Q1 2022 Regal Rexnord Corp Earnings Call
Good day and welcome to the Rexnord first quarter 2022 earnings conference call and webcast.
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I would now like to turn the conference call over to Mr. Robert Berry, Vice President Investor Relations Mr. Barry the floor is yours Sir.
Great. Thank you operator, good morning, and welcome to <unk> first quarter 2022 earnings Conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Ralph Great hard, 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 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 <unk>, we speak that we're presenting certain non-GAAP financial measures in the presentation. We believe 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 <unk>.
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 and Mark will then provide our first quarter financial results in detail and discuss updates to our 2022 guidance. We'll then move to Q&A after which Louis will have some closing remarks.
Thanks.
And with that I'll turn the call over to Lewis.
Thanks, Rob and good morning, everyone. Thanks for joining us to discuss our first quarter earnings and to get an update on our business and thank you for your interest in Regal Rexnord.
I am really pleased to report that 2022 got off to a very strong start for Regal rexnord with solid first quarter operating performance plus significant progress on our M&A integration and longer term growth and margin initiatives.
In the quarter the company achieved 15% organic top line growth.
Posted 200 basis 280 basis points of adjusted gross margin expansion.
And realized 250 basis points of adjusted EBITDA margin expansion.
Our topline performance was boosted by clearly identify a bull share gains in many parts of our business, while our margin expansion was underpinned by among other factors achieving positive price cost and realizing strong merger synergies.
Yes.
And with first quarter orders up 10% and our record backlog our revenue prospects are solid.
Our PMC and Arrowhead integration activities are progressing nicely and I'd like to congratulate the PMC integration team that through strong execution was able to accelerate a number of our synergy actions, allowing us to start realizing savings a bit sooner.
Then we had previously planned.
While our results in the first quarter were strong the global supply chain continues to be challenged and new supply chain headwinds arose during the quarter related to Covid containment efforts in China.
The good news is that our Regal rexnord team has been successful confronting all challenges head on and I believe that is inherent in our results and updated outlook.
So before going any further I would like to say a sincere. Thank you to our 30000 associates around the world.
It is your disciplined execution embrace of our 80 20 principles and continued adherence to our Regal rexnord values, even as we faced persistent personal and professional challenges that is allowing us to serve our customers at a high level.
<unk> sure.
Meet our financial commitments, while continuing to invest in our business.
One of the things I am most proud of and most excited about as I look ahead are the share gains our teams have been achieving in recent quarters.
I attribute these gains to a number of factors, including execution, that's a little better than some of our competitors. Our 80 20 mindset and now our digital investments that are making it easier for our customers to transact with us.
New product development has also been gaining momentum as our team strengthen the muscle around driving customer intimacy and leveraging voice of the customer to make products that are purpose pool for our customers and deliver value they are willing to pay for.
Value, we measure with the gross margins, we earn on selling them.
A common denominator of all new product development at Regal Rexnord is being mindful of our business purpose.
Creating a better tomorrow by energy efficiently converting power into motion.
And while driving energy efficiency is central to our purpose. Our teams are also thinking more broadly about the environmental impact of our products.
A great example is pictured on this slide.
Rexnord branded gear drive sold through our Mcs segment, which is commonly used in metals and mining pulp and paper and aggregates end markets.
In the example, pictured a customer in the aggregates market was having to perform excessive oil changes because it did not have a good way of measuring oil quality and its prior gear drives.
While run time is typically used to tie morial changes.
This is a rudimentary approach and often results in excessive cost and oil waste.
In response, our Regal Rexnord engineers developed a continuous oil monitoring solution with an Iot sensor and control board that uses proprietary algorithms to identify when oil degradation has occurred.
The result is increased run time reduced frequency of oil changes lower operating costs and lower hazardous waste disposal.
The gear drive is also equipped with remote monitoring capabilities, which connects to an online dashboard and enables robust diagnostics and prognostics, resulting in further operating efficiency gains for the customer.
A real win.
Before turning the call over to Rob I'd like to share some perspective on the operating environment expected in second quarter.
As you May remember when we set our guidance for this year, we decided to take a more conservative approach, capturing our strong orders and record backlog, but retaining some caution around supply chain constraints and inflation.
In short I'm glad we did because unfortunately leave the operating environment became riskier during the first quarter related mainly to the situation in Ukraine and to a lesser extent, the China government's COVID-19 containment efforts.
The situation we are experiencing in China included a whole city lockdown in Shanghai, starting on April one.
The local port is open but logistics around it had been restricted.
For Regal a couple of our facilities were impacted but we're able to resume partial production earlier this week and should be fully operational in may how's.
However, we continue to confront challenges related to a number of our suppliers not being fully operational.
Fortunately all of our associates in the region are safe and notably vaccination rates among our team in China are nearly a 100%.
As a result of the Lockdowns, our sales have seen a modest negative impact to start second quarter. However.
However, net of expected catch up activity and assuming current plans for relaxing raising government COVID-19 containment protocols. We believe the ultimate net impact will be minimal for Regal rexnord.
Turning to Ukraine, I think it goes without saying that this situation is both horrifying and saddening and our thoughts and prayers are with the people of Ukraine.
From a business perspective, Regal rexnord has very little exposure to either Russia or Ukraine.
That said the macroeconomic ripple effects of the crisis are just starting to be felt but likely raise risk to the macro outlook in Europe , and perhaps more broadly.
I'm not going to speculate but rest assured that we are monitoring the situation closely and we will remain focused on what's under our control.
Keeping our associates safe executing our M&A synergy plan continuing to pursue our numerous growth and margin expansion initiatives and remaining balanced when it comes to capital deployment.
And with that I'll turn the call over to Rob to take you through our first quarter performance in more detail.
Thanks, Louis and good morning, everyone. As you heard radar Rexnord had very strong results in Q1, despite having to navigate a number of persistent headwinds. So I'd also like to thanks to send my thanks to our global team for executing with discipline in this challenging environment.
So now, let's turn to our first quarter segment financial performance.
Starting with our motion control solutions segment, our Mcs organic sales in the first quarter were up nine 9% from the prior year.
The result reflects broad based growth, but with particular strength and then general industrial forestry and agriculture end markets, partially offset by lapping prior year large project activity in the wind and helicopter aerospace markets.
As in recent quarters supply chain disruptions continue to impact our ability to deliver resulting in increased backlog and posing a headwind to the top line.
This theme of supply chain related backlog build can be said of all of our segments adjusted.
Adjusted EBITDA margin for the quarter for Mcs was 24, 8% down.
Down 140 basis points compared to the prior year factoring in commodity inflation higher freight cost updated corporate cost allocations and FX headwinds largely offset by <unk> related to favorable price realization merger synergies restructuring actions higher volumes and mix.
These results were in line with our expectations and we remain on track to deliver the targets we set when we announced this transformative merger.
Orders in Mcf for the quarter were up approximately 7% and are tracking slightly down in April due primarily to some of the lumpiness, resulting from a few large project orders in the prior year prior year months, both on a daily basis.
Turning to climate solutions.
Organic sales in the first quarter were up 14, 9% from the prior year. The increase was driven by broad based strength, but particularly in North America residential HVAC in EMEA and in North America General industrial.
The business also continued to achieve nice market share gains in the quarter.
The adjusted EBITDA margin in the quarter for climate was 21, 1% down 20 basis points versus the prior year period factors impacting this margin include commodity inflation higher freight costs and supply chain related frictions, largely offset by price realization and restructuring savings and positive mix.
Orders in climate for the quarter were up approximately 11% and our down modestly in April which we see is timing related and we fully expect to move back to at least neutral within the next few weeks despite tough order comps based on our customers' forecasts.
Turning to commercial systems.
Organic sales in the first quarter were up 24, 8% from the prior year.
Growth in the quarter reflects strong performance in North America General industrial pool pump and large commercial HVAC.
Our commercial business also continues to achieve meaningful share gains in the North America General industrial market tied to some of our digital investments.
The adjusted EBITDA margin in the first quarter for our commercial systems was 21, 1% up 510 basis points compared to the prior year, reflecting favorable favorable price realization positive mix and volume growth, partially offset by commodity freight and other non material inflation. In addition to costs associated with.
The supply chain disruptions.
While performance was strong in the commercial systems segment during the quarter and the team is executing extremely well a portion of the strong EBITDA margin performance was related to the annual inventory revaluation at the beginning of this year and the timing of the associated inventory movements. We expect this segment's EBITDA margins to return.
Turn to more normal levels in a range of roughly 15% to 17% through the remainder of the year.
The inventory included in the annual revaluation is sold.
Shifting to orders segment orders for the first quarter.
We're up.
11% and April is tracking roughly flat, which is also consistent with our Q2 expectation.
In industrial systems.
Organic sales in the first quarter were up seven 1% versus the prior year principal drivers included strength in Americas General industrial markets, partially offset by weakness in Asia.
The adjusted EBITDA margin in the quarter for industrial was eight 4%.
As we continue to improve the operational performance of this segment.
Orders in industrial for the quarter were up approximately 16% and are tracking at a similar rate in April on a daily basis.
On the following slide.
We highlight some key financial metrics for your review.
Couple notable highlights.
First on the right side of this page you will see that we ended the quarter with a net debt to EBITDA ratio of one seven times or one five times on a pro forma basis second our free cash flow in the quarter was negative $19 $3 million.
While we historically see.
A slow start to free cash flow at the beginning of the year. These results were slightly below our expectations the.
The supply chain headwinds impacted our inventory balances at quarter end a bit more than initially expected. We see this is timing related and fully expect to achieve at least a 100% free cash flow conversion rate for the year.
Finally, we spent $114 million on purchasing our shares in the first quarter and now have $320 million remaining on our share purchase authorization.
Moving to the outlook.
We are raising our expectation for adjusted earnings per share to a range of $10 10 to $10 70.
From our prior range of $10 to $10 60.
The range continues to assume a mid to high single digit revenue growth rate.
Now before we go to questions I'd like to touch briefly on our decision to align our inventory accounting approach from LIFO or last in first out to the FIFO first in first out method.
As of January one 2022, the company had just under 50% of its inventory all in the U S accounted for under the LIFO method and the remaining 50% under FIFO.
Aligning the enterprise on one methodology provides for better consistency, resulting in improved comparability across segments regions and business units.
Making this adjustment now at the start of the first full year. Following the recent merger with Rexnord PMC and the acquisition of Arrowhead systems also makes sense.
In addition to the consistency and improve comparability benefits FIFO allows for better matching of cost of goods sold revenues in a given period and it reduces the administrative burden of determining LIFO equivalent valuations from a guidance perspective. This accounting change is only a negligible impact because we had not anticipated any additional LIFO related expense.
In our 2022 outlook to begin with and the cash tax implications, resulting from this change should not impact our ability to achieve our targeted 100% annual free cash flow conversion.
We've included a table in the appendix of this presentation to reconcile the moderate impact of this change on our P&L.
I will wrap up this call by saying that we are very pleased with the Q1 results and our team's ability to execute in an extremely challenged challenging environment. We are meeting all of our expectations with the merger as well as the newly acquired Arrowhead business and our outlook remains very positive considering we.
We're still in the early stages of our continued transformation.
And with that operator, we are now ready to take questions.
Alright, Thank you Sir.
We will now begin the question and answer session.
Ask a question you May press Star then one on a touchtone phone.
Susan a speakerphone, please pick up your handset before pressing the keys.
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Your question. Please press Star then two.
Again. It is star then one to ask a question at this time I will just pause momentarily to assemble our roster.
And the first question, we have will come from Mike Halloran of Baird. Please go ahead.
Hey, good morning, everyone.
Good morning, good morning.
You know our industrial orders up it sounds like the rest of them were closer to flattish cumulatively.
But you also have a pretty robust backlog you know maybe talk about the relationship you see between the orders and.
And the backlog as you work through the year here.
Obviously, some level of slowing in orders was inevitable given how the backlog is as materialize, but you know maybe put that in context of how youre thinking about the revenue growth the underlying demand and how this matching or mismatched materializes as you move forward if that question makes sense.
Yes completely Mike I will clarify a couple of things, though orders were up.
10% in Q1.
It's actually yes, sorry, Louis I apologize I'm in an April I apologize.
Okay, Yes, yes.
No that's okay. That's okay.
I'll make a point.
No.
You think about some of the businesses and you look at the compares year over year. For example April last year orders were up 100% for our climate business and so the compares are a little bit top.
Nevertheless.
Youre right.
Yes.
<unk> built a pretty strong backlog, our backlog is roughly up 30% year over year in Q1, and if you looked at it.
Ending backlog ended the year was actually up 60% year over year and so the backlog is quite healthy and strong we are not anticipating a significant reduction in backlog through this year and our current guidance.
And that's a conservative approach bluntly, it's all around the supply chain.
The Merck Ignace and volatility that we see we still believe that there is strong demand in most of our markets served.
And so from that perspective.
We're feeling pretty good about the opportunity for this year.
And the progression through the through the year and the backlog will certainly support it.
Does that help Mike.
Yeah, no no that does.
And.
The follow up I suppose is when you think about the order patterns from a customer perspective.
Get a sense that there was a pull forward of some of these orders and so inevitably you get maybe in the order of air pocket, but that's already assumed in backlog.
And maybe just a discussion on inventory levels and purchasing patterns at your customer level.
Yes.
Got it.
Great question.
As least lead times have extended.
ERP systems of our customers.
Ramp up their minimum order quantities and demand requirement really no different than what we're dealing with our supply chain as well as our supply chain lead times have increased we've certainly ramped up our needs as well. So I think there is some of that.
When we think about Q2 as an example, we're forecasting orders in Q2 to be relatively flat.
Compared to last year now from a full year perspective, we do expect the orders to be up year over year, but Q2, we expect them to be relatively flat. So yes, I absolutely believe.
Because of the supply chain challenges that our customers have.
And the longer lead times, our customers have placed a bit stronger demand on us to satisfy those requirements.
That makes a lot of sense I appreciate it.
Sure.
Yeah.
Next we have Jeff Hammond of Keybanc.
Hey, good morning, guys.
Good morning, Jeff.
Just back on the kind of order movement.
You mentioned Louis.
Some markets still feel very good and maybe there's just some timing and some maybe some pockets where you're seeing real slowing. So just maybe talk about where you think there's there's real demand risk versus just some.
Comp noise or supply chain noise.
And I would tell you Jeff its already embedded in our guidance, but wind is a market that we've seen soften mostly because of larger projects last year and the compares.
We are we are seeing some softening in China.
Moderating certainly concerns around Covid lockdown.
And then we have concerns around EMEA as well.
Now, we haven't really seen that in a demand or order slowdown bluntly, we did initially but that rebounded.
Through the quarter at our European operations and businesses, but that's that's a current certain for us.
They're wise.
Everything is quite strong and positive.
And so.
Yeah, we feel good and part of the reason why we raised our guidance slightly.
Because we feel good that the demand is still there and they're still strengthen that demand so really from a market perspective.
Other than wind.
And a little bit in China.
We think the overall demand is still healthy.
Okay very helpful. And then just in M C S.
You know, Rob I think you mentioned.
Some corporate allocation I'm, just wondering what the core incremental margins were in Mcs and.
If there was a synergy number you know that.
That you were able to give us in <unk> and kind of how that builds through the year.
Sure so the.
The incrementals in Mcs or a little below what we might not normally see in that business due to some of the.
As I said the <unk>.
Inflation that we're seeing that hit that business the freight inflation and other inflation. So it's a little bit lower than what we might expect.
We expect that business to perform above 30%.
And then the.
Second half of the question was around the <unk>.
<unk> energy that we saw in the in the in the first quarter, we saw about $8 million to $10 million of synergies that came through in the quarter, which is.
Really in line absolutely in line with what we thought even tracking slightly ahead. If you will in terms of the synergy realization.
Okay, and how do you see that building I mean.
On the point of kind of.
The temporary price cost dynamics freight and then the build in synergies like just just trying to get a better sense of kind of how the margins.
Kind of trend through the year is this the low point et cetera.
Yes, So let me give you some yes, let me give you some color on that so the margins in Mcs the expectation there that the margins will continue to improve every quarter as we go through the year.
And that is <unk>.
Absolutely tied to the performance that we're talking about and on the synergies and realizing those synergies and as we said we have good visibility and are very confident in our ability to achieve the $70 million exit rate as we come out of this first year.
Okay I appreciate it guys.
Great. Thanks, Rob.
And next we have Nigel Coe of Wolfe research.
Okay.
Thanks, Good morning, everyone.
Good morning.
Morning, guys.
Going back to the orders I mean, you've got really really impossible comps coming up so I wanted to focus more on the book to Bill I mean, you talked about the backlog build.
During our <unk> very healthy, but what about April even though you had down orders with are you still building building backlog.
And in April .
Yes, we're not anticipating to build further backlog in April so our book to Bill was and I don't have the numbers exactly right in front of me Nigel but it was about 1.1 in first quarter and it should be relatively flat.
For second quarter.
Okay. Thanks.
Thanks, that's helpful. And then just going back to a FIFO the commercial margins. So it sounds like this was made.
Maybe a consequence of this change from LIFO to FIFO the flushed through in the commercial margins number one is that correct and then secondly, any way to think about what the benefit would have been intra quarter for <unk> from that change.
So thank you for.
So the question, but let me be very clear the the first quarter commercial margin.
Was.
But more around the benefit of the annual inventory revaluation relative to the timing of the inventory movements that were included in the rebel. So when you do your cost roll. The assumption is that there is the theory that there's perfect timing with the with the terms of your inventory, but when there is a bit of a.
Timing difference, which is what happened in commercial you will see that that flows through at a higher rate in other words not as much inventory flowed through in the quarter that that was assumed when we did the reevaluation. So it isn't related to.
The life that changed from from LIFO to FIFO now.
When you said your second part of that question was.
What about the.
Impact.
<unk> of that change to the business an immaterial amount.
The impact of Q1 would have been very immaterial, but it would not it is not the reason for the commercial margin improvement that we estimate that that.
Is that impacting commercial was approximately $10 million and so if you were to look at it that way and you were to back out that $10 million from that number you would see the margins in commercial are closer to about 17%.
Relative to the 21% that was posted.
Yes Nigel.
And a follow on here because when you look at commercial systems and you probably recall that I've said, a number of times, our commercial systems business is a diamond in the rough and we are starting to see some of those benefits. So the fact that even.
When you think about the business when you pull out the cost re role and its about 17, 17% 18%.
EBITDA margins in the quarter that solid and they were hitting on all cylinders they've got good strength in new products, our digital customer.
Capabilities to grow share have improved and our service levels are allowing us to slightly beat our competitors and win more so commercial had a very strong quarter now.
As Rob said, we think that will moderate slightly in our our belief is that the EBITDA margins will return to about a 15% to 17% range for the remainder remainder of the year, but Q1 was a strong quarter for our commercial systems business I couldnt be more proud of that team.
Yeah, and then 15% is still very healthy okay. Lewis. Thank you. Thank you very much sure.
Next we have Chris Glenn.
Sure.
Thank you good morning.
Good morning.
Curious.
And if you think about the rexnord piece here, they've got a nice aerospace business I think it's OE centric so.
Little bit of a delay versus the aftermarket cycle, but how's that looking for you know.
Ramp intensity as you move through the quarters this year.
What effect might that have on <unk>.
<unk> EBIT margins relative to the first quarter, maybe a bit similar to how you talked about <unk>.
Commercial subsequent to <unk>.
Yes sure.
We do have a solid strong aerospace business.
Pre COVID-19 , it's about $250 million.
Dollars in revenue, that's about $50 million from the legacy Regal.
$200 million from Rexnord that business has been rebounding.
Strong orders growth, we expect revenue to continue to grow through the year I would tell you the margins in that business or are not quite at our fleet average and so we're working those and we see a clear path to get those to our fleet average more of the benefit of the <unk>.
<unk> EBITDA.
EBITDA improvement is going to come from the synergies and we see a step function every quarter.
<unk>.
As the quarter progressed this year and again more from synergy benefit then then from aerospace.
Great. Thanks.
And then overall just going back to the FIFO change so as product expenses and inflation push you a little right how should we think of.
That impact do you expect to maintain price cost positive every quarter. This year like for the last five.
<unk> plus.
Yes short answer on that one it absolutely.
We have great confidence in our team's ability to implement price increases on our non contracted business.
Effectively to cover off on inflation and then our two way material price formulas, while there is often a bit of a lag.
We were very confident that those will catch up but we think we will be price cost positive every quarter. This year and Chris It's actually been 18 quarters that we've been price cost positive and I Couldnt agree with Rob Moore, the way, we manage our business our cadence or 80 20.
The approach, we will we will manage through the inflationary period, which we do expect but we will be price cost positive.
Great I appreciate the color. Thanks.
Sure.
Okay.
The next question will come from Julian Mitchell of Barclays.
Yeah.
Hi, good morning.
Good morning, maybe just a first question around.
What youre seeing and sort of expecting in the U S consumer are already facing businesses.
You did not call those out as an area of concern, it's clearly something investors, though are extremely concerned about right now.
So maybe help us understand kind of how you see those resi orders in climate playing out this quarter and also sort of expectations around the pool segment within commercial.
And just sort of how youre assessing kind of sell through sell in dynamics.
In that U S resi market.
Yes, great Julien I'll take that here. So first of all we think the underlying end market demand remains an incredibly healthy.
We had anticipated a slower order growth rate in climate, mostly due to very tough comps.
In my earlier comments I had I had shared that member.
Remember that orders were up 100% year over year in April .
And our climate backlog is up 20% year over year at the end of first quarter and was up 60% year over year at the end of last year. So our backlog is very healthy and again, we think the underlying demand is healthy. We also believe that there is a restock opportunity that remains.
As of the supply chain constraints, we work with our Oems very very closely we understand they're there with inventories in there.
The simple fact that we haven't been able to supply, especially the variable speed motors to the extent that they would consume them and so with that and given that strong <unk> new construction. The fact that we believe we are gaining share as well, especially in the variable speed motor space, where we can differentiate on.
Technology, but also on our service levels, we're feeling pretty bullish.
And then longer term work from home I E to the Reg changes of 2023, there is still a tailwind here that will benefit.
Climate side of our business certainly certainly in 'twenty, two and then specific to pool.
I'll remind everyone that pool is only about 3% of our sales.
Well wealth some inventories are currently high.
In the channel right now.
Those are not our inventories we have validated that we are close to our distribution channel.
We are close to our Oems, we know that very clearly.
Take that and you know you look at the the pool Doa regs that went into place in the first half of last year, that's a bit of a mix up for us and then the just the secular trends that are highly favorable around southern.
Southern migration backyard living millennial entering in the housing market. The urbanization. All of these are benefits and I think you saw in the results of our our Oems and distributors.
Theyre doing well you add that too.
Our new product development efforts and a new product that we've launched in the last six months that is more compact and higher energy efficient than our competitors, we feel theres strong tailwind now again, it's 3% of our business, but we feel a strong tailwind.
Thanks, and then just my second question would be sort of any.
High level context, you could give us around the second quarter expectations I realize you don't give explicit sort of quarterly financial guidance, but.
There is a sort of a fast moving.
Macro context here, so should we think about second quarter being sort of sales up slightly sequentially, maybe margins down slightly sequentially is that the right kind of framework.
Yeah, Julien Ravi I'll take that one so you are right we don't normally give.
Lot of color on the next quarter, but as you said considering the volatility in the market.
It certainly is a benefit to do that.
First of all we'd say their top line relatively flat to slightly up overall when you're looking at.
Cadence there from first to second.
We would say that our and then when it comes to margins.
Overall, EBITDA margins should be relatively flat in the second quarter to the first quarter of course, there's a little bit of movement between the segments. We have already commented earlier that we expect commercial to fall in the range of around 15% to 17% over.
Over the next few quarters. So that also applies to the second quarter.
Industrial.
We see that to continue to improve in Q2 and beyond based on the operational improvements we've made in that business, we see climate relatively flat.
Relative to the first quarter and then as I said earlier Mcs.
Continues to improve at a moderate pace as we go through each quarter throughout the year.
When we make our when we create our forecast at this point, we're looking at that supply chain.
The issues around supply chain those challenges in particular, our assumption is that stays relatively constant with the way. It is today, but we're also expecting to China actually recovers a little bit in may so.
Hey, it could be a little better than what I, just described could be a little bit worse than what I. Just described but I think thats pretty much middle of the fairway and the way we're thinking about it right now.
Very helpful. Thank you.
Great.
The next question, we have will come from Chris Dankert of loop capital.
Hey, Thanks for taking the question I.
I guess zooming out a little bit to a higher level here.
A couple of years back we'd highlighted some of the product rationalization effort. Some targets there I guess any kind of update spin.
As specific as you want to get by by segment. Your kind of overall just on how far we are along down that path on product rationalization here.
Yeah.
<unk>.
Good question, Chris I would say.
Different by different segments climates, and really good solid position, probably not not much more to do.
Commercial is still working through and really driving 80 20 in and thinking as we've talked.
Industrial will continue to work pruning and managing our SKU count and to drive to higher margins. That's a big part of our 80 20 initiatives there and then lastly Mcs.
Nice part about Mcs of bringing these two strong businesses together is product line simplification and in a number of spaces. We just reviewed something the other day that that we'll be able to take more than 50% of our skus out of our product line and see over time 10.
Incremental savings that we haven't even baked into our plans yet and so there's opportunity still out there. What you can be assured of Regal Rexnord is that we drive 80, 20, and we will constantly evaluate segments of reevaluate to understand how best to serve.
Our highly valued customers, but also to move more and more of our products to a products. So I'm not giving you exact numbers here Chris.
I would tell you there is still.
There is still plenty of self help that we have here.
No. That's a really helpful update. Thank you so much for kind of walking through that.
I guess the follow up I'd have here is you know thinking about footprint consolidation specifically for industrial I think the historical plan was hey, let's let's cut out about eight locations. There if I look back at the filings you guys have we havent made a lot of progress there maybe I mean actually any technically is am I misreading something in the filings.
Have we been seeing closures there is it a matter of supply chain slowing down some of that footprint consolidation just any comments on industrial specifically and kind of.
I'll, let square footage rationalization is progressing here.
Yeah, So I'm I'm I'm I'm, not sure where the eight numbers coming from.
That since I've been at regression or it's been three years now that has never been a big part of our plans the big part of our plans was.
Much of our production was coming out of China, and we needed to have a regional.
<unk> capability and that was the establishment of our MGM facility.
In Monterey, what we did do there is we took two facilities and we consolidated into one and expanded that facility.
There is perhaps one more footprint consolidation in time.
But I don't think Theres, a lot more footprint rationalization in.
In industrial more of the effort had been placed on starting up that Monterrey facility and I couldnt be more pleased with the production and the output of that facility today and improving the supply chain. The supply chain is long in our industrial business and we've been rationalizing that.
We can't really over the last two years, meaning getting our suppliers closer to our manufacturing facilities are beyond that.
Hopefully that answers that again like I said I don't I don't know where that eight eight site rationalizing organization is coming from I'm, sorry about that yes.
No no worries I'll follow up a little bit offline, but thanks, so much for the color and again congrats on a really nice start to the year here.
Yes, thank you very much.
Yeah.
So again as a reminder, if you'd like to participate in today's Q&A. Please press Star then one on the touch Samsung again Thats Star then one to ask a question.
Liptak of Seaport research.
Hey, good morning, guys I'll chime in with a congratulations to a strong start to.
Baseball.
Wanted to ask first about.
The pricing strategy.
And in the first quarter.
The organic revenue growth can you give us an idea of how much was a unit volume growth versus selling price increases.
Okay.
Sure so the.
The growth in the first quarter was primarily.
The market and and and price.
Now price made the made.
Made up the majority of the organic growth that we're seeing and what we are.
Communicated during the call.
Okay great.
Okay, perfect and then the inventory levels yet.
Thanks build in the quarter to protect against the uncertainty are you expecting inventories will.
It will come down later in the year or.
Will you continue to build them or keep them at this level.
We absolutely expect inventory levels to come down at the end of the year actually in that.
More in the second half of the year, we do expect that inventory will be a source of cash as we as we exit this year and it will be a strong contributor to our free cash flow conversion.
Our operating cash flows.
Okay great.
And then in them.
Excuse me.
The 70 million in synergies can.
Can you give us an update.
How much are you into that.
Getting to that $70 million target that you mentioned.
$8 million to $10 million, so far that you got in the first quarter.
But.
Where are we in that journey to the $70 million.
Yeah, I mean, we have a very clear path.
We've been able to get after the general and administrative indirect and footprint related synergies a bit faster than expected and so feel really good about that.
Little bit of it.
Certainty around the cadence of sourcing savings so maybe a little further a little behind on direct material, but overall.
Head of our objectives, and so like Rob said, a $8 million to $10 million first quarter and that will improve as the year progresses, which will of course help the EBITDA margin improvement in MTS and we have a clear path to be at the $70 million run rate by the end of the year, if not maybe a little bit stronger than that.
Okay, great. Okay. Thanks for the color on that.
Sure. Thanks.
Thanks, Paul.
Oh, sorry, no additional questions at this time, we'll go ahead and conclude our question and answer session.
I'd now like to turn the conference call back over to Mr. Louis Pinkham CEO for any closing remarks Sir.
Great. Thanks, operator, and thanks to our investors and analysts for joining us today.
As I look ahead to the remainder of 2022, despite the many challenges we are facing.
What keeps me excited is the sizable opportunity for value creation that is under our control.
From our new product development pipelines, and our outgrowth initiatives to ongoing restructuring actions two sizable merger synergies to a tremendous opportunity tied to capital deployment.
I am confident the best days for Regal Rexnord for our customers our shareholders and our associates remained firmly ahead of us.
Thank you again for joining us today and thank you for your interest in Regal Rexnord have a good day.
And we thank you also start to yourself and to the rest of the management team for your time again. The conference call has now concluded at this time you may disconnect. Your lines. Thank you take care and have a bus day everyone. Thank you.
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