Q1 2023 Regal Rexnord Corporation Earnings Call
Hello, and welcome to the Regal Rexnord first quarter 2023 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero after today's.
Presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
With Jonathan the question queue. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Robert Berry VP Investor Relations. Please go ahead.
Great. Thank you operator, good morning, and welcome to redirect your its first quarter 2023 earnings Conference call. Joining me today are Louis Pinkham, Our Chief Executive Officer, and Robert Harrer, Alright, Thank you give vice president and Chief Financial Officer.
I'd like to remind you that during today's call you may hear forward looking statements related to our future financial results plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release, and then our reports filed with the SEC which are.
On <unk> Dot com.
On slide three we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors and we have included reconciliations between non-GAAP financial information and the GAAP equivalent in the press release and in this presentation material.
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 first quarter financial results in more detail and provide an update to our 2023 guidance. We will then move to Q&A after which Louis will have some closing remarks with that.
I'll turn the call over to Lewis.
Great. Thanks, Rob and good morning, everyone.
Thanks for joining us to discuss our first quarter earnings to get an update on our business and for your continued interest in Regal Rexnord.
Before getting into our first quarter results I would like to spend a few minutes on our recent acquisition of ultra which we closed expeditiously on March 27.
I will begin by extending and enthusiastic welcome to our new Regal Rexnord colleagues, who joined US from Ultra we are extremely excited about how together as part of a larger and strategically better positioned one Regal rexnord team, we can accelerate our COO.
Company's ongoing transformation into a faster growing and more profitable enterprise.
Yeah.
For the second time in two years, we have thoughtfully deployed capital to effect a positive step change in our business.
With so much progress in such a short period of time.
I would like our key stakeholders to pause for a moment and take stock of what Rio Rexnord has become.
One of the most impactful elements of our transformation is the evolution of our sales mix by application.
As you can see in the chart on the left the Regal Rexnord portfolio is now weighted to automation power transmission and industrial powertrain solutions, which together represent over 60% of our sales.
These are businesses with highly attractive growth and margin dynamics.
European by differentiated technology that customers value.
The remaining portfolio was a combination of the air moving subsystems and motors, which after three years of AED 20 management and targeted R&D investment is now an offering that is defined by differentiated technologies and sold to customers who whose.
Needs are well aligned with our value proposition.
Another way to think about how the Regal rational portfolio has evolved is to consider its exposure to markets with secular growth tailwind illustrated on the Middle chart.
The exposure of the legacy portfolio plasma ultra raises our exposure to secular growth markets to over 35%.
If you also include the residential HVAC market with its consistent March towards higher minimum energy efficiency standards that require consistent innovation in motors blowers and total systems design.
Our secular exposure is just under 50%.
Adjusting for the faster growth, we foresee in these markets puts us on track to having over 50% of our sales generated in secular growth markets by 2025.
In short our market exposure today is inherently stronger than it was just a few years ago.
The chart on the right illustrates our evolution by revenue.
Through the addition of Rexnord PMC, then arrowhead and now ultra.
Along with organic growth in 2021, and 2022, 17% and 9% respectively. We are poised to be a 7 billion dollar plus enterprise this year.
Regal Rexnord is now positioned to serve a wider range of customers and end markets do so with a broader portfolio of more technology rich sub systems and digital solutions and go to market with enhanced channel positions that support higher service levels for our customers.
Said another way our transformation allows us to start approaching customers as a trusted advisor.
Rhematic evolution from our legacy market position is more of a component provider.
Our customers are experiencing this evolution through our enhanced offering and service levels.
Our shareholders will experience it through better organic growth higher margin and stronger free cash flow.
Our associates will experience it as a member of a team that is expanding its most important customer relationships and is poised to more consistently win in the markets we serve.
One way we plan to help investors better appreciate how the legacy Regal plus ultra leads to growth acceleration.
It's just spend a few minutes on each of our next several earnings calls introducing the product portfolios of our principal automation businesses.
We'll start this quarter with Kollmorgen.
Our factory automation and controls business.
The Kollmorgen business designs and manufactures high performance motion systems for applications that include factory automation Aerospace and defense.
Automated guided vehicles or Hgv's medical imaging and robotics among others. It's.
Its principal products pictured on the right include machine control hardware and software plus highly engineered servo and stepper drives and motors.
The business competes on its differentiated technology and precision engineering and focus is on customers in high growth markets that have demanding performance standards.
The fact that customers can count on Kollmorgen products to reliably perform to exacting specifications and do so consistently over time has created extremely sticky customer relationships and annuity revenue streams with attractive margins.
We see so much opportunity to help a business like kollmorgen grow faster.
By leveraging the customer relationships Channel Partners, Inc.
Global sales organization of a 7 billion dollar global enterprise.
We plan to bring kollmorgen offering to new customers and leverage its technology in a wider variety of applications.
Including as part of sub systems that include other Regal rexnord products.
A great example of where we are seeing such opportunities only six weeks in is in our aerospace business, where the legacy Regal and Kollmorgen teams are already collaborating on how best to leverage our expanded portfolio with our customers.
I look forward to updating you on our progress as we get further along including once we define an outlook for ultra steel synergies likely later this year.
Now, let's turn to the first quarter last night, we reported results that delivered on our prior commitments.
Organic sales declined by 4% in the quarter.
While we did see pressure from Destocking and pockets of weaker underlying demand in PFS. We also saw strong growth in AMC and industrial and solid performance in our Ips segment.
Driven by continued strong price realization.
Broad based tailwind from new products, and rising industrial powertrain cross selling synergies.
The tailwind, we're seeing from our AMC and Ips team's executing PMC and arrowhead seals synergies.
Also bolsters my confidence in our enhanced growth prospects with altra.
Our adjusted EBITDA margins in the quarter were solid coming in at 19, 7%.
In line with our previously stated expectations.
When comparing these results to the prior year. It is important to remember that the annual cost roll provided a favorable impact in the prior year, but an unfavorable impact in the current year.
Despite a modest top line decline, we saw resilient margin performance tied to our ongoing 80, 20, and lean efforts and merger synergies.
So perhaps the best example of our team's strong performance in the quarter is cash flow generation.
Underpinned by significant progress lowering working capital and inventory in particular.
In a quarter that typically faces seasonal headwinds on free cash flow, we delivered $174 million.
That allowed us to end the quarter with net debt to adjusted EBITDA of $3 96.
On track with our expectations.
We are putting a particular emphasis on inventory reduction and on free cash flow generation more broadly in order to delever our balance sheet quickly.
Which includes tying a greater portion of our leaders variable compensation incentives to this goal.
In short what gets measured gets done we will remain laser focused on cash flow generation and debt reduction to achieve our post 24 target of less than two five.
A solid start to 2023 and for the strong execution pursued with a sense of urgency as well as continued adherence to our Regal rexnord values I want to say, thank you to our Regal Rexnord associates around the world.
Next let's turn to orders well, our organic orders were down 9% in first quarter. This is slightly better performance than we anticipated and resulted in a book to bill for the quarter, just north of one point no in them.
Marginal growth to our backlog.
Destocking end market headwinds in our PFS segment in particular residential HVAC.
We'll pump in certain short cycle industrial markets posed a significant headwind as expected.
But performance elsewhere was on the whole a bit stronger and included positive momentum in markets, such as Arrow energy Marine solar and non res construction.
We see this dynamic continuing into second quarter with destock and softer demand weighing on our consumer in short cycle industrial markets.
But better performance in later cycle, industrial aerospace energy and medical device and non res markets.
We also continue to model better orders performance in the back half, especially in the fourth quarter as destock headwinds likely abate comps become easier and our growth initiatives continue to gain momentum.
These include progress towards our goal of doubling doubling.
New product vitality by 2025.
Our maturing 80 20 growth initiatives and.
And rising PMC plus early ultra cross marketing synergies.
The bottom line is our focus in 2023 and beyond we will remain on controllable execution.
Between our still ample backlog.
Healthy new product pipeline.
Sizable M&A cost and cross marketing synergies.
Significant ongoing 80, 20, and lean initiatives and accelerating improvement in our working capital metrics.
We have so many opportunities under our control to create value for our key stakeholders.
Executing this self help is where our focus will be.
Regardless of what the macro does.
And with that I'll now turn the call over to Rob to take you through our first quarter performance and our updated outlook for 2023, which now includes ultra.
Thanks, Louis and good morning, everyone. I'll also begin by thanking our global team for their strong execution and by welcoming our new colleagues joining us from ultra we're excited to have you onboard and about where we plan to take the company together.
Before getting into our first quarter results I'd like to discuss a few administrative items first as we announced when we closed the altra transaction on March 27, we implemented a new segment structure concurrent with closing the transaction.
For reference.
Our new segments are listed on the right hand side of this slide in Green along with the percentage of our pro forma 2022 sales that they represent.
How do we map to these new segments from our old structure is detailed on the left.
In the appendix of this earnings call Slide presentation, we provided segment financials for 2022 by quarter for our legacy Regal Rexnord businesses under this new segment structure.
I would also like to remind you that while we are reporting our Q1 results under this new segment structure. These results are only for our legacy Regal Rexnord business.
Because we closed the acquisition of Alterra and the last week of the first quarter and that period's impact is considered immaterial to our first quarter performance. Those few days of Ultra's Q1 performance will be reported with our second quarter results.
We estimate the impact of this shift could be roughly <unk> <unk> of adjusted earnings per share that will be included in our second quarter results.
Now let's proceed to discussing our first quarter results by segment.
Starting with automation and motion control, our AMC organic sales in the first quarter were up 11, 7% from the prior year. The result reflects growth in data center, aerospace and food and beverage markets.
Adjusted EBITDA margin in the quarter for AMC was 23% up 290 basis points versus the prior year factoring benefits from price mix and volume.
Orders in AMC for the quarter were down 4% on a daily FX neutral basis.
Book to Bill in the quarter was one one.
In April book to Bill track at roughly <unk> nine inclusive of the Altra business.
Our AMC business is more of a long cycle business and therefore order patterns do tend to be a bit lumpy in.
In fact overall comparable backlog for AMC is up roughly 3% year over year at the end of April .
Turning to industrial powertrain solutions or Ips organic sales in the first quarter were up one 3% from the prior year.
Growth in the quarter reflects strong performance in global metals, and mining and energy end markets, largely offset by project timing in alternative energy and weaker demand in agriculture and forestry markets.
The adjusted EBITA margin in the first quarter for Ips was 29, 3%.
Up 290 basis points from the prior year.
Margin benefited from merger synergies and lower freight costs.
Segment orders for the first quarter were down 4% on a daily FX neutral basis tied largely to pressure in short cycle industrial markets.
Book to Bill in the quarter was one point al.
In April book to Bill also tracked at one point all inclusive of the Altra business.
Turning to power efficiency solutions our P S.
Organic sales in the first quarter were down 15, 9% from the prior year.
The decline was driven by significant channel Destocking activity.
Particularly in the North America pool pump residential HVAC and shorter cycled general commercial and general industrial markets in North America and China.
This destock activity was fully anticipated and is largely in line with the expectations that we outlined in our fourth quarter earnings call.
Note that we expect further headwinds from Destocking in the second quarter roughly on par with what we saw in the first quarter, but see this pressure moderating in the back half, especially in the fourth quarter.
The adjusted EBIT margin in the quarter for <unk> with 13, 7%.
This performance was as expected and closely aligns to the guidance provided on our fourth quarter earnings call. As a reminder, when comparing to the prior year. In addition to lower volumes. This margin performance largely reflects the year over year impact of the annual cost roll in that we saw favorable impact last year and an unfavorable impact this year.
As we look ahead, the second quarter, we anticipate a significant sequential improvement in this segment's adjusted EBITDA margin to a mid teens level.
Shifting to orders orders in Pts for the first quarter were down 20% on a daily FX neutral basis.
Book to Bill in the quarter was one point out book.
Book to Bill in April also tracked at one point out.
Yeah.
On the following slide we highlight some additional financial updates on the right side of this page you will see that we ended the quarter with a net debt to adjusted EBITDA ratio of 396 times, which reflects impact from ultra financing net of our strong free cash flow generation in the first quarter.
This metric is in line with the net leverage target we announced at close.
Free cash flow in the quarter was very strong coming in at $174 4 million as Louis mentioned the team did a great job improving free cash flow performance in the quarter, owing in part to significant progress improving working capital and in particular, lowering and lowering inventories we continue to see significant opportunities to augment our.
Cash flow in 2023 by lowering inventory.
As we've previously stated.
Use of cash flow, we remain heavily weighted to paying down our debt.
Moving to the outlook.
On this slide we are updating our weighted average 2023 end market growth expectation to include Altra.
Note that our outlook for each for each legacy Regal Rex North end market are unchanged for reference we have added a column in the center of this table, representing how our end market exposure is changed by adding altra.
Broadly speaking our portfolio now has greater exposure to end markets with secular growth tailwind.
Regarding 2023, specifically you can see in the last two columns on the right hand side that by adjusting our end market exposures to add ultra our weighted average estimated end market growth rate for 2023 rises by 50 basis points to down 3%.
This benefit is captured in our estimates for altra accretion in 2023.
On this slide we are updating our financial guidance to include Altra AG.
As you can see in this table starting on the left we present our outlook for revenue adjusted EBITDA and adjusted earnings per share for our legacy Regal Rexnord business, which is not changing.
In the next two columns, we define our expectations of how adding ultra will impact our revenue adjusted EBITDA and adjusted EPS in 2023.
Note that these impacts only reflect our ownership of altra from that transaction closing date of March 27.
The last two columns simply add the outlooks for legacy Regal plus ultra to arrive at our current guidance, which calls for revenue in a range of approximately six 5% to $6 8 billion.
Adjusted EBITDA in a range of one four to $1 5 billion.
And adjusted earnings per share in a range of $10 20 to $11 10.
At the bottom of the table, our various below the line modeling items.
For reference our assumption is that ultra will add 15% to 25 to our adjusted earnings per share and factor sales at ultra being flat to up 100 basis points versus 2022 levels or slightly above our expectations for legacy rig rexnord.
We have also factored approximately $20 million of cost synergies, which equates to about $40 million on an annualized run rate basis exiting 2023.
Finally, as you can see at the bottom of this slide we are expecting free cash flow conversion of this year of at least 100% our expectation in dollar terms is to generate at least $600 million in free cash flow.
Lastly in light of the closing when closing of <unk> transaction and simultaneously revising our segment structure, we decided to provide more specific expectations for our second quarter performance by segment and make it easier for the investment community to understand our near term.
Financial expectations for the business.
Note that we are not planning to adopt this approach on a go forward basis, but felt it did make sense at this time.
In the table presented on this slide we provide second quarter revenue and adjusted EBITDA margin expectations for each of our segments under our revised segment structure.
The expectations outlined for adjusted EBITDA margin factor a significant sequential improvement in performance and include benefits from PMC and Altra M&A synergies along with our ongoing 80, 20 and lean initiatives.
In summary.
We are continuing to err on the side of caution as we forecast market related performance for our legacy business and as we add the altra business to our outlook. However, we do have line of sight to significant cost synergies along with other cost savings initiatives they are well within our control.
We also continue to gain traction on our growth initiatives and as I mentioned earlier, our portfolio now has greater exposure to end markets with secular growth tailwind, which further strengthens our resiliency.
So on the whole we are very pleased with the way we ended Q1 and while the macro outlook remains a bit uncertain as we enter Q2, 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 with that I would like to turn the call back to the operator, so we can take questions operator.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw from the question queue at any time. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Today's first question comes from Mike Halloran with Baird. Please go ahead.
Hey, good morning, everyone.
Good morning, Mike.
So a couple of questions here first just.
A lot of moving pieces, you know last quarter, we would have talked about.
Call it 8% year, one type accretion mid teens for 2014 Middle East when you also transaction.
You gave guidance for this nine months can you just right size us relative to those expectations and if there are any puts and takes what would be driving the change either way.
Sure Mike. Thanks for the question. So first of all the accretion outlined on slides for the first three quarters of ownership in the first 12 months. We would say you know maybe roughly expect about 4% to 6% accretion in that timeframe you referenced the 8% estimate that we talked about.
Last quarter end.
In that that assume that we're only going to adjust at that point to get that 8% for the lower than originally assumed financing cost and now that we've got a more holistic view of ultra's fundamentals in tax and other.
Interest rate increases and that we're seeing that look more like 4% to 6% over that 12 month period now.
I think what's most relevant is that.
Tremendous accretion that we expect over the next few years the value creation in getting to that $18 earnings per share forecast for 2025 remains very much intact and so yes, we are a little bit behind.
To start relative to that first 8% because of some of the.
The assumptions that I mentioned, but very much still in line with that $18 earnings per share.
We put out there.
Just to clarify that Rob where those more below the line. So tax interest rate was the biggest driver of that and then fundamentals, maybe slightly lower or do I have that backwards.
It is mostly the below the line that you are referencing that is almost all of the difference in what we are and what we change in our estimate on accretion.
And Greg on the minimum.
All right.
Perfect and then I'll dovetail into the next question I think so the orders expecting.
Call. It stabilization in the next couple of quarters better in the fourth quarter.
What's underpinning that what are you seeing from environment perspective to get you there and I suppose obviously, you can see the destocking impact.
What's happening in the PFS side now.
Is it mostly just clearing that out and getting to a point, where you're getting something more normalized relative to them. Much demand is this also holding true for your more short cycle industrial type pieces, just any context to understand the confidence would be great.
Yeah, It's really all of that you said, Mike I think you summed it up nicely.
Orders were slightly better in Q1 actually orders sequentially improved from Q4, we.
We do think Theres still destocking going on especially <unk>, a pool is only 1%, but it's clearly a destocking going on in pool as well Thats really what gives us confidence that the bottom hits in Q2 from a.
Short cycle industrial perspective, we are seeing some headwinds there, but I will tell you that we still see from our distribution.
Channels that.
Our cogs to them, meaning our sales to them are slowing a bit, but they're still seeing growth and so we feel pretty good from even short cycle industrial.
And then when you look at the overall drivers of the business.
Early cycle is where I really focus most of my comments mid and late ultra actually mixes us up a bit more into mid and late and when you look at some of the proxies that we used for overall market trends and general industrial.
I asked them.
Is below 50, China PMI.
Is up now and so we're starting to see in second quarter some strength there.
As I said on industrial distribution continued growth, but it certainly caution.
<unk>.
A bottoming out in second quarter, non res commercial which is about 6% of our portfolio now still strength. So we feel good there food and beverage strength more more so on food or beverage a bit weaker alternative energy strength.
We like the space, one actually one of our customers came out stating that with IRI their demand might be up more than 25%. This year and then we'd like our aerospace positioned 5% of our businesses in aerospace and aerospace is definitely growing and medical is growing so again Mike.
We do think Q2 will be the bottom of our orders and then we'll grow from there I hope that helps.
No that was great really appreciate the time congrats on getting the closedown.
Thanks, Yes, thanks, Mike.
The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.
Hi, Thanks, good morning.
Nice work on the re segmented information that recast nice and clean.
I didn't want to.
So comment on the free cash flow was very.
Very strong obviously, Louis you mentioned, a little change in incentive compensation structure to a channel efforts on.
Debt reduction.
I'm wondering if there is kind of an interim accelerated aspect to that.
Obviously, there is long term emphasis on it too, but there is always tradeoffs. So I'm wondering how you're staging that and if we would accept expect similar quarters of magnitude to your first quarter free cash flow.
Maybe not every quarter this year, but.
Yes.
Yeah, Chris So hey, thanks for your comments and.
Thanks for your question specific to.
Compensation, we do believe what gets measured gets done.
Trade working capital as a measurement that we have had historically in in all of our compensation measures we've increased that.
From about 20% of the.
Variable pay or <unk>.
Annual variable pay bonus to 35% for this year, we'll reassess at the end of this year, if we want to make a different change, but we felt it was important to make it very clear to our organization that we need to reduce our inventory and free up cash because we are on a laser focus.
<unk> of reducing our net debt to EBITDA below two five by 'twenty by.
By 20 by the end of 'twenty four.
<unk> that that was the whole rationale.
And we.
We feel good about first quarter performance and I'll just add on Chris just on the inventory side. So we talked about that we're estimating.
Somewhere between $150 million to $200 million.
Cash generated from from lowering our inventories in the year, we saw about $47 million of that come from inventory.
And contributed in the first quarter, which certainly puts us on a nice track for the rest of the year as far as the cadence of cash as we go through the year normally in the first and second quarter. It is a little lower and it starts to ramp up in the back half I think from a from a modeling perspective, you can assume that we.
We will see.
The remaining cash that kind of goes to that above $600 million in the year.
It trends up slightly more in the back half than the first half.
Or at least from court from Q2 to Q3 in particular, but fairly flat line as we go through the year.
Thanks, Rob could you clarify what the $600 million reference was didn't catch it yeah.
During my prepared remarks, I mentioned that we expect to see free cash flows of at least $600 million in the year.
Oh coffee thanks.
The next question comes from Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, good morning, guys.
Good morning, Jeff Congrats on getting all this done.
And then just on on.
Yes, and the Destocking I mean, it seems more stark than than what we had in our models. I think you said in line I think <unk> typically a seasonally stronger, but you havent still muted just trying to understand.
Kind of what you're building in for additional Destock and then just the the.
The margin cadence.
You know and really or you know activity your revenue cadence for this business as you as you look into the second half.
Yes so.
Jeff.
From a destock perspective, we definitely well first of all for Q1, we think Q1 hit exactly where we expected from a sales perspective for PFS.
Think about the the overall segment.
Really it align exactly with our guidance that we had given at the end of Q4 now specific to what our view is that in Q2 and going forward. We still believe there's destock pressure, we think we're probably in the seventh inning.
We also believe there is.
A bit more caution and then a couple of years ago in the consumer space and so some under underlying demand moderation you certainly probably read that.
Our HVAC OEM customers, saying down.
The high single digits for the year, we're forecasting because where we're a component supplier and we are forecasting more in low teens.
So really very much aligned we expect that Q3 will be slightly better than Q2 and that Q4 will return to.
Orders growth.
Let me just add on if I could Jeff for you just a little bit on your question about margin performance as we move forward.
We provided the second quarter look by segment, but let me let me give you a sense of where we see full year range. So how we see by segment each of the segments performing and where we expect their full year rate for land based on our current guidance. So I'll just give you the four segments here and say AMC we.
We expect that.
To be somewhere in the low twenties, so certainly a bit ahead of the second quarter expectations with sequential progression as we move through the year for Ips, we're thinking mid twenties.
Again ahead of our second quarter expectations that we laid out with.
With nice progression.
Tds, which is specific to your question on high teens for the year with strong sequential progression throughout the year, but more weighted towards the fourth quarter, and then industrial low double digits again with nice sequential progression. So hopefully that gives you a good sense of the margins that we're expecting as we move through.
The year.
Rob that's that's very helpful.
Just on the ultra and I think.
They reported they are four key that was kind of in line with how we were modeling and I think you said <unk> in line can you just talk about any puts and takes youre seen in their businesses anything acting better worse and then just you know.
As you look at the accretion what what are you baking in for synergies for that first nine months I know you know public company costs kind of come out right away.
Yes, So let me let me touch on ultra first overall.
Would it be more excited.
As we closed as we get to know the team even teams even more.
Ultimately a great fit.
You're really good at this point.
As you know we our integration teams worked together from both the altra side and the Regal Rexnord side for a few months getting ready for clothes, we leveraged the playbook from our PMC merger that went so well and we hit the ground running on day one.
We're already finding ways early on on how to collaborate and view really excited as I said in my prepared remarks.
Yes.
We're not we're really excited about the $160 million of.
We're more excited about the cross marketing.
Opportunities between the business and feel that that's got an accelerating one I am I will emphasize here is that ultra did not at all run their business from an 80 20 perspective.
And we feel strongly that that's going to help them in the way they prioritize.
Both from a growth perspective, and a service perspective, so right now we're very very focused on understanding the evaluation. The analysis and then putting our plans together of how we're going to drive the altra business from an 80 20 perspective and all that.
And one other piece of that and that is the second half of your question on synergies.
We do expect to realize the $20 million of <unk>.
Synergies for ultra in in the year.
Which would equate to a $40 million exit rate as we as we exit 'twenty three and so far on the PMC side, which we also have synergies flowing through we realized about $10 million of synergies in the first quarter related to the PMC merger, we expect $45 million in the year for <unk>.
<unk> related synergies, which equates to about $120 million exit rate on PMC. So so that all of that said summarize would be about $65 million realized between bolt on acquisitions in the year and about $160 million exit rate.
For synergies between both of those now one thing bear in mind is on the ultra synergies in terms of modeling where those would hit it from a segment standpoint, you'd assume about 80% of that goes to Ips and about 20% of that goes to AMC.
Hopefully that helps.
Okay, and then just any puts and takes in the in the base business and markets.
For Altra.
No I mean.
The purpose of putting the slide in the deck was to give a perspective on our market assumptions, we absolutely think that the ultra markets mix us up to a bit stronger or our original 23 assumptions was a weighted average market down three and a half ultra wasted.
Three we think the altra markets are likely down a couple percent and we're guiding right now that ultra is going to be flat to up so we feel good about their market positions and where theyre going.
Okay I appreciate it guys.
Thank you Peter.
The next question is from Nigel Coe with Wolfe Research. Please go ahead.
Oh, Thanks, Good morning, just cook, a buffet congratulations on getting out of them.
One just a follow up to Jeff's sort of math on ultra the EBITDA.
<unk> you gave for Altra.
Slide 15 does that include the synergies I mean, it's a small number but just.
Is that because of the tornadoes.
Yes, it does.
It does okay. Good just a thought there just want to make sure and then on the the so the power efficiency of the <unk> segments.
Yeah.
If you look at the flat sequential sales that implied maybe.
Maybe.
High teens organic decline this is mid teens and.
And <unk> is that the right way to think about it since it's not that flat sequential sales would be very unusual. So I'm. Just wondering are we seeing even greater pressure claim inventory I think you said similar pressure it feels like it's even greater pressure.
What are you baking in for that and then just on that second half ramp it seems like you're pointing towards that 20% plus.
Margins in the back half of the year, just kind of look at getting some mid teens too.
Two to high teens.
Yeah, so from a from a revenue perspective.
We do believe theres going to be continued pressure on destocking in Q2, but no worse than what we're seeing in Q1 and again, that's why we're guiding to two flat overall sales sequentially.
Q1 to Q2 from a year over year perspective.
I'll remind you that from a staffing perspective, the stack here as a compare of 40% growth on a two year stack in 'twenty two and so 23 Q2, it is a tough compare but.
Yeah right now we're not seeing any further deterioration were saying that yeah.
There is some destocking still to go and that will allow us to clear it out in Q2 and Q3 you start to see.
Some return to normalized revenue levels and from a margin perspective sure absolutely.
Absolutely seen at the first half is heavily weighted by the by the volume that we're seeing that decline in volume, but also that that the year over year impact of the cost for all hitting in that first quarter, but you take that out and you are right in the back half of the year, we would expect to see those the low twenty's.
To get to that.
That teens level by end of year. So your math is correct.
Well I'm glad my math is correct.
And then I've got a quick follow on with the industrial business. So conspicuous by its twice absence in the slides.
No, we're all being that divestment process.
Yeah, I don't think too conspicuous since it's really only 8% of our sales and 4% of our EBITDA, but right now with regards to where we are with this strategic review there is not much we're ready to say at this point, we're continuing the review and expect to be able to provide an update on the process.
<unk> relatively soon.
Okay. Thanks, Louis Thanks, Rob.
Yeah. Thank you.
As a reminder to ask a question you May Press Star then one.
The next question comes from Julian Mitchell with Barclays. Please go ahead.
Thanks, a lot congratulations on closing the deal.
There's been a lot of sort of multilayered questions, maybe one hopefully simple one for me just when I'm thinking about the the orders and sales.
So we are assuming the orders year on year in Q2 are down sort of nine or 10% similar to.
The first quarter.
And then sort of flattish in Q4.
And then organic sales.
We are down kind of low single digits kind of second and third quarter and may be sort of close to flat by Q4 is that the way to think about the year on year. So what is in the sales.
Yes, so so.
Certainly it is the way to think about it for Q2 on orders and we're thinking about orders in Q2, maybe a little bit.
More than down that 910, maybe low teens in Q2, and then when you when you start building from there.
Year over year, certainly sequential growth.
Q2 to Q3, Q3, Q4, and then year over year slightly down in Q3, and then up in Q4 on easier comps.
From a revenue perspective, yes.
Profiled it maybe a little bit lighter than what we would expect we do expect growth.
Year over year in Q4, and then the the.
Mid single digits.
That's extremely helpful.
And then just my second question.
Trying to look more I guess, a couple of markets. One is general industries, which I think is a 21% of your sales and then warehouse, which I think is about five.
So general industry.
It's sort of perspectives. There on you know when when did you see the Destocking start when do you think it will.
And.
And then on the warehouse.
You've got some very good sort of macro numbers on capex growth recently, but a lot of companies bottom up sounding.
Listen Wes.
So maybe update us on what Youre seeing there.
Yeah. So.
I'll hit warehouse first to your point, it's about 5% of our sales we are.
Forecasting it to be down.
Low teens and.
And so we.
We do feel pressure coming from the warehouse markets.
In 2023, but you know what I, what I love about this space is we have great differentiated product and we're winning against our competitors because of our technology, but from a macro market perspective, we are expecting 23 to be down.
Or general industrial.
You got into again remember that within that space. There is a lot of different markets and there is short.
Mid and late cycle now.
From a distribution standpoint, we don't expect Theres a lot of Destocking left to do here.
<unk>.
We definitely think from that perspective that the inventory normalization will occur in Q2.
So like I said, our distributors are seeing still seeing sales grow so therefore demand.
They are lowering their inventories, but theres not a big adjustment that's needed so at least for our products.
And so we would say.
If there is a slight decline that's going to be Q2 with recovery going forward.
That's great. Thank you.
Sure.
Thank you. This concludes our question and answer session I would now like to turn the call back over to CEO . Louis Pinkham for any closing remarks.
Thank you operator, and thanks to our investors and analysts for joining us today.
I hope a key takeaway from today's presentation is that Regal rexnord has transformed into an enterprise positioned to deliver faster growth higher margins and greater cash flow.
With Altra, we are clearly on a path to outgrow our own markets raise our gross margins to about 40%, our adjusted EBITDA margins to 25% and generate substantial free cash flow, allowing us to rapidly reduce our net leverage.
Thank you again for joining us today and thank you for your interest in Regal Rexnord.
The conference has now concluded.
You for attending today's presentation you may now disconnect.
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