Q3 2024 Regal Rexnord Corp Earnings Call
Operator: Good morning, and welcome to Regal Rexnord's third quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Good morning, and welcome to your Bagel Rexnord third quarter 2024 earnings call all participants will be in listen only mode.
You need assistance personnel conference specialist by pressing the star key followed by zero.
Operator: After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
Robert Barry: I would now like to turn the conference over to Rob Barry, investor relations.
Speaker Change: I'd now like to turn the conference over to Rob Barry Investor Relations. Please go ahead.
Robert Barry: Please go ahead. Great. Thank you, operator.
Rob Barry: Great. Thank you operator, and good morning, and welcome to Regal Rexnord third quarter 2024 earnings Conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob <unk>, Our Chief Financial Officer.
Robert Barry: Good morning and welcome to Regal Rexnord's third quarter 2024 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob Rehard, our Chief Financial Officer. I'd like to remind you that during today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and 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, and we've included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in these presentation materials.
Speaker Change: I'd like to remind you that during today's call you may hear forward looking statements related to our future financial results plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the Regal Rexnord Dot com website.
Speaker Change: Also on this slide we think that we are presenting certain non-GAAP financial measures that we believe are useful to our investors and we've included reconciliations between the non-GAAP financial information in the GAAP equivalent in the press release and in the 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 3Q performance, and an update on our powertrain business. Rob Rehard will then present our third quarter financial results in more detail and review our latest guidance.
Turning to slide three let me briefly review the agenda for today's call Lewis will lead off with his opening comments and overview of our three key performance and an update on our powertrain business. Rob <unk> will then present, our third quarter financial results in more detail and review our latest guidance. We'll then move on to Q&A after which Louis will.
Robert Barry: We'll then move on to Q&A, after which Louis will have some closing remarks.
Speaker Change: I have some closing remarks.
Louis Pinkham: And with that, I'll turn the call over to Louis. Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our third quarter results and get an update on our business and for your continued interest in Regal Rexnord. I believe our third quarter can be characterized by significant and strong, controllable execution by our team. As an enterprise, we achieved a record-adjusted gross margin of 38.4 percent and a record-adjusted EBITDA margin of 22.8 percent, which is up 110 basis points versus prior year on a comparable basis. Our largest segment, IPS, had a very strong quarter, achieving positive organic growth in weak markets, which we believe provides clear evidence its outgrowth initiatives are gaining momentum.
Speaker Change: I will turn the call over to Lewis.
Lewis: Great. Thanks, Rob and good morning, everyone.
Lewis: For joining us to discuss our third quarter results and get an update on our business and for your continued interest in Regal Rexnord.
Lewis: I believe our third quarter can be characterized by significant and strong controllable execution by our team as an enterprise we achieved a record adjusted gross margin of 38, 4% and a record adjusted EBITDA margin of 22, 8%, which is up 100.
Lewis: <unk> hundred 10 basis points versus prior year.
Lewis: Comparable basis.
Lewis: Our largest segment.
Lewis: Yes.
Lewis: Very strong quarter, achieving positive organic growth and weak market, which we believe provides clear evidence it's outgrowth initiatives are gaining momentum.
Louis Pinkham: In addition, IPS posted another quarter of very strong, record-adjusted EBITDA margins, aided in large part by achieving planned synergy. That said, we were disappointed in our overall third quarter sales results, with sales down 2.7% on a comparable organic basis, driven mainly by our AMC and PES segments, facing end-market headwinds that continued to be more severe than we expected. In particular, we saw larger headwinds in discrete automation in AMC and in general commercial and non-U.S. commercial HVAC markets in PEF. And while our residential HVAC business with NPS has started to see signs of stronger demand, we have not been able to ramp our capacity fast enough to keep up with it, weighing on our service levels.
Lewis: In addition, Ips posted another quarter of very strong record adjusted EBITDA margin aided in large part by achieving planned synergies.
Speaker Change: That said, we were disappointed in our overall third quarter sales results with sales down two 7% on a comparable organic basis, driven mainly by our AMC and P segment facing end market headwinds that continued to be more severe than we expected in <unk>.
Speaker Change: Particular, we start.
Lewis: Sure headwinds in discrete automation and AMC, and then general commercial and non U S commercial HVAC markets in <unk>.
Lewis: And while our residential HVAC business with NPS has started to see signs of stronger demand, we have not been able to ramp our capacity fast enough to keep up with it weighing on our service levels. We expect this to be largely resolved during fourth quarter.
Louis Pinkham: We expect this to be largely resolved during fourth quarter. Despite these headwinds, we are seeing growing momentum behind our various cross-cell initiatives, which helped IPS achieve positive growth in the quarter. I will highlight a notable example later in the presentation.
Lewis: Despite these headwinds we are seeing growing momentum behind our various cross sell initiatives, which helped Ips achieved positive growth in the quarter I will highlight a notable example later in the presentation.
Louis Pinkham: And before digging deeper into our results, I want to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution, navigating through persistently choppy end markets, while also continuing to advance our many longer term value creation drivers. We discussed these value creation opportunities in some detail at our September 17th Investor Day. For those who were not able to attend, I think you would find it worthwhile to review the materials which are available on our investor site. Expanding on third quarter results, orders in the quarter on a daily basis were up 2.5 percent. The growth was led by IPS, followed by AMC, and while weighted to longer cycle bookings, helps give us confidence that we will see better top line performance in 2025.
Lewis: And before digging deeper into our results.
Lewis: I wanted to thank our 30000 recalibration of our associates for their hard work and disciplined execution navigating through persistently choppy end market. While also continuing to advance our many longer term value creation drivers.
Lewis: We discuss these value creation opportunities in some detail at our September 17th Investor Day for those who are not able to attend I think you would find it worthwhile to review the materials, which are available on our investors site.
Lewis: Expanding on third quarter results orders in the quarter on a daily basis, we're up two 5%. The growth was led by Ips followed by AMC and while weighted to longer cycle bookings helps give us confidence that we will see better top line performance in 2020.
Lewis: Five.
Louis Pinkham: In October, daily orders were down less than 1%. Despite third quarter top line pressures, margins in the quarter were strong. Our adjusted gross margin came in at a record 38.4%. Adjusted EBITDA margin was 22.8%, up 110 basis points versus the prior year on lower volume. That translates to $7 million of adjusted EBITDA growth on a roughly $44 million revenue decline. We think very strong performance for a business with over 38% gross margins and reflects achieving $27 million of synergies in the quarter along with strong cost management by our team. Regarding synergies, we remain on track to achieve $90 million this year, after which we will have another $120 million of cost synergies to realize, largely in 2025 and 2026, and worth about two points of margin.
Lewis: In October daily orders were down less than 1%.
Lewis: Despite third quarter topline pressures margins in the quarter were strong our adjusted gross margin came in at a record 38, 4%.
Lewis: Adjusted EBITDA margin was 22, 8% up 110 basis points versus the prior year on lower volumes.
Lewis: That translates to $7 million of Magellan.
Lewis: EBITDA growth on a roughly $44 million revenue decline, we think very strong performance for our business with over 38% gross margins.
Lewis: Flex achieving $27 million of synergies in the quarter, along with strong cost management by our teams.
Lewis: Regarding synergies we remain on track to achieve $90 million. This year after which we will have another $220 million of cost synergies to realize largely in 'twenty five 'twenty six and worth about two points of margin.
Louis Pinkham: Adjusted earnings per share in the quarter were $2.49, which is up 18.6% versus prior year, and a clear inflection point for Regal. Lastly, we generated $126 million of adjusted free cash flow in the quarter, which contributed towards paying down debt. In summary, a good quarter of controllable execution by our team, coupled with some encouraging performance on order.
Lewis: Adjusted earnings per share in the quarter were $2 49.
Lewis: Which is up 18, 6% versus prior year and a clear inflection point for Regal.
Lewis: Lastly, we generated $126 million of adjusted free cash flow in the quarter, which contributed towards paying down debt.
Lewis: In summary.
Lewis: Good quarter, a controllable execution by our team coupled with some encouraging performance on orders.
Louis Pinkham: At our September Investor Day, we presented our detailed strategy for accelerating profitable growth. Each quarter going forward, I plan to highlight a product, case study, or initiative that shows our growth strategy in practice. This quarter, it is a powertrain win that demonstrates how we are providing differentiated value add for our customers and getting paid for it through value pricing. Pictured on the left-hand side of this slide is a powertrain we designed for a mining customer. Its principal components are called out on the diagram. Nearly a hundred of these powertrains will be installed to power and control motion across the mine's vast network of conveying infrastructure, which will move potash from deep inside the mine and then, once on the surface, through a network of ore processing operations.
Lewis: At our September Investor Day, we presented our detailed strategy for accelerating profitable growth each quarter going forward I plan to highlight our product case study or initiative that shows our growth strategy in practice.
Lewis: This quarter. It is a powertrain win that demonstrates how we are providing differentiated value add for our customers and getting paid for it through value pricing.
Lewis: Pictured on the left hand side of this slide is a powertrain we design for a mining customer.
Lewis: Its principal components are called out on the diagram.
Lewis: Nearly 100 of these powertrains will be installed to power and control motion across the mine that network conveying infrastructure, which will move potash from deep inside the mine and new ones on the surface through a network of more processing operations.
Louis Pinkham: Various pieces of the conveying infrastructure are being direct shipped to the mine site where they will be assembled. To help minimize the degree of on-site assembly, the customer valued being able to receive the powertrain from us as a fully assembled, fully integrated solution. Our engineers were also able to address all of the mine's power and motion needs with only three sizes of the powertrain pictured, down from the five originally conceived by a third-party integrator, further reducing complexity. This is a great example of how our team's understanding of the customer's application resulted in valuable design enhancements.
Lewis: Various pieces of the conveying infrastructure are being direct ship to the mine site, where they will be assembled to help minimize the degree of onsite assembly the customer valued being able to receive the powertrain from us as a fully assemble.
Lewis: Fully integrated solution.
Lewis: Our engineers, we're also able to address all of the mine power and motion needs with only three sizes of the powertrain picture down from the five originally conceived by a third party integrator further reducing complexity. This is a great example of how our teams understanding of the customer's application.
Lewis: Asian resulted in valuable design enhancements.
Louis Pinkham: while not directly part of the powertrain and not pictured on this slide. Our innovative RexPro conveyor chain is also being sold as part of the project. The Rexpro solution arrives in a manageable length that can be easily assembled into longer strands using simple fasteners and tools, a much easier, safer, and faster assembly process versus competing products. Winning this Rexpro business also reinforces how we are selling Regal's broader portfolio to our valued customers. A notable feature of this powertrain win is that we are being paid a premium specifically tied to integrating the motor into the drivetrain, leveraging our motors and powertrain expertise.
Lewis: While not directly part of the powertrain and not pictured on this slide our innovative Rex Pro conveyor chain is also being sold as part of the project.
Lewis: The Reg solution arrived in a manageable lengths that can be easily assembled into longer string and using simple fasteners and tools are much easier safer and faster assembly process versus competing products.
Lewis: Winning this Rex pro business also reinforces how we are selling regal broader portfolio to our valued customers.
Lewis: A notable feature of this powertrain win is that we are being paid a premium specifically tied to integrating the motor into the drivetrain leveraging our motors empowered trained expertise.
Louis Pinkham: The motor's precise alignment in the subsystem is critical to its functionality and efficiency under the harsh operating conditions at the mine. As you can see on the lower right portion of the slide, the value of our complete solution, engineered for ease of install by a customer coordinating content from a global set of suppliers for assembly at a remote site, all earned Regal Rexnord a nice price premium above the individual component cost while still helping our customers save time, money, and reduce project risk. This win helps validate our powertrain strategy and our strategic focus on a subset of high value verticals where we have deep domain expertise, motors expertise, and a highly engineered power transmission component that are truly valued by our customers.
Lewis: The motors precise alignment and the subsystem is critical to its functionality and efficiency under the harsh operating conditions at the mine.
Lewis: As you can see on the lower right portion of the slide the value of our complete solution engineered for ease of install by a customer coordinating content from a global set of his suppliers for assembly at a remote site all earned Regal Rexnord, a nice price premium above the individual <unk>.
Lewis: <unk> costs, while still helping our customers save time money and reduce project risk.
Lewis: This win helps validate our powertrain strategy and our strategic focus on a subset of high value vertical where we have deep domain expertise.
Lewis: Motors expertise and a highly engineered power transmission components that are truly valued by our customer.
Louis Pinkham: On top of all of this, the harsh duty nature of this application leads to a significant aftermarket opportunity for our business, which we forecast at approximately six times the value of the initial product sale at even stronger margins. This is another example of what we discussed at Investor Day, creating a more durable business through stronger and stickier relationships with our customers, along with significant aftermarket revenue potential.
Lewis: On top of all of that the harsh duty nature of this application leads to a significant aftermarket opportunity for our business, which we forecast at approximately six times the value of the initial product sell at even stronger margins.
Lewis: This is another example of what we discussed at Investor day, creating a more durable business through stronger and stickier relationships with our customers along with significant aftermarket revenue potential.
Louis Pinkham: My congrats to the team for this fantastic win.
Rob Barry: My congrats to the team for this Ben Tastic win.
Robert Rehard: And with that, I'll turn the call over to Rob. Thanks, Louis, and good morning, everyone. I'd also like to thank our global team for their hard work and disciplined execution in the quarter.
Speaker Change: And with that I'll turn the call over to Rob.
Rob Barry: Thanks, Louis and good morning, everyone.
Rob Barry: Also like to thank our global team for their hard work and disciplined execution in the quarter.
Robert Rehard: Now, let's review our operating performance by segment. Starting with automation and motion controller AMC, net sales in the third quarter were down 4.1% to the prior year on an organic basis. The results reflect weakness in discrete automation, partially offset by strength in the aerospace and defense, food and beverage, data center, and medical market. Within discrete automation, where the growth was below our expectations, the shorter cycle business continued to remain weak, with distributors retaining lean stocking levels and smaller projects slower to materialize. Due to heightened caution in the channel, we believe, tied to factors such as persistent ISM weakness.
Rob Barry: Now, let's review our operating performance by segment.
Rob Barry: Starting with automation and motion control, our AMC net sales in the third quarter were down four 1% to the prior year on an organic basis.
Rob Barry: The results reflect weakness in discrete automation.
Rob Barry: Partially offset by strength in the aerospace and defense food and beverage data center and medical markets.
Rob Barry: Within discrete automation, where the growth was below our expectations. The shorter cycle business continued to remain weak with distributors routine lean stocking levels and smaller projects slower to materialize due to heightened caution in the channel we believe tiger factors such as persistent ISR weakness.
Rob Barry: Yes.
Robert Rehard: slower-to-materialize benefits from interest rate reductions, and U.S. election uncertainty. AMC's adjusted EBITDA margin in the quarter was 21.8%, which was below our expectations on lower volumes, weaker mix, particularly with discrete automation, and larger-than-expected foreign exchange margins. Orders in AMC in the third quarter were up 4.5% versus prior year on a daily basis. The second quarter in a row of positive orders. Booked a bill in the third quarter for AMC was .9. We are encouraged by the fact that for the second quarter in a row, we saw positive orders in discrete automation. while aided by a couple large project orders.
Rob Barry: Slower to materialize benefits from interest rate reductions in the U S election uncertainty.
Rob Barry: Amc's adjusted EBITDA margin in the quarter was 21, 8%, which was below our expectations on lower volumes and weaker mix, particularly with discrete automation and larger than expected foreign exchange pressures.
Rob Barry: Borders and AMC in the third quarter were up four 5% versus prior year on a daily basis.
Rob Barry: Second quarter in a row of positive orders.
Rob Barry: Book to Bill in the third quarter for AMC was <unk> nine.
Rob Barry: We are encouraged by the fact that for the second quarter in a row, we saw positive orders in discrete automation.
Rob Barry: While aided by a couple of large project orders automation orders would have been roughly flat even excluding these wins.
Robert Rehard: Automation orders would have been roughly flat, even excluding Third quarter also saw an inflection to positive order growth in food and beverage, which we, which was also encouraging to see after a long period of pressure in that. Finally, we continue to see strength in Aero, Datacenter, and Meta. October orders for AMC were down 11.5% on a daily organic. and largely reflects lumpy, longer-cycle project activity in discrete automation. Given these characteristics, we believe October's orders performance is best considered in the context of AMC's recent order trend. The weighted average of second quarter, third quarter, and October orders, which were all weighted the longer cycle, is about 5% higher than the year before.
Rob Barry: Third quarter also saw an inflection to positive order growth in food and beverage, which we which was also encouraging to see after a long period of pressure in that end market.
Rob Barry: Finally, we continue to see strength in Aero data center and medical.
Rob Barry: October orders for AMC were down 11, 5% on a daily organic basis and.
Rob Barry: And largely reflects lumpy longer cycle project activity in discrete automation.
Rob Barry: Given these characteristics. We believe october's orders performance is best considered in the context of AMC recent order trend the weighted average of second quarter third quarter and October orders, which were all weighted to longer cycle is about 5% in.
Robert Rehard: actually helps boost our confidence that AMC will be able to deliver stronger top-line performance in 2025.
Rob Barry: And actually helps boost our confidence that AMC will be able to deliver stronger top line performance in 2025.
Robert Rehard: Turning to Industrial Powertrain Solutions, or IPS. Net sales in the third quarter were up almost 1% versus the prior year on an organic basis. The results reflect strength in energy, aerospace, and metals and mining, net of weakness in the alternative energy, and machinery off-highway markets. cross-marketing synergies continued to contribute a couple points of growth in the quarter. We believe this segment's third quarter results reflect outperformance versus our IPF in March. Even so, it was slightly below our expectations due to incremental weakness in certain short-cycle general industrial end markets that tend to correlate with the ISM.
Rob Barry: Turning to industrial powertrain solutions or Ips.
Rob Barry: Net sales in the third quarter were up almost 1% versus the prior year on an organic basis.
Rob Barry: The results reflect strength in energy aerospace and metals and mining net of weakness in the alternative energy and machinery off highway markets Cross marketing synergies continued to contribute a couple of points of growth.
Rob Barry: In the quarter.
Rob Barry: We believe this segment's third quarter results reflect outperformance versus our Ips and markets.
Rob Barry: Even so it was slightly below our expectations due to incremental weakness in certain short cycle general industrial end markets that tend to correlate with the ISO.
Robert Rehard: Adjusted EBITDA margin in the quarter was 26.8%, above our expectations and up nicely from prior year. This strong performance reflects higher volumes, stronger mix, and custom. Orders in IPS on a daily basis were up nearly 6% in the third quarter, which suggests we are building some sequential momentum. This solid performance reflects growth in the distributor and OEM chain. Book DeVille in third quarter for IPS was roughly 1.0. in October. Orders on a daily organic basis were up 6.6%. We believe continuing the positive momentum and market outgrowth we saw in the quarter.
Rob Barry: Adjusted EBITDA margin in the quarter was 26, 8% above our expectations and up nicely from prior year.
Rob Barry: This strong performance reflects higher volumes stronger mix and cost synergies.
Rob Barry: Orders in Ips on a daily basis, we're up nearly 6% in the third quarter, which suggests we are building some sequential momentum.
Rob Barry: This solid performance reflects growth in the distributor and OEM channels.
Rob Barry: Book to Bill in the third quarter for Ips was roughly one point out.
Rob Barry: In October.
Rob Barry: Orders on a daily organic basis were up six 6%, we believe continuing the positive momentum and market outflow, we saw in the quarter.
Robert Rehard: Turning to Power Efficiency Solutions, or PES. Net sales in the third quarter were down 6.2% versus the prior year on an organic basis, which was below our expectations. The decline versus prior year primarily reflects weakness in the general commercial market and in commercial HVAC outside the U.S. The shortfall versus our prior forecast relates to incremental weakness in both these... and to a slower-than-expected capacity ramp in residential HR. Let me provide a little more color on what we are seeing in residences. This market has been under pressure for almost two years due to weak underlying in-market demand and significant de-stock.
Rob Barry: Turning to power efficiency solutions our P S.
Rob Barry: Net sales in the third quarter were down six 2% versus the prior year on an organic basis, which was below our expectations.
Rob Barry: The decline versus prior year, primarily reflects weakness in the general commercial marketing PARP market and in commercial HVAC outside the U S.
Rob Barry: The shortfall versus our prior forecast relates to incremental weakness in both of these markets and to a slower than expected the expected capacity ramp in residential HVAC.
Rob Barry: So let me provide a little more color on what we're seeing in residential.
Rob Barry: This market has been under pressure for almost two years due to weak underlying end market demand and significant destocking.
Robert Rehard: We believe de-stocking is over. But end-user demand remains weak, and forecasts from our OEM customers suggest it will remain so into next year. However, in the last three months, we started to see strengthening in demand, mostly from a subset of our customers that appear to be pre-building Resi-HVAC units in advance of the end-of-year regulatory change. Our team has been ramping our production in response, but has been challenged to keep pace with demand, for a couple reasons. One, we did not anticipate the significant level of pre-buy activity by our OEM. in part because we have had low visibility and shifting messages from them about their demand plans ahead of the refrigerants.
Rob Barry: We believe destocking is over.
Rob Barry: But end user demand remains weak and forecast from our OEM customers suggest it will remain so into next year.
Rob Barry: However in the last three months, we started to see strengthening in demand mostly from a subset of our customers that appear to be pre building ready H vac units in advance of the end of the year regulatory change.
Rob Barry: Our team has been ramping our production in response, but had been challenged to keep pace with demand for a couple of reasons.
Rob Barry: One we did not anticipate the significant level of pre buy activity by our OEM customers in part because we have had low visibility and shifting messages from them about their demand plans ahead of the refrigerant transition and to some of our suppliers have struggled to increase there.
Robert Rehard: And two, some of our suppliers have struggled to increase their own capacity, coming off two years of demand decline. We are currently working to ramp our capacity as fast as possible. and saw our third quarter Resi HVAC sales up over 10% sequentially, well above the typically flattish seasonal demand pattern. We continue to make further progress and, as Louis mentioned, should be able to catch up in fourth quarter on our now healthy Resi HVAC backlog, helping enable positive growth for PES this quarter. Also, an important perspective is that the surge in market demand that appears driven by pre-buy activity is weighted to smaller HVAC.
Rob Barry: One capacity coming off two years of demand declines.
Rob Barry: We are currently working to ramp our capacity as fast as possible.
Rob Barry: And saw our third quarter, RASM HVAC sales up over 10% sequentially well above the typically flattish the seasonal demand pattern.
Rob Barry: We continue to make further progress and as Louis mentioned should be able to catch up in fourth quarter on our now healthy Rad G H bass backlog, helping enable positive growth for this quarter.
Rob Barry: Also an important perspective is that the surge in market demand that appears driven by pre buy activity is weighted to smaller HVAC systems, where we are less focused and actually larger systems, where we are more focused with how freemium efficiency solutions or down.
Robert Rehard: where we are left focused. and actually larger systems where we are more focused with our premium efficiency solutions or down year over year in the course. These dynamics are apparent in the AHRI data. Turning to segment margins, the adjusted EBITDA margin in the quarter for PES was 17.8%, consistent with our expectation, but down from the prior year on lower volumes and weaker. We were pleased with the team's effort to hit our third quarter margin commitment for PES, a testament to strong cost management. shifting the orders. Orders in PES for the second quarter were down 3% on an organic daily basis, however, did improve sequentially.
Rob Barry: Year over year in the quarter.
Rob Barry: These dynamics are apparent in the AHRI data.
Rob Barry: Turning to segment margins the adjusted EBITA margin in the quarter for <unk> was 17, 8% consistent with our expectation, but down from the prior year on lower volumes and weaker mix. We were pleased with the team's effort to hit our third quarter margin commitment for P. S. A testament.
Rob Barry: Strong cost management.
Rob Barry: Shifting to orders.
Rob Barry: Orders in <unk> for the second quarter were down 3% on an organic daily basis, However did improve sequentially.
Robert Rehard: The order's decline reflects the in-market headwinds I mentioned earlier for this segment, as well as our slower capacity ramp-in resume. The bill in the quarter for PES was 1.01, which is encouraging and consistent with our expectation for positive growth in this segment for the fourth quarter. Daily orders for PBS in October were down 1.5%, also reflecting the dynamics I outlined impacting third quarter performance. However, we saw improved ready HVAC orders sequentially in October, and we expect to see further improvements as fourth quarter.
Rob Barry: The orders decline reflects the end market headwinds I mentioned earlier for this segment as well as our slower capacity ramp in residential.
Rob Barry: Book to Bill in the quarter for <unk> was one point.
Rob Barry: Which is encouraging and consistent with our expectation for positive growth in this segment for the fourth quarter.
Rob Barry: Daily orders for PBS in October were down one 5% also reflecting the dynamics I outlined impacting third quarter performance. However, we saw improved ready H back orders sequentially in October and we expect to see further improvement as fourth quarter.
Rob Barry: Faults.
Robert Rehard: on the following slide. We highlight some additional financial updates for your reference. Notably, on the right side of this page, you will see we ended the quarter with total debt of approximately $5.7 billion, and net debt of $5.2 billion. We repaid approximately $114 million of gross debt in the quarter. or $730 million on a year-to-date basis and remain on track to pay down $700 million of our debt this year. Adjusted free cash flow in the quarter was $125.5 million. We have continued to deploy the majority of our free cash flow to debt reduction. And that is our plan going forward.
Rob Barry: On the following slide.
Rob Barry: We highlight some additional financial updates for your reference.
Rob Barry: Notably on the right side of this page you will see we ended the quarter with total debt of approximately $5 7 million.
Rob Barry: And net debt of $5 2 billion.
Rob Barry: We repaid approximately $114 million of gross debt in the quarter.
Rob Barry: $730 million on a year to date basis and remain on track to pay down $700 million of our debt this year.
Rob Barry: Adjusted free cash flow in the quarter was $125 $5 million. We have continued to deploy the majority of our free cash flow to debt reduction.
Rob Barry: That is our plan going forward.
Rob Barry: Yeah.
Robert Rehard: Moving to the out... As we stated our investor day on September 17th, we were tracking lower in our guidance. Today, we are updating our guidance to factor some incremental. Reducing our sales outlook to factor weaker performance in third quarter and our latest expectations for fourth quarter. primary drivers of the lower sales outlook, our top-line performance in PBS and in HBO. There are two main drivers of our... 1. Sustained weakness in the non-U.S. commercial HVAC and U.S. general commercial markets, and 2. The slower-than-expected ramp in our residential HVAC capacity, which I discussed earlier. Our lower sales outlook for AMC is largely related to a more protracted recovery, discrete automation versus our prior expectations.
Rob Barry: Moving to the outlook.
Rob Barry: As we stated at our Investor Day on September 17, we were tracking lower than our guidance range.
Rob Barry: We are updating our guidance to factor some incremental headwinds.
Rob Barry: We are reducing our sales outlook to factor weaker performance in third quarter, and our latest expectations for fourth quarter.
Rob Barry: The primary drivers of the lower sales outlook, our topline performance in Pds and an AMC.
Rob Barry: There are two main drivers of our revision in tes, one sustained weakness in the non U S. Commercial HVAC in U S general commercial markets and to a slower than expected ramp in our residential HVAC capacity, which I discussed earlier.
Rob Barry: Our lower sales outlook for AMC is largely related to a more protracted recovery in discrete automation versus our prior expectations as well as incremental caution among our customers across the segment related to factors, including persistent ISR pressure and a lower than expected demand acceleration benefit.
Robert Rehard: as well as incremental caution among our customers across the segment related to factors including persistent ISM pressure and a lower than expected demand acceleration benefit tied to interest Our outlook for adjusted EBITDA margin is now 22%. due to the lower sales volumes and slightly weaker. We are also making minor adjustments to our below the as detailed in the table. Notably, our effective tax rate is coming down by 2.5 points, driven primarily by one-time tax benefit in non-U.S. states. The net impact of these changes reduced the midpoint of our adjusted diluted EPS guidance range by 30 cents to $9.
Rob Barry: Tied to interest rates.
Rob Barry: Our outlook for adjusted EBITDA margin is now 22% due to the lower sales volumes and slightly weaker mix.
Rob Barry: We are also making minor adjustments to our below the line estimates as detailed in the table.
Rob Barry: Notably our effective tax rate is coming down by two five points driven primarily by a onetime tax benefit in non U S operations.
Rob Barry: The net impacts of these changes reduced the midpoint of our adjusted diluted EPS guidance range by 30 to $9 30.
Robert Rehard: Our new Adjusted Diluted EPS Guidance Range for full year 2020. is now $9.15 to $9.45. Finally, we now expect adjusted free cash flow to be approximately $600 million this year, down from our prior expectation. The primary drivers of the revised cash flow expectation are our lower EBITDA outlook, higher inventory investments, largely tied to the Resi HVAC grant, and sell-through in our PES sector. Timing of receivable collections associated with the expected timing of shipping. For reference, our updated free cash flow guide still represents a 10% free cash flow margin, and we believe we continue to have a clear path to a low to mid-teens cash flow margin over the next two to three years, as we continue to realize synergies, repay debt.
Rob Barry: Our new adjusted diluted EPS guidance range for full year 2024 is now $9 15 to $9 45.
Rob Barry: Finally, we now expect adjusted free cash flow to be approximately $600 million. This year down from our prior expectations. The primary drivers of the revised cash flow expectation are our lower EBITDA outlook higher inventory investments largely tied to the ready HVAC Graham and sell through in our <unk> segment.
Rob Barry: <unk>.
Rob Barry: Timing of receivable collections associated with the expected timing of shipments in the quarter.
Rob Barry: For reference our updated free cash flow guidance still represents a 10% free cash flow margin and we believe we continue to have a clear path to a low to mid teens cash flow margin over the next two to three years as we continue to realize synergies repay debt reduce cash restructuring costs and drive stronger topline growth.
Robert Rehard: cash restructuring costs and drive stronger top line growth.
Robert Rehard: On this slide, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for fourth quarter and for the full year. Note that the 2024 guided growth rates for AMC and IPS are all calculated versus 2020. Proforma. While we are disappointed to be trimming our outlook, we are pleased with the continued strength of IPS, while continuing to see market headwinds at AMC. With that said, we are staying focused on what is under our control, working the many outgrowth initiatives we outlined at Investor Day, continuing to deliver synergies and execute our 80-20 and lean initiatives to expand margins and generating healthy free cash flow and paying down our debt.
Rob Barry: On this slide we've provided more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for fourth quarter and for the full year.
Rob Barry: Note that the 2024 guided growth rates for AMC and Ips are all calculated versus 2023 pro forma sales results.
Rob Barry: While we are disappointed to be trimming our outlook. We're all we are pleased with the continued strength of Ips, while continuing to see market headwinds at AMC in Pts.
Rob Barry: With that said we are staying focused on what is under our control working the many outgrowth initiatives, we outlined at Investor day, continuing to deliver synergies and execute our 80, 20, and lean initiatives to expand margins and generating healthy free cash flow and paying down our debt.
Robert Rehard: So despite some temporary near-term frictions, confidence in our Regal Rexnord value creation opportunity remains high.
Rob Barry: So despite some temporary near term friction as confidence in our Regal rexnord value creation opportunity remains high.
Robert Rehard: Now, before taking questions, many of you may be interested in our thoughts for 2025. And while we are not planning to provide 2025 guidance today, I'm happy to share a few guideposts to help with modeling next year. We will provide a fuller update, as we typically do, when we report for 2025. From a sales perspective, we are currently planning for limited growth in 2020. Because a number of our end markets are experiencing headwinds that, for now at least, we assume persist into next year. Markets that fall into this category include discrete automation, non-U.S. commercial HVAC, general commercial, general industrial, and machinery off-highway.
Rob Barry: Now before taking questions. Many of you may be interested in our thoughts for 2025, and while we're not planning to provide 2025 guidance today I'm happy to share a few guideposts to help with modeling next year, we will provide a fuller update as we typically do when we report fourth quarter results.
Rob Barry: From a sales perspective, we are currently planning for limited growth in 2025, because a number of our end markets are experiencing headwinds that for now at least we assume persist into next year.
Rob Barry: Markets that fall into this category include discrete automation non U S commercial HVAC general commercial general industrial and machinery off highway.
Robert Rehard: Regarding residential HVAC, demand appears to be roughly flat this year at the end-user level, and for now we are assuming that remains the case, or potentially modestly better in 2025. That said, we believe the refrigerant transition is creating some uncertainty in the demand outlook, which may vary at different points of the value chain. We plan to provide additional thoughts on this topic when we guide 2015. From a margin perspective, a key driver will be incremental cost synergies that we expect to realize. We would also expect any organic growth to lever at an enterprise average in the low below the line.
Rob Barry: Regarding residential HVAC demand appears to be roughly flat. This year at the end user level and for now we are assuming that remains the case or potentially modestly better in 2025.
Rob Barry: That said, we believe the refrigerant transition is creating some uncertainty in the demand outlook, which may vary at different points in the value stream.
Rob Barry: We plan to provide additional thoughts on this topic when we guide 2025.
Rob Barry: From a margin perspective, a key driver will be incremental cost synergies that we expect to realize next year. We would also expect any organic growth to lever at an enterprise average in the low thirties.
Rob Barry: Below the line the.
Robert Rehard: The primary drivers in the bridge will be a roughly $50 million decline in interest expense and a reversion to our long-term expected effective tax rate of $25 million. Again, we will provide more details with our forthcoming...
Rob Barry: The primary drivers in the bridge will be a roughly $50 million decline in interest expense and a reversion to our longer to our long term expected effective tax rate of 24% again, we will provide more details about our fourth quarter report.
Operator: With that, operator, we are now ready to take questions. Thank you. To ask a question, you may begin, you may press star then one on your telephone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Once again, that's star then one to ask a question.
Rob Barry: And with that operator, we are now ready to take questions.
Rob Barry: Thank you.
Speaker Change: Ask a question you may begin.
Speaker Change: Star then one on your telephone.
Speaker Change: Okay, Yeah, the speaker phone please pickup your handset before pressing the keys withdraw your question. Please press Star then two once again Thats Star then one to ask a question.
Michael Halloran: And our first question comes from Mike Halloran, Ed Bear. Pagan Marie, everyone.
Speaker Change: Our first question comes from Mike Halloran of Baird.
Mike Halloran: Hey, good morning, everyone.
Michael Halloran: Good morning, Mike. So, just a clarification on thoughts for next year. First, the limited growth comment. Is that an organic comment or an all-in comment? And then on an organic basis, is the thought here just relatively normal sequentials, a sequel? and then kind of adjusting for some of the moving pieces you're seeing in the PSI.
Speaker Change: Good morning, Mike.
Mike Halloran: So just a clarification on the thoughts for next year first the limited growth comment.
Mike Halloran: Is that an organic comment or an all in comment and then on an organic basis as the top here just relatively normal sequential is all else equal.
Rob Barry: And then kind of adjusting for some of the moving pieces, you're seeing in the PEO side.
Michael Halloran: Yeah, so, Mike, it is an organic comment, and we think it's best right now to go into next year very measured. Given uncertainties in the markets, given the election results, just a lot going on, we're going to move into next year likely a little bit more incrementally measured than we have historically, and again because of the level of uncertainty. Got it.
Speaker Change: Yes, so Mike it is an organic comment.
Rob Barry: And we think it's best right now to go into next year very measured given uncertainties in the market given the election results just.
Rob Barry: A lot going on where NIM move into next year likely a little bit more incrementally measured than we had historically and again because of the level of uncertainty.
Speaker Change: Got it and then.
Michael Halloran: And then, you know, if you look back typically short cycle business, the spread between orders and kind of revenue growth is bigger today than it would have been historically. At what point in time do you think that starts matching up? And maybe talk to how the business has morphed a little bit and gotten a little longer cycle? I'm sure there's some other things behind it. But when do you think that kind of sinks? Yeah, you know, it has morphed a bit from the historic, especially in AMC, and so AMC, much longer cycle, our backlogs, you know, roughly six months, some of our businesses, data center, aerospace, we have more than a year of backlog, so that takes a bit more time.
Speaker Change: If you look back.
Rob Barry: Typically a short cycle business the spread between the orders and kind of revenue growth.
Rob Barry: Bigger today than it would have been historically.
Speaker Change: At what point in time do you think that starts matching up and maybe talk to how the business has morphed, a little bit and gotten a little longer cycle.
Speaker Change: Well I'm sure there's some other things behind it but when do you think that kind of sinks up.
Speaker Change: Yeah.
Speaker Change: It has marked a bit.
Speaker Change: From the historic especially in AMC and so AMC much.
Speaker Change: Longer cycle, our backlogs you know roughly six months some of our businesses data center aerospace we have more than a year of backlog so that takes a bit more time.
Michael Halloran: IPS, we feel pretty good, though, about the fact that our orders have been strong, and, you know, we beat by about a percent this quarter and feel good about the momentum there, and PES continues to be a short cycle business, and so it's, when orders ramp, we will ramp. The one piece I'd say, even within the quarter, as much of our business is book and ship the next day. Now, the backlog there is about a month and a half, but it's certainly our shorter cycle business, PES.
Speaker Change: Yes, we feel pretty good though about the fact that our orders have been strong and we beat by about a percent this quarter and feel good about the momentum there NPS continues to be a short cycle business and so it's when orders ramp we will ramp the one piece I'd say even.
Speaker Change: Within the quarter as much of our business is book and ship. The next day now in the backlog there is about a month and a half.
Speaker Change: But it is certainly our shorter cycle business P F.
Michael Halloran: And then one more, if I may, just thoughts on free cash flow in the next year. I know a little disappointing to end this year because of moving pieces. How does next year track? And maybe just put that in the context of previous guidance you've given. Sure.
Speaker Change: And then one more if I may just thoughts on free cash flow into next year and a little disappointing down this year because of the moving pieces. How does next year track and maybe just put that in the context of previous guidance you've given.
Michael Halloran: Thanks, Mike. So we absolutely still have a good path on next year despite the fact that we've got some timing differences this year. We do believe we could end next year at an exit rate at about a billion dollars, which is what we've previously communicated. Again, the primary drivers will be cash interest coming down, cash taxes, and then of course we're going to reduce our cash restructuring as well. And expect to get a little working capital benefit, especially given the fact that we've got some timing differences this year. So all of those contribute to continuing to deliver next year.
Speaker Change: Sure.
Speaker Change: So we absolutely still have a good path on next year. Despite the fact that we've got some timing differences. This year. We do believe we get in next year at an exit rate at about $1 billion.
Speaker Change: As what we've previously communicated again the primary drivers will be cash interest coming now in cash taxes.
Rob Barry: And then of course, we're going to we're going to reduce our cash restructuring as well and expect to get a little working capital benefit.
Rob Barry: Especially given the fact that we had some timing differences. This year. So all of those contribute to continuing to deliver next years commitment.
Michael Halloran: Thank you. Appreciate it, everyone.
Rob Barry: Thank you I appreciate everyone.
Michael Halloran: Thanks, Brian.
Speaker Change: Thanks, Mike.
Jeffrey Hammond: The next question comes from Jeff Hammond at Key Bank Capital Markets. Hey, good morning, guys.
Speaker Change: The next question comes from Jeff Hammond of Keybanc capital markets.
Jeff Hammond: Hey, good morning, guys.
Jeffrey Hammond: Good morning, Jeff. Still struggling a little bit with HVAC. I mean, one, just trying to understand why you guys weren't more prepared for an uptick. It seemed pretty well telegraphed that there was going to be pre-buy here. And your order rates kind of indicate, you know, continued softness relative to not being able to ramp. And, you know, I'm seeing like 30%, 20% to 30% order growth from the OEM. So, you know, maybe it's the other stuff, but I'm just trying to get my arms around it.
Jeff Hammond: Jeff.
Jeff Hammond: I'm still struggling a little bit with a track I mean, one just trying to understand why you guys weren't more prepared for an uptick would seem pretty well telegraphed that.
Jeff Hammond: There was going to be pre buy here and your order rates kind of indicate.
Jeff Hammond: Continued softness relative to not being able to ramp them.
Rob Barry: I'm seeing like 30%, 20% to 30% order growth from the OEM. So.
Rob Barry: Maybe it's the other stuff, but I'm just trying to get my arms around it.
Jeffrey Hammond: You know, I really want to break this up into two, if I could, you know, first of all, we have seen rebounds in resi HVAC and sales have increased about 10%. But after two years of weak demand and false starts on recovery, the recent surge in demand was not something we could have or would have wanted to get ahead of. So our capacity ramp is lagging this demand surge, however we expect to be caught up through the end of fourth quarter. I'll also reference that many of our OEMs kept their strategy around the A2L transition pretty under wraps and so we didn't have a lot of visibility to this and it takes time to ramp up volumes and the supply chain.
Rob Barry: I really want to break this up into two.
Rob Barry: If I could.
Speaker Change: First of all we have seen a rebound in revenues back in sales have increased about 10%.
Rob Barry: But after two years of weak demand and false starts on recovery. The recent surge in demand was not something.
Rob Barry: We could have or would have wanted to get ahead up so our capacity ramp.
Rob Barry: Lagging the demand surge in however.
Rob Barry: However, we expect to be caught up through the end of the fourth quarter also referenced that many of our Oems kept their strategy around the <unk> transition pretty pretty under wraps and so we didn't have a lot of visibility to this and it takes time to ramp up volumes and that.
Jeffrey Hammond: The last point I'll make to your comments about also a disconnect between maybe some of the growth of an OEM versus us. First of all, remember our OEMs get priced in the market, we do not. And so there's always a disconnect there. And then secondly, as Rob said in his prepared remarks, it's notable as outlined in AHRI that the pre-buy activity appears weighted to smaller HVAC systems where we have relatively lower exposure given our focus on premium and actually larger systems year to date and in the quarter have been down.
Rob Barry: Supply chain the last point I'll make to your comments about the also a disconnect between maybe some of the growth in an OEM versus US first of all remember our Oems get priced in the market, we do not and so there's always a disconnect there and then secondly.
Rob Barry: As Rob said in his prepared remarks.
Rob Barry: Notable.
Rob Barry: As outlined at AHRI and the pre buy activity appears weighted to smaller HVAC system, where we have relatively lower exposure given our focus on premium and actually larger systems year to date and in the quarter have been down so.
Jeffrey Hammond: So I think it's really those two items that I think best answer your question.
Rob Barry: So I think it's really those two items that.
Rob Barry: I think best to answer your question.
Jeffrey Hammond: Okay, then discrete automation, you know, I heard, you know, good things and bad things on the order front. And, you know, I'm just wondering, you know, as you check with your customers and the channel, what you're seeing there in terms of, you know, signs of an inflection or, you know, maybe just continued choppiness. Yeah, yeah. Longer cycle orders, and we're winning and seeing some growth, and actually our win rates, our funnels are up, so this gives us confidence into 25. I would say short cycle book shift type orders are not, and we're not forecasting them to.
Speaker Change: Okay, and then discrete automation.
Speaker Change: Sure.
Speaker Change: Good things and bad things on the order front.
Speaker Change: Just wondering as.
Speaker Change: As you check with your customers in the channel what.
Rob Barry: What youre seeing there in terms of you know.
Rob Barry: Signs of an inflection or you know.
Rob Barry: Maybe just continued choppiness.
Speaker Change: Yeah, yeah longer cycle orders.
Speaker Change: We are winning and seeing some growth and actually our win rates. Our funnels are up. So this gives us confidence into 25, I would say short cycle book ship type orders or not and we're not forecasting them to know we had expected that would be interested.
Jeffrey Hammond: Now, we had expected that with the interest rate cuts, that we would see some more release of capital projects. than we have, and I just think as we finish this year, uncertainty with the election, ISM still being below 50, I think it's the longest stretch for over 33 years, it's just waiting on people's desire to go back in with projects, and so that's putting a weight on the more short cycle book shift, discrete automation. Hopefully that helps.
Rob Barry: Rate cuts.
Rob Barry: We would see some more release of capital projects than we have and I just think as we finish this year uncertainty with the election I assume still being below 50, I think its the longest drags for over 33 years.
Rob Barry: It's just waiting on peoples.
Rob Barry: Desire to.
Rob Barry: I'll go back in with projects and so thats, putting a weight on the.
Rob Barry: Short cycle book ship discrete automation hopefully that helps.
Jeffrey Hammond: Okay, thanks.
Speaker Change: Okay. Thanks.
Jeffrey Hammond: Thanks, Jeff.
Speaker Change: Thanks, Joe.
Randy: The next question comes from Kyle Mendez of Citigroup. Hi, good morning.
Speaker Change: The next question comes from Paul Mendes at Citigroup.
Rob Barry: Hi, Good morning, this is Randy on for Karl.
Randy: This is Randy. I'm for Kyle.
Randy: Are you ready? Um Yeah, so I have a quick question about, um, about the cross selling synergies and, um, particularly in IPS. I was just hoping you could talk through.
Speaker Change: Hey, Ryan.
Rob Barry:
Randy: Yes, so I have a quick question about about the cross selling synergies and particularly in Ips.
Randy: I was just hoping you could talk through.
Louis Pinkham: What kind of incremental benefits that you've been seeing from these synergies and how that has trended versus your expectations this year, and if you expect that to continue stepping up going forward? So we think our outperformance in IPS is greatly driven by our cross-sell and our industrial powertrain initiatives. We believe that that is worth about one to two points of our growth in this quarter. I'll remind you that only about 15% of our customers buy two or more of our products, and if they were only buying one more, the opportunity is significant. So we think this will continue to accelerate.
Randy: What kind of incremental benefits that you've been seeing from the synergies from the synergies and how those trended trended versus your expectations. This year and if you expect that to continue stepping up going forward.
Speaker Change: So we think our outperformance in Ips is greatly driven by our cross sell in our industrial powertrain initiatives.
Speaker Change: We believe that that is worth about 1% to two points of our growth in this quarter.
Speaker Change: Mind, you that only about 15% of our customers by two or more of our products and if they were only buying one more the opportunity is significant and so we think this will continue to accelerate.
Louis Pinkham: In addition, our focus on – and this is why I emphasized in my prepared remarks the project win in the industrial powertrain, because it gives another example of the strength of the scale and scope of our portfolio. Hopefully that helps. Great, that's helpful.
Randy: In addition, our focus on and this is why I emphasized in my prepared remarks, the project win in the industrial powertrain because it gives another example of the strength of the scale and scope of our portfolio.
Randy: Hopefully that helps.
Speaker Change: Okay, Great. That's helpful. And then another quick one on all shifting gears to AMC a little bit.
Louis Pinkham: And then another quick one on shifting gears to AMC a little bit. I see you guys are expecting some sequential margin improvement in the fourth quarter. So with that, is it fair to say that the third quarter was kind of a bottom for discrete automation, or is it some of the other end markets that will drive the improvement sequentially? Yeah, it really is across the board. It does reflect what we see in our backlog today along with the cost synergies we expect in the quarter. We also see that we're going to get better sales in fourth quarter versus third quarter and so leverage on that will be stronger.
Speaker Change: I assume you guys are expecting some sequential margin improvement in the fourth quarter, so with that or is it fair to say that the third quarter was kind of a bottom for discrete automation or just some of the other end markets that will drive the improvement sequentially.
Speaker Change: Yes, it really really is across the board. It does reflect what we see in our backlog today.
Speaker Change: Along with the cost synergies, we expected in the quarter.
Speaker Change: We also see that we're going to get better sales in the fourth quarter versus third quarter and still leverage on that will be stronger and then the business did implement some cost actions in response to the lower near term demand environment with which we.
Louis Pinkham: And then the business did implement some cost actions in response to the slower near term demand environment which we expect to more fully realize. And finally, the third quarter did have the impact that I commented on during the call of some FX exposure on the EBITDA line that was not in our expectation initially. And I would maybe characterize that as maybe a third of the difference that we saw relative to our expectation. So all of that combined, we feel good about the ramp that we've got going on and to your question as to specifically do we see that third quarter at the bottom I'd say yeah, pretty close to a bottom there moving forward.
Randy: Back to more fully realize and finally, the third quarter. It did have the impact that I commented on during the call.
Randy: On some FX exposure on that at the EBITDA line that was not in our in our expectation. Initially so you don't.
Randy: And I would maybe characterize that as maybe a third of the of the difference that we saw relative to our expectations. So all of that combined we feel good about the ramp that we've got going on and to your question specifically do we see that third quarter is a bottom I'd say, yeah pretty close to a bottom there a moving part we would not expect that performance going forward.
Louis Pinkham: We would not expect Got it.
Louis Pinkham: Super helpful.
Speaker Change: Got it Super helpful. Thank you guys.
Louis Pinkham: Thank you, guys. Thanks, Brennan.
Speaker Change: Okay. Thanks Ryan.
Julian Mitchell: The next question is from Julian Mitchell of Barclays. Hi, good morning. Maybe just my first question on the EBITDA margin outlook.
Speaker Change: The next question is from Julian Mitchell with Barclays.
Julian Mitchell: Hi, good morning.
Julian Mitchell: Maybe just my first question on the EBITDA margin outlook because I.
Julian Mitchell: I don't know if that's been touched on yet. So it looks like you're ending this year in the fourth quarter with a sort of, you know, 100, 150 bps of margin increase year on year. So maybe a sort of 23% margin in Q4. Next year, you're saying exiting at sort of 25. So you've got a sort of a 200 point increase in the margin. next year, at least year-end to year-end. I guess one sort of understands if that's roughly the right ballpark of kind of margin expansion next year, and the composition of that would be sort of 100 bps from the synergies, and then 50 bps plus coming from volume leverage or price cost.
Julian Mitchell: I don't know if thats been touched on yet so it looks like yes.
Julian Mitchell: Ending ending this year in the fourth quarter with a sort of.
Randy: 100, 150 bps of margin increase year on year.
Randy: So maybe a sort of 23% margin in Q4.
Randy: Next year, you're saying exiting at sort of 25, so you've got a sort of a 200 point increase in the margin.
Randy: Next year at least year rate into yearend.
Speaker Change: Just wanted to sort of understand.
Speaker Change: That's roughly the right ballpark of kind of margin expansion next year and the composition of that would be sort of a 100 bips from the synergies.
Randy: And then 50 bps plus coming from volume leverage or price cost is that the right way to think about kind of margin expansion and should it be fairly linear through the year.
Robert Rehard: Is that the right way to think about kind of margin expansion, and should it be fairly linear through the year? Yeah, so first of all, on fourth quarter, which I think where you were going first, it is a little lower, but we're a little bit, we're going to be a little bit measured as we kind of go through the fourth quarter here based on what we It is still within our normal decremental margins, so it does reflect the mix of sales coming out, which is weighted to higher margins. So moving into next year. Yeah, you characterized it correctly, and we do believe that we have a good path based on both the synergy expectation, the volume that we expect to realize as we go through the year from an EBITDA perspective, and then from an earnings perspective.
Speaker Change: Yes, so first of all on the fourth quarter.
Speaker Change: Which is I think where you were going first at it does it is it is a little lower but we're a little bit and we're gonna be a little bit measured as you kind of go through the fourth quarter here based on what we've seen.
Speaker Change: But we are it is still within our normal decremental margins. So it does reflect the mix of sales coming out which is weighted.
Speaker Change: Higher margin AMC, so moving into next year, yet you characterized it correctly and we do believe that we have a good path.
Speaker Change: Based on on bolt.
Speaker Change: Synergy expectation the.
Speaker Change: The volume that we expect to realize as we go through the year from an EBITDA perspective, and then from an earnings perspective, the interest coming out the interest expense coming out next year, which should drive.
Robert Rehard: You know, the interest expense coming out next year, which should drive a nice benefit as well. So, yes, we do expect to come out next year at a couple hundred basis points relative to where we finished this year of improvement at an exit rate and still feel very strong.
Speaker Change: This benefit as well so yeah.
Speaker Change: Yes, we do expect to come out next year at that a couple of hundred basis points relative to where we are we finished this year.
Speaker Change: The improvement is at an exit rate and still feel very strongly about that.
Julian Mitchell: That's great.
Speaker Change: That's great. Thank you and then just my quick follow up.
Julian Mitchell: Thank you.
Julian Mitchell: And then just my quick follow-up, circling back, unfortunately, to the PES division and this sort of Resi HVAC back and forth. But I think, Louis, you'd mentioned maybe that 10% revenue increase in Resi HVAC sales. So I just wanted to clarify, was that a sort of a Q3 year-on-year comment?
Speaker Change: Circling back Unfortunately to the PFS division and they sort of raise the HVAC back and forth but.
Speaker Change: I think Louis you had mentioned maybe that that 10% revenue increase seen in the resi HVAC side.
Speaker Change: So I just wanted to clarify was that a sort of a Q3 year on year comment and then anything you could flesh out for us on the resi HVAC sales growth.
Julian Mitchell: And then anything you could flesh out for us on the Resi HVAC sales growth year-on-year assumption for the fourth quarter? And anything maybe for 24 as a whole?
Speaker Change: We're on year assumption for the for the fourth quarter.
Speaker Change: And anything maybe for 24 as a whole just so we can understand.
Julian Mitchell: Just so we can understand, kind of going into next year, how to think about pre-buy normalizing versus sell-through demand, accelerating perhaps, that type of thing. Yeah. Sure, Julian, we'll try to help here. So, first of all, the comment on 10% was a sequential comment. So, stating that we are ramping and we're getting better. And so, we expect a sequential into fourth quarter as well. The year on year, you know, it's an important part of our business, Julian, but it's 10% of our business. And I don't have that level of detail in front of me.
Speaker Change: Going into next year, how to think about pre buy normalizing versus sell through demand accelerating perhaps that type of thing.
Speaker Change: Yeah.
Speaker Change: Sure Julian will try to help here. So first of all the comment on 10% was a sequential comment so stating that we are ramping and we're getting better and so we expect a sequential into fourth quarter as well.
Speaker Change: The year on year.
Speaker Change: It's an important part of our business.
Speaker Change: Julien, but it's 10% of our business and I don't have that level of detail in front of me.
Julian Mitchell: So, we're going to have to follow up with you separately to give you that information. Okay, no worries. But your point would be, Louis, that the sort of inventory balances, you know, at the OEMs and distributors, let's say, in that market, maybe a little bit higher, but only at the kind of smaller systems end of the spectrum as you exit this year. Yes, I mean, that's what we're seeing right now. That's what we're seeing in our demand.
Speaker Change: So we're gonna have to follow up with you separately to give you that information.
Julian Mitchell: Okay, no worries, but youre pointing we'd be lewis that the sort of inventory balances.
Speaker Change: OEM.
Speaker Change: And distributors, let's say in that market, maybe a little bit higher but only at the kind of smaller systems end of the spectrum as you exit this year.
Speaker Change: Yes, I mean, that's what we're seeing right now and that's what we're seeing in our demand and I'm sorry, I didn't elaborate on one other part of your question, which is what do we think about next year. We do think some of that will occur.
Julian Mitchell: And I'm sorry I didn't elaborate on one other part of your question, which is what do we think about next year? We do think some of that will occur, meaning the build in HL through the end of this year, which will make next year a little bit softer. And we also believe end market demand is likely not improving in next year. And so we think it's going to be, at least right now, an improvement for us, partially because of the inventories that will have to be reset, but it won't be significant growth for 2025.
Speaker Change: The build in H well through the end of this year, which will make next year, a little bit softer and we also believe.
Speaker Change: End market demand is likely.
Speaker Change: Not improving in next year, and so we think it shouldn't be.
Speaker Change: At least right now.
Speaker Change: An improvement for us partially because of the inventories that we will have to be reset, but it won't be significant growth for 'twenty five, but we will provide more on this when we get together in January.
Julian Mitchell: But we'll provide more on this when we get together in January. That's great. Thank you. Thanks, everybody.
Speaker Change: That's great. Thank you.
Speaker Change: Thanks Julien.
Nigel Coe: The next question comes from Nigel Coe at Wolf Research. Thanks. Good morning, everyone. Thanks for the details on 25. Rob, maybe talk about, I think you mentioned $1 billion of free cash flow as an exit rate for 25. Just curious what that means, because obviously there's a lot of seasonality on free cash flow. So just wondering what you meant by that. But I just want to kick off with a question on, you know, the, you know, we've got pressures in commercial, you know, broadly speaking, and then Europe and China. Maybe just kind of double click into that a little bit more so we understand exactly what's going on there.
Speaker Change: Next question comes from Nigel Coe of Wolfe Research.
Nigel Coe: Thanks, Good morning, everyone. Thanks for the details and 25.
Nigel Coe: But maybe talk about I think you mentioned that billion dollars of free cash flow as an exit rate for 25.
Speaker Change: Just curious what that means because obviously, there's a lot of seasonality.
Speaker Change: On free cash flow. So I'm just wondering what you meant by that but I just wanted to kick off with a question on the.
Speaker Change: <unk>.
Speaker Change: Yes, we've got crushed.
Speaker Change: Question is in commercial.
Speaker Change: Broadly speaking and then Europe, and China, maybe just kind of double click into that little bit more to understand exactly what's going on there and then you know what.
Nigel Coe: And then, you know, what's the visibility in 25 to those end markets getting better within PES?
Speaker Change: What's the visibility in 'twenty five to those end markets getting better with M. P F.
Nigel Coe: So let me take the first part and just start there, and then Louis, if you want to maybe contribute more on the second half of the question. So when it comes to the explanation around the free cash flow exit rate, 25, about a billion dollars, we do see a path to incrementally improve our free cash flow through the year, next year, based on a lot of the factors that I described previously. Even though certainly it's going to contribute there, along with cash interest, cash taxes, and lower cash restructuring, as well as working capital. When I say I'm looking to exit the year 25 at a billion dollars, I'm saying likely in the fourth quarter, annualized, you would see a number that would represent something closer to a billion dollars.
Speaker Change: So let me take the first part and just start there and then Luke do you want to maybe contribute more in the second half of the question. So when it comes to the explanation around the free cash flow exit rate twenty-five. It spent about $1 billion, we do see a path to to incrementally improve.
Speaker Change: Our free cash flow through the year next.
Speaker Change: Next year based on a lot of factors that I described previously.
Speaker Change: EBITDA or at least going to contribute there.
Speaker Change: Along with cash interest cash taxes.
Speaker Change: And and lower cash restructuring as well as working capital.
Speaker Change: I'd say on I'm looking to exit the year of 25 at a $1 billion I'm, saying likely in the fourth quarter annualized you would see a number that would represent something closer to $1 billion.
Louis Pinkham: Okay, that's clear, thanks. Yeah, so the comments, Nigel, on CHCC outside the U.S. You know, we serve a broad set of customers in Europe and in China, including local players, and we are seeing continued pressure in the European market and the China market. ISM is below 50 in both. China market still heavily weighted because of some of the residential overbuild. We don't see a lot of line of sight to great improvement in Europe or China next year.
Speaker Change: Okay, that's clear thanks.
Speaker Change: And then on the on the P S movies.
Speaker Change: Yes, so the comments Nigel on <unk> outside the U S. We serve a broad set of customers in Europe and in China, including local players and we are seeing continued pressure in the European market and the China market.
Speaker Change: Is it below 50 and bone.
Speaker Change: China market is still heavily weighted because some of the residential overbuild.
Speaker Change: Don't see a lot of line of sight to great improvement in Europe, or China next year.
Louis Pinkham: And this is a little bit of why when we talked about 25, we're saying we're going to be measured in our thought process, and we don't see a lot of opportunity for growth in those markets in 25, not at this time. Okay, that's helpful.
Speaker Change: And this is a little bit of why when we talked about 25, we're saying we're going to be measured in our thought process and we don't see a lot of opportunity for growth in those markets and 25, but not at this time.
Speaker Change: Okay. That's helpful and then a quick follow on.
Louis Pinkham: And a quick follow-on, you know, with IPS, I mean, obviously IPS performance has been, you know, very different to other two segments, and I understand, you know, share gains have been part of that, but the long-cycle markets, metals and mining, aerospace, etc., are driving that to some degree. Your comment on long-cycle orders suggests that those end markets remain strong. Inter25, is that the right interpretation? Except that our comments on longer cycle orders were more AMC-centric. Oh, okay. And so our cycle factory automation, so discrete automation, excuse me, that we sell into AeroDefense, our medical, our data center business, that's where much of that commentary was about, which gives us some confidence into 25.
Speaker Change: With Ips I mean, obviously IPF performances.
Speaker Change: Because that's been a very different to two segments.
Speaker Change: So I came to be and part of that but the long cycle market smell of the mining aerospace et cetera.
Speaker Change: Driving that to some degree your comment on the long cycle orders suggest that those end markets remained strong.
Speaker Change: And the 25 is that the right central patients.
Speaker Change: Except that our comments on our longer cycle orders were more AMC centric side.
Speaker Change: Cycle factory automation.
Speaker Change: Discrete automation or excuse me.
Speaker Change: That we sell into Aero defense or medical or data center business, that's where much of that commentary was about which gives us some confidence into 'twenty five.
Louis Pinkham: IPS, though, to your point, I mean, look, probably the biggest macro driver that we look at for IPS is ISM. That's been below 50 for many, many months, yet IPS continues to execute and outperform, and we believe that that just reinforces the thesis of the rationale for the Rexnord and the Ultra Acquisition, and it's all about our scale and scope of go-to-market and the portfolio of products that we have. And so we'll continue to drive that activity and think that's a long-term benefit for IPS and Rexnord. Okay, thank you. Yeah, sure.
Speaker Change: Ics, though to your point I mean, the probably the biggest macro driver that we look at for Ics as ISO that's been below 50 for many many months yet.
Speaker Change: <unk> continues to execute and outperform and we believe that that just reinforces the thesis of the rationale for the rexnord and the ultra acquisition and it's all about our scale and scope of go to market and the portfolio of products that we have and so we'll continue to drive.
Speaker Change: That activity and think that's a long term benefit for Ips in Regal.
Speaker Change: Okay.
Speaker Change: Yeah sure. Thank you.
Joseph Ritchie: The next question comes from Joe Ritchie at Goldman Sachs. Hey, good morning, guys.
Speaker Change: The next question comes from Joe Ritchie with Goldman Sachs.
Joe Ritchie: Hey, good morning, guys.
Joseph Ritchie: Morning. Hey, sorry to harp on the free cash flow, but just want to want to make sure I understand it. So the exit rate for next year is going to be a billion dollars exiting 4Q. So call it roughly a 250 million plus number in the fourth quarter of next year if you annualize it. But the reality is like you're hitting that number this year.
Speaker Change: Joe.
Joe Ritchie: Hey, sorry to harp on the free cash flow, but just.
Joe Ritchie: One I want to make sure I understand it so the exit rate for next year is gonna be a $1 billion exiting <unk> to call. It roughly a $250 million plus number in the fourth quarter of next year, if you annualize it.
Speaker Change: But the reality is like Youre hitting that number this year and so it doesn't provide a lot of color on the full year free.
Joseph Ritchie: And so it doesn't provide a lot of color on the full year free cash flow number for 2025. And so what I'm trying to understand is whether, you know, 750 to 800 is kind of like a reasonable starting point and seeing a lot of progress versus the 600 that you're expecting. Yeah, I think the way to think about it, Joe, is think about about about an $800 million number for next year. So a couple hundred million dollars of benefit, maybe even a little bit better than that, depending on the working capital contribution as we go through the year is is one of the determining factors there.
Speaker Change: Free cash flow number for 2025 until what I'm trying to understand is whether seven.
Speaker Change: 50 to 800 is kind of like a reasonable starting point and seen a lot of progress versus the 600 that you're expecting for this year.
Speaker Change: Yes, I think the way to think about it always is.
Speaker Change: Thinking about it about $800 million number for next year. So a couple of hundred million dollars of benefit and maybe even a little bit better than that depending on the working capital.
Speaker Change: Contribution as we go through the year is one of the determining factors there and I said like I said, we're going to get a little bit of that trickle over from this year from a timing perspective.
Joseph Ritchie: And I said, like I said, you know, we're going to get a little bit of that trickle over from this year from a timing perspective. But again, it that's really kind of the one area where, you know, could flex a little bit, but I still think 800 million is about the right Okay, very clear.
Speaker Change: But again, it's that's really kind of the the one area, where it could flex a little bit, but I still think 800 million is about the right number.
Speaker Change: Okay very clear thanks, Thanks for that Rob and then and then I guess, maybe just a near term question on the fourth quarter because.
Joseph Ritchie: Thanks for that, Rob.
Joseph Ritchie: And then I guess maybe just a near-term question on the fourth quarter, because not to pin you down to a number necessarily by segment, but so PES last year had that one of your customers had cut production for a few weeks, and so there should be a pretty good, nice little benefit there. And so, I don't know, in my model, I was forecasting PES to be up double digits in the fourth quarter.
Speaker Change: Not to pin you down to a number necessarily by segment by <unk> last year had that.
Speaker Change: Yeah.
Speaker Change: One of your customers have cut production for a few weeks and so there's there could be a pretty good nice little benefit there and so I don't know I in my model I was forecasting to be up double digits in the fourth quarter.
Joseph Ritchie: When you think about the buildup by segment, how does kind of like the forecast for the fourth quarter shake out by segment ballpark? Yeah, well, I don't think that it would be double digits in the fourth quarter for PES. I think it's going to be in the range that we provided. There's a guide there that we put out by segment, which would be, you know, kind of low, lower Lower single-digit. Yeah, it's about mid single-digit is the mid mid point of of our fourth quarter I'll remind you though that fourth quarter historically is a lower quarter and I agree with you last year We did have one OEM shut down the facility for three three weeks, but we are forecasting fourth quarter to be of about 20 million dollars year-over-year and so that I would say addresses that along with our our ramp in resi HVAC and clearly too if you look at the HRI data year-to-date the market's down At least, certainly in the larger units, the market's down.
Speaker Change: When you when you think about the build up.
Speaker Change: <unk> segment.
Speaker Change: How does how does it kind of like that the forecast for the fourth quarter shakeout by segment ballpark.
Speaker Change: Yeah, well I don't think that it would be double digits in the fourth quarter for <unk> I think it's it's going to be.
Speaker Change: In the range that we provided in.
Speaker Change: In the in the guide there that we put out by segment.
Speaker Change: Which would be.
Speaker Change: Kind of low lower.
Speaker Change: In the fourth quarter, a lower single digit yes, it's about mid single digit.
Speaker Change: The midpoint of our fourth quarter I'll remind you, though that fourth quarter historically is a lower quarter.
Speaker Change: And I agree with you last year, we did have one OEM shut down a facility for $3 three weeks, but.
Speaker Change: We are <unk>.
Speaker Change: Forecasting fourth quarter to be up.
Speaker Change: About $20 million year over year, and so that I would say.
Speaker Change: The address is that along with our our ramp in red the HVAC.
Speaker Change: Yes.
Speaker Change: Clearly too if you look at the age or I am for data year to date the market down.
Speaker Change: And at least certainly in the larger units the market's down so I don't think Theres a lot of catalyst here that would say that fourth quarter should be up double digit.
Joseph Ritchie: So I don't think there's a lot of catalyst here that would say that fourth quarter should be up double digits. Okay, got it. Thank you. Thanks, Joe.
Speaker Change: Okay got it thank you.
Speaker Change: Thanks, Joe.
Christopher Glynn: The next question comes from Christopher Glynn in Oppenheimer. Hi, thanks. Just wanted to dive into the commercial aspects of PES a little bit, you know, with the Resi HVAC in North America commercial doing a little better.
Speaker Change: Next question comes from Christopher Glynn with Oppenheimer.
Speaker Change: Yes.
Speaker Change: Hi.
Christopher Glynn: Thanks, just wanted to dive into the commercial aspects of Pts a little bit.
Christopher Glynn: The rising age back in North America commercial.
Christopher Glynn: Doing a little better.
Christopher Glynn: The magnitude on the international commercial and general commercial seems a little striking, so curious if you could talk about, you know, various factors like, you know, channel inventory and markets or maybe business selectivity and shared decisions type trade-offs. And just to be clear, though, um...
Speaker Change: The magnitude on the international commercial and general commercial seems a little striking so curious if you could talk about.
Speaker Change: Various factors like channel inventory end markets are maybe business selectivity and shared decision type of trade offs.
Speaker Change: Okay.
Speaker Change: And just to be clear, though.
Louis Pinkham: Chris, I think it's important to note just how that segment breaks down. 31% of that segment is general commercial, and we would say it links very well to ISM. 23% of that segment is commercial HVAC and we've been seeing North America commercial HVAC strong, but outside of North America, EMEA and Asia down, and down you know, high single digits, low double digits. And then Poole is about 9% of that segment, and it's relatively flat, slightly down. And so Resi-HVAC makes up 37%. And so, you know, this is what, when we have the pressure in general commercial and CHVAC outside of North America, that's really 50% of the business.
Chris: Chris I think it's important to note just how that segment breaks down 31% of that segment as general commercial and we would say it links very well to I S. M.
Speaker Change: 23% of that segment is commercial HVAC and we've been seeing North America commercial HVAC strong, but outside of North America, EMEA and Asia down.
Speaker Change: And down.
Speaker Change: High single digit low double digits.
Speaker Change: And then pool is about 90% of that segments, and it's relatively flat slightly down and so revenues bad makes up 37%.
Speaker Change: And so you know this is what.
Speaker Change: When we had the pressure in general commercial and <unk> outside of North America, that's really 50% of the business and that has been under pressure no question and now we're starting to see royalty HVAC improve and we think that will continue and that should uplift.
Louis Pinkham: And that has been under pressure, no question.
Louis Pinkham: And now we're starting to see Resi-HVAC improve, and we think that will continue, and that should uplift the segment, certainly in Q4 and going into 25. Okay, great. Thanks.
Speaker Change: The segment, certainly in Q4 and going into 'twenty five.
Speaker Change: Okay, great Thanks, and on the residential HVAC.
Louis Pinkham: And on the residential HVAC, not sure if there's any share sensitivities there, but any possibility OEMs who, you know, you kind of lagged delivery to that, you know, they hit back at some point in the future? You know, we're close with all our OEMs. We are working through the challenges of the ramp-up. We don't see a material impact whatsoever. If anything, we continue to work to grow with our OEMs and air-moving solutions. As we talked about at our investor day, we're gaining some nice momentum there. We feel good the long-term relationship with our Resi, HVAC, OEMs is positive.
Speaker Change:
Speaker Change: Not sure if there isn't any share sensitivities, there, but any possibility Oems, who you're kind of lagged delivery to that.
Speaker Change: They hit back at some point in the future.
Speaker Change: You know, we're close with all our Oems.
Speaker Change: We are working through the challenges of the ramp up we don't see a material impact whatsoever. If anything we continue to work to grow with our Oems and are moving solutions as we talked about at our Investor day, we're gaining some nice momentum there we feel good in the long term really.
Speaker Change: Tranship with already a Tracy Oems is positive.
Louis Pinkham: Great, thank you.
Speaker Change: Great. Thank you.
Speaker Change: Yep. Thank you.
Louis Pinkham: This concludes our question and answer session.
Speaker Change: This.
Speaker Change: A question and answer session I would like to turn the conference back over to Louis Pinkham for closing remark.
Louis Pinkham: I would like to turn the conference back over to Louis Pinkham for closing remarks. Thank you, Operator, and thanks to our investors and analysts for joining us today. Our teams remain highly engaged, executing the many growth and margin enhancement initiatives outlined at our September Investor Day. in particular, leveraging our powerful enterprise to accelerate profitable growth, both organic and in time, inorganic. We are seeing clear signs of our progress in IPS, and expect improving momentum in our other segments as well as we look ahead to 2025 and beyond. Thank you again for joining us today and thank you for your interest in Regal Rexnord.
Louis Pinkham: Thank you operator, and thanks to our investors and analysts for joining us today.
Louis Pinkham: Our teams remain highly engaged executing the many growth and margin enhancement initiatives outlined at our September Investor day.
Speaker Change: In particular, leveraging our powerful enterprise to accelerate profitable growth, both organic and in time inorganic.
Speaker Change: We are seeing clear signs of our progress in Ips and expect improving momentum in our other segments as well as we look ahead to 2025 and beyond.
Speaker Change: You again for joining us today and thank you for your interest in Regal Rexnord have a good day.
Operator: Have a good day.
Operator: The conference is now concluded. Thank you for attending.
Speaker Change: The conference has now concluded. Thank you for attending you may now disconnect.
Operator: You may now disconnect.