Q2 2023 Regal Rexnord Corporation Earnings Call
Good morning, and welcome to the Regal Rexnord Corporation second quarter 2023 earnings 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 Touchtone phone. Please note. This event is being recorded I would like now 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 <unk> second quarter 2023 earnings Conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob <unk>, Our Chief Financial Officer.
Before we get started I'd like to note that we are experiencing some scattered blackout in our area. This morning and in the event that we are disrupted during the earnings call. Please note that we will rejoin the call. Shortly thereafter, we do thank you in advance for your patience in the event that <unk>.
Option occurs.
I would 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 in our reports filed with.
With the SEC, which are available on the <unk> Dot com website.
On slide three we think that we are presenting certain non-GAAP financial measures that we believe are useful to our investors and we have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in the presentation materials.
Turning to slide four let me briefly review the agenda for today's call Lewis will lead off with his opening comments, Rob <unk> will then provide our second 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.
And with that I'd like to turn the call over to Lewis.
Great. Thanks, Rob and good morning, everyone. Thanks for joining us to discuss our second quarter earnings to get an update on our business and for your continued interest in renal rexnord.
The second quarter was an exciting one for the rebuild rexnord team our first full quarter together with our new colleagues from ultra.
Bringing together ultra and renewal rexnord and marks another significant milestone on one for the last four plus years has been a steady journey a profound transformation.
We have a simple but powerful concept that rebuild rexnord charting our path forward and we're driving a continuous improvement mindset.
Sure what we call our from two.
We are regularly challenging our businesses functions and associates to define their from two.
Where are they are current state and when they plan to future state.
And then identifying the investments the initiatives and the actions they must take to navigate that from two journey.
All I should add Dragon with an 80 20, prioritization mindset and supported by data.
As I reflect on our Rx from two and where we are today.
Think about a legacy business that in 2020 had two $9 billion in sales, which today has annual sales of above $7 million.
Our business, where growth was stagnant to a business more focused on secular growth market with significant focus on vitality, which we expect to double by 2025 after doubling from 2019 to 2022.
A business that had adjusted gross margins about 27% now on track to be at 35% gross margin business. This year with adjusted gross margins just over 35% in quarter two.
A business that treated all products and customers equally too.
Two one net use customers product really all opportunities through an 80 20.
I could go on but in short a pretty dramatic from tier.
The next steps on our transformation journey will be even more exciting and I am pleased to share that through our first three months together with altra, we are off to a great start.
The teams have come together really well altra and legacy Regal Rexnord, our great cultural fit.
Operationally the legacy Altra business had a great second quarter, which exceeded our expectation.
By the way so did legacy Regal.
Integration activities activities and initial synergy actions are both well on track.
And the teams have already started building a healthy pipeline of cross marketing opportunity. In fact, we have already seen a few million dollars of wins just three months.
I look forward to sharing updates on our progress in future quarters, and having you see further benefits of the combination and our future results.
In addition to all that we're doing with Altra. Our teams also executed a very solid second quarter with performance on sales and adjusted EBITDA. Both tracking modestly ahead of the expectations, we laid out last quarter.
Sales in the quarter were up 31, 1% versus the prior year or down five 7% on a pro forma organic basis.
For context.
This moderate organic sales decline was against a two year stack compare up 40%.
The organic sales decline is being driven by fully anticipated weakness in our Pts segment market as residential HVAC and parts of the general commercial channel are facing weaker demand and destocking headwind.
Putting.
Aside our other segments in aggregate posted low single digit organic growth led by AMC.
Turning to orders our daily orders were in line with our expectations coming down 12, 7%.
This performance should be considered in the context of a two year stack compare of 55% and is consistent with our normalizing global supply chain and a return to more typical customer stocking levels.
Our orders and sales performance resulted in our quarter end backlog that is approximately 65% above our normal levels.
Book to Bill at approximately one point, though in the quarter and on a year to date basis.
Margins in the quarter were strong.
Adjusted gross margin came in just over 35%.
Margins continued to benefit from our 80 20 effort and the launch of mixed positive new products.
The second quarter adjusted EBITDA margin was 21, 5% up 50 basis points versus the prior year or up approximately 80 basis points on a pro forma basis.
Finally free cash flow was a standout positive in the quarter coming in at $176 $3 million up significantly from the prior year period and continuing to reflect our team's focus on working capital management.
The combination of our first half cash flow and deploying excess balance sheet cash allowed us to pay down $600 million in debt this quarter.
In short a very strong quarter, one that I think demonstrates solid execution by our teams.
Whether it is executing our M&A integration and synergies.
Our base business performance.
Everyone at <unk> is working very hard to advance our transformation by pursuing cross marketing synergies doubling our product vitality, raising our secular end market exposure and continuing to drive 80, 20 and lean.
We are becoming a faster growing higher margin more cash generative enterprise.
I wanted to thank all our associates for their disciplined execution and for their dedication in making Regal rack storage stronger every day.
As I mentioned last quarter, one way, we plan to help investors better appreciate how together with the ultra we are better positioned to accelerate profitable growth is to spend a few minutes introducing our principal AMC businesses.
This quarter I will discuss linear motion.
Our linear motion division within the AMC segment, which includes the well established Thompson Nook and delavan brands. So the actuators and related highly engineered components that enable precision movement in machines devices and other applications.
These are differentiated technology rich products that fit perfectly inside Regal rexnord broader portfolio of automation and power transmission components and some sub system.
In this regard, but linear motion portfolios significantly advances our strategy of becoming a trusted adviser to our customers.
On the right hand side of this slide are examples of the end markets. The linear motion business serves including NGL logistics medical Aerospace and defense and agriculture to name a few.
The yellow arrows in each picture illustrates the kinds of precision movement our products enable.
Such as the automation of a packaging line or raising and lowering aircraft wing flaps.
Some relevant commentary touristic across these applications include an absolute need for reliability, often in harsh conditions, along with accuracy and precision.
In short our linear motion components are critical to the proper functioning of the applications in which they reside and in many cases to the safety of the applications users.
As indicated on the lower left hand side of the slide our linear motion business has established itself as a leading provider through its track record of performance achieved by leveraging proprietary technology.
Deep application expertise and a strong channel and online president presence that supports high customer service levels.
Most of the businesses and markets also have strong secular growth tailwind some related to macro trends such as electrification onshoring and automating labor intensive processes and some to end market specific factors such as growth in e-commerce or.
The rising global Middle class that is driving demand for aircraft and the agricultural products.
The strength of our linear motion solutions and channels plus the secular tailwind I mentioned supported a five year organic growth CAGR for this business of roughly 6%.
We believe that we can accelerate that growth going forward into the high single digits by exploiting significant cross marketing opportunities leveraging our rebuilt <unk> salesforce and increasing our value add to customers by offering a broader portfolio of adjacent automation.
Power transmission and high efficiency electric electric motor solutions.
I wanted to take a moment to emphasize the power of the broader rebuild of our store portfolio. For example, intra logistics legacy rig already had a strong portfolio of power transmission and commands components and sub systems with strong and that customer relationships in place.
The addition of our linear motion portfolio, along with other precision motion solutions from other AMC divisions enable a more complete and value added offering engineered to our customers' specific needs.
Similar cross marketing opportunities exist to an even greater extent in the aerospace and defense market and next quarter, we will dig deeper into AMC now expanded aerospace business, which is approaching $350 million in annual revenue.
Lastly, I'd note that our medical market exposure, which has been a priority for us to expand has now reached 3% of Regal restaurant sales.
Our sales teams are discussing the power of the enhanced Regal registered portfolio with customers and using an 80 20 approach they have focused on quad one.
While it is still very early days and many of these initiatives are by nature longer sales cycle, we have already begun building a sales opportunity funnel and am excited by what the teams are seeing.
I hope this provides a little bit more color on how we believe the scale of <unk> can help accelerate growth in linear motion and how differentiated linear motion technologies enhance our ability to sell our broader power transmission automation and.
High efficiency motor portfolio.
With that I will now turn the call over to Rob to take you through our second quarter segment financial performance and discuss our latest guidance.
Thanks, Louis and good morning, everyone.
I will also begin by thanking our global team.
We have a lot going on and the team's hard work and disciplined execution not only drove very strong second quarter performance, but is helping build a higher performing renal rexnord.
Now, let's review our operating performance by segment.
Starting with automation and motion control, our AMC organic sales in the second quarter pro forma for the ultra acquisition were up 4% from the prior year.
Reflecting strength in the aerospace medical and data center end markets tempered by project timing headwinds in the beverage market.
Given project timing headwinds it is useful to look at Amc's growth in the first half, which was seven 8% on a pro forma organic basis.
Adjusted EBITDA margin in the quarter was 25, 3% nicely ahead of our expectation and reflects favorable price cost and volume growth along with a reinforcement that the product and technology to AMC, which as a reminder is a combination of altra is automation and controls business along with renal aerospace.
Data center and commands businesses are highly valued by our customers and justifies strong gross margins.
Orders in AMC on a pro forma organic basis, we're down roughly 20% in the second quarter on a daily basis with book to Bill at <unk> nine.
This order reduction is as expected and supply chain has normalized and lead times reduce in July book to Bill track at roughly <unk> 95.
For perspective, AMC second quarter order decline is against a two year stack of 60% and the segments backlog at the end of second quarter is roughly 55% above our normal level. So we feel good about the growth prospects for AMC in 2023 and into early next year.
Yeah.
Turning to industrial powertrain solutions or Ips pro forma organic sales in the second quarter were up 60 basis points from the prior year.
Growth in the quarter reflects strength in the metals and mining energy and marine end markets, partially offset by weakness in the agriculture end market and impacts from the timing of renewable energy projects.
Adjusted EBITDA margin in the first quarter for Ips was 23, 6%.
In line with our expectation and reflects benefits from volume and price cost I remind you and as indicated on the right side of this slide our legacy Regal Ips business was 26, 9% EBITDA in Q2 of 2022 before the ultra acquisition, which reinforces the strength of the P&L.
Synergies and the opportunity to improve Ips EBITDA margins further with the altra synergies.
Our global supply chain and manufacturing scale, along with our 80 20 approach are the main drivers.
Pro forma organic orders and Ips were down 4% in the second quarter on a daily basis and book to Bill was one <unk> in the quarter.
In July book to Bill also tracked at roughly one point out.
For perspective, Ips is second quarter quarter decline as against a two year stack of nearly 50% and the segments backlog at the end of second quarter is roughly 65% above our normal level.
Turning to power efficiency solutions or P. Es organic sales in the second quarter were down 22, 2% from the prior year.
The decline was driven by significant channel destocking activity, along with weaker demand in the North America residential HVAC market and to a lesser extent weakness in China.
This destock pressure was fully anticipated and is directionally consistent with the expectations, we outlined in our last earnings call.
Note that we expect further headwinds from Destocking in the third quarter, but to a somewhat lesser degree compared to the second quarter and expect destocking to be mostly behind us as we enter the fourth quarter.
The adjusted EBITDA margin in the quarter for Pts was 18, 6%, which was modestly ahead of our expectations.
Key contributors to the margin performance or favorable price cost mix and operational performance, partially offset by lower volumes.
We expect this level of margin performance to continue in the back half potentially with moderate upside versus the second quarter levels.
Shifting to orders orders NPS for the second quarter were down 14, 5% on a daily basis slightly better than our expectations.
Book to Bill in the quarter was $1, one and track at one point out in July .
For perspective, the two year stack on second quarter orders is 70%.
Yeah.
On the following slide we highlight some additional financial updates for your reference.
Notably on the right side of this page Youll see we ended the quarter with total debt of 668 billion, which is a $600 million reduction versus the end of the first quarter.
Free cash flow in the quarter was very strong coming in at $176 $3 million up from $91 6 million.
Five year period.
The teams continue to do a great job improving free cash flow performance driven in part by improving working capital and in particular by lowering inventories.
We continue to see significant opportunities to increase our cash flow in 2023 by further lowering inventory.
We are now on track to generate greater than $650 million.
A free cash flow this year, an increase of $50 million from our prior estimate.
As we stated previously capital allocation will remain heavily weighted to paying down our debt.
Now moving to the outlook.
We're making several adjustments to our guidance for adjusted earnings per share, which is now in a range of $10 20 to $10 60.
Versus the prior range of $10 20 to $11.
<unk>.
You will see that the midpoint of our prior range is coming down by.
By 'twenty five.
Which primarily reflects higher depreciation expense of approximately $10 million in higher net interest expense of roughly $9 million.
The depreciation expense change reflects both a true up to acquisition related step up depreciation along with an increase related to the latest anticipated cadence of footprint actions and capital investments many related to rexnord PMC synergy realization.
The interest expense change reflects higher assumed rates, primarily based on the latest silver forward interest rate curve.
You'll also see that we are lowering the high end of our range.
Given we are now just over halfway through the year, we have better visibility into our expected performance and we believe some of the modeling assumptions behind our prior ranges high and now appear less likely in particular.
We now assume a slower pace of recovery in U S consumer markets, including residential HVAC and pool as well as in certain short cycle industrial markets.
In addition, we are no longer expecting a meaningful recovery in China. This year.
Finally at the bottom of this slide we present, our standard below the line modeling items.
In summary.
We are very pleased with our performance in the quarter, both legacy renal rexnord and the newly acquired ultra business performed well.
We added roughly 40% to the top line through the acquisition and our teams are effectively executing on both cost and cross marketing synergies.
We continue to have lots of levers under our control to accelerate profitable growth and drive meaningful value creation range.
Ranging from doubling our product vitality to shifting into more secular markets and continuing to drive 80, 20 and lead across our businesses.
And with that I will.
Now I'd like to turn the call back over to the operator, so we can take questions operator.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone if youre 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 our roster.
Our first question comes from Mike Halloran with Baird go ahead.
Hey, good morning, everyone.
Hey, good morning, Mike.
So could you could you just dig a little bit into what youre seeing from an underlying demand perspective.
And how you think orders are going to track as we look to the back half of the year with some some granularity as you think about the big chunks of your business.
Rosie pieces some of the short cycle industrial pieces in your new guidance.
You can see there.
Yeah, Mike.
This is Louis and good morning.
You know the answer to your question answered the second half first and then go over how we are thinking about market. So we're expecting orders in Q3 to be down year over year mid single digits in Q4 to rebound.
To being up.
Mid single digits, that's how we're profiling.
The rest of the year. So how are we thinking about it from a market perspective, you know.
A little bit slower pace of recovery in the second half specifically around <unk> each back a pool in general commercial.
What we like about our <unk>.
Portfolio, though is we're pretty balanced mid.
Early and late cycle, we have some nice markets, though that our accelerating growth.
Aerospace medical on data center strength.
Our view to strengthen alternative energy, but it tends to be a little lumpy and were forecasting strength in the second half.
Alternative energy and non res construction has been pretty solid for us and we're expecting other than.
We did see headwind pressure in China, and non res construction, our north American non res construction is up nicely.
From an industrial distribution standpoint, I would tell you that we're still seeing.
And still grow because as you know, we we have strong relationships with our distributors and so.
We share openly sailed out as well as as orders and the sales out from our distributors are doing quite strong there was a little bit and we expect going into Q3 continued inventory management so orders down.
But overall.
I feel good about that.
Demand profile in that industrial distribution space. So hopefully that gives you a view of how we're thinking about our markets. How we're positioned again, Mike I would tell you that not one of our markets make up more than 20% of our sales and we like that distribution of.
Early mid and late cycle exposure.
That's very helpful.
If you think about the down mid single digits <unk> transitioned the plus mid single digit orders in the fourth quarter.
This just destocking normalizing and then seeing relatively normal sequential trends with maybe a couple of markets you see a little bit more confident in or is there an expectation that things are maybe a little stronger cumulatively as you hit the fourth quarter.
Rental basis.
Just from an underlying demand perspective.
No I think that's that's pretty spot on.
We expect some continued destocking through <unk>, we expect that to be behind us by the end of <unk>, taking a little bit longer than we anticipated.
We do not expect any significant strengths.
Going into Q4 necessarily from a demand perspective, and as I've said before we're really not expecting any strong recovery in China, either slight in fourth quarter.
But we expect it to be pretty muted for the year. So so overall the way you summarized it.
Great and then last one just maybe get some context on the cross selling you know what.
What's working from an early perspective in.
What kind of pace of progression do you think you can see here.
On a qualitative basis is.
As you continue to merge these two businesses.
You know put the R&D efforts on a more joined basis.
Unexcited Mike.
I thought we would be spending a lot more time on the industrial powertrain side, and there's definitely opportunity there.
We rounded out our offering with in particular with the.
Clutch and brake and then strengthened our position in gearing.
Gear Motors with the Bauer brand, a great global brand and.
Our coupling business and so I'm I'm excited there what I didn't expect to be as excited about so quickly is how we're going to be able to leverage the strength of the total Regal rush Nord with the traditional.
Ines business, so our AMC business.
Our aerospace business today is $350 million of Regal.
And it's early cycle of growth and we're now talking at a much higher level with our customers because of the portfolio and the offering that we have and we think it's positioned to accelerate so you know were we.
I would say that.
We did a big positive for US and an example of just now the scale and scope of Regal and the potential for our future.
Great really appreciate the time Louis Thanks, Yes, thanks, Mike.
Yes.
Our next question comes from Julian Mitchell with Barclays go.
Go ahead.
Thanks, very much and good morning, maybe kind of keep my questions a little concise as possible. The first one really the second half guidance.
Sales have sort of three and a half.
Billion and $5 60 ish of EPS, any cadent, calling out to us between sort of third and fourth.
Quarters, do you think about sales and margins.
Sure Julian This is Rob let me give you a sense of what we think that looks like in the third quarter.
I'll go ahead and move through this.
Through the segments to give you the best color possible.
Pete for the PFS segment.
The third quarter, we would expect revenues in the range of $465 million to $485 million with <unk>.
Margins in the high teens sell margin similar to the second quarter.
On the revenue side, we did as I am.
Pointed out the number you'll see that as a slight improvement versus the second quarter base.
Based on better seasonality less destocking and better mix as you move to industrial we see industrial at about $130 million to $145 million. So very similar to the second quarter and the margins there low double digit.
Moving to AMC.
Relatively relative to the second quarter relatively flat.
From the topline maybe.
Revenues in the range of $445 million to $455 million.
When I say relatively flat you have to remember there is an impact of the stub period in the second quarter. That's obviously not repeated in the third and when you when you.
Think about that.
Fairly flat quarter to quarter.
That applies to both AMC and Ips, but again back to AMC margins in the mid twenties.
So very similar to the second quarter synergies driving a piece of that.
Although volumes down a bit.
Moving to Ips.
Revenue is about $655 million to $670 million, so and by the way the margins on that low to mid twenties.
Top line.
Down a bit because of the agricultural destock again, you don't have that stub period impact in the third quarter and short cycle industrial continues to be a headwind there.
So overall you know in the third quarter, that's about one point.
695 billion to $1 75 5 billion.
As a range on the top line with margins in the low twenties. So that's the way we're thinking about it.
In the third quarter.
And then of course, the implied is that the fourth quarter, absolutely would be stronger than the third and so the <unk>.
Logical question might be what gives us that confidence.
The fourth can be up and I'll answer that by saying that we do have elevated backlogs in most of our business as I talked about in my prepared comments that gives us some pretty good visibility I talked about the book to Bill.
At 1.0 exiting July that gives us some nice confidence that we're holding backlog as we're kind of now a month ended the third quarter.
Our supply chain continues to normalize and that gives us some rising confidence that we can deliver that backlog and then you know we do have.
Better visibility and good visibility into some of our more lumpy project orders.
Things like that we talk about like datacenter and renewables and that and then finally the.
P. S. Destock, we believe will be behind us in the third quarter, and we will see some slight improvement in demand in the fourth so that's the cadence of what we're seeing from Q3 to Q4.
And the Q3 detail.
Alright.
That's very helpful. Thank you and then just a follow up on the amount of Destocking left in your sort of short cycle industrial markets.
The main areas, where inventories are still elevated today most of the pace at which you think we get through those and we sort of done by Q4 on the short cycle industrials Destocking in any area that is most acute.
Yeah, you know Julian good morning. This is Louis.
We do expect to be through by the start of Q4.
Yeah, we're still working through.
Really Rajiv HVA see pool, a bowl of course, a small part of Regal, but it has had a pretty significant destock.
And so it has had an impact in Q2 and expecting continuing into Q3 and then back.
Getting to normal in Q4, and then industrial distribution. There's no question that there is some balancing of inventory levels and like I said before is our lead times are are reducing as well.
And.
We're being able to support a reduction in the distribution channel, but again, we expect that to clear up by the end of Q3.
Operator next question.
The next question comes from Christopher Glynn of Oppenheimer go ahead.
Thanks, a lot of good information here and transparency, so pretty easy to digest.
Curious, if there's any markets or channels that maybe have any unstable patterns doesn't really seem that with the book to bill in the residential situations pretty transparent but.
Yes, just curious if anything kind of surprised you in the quarter.
Good morning.
Chris not you know nothing more than we've already commented on.
You know, maybe China not seeing on SaaS.
Faster rebound.
The beginning of the year I was pretty bullish on China rebounding just based on my history with China over the years.
I have been a little surprised by that.
But our forward doesn't have much of any forecast.
<unk> there.
Beyond that everything really play to our expectations.
So nothing more than that.
Okay, and then any update on the industrial process.
Yes, so we've made a lot of good progress.
We believe we will be at a <unk>.
<unk> to share more in the next couple of months.
Great. Thank you.
Thank you got it.
As a reminder, if you have a question. Please press Star then one.
Our next question comes from Nigel Coe.
Wolfe Research go ahead.
Oh, Thanks, good morning, guys.
Good details here, so not pretty much from my side.
Just on the on the on the.
Three Q and I'm back off color, Rob maybe can you just remind us the cadence of the.
The cost synergies from from obviously from outright but also from the.
The PMT transaction, what should we be expecting for three came for Keith and then just.
Just a final point on Ips, you said low to mid twenties.
Would that be sort of flattish with what we saw in <unk>.
Similar to Q2, yes, yes.
And then let me give you the detail on the synergies.
We saw about $14 million of incremental.
Synergies in the second quarter, which includes bolt PMC and Altra and you know if you break that down you know you'd think PMC is about $10 million to $11 million and then about three to four for altra. So that's how you get that $14 million. So we're we expect incremental about $45 million from PNC to flow through the P&L.
In 2023, and about $20 million from altra to flow through the P&L in 'twenty three I wouldn't ask so that means you'll get an exit rate there.
From ultra about $40 million annually. So the total P&L impact in 'twenty, three and about $65 million you can count on that.
The synergies coming through.
And increasing each quarter, we might expect that next quarter, we might see something closer to a two.
$2 million to $3 million, maybe above what we saw in the second quarter, and then improving to that that exit rate that I commented on in the fourth.
Okay and then this this depreciation pension you highlighted.
Is he accounting now pretty much settled down now you wouldn't expect them to.
Too many changes from here on.
Yes, I would not expect additional true ups to any.
Material degree going forward it might be slight tweaks.
That could be but it's not going to be anything material and something that I would expect us to absorb.
The accounting is largely behind us at this time.
Okay, Great and then my follow on is Lewis here.
Obviously seen a few cycles like we always have but from your perch, when you're saying a cynic would say he was saying the weakness right now in some of the consumer durables and short cycle industrial which is what you'd expect to see weakness emerging.
And therefore, the suspend cascade into some of the longer cycle businesses are based on your experience are.
Are you seeing something different this time that maybe suggest that perhaps non res energy et cetera, and it remained stronger for longer.
Yes.
Yes.
Yes.
Obviously, a great question Nigel it's something that we are thinking a lot about as we are moving right now into our strategic planning period and getting prepared for our thoughts on next year.
Now things look pretty good in the longer cycle businesses, our backlogs are strong and honestly our orders are accelerating.
And in.
Some of the bigger projects and opportunities I think you know as I think about what drivers for Regal.
The trend towards electrification.
The opportunity around regulatory driving performance and energy efficiency.
Onshoring and automation. These are major drivers and then you know some of the stimulus has helped US we can't directly.
Pinpoint, but art mining business has been quite strong and we believe we are getting benefits out of the infrastructure investment and jobs Act.
We expect you know as we move forward.
Even the science and chips as well will help the the AMC automation and conveying businesses. So I think there are some things that should help keep a later cycle business is strong.
As our early cycles rebound and Theres no question, we feel like we're pretty darn close to the bottom in.
In rugby in pool and.
Commercial and then we have accelerating markets as I said before aerospace, we're just really excited about the growth there.
Medical.
Alternative energy and.
So all of these hopefully.
Nigel will give you a perspective of how we're thinking and we do think 24 should be a pretty solid year for us and we will provide more color and guidance on that.
As we progress into this into the end of this year and the beginning of next.
Yeah, great. Thanks, that's great perspective, thank you.
Yeah.
Our next question comes from Walter Liptak from Seaport.
Thanks for taking my question.
Wanted to ask.
The working capital the inventories came down a little bit stronger than I remember from <unk>.
Last quarter you guys are you know you're kind of beefed up the.
The bonus compensation related to working capital's, there's still more that comes out was that kind of in line with what you were thinking or a little bit better any color there.
Yeah. Thanks Walt.
Good to hear from you.
We estimate for 'twenty three now somewhere in the range of two.
$200 million to $225 million specifically.
Specifically from inventory reductions we saw it as a reminder, about $45 million of that benefit in the first quarter. We just saw another $64 million here in the second quarter. So we're largely on track, but even a little bit ahead of what we originally had expected to your point there.
Now we also expect another $100 million to $150 million coming in 2024. So if you if you kind of add all that up that's about $300 million to $375 million over the next 18 to 24 months.
Obviously, the precise timing is out of our control since it's tied to supply chain normalizing and those sorts of things.
And also some of the challenges that we continue to have in the areas of electronics to a small degree and then castings as well, but but overall that's what the picture looks like so we're excited about that and we see that the ability to use that to continue to pay down our debt is a great benefit from a capital allocation standpoint.
Okay, Great alright, thank you.
Thanks, Paul.
The next question comes from Jeff Hammond of Keybanc capital markets go ahead.
Hey, guys good morning.
Morning, Jeff.
So just wanted to dig in a little bit on some of the margin to franchise. It seems like Ips running a little lower I don't know if that's mix of of ultra doing better than your legacy doing a little worse and then you know P. S really nice step up there.
Just maybe a sense of what what drove that versus your expectation.
Yeah, Let me take that Justin this is Louis I'll start with P. S.
Couldnt be more pleased with the performance of <unk>. So it really starts with our operations performing very well in Israel really indicative of the strong 80, 20 and lean journey that we've been on so even when volumes are down we're executing well now we had some additional benefits.
Continue to get price to cover our non material inflation.
Mix has definitely helped us.
As the mix of the business through aftermarket and distribution versus OEM.
We've seen some benefit from new product that we've launched that.
A mix positive to that segment overall.
I think the business is doing very well and really nicely positioned for when demand does rebound.
Our solid performance there you know I said that was PFS.
I would tell you Ips really perform.
Pretty much as we expected there was a bit of mix headwind, notably in the short cycled the stocking that we talked about and as you know distribution tends to be a positive margin mix for us.
We continue to see some pockets of inflation labor certain metal alloys castings for sure definitely castings and been a supply chain constraint overall, though I'm I'm really pleased with the <unk> performance, we have many levers in the future to pull.
<unk> to drive margin improvement synergies 80, 20, and then continued investment in doubling our vitality.
Watching more.
Margin.
Mixed positive margin products, so overall, a really spot on to our expectations.
Okay, Great and then just.
The higher interest expense I, just wanted to understand it looks like you paid down quite a bit of that I'm, assuming you're free cash which is coming in better would pay down debt in the second half is it just you know.
Something with with the right dynamic or something else, yeah, it's primarily related to the rate dynamic.
We did raise it today as I said about $9 million for the year here and I mean, that's the net of both the interest expense and the interest income is primarily related to the change in interest in the sulfur curb that inched up more steeply yeah, theres a little bit of does still settling you know in terms of getting everything.
Hi down relative to the the acquisition, but that was fairly small dollar. So it's primarily related to the sofa curve true up and if we don't continue to see additional.
Increases above and beyond whats built in today I would expect that to come in where we see it with potential to actually beat it a bit based on some of the cash flow opportunities that we've been talking about.
Okay, and then just last one.
Just on the the the charges and how they kind of flow through SG&A versus <unk> versus gross margin I, just want to be able to kind of get back to that kind of 35% gross adjusted gross margin you talked about.
Yeah, I I would recommend on that one Jeff may lead follow up offline. There's a there's some scheduled in the back of the.
Of the work book or the 8-K that we can certainly talk to and I think that's the easier way to get through that it's not as simple as it's not a simple answer there are quite a few dynamics in play on that one.
Okay no worries thanks a lot.
Got it.
Thanks, Jeff.
This concludes our question and answer session I would like to turn the conference back over to Mr. Louis Pinkham for any closing <unk> closing remarks.
Thank you operator, and thanks to our investors and analysts for joining us today.
As you heard this morning, there are so many opportunities in front of us to enhance value creation for our key stakeholders as a scale player in the markets. We serve with differentiated technologies strong channel positions ample financial resources and a great team that continues to ebb.
Execute at a high level, we are excited about pursuing these opportunities with discipline, our sense of urgency and always in accordance with our Regal rexnord values.
Thank you again for joining us today and thank you for your interest in Regal rest in order to have a good day.
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The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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