look at additional acceleration of growth as we've talked about historically, our mod sort offering which is well suited for the e-commerce space, which has grown significantly under our ownership over the last three years.
Will accelerate because of arrowheads competency in providing a subsystem and their control engineering competency and so synergistically really just a nice fit for us.
From a from a disciplined capital allocation perspective, I can tell you our funnel is strong.
I like what I see I think there is opportunity I will tell you, though we will be disciplined as we've talked about in the past, we will not overpay it needs to be in a market that is growing above.
Sorry.
Our business in a market that's growing above GDP.
It has good gross margins, 35% plus or a path to get there accretive first year.
ROIC.
10% year three year five is highly strategic so we'll be disciplined financially, but it needs to strengthen our position.
Like I said I think the funnel is strong.
We're actively talking about a number of opportunities we won't shy away from an.
An acquisition in 'twenty, two but what I will tell you is it won't be Mike.
My guess is.
You won't see anything in the short run, but perhaps later in the year into 'twenty three.
Okay, great. Thanks for all that color.
Sure.
The next question comes from Chris Dankert with loop capital. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions.
Good morning.
Fully fully appreciate taking a somewhat.
Somewhat conservative hack at the guide here.
But just trying to think out loud if input and freight costs don't kind of either as expected here. How quickly can we course corrected and readjusted pass that pricing sort of is there a way to get ahead of it a little bit more quickly than in the past and any comments on just the speed there.
Yes so.
We are using in some instances, Chris surcharges surcharges allows us to move faster than a normal.
Price list price increase and so that has helped I would tell you that the.
The pressure we saw in fourth quarter the inflation for sure was partially due to.
Our supply chain constraints and the need to go to the spot market too.
Confirm containers and by the way the inflation in the spot market was up 125% in fourth quarter, a lot of which was driven by that.
The big retail component of the end of the year and the Christmas holidays, and even the Chinese new year holiday, we are better able to manage through that because of the reduction in supply chain constraints, we're seeing into coming into Q1, So we feel better around the cost profile, but it's still.
Inflated over 'twenty, one and then like I said to be able to go for price, we definitely have used surcharges to help us.
Address this accelerated inflation.
Got it got it that's helpful.
And then he got very excited to hear more about the cross selling synergies over time here, but is there also kind of a margin opportunity tied to that cross selling since by definition. A lot of these are going to be more system based sales or is that too optimistic to way to frame it.
The industrial powertrain I would say absolutely.
Theres going to be some margin opportunities, especially with the Oems right.
We have a little bit lower margins with Oems and then have a little bit higher margins in the aftermarket, but because we're able to provide a optimal solution. It should be a mix up from a cross selling perspective.
I would tell you.
It's not about the optimization piece, it's just simply about selling.
Legacy Regal components into the PMC channel and the legacy PMC components into the Regal OEM channel so, but so I don't believe there is a margin uplift there there is for overall Regal rexnord, though because of course, the Mcs segment.
Margins are about 500 600 basis points above our fleet average so from a mixed perspective, that's a benefit for sure.
Got it got it thanks, so much for that and best of luck you guys.
Thank you Ross.
Yeah.
As a reminder, if you have a question. Please press star then one to be joined into the queue.
The next question comes from Joe Ritchie of Goldman Sachs. Please go ahead.
Hi, Thanks, good morning, everyone.
Morning, Joe.
So I guess my first question you guys touched on the M&A.
Yes piece of the capital allocation bucket for this year I'm just curious does it seem like you have much dialed in for buyback I know you raised your authorization last quarter.
How are you thinking about that toggle for 2022.
Yes, Joe This is Rob absolutely, we intend to remain balanced in our capital allocation and that does absolutely include the optionality around buying back our shares which we've done in the fourth quarter and and as an option for us going forward. However, it isn't in any in any way embedded in our guidance at this time, but it's absolutely.
<unk> an option for us and that's the way we're thinking about it.
Got it okay that's clear.
I guess the question I know that you guys historically.
<unk> had been reticent to give you a pricing thats going to come through this year, but I'm curious when you think about all the puts and takes on price costs.
And the margins that you've given us for the first quarter and through the year, how do you see that relationship.
Trending throughout that throughout most of 2022.
Yes, Joe this is Rob again.
Absolutely.
Price cost is going to we expect that to be positive as we move into.
22 will be a carryover at least a couple of points there end of 'twenty two.
And.
We've been getting better at getting leverage on that price as we move through the year over the last we've been price cost at least neutral over 17 quarters now, we keep improving our ability to capture more price to cover off on that margin.
Rag that we've that we've seen in many of our businesses some businesses its elite easier than others, but we're absolutely seeing that improve and we expect to see that improve throughout the year. So therefore.
Alex.
The cadence of that improvement will continue and will and we will see that in our margins each quarter moving forward that would be the expectation, but I'd also want to remind you that.
Price cost is certainly one that.
That we see as a positive, but we still have a lot of other inflation that's impacting our business.
Such as labor and freight that we talked about today. So those are other areas where we.
And we do have surcharges as Louis discussed just a few minutes ago that are helping to offset some of that impact, but again that is impacting our business and Ken can drag a little bit on some of the improvement you might naturally expect with the carryover and additional price coming through this next year, Hey, Joe Im going to add one other comment and clearly I agree with everything Roger.
The other piece to keep in mind, we are getting more mature every day around how we drive 80 20.
820 helps us know, where we should be driving price versus where we should be driving more customers to a product to drive efficiency in our manufacturing facilities. So on top of all of what Rob shared 80, 20 should continue to give us momentum through 'twenty two.
Great. Thank you.
Great.
This concludes our question and answer session I would like to turn the conference back over to Louis Pinkham CEO for any closing remarks.
Thank you operator.
And thanks to our investors and analysts for joining us today.
As I consider 2022, Theres a lot to be excited about even with the challenging operating environment.
We're starting the year with a record backlog our team is executing at a very high level and we see growing revenue and margin tailwind from our M&A synergies from further capitalizing on the benefits of 80, 20, and as our lean initiatives keep maturing.
All of which in the coming years are expected to drive significantly higher gross margins.
This operating performance support strong free cash flow and along with our clean balance sheet means sizable value creation upside from capital deployment.
Frankly as much progress as we have already made I believe we're still in the early innings of transforming our business. So.
So I look forward to sharing further updates in the future.
Thank you again for joining us today and thank you for your interest in Regal Rexnord.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.