Q3 2022 Regal Rexnord Corp Earnings Call
Good morning, and welcome.
<unk> third quarter two.
Earnings Conference call.
All participants will be in listen only mode.
Thanks.
Specialist.
Thank you.
Hey, Rob.
After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I'd now like to turn the conference over to Robert Barry Vice President of Investor Relations. Please go ahead.
Great. Thank you operator, good morning, and welcome to Regal Rexnord third quarter 2022 earnings Conference call. Joining me. This morning are Louis Pinkham, our Chief Executive Officer, and Rob for a 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 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 Robert Howard will then provide our third quarter financial results in more detail and discuss updates to our 2022 guidance. Lewis will then share. Some brief comments about our recently announced acquisition of Ultra we will then move to <unk>.
M&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 third quarter earnings and to get an update on our business.
Thank you for your interest in Regal Rexnord.
As you saw on our announcement last week regarding our planned acquisition of ultra.
It is clear that our team is working on a number of fronts to continue advancing Regal rexnord transformation into a faster growing higher margin more cash generative and higher return enterprise.
I am excited to report the product of those efforts are also apparent in our strong third quarter results.
Even in the face of persistent inflationary and supply chain headwinds and some incremental macro related caution at our customers.
Our Regal Rexnord team delivered strong third quarter performance.
That includes 8% organic top line growth of 120 basis points of adjusted EBITDA margin expansion and further evidence of share gains.
Ported by our digital and e-commerce investments, new products and competitive service levels.
The margin gains we achieved were enabled by a host of factors chief among them continued strong performance realizing merger synergies.
We're we remain ahead of plan.
And continuing to achieve a positive price cost position.
Also notable the team's disciplined approach to managing working capital improved our free cash flow performance in the quarter.
And so as we forge ahead into the fourth quarter. We are firmly on track to meeting our earnings guidance commitment, which we have revised to reflect a modestly higher midpoint in our targeted range for earnings per share.
For this strong edge execution pursued with a sense of urgency as well as continued adherence to our Regal rexnord values I want to say a sincere. Thank you to our approximately 29000 Regal rexnord associates around the world.
Turning to orders we did we did see some moderation as expected daily organic orders were down three 6% for the quarter on an FX neutral basis in line with what we shared at our September Investor Day.
Even so we remain cautiously optimistic about our top line prospects, especially given our strong backlog position.
Roughly 70% from the beginning of 2021 plus.
Plus commentary from many of our customers across a range of end markets.
It remains fairly positive.
In addition for certain of our end markets, including aerospace mining AG and non res construction, which makes up over 25% of Regal rexnord, there are signs of growing momentum.
And beyond what markets give us.
We have many outgrowth initiatives underway, including a healthy pipeline of new mixed positive products and high impact digital and E Commerce investments.
Which brings me to controllable execution.
Our mantra at Regal ration of art.
Regardless of what the macro does we will manage it by focusing on what is under our control.
And we have a lot under our control on the growth margin and free cash flow fronts.
Controllable execution is evident in our third quarter segment performance.
Commercial is a great example.
This segment turned in another quarter of double digit organic top line growth as the benefits of 820 initiatives, new products and digital and E. Commerce investments are driving our growth.
Industrial also continued to demonstrate strong execution adjusted EBITDA margins up 370 basis points and mid teens organic order growth are quantifiable signs that the turnaround and industrial is continuing.
<unk> been gaining momentum.
Climate performed just slightly below what we had communicated in our last earnings call with incremental temporary margin pressure largely tied to non metals inflation and mix.
However, the climate team has a plan for improvement back to the segments more normal high teens to low twenties margin levels with a step up in Q4, an improvement throughout 2023.
And we remain we remain very excited about climates prospects as we head into 2023, given regulatory changes, we are well positioned to address plus government incentives around heat pumps and meaningful new product.
<unk>.
Which brings me to MTS.
Solid growth and very strong margin performance in large part related to that team continuing to realize merger synergies, but also strong operational performance.
Our powertrain team is also gaining momentum in the market and.
And I'll share. An example of one of its recent powertrain wins on the next slide.
As we discussed at our September Investor Day, we assembled a cross functional team dedicated to selling integrated industrial powertrain solutions, leveraging end market application and product expertise spanning our motors and power transmission businesses.
The team has accelerated our traction selling powertrains and our opportunity funnel is growing nicely.
Pictured on this slide is a recent powertrain when the product of the teams collaborative efforts.
This win was with a grain processing customer involved in the production of ethanol renewable diesel and biodiesel fuels.
The customer was looking for an integrated solution that improved efficiency and reliability and lowered install time.
What our team came back with was a sub system that integrates our marathon motors, our fault gearbox and couplings and rexnord bearings.
What makes this solution differentiated is a design that leveraged our powertrain teams relevant application expertise.
In this example.
Elevator for the AG end market.
The result was lower complexity reduced install time and greater efficiency and reliability, we made it easier for our customer and gave them a superior product.
Having deep application expertise as part of the secret sauce to selling powertrains and one of the reasons. We're excited about adding ultra is because it enhances our capabilities and relevant powertrain components and extends our application expertise into new markets.
Yeah.
We will share more on this front post closing.
And with that I'll turn the call over to Rob to take you through our third quarter performance in more detail.
Thanks, Louis and good morning, everyone.
I'd also like to send my thanks to our global team for their strong execution in what continues to be a challenging operating environment now, let's turn to our third quarter segment financial performance.
Starting with our motion control solutions segment, our Mcs organic sales in the third quarter or up three 6% from the prior year.
The result reflects broad based growth, but with particular strength in the general industrial and aerospace end markets, partially offset by weakness in alternative energy in particular that China wind market.
Adjusted EBITDA margin in the quarter for Mcs was 27, 2%.
Up 30 basis points compared to the prior year factory and favorable price realization merger synergies and volume, partially offset by mix higher freight cost and FX headwinds.
As expected the segment posted a nice sequential improvement in margin in the quarter.
Orders in Mcf for the quarter were flat on an organic FX neutral basis in October book to Bill track at roughly one point out.
Turning to climate solutions organic sales in the third quarter were up four 9% from the prior year.
The increase was driven by healthy price realization and modest volume gains in our North America, Razee HVAC OEM business, partially offset by modest volume declines elsewhere, particularly in Europe .
We would attribute our volume gains in HVAC to outgrowth since we believe in market volumes moderated against a challenging prior year compare.
The adjusted EBITDA margin in the quarter for climate was 16, 4%.
Factors impacting margins in the quarter include commodity inflation, including plastics unfavorable mix and higher freight costs, partially offset by strong price realization.
We also had some carryover impacts from second quarter related to intentional decisions the business made to oversee our certain high value customers, which resulted in lower past dues, but also higher freight and component costs.
While climate margins were a bit slower to improve relative to our expectations. We continue to see this margin performance is temporary.
The climate team has a path to modestly higher margins in the fourth quarter and plans for a more significant recovery in 2023, when we expect the segment's adjusted EBITDA margin to move back into the high teens or low twenties.
Turning to orders orders in climate for the third quarter were down 10% on an FX neutral basis adjusted to exclude the impact from an OEM customer pushing out orders tied to several key platform changes.
Book to Bill in October is tracking tracking at roughly 95.
While the orders reflect a deceleration from recent periods. This performance is broadly in line with our expectations as our lead times continue to shrink given a moderate improvement in the supply chain environment, along with the fact that a number of our customers decided to take a more conservative stance on inventories into the end of the year.
More broadly we remain very enthusiastic about climate prospects in 2023, when we expect several tailwind to support growth and margin gains, including higher U S minimum efficiency standards in resi HVAC rebate on heat pumps in the inflation reduction at <unk>.
And significant new products that we're launching you may recall that we discussed all of these <unk> in more detail at our September Investor Day.
Turning to commercial systems organic sales in the third quarter were up 11, 5% from the prior year growth in the quarter reflects strong performance in large commercial HVAC, North America General industrial and our air moving business.
The strength, we're seeing in general industrial continues to reflect meaningful share gains tied to investments we are making in digital e-commerce and new products.
The adjusted EBITDA margin in the third quarter for commercial systems was 16, 7% up 20 basis points compared to the prior year, reflecting favorable price realization, partially offset by commodity and other non material product cost inflation weaker mix.
And higher freight costs.
Shifting to orders segment orders for the third quarter were down just over 9% on an FX neutral basis or flat after adjusting for orders from pool pump Oems, which have been actively right sizing their inventories as we move into the off peak season for pool.
Looking to October book to Bill track at roughly <unk> nine.
In industrial systems organic sales in the third quarter were up 14, 7% versus the prior year principal drivers include strong price realization and volume.
Ladder tied mostly to share gains as greatly improved operating performance is allowing the industrial team to win in the market.
The business is the business is however, seen some modest weakening in China, which we expect to become slightly more pronounced in the fourth quarter and temper the segment's growth.
The adjusted EBITDA margin in the quarter for industrial was 13, 2%.
An increase of 370 basis points versus the prior year period.
While the margin did fall a bit shy of where we anticipated in the quarter. We continue to be extremely pleased with the performance at industrial which we feel remains on a sustainable path this stronger performance.
Orders in industrial for the quarter were up approximately 16% on an FX neutral basis very strong performance that we think provides further evidence that industrial operational recovery is gaining momentum in October book to Bill was one point out.
On the following slide we highlight some key financial metrics for your review.
Couple notable highlights burst on the right side of this page Youll see we ended the quarter with a net debt to adjusted EBITDA ratio of one four times.
Second our free cash flow in the quarter was $111 1 million, which equates to a conversion rate of roughly 93%.
Our team did a great job improving free cash flow performance in the quarter and we expect to see further improvement in the fourth quarter.
That said as much progress as we are making our free cash flow based on what we know today, while we will continue to push for a 100% free cash flow conversion rate in 2022, we believe we may end closer to 95%, mainly due to persistent supply chain challenges and our focus on maintaining high service levels with our highly.
Value customers, we expect fourth quarter to demonstrate very strong cash flow performance as we close out the year.
As we've previously stated our focus will continue to be on paying down our debt with the improving cash generation.
Moving to the outlook.
We are raising our guidance at the midpoint by revising our expectation for adjusted earnings per share to a narrowed range of $10 35 to $10 75.
Our prior range of $10 20 to $10 80.
Which is a 5% increase at the midpoint.
Considering the revised range now contemplates a sizeable increase in net interest expense our updated outlook Embeds core operating performance that is tracking nicely above our prior expectations.
Now, let me provide a bit more color by segment for the fourth quarter.
From a topline perspective, we would expect the revenues for the commercial climate and industrial segments to moderate slightly lower from third quarter levels due mostly to see normal seasonality. We would expect the revenues for the Mcs segment to come in relatively flat to third quarter levels.
Moving to margins, we would expect commercial margins to move to low to mid teens industrial to low double digits, and then both climate and Mcs to improve modestly from third quarter levels.
I'll wrap up this section by saying that on the whole we are very pleased with the Q3 results and our team's ability to execute in an extremely challenging environment.
We are meeting nearly all of our expectations and while the macro outlook has certainly become less certain our outlook remains very positive considering the tremendous amount of self help we have in front of us on the growth margin and cash flow fronts.
And now before we open the line for questions I will turn the call back over to Louis for a few comments highlighting last week's announcement to acquire Altra industrial motion.
Thanks, Rob.
I am sure you are aware last week, we announced our decision to require altra industrial motion.
The industrial logic for adding ultra to Regal Rexnord is crystal clear.
<unk> forms our automation capabilities and enhances our industrial powertrain offering creating clear benefits for our customers and a host of new opportunities for profitable growth.
Expected financial returns are incredibly strong.
Accretion in year, one double digit accretion thereafter, ROIC above 10% by year, five and a path to a 40% enterprise gross margins supported by $160 million in cost synergies plus upside from substantial expected cross marketing synergies.
Notably our expected 2025 free cash flow rises from about $1 billion as shared at our Investor day to about $1 1 billion in 2025.
And then to nearly $1 $4 billion in 2026, as our interest cost and cash tax rate both declined significantly in 2006 and beyond.
We believe the valuation is compelling and reflects the quality of the altra business. It has synergies with our business and the transaction's timing.
The acquisition is unique because it will deliver significant synergies and catalyze our growth while further enhancing our scale and diversification, which improves our already strong credit profile.
We have always managed rebuild rexnord as in a manner consistent with an investment grade credit profile.
Low leverage abundant liquidity consistently strong free cash flow conversion and manageable debt maturities.
We are larger more diversified and lower levered than our investment grade rated peers today.
And the acquisition of ultra further enhances our scale diversification and exposure to resilient end markets.
We are adding leverage to fund the transaction and we believe it will be manageable, we expect our enhanced credit profile will give us broad access to financing in both the bank loan and bond markets.
We've designed a permanent debt structure that will give us the flexibility to acquire and integrate ultra while repaying debt expeditiously to achieve our leverage targets, which are consistent with an investment grade profile.
We recognize the macro uncertainty on the horizon, but are encouraged by the quality of the record backlogs at Regal Rexnord and altra.
We have run extensive sensitivity scenarios for interest rates and our forecasted EBITDA and we expect the combined Regal rexnord and altra to be resilient aided by strong pro forma cash flows and our under Levered balance sheet ahead of the transaction.
We closed out the third quarter with net debt to adjusted EBITDA of one four times and we expect further standalone delevering in advance of the transaction closing next year.
We're putting our balance sheet to work to acquire a highly strategic asset and create meaningful value for our shareholders.
We've already begun the process of putting our new permanent debt structure in place.
Yesterday, we hosted a meeting with our relationship lenders, which was very well attended and received.
We will have more details on the outcome shortly but we are moving quickly to amend our existing debt structure to facilitate the acquisition and put in place flexible attractively priced and pre payable debt to facilitate our de levering targets.
The motion control in automation industries are undergoing significant change.
We are operating from a position of strength.
We are ready to do this transaction.
We've made significant progress on <unk> operational transformation and Pmc's merger integration and have a clean balance sheet.
We expect the heaviest lifting on integrating PMC to be complete before starting footprint moves at altra.
The playbook and team that worked so well with PMC will be deployed at ultra.
For all these reasons, we are excited about altra associates, joining a redirection of our team and confident in our team's ability to create meaningful value for all of our stakeholders with this transaction.
For our customers our associates.
And our shareholders.
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 your telephone keypad.
If you are 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 assemble the roster.
Our first question will come from Michael Halloran of Baird. Please go ahead.
Hey, good morning, everyone.
Good morning, Mike.
So can we talk a little bit about the order trajectory as you sit here and kind of end market thoughts into next year, obviously at the analyst day, you throw out a low single digit kind of growth number we're seeing some weakening in some of the markets. Obviously, some nice offsets with what Youre doing internally you are coming on some other things.
So just maybe some commentary on that side and how we should be thinking about things as we track into next year.
Yes sure Mike.
As a reminder, at Investor day, we did say, 3% to 4% growth assuming no recession.
And markets that are flat to up modestly.
That paradigm is still relatively intact, but more uncertain around market.
It reflects a 2% to 3% outgrowth tied to many of our growth initiatives.
And of course, our strong backlog.
If investors have a different view on end markets. They can adjust the framework, but we feel very good about what's in our control, especially around our digital and e-commerce initiatives, our new product and our superior service levels.
We're going to provide more clarity on 2023, when we report fourth quarter.
So for now I think thats about where I want to end my commentary.
Fair and then what about and that was helpful. What about on the channel inventory side.
You know certainly some targeted areas, where there seems to be some destocking happening at the customer level, but maybe some thoughts more broadly across the enterprise.
Yes, you know some of the metrics are still strong Mike I'd say ISN remains above 50, but.
As of September new orders and employment contracts were coming down a bit I will tell you in the industrial distribution channel.
Theyre still sounding quite positive and as you know we have clear visibility to their sales out.
And.
There is still strong.
So given that they are looking at some inventory adjustments, but were feeling that the industrial channel is still really solid now.
Pool is a very small part of Regal rexnord, it's only about 2% to 3% but that.
The big.
Reset if you will on during Q3.
The HVAC Oems and their normal pattern, they will take down their inventories going to the end of the year.
So overall, a little bit more mixed but I will tell you with 50% of our business being.
More of that industrial space, we feel pretty good around the industrial distribution.
And continuing into next year no one.
One other comment that I would make is when I look at our business and what we've done to change the portfolio over the last few years, we're about a third early cycle, a third mid cycle and about a third late cycle and we're seeing some momentum in that late cycle non res construction aerospace.
These are markets that are gaining some momentum and we feel good about so a little bit mixed bag.
So hopefully that helps.
No that helps a lot I appreciate it thanks for the color.
Thanks, Mike.
Our next question comes from Julian Mitchell of Barclays. Please go ahead.
Hi, good morning.
Just wanted to good morning, I, just wanted to circle back to the fourth quarter.
Donald sort of why.
<unk> levels.
Rob you've laid out some segment moving pieces.
Just wanted to clarify if we're thinking kind of enterprise wide legal rexnord.
Is the guide midpoint based on kind of mid single digit organic sales growth.
Sort of 21, 5%.
Margins.
Are those the right sort of rough ballpark figures for Q4.
Anne Samuel book to Bill comments that we assume that orders are probably down sort of high single digits in Q4.
So Julien. Thank you for the question first first answer is yes, and assume about low to mid single digit growth in Q4.
And in your EBIT to comment on the margin side is is tracking very closely to what our expectations, where our expectations are maybe slightly below but pretty close to that.
Based on some of the comments that I made.
The second part of your question was related to.
Order expectations as we move into the fourth quarter and again, we would expect orders to be.
Down a bit in the fourth quarter, maybe low single digit.
In the fourth quarter, yes that would be on an FX neutral perspective, Julian just to be clear and so that would probably translate more to down mid to high single digit but.
We do expect orders to be down in the fourth quarter.
That's helpful. Thank you.
And I suppose when you you mentioned some areas of <unk>.
And a specific softness I think around cool in HVAC.
Stocking and then.
Also China, a little bit.
Software in the industrial side going into the fourth quarter. So maybe just kind of flesh out on the pool and HVAC side how.
What's sort of destock do you think.
Needed some basis points from channel.
Channel partners and customers.
And then maybe just flesh out.
China, and how youre thinking about that run rate into year end.
Yes, I'm sorry.
Hit pool quickly because it's only 2% of our sales and so we.
We think thats leveled out and we will continue in the fourth quarter.
Tell you.
That it doesn't have a big impact on us from an HVAC standpoint.
A lot of this is simply the destin adjustment from an order perspective on the fact that our lead times are coming down a little bit as well because of slightly improve supply chains and therefore, it's really just an ERP demand creation perspective, but.
The Oems typically do this.
In fourth quarter.
With a slight reduction we don't see a huge impact in and Rob has already given you guidance on what we expect from a revenue perspective for fourth quarter.
And then China, Yes, China is under a little bit more pressure then.
We anticipated at.
At the beginning of third quarter.
China was down 8% to us on sales year over year.
It was actually down.
Big Wind order, 74%, so the total down of.
China for us was 34% down 8% because of win.
Then wind project lumpy I wouldnt take that into consideration a modeling it's really the 8% down ex win and we would say that that will likely continue.
In Q.
Into Q4, now let me be clear that wind project is in Mcs specific.
Project, it only impacted the Mcs business.
So hopefully that helped Julien.
That's perfect. Thank you.
Sure.
Yes.
The next question comes from Jeff Hammond of Keybanc. Please go ahead.
Hey, good morning, guys.
Good morning, John Okay. So just a climate margin I had thought that that was going to get better and it stepped down again and I think the trajectory is maybe a little bit less in.
In the <unk> than you thought maybe just what's what's changed there and maybe speak to the to the mixed dynamic.
Yes.
I'll take this on Jonathan margins did come in modestly below our expectations really largely due to factors outside our control.
A weaker mix.
We saw incremental supply chain and inflationary headwinds specifically around plastics, and that's a pretty big part of our supply there.
Again, we believe the pressures on climate, though are temporary and expect improvement back to normal levels, especially going into 2023 fourth quarter, we'll see modest improvement just around.
Improved.
Our mix and overall a strong performance.
Yes.
<unk>.
Really strong business for us has lots of room for upside into 'twenty, three, especially with the seer regulation and our new products that we're launching and so.
We are confident that we will get back into those high teens and low <unk> in 2023.
Okay.
As we look at the the Altra deal and the combined businesses just yeah. If we go back.
Clearly some concerns over the leverage if you.
If you kind of run the test stress test recession for both businesses.
Where does where does that take you from a leverage at a high watermark and just if you were to get into that situation anything you can really do to kind of accelerate the debt pay down whether it be noncore business divestitures et cetera. Thanks.
Sure. This is Rob so so Jeff I would tell you that the that the stress testing that we did.
Good.
Dramatic shifts and an EBITDA that we might stress test for 'twenty, three and even 24.
Still provided.
Never fried is scenario, where we couldnt service the debt the leverage did get above four but but still.
Always we're able to.
To service the debt and if there was a and to your second part of the question, which was would we look to accelerate anything.
As we've commented previously.
We are.
Always evaluating our portfolio, but we have no plans at this time to do anything like that.
And.
And if we did that to make that determination, we will certainly communicate that at the appropriate time.
Okay. Thanks, a lot.
Thanks, Jeff.
Okay.
The next question comes from Joe Ritchie of Goldman Sachs. Please go ahead.
Thanks, Good morning, guys.
Good morning, Jeff.
Hey, Louis.
There is some concern around the timing of this ultra acquisition, China integrate two assets.
And the resources you have in place to do it successfully.
Maybe just talk a little bit about the timing and then also your confidence in getting after the synergies associated with the altra deal once it closes.
Yes happy to.
And.
Thought about this a lot and got a pretty thoughtful response here.
To take you through and it really starts with certainty and action ability.
So we maintain a short list of transformative targets that we see as providing a unique combination of accretive margin growth and synergy that can provide a step change on our continued transformation journey.
Ultra was the crown jewel in that list for us.
And put simply we did not believe this deal would be available in the future. It wouldn't have been available for us a year ago and.
And we felt we needed to act.
The biggest challenge is finding the opportunity where one of these targets is actionable and acquirable under highly attractive terms. While we also have the readiness from an integration perspective, and the balance sheet to transact.
All of those elements lined up here, which we believe is very rare.
The deal metrics are best in class.
And our as compared to our rexnord PMC deal as well as other recent deals in the PT and automation landscape.
We are also ready with a proven integration team on this deal that will quickly synergize and have high visibility into.
Taking out public costs quickly and then Dovetailing. Once we're finished with the PMC footprint moves to be able to move quickly into the altra moves.
The one element of question is leverage I would say.
We did extensive sensitivity analyses on both EBITDA downside as well as further interest rate increases looks.
Looking at past recessions, including multiyear downside scenarios.
In all cases, we feel highly confident in our ability to navigate.
We also work with J P Morgan and met with the rating agencies prior to signing to ensure we felt confident in our path to securing the debt we need to close this transaction and maintain our commitment to an accelerated reduction in our leverage.
Pay ultimately, we sat down and outline pros and cons.
We made a deal.
Disciplined decision based on the facts and data we debated this extensively and there are external factors that we cannot yet get into but we strongly believe this deal as it stands now would not be available in the future.
I'm highly optimistic as is our team.
And there is a lot to process here as more of our investors have time to better get their arms around what we're doing.
I am confident that there will be compelled and as excited as we are about this transaction.
So hopefully that helps.
Yeah that was that was comprehensive I appreciate that and maybe my one follow up.
Is is once you've got this debt lined up and I know that you've turned out.
A lot of your current debt I'm just curious how are you thinking about the structure of both variable versus fixed that going forward.
And then secondly.
Is that number one priority for you at this point once the deal gets get to execute it to pay down debt.
So.
Just two parts to.
The first is how are we going to structure. This so we're already out and we're upsizing, our revolver and our term loan and Thats going on right now as we speak.
Over the next couple of weeks.
Remaining.
We will then go to the bond market and look to.
Potentially 357 10.
Honest to.
Stagger.
The paydowns so that we can continue to pay down quickly and there is no concentration in any one year. So we'll minimize that but at the same time stagger that so that we can pay down very quickly and we absolutely.
Have a clear path to paying that down too.
At 253 times by the time, we're through 24, and then below two and a half and 25. So so very clear path on that front given the very strong cash flow generation of this business and in our priority.
And we've been running the company here as investment grade for many many years.
The investment grade profile.
Our priority will be to continue to pay down debt.
With the available cash that we have to get back down to that two to two five times leverage range that we're comfortable with.
Great. Thank you.
Thanks, Jeff.
The next question comes from Christopher Glynn Oppenheimer. Please go ahead.
Hey, Thanks, good morning, everyone.
Just.
I wanted to go back to the comment on climate margins getting back to the.
High teens low <unk> in 2023 was that comment meant.
Captured the full year or kind of a target rate by later in the year.
Yes.
Really was to capture the full year and honestly when we get into the first quarter, we would expect to be very close to if not right on that target and then progressed through the year in that range. So hopefully that helps.
Great and then for.
For industrial.
Just curious you know margins kind of broke out last quarter with some onetime but held in your target range here.
Just curious how that.
Overall pivot to Mexico, relocating the supply chain and staffing there if anything interesting going on there or if it's all going according to plan.
Yes, it's really all going according to plan Chris.
Ill remind you given the size of the industrial business and we broke out industrial to give more visibility.
Shift in performance can be magnified in the margin.
The transition to Mexico is going where.
In a very stable state feel really good about the supply chain that the industrial business is seeing some headwinds around China and if you look at our profile of our businesses industrial has still more presence in China than any of our businesses China is about 8%.
To Regal Rexnord for industrial it's 25% APAC is 35% so it's a bit more mixed there and they are seeing some headwinds and thats really the driver here okay.
Okay. Thank you.
Sure.
The next question comes from Nigel Coe of Wolfe Research. Please go ahead.
Thanks, Good morning, and thanks for the questions.
I wouldn't normally lead off with interest, but it's a big swing in the in the guide.
And there's a big step up from <unk> to <unk> <unk> to <unk>.
Are you baking in future rate increases into that number where you're marking to market. The current kind of rates and given the swing.
C N interests I think the big swing you previously expressed confidence Lewis and the and the high end or are we now sort of more at the midpoint.
So now is a first of all on the <unk>.
Uptick in the interest.
So certainly theres two components to this one is based on rate increases that we've seen and and so we are using.
The yield curve to determine what does what our interest rates should be now and going forward that we're plugging into our profile to see where that interest should come out. So there's that piece of it and then there's a piece that as we've commented from a free cash flow cadence standpoint.
Haven't generated as much cash in the first three quarters of the years year, as we normally would and and thats largely tied to inventory levels and what we're doing to kind of oversight of our our highly valued customers and so we made great progress in the third quarter and that we're now.
Over 90%.
And expect to finish the year still at 95% range as.
As we exit the year, which means tremendous cash flow in Q4, but in Q3, we didn't pay down as much debt as we had anticipated which also drove some of the the interest expense that you are referencing so those are the two components to it that really.
Impacted the number and the take up but again the nice thing is despite that we're over performing from an operational perspective, and and still able to raise guidance at the midpoint. So we feel really good that we're able to overcompensate for that as well as other FX.
Headwinds that our business has been facing as most others have as well and still performing very well.
Yeah, and so I would just add onto that Nigel exactly what Rob said.
We did say upper end, we reset the midpoint up five.
Operationally, we're performing at that upper end, but the two items of interest rates and FX.
<unk> should not be missed here.
Bring us too we feel confident at $10 55.
Okay. That's very clear and then just a quick one for Rob I think there's there's a quite.
Quite a big pickup in the accounts receivable allowances from tissue to <unk>.
I'm just wondering if you know where that landed in saying what will close them.
It really wasn't anything that went through the P&L, it's related to purchase accounting and the way we account for when we for allowances. When we purchased the are we March with Rexnord. So there really wasn't a take up in the allowance.
That would go through the P&L as more just balance sheet related and reestablishing that allowance here in the third quarter.
They've got nice N easy thanks, a lot.
Okay great.
Once again, if you would like to ask a question. Please press Star then one.
And our next question will come from Chris Dankert of Loop capital. Please go ahead.
Hey, good morning, Thanks for taking the question.
I guess looking at the.
The PMC business organic growth I understand there is.
Some pretty hefty comp issues, there a lot of noise with the PMC deal but.
Three 6% organic a little bit light versus some of your major distributors in some of your peers here I guess, maybe I underappreciated, the China wind component, but any comment on the kind of the organic growth and an mcf this quarter and kind of how we're going to trend forward a bit.
Yes. It was a it was a really hard compare bluntly and there was a hard can flip there.
On two fronts.
Winning projects in China, as well as solar projects in the U S.
If you would eliminate those we would be at high single digits growth. We felt really we felt really good about the.
<unk> performance.
Got it thanks, so much for the breakdown a little bit.
And then forgive me if I missed it but on the P&C synergies on both the sales and the cost synergies any update kind of on what was realized in the quarter here.
Yes, Chris.
We did see about $14 million comes through in the third quarter.
Related to the <unk>.
The synergies on the PMC deal that brings us after the third quarter up to about $33 million on a realized year to date and to be clear, we do expect that we should see fourth quarter.
About $17 million, right, which would get you about over $50 million for the full year and really just a bit ahead of our $70 million targeted exit rate from 2022.
Got it and then just.
Yes, sorry go ahead.
That's exactly what I'm going to circle back on the sales side.
Yes, so Chris we arent in a position to give you a specific number here, we're still on our <unk>.
Track to get $30 million of the incremental sales synergies for this year.
But we're not prepared to report on Q3.
Fair enough. Thanks for all the updates guys.
Yes. Thank you.
Okay.
The next question is a follow up from Nigel Coe of Wolfe Research. Please go ahead.
Sorry, I couldn't resist one more so thanks for the thanks for the opportunity.
You know obviously that the the leverage is it's sort of like you know.
You know Jos already about that question.
No doubt, you'll take down leverage pretty quickly post the altra deal, but I'm. Just wondering you know kids noncore asset sales accelerate that processing or is that on the menu opportunities.
Okay.
You know what I apologize Nigel I didn't hear it could what sales what I'm sorry, yes, non non core asset sales. So you know.
Oh, yes, yes.
I'm, sorry, I figured that's what you meant but I am sorry, I missed misunderstood.
It could but we're not in a position right now to comment on that.
We did a full portfolio review.
And we'll continue to do so on a very regular basis.
But we're not we don't have a clear plan on anything at this time, okay. Thanks.
Okay.
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.
In summary, the <unk> team is continuing to deliver very strong performance that gives me confidence that even if we head into a period of heightened macro uncertainty.
Regal Rexnord team can create value for our customers and shareholders and new opportunities for our associates by focusing on controllable execution and.
And we have so many value creating opportunities to pursue.
As we outlined at our September Investor Day, we have a path to accelerated organic growth and material margin and free cash flow upside.
With the addition of Altra, our targets move even higher.
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 and you may now disconnect.
Okay.
Yes.
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