Q2 2024 Regal Rexnord Corp Earnings Call
Good day and welcome to the Regal Rexnord second quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Operator: All participants will be in line. If you do need assistance, please sit down with a conference specialist or press star. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone key.
To ask a question you may press the star then 1 on your telephone keypad. To withdraw your question please press the star then 2. Please note this event is being recorded. I would now like to turn the conference over to Robert Barry, Vice President of Investor Relations. Please go ahead.
Operator: To try your question, please press the star. Please note this event is, But now I'd like to turn the conference over to Robert Barry, Vice President of Investor Relations. Please go ahead. Great. Thank you, Operator. Good morning, and welcome to Regal Rexnord's second quarter 2024 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Robert Rehard, our Chief Financial Officer. Before we begin, a note regarding the slide presentation.
Operator: Due to a minor technical issue at our webcasting firm, those who are viewing our second quarter presentation slides on the webcast will need to manually advance the slides during the presentation versus our typical practice of auto-advancing them on our end.
Robert Barry: Great. Thank you, operator. Good morning and welcome to Regal Rexnord's second quarter 2024 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Robert Rehard, our Chief Financial Officer.
Robert Barry: Moving to slide two, 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. However, 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 the SEC, which are available on the RegalRexnord.com website. Also on this slide, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors. We have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in these presentation materials.
Speaker Change: Before we begin, a note regarding the slide presentation. Due to a minor technical issue at our webcasting firm, those who are viewing our second quarter presentation slides on the webcast.
We'll need to manually advance the slides during the presentation versus our typical practice of auto-advancing them on our end.
Moving to slide two, 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. Thank you. Thank you.
Speaker Change: Our actual results may differ materially from those projected or implied due to a variety of factors.
Speaker Change: which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the RegalRexnord.com website.
Speaker Change: Also on this slide, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors. We have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in these presentation materials.
Robert Barry: Turning to slide three, let me briefly review the agenda for today's call. Louis will lead off with his opening comments, an overview of our 2Q performance, and an introduction to our power systems. Rob Rehard will then present our second quarter financial results in more detail and review our latest 2024 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 Rob. Thanks, Rob. And good morning, everyone.
Speaker Change: Turning to slide three, let me briefly review the agenda for today's call. Louis will lead off with his opening comments, an overview of our 2Q performance, and an introduction to our power systems business.
Rob Rehard: Rob Rehard will then present our second quarter financial results in more detail and review our latest 2024 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 Louis.
Louis Pinkham: Thanks for joining us to discuss our second quarter results, to get an update on our business, and for your continued interest in Regal Rexnord. Our team delivered a strong second quarter with outperformance on nearly every metric and especially strong margin outperformance at IPS. So before I go any further, I want to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution, delivering strong second quarter performance while continuing to execute our many longer-term value creation drivers. Turning to our results in more detail, sales in the second quarter were down 7% on an organic basis, excluding industrial systems.
Louis Pinkham: As a reminder, we closed on the sale of industrial systems at the end of April, and so it is in our reported financials only for the first month of the quarter. Also, recall that due to the timing of the ULTRA acquisition closing very late in the first quarter of 2023, we pushed five days of sales into last year's second quarter. And while immaterial to our annual performance, it was a roughly two-point headwind to growth this quarter.
Louis: Thanks Rob and good morning everyone. Thanks for joining us to discuss our second quarter results to get an update on our business and for your continued interest in Regal Rexnord.
Speaker Change: Our team delivered a strong second quarter with outperformance on nearly every metric and especially strong margin outperformance at IPS.
Speaker Change: So, before I go any further, I want to thank our 30,000 Regal Rexnord associates.
Speaker Change: We pushed five days of sales into last year's second quarter.
Speaker Change: and while immaterial to our annual performance, was a roughly two-point headwind to growth this quarter.
Louis Pinkham: Performance in the quarter continued to be impacted by weak end market demand and destocking in North America residential HVAC, weakness in commercial HBHC outside North America, and pressure in Discrete Factory Automation. Orders in the quarter, on a daily basis, were down 1.5% excluding industrial but up approximately 2% excluding a large atypical blanket order received in the pool business in the prior year period, which we see as a more relevant performance indicator for Regal.
Speaker Change: Performance in the quarter continued to be impacted by weak end market demand and destocking in North America residential HVAC.
Speaker Change: but up approximately 2% excluding a large atypical blanket order received in the pool business in the prior year period.
Speaker Change: which we see as a more relevant performance indicator for Regal.
Louis Pinkham: This positive inflection was led by AMC, which saw orders rise 12% versus the prior year, followed by IPS orders, which were flat following eight quarters of decline. In July, daily organic orders were up roughly 5%, continuing to build on the momentum we saw in the second quarter. We read this order performance as encouraging signs that all our segments can deliver positive top-line growth in the second half. However, as Rob will elaborate, we now expect this second half ramp to occur at a slightly more gradual pace in the AMC segment versus what was factored into our prior forecast. Despite second quarter top line pressures, margins in the quarter were strong. Our adjusted gross margin came in at a record 38.1%, excluding industrial.
Speaker Change: This positive inflection was led by AMC, which saw orders rise 12% versus prior year.
Speaker Change: followed by IPS orders which were flat following eight quarters of declines.
Speaker Change: We read this order performance as encouraging signs that all our segments can deliver positive top-line growth in the second half.
Speaker Change: Our adjusted gross margin came in at a record 38.1% excluding industrial.
Louis Pinkham: Adjusted EBITDA margin, excluding industrial, was 22.2% and reflects achieving $25 million of synergies in the second quarter. We remain on track to achieve $90 million of synergies this year. Lastly, we delivered approximately $136 million of adjusted free cash flow in the quarter. That cash flow, along with proceeds from the industrial sale, enabled us to pay down approximately $481 million of gross debt in the quarter, which, combined with our first quarter results, equates to $618 million of debt repayments in the first half. We ended the quarter with net debt to EBITDA leverage at 3.6 times.
Speaker Change: We ended the quarter with net debt to EBITDA leverage at 3.6 times.
Louis Pinkham: Nice progress on delivery. We expect that our annual adjusted cash flow this year, plus net proceeds from the industrial system sale, should enable approximately $900 million of debt to be paid out in 2024. In summary, a solid quarter of controllable execution by our team. Shifting to the next slide, each quarter, I've been introducing one of our principal AMC businesses to help investors better appreciate how we are well-positioned to accelerate profitable growth. This quarter, I will cover power systems.
Louis Pinkham: As you can see on the left-hand side of this slide, this is about a $125 million business and has been experiencing very strong growth, posting a 25% compounded annual growth rate over the last three years, in large part due to its primary focus on the data center market, where the rapid adoption of AI plus ongoing growth in e-commerce are fueling significant data center expansion. This is a US-weighted business going to market under the Thompson brand.
Louis Pinkham: As we lay out on the right side of this slide, our principal products include paralleling switchgear and automatic Transfer Switches, along with a field services business. Our highly engineered products are used to provide standby and backup power in mission-critical applications where even the briefest interruption of power supply can be disruptive to end users.
Louis Pinkham: Our services business helps our customers ensure 24-7 uptime, create stickier customer relationships, and benefits Regal by creating a recurring revenue stream. The primary applications presented on the lower right are data centers, which comprise the majority of power system sales, along with smart manufacturing, medical, and critical public infrastructure, in particular water and wastewater management. Our Power Systems team is winning in these high growth markets for reasons we list on the left. At the top of the list is deep application expertise. We focus on some of the most complex power management challenges, such as in co-location data centers, where multiple customers each have unique power management needs.
Speaker Change: The primary applications presented on the lower right are data centers, which comprise the majority of power system sales, along with smart manufacturing, medical, and critical public infrastructure, in particular, water and wastewater management.
Speaker Change: At the top of the list is deep application expertise. We focus on some of the most complex power management challenges, such as in co-location data centers, where multiple customers each have unique power management needs.
Louis Pinkham: Our business is also differentiated by its best-in-class lead times, exceptional quality, and proprietary technology, most notably in our switchgear controllers that enable smooth load transitions and minimal transience required in sensitive applications. We are also investing for growth and see future share gains tied to new products, expanding our services footprint, augmenting our sales organization, and notably, building on recent successes with our lean initiatives to scale up our manufacturing capacity, largely in best value regions.
Speaker Change: most notably in our switchgear controllers that enable smooth load transitions.
Speaker Change: and Minimal Transients Required in Sensitive Applications.
Speaker Change: We are also investing for growth and see future share gains tied to new products.
Louis Pinkham: We believe that all of these attributes, along with our growth investments, should translate into at least low double-digit sales growth at enterprise accretive margins over our three-year planning period. Air Moving Solutions, and other products within the portfolio. This makes power systems a critical component of Regal Rexnord's data center growth strategy. And with that, I'll turn the call over to Rob.
Rob Rehard: Thanks, Louis, and good morning, everyone. I'd also like to thank our global team for their hard work and disciplined execution, which delivered results that exceeded our targets for the quarter. As a reminder, we closed the ULTRA acquisition at the end of the first quarter last year, and so having lapped that one-year anniversary, we no longer need to consider current period operating performance on a pro forma basis when discussing our AMC and IPS segments.
Speaker Change: Thanks, Louis, and good morning, everyone.
Speaker Change: I'd also like to thank our global team for their hard work and disciplined execution, which delivered results that exceeded our targets for the quarter.
Speaker Change: As a reminder, we closed the ULTRA acquisition at the end of first quarter last year, and so having lapped that one-year anniversary, we no longer need to consider current period operating performance on a pro forma basis when discussing our AMC and IPS segments.
Rob Rehard: Now, let's review our operating performance by segment, starting with Automation and Motion Control, or AMC. Net sales in the second quarter were down 10% to the prior year on an organic basis, which is slightly better performance than we had expected. The results reflect strength in the aerospace, data center, and medical-in markets, which was more than offset by lingering weakness at global factors. Factory Automation OEM.
Speaker Change: Net sales in the second quarter were down 10% to the prior year on an organic basis, which is slightly better performance than we had expected.
Rob Rehard: Notably, our second quarter performance reflects an approximately 6% sequential improvement and growth in all of our divisions outside of factory automation. From a first half perspective, which smooths out some of the lumpiness we see in this segment, pro forma organic sales were down 7.4%. Adjusted EBITDA margin in the quarter was 22.5%, slightly below our expectations on weaker men. Given the lower volume in discrete factory automation, which generally runs with margins above fleet average for this segment, we see an unfavorable mix impact when these volumes drop. Orders in AMC in the second quarter were up 12% versus the prior year on a daily basis, a notable inflection after six quarters of decline. I booked a bill, and the second quarter was 1.05.
Speaker Change: From a first-half perspective, which smooths out some of the lumpiness we see in this segment, pro forma organic sales were down 7.4%.
Speaker Change: Adjusted EBITDA margin in the quarter was 22.5%.
Speaker Change: and slightly below our expectations on Weaker Mix.
Speaker Change: Orders in AMC in the second quarter were up 12% versus prior year on a daily basis, a notable inflection after six quarters of declines.
Rob Rehard: In the quarter, we continued to experience healthy booking rates for longer cycle projects at aerospace, medical, and data center customers, but with the majority of requested delivery dates landing in late 2024 or early 2025. This timing, combined with continued caution and slower capital investment ramp-ups at certain customers in our shorter cycle factory automation and industrial OEM end market, means that we are now forecasting a more measured pace of recovery for these end markets and, in turn, for AMC overall in 2024.
Speaker Change: In the quarter, we continued to experience healthy booking rates for longer cycle projects at aerospace, medical, and data center customers, but with the majority of requested delivery dates landing in late 2024 or early 2025.
Rob Rehard: July orders for AMC were up roughly 10% on a daily organic basis, providing further evidence that we are gaining momentum into the second half, but again with the anticipated pace of recovery tempered versus our prior expectations as delivery dates on these orders are weighted to fourth quarter 24 or early 2025. I will share more color on how this performance impacts our outlook for AMC later in the call. Turning to Industrial Powertrain Solutions, or IPS.
Speaker Change: I will share more color on how this performance impacts our outlook for AMC later in the call.
Rob Rehard: Net sales in the second quarter were down 2.8% to the prior year on an organic basis, which was slightly better than our expectations. From a first half perspective, pro forma organic sales were down 1.9%, but we are gaining momentum here as we move into the third quarter and second half. The results reflect strength in metals and mining and power generation that we believe is driven by stimulus investments and mega-projects, net of weakness in agriculture, construction equipment, and general industrial markets.
Speaker Change: From a first half perspective, pro forma organic sales were down 1.9%, but we are gaining momentum here as we move into the third quarter and second half.
Rob Rehard: Tail synergies were a tailwind worth a couple points to growth in the quarter. Adjusted EBITDA margin in the quarter was 25.8 percent, above our expectations and up 220 basis points from the prior year. This strong performance reflects better-than-anticipated mix as well as continued strong synergy realization partially offset by headwinds from lower volumes, orders an IPS on a daily basis or flat in the sector, which was great to see after eight quarters of declines and, as I mentioned previously, appears to signal momentum going into the second half. This performance reflects particular strength in power generation and marine, net a weakness in agriculture and construction equipment, and I booked a bill in the second quarter was.97.
Speaker Change: This strong performance reflects better-than-anticipated mix, as well as continued strong synergy realization partially offset by headwinds from lower volumes.
Speaker Change: Orders in IPS on a daily basis were flat in the second quarter, which was great to see after eight quarters of declines, and as I mentioned previously, appears to signal momentum going into the second half.
Rob Rehard: In July, orders on our daily organic basis were up 3.5%. We are pleased to see an inflection of positive order growth. This performance not only gives us further confidence in our second half outlook for our IPS but also provides more evidence that IPS is outperforming its end markets, considering macro indicators such as ISM and certain cautious intra-quarter peer reports that suggest a number of IPS's short cycle industrial end markets are sluggish. Turning to Power Efficiency Solutions, or PES.
Speaker Change: In July , orders on our daily organic basis were up 3.5%. We are pleased to see an inflection of positive orders growth.
Rob Rehard: Organic sales in the second quarter were down 10.1% to the prior year on an organic basis, which was ahead of our expectations. In the second quarter, the business continued to be impacted by Channel D stocking and weaker underlying demand in North America residential HVAC, and headwinds in the European and Asia-Pacific commercial HVAC business. However, commercial HVAC in North America continued to be a bright spot.
Speaker Change: In the second quarter, the business continued to be impacted by Channel D stocking and weaker underlying demand in the North America residential HVAC market.
Speaker Change: and headwinds in the European and Asia-Pacific commercial HVAC businesses.
Speaker Change: Commercial HVAC in North America continued to be a bright spot.
Rob Rehard: As we commented when we entered the second quarter, we were cautious in our estimated pace of recovery in residential HVAC given the persistent headwinds we faced. However, as we progressed through the second quarter, the timing of demand was slightly better than we anticipated, and we ended the quarter ahead of our expectations. Overall, we are cautiously optimistic that we have now moved past most of the pervasive inventory destocking headwinds we've seen over the past year and a half. The adjusted EBITDA margin in the quarter for PES was 16.1%, consistent with our expectation, but down from the prior year on lower volumes and weaker mix.
Rob Rehard: We continue to expect that PES margins will be stronger in the back half as volume increases. Shifting to orders, orders in PES for the second quarter were down 14% on an organic daily basis, but only down 3% excluding a large blanket order in the pool business booked in the prior year period. The adjusted order decline primarily reflects weakness in commercial HVAC outside North America.
Speaker Change: We continue to expect that PES margins will be stronger in the back half as volumes improve.
Speaker Change: Orders in PES for the second quarter were down 14% on an organic daily basis.
Speaker Change: but only down 3% excluding a large blanket order in the pool business booked in the prior year period.
Rob Rehard: Notably, daily orders in the quarter for our legacy North America climate business were up low single digits, and this is a positive sign of momentum in residential HVAC. While this is encouraging, we believe a portion of the residential HVAC channel continues to have elevated inventory, particularly at certain HVAC distributors, and that underlying volumes in residential HVAC are down slightly. Booked a bill in the quarter for PES was $1.02.
Speaker Change: Booked a bill in the quarter for PES was $1.02.
Rob Rehard: Daily orders in July were up 3% versus the prior year, keeping us confident that we are seeing residential HVAC and markets improving, but also continuing to reflect some weakness in commercial HVAC outside North America. We highlight some additional financial updates for your reference. Notably, on the right side of this page, you'll see we ended the quarter with total debt of approximately $5.8 billion and net debt of $5.25 billion. We repaid approximately $481 million of gross debt in the quarter, which includes net proceeds from industrial system sales. Net debt declined by approximately $465 million.
Speaker Change: We highlight some additional financial updates for your reference.
Speaker Change: Notably, on the right side of this page, you'll see we ended the quarter with total debt of approximately $5.8 million and net debt of $5.25 billion.
Speaker Change: We repaid approximately $481 million of gross debt in the quarter, which includes net proceeds from the industrial system sale.
Speaker Change: Net debt declined by approximately $465 million.
Rob Rehard: Adjusted free cash flow in the quarter was $136.4 million, and we are on track to deliver $700 million of adjusted free cash flow this year. Consistent with our prior plans, we expect to deploy the majority of this free cash flow to debt reduction. As a result, we are on track to pay down approximately $900 million of our debt.
Speaker Change: Consistent with our prior plans, we expect to deploy the majority of this free cash flow to debt reduction. As a result, we are on track to pay down approximately $900 million of our debt in 2024.
Rob Rehard: Moving to the outline, we are making several adjustments to our guidance for 2024, which are detailed in the table on the right-hand side of this slide. Also included in the table is our standard disclosure on below-the-line items, with specific indications of what has changed. As a reminder, our enterprise results include the recently sold industrial systems business for the first four months of the year, which equates to approximately $160 million in sales and $13 million in adjusted earnings.
Rob Rehard: We are reducing our sales outlook by approximately $45 million. As we entered the year, we commented that our full-year outlook called for a rebound in both residential HVAC and factory automation. As I've commented today, we are finally seeing the early stages of a rebound in residential HVAC, and we even saw a bit of demand pull forward in the quarter. However, we now expect a softer second half ramp in our automation and motion control segment.
Speaker Change: However, we now expect a softer second half ramp in our automation and motion control segment.
Rob Rehard: More specifically, as we commented when we reported the first quarter, we were seeing a strong surge in funnel activity within certain of our AMC businesses and started to see the longer cycle backlog building into the third and fourth quarters. However, as we move through the second quarter and now early into the third quarter, we are seeing delivery dates on new orders shifting later into 2024 or early 2025.
Speaker Change: More specifically, as we commented when we reported first quarter, we were seeing a strong surge in funnel activity within certain of our AMC businesses and started to see the longer cycle backlog building into the third and fourth quarters.
Speaker Change: However, as we move through the second quarter and now early into the third quarter, we are seeing delivery dates on new orders shifting later into 2024 or early 2025.
Rob Rehard: Given that we continue to see strong orders, booked to bill above 1, and growing funnel activity in AMC, we see this as purely timing, but it is having an impact on our current year outlook. Our outlook for adjusted EBITDA margins is 22.4%, which is roughly a half point below our prior outlook due to lower sales volumes and slightly weaker margins below the line. Our latest forecast for interest expense is now $6 million higher, or $376 million, reflecting the impact of upward SOFR rate revisions versus our prior estimate, along with the expected cadence of free cash flow in the year and the associated impact on interest. We are also providing our latest expectations for depreciation, amortization, and effective tax returns.
Speaker Change: Given that we continue to see strong orders, book-to-bill above 1, and growing funnel activity in AMC, we see this as purely timing, but it is having an impact on our current year outlook.
Speaker Change: below the line.
Speaker Change: Our latest forecast for interest expense is now $6 million higher, or $376 million, reflecting the impact of upward SOFR rate revisions versus our prior estimate, along with the expected cadence of free cash flow in the year and the associated impact on interest expense.
Speaker Change: We are also providing our latest expectations for depreciation, amortization, and effective tax rate.
Rob Rehard: The net impact of these changes reduces the midpoint of our adjusted, diluted EPS guidance range by 40%, to $9.67, which was the low end of our prior range. Our new adjusted diluted EPS guidance range for full year 2024 is now $9.40 to $9.80, which compares to our prior range of $9.60 to $10.40. The changes we are making today are roughly a 4% reduction in EPS and a 2.5% reduction in EBITDA versus the full year guidance provided last quarter.
Speaker Change: The net impact of these changes reduces the midpoint of our adjusted diluted EPS guidance range by 40 cents.
Speaker Change: to $9.60.
Speaker Change: which was the low end of our prior range.
Speaker Change: The changes we are making today are roughly a 4% reduction in EPS and a 2.5% reduction in EBITDA versus the full year guidance midpoint we provided last quarter.
Rob Rehard: Finally, we continue to expect adjusted free cash flow to be approximately $700 million this year, and once again, we plan to use the majority of this cash to pay down roughly $900 million of our debt by the end of this year.
Speaker Change: Finally, we continue to expect adjusted free cash flow to be approximately 700 million dollars this year and once again we plan to use the majority of this cash to pay down roughly 900 million dollars of our debt by the end of this year.
Rob Rehard: Our ability to maintain our expectation for $700 million of free cash flow this year, despite lower expected EBITDA, is due to updated working capital improvement opportunities our teams are projected to execute in late Q3 and throughout Q4, especially in the area of inventory reduction. On this next slide, we provide more specific expectations for our performance by segment, on revenue and adjusted EBITDA margin for the third quarter and for the full year.
Speaker Change: Our ability to maintain our expectation for $700 million of free cash flow this year, despite lower expected EBITDA, is due to updated working capital improvement opportunities our teams are projected to execute.
Speaker Change: on revenue and adjusted EBITDA margin for the third quarter and for the full year.
Rob Rehard: Note that the 2024 guided growth rates for AMC and IPS sales are calculated versus 2020 B Pro Forma sales, starting with AMC. For the third quarter, we expect sales to be approximately $420 million and adjusted EBITDA margin to be approximately $24. For the full year, we now expect AMC sales to be down low single digits. A reduction versus our prior expectations of flat, reflecting a softer second half. With that said, we feel good about the longer cycle part of the business, with AMC orders, as stated earlier, up 12% year-over-year in the course. We now expect AMC's 2024 Adjusted EBITDA margin to be approximately 24%, the low end of the prior target range, reflecting our weaker volume output and shift to IPM.
Speaker Change: Note that the 2024 guided growth rates for AMC and IPS sales are calculated versus 2020 the pro forma sales results.
Speaker Change: starting with AMC.
Speaker Change: For third quarter, we expect sales to be approximately $420 million and adjusted EBITDA margin to be approximately 24%.
Speaker Change: A reduction versus our prior expectations of flat, reflecting a softer second half round.
Speaker Change: With that said, we feel good about the longer cycle part of the business, with AMC orders, as stated earlier, up 12% year-over-year in the quarter.
Speaker Change: We now expect AMC's 2024 adjusted EBITDA margin to be approximately 24%.
Speaker Change: The low end of the prior target range reflecting our weaker volume outlook.
Rob Rehard: For the third quarter, we expect sales to be approximately $655 million, and adjusted EBITDA margin to be approximately $655 million. For the full year, we continue to expect IPS sales to be roughly flat, showing the momentum that is building in this business tied to healthy sales energy. We continue to expect IPS's 2024 adjusted EBITDA margin to be approximately 26%, reflecting nice tailwinds from Synergy and overall business performance. Finally, P.
Speaker Change: For third quarter, we expect sales to be approximately $655 million and adjusted EBITDA margin to be approximately 26%.
Speaker Change: For the full year, we continue to expect IPS sales to be roughly flat, showing the momentum that is building in this business tied to healthy sales synergies.
Speaker Change: reflecting nice tailwinds from Synergy's in overall business performance.
Rob Rehard: For third quarter, we expect sales to be approximately $455 million and adjusted EBITDA margin to be approximately 18%. For the full year, we continue to expect sales to decline at a mid-single-digit rate, but we now expect margins to be approximately 16.5%, near the lower end of our prior target range, reflecting weaker mix in the motor. While it is disappointing that we are seeing a slower second-half ramp for AMC, I think it's important to consider our results in the broader context of where we're taking Regal Rexnord, clear path to top quartile 40% gross margins, which our 38% Q2 gross margin reinforces, along with a path to 25% adjusted EBITDA margins and $1 billion in annual free cash flow, cash that we expect to enable a dramatic shift in our capital structure from debt to equity over the next couple of years and longer.
Speaker Change: Finally, PES.
Speaker Change: For the full year, we continue to expect sales to decline at a mid-single-digit rate, but we now expect margins to be approximately 16.5 percent, near the lower end of our prior target range, reflecting weaker mix in the motors businesses.
Speaker Change: Cash that we expect to enable a dramatic shift in our capital structure from debt to equity over the next couple years and longer term.
Rob Rehard: Fund Robust in Organic, not to mention the many things we are doing to accelerate organic growth. Moving to slide 13, a reminder that telling that growth story will be the primary focus of our upcoming Investor Day on September 17th in New York City. And we look forward to seeing many of you there.
Speaker Change: Moving to slide 13, a reminder that telling that growth story will be the primary focus of our upcoming Investor Day on September 17th in New York City and we look forward to seeing many of you there.
Operator: And with that, operator, we are ready to take, Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad, or use the speakerphone.
Speaker Change: Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Operator: Just cup your hands up before... Any time your question has been addressed and you would like to withdraw it, please press the star then 2, and we will pause. The first question comes from Michael Halloran. Good morning, Michael. To make sure you can hear me, the first question here is around kind of order dynamics and expectations in the back half of the year. And, you know, if I hear the order commentary across the segments, it feels at least kind of in line with your thought process exiting the first quarter report, if not better.
Speaker Change: And today's first question comes from Michael Halloran with Baird.
Speaker Change: Morning, Michael.
Michael Halloran: Just making sure you can hear me.
Speaker Change: So I think the first question here should is around kind of order dynamics and expectations in the back half of the year and you know if I hear the order commentary
Speaker Change: across the segments it feels at.
Speaker Change: at least in line with your thought process exiting the first quarter report, if not better.
Speaker Change: When you look at the back half of the year from a cadencing perspective, it seems more messaging around deliveries and outlay timing as opposed to a change in the underlying demand thought process.
Speaker Change: So maybe you could confirm that one way or another, and then also talk to the underlying demand process and where you're seeing the bigger puts and takes.
Speaker Change: if at all, versus what you were seeing, say, a quarter ago.
Operator: When you look at the back half of the year, from a cadencing perspective, it seems more messaging around deliveries and prod and outlay timing as opposed to a change in the underlying demand thought process. So maybe you could confirm that one way or another, and then also talk about the underlying demand process and where you're seeing the bigger puts and takes, if at all versus what you were seeing, say, a quarter ago. Yeah, so Mike, good morning, and thanks for the question. I think you've summarized it quite well, actually.
Speaker Change: Yeah, so Mike, good morning and thanks for the question. I think you've summarized it quite well actually. The orders...
Louis Pinkham: The orders really met our expectations in Q2. We feel really good about the fact that AMC has turned to positive order growth at about 12%. That IPS feels really solid at relatively flat, but that's after 8 quarters of decline. And then PES is starting to gain some momentum, especially now that July orders of PES are at roughly three. And then again, for AMC, roughly 10 and 3 12 for IPS, so roughly 5 for Regal. So yeah, July feels good as well.
Speaker Change: Really met our expectation in Q2. We feel really good about the fact that AMC has turned to positive order growth at about 12%.
Speaker Change: That IPS feels really solid, relatively flat, but that's after eight quarters of decline.
Speaker Change: And then PES is starting to gain some momentum, especially seeing now July orders of PES at roughly three.
Speaker Change: And then again, for AMC, roughly 10 and 3 1⁄2 for IPS, so roughly 5 for Regal. So yeah, July feels good as well.
Louis Pinkham: But to your question around timing, it really is simply timing. It's not underlying market demand. We are just seeing orders being placed in our backlog in the latter half, the latter quarter, and then into the first half of next year. When we look at it from a market perspective, it's pretty much playing out as we expected, in that Resi HVAC is starting to see a rebound. We are also seeing some stabilization of factory automation.
Speaker Change: But to your question around timing, it really is simply timing. It's not underlying market demand. We are just seeing the orders being placed for in our backlog in the latter half, latter quarter, and then into the first half of next year.
Speaker Change: You know, when we look at it from a market perspective, it's pretty much playing out as we expected in that Resi HVAC is starting to see a rebound.
Louis Pinkham: Actually, our factory automation business, our orders in Q2 were up 9% year-over-year, giving us some confidence in that recovery. And we're seeing some early green shoots. Early green shoots in alternative energy, solar, in food and beverage, giving us confidence that the second half will show positive growth and that we will move into 2025 with growth as well.
Speaker Change: We are also seeing some stabilization of factory automation. Actually, our factory automation business, our orders in Q2 were up 9% year over year, and so giving us some confidence in that recovery.
Speaker Change: And we're seeing some early green shoots in alternative energy solar, in food and beverage, and so giving us confidence that the second half will show positive growth and that we will move into 2025 with growth as well.
Louis Pinkham: And then, you know, kind of a subset question that when you look at the IPS segment, you know, the dominant single-digit thought process for the year, as you, I think, as Rob alluded to in some of the prepared remarks, some of the data points that were coming out from some of the subsegments were a little more challenging, but you seemed to be outperforming. So maybe talk about the levels of our performance and also as you think about kind of the growth rates, plus and minuses within certainly some of the more machinery-oriented components of that IPS segment. Maybe just talk about the trend trajectory and how you're playing against that kind of trend. Yeah,
Speaker Change: helpful and then you know kind of a subset question that when you look at the IPS segment you know the dominant single-digit thought process for the year
Speaker Change: As you, I think, as Rob alluded to in some of the prepared remarks,
Speaker Change: Some of the data points that were coming out from some of the subsegments were a little more challenging, you seem to be outperforming.
Speaker Change: So, maybe talk to the levels of our performance and also as you think about kind of the growth rates, plus and minuses.
Speaker Change: within certainly some of the more machinery-oriented components of that IPS segment. Maybe just talk to the trend trajectory and how you're playing against that kind of trend.
Louis Pinkham: So... Great question, Mike, and thanks for the question, because we actually think our IPS segment is outperforming the market. The business is certainly being impacted by some weekend markets, ag, and construction, but strength in marine, power gen, and metals and mining. We also feel really good, though, about our cross-sell synergies and our powertrain growth initiatives, which are allowing us to outperform the market. Through July of this year, we basically lapped our 2023 cross-selling targets that we achieved on a four-year basis.
Speaker Change: Yeah, so...
Speaker Change: Great question Mike and thanks for the question because we actually think our IPS segment is outperforming market.
Speaker Change: The business is certainly being impacted by some weekend markets, ag, construction, but strength in marine, power gen, and metals and mining.
Speaker Change: We also feel really good, though, about our cross-sell synergies and our powertrain growth initiatives, which is allowing us to outperform the market.
Speaker Change: Through July of this year, we basically lapped our 2023 cross-selling that we achieved on a four-year basis.
Louis Pinkham: Our funnel of potential cross-selling opportunities is up roughly 190% year-over-year, and we feel really good about that progress. And when we run the math, only about 10% of our customers are buying two or more of our products.
Speaker Change: Our funnel of potential cross-selling opportunities is up roughly 190% year-over-year, and we feel really good about that.
Speaker Change: And when we run the math, only about 10% of our customers are buying two or more of our product. And just think if they were able to buy more of our product.
Louis Pinkham: And just think if they were able to buy more of our product, and certainly if they're buying one in the industrial powertrain, they're likely to buy them all. And so, we feel good about cross-selling is allowing us to outperform. Rob said in his prepared remarks, roughly a couple of percent, and we believe that's what's strengthening our position. We'll provide quite a bit more detail on this at Investor Day, but that's a major driver of the success we're seeing at IPS. Great. Thanks, Louis. I appreciate it.
Speaker Change: And certainly, if they're buying one in the industrial powertrain, they're likely buying all.
Speaker Change: And so we feel good about the cross sell is allowing us to outperform.
Speaker Change: Rob said in his prepared remarks roughly a couple of percent and we believe that's what's strengthening our position. We'll provide quite a bit more detail on this at the investor day but that's a major driver of the success we're seeing at IPS.
Louis Pinkham: Yeah. Thanks, Mike. Thank you. And the next question comes from Jeff Hammond with KeyBank Capital Markets. Hey guys. Good morning. Good morning, Jeff. So, I just want to focus on PES.
Speaker Change: Great. Thanks, Louis. Appreciate it. Yeah. Thanks, Mike.
Speaker Change: Thank you. And the next question comes from Jeff Hammond with KeyBank Capital Markets.
Speaker Change: Hey, good morning guys. Morning. Morning, Jeff.
Speaker Change: So, I just want to focus on PES. I mean, I think what we're hearing from the Res HVAC OEMs is they're seeing volume growth again, destocking's done.
Jeff Hammond: And then they're taking last call for 410-A and, you know, we saw some pretty sporty order rates. I think 30, you know, from one, 100% from another, and probably some noise in there. But it just still seems like your business is lagging and I'm trying to...
Speaker Change: to understand that, and then just maybe speak in general to any share or content shift that you've seen around this refrigerant change.
Louis Pinkham: I mean, I think what we're hearing from the Res HVAC OEMs is they're seeing volume growth again, destocking's done, and then they're taking last call for 410A. And, you know, we saw some pretty crazy order rates, I think 30, you know, from one, 100% from another, and probably some noise in there. But it just still seems like your business is lagging, and I'm trying to understand that. And then just maybe speak in general about any share or content shift that you've seen around this refrigerant change. Yeah, so good morning, Jeff.
Speaker Change: Yeah, so good morning, Jeff. A couple of points I'd comment on.
Louis Pinkham: A couple of points I'd comment on. You know, first of all, we are actually very pleased with our position in PES and how they performed in Q2 and slightly above our expectations. But I want to remind you that PES is a business that's only about 25% Resi-HVAC. And we saw orders in the quarter up low single-digits, and we're forecasting sales in the third quarter up low single-digits. Now your comments around some of the OEMs calling out much larger orders; it really is going to be dependent upon the transition, or at least that's our expectation, the A2L refrigerant transition. We are seeing some OEMs deciding to build inventory of old 410A systems ahead of the transition, while others are already opting not to.
Speaker Change: You know, first of all, we actually are very pleased with our position in PES and how they performed in Q2 and slightly above our expectations.
Jeff Hammond: But I want to remind you that PES is a business that's only about 25% resi-HVAC.
Louis Pinkham: And so we're going to monitor this closely, but for now, our forecast did not factor any significant pre-build of old systems. Now, with regard to the new systems and our position on those new systems, we're a leader in the variable speed motor market in climate control, in residential HVAC, and our position is pretty strong across the board there, so no change from that perspective. Now, as you know, over the last five years, we have been moving away from lower end, lower technology, lower margin motor business, but this just aligns with the strategy we've been taking of providing value-added, margin-positive business for Regal Rexnord. Okay, so it sounds like the lingering weakness is maybe more in that general commercial... and the rest of the world than Res HVAC.
Jeff Hammond: Now, with regards to the new systems and our position on those new systems, you know, we're a leader in the variable speed motor market in climate in residential HVAC.
Speaker Change: And our position is pretty strong across the board there, so no change from that perspective. Now, as you know, over the last five years, we have been moving away from lower end, lower technology, lower margin.
Jeff Hammond: motor business, but this just aligns with the strategy we've been taking of providing value-added, margin-positive business for Regal Rexnord.
Speaker Change: Okay, so it sounds like the lingering weakness is maybe more in that general commercial...
Louis Pinkham: Shifting gears, though, to AMC, I'm trying to bridge first half to second half margins to get to your 24, because it seems like sales are second half to first half, maybe flat to slightly down. And yet, to hit your margin target, you have to be significantly higher on margins. And it seems like, I guess, discreet is maybe margin mix rich, which is where the kind of lingering weakness is. Yeah, so, you know, Jeff, you've pretty much hit it right on the head.
Jeff Hammond: and the rest of the world than Res HVAC. Shifting gears though to AMC,
Speaker Change: I just, I'm trying to bridge first half to second half margins to get to your 24 because it seems like sales are second half to first half maybe flat to slightly down.
Jeff Hammond: and yet you know to hit your margin target you got to be significantly higher on margins and it seems like I guess discreet is maybe margin mix rich which is where kind of the lingering weaknesses
Louis Pinkham: The shift in mix to factory automation and continued ramp-up in especially those very, you know, margin-rich businesses within AMC, like the medical business, are really playing into that uptick in margins as you move into the back half, which is contributing to the higher rate as we finish the year. Okay, so discrete automation still gets better in the second half. It's just a slower ramp than you previously thought? Absolutely, it gets better in the second half.
Speaker Change: Yeah, so, you know, Jesse, you're pretty much hit it right on the head. The shift in mix to factory automation and continued ramp up in especially those very, you know, margin-rich businesses within AMC like the medical business.
Jeff Hammond: are really playing into that uptick in margins as you move into the back half, which is contributing to the higher rate as we finish the year.
Speaker Change: Okay, so discrete automation still gets better in the second half, it's just a slower ramp than you previously thought? Absolutely, it gets better in the second half.
Louis Pinkham: I'll just remind you of a comment I made a second ago, Jeff, that orders were actually up in discrete automation in Q2, by about 9%. So we are expecting a stronger second half in factory automation for sure. Okay, thank you. Terrific guy.
Jeff Hammond: I'll just remind a comment I made a second ago, Jeff, that orders were actually up in discrete automation in Q2 about 9%, so we are expecting a stronger second half in factory automation for sure.
Speaker Change: Okay, thank you. Sure, got it. Thanks, Jeff.
Louis Pinkham: Thanks, Jeff. Thank you. And the next question comes from Julian Mitchell with Barclays. Hi, good morning.
Speaker Change: Thank you and the next question comes to Julian Mitchell with Barclays
Louis Pinkham: Maybe my first question, and thanks for the various guidance points, if we look at sort of the third versus fourth quarter, just trying to understand the sort of degree of ramp there, I think, you know, is it fair to say that the sort of third-quarter earnings or EPS, based on what you've said, is looking at sort of $250 to $260 or so, and then you have that steeper ramp into Q4 based on things like the Is that roughly sort of the right seasonality, or maybe just clarify that and if there's anything moving around below the line between Q3 and Q4.
Julian Mitchell: Hi, good morning. Maybe my first question, and thanks for the various guidance points, if we look at sort of the third versus fourth quarter, just trying to understand the sort of degree of ramp there,
Speaker Change: I think, um...
Speaker Change: you know, is it fair to say that the sort of third quarter...
Speaker Change: Earnings or EPS based on what you've said is looking at sort of 250 to 260.
Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.
Speaker Change: into Q4 based on things like the AMC margin mixed tailwind from factory automation. Is that roughly sort of the right seasonality or maybe just clarify that and if there's anything moving around below the line between Q3 and Q4?
Louis Pinkham: Yeah, there really isn't anything moving below the line between Q3 and Q4 aside from interest expense, which will obviously get a little bit better as you go into the back half of the year, or the final quarter of the year in particular. The margin should improve as a result of mix as you go from third to fourth, and if you do the math on the third quarter that we put out along with the full year guide, you'll see there's maybe 100 basis points of margin improvement as you move from third to fourth. So that's also a contributor there to higher sales as well.
Rob Rehard: So that's how you get there that supports the margins that we put in there and the ramp up in earnings. But aside from interest expense, there is no other below-the-line improvement that I see, and so that sort of 250-260 number doesn't sound outlandish for Q3. No, I mean, if you go back and do the math, it's about 250 off of what we put out, so you're right on. That makes sense.
Louis Pinkham: And then just a very quick follow-up, you know; excited to hear more at Investor Day in sort of seven weeks or so. But I suppose, you know, as we're thinking about, you know, the way the macros are ending up and, at the same time, the progress on synergies and maybe some green shoots on the top line, just sort of trying to circle it all together, Louis, if we think about the EBITDA margin, you know, sort of aspirations for the medium term, I think you've talked about that 25% or mid-20s E Just wondered sort of is that sort of a moving feast because the top line is proving to be very choppy. Any thoughts around that, please?
Louis Pinkham: You know, Julian, I think it's a little early for us to comment any further than what we've said. We feel really good about our path to 40% gross margins. I think we've proven ourselves to be margin zealots, and so I feel good about that 25% and then continuing to invest in the business. You know, to get to the 40% gross margin, we ended Q2 at 38.1.
Speaker Change: Julian I think it's a little early for us to comment any further than what we've said we feel really good about our path to 40% gross margins.
Speaker Change: I think we've proven ourselves as being margin zealots, and so I feel good about that 25% and then continuing to invest.
Speaker Change: The business.
Speaker Change: To get to the 40% gross margins we ended Q2 at $38 one.
Louis Pinkham: If you just take the synergies alone over the next year and a half, we get to 40% gross margin, if not a little bit better, and I'll tell you, we'll continue to drive 80-20 and be lean until then. So even if there's a little weakness on the top line, so the de-leverage and ESNA costs are a little bit higher as a percent, we still feel pretty So we're not ready to say much more than that, but we'll certainly elaborate on yesterday. Great. Thank you. Thank you. Thanks, Julian.
Speaker Change: If you just take the synergies alone over the next year and a half we get to 40% gross margins, if not a little bit better and I'll tell you. We'll continue to drive 80, 20 and lean until then so even if there is a little weakness on the top line the deleverage.
Speaker Change: And <unk> cost are little bit higher as a percent, we still feel pretty good about driving to that 25.
Speaker Change: So we're not we're not ready to.
Speaker Change: I'd say much more than that but we will certainly elaborate at investor day.
Speaker Change: Great. Thank you.
Sheila: Thanks Sheila.
Louis Pinkham: Thank you. And the next question comes from Nigel Coe with Wolf-Reese. Thanks. Good morning, everyone. Good morning, Nigel.
Scott Thompson: Thank you and then ask Scott Thompson, Nigel Coe with Wolfe research.
Scott Thompson: Thanks, Good morning, everyone.
Louis Pinkham: Thanks for the question. Good morning. So, I just wanted to ask another boring question on PES.
Speaker Change: Thanks for the questions.
Speaker Change: Good morning, So just wanted to.
Speaker Change: Another question on PFS.
Louis Pinkham: So, this step up from Q2 to Q3, so it's about $33.5 million in sales. Obviously, a bit more aggressive than normal seasonality, but we're not in a normal environment. So, I'm just wondering the visibility on that and maybe just talk about the dollar orders instead of the dollar orders in the second quarter and maybe in July that support that lift in sales. Yeah, so we're happy to follow up after the call with you specifically on giving you exact dollar orders.
Speaker Change: This step up from Q2 Q2 to Q3, so its about $35 million of sales.
Speaker Change: Obviously, a bit more aggressive than normal seasonality, but we're not a normal environment. So I'm just wondering the visibility on that and maybe just talk about the dollar orders instead up year to year the dollar orders.
Speaker Change: In the second quarter and maybe in July that supports that lift up in the sales.
Speaker Change: Yes, so we're happy to follow up after the call with you specifically on giving you exact dollar orders.
Louis Pinkham: Nigel, I don't have it in front of me, but what I can tell you is that, again, second quarter resi orders were up low single digits, and that's going to drive our third quarter revenue to be up, up low single digits. And as you know, the backlog in this business is only about two months. And so we're on a very short cycle in PES.
Speaker Change: Nigel I don't I don't have it in front of me, but what I can tell you is that again second quarter read the orders were up low single digits, and that's going to drive our third quarter revenue to be up.
Speaker Change: Up low single digits and as you know.
Speaker Change: The backlog in this business is only about two months and so we're very short cycle and P. S.
Louis Pinkham: And exiting Q2 with a 1.02 book bill also gives us that confidence for a bit of a step up. Now, from a third quarter perspective, realize that what we're forecasting overall for PES is sales slightly down. And that's driven by the rest of the business still having some pressure, in particular general commercial, which I would align heavily to ISM, and that we're seeing revenue down mid-single digit. So overall, slightly down in the third quarter, but we have confidence with a book bill of 1.02 and with the start of the rebound in residential HVAC that we have a path to. Okay, that's great. Thanks, Louis. And then, Rob, you were pretty defensive about the improvement in automation.
Speaker Change: And exiting.
Speaker Change: Q2 with a one two book to Bill also gives us that confidence for.
Speaker Change: A bit of a step up now from a third quarter perspective realize that what we're forecasting overall for P. S as sales slightly down.
Speaker Change: And that's driven by the rest of the business still having some pressure in particular general commercial debt I would align heavily to ISS and.
Speaker Change: And that we're seeing our revenue down mid single digits. So overall slightly down in third quarter.
Speaker Change: But we have confidence with a book to bill at one point or two and with the starting of the rebound in residential HVAC that we have a path to third quarter and fourth quarter for that matter.
Speaker Change: Okay, that's great. Thanks Louis.
Speaker Change: And then Rob you you were pretty definitive about the improvement in automation.
Rob Rehard: Yeah, I think he said absolutely improved so I'm. Just wondering are you talking about the kind of the year over year deltas are against easier comps. So we're talking here about the actual dollar.
Speaker Change: <unk> relative to the first half of the year.
Speaker Change: Okay.
Speaker Change: Am I disappointed and you know it was a very weak I assume so I'm just wondering if we've got enough kind of suck hedge for the macro in the back half of the year.
Rob Rehard: [inaudible] Yeah, we feel good about where we've gone relative to what we're seeing. You know, I feel good about the fact that we saw the order rates improving, as Louis mentioned, about 9% in that particular part of the business. And the fact that, you know, we've – and so to your question specifically, both sequentially, the book building or factory automation business was over 1.1; it was like 1.13. So we feel, you know, we're progressing on the right sequential basis, as Rob said. And then just on the book-to-bill, the July orders, obviously very encouraging year-over-year, but was book-to-bill above one in July? Yes, book the bill was slightly over one, and as I said, there's about 10% on order.
Speaker Change: Yeah, we feel good about where we bomb where we've guided relative to what we're saying.
Speaker Change: I feel good about the fact that we saw the order rates.
Speaker Change: Improving.
Speaker Change: As Louis mentioned about 9% in that particular part of the business and the fact that.
Louis: And so to your to your question, specifically, both sequentially and year over year, we're feeling very good about the back half and the way, we are and where we're guiding.
Speaker Change: AMC.
Speaker Change: Just quickly on factory.
Speaker Change: Nigel I am sorry, Brookville and our factory automation business was over 1.1, it was like 1.13 so.
Speaker Change: So we feel you know.
Speaker Change: We're progressing in the right sequential basis as Rob said.
Speaker Change: And then just on the bulk of the book to Bill that the July.
Speaker Change: So obviously very encouraging.
Speaker Change: Yeah, but it was book to Bill above one in July.
Speaker Change: Yes book to Bill was slightly over one and as I said, there's about 10% on orders.
Speaker Change: Alright, thanks, guys.
Michael Halloran: Sure. Thanks, Michael.
Speaker Change: Thank you and that's what it comes down to training with Goldman Sachs.
Rob Rehard: Great. Thanks, guys. Sure.
Speaker Change: Hi, Hey, guys. This is our this is Joe How're, you doing hey, Joe Good morning.
Rob Rehard: Thank you. And that's the question and answer video pitch for you from Goldman Sachs. Hi, hey guys, this is Joe. How are you doing?
Speaker Change: Uh huh.
Speaker Change: Good morning, So maybe just following up on <unk> question. There. So we're all just trying to kind of double click into the orders.
Louis Pinkham: Hey Joe, good morning. Good morning. So, maybe just following up on Nigel's question there. So, we're all just trying to kind of double-click on the orders in July in AMC. I think you had, I think you referenced that you expected those to convert to revenues or a portion thereof, at least in the fourth quarter. Like, how much of it is going to convert this year versus what your expectation is for something maybe a longer cycle into 2025? You know Joe, we don't have it cut that way.
Speaker Change: In July in AMC.
Speaker Change: I think you had it I think he referenced that that you expected to convert to revenues or a portion of that base in the fourth quarter like how much how much of it is going to convert this year versus versus what your expectation is for something maybe longer cycle one to 2025.
Speaker Change: Yeah.
Louis Pinkham: Our backlog is filling nicely for what we've guided to. We're not expecting any significant lift in order to be able to achieve the fourth quarter guide. So we're happy to provide more detail going forward, but I think maybe the way to think about it is that about a third of those orders will go into the second half and about two-thirds into the 25. But we're happy to give you more detail in the future. Okay, yeah, no, that's helpful, Louis.
Speaker Change: You know Joe we don't we don't we don't have it cut that way.
Speaker Change: Our our backlog is filling nicely for what we guided to or we're not expecting any significant lift in orders to be able to achieve the fourth quarter guide.
Speaker Change: So all right.
Speaker Change: Happy to provide more detail.
Speaker Change: Going forward, but I think the maybe the way to think about it as about a third of those orders will lay into the second half and about two thirds into.
Speaker Change: 25, but we were happy to give you more detail in the future.
Louis Pinkham: So then I guess the baseline then is that we've kind of hit a bottom on revenue for AMC, you know, $4.20 in the third quarter. We start to improve from there, so I want to make sure that I have that right. And then secondly, I think Jeff touched on the margins earlier. It seems like a pretty material uptick in margins sequentially, not just in 3Q but also in 4Q. I'm baking in, you know, close to 300 basis points.
Speaker Change: Okay, Yeah, no that's that's.
Speaker Change: Helpful.
Louis: Louis I guess.
Louis: So then I guess the baseline then is we've kind of hit a bottom on revenue for AMC.
Speaker Change: <unk> in the third quarter, and we start to start to improve from there. So I want to make sure that I have that right and then and then secondly, I think Jeff touched on the margin earlier, it seems like a pretty material uptick in margins sequentially not just in <unk>, but also in <unk> I'm baking in you know close to.
Louis: The 300 basis points.
Speaker Change: Just is there a way to parse that out into four key margin and what really drives that improvement for <unk>.
Rob Rehard: Like, just is there a way to parse that out into the 4Q margin and what really drives that improvement for 4Q? Let me just take revenue, very quickly. So the revenue guide is actually relatively flat sequentially into Q3. And then, yes, the step up into Q4. We feel confident with the roughly 10% or 12% of orders up in Q2, the 10% of orders up in July, the more than 1.1 billion book bill coming out of July, that that is definitely the path that this business is on. With regard to margins... Yeah, and I'll take that side of it.
Speaker Change: Let me let me just.
Speaker Change: Very quickly our revenue.
Speaker Change: The revenue guide is actually relatively flat sequentially into Q3, and then yes, the step up into Q4.
Speaker Change: We feel confidence with you know.
Speaker Change: Roughly 10% or 12% of orders up in Q2, the 10% of orders up in.
Speaker Change: July.
Speaker Change: More than 1.1 book Bill coming out of July.
Speaker Change: That that is definitely.
Speaker Change: The path that this business is on with regards to margins yeah, I'll take that side of it. So the margin step up is absolutely related to mix within this business and the greater mix going into that like like discrete factory automation, which we've been talking about.
Rob Rehard: The margin step-up is absolutely related to mix within this business and the greater mix going into that discrete factory automation, which we've been talking about, as well as a little bit of synergy improvement as we move through the back half of the year. Remember, we said we were going to do $90 million, and we're on track to do that. We did about $25 million in the second quarter and expect to do over $20 million in the third and the remainder in the fourth.
Speaker Change: As well as a little bit of synergy improvement as we move through the back half of the year remember.
Speaker Change: We said, we're going to do a $90 million and we're on track to do that you know we did about 25 million.
Speaker Change: In the second quarter and expect to do over $20 million in the third and the remainder in the fourth.
Speaker Change: And roughly 20% of those synergies are also goes into the.
Speaker Change: The AMC side of the business. So that's also helping to improve margins as we go through the year.
Speaker Change: Okay. Thanks, guys.
Speaker Change: Got it.
Rob Rehard: And roughly 20% of those synergies also go into the AMC side of the business. So that's also helping to improve margins as we go through the year. Okay, guys. Thank you. And the next question comes from Christopher Glynn with Albany. Thank you. Good morning, guys. Good morning, Chris.
Speaker Change: Thank you and the next question comes from Christopher Glynn with Oppenheimer.
Christopher Glynn: Thank you good morning, guys good.
Chris: Good morning, Chris.
Louis Pinkham: So, looking at IPS, holding up well, performing well, but very much a kind of two stories, various different markets, with ag and construction down significantly. I'm wondering if you could go into a little bit in terms of the magnitudes on a relative basis of some of the pluses and minuses because, you know, at some point, things like agriculture and construction are going to turn, and, you know, based on the comparisons, it helps us think about what you're seeing there and, you know, the kind of mix of D stock that's into those magnitudes. Yes, so it is. Chris, you know, I don't have it broken down into that level of detail, but roughly from our operating reviews, I can tell you that we're seeing adding construction down high single digits.
Chris: So.
Speaker Change: Looking at our IP.
Chris: Ips are holding up well performing well, but.
Chris: Every much.
Speaker Change: Kind of kind of two stories various different markets like AG and construction.
Speaker Change: Down significantly I'm wondering if you could go into a little bit in terms of the magnitudes are on.
Chris: A relative basis.
Chris: Some of the pluses minuses, because you know at some point things like gag and construction are going.
Speaker Change: Churn and based on the comparisons helps it helps us think about it what youre seeing there and kind of a mix of destock that into.
Chris: Into those magnitudes.
Chris: Yes so.
Chris: Chris you know I don't have it cut into.
Chris: That level of detail, but roughly from our our operating reviews I can tell you that we're seeing adding construction down high single digit.
Louis Pinkham: I think there's a bit of D-stock there, but I don't think it's a ton of D-stock. I think there are demand constraints in those markets.
Chris: I think there's a bit of a destock there I don't think its a ton of destock I think there is demand constraints in those markets.
Louis Pinkham: We are seeing marine power generation up high single digits, and that's really a big part of that balance. And then, you know, with ISM being below 50 and PMIs in Europe and Asia below 50, the fact that IPS, we're calling for relatively flattish, we feel good that our cross-sell activity is helping to bolster the overall business to outperform the market. But hopefully, that gives you a little sense of how we're thinking about it by market. Yeah, on the kind of MRO and distribution side, what do you see there? Is self-root pretty aligned, do you think?
Speaker Change: We are seeing marine.
Chris: Power Gen up high single digits, and that's really a big part of that balance and then you know with <unk> being below 50, and PMI is in Europe and Asia below 50.
Speaker Change: Fast that.
Speaker Change: Yes were calling for relatively flattish we feel good that our cross sell activity is helping to bolster the overall business to outperform market.
Chris: But hopefully that gives you a little sense of how we're thinking about it by market.
Speaker Change: Yeah on the.
Speaker Change: Kind of MRO and distribution side, what are you seeing there is sell through pretty aligned do you think.
Louis Pinkham: Yeah, no, no. We do not have an inventory issue in distribution. This is part of the reason this business is a good forecastable business for us. Half of the business is aftermarket MRO, and half of that goes through distribution. Half of that, we see the sales in, sales out, and inventory levels of our distributor. And nothing is out of whack right now.
Speaker Change: No no we do not have an inventory issue on distribution. You know this is part of the reason why this business is a good forecastable business for US we have half of the businesses is aftermarket MRO grocery distribution half of that we see the sales in sales.
Speaker Change: And inventory levels of our distributor.
Speaker Change: And nothing is out of whack right now.
Speaker Change: So yeah, it's pretty much aligning with the demand.
Louis Pinkham: So yeah, it's pretty much aligning with the demand. Great. And then just kind of tuning a question on discrete within AMC, where we've had a lot of discussion. Are you, it seems like you're starting to maybe anticipate flattish revenue year over year in the fourth quarter for discrete and, you know, probably down very hefty double digits on a reported revenue basis in the second quarter. So just want to make sure that understanding of the bridge is correct, um, I don't, I don't, we don't have it for just discreet.
Speaker Change: Great and then.
Speaker Change: Kind of tuning question on the discrete within AMC, where we've had a lot of discussion are you. It seems like you're starting to maybe anticipating flattish.
Speaker Change: Revenue year over year in the fourth quarter for discrete and.
Speaker Change: Probably down very hefty double digits.
Speaker Change: On a reported revenue basis in the second quarter. So just want to make sure that understanding of the bridge is correct.
Speaker Change: Yeah.
Speaker Change:
Speaker Change: I don't I don't we don't have it for just discrete.
Louis Pinkham: You know, discrete automation is roughly 35% of that segment. The overall segment for the full year will be, you know, down low single digits is what we're guiding to. And so we're expecting a pickup in the second half of the order. And we're supporting it from a year-over-year perspective. There's not much more I have prepared on factory automation than that. The only other thing I would add is, you know, I think we're thinking around flat-to-low single digits in the back half.
Speaker Change: Discrete automation is roughly 35% of that segment. The overall segment for the full year will be down low single digits is what we're guiding to and so we're expecting a pickup in the second half of the orders are supporting it from a year over year perspective.
Speaker Change: There is not much more I have prepared on factory automation than maybe.
Speaker Change: The only other thing I would I would add is I think we're thinking around flat to up low single digits in the back end and the back half or for that for that particular business is about what we've been we've been monitoring insane.
Speaker Change: Thank you.
Speaker Change: You got it.
Speaker Change: Thank you and this does conclude the question and answer session I would like to return the conference to Louis Pinkham for any closing comments.
Rob Rehard: Or, for that particular business, it's about what we've been monitoring and seeing. Thank you. Thank you, and this does conclude the question and answer session. I would like to return the conference to Dr. Louis Pinkham for any closing comments. Great. Thank you, operator. And thanks to our investors and analysts for joining us today. The performance we've delivered over the last five years tells a tremendous story of portfolio transformation, margin expansion, free cash flow acceleration, and laying the groundwork for faster organic growth.
Louis Pinkham: Great. Thank you operator, and thanks to our investors and analysts for joining us today.
Speaker Change: The performance we delivered over the last five years tells a tremendous story of portfolio transformation margin expansion free cash flow acceleration and laying the groundwork for faster organic growth. The next phase of our journey will be more about leveraging the benefits of our reshape.
Rob Rehard: The next phase of our journey will be more about leveraging the benefits of our reshaped portfolio to accelerate profitable growth, both organic and, in time, inorganic. We see so many levers under our control to create significant shareholder value, and we look forward to presenting that story at our Investor Day scheduled for September 17th in New York City. We hope you will join us. Thank you again for joining us today and thank you for your interest in Regal Rexnord.
Speaker Change: Portfolio to accelerate profitable growth, both organic and in time inorganic.
Louis Pinkham: We see so many levers under our control to create significant shareholder value and we look forward to presenting that story at our Investor Day scheduled for September 17th in New York City.
Louis Pinkham: We hope you will join us.
Speaker Change: You again for joining us today and thank you for your interest in Regal Rexnord.
Louis Pinkham: Thank you. The conference has now concluded. Thank you for attending today's presentation. We now disconnect. ?? © BF-WATCH TV 2021 [inaudible] © BF-WATCH TV 2021 ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? © BF-WATCH TV 2021 ?? ?? ?? ?? © BF-WATCH TV 2021 ?? ?? ?? ?? ?? ?? [inaudible] ?? © BF-WATCH TV 2021, ?? ?? ?? ?? ?? ?? © BF-WATCH TV 2021, ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? and many more. I'm your host, Rebecca Felgate.
Speaker Change: Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Operator: © BF-WATCH TV 2021,. .. .. .. .. [inaudible] ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? © BF-WATCH TV 2021 [inaudible] © BF-WATCH TV 2021 ?? ?? ?? [inaudible] ?? ?? ?? ?? ?? ?? © BF-WATCH TV 2021, [inaudible] ?? ?? ?? ?? ?? ?? ?? ?? ??
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