Q4 2022 Regal Rexnord Corp Earnings Call
Good morning, and welcome to the Regal Rexnord fourth quarter 2022 earnings Conference call.
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I would now like to turn the conference over to Robert Barry Vice President of Investor Relations. Please go ahead.
Great. Thank you Andrea good morning, and welcome to Regal Rexnord fourth quarter 2022 earnings Conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob <unk>, Our Vice President and Chief Financial Officer.
Turning the call over to Louis I would like to remind you that the statements made in this conference call that are not historic 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 relevant 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 there are operating results across accounting periods and in the same manner as management. Please see this slide for information regarding these non-GAAP financial.
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 fourth quarter financial results in more detail and discuss our 2020 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 continued interest in Regal Rexnord.
Last night, we reported strong results that evidenced our transformation continues to gain traction.
Organic sales growth of slightly over 4% for the enterprise reflects continued share gains and strong price discipline, even as some of our end markets slowed.
The share we are gaining continues to be supported by our digital and E Commerce investments.
New products and competitive service levels.
This fourth quarter was also the eighth in a row of being price cost positive.
Along with sizable M&A synergies.
In PD mix up and now our ongoing 80, 20, and lean efforts drove 300 basis points of adjusted EBITDA margin expansion versus the prior year period.
I was also pleased to see our cash flow performance improved in the fourth quarter, resulting in cash flow conversion of 165%.
Despite the strong finish we did fall short of what arguably was an ambitious goal for the year.
While the supply chain is improving.
During the quarter. It did continue to contained us while making it costlier to maintain high service levels for our most valuable one one customers.
In aggregate, a very strong finish to 2022.
I think it is also important to acknowledge the first full year of Regal Rexnord as we continued to manage our portfolio and drive significant shareholder value.
Sales were up 37% versus 2021 with organic sales up 9% year over year.
Adjusted EBITDA reached more than $1 $1 billion.
We achieved 33% adjusted gross margin right on track to our plans.
And adjusted EBITDA margins improved 230 basis points from 19% to 21, 3%.
Solid overall results and.
This strong execution pursued with a sense of urgency as well as continued adherence to our Regal rexnord values.
Wanted to say a sincere thank you to our Regal rexnord associates around the world.
Now I do want to take a moment and comment a bit further on cash flow because I am increasingly optimistic about our cash flow outlook.
In addition to the EBITDA growth, we expect in 2023, plus strong gains over the forecast period. We also see a significant opportunity to reduce working capital and especially inventory both as the supply chain continues to improve and as we.
We further mature our 80 20 and lean efforts.
Our teams are becoming more disciplined about how they manage working capital.
Some of this is happening through it and logistics investments such as our new global freight scheduling software.
Some is occurring through our M&A synergies.
In addition, I am excited to announce that we added a new member to my leadership team, our vice President of strategic sourcing who is bringing over two decades of global sourcing and supply chain experience to Regal Rexnord, and who I am confident will help us improve our working capital.
Performance.
Continuing to expand our gross margins by lowering our input costs and enhance the service level improvements that are helping us gain market share by reducing our lead times.
In the spirit of what gets measured gets done we are complementing this stepped up focus on cash flow by making working capital performance and resulting free cash flow a larger component of our leadership's 'twenty two 'twenty three compensation, creating a stronger link.
Between incentives and targeted performance.
Cash flow is a critical driver of our value.
But it becomes even more critical in the context of the leverage we've added to fund the altra transaction and I can assure you that my team and I will be over managing it.
Turning to orders.
We did see further pressure in the quarter with daily organic orders down just over 10% on an FX neutral basis.
This was not as surprised directionally, given softening macro indicators, such as U S and non U S. PMI.
And what some of our large HVAC customers had been integrate indicating on destocking.
But it was weaker than we anticipated in terms of magnitude as we entered Q4, particularly in residential HVAC.
We do expect order weakness to persist in early 2023, especially in the first quarter when we face a tough compare.
And with supply chain improvements plus heightened macro caution our customers are likely reducing their stocking levels further.
That said, we remain cautiously optimistic about our top line prospects.
Not only do we have a diverse set of end markets with balanced early mid and late cycle exposures, but we continue to have an elevated backlog.
Still up nearly 50% versus early 2021 level.
And we expect significant tailwind from new product launches in 2023.
As a reminder, we aim to double our product vitality in the 2023 to 2025 time frame.
We also have sizeable self help tailwind from rexnord, PMC and Arrowhead synergies both on cost and revenue and then anticipate significant M&A synergy upside once we close altra.
Rob will provide further detail on all the moving parts plus our 2023 expectations for growth margins and earnings in his section.
But the bottom line is that our focus in 2023 and beyond remains on controllable execution.
Between our ample backlog healthy new product pipeline current unexpected M&A synergies and significant ongoing 80 20 in lean initiatives, we have a tremendous opportunity to create value for our key stakeholders, our customers our associates and our <unk>.
Shareholders and.
We believe this to be the case, regardless of what the macro does.
Shifting focus a bit I'd like to provide an update on where we are with the altra transaction since announcing the acquisition on October 27th of last year, we secured financing for the transaction saw approval of the deal by ultra shareholders and made nice progress on the regulatory front.
We were very pleased with our early January financing activities, which involved raising $4 $7 billion in 357, and 10 year unsecured notes.
The offering was greater than four times, oversubscribed, which helped us achieve interest rates that were over 100 basis points lower than assumed when we announced the transaction.
On the regulatory front, the waiting period on our U S. HSR filing ended on January 12, and a simplified regulatory review process was initiated in China in mid January .
China and other jurisdictional reviews remain in process and we continue to expect that we will close the transaction in the first half of this year.
We remain extremely excited about adding altra to our Regal rexnord team.
We see tremendous opportunities to drive material cost and revenue synergies through this combination and create meaningful benefits for all of our key stakeholders.
One of the many growth opportunities, we envision with altra is enhancing our industrial powertrain offering by adding certain capabilities that we lack such as clutches and expanding narrower or parts of the offering such as in brakes.
Meanwhile, our current powertrain team continues to see great momentum in the market.
As a reminder, this cross segment cross functional team is dedicated to selling integrated industrial powertrain solution and its focused efforts are driving strong momentum selling these highly differentiated subsystems.
Pictured on this slide is a recent powertrain when in this case, our Regal Rexnord powertrains are running clarifying tanks that are critical components of a large municipal water treatment facility.
Our content includes marathon motors racks, and hub city gearboxes bulk couplings and rexnord bearings in.
In addition to providing custom fabricated baseplate and bearing pedestals.
In aggregate, our seven figure project win for the powertrain team.
What the customer needed and we were able to provide is first an integrated solution and second a solution that enhanced durability and energy efficiency.
For our customer this installation is over 100 million dollar project.
So they were eager to lean on Regal rexnord application and powertrain expertise to provide these sub systems.
<unk> commissioning so they could free up time to focus on other aspects of the projects in other words, we made it easier for our customer.
And at the same time optimize this sub systems efficiency and durability.
On top of that our team brought this highly customized solution together with best in class lead times doing our part to help keep the broader project on schedule.
What we love about these differentiated subsystem sales is that conversations with the customer are more strategic.
More focused on our technical capabilities and on efficiency, making this powertrain sub system, an absolute win win for the customer and for our Regal Rexnord.
Plus this win Tees up other project opportunities and a strong MRO funnel for the future.
So congratulations to our powertrain team for acting with urgency to deliver this great result.
And with that I'll now turn the call over to Rob to take you through our fourth quarter performance in more detail.
Thanks, Luke and good morning, everyone.
I'll begin by also thanking our global team for their strong execution, including delivering a very strong finish to 2022 and what remains a challenging operating environment now, let's turn to our fourth quarter segment financial performance.
Starting with our motion control solutions segment, our NCS organic sales in the fourth quarter were up nine 4% from the prior year.
The result reflects broad based growth with particular strength, and then general industrial energy metals and mining and aerospace end markets, partially offset by weakness in alternative energy, including lapping project activity in the China wind market.
Adjusted EBITDA margin in the quarter for Mcs was 27, 8% up 300 basis points compared to the prior year, primarily due to merger synergies and volume growth, partially offset by non material inflation supply chain frictions mix and FX headwinds.
Orders in Mcs for the quarter were down 7% on a daily FX neutral basis and January book to Bill tracked at roughly 1.2.
Turning to climate solutions.
Organic sales in the fourth quarter were down 10, 7% from the prior year.
The decline was driven by global end market volume headwinds, particularly in the North America residential HVAC market as large HVAC Oems took significant actions to reduce inventories.
This market volume headwinds were partially offset by pockets of share gains.
To put climates fourth quarter top line results in context, the U S residential HVAC business faced tough comparisons, including 15% growth in the prior year quarter, and a two year stacked growth rate of nearly 40%.
While some top line pressure in the well.
While some top line pressure in the face of these difficult comparisons with anticipated the headwinds in the quarter from OEM Destocking activity were more severe than we expected.
We believe a weaker macro outlook plus temporary near term uncertainty around how the January one implementation of the new U S energy efficiency regulations would impact regional channel inventory levels prompted a more cautious stance from our HVAC OEM customers.
This dynamic likely continues to weigh on the first quarter as well, but we are cautiously optimistic that we will see improving conditions thereafter.
The adjusted EBITDA margin in the quarter for climate was 18, 5%.
While there was pressure on climate EBITDA margins in the fourth quarter due to lower volumes and headwinds related to material inflation non material inflation supply chain disruptions in currency. The segment did realize the benefit related to the capitalization of freight variances that will unwind in the first quarter of 2023.
We continue to see a path back to margin in the high teens to low twenties. During 2023 that most of the improvement is likely to occur after the first quarter.
Expected drivers of the forecast improvement include one launching mixed positive new products in particular, our frontier compressor drive to mixed tailwind related to new U S minimum efficiency standards or seer ratings, which should drive greater demand for our electronic for our electronic variable speed motors.
And three significant productivity and restructuring initiatives, many tied to maturing 80, 20 and lean efforts.
Turning to orders.
Orders in climate for the fourth quarter were down 22% on a daily FX neutral basis book to Bill in January is tracking at roughly 1.2.
Turning to commercial systems.
Organic sales in the fourth quarter were up five 6% from the prior year growth in the quarter reflects strong performance in North America General industrial in the large commercial HVAC markets, partially offset by headwinds in China.
That strength, we are seeing in general industrial continues to reflect meaningful share gains tied to investments we are making in digital and the E Commerce channel initiatives.
The adjusted EBITDA margin in the fourth quarter for commercial systems was 17, 6% up 510 basis points compared to the prior year, reflecting some moderation in freight costs, along with strong execution of our 80, 20, and lean initiatives, partially offset by commodity and other non material product cost inflation.
Shifting to orders segment orders for the fourth quarter were down 17% on a daily FX neutral basis or down 10%, excluding orders in pool, which continued to actively rightsize inventories during the quarter.
Looking to January book to Bill track at roughly <unk> 95.
And industrial systems organic sales in the fourth quarter were up nine 7% versus the prior year print.
Principal drivers include volume growth largely tied to share recapture stemming from improved operating performance and service levels, along with end market strength in general industrial and data Center.
As expected the business did see some weakening in China, which tempered the segment's growth.
The adjusted EBITDA margin in the quarter for industrial was 12, 2% an increase of 650 basis points.
Versus the prior year period.
We continue to be extremely pleased with the performance at industrial which we feel is on a sustainable path.
Orders in industrial for the quarter were down 5% on a daily FX neutral basis in January book to Bill was one point out.
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 Youll see we ended the quarter with a net debt to adjusted EBITDA ratio of one two times.
Second our free cash flow in the quarter was $169 million, which equates to a conversion rate of roughly 165%. Our team did a great job improving free cash flow performance in the quarter and while the result, less shy of our full year conversion target, we see significant opportunities to augment our.
Cash flows in 2023 in particular by lowering inventories as a supply chain improves as we stated previously our focus will continue to be on paying down debt with the improving cash generation.
Moving to the outlook and please note that all of our adjusted earnings guidance excludes any impacts related to altra.
Let's start with the top line.
We defined our topline forecast by considering several factors one a weakening demand environment evident in our order rates.
Our record backlog.
Three pricing dynamics and for continued success with our outgrowth initiatives, including expected new product launches service level improvement in E Commerce and digital investments.
To help illustrate how we're thinking about market impacts in 2023.
We've included a table on this slide detailing our principal end markets and our current views on how each is likely to grow this year.
As noted in the table the weighted average of our underlying end market growth assumptions is a three 5% decline in 2023.
Beyond what end markets may be doing we expect to deliver outgrowth of roughly two points, which equates to outperforming these markets by a little better than 50%.
Our top line modeling also embeds, a slightly positive impact from price along with a modest headwind from currency, which brings our overall sales growth expectation to down roughly 1% at the midpoint of our range.
At the EBITDA line, we anticipate delivering margin expansion of 50 to 70 basis points at the mid point.
Note that margin gains will likely be weighted to the back half of the year with only modest improvements expected in the first half due to continued although albeit moderating supply chain challenges.
Before leaving margins award on commodity inflation.
While we saw prices of our principal commodities steel copper and aluminum declined through the second half of last year. We are starting to see those prices moderate slightly higher coming out of January on a sequential basis.
Our outlook assumes relatively neutral commodity costs in 2023 relative to the way we finished 2022.
We also assume that we will remain at least price cost neutral unlikely slightly positive zero.
<unk> 2023.
Moving further down the income statement, we factor below the line items as detailed later in this presentation to arrive at a range for projected adjusted earnings per share of $10 five to $10 85 or $10 45 at the midpoint.
I will highlight that we have nearly 50 cents of incremental year over year net interest expense embedded in our estimates, which reflects higher benchmark interest rates to be clear our net interest expense guidance excludes any new acquisition related financing costs and is aligned with the interest expense on our current business that we saw in the fourth quarter.
'twenty two.
In summary.
We are choosing to err on the side of caution here as we start the year, but our confidence in the business remains extremely strong we have line of sight to additional margin upside through our M&A synergy efforts disciplined cost savings initiatives and a continued focus on 80 20 and lean.
We're also gaining traction with our growth initiatives, especially our industrial powertrain Cross segment initiatives and we remain on track to double our new product vitality over the next three years.
Which is also expected to benefit our margins through higher mix.
On this slide.
As I referenced earlier, we provide some modeling items that should be helpful. As you build out the income statement below the EBITDA line and model free cash flow again, our $105 million of guided interest expense is for our current business only and exclude all ultra related impacts.
I'll wrap up by saying that on the whole we are very pleased with the Q4 results and our team's ability to execute in what remained a challenging environment, while the macro outlook remains uncertain.
Our outlook for the company remains very positive considering the tremendous amount of self help we have in front of us on growth margin and cash flow and.
And now I'd like to turn the call back to the operator, so that we can take any questions operator.
We will now begin the question and answer session.
I 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.
Okay.
And our first question will come from Nigel Coe of Wolfe Research. Please go ahead.
Thanks, Thanks for the first question I appreciate it good morning, everyone.
So typical.
Hey.
So first of all congratulations on the financing for the deal it looks like a good sense there but in terms of.
The down 2% organic I think that's the number you're keying in on here down one 2%.
How does that look through the year and I'm just.
This one of the challenges in the <unk>. So any help on the phasing of that download diligence would be helpful.
Sure. Thanks for the question, let me let me let me let me do it this way let me let me give you the full second I'll give you a guidance by for the whole company in a way that should work, but but and kind of how we're expecting that just too.
But let me let me start by just giving you some segment guidance.
And then what I'll do is I'm going to give you. The full year, then I'm going to give you a little bit of direction on Q1, and the first half of the year, we expect to be relatively slow or slower, especially in Q1, and then more and more of the improvement coming in the back half so starting with it with by segment and I'll start with the top line and and I'll start by.
He cited climates first.
And for each one of these the way I would look at this is I'll give you the the the expectation that's embedded in our mid point, and then just plus or minus 200 basis points in the range. So climate down mid single digit.
Commercial down mid single digits.
Industrial up high single digit.
And Mcs up low single digit.
So overall down about 1%.
At the midpoint again, plus or minus 200 basis points for the range now before I get in before I get into Q1. Let me also just finished this section up by giving you a bit on EBIT margins.
So I'll use 22 of the jump off point to full year 'twenty two for climate margins up half a point give or take commercial margins roughly flat to up slightly in.
Industrial margins up as much as a half a point in Mcs margins up between 50, and 100 basis points now I'm going to get back to Q1.
Does it is unique.
Similar to last year, where we had an outsized benefit of the cost roll, which was positive to the first quarter. This year, we're seeing the opposite effect right receipt, we're seeing deflation. So it's an expense versus income in the prior year.
So with that being said.
Let me, let me first start with top line.
And I'm going to give you. These numbers these expectations and think of this as more sequential to fourth quarter.
For climate.
Flat.
Commercial.
Roughly down high single digit.
Industrial up high single digit and Mcs down low single digits against sequential and also overall Regal rexnord level down low single digits.
So now let me move to similar to I did what I did on the.
Full year, let me give you the directional guidance on EBITDA margins.
So for our climate.
And this is again sequential to be clear.
Roughly down five points commercial roughly down three points industrial rougher.
Roughly down two five points and Mcs roughly flat. So overall, we expect to be down roughly one five to two points.
So again first half expect more pressure, especially in Q1 and more improvement in the back half hopefully that debt is fairly comprehensive.
Yes, the answer is a little bit of my question that for sure, but we will have a little bit.
But what kind of person system.
I'll come back offline my follow up question is on the Alpha deal.
The HSR waiting period over is that equivalent to effectively getting sign off from.
Some of the regulators on that deal and is there a possibility. This deal could close this side of the quarter.
I know you said first half, but so does that neither of them if I could a bit wonky close here.
Yes, so Nigel this is Louis good morning.
First of all with regards to the HSR.
It's a review process and the review process expired on January 12, and so that's that's the process.
Specific to could this closing in first quarter.
Potentially unlikely.
We still have.
Regulatory really the only outstanding item at this point of course, because we had a good success in the financing and use.
U S HSR should be behind us, but.
We also have behind us, Turkey, UK and Australia.
However, it's still pending is EU and China and as I said in my prepared remarks, China.
Accepted a short form.
Mid January .
There is typically a 30 day period from that.
We also received.
FTE.
Approvals from Czech Republic, Italy, and the UK.
And outstanding from Australia, Denmark, France, and Germany, So really still on track with what we expected we believe first half.
And so it certainly.
I'm, giving you my thoughts that it's likely second quarter, but we'll see.
Great. Thanks.
Sure.
The next question comes from Mike Halloran of Baird. Please go ahead.
Hey, good morning, everyone. Thanks for taking the questions.
Sure Mark.
Just a clarification on the on all that detail. Rob you gave when you think about the underlying dynamics from an end market perspective.
Is the expectation that the.
What is the expectation for those end markets front half versus back half at a high level.
You know obviously appreciate all the finite finite.
Finite detail in there, but just maybe bring it a little higher level and just talk about the broad based expectations for the underlying dynamics.
As you work through the year and what's embedded in guidance that way.
Sure Mike.
I'll I'll take this one.
What we like about our portfolio is very balanced early mid and late cycle exposure.
No question, we're seeing slowing in that early cycle anything consumer related has seen slowing and so you know.
Residential HVAC.
We're thinking likely down a.
High single low double digit for 2023 and more weighted to the first half pool down not pool.
Residential HVAC is about 15% of Regal holds only about 2% to 3%, but that's going to be about the same type of profile.
Anything that's a little later cycle, though we're seeing.
Acceleration bluntly aerospace is quite strong we expect solar alternative energy to be strong and then kind of relatively flat would be.
The commercial space.
Hospitality power Gen.
And we still feel pretty good about non res construction.
Some a little bit of noise in some of the indicators, but nonetheless construction should be pretty strong in this first half as well so I hope that I hope that helps Mike.
So basically that's it seems like you're saying from a seasonal perspective, you're going to get a lot of variance by end market, but youre not expecting acceleration in any of kind of the shorter cycle earlier cycle type things in the area, where you might see a little bit of that extra strength of these longer cycle things. So.
Not not assuming some sort of recovery in the year in the areas, where there's a little bit of stress that's being seen in the short term correct.
I would tell you read the HVAC later habit.
The fourth quarter of the year as we would expect to see a little bit of a rebound, but otherwise no I think you're right on we don't really see a lot of seasonality, though Mike I Wouldnt referenced this season.
But.
When you think about it a couple of other things that I just.
Provide you when you think about the strength of our backlog up 45% when you think about the comps.
But the stacking of orders for both our commercial and climate business is it 30% stack in fourth quarter. So we weren't so supply prized about orders being down in fourth quarter in those two segments overall, though we're forecasting our viewpoint is our backlog will likely drop is.
The year progresses, the first half of the year orders will be down.
High single digit low double digit.
Levels.
Starting to recover in third and fourth quarter.
Well, that's that's very great context, and then.
Follow up is just on the on the success Youre, having a new product side, maybe talk about how the market.
Is receiving some of the initiatives you're putting out there.
You know the confidence I suppose in that end market outperformance remains high so any help on that side would be great.
Yeah, our confidence remains quite high.
The only thing that's going to slow us down is the supply chain and whenever you launch a new product it takes a little bit longer than you know, it's a little tougher electronics continues to be a bit of a constraint for us, but you know we have a partner OEM and our compressor drive and so we can accelerate that as fast as I can produce it.
We have a partner OEM and our global motor Impeller solution of Cobra solution.
Where our partner OEM would take more than I can capacity get out the door, it's a great product it's.
Smaller footprint, it's more energy efficient than anything in the marketplace. This aligns very well with how we think about our subsystem solutions and driving differentiation to solve our customers' problems and come out with other products in the portfolio all around that.
And so I feel our teams have done a great job over the last few years of developing a robust product roadmap and we're seeing launches come out that should help us.
Overachieve market and that's why we're pretty confident in that.
300, 200, 5300 basis points of beat to market.
Really appreciate it thanks for all the context, yes.
Yes, Thanks, Mike.
The next question comes from Christopher Glynn of Oppenheimer. Please go ahead.
Thanks, Good morning, and I appreciate.
Appreciate all the detail.
I'm curious about some of the book to bills in January with the 1.2 is that Mcs and climate I think climates, just kind of walk the denominator moving around quite a bit there, but maybe.
Maybe the Mcs there speaks to some particular strength curious if you could comment on that.
We saw a little bit more strength in our order rates at Mcs than we anticipated in January youre spot on.
You know.
Aerospace is strong there.
No question, we get larger blanket orders there we've got a large order in January we've got a large order as well in solar in January So I think if you take those out overall.
Not a big not a big surprise that debt book.
Book Bill the other on climate, just clearly you are right. It is a little wonky. The other lumpiness is that we did shut down the facility. The first week of January given the demand levels and we thought the facilities I should say, we thought that was the most efficient manner to.
Manage the order rates and so that's why it's a one two book to Bill.
Okay, Great and then Louis you mentioned early in the pitch about significant upside to the synergies once close.
Altra, I think that comment ties to the relative progress towards the original 160 target.
No it really ties to simply that once we close we'll have access to that $160 million target I wasn't referencing yet that we have line of sight to anything significantly more than that of course, we have not come out with <unk>.
Growth synergies, which we are really bullish about with this transaction and we won't come out with until probably six to nine months. After we close but that's the whole reason why we're doing ultra is to drive the accelerated growth for Regal.
We're very pleased with our growth synergies out of the Mcs PMC transaction of last year.
<unk> achieved north of $25 million, which was right on track of what we were looking for so.
Right now though.
Nothing more to guide on synergies.
Okay, Great and then on the PMC is at about $50 million plus incremental are realized within the 2023 guidance.
Yes, there's $50 million incremental some of that is carryover and then plus new so that's about $20 million of of carryover and $30 million of Nu.
Great. Thank you.
Yeah.
The next question comes from Julian Mitchell of Barclays. Please go ahead.
Hi, This is Matthew Shafer on for Julian Mitchell.
My first question would be on China, you guys cited some pressures in commercial and industrial in the quarter can you maybe flesh out your expectations for China in 2023.
Hey, good morning, Matthew Yeah happy to Yeah definitely there was some pressure I think our teams performed extremely well, though and you see it in the results of Q4, even given the fact that we did have some operational pressure in Q4 and orders slowed no we do not <unk>.
And by the way all of our operations are fully operational at this point in China supply chain is a little bit still constrained, but we expect a nice rebound coming out of Chinese new year, and although we're not forecasting a lot of strength in China in 'twenty three I think it could surprise right now.
It's relatively flat year over year as our forecast I think it could surprise, China always always surprises me on the upside.
Okay. Thank you and then just one on pricing you guys don't give much price disclosure where are you still expecting shareholder group price in 2023, and then what gives management confidence that you guys will be able to do it essentially if theres more deflationary environment.
Yeah, Matthew this is rob thanks.
So absolutely we are we do believe that we can be price cost positive slightly positive and that's that's basically embedded in our in our guide and what we had assumed.
You asked about what gives us confidence well.
First of all the fourth quarter was 21st quarter.
And at least price cost neutral and the eight quarter, where we've been price cost positive. Despite the challenging environment that we're in so we've got a really strong track record of holding on to price. If you go back and Uh Huh.
Historically, you'll see that we've been able to do that especially in distribution and aftermarket side. Remember this is all net of MTS.
That I'm talking talking about here we've got.
Two way material price formulas on about 20% of our business. So.
So that's working in the other direction on us right, now, but but but rollover certainly our carryover benefits from price moving into 'twenty. Three is the other side that helps offset some of that impact so hopefully that helps.
Great. Thank you guys.
Sure.
The next question.
<unk> comes from Jeff Hammond of Keybanc capital markets. Please go ahead.
Hey, guys good morning.
Morning, Jeff.
Thanks for all the detail that was very helpful. The one the one thing I want to zero in on is climate.
Because I know you had some noise in the margins this year and I think you're saying for the full year revenue down mid single digits margins up 50 bps, but.
<unk> margin is down pretty substantially sequentially and year on year. So I'm, just trying to understand kind of in a in a declining market and the tough one Q kind of how you get you know.
Margins up.
And on a full year basis.
Yeah. So.
First of all the the margin drivers on a full year basis are obviously, you've got the volume piece ongoing go in one direction, but then we've got new product development like the new frontier product that I mentioned in our.
In my prepared remarks.
And then we still anticipate will be price cost positive. Despite the fact that the NPS are moving in a downward direction and so for.
From a full year perspective, we absolutely have line of sight to to see in those margins.
That half a point give or take I mean that is absolutely lower market, where we're modeling at this point remember also Jeff that we're going to start the year a bit conservative here and so you know we think there could be additional opportunity here for climate as we move through the year.
Jeff I'll add a couple of more things and Rob spot on when you think about 'twenty. Two we did a lot to service our customer in 'twenty, two and our supply chains are balancing out and so we're not going to have as much of that headwind around spot buys in premium freight and just bluntly we continue.
To drive 80, 20, and lean on that is helping us in being more productive and more efficient and so overall.
The challenge of Q1 is really just the compare year over year in the cost roll, we believe climate will strengthen as the year progresses.
And one more point that I and I failed to mention this.
When youre dealing with the NPS and they move in a downward direction. It does help your margin rate as you move through the year. So just one other point to make.
Okay. That's great color, maybe just sneak two quick ones Jim.
Well I appreciate the free cash flow you know comment and targets, maybe just speak to what you think free cash flow conversion can be as you work on that working capital. What you think you know the source from from all the working capital build was in 'twenty two can be in 'twenty three and then just any update on what you're thinking about altra accretion.
For 2023, just given the much favorable.
Interest costs that you've got thanks.
Sure so.
Take those in order first.
We when it comes.
Free cash flow in trade working capital and where we expect to see a significant source of cash as we move into 'twenty three is going to be an inventory and that as we said is as the supply chain normalizes and we estimate that that into 2023, we estimate that somewhere in the range of $150 million to $200 million of.
As a source in 'twenty three and then as we move forward into 'twenty for.
Another $100 million again, as we have this elevated inventory level and that supply chain starts to normalize so 250 $300 million range over the next 18 to 24 months is how we're thinking about it.
We know the timing is a bit out of our control, but that those are the levels that we're talking about at this point and I feel very confident in our ability to execute on that based on the way that we manage manage the business for sure let's talk about accretion now.
So we see based on the we had originally modeled as we mentioned.
Rates interest rates on an average of about seven 5% on the bonds and we're now roughly at $6 two on a weighted basis. So that 130 basis points certainly helps in terms of the interest expense that will be seen flow through the business and that absolutely impacts accretion and so we expect the next 12 months.
Post close debate the accretion to be around 8% and it's up about from about 4% with at announcement.
And then.
Certainly a 2024 estimate at this time at somewhere in the mid teens, so hopefully that helps.
Okay. Thanks, guys.
Thanks, Jeff.
The next question comes from Chris Dankert of Loop capital. Please go ahead.
Hey, good morning, guys. Thanks for taking the question for her for all the details so far this morning.
I guess thinking about the the sale comments you could provide some market commentary from your organic commentary I guess baked into that organic outlook, how should we thinking about backlog burn kind of what's baked in versus what could be upside from the risk of cancellations. Let me comment on kind of how the backlog fits into that guidance outlook would be great.
Yeah, So good morning, Chris and thanks for your comments.
We are expecting.
<unk> down of our backlog in order to achieve those numbers now I'll tell you you know orders were slightly stronger in January than what our modeling is for that burn longer burned down.
Backlog now.
It's one month, where it can be measured in our approach here, but we can achieve our guidance with a mid.
Mid teens reduction in orders in the first half and an improvement in the second half and we can and we can meet our guidance through the backlog and so that's how we're modeling it right now.
If if orders are a little bit stronger then thats going to give us a little bit more strength.
Got it understood.
And then just.
Appointed from the Destocking commentary it seemed like that was focused specifically on climate and HVAC.
Again, given the order strength.
Backlog numbers for for Mcs Theres, no destocking going on in industrial or the motion control business right now corrected it seemed like again your major distributors were all kind of building inventories still just maybe some comments on how you see channel inventory on more of the industrial and Mcf.
<unk> be great.
Yeah, I think that's probably about right.
We see visibility through our distribution partners their sales out and they still seem to be fairly strong we do not see a destocking.
The shorter cycle products the early cycle products.
Bearings as an indicator and perhaps that's a little bit slower, but overall like I said, we were pretty pleased with our Mcs order rates in January and so I think youre spot on we're not we're not seeing destocking in industrial nor are we seeing destocking in Mcf I would throw pool into.
New York, where we are absolutely seeing destocking in <unk>.
We expected it but its significant and then like you said residential HVAC.
Okay, well, thanks, so much for the comments and best of luck on 23 here.
Yeah, great. Thanks, thanks much.
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 Regal Rexnord team is continuing to deliver very strong performance.
While we are taking a measured approach to our 2023 guidance as we head into a period of weaker macro activity.
I am confident that our Regal rexnord team can continue to create value for our customers and shareholders and opened up attractive new opportunities for our associates.
All by focusing on our controllable execution.
We are fortunate in having so many value creating opportunities to pursue.
A clear path to higher outgrowth, plus material margin and free cash flow upside.
With the highly anticipated addition of altra, our opportunity set becomes even wider.
So much to be excited about at Regal rexnord. Thank.
Thank you again for joining us today and thank you for your interest in Regal have a good day.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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