Q4 2024 Regal Rexnord Corp Earnings Call
Good day and welcome to the Regal Rexnord fourth quarter 2024 earnings Conference call all participants will be in a listen only mode.
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Speaker Change: I would now like to turn the conference over to Robert Barry Vice President of Investor Relations. Please go ahead.
Speaker Change: Great. Thank you operator, good morning, and welcome to Regal Rexnord fourth quarter 2024 earnings Conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob <unk>, Our Chief Financial Officer.
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.
Speaker Change: <unk> on the Regal Rexnord Dot com website.
Speaker Change: Also on this slide we see that we are presenting certain non-GAAP financial measures that we believe are useful to our investors and we have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in the presentation materials.
Speaker Change: 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 <unk> performance and discuss the recent announcement in our aerospace business, Rob <unk> will then present, our fourth quarter financial results in more detail and outline our 2025 financial.
Speaker Change: Guidance.
Speaker Change: After that we'll move to Q&A and then Louis will be back with some closing remarks.
Luis: I will turn the call over to Luis.
Luis: Great. Thanks, Rob and good morning, everyone. Thanks for joining us to discuss our fourth quarter results and to get an update on our business and for your continued interest in Regal rational.
Luis: Before we dig into the material on this slide let me share a few high level thoughts on our performance in the fourth quarter.
Luis: Our fourth quarter performance reflected strong controllable execution by our team with notable progress on our outgrowth initiatives synergy realization gross margin expansion orders acceleration and debt reduction however markets continued to provide.
Luis: Good challenges, which were larger than we expected for the quarter.
Luis: Some notable highlights include Ips continuing to deliver clear signs about growth plus healthy margin expansion.
Luis: AMC exceeded its fourth quarter revenue target and achieved high single digit order growth.
Luis: And <unk> made tremendous progress ramping capacity in residential HVAC with that vertical growing at a low 20% rate in the quarter.
Luis: So before continuing I wanted to take a moment to thank our 30000 redirection of associates for their consistent hard work and discipline controllable execution.
Luis: Despite strong execution by our team a number of our key end market sources stained or incrementally weaker demand in the quarter, which included a typically high end of the year customer push outs.
Luis: In particular global General industrial markets remained challenged in the machinery and off highway market, while only about 4% of total Regal restaurant sales stepped down significantly impacting Ips and AMC.
Luis: On a regional basis, we saw the most significant incremental pressure in China, though encouragingly, our core North American business was in aggregate nearly flat.
Luis: The higher customer push outs impacted all three segments, though especially Ips.
Luis: Fortunately, we believe we have line of sight to this pushed out spend returning in 2025, and so we would not interpret these actions by our customers as signs of weakening markets. In fact as an enterprise. We believe we are actually starting to see a more sustained net inflection in our.
Luis: Business momentum evidenced by our accelerating orders performance with all segments contributing.
Luis: While it is too soon to tell if the order acceleration will be sustained throughout the year. This improving mortgage momentum, which continued into January makes us cautiously more optimistic about our growth prospects in 2025.
Luis: Rob will share more on our 2025 outlook in his section.
Speaker Change: Now, let me provide some specifics on our fourth quarter performance starting with sales.
Speaker Change: Our sales in the quarter were down one 4% versus the prior year on an organic basis with T growing slightly.
Speaker Change: Orders in the quarter on a daily basis were up four 4%.
Speaker Change: Notably orders and AMC were up nearly 9% with Ips orders up nearly 4%.
Speaker Change: P. S orders also grew modestly largely driven by pre buy dynamics in the HVAC.
Speaker Change: Partially offset by weaker global general commercial market.
Speaker Change: Well in general our orders remain weighted to longer cycle bookings. This growth gives us confidence that we will see better top line performance as 2025 unfolds.
Speaker Change: In January do you have the organic orders were up one, 4%, which aligned with our expectations for orders in the month.
Speaker Change: Despite fourth quarter topline pressure margins in the quarter remains healthy our adjusted gross margin was 37, 1% up 60 basis points versus the prior year, excluding industrial system.
Speaker Change: For the full fiscal year, our adjusted gross margin was 37, 8% up 210 basis points versus the prior year, excluding industrial and we believe we are firmly on track to achieve our targeted annual run rate gross margin of 40%.
Speaker Change: Exiting this year.
Speaker Change: Our progress on gross margin was aided by exceeding our 2020 for cost synergy goal during the quarter, bringing our annual synergies recognized two $101 million for the year ahead of our $90 million goal.
Speaker Change: Adjusted EBITDA margin was 21, 7% down 80 basis points versus the prior year, excluding industrial systems on lower volumes weaker mix FX pressure and some growth investments much of which was offset by synergy benefit.
Speaker Change: Right.
Speaker Change: A notable margin bright spot was the Ips, which achieved an adjusted EBITDA margin of 26% in the quarter.
Speaker Change: Two points versus the prior year.
Speaker Change: Adjusted earnings per share in the quarter were $2 34.
Speaker Change: Up two 6% versus prior year.
Speaker Change: Lastly, we generated $185 million of adjusted free cash flow in fourth quarter, which contributed to Regal paid down $205 million of debt.
Speaker Change: For the full year, we paid down $938 million of our debt exceeding our goal.
Speaker Change: Cash generation and debt pay down or an important part of our long term value creation story, which was clear by our performance in 2024.
Speaker Change: In summary, our COO.
Speaker Change: Quarter characterized by persistent market headwinds and rising FX pressures, but also encouraging order performance and continued solid controllable execution by our team.
Speaker Change: Next I'd like to share an exciting development related to one of our key growth initiatives, which is to leverage the scale and scope of our regal rational portfolio to provide differentiated customer value propositions.
Speaker Change: During the fourth quarter, we announced a partnership with Honeywell aerospace to provide solutions for the advanced air mobility market, sometimes referred to as electric vertical takeoff and landing or E VTOL aircrafts.
Speaker Change: Initially the partnership will focus on Regal rexnord, providing electro mechanical actuator solutions. A representative example of which is pictured on the right hand side of this soares.
Speaker Change: As our partnership with Honeywell evolves, we believe it has the potential to expand beyond its initial focus to other technology and product advancements in the aerospace market.
Speaker Change: There are a number of notable factors that we believe position us to be a valuable partner to Honeywell, which are listed on the left hand side of the slide.
Speaker Change: First is our longstanding heritage in the aerospace business.
Speaker Change: Is the depth and breadth of our portfolio.
Speaker Change: The combination of our legacy Regal Rexnord and ultra aerospace businesses created a critical massive component bra, which now allows us to offer more value added solutions.
Speaker Change: As you can see in the picture electric actuators for the advanced Air mobility market comprise many of our components, which we are able to engineer into value added system.
Speaker Change: The value prop for customers and for Honeywell. This is about improving quality and reliability through an integrated system.
Speaker Change: Optimized for performance.
Speaker Change: Along with making it easier to do business with Regal rexnord by being able to procure one system versus multiple components.
Speaker Change: Next is our subject matter expertise in aerospace we have a strong track record as a tier one component supplier, which allows us to interact with customers as a trusted adviser and lead discussions with our technology focus.
Speaker Change: Finally, our significant global manufacturing capabilities means that we can produce at scale with consistency and reliability.
Speaker Change: The growth outlook for the EV market is strong and we are confident in our ability to provide quality solutions at scale.
Speaker Change: Our partnership with Honeywell is consistent with our strategy of moving up the value chain and selling more value added solutions to our customers.
Speaker Change: These were themes, we discussed at our September Investor Day, and we are pleased to be making progress executing on this strategy.
Speaker Change: Beyond the strategic validation. We are also very excited about the significant growth potential we see in the advanced near mobility market more broadly.
Speaker Change: Industry forecast for a M unit growth are compelling estimating 2000 aircraft per year by 2030 with potential legal risk Snored addressable ship set content of $220000 per plane.
Speaker Change: To be clear this is an external market forecast and not related to our Honeywell partnership specifically, though we do believe Honeywell is positioned to be a meaningful player in the a M market.
Speaker Change: Even at a fraction of these anticipated growth rates.
Speaker Change: <unk> has the potential to be a needle moving growth opportunity for Regal rational.
Speaker Change: My congratulations to our AMC aerospace team for securing this highly compelling partnership.
Ron: And with that I'll turn the call over to Ron.
Ron: Thanks, Louis and good morning, everyone.
Ron: I'd also like to thank our global team for their hard work and disciplined execution in the quarter.
Ron: Now, let's review our operating performance by segment.
Ron: Yeah.
Ron: Starting with automation and motion control, our AMC net sales in the fourth quarter were down two 3% in the prior year on an organic basis.
Ron: But modestly ahead of our expectations.
Ron: The decline reflects continued weakness in the general industrial and discrete automation, which was partially offset by strength in the food and beverage and aerospace and defense markets.
Ron: The inflection to healthy positive sales growth in food and beverage is a noteworthy positive after a sustained period of pressure in that end market.
Ron: Within discrete automation the shorter cycle business showed sequential improvement, but remains below the 2019 levels that we would consider a more normal level of demand.
Ron: And while longer cycle orders remained quite strong those orders have delivery date weighted to the back half of 'twenty five or into 2026.
Ron: Amc's adjusted EBITDA margin in the quarter was 21, 6%.
Ron: Which was below our expectations on a weaker mix, particularly within discrete automation as well as larger than expected foreign exchange pressures.
Ron: Orders in AMC in the fourth quarter were up eight 8% versus prior year on a daily basis.
Ron: The third quarter in a row of positive orders.
Ron: Book to Bill in the fourth quarter for AMC was 1.15, which is significantly more favorable than the point 92, we saw exiting 2023.
Ron: We are encouraged by the positive order momentum we have been seen in AMC over the past three quarters, which gives us increased confidence. This business is poised to inflect to positive sales growth, which our current outlook assumes starts to occur in the back half of this year.
Ron: I'll elaborate on Amc's outlook later in my remarks.
January orders for AMC or up about 6% on a daily basis.
Ron: Turning to industrial powertrain solutions or Ips net sales in the fourth quarter were down one 9% versus the prior year on an organic basis.
Ron: The decline reflects particular weakness in the machinery on highway market in general industrial and metals and mining, partially offset by strength in energy and marine markets.
Ron: We estimate that cross margins marketing synergies also continued to contribute a couple of points of outgrowth in the quarter, helping us outperform in what remains a down market.
Ron: Despite continued outgrowth momentum fourth quarter sales in Ips.
Ron: Were below our expectations, most notably due to a significant incremental weakness in the machinery off highway market. In addition to last minute end of year customer push outs that we saw in a number of end markets.
Ron: That said, we see this dynamic is more timing related.
Ron: Notably excluding the impact of these late December push outs.
Ron: <unk> would have been slightly ahead of sales target midpoint for the quarter.
Ron: Adjusted EBITDA margin in the quarter was 26% up 200 basis points versus the prior year aided mainly by synergies.
Ron: Orders in EPS on a daily basis, we're up nearly 4% in the fourth quarter and we believe reflects further outgrowth and what remain down in markets.
Ron: Book to Bill in fourth quarter for Ips was one point out.
Ron: In January orders on a decent organic basis or up nearly 2%.
Ron: Turning to power efficiency solutions more P S.
Ron: Net sales in the fourth quarter were up slightly versus the prior year on an organic basis, which was below our expectations.
Ron: The result reflects strong growth in residential HVAC and to a lesser extent in pool and in commercial HVAC in North America, which was offset by significant weakness in the general commercial market, especially in China and commercial HVAC outside North America.
Ron: As we shared last quarter. It was our intention to make significant progress ramping our capacity in residential HVAC. So we can serve our customers ahead of the year and <unk> regulatory transition. We are pleased to see that the S. T made great progress on this front, which allowed us to support our customers and deliver.
Ron: Low twenty's sales growth in the residential HVAC business for the quarter.
Ron: Let me also provide some incremental color on the general commercial market.
Ron: We experienced incremental weakness in the quarter.
Ron: This part of the business sells general purpose motors into a range of markets. Many with general industrial characteristics and so tends to correlate with U S. M.
Activity here has been weak, but slowed notably in December, especially in China, and Europe to a degree we were not expecting.
Ron: Despite these market pressures based on third party market data.
Ron: <unk> gained share and in our primary North American market in 2024.
Ron: Turning to segment margins.
Ron: The adjusted EBITDA margin in the quarter for P. S.
Ron: It was 15, 3%.
Ron: Which was below our expectation on lower volumes larger than expected FX headwinds and some temporary labor efficiencies as we prioritize ramping capacity with urgency to best serve our residential HVAC customers ahead of the refrigerant transition.
Ron: Relative to prior year. The P. S margin was down on lower volumes FX related pressure and temporarily higher labor costs.
Ron: Shifting to orders orders NPS for the fourth quarter were up 1% on a daily basis.
Ron: Notably orders and ran the HVAC were up over 20% in the quarter, leading us to build some backlog and Reggie while orders in commercial HVAC and general commercial were down.
Ron: Book to Bill in the quarter for <unk> was <unk> 97.
Ron: Similar to what I discussed for AMC. This business is exiting the year in a stronger position versus where it was a year ago exiting 2023.
Ron: Daily orders for P. S. In January were down three 4%.
Ron: While we expected a modest decline due to the age of all transition we actually saw strength in residential HVAC orders in the month, which were up 3% on strength in furnace.
Ron: January is also being weighed down by lapping a large project order in January 2024, absent, which monthly orders in January would have been roughly flat.
Ron: We view this favorably given the degree of activity that was pull forward ahead of the year ended the year well transition.
Ron: Okay.
Ron: On the following slide we highlight some additional financial updates for your reference notably.
Ron: Notably on the right side of this page you will see we ended the quarter with total debt of approximately 546 billion.
Ron: And net debt of five or $6 billion, we repaid approximately $205 million of gross debt in the quarter and $938 million for the year ahead of our plan.
Ron: A further note we ended the year with variable rate debt of roughly $450 million, representing approximately 8% of our total debt outstanding which we expect to have repaid by the end of this year.
Ron: Adjusted free cash flow in the quarter was $185 $3 million, which which was primarily deployed to debt reduction we plan to continue deploying the majority of our free cash flow to debt reduction in 2025.
Ron: Turning to the outlook.
Ron: Let me walk you through our principal 2025 guidance points, which are specified in the table on the right side of this slide.
Ron: Starting with sales.
Ron: Our 2024 sales were just over $6 billion, excluding the industrial business that we sold in April 2024 bridges to a go forward 2024 sales level of $5 $8 million.
Ron: Our 2025 guidance midpoint assumes a similar level of sales factoring roughly flat organic growth and a modest.
Ron: Headwind from FX.
Ron: Our flat organic assumption embedded modest end market pressure offset by about one point about.
Lastly, we expect sales to be slightly back half weighted at roughly 1% above the first half level.
Ron: For reference our book to Bill entering 2024 was <unk> 93 versus 1.0. This year as we enter 2025. So we do believe a year later, we are better positioned to grow.
Ron: From an EBITDA margin perspective, our target is 23% for the year, which is about a one point improvement compared to our 2024 performance excluding the industrial business.
Ron: The principal drivers in the margin bridge, our $54 million of incremental synergies plus productivity initiatives net of a roughly $20 million FX profit headwind.
Ron: We expect EBITDA margins to improve as we progress through the year on volume cost synergy realization productivity and mix in AMC.
Ron: We assume the fourth quarter margin approaching 25% aligned with the targets, we presented at our last Investor day.
Ron: We're also sharing the relevant below the light modeling items, notably we expect a benefit from lower interest expense expense worth just over $50 million, reflecting progress paying down our debt during 2024 and anticipated meaningful further debt reduction this year.
Ron: This alone is worth about 60 cents of EPS growth in 2025.
Ron: You will also see that our effective tax rate is now expected to be 22, 5% down from our prior mid term base case assumption of 24%.
Ron: This is due to identifiable tax benefits, we expect in the year.
Ron: While we are working on opportunities to more permanently lower effective tax rate for now investors should assume a 23% rate in 2026 and beyond.
Ron: These.
Ron: Functions, resulting in diluted adjusted EPS midpoint estimate of $10 per share.
Ron: And an EPS guidance range of $9 60.
Ron: At $10 40 at the midpoint this outlook delivers approximately 10% adjusted earnings per share growth versus the prior year.
Ron: We expect adjusted free cash flow to be approximately $700 million this year, representing a roughly 12% free cash flow margin.
Ron: We expect the growth in free cash flow over 2024 to be achieved through a combination of trade working capital improvements, particularly inventory higher EBITDA, which includes a $54 million benefit from synergies lower cash restructuring and lower cash interest.
Ron: We expect our annual run rate cash flow to be approximately $900 million.
Ron: Exiting 2025 this is below our prior target of $1 billion due to lower volumes relative to prior expectations. However, we remain on track to reduce our net leverage is roughly three times <unk> seen this year is all available free cash flow will be prioritized towards paying down debt.
Ron: Finally as noted at the bottom of this slide our guidance does not consider the impact of potential Mexico or Canada tariffs.
Ron: The impacts of the recently implemented China tariffs, while immaterial are considered in our outlook.
Ron: On this slide.
Ron: We provided more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for the first quarter and for the full year.
Ron: I would flag that we expect the first quarter would be the low point for the year from a sales margin and EPS perspective with anticipated sequential improvements thereafter tied to topline benefits associated with our building positive orders momentum further synergy gains and ongoing debt reduction.
Ron: As I wrap up my prepared comments I would like to reiterate that while we are cautiously optimistic entering 2025, we are remaining measured in our approach to guidance we.
Ron: We are using current market conditions to set our expected guidance range and as discussed we see a stronger second half.
Ron: Versus the first half based on current order trends and backlog characteristics.
Ron: Although we are entering 2025 with a stronger book to bill than prior year, we're still not quite seeing sustained strength in the ISN and general industrial metrics.
Ron: That said our teams are energized by the progress we have made transforming this business by the potential we see in our portfolio and by our ability to profitably outgrow our markets in 2025.
Speaker Change: And with that operator, we're now ready to take questions.
Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. It are using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: Your question. Please press Star then two.
Speaker Change: The first question comes from Jeff Hammond from Keybanc capital markets. Please go ahead.
Speaker Change: Hey, guys. This is much more on for Jeff.
Speaker Change: And then I guess my first question.
Speaker Change: Should we think of the upside to synergies in 'twenty 'twenty four is pull forward of the sales synergies or are upside to the total opportunity.
Speaker Change: And then if you could just level set us on the incremental synergies in 2025.
Speaker Change: Yeah, so the the.
Speaker Change: The synergies that we realized earlier than anticipated is or not.
Full forward from 2025, but our goal for 2025.
Speaker Change: Is $54 million, which which would be a reduction from the 60.
Speaker Change: $5 million, we had presented previously so it's not incremental synergies overall, but rather just we got them a bit earlier than originally anticipated.
Speaker Change: Okay. That's helpful. And then maybe if you could just level set us on your manufacturing footprint in Mexico, but with all the tariff talks and then just risks associated with tariffs and how do you expect to navigate if they happen.
Speaker Change: Yeah. So.
Speaker Change: We certainly have a strong position in Mexico with about a little over 30% of our direct labor workforce in Mexico.
Speaker Change: You know from a tariff perspective.
Speaker Change: Clearly.
Speaker Change: Tracking this very closely.
Speaker Change: But theres still quite a bit of uncertainty.
Speaker Change: Nevertheless in the last quarter, we stood up a cross functional team to focus on tariffs assessing the various impacts and to try to be best prepared if they get implemented hence the reason why with the China tariffs, we feel we'll be able to absorb that fairly easily with regards to Mexico in particular.
Speaker Change: If tariffs get put in place will have to leverage our flexible global manufacturing footprint and supply chain.
Speaker Change: We'll continue to push operational efficiencies and then we'll continue to implement a variety of cost saving measures.
Speaker Change: But in addition, a large part of our approach will will likely have to be implementing price actions across the broader broader product lines I will tell you that.
Speaker Change: Our strategy for a while has been in region for region and supply redundancy and so we have quite a few levers to pull. One example of that is five years ago with regards to our China supply chain.
Speaker Change: We're pretty embedded with China globally, and now China stands on its own.
Speaker Change: And again, why we feel that the China tariffs are fairly immaterial.
Speaker Change: And I'd also say you know we have a muscle here we've done this before when the tariffs were put in place five or six years ago. We took actions in our industrial systems business. We relocated production we passed on price as a headwind.
Speaker Change: And in the end over a midterm timeframe, we were able to get our margins right back to where they need to be so well, we feel as though we're confident that whichever direction. The administration goes we'll be able to manage through it effectively.
Speaker Change: Okay, great. Thanks for the questions.
Speaker Change: Thank you.
Speaker Change: The next question comes from Kyle Mendes from Citigroup. Please go ahead.
Kyle Mendes: Thank you I just wanted to dive deeper into the outgrowth, you're seeing it sounds like a lot of it is in Ips. So I guess, just you know, what's what's giving you some of that success driving driving the outgrowth in our competence and and one point of outgrowth in 2025.
Yeah, a lot of it is in Ips, but it's also an AMC and partially in PFS. So let me walk backwards. So P. Yes, it's all about our new products and our move more into air moving we're getting some nice momentum with our our sand filter units in our clean rooms and data.
Kyle Mendes: The centers and so feel really good around the vitality and as you know vitality as we talked at Investor Day is really important to us when we go to AMC. It. It's all around these integrated solutions and being able to move up the value chain to provide better solutions to our.
Kyle Mendes: Our customer now we talked about the E. P. Tau on this call that's a little bit more longer term, but short term.
We're working on many programs in AMC.
Kyle Mendes: And definitely as we're seeing it in the order rates and the growth of the ordinary.
Kyle Mendes: Finally, it is Ips and Ips, it's all about the industrial powertrain and it's a very very similar story that I talked about with AMC.
Kyle Mendes: <unk> bundle for the industrial powertrain solutions system totally integrated system is up.
Kyle Mendes: Roughly double last year remember our scale and scope provides us.
Kyle Mendes: The strongest go to market in the industry.
Kyle Mendes: We're also seeing significant benefit around the cross sell you know if you if you look at cross sell today, only 19% of our customers buy more.
Kyle Mendes: More than one of our product categories, and if you could just double that cross sell that incremental $150 million of revenue for us.
Kyle Mendes: And so this is where we get confidence around the <unk>.
Kyle Mendes: Roughly 100 basis points of outgrowth for 2025.
Kyle Mendes: And I guess following up on that just where are you in but then I P. S, especially just where are you seeing some some early wins with the cross selling.
Kyle Mendes: And then just opportunities you see in 2020 five to drive additional cross selling thank you.
Kyle Mendes: Yeah. So so we're seeing it mostly with Oems, but we're also seeing it in.
Kyle Mendes: Roger to work. So one example of it is a mining project in South East Asia, where we would normally sell components, but we're selling an integrated system with the motor the gear drive Ah and shocked with couplings and bearings.
Kyle Mendes: That that project is going to be worth over an 18 month period.
Kyle Mendes: Mid teens millions.
Kyle Mendes: And so this is the kind of opportunities that we're seeing today that we're winning that's going to allow us to what we feel accelerate the Ips sales growth.
Kyle Mendes: Great. Thank you guys.
Speaker Change: Thanks Kyle.
Speaker Change: The next question comes from Mike Halloran from Baird. Please go ahead.
Mike Halloran: Hey, good morning, everyone.
Yeah. So so.
Mike Halloran: Which is more like two questions, but I just kind of want to make sure I have my hands around how you're thinking about the sequential cadence through the year.
Speaker Change: First quarter here, obviously, the low watermark as Rob talked about in the prepared remarks.
Speaker Change: I was thinking that with the order cadence thing I think is a question I'm getting a lot from folks just you've seen a couple of pilot positive order quarters first quarter guidance, a little softer back half gets better maybe just talk to that cadence and what is it about the first quarter. That's that's so challenging and then.
Speaker Change: Trends seem like they're not that different from an order book perspective, why do you think that these things.
Speaker Change: <unk> profit.
Speaker Change: If you could just kind of help a little bit more with that cadence.
Speaker Change: Yeah, Hey.
Mike Halloran: Hey, Mike Thanks for the question and I think it's.
The question.
Mike Halloran: As an important one for us to clarify even further so you know first quarter is typically the low mark for us and on top of that we will have.
Mike Halloran: <unk> pressure because of the <unk> that was pulled forward into Q1.
Mike Halloran: Sorry into Q4.
Mike Halloran: Although I feel.
Mike Halloran: A little bit better that we saw about 3% and orders in the residential HVAC business in January but we were we are forecasting that residential HVAC to down in the first quarter and that overall is what's putting a bit of pressure and then it's AMC and most of the project.
Mike Halloran: Sorry, most of the order, we're seeing are longer cycle projects in that that improved position is helping us give confidence to the second half. So you know AMC saw roughly 9% of orders in the quarter, but if you look at the in Q4, if you look at the beginning.
Mike Halloran: <unk> of this year at the shippable backlog.
Mike Halloran: In our in our backlog for the second half.
Mike Halloran: For factory automation in particular, it's double where we were incurring last year.
And so it's those longer cycle that are more weighted to the second half that are giving us confidence in it.
Mike Halloran: As Rob said, we're entering this year with a book Bill of about.
Mike Halloran: Slightly around one versus <unk> nine three <unk>.
Mike Halloran: Last year, but a lot of those orders are more weighted to the second half and by the way the weighting to the second half and a lot of it in factory automation, where we have a bit stronger margins is also why we feel good about the margin profile of the second half are feeling more confident about the margin profile in the second half. So hopefully that was helpful. Mike.
Mike Halloran: No that was and if you look back at the history and I know you guys are piecemeal the handful of companies together, some this might be little higher and see it.
Mike Halloran: Its just unusual right because normally you get kind of short cycle business that leads the long cycle business.
Mike Halloran: This feels a little unique in that you might actually have the short cycle recovery and the long cycle business and at the same time not keen interest I'm just kind of curious how this would track versus what you've seen historically.
Mike Halloran: Yeah, Mike I don't really think I have a solid answer because we haven't made that compare but I don't think it's I don't think it's an easy compare because in particular, what's driving this is factory automation and as you well know factory automation has had.
Mike Halloran: A lot of pressure of last year, which was still based on the Covid overhang.
Mike Halloran: What is driving a big piece of this longer cycle project work, though is the defense work and the aerospace work that we're well positioned in and we're seeing that are really fell into the second half. So so hopefully hopefully that that comment helps with how we're thinking about it no that's fair and then.
Mike Halloran: Just one one quick clarification could you just talk through the free cash flow assumptions. One more time 700. This year I think you said the exit rate was 900 is 900, the rough start process for 26 at this point and maybe just talk talk to the puts and takes on what the changes are and how to think about leverage as your own.
Mike Halloran: That similar time frame.
Mike Halloran: Sure. So yeah. The the 900 is in the 2026 thought at this time I mean, it gives you the 700 from that over 500 this year I think.
Mike Halloran: Can you can look at it is you know you Gotta EBIT contribution.
Mike Halloran: And then you've got your cash interest.
Mike Halloran: That's going to give you about $50 million in your cash taxes about $40 million.
Mike Halloran: Working capital about $50 million in restructuring cash restructuring piece, though when you add that up you get you get about that $200 million between the 500 700 to bridge to 20 to 25 and then to go into 26. Then you would then we would expect that maybe another.
Mike Halloran: 75 million on cash interest.
Mike Halloran: To help you out as well as about $50 million on cash restructuring.
Mike Halloran: Offset a bit with some working capital that we won't get as much in 'twenty six but the remainder will pretty much be in the EBITDA contribution to get you to that to the 900 hopefully that helps.
Mike Halloran: That's great that's great and then the leverage in some assumed then.
Mike Halloran: By the end there.
Mike Halloran: Yes.
Mike Halloran: We're thinking will be about three times by the end of this year, which means we should be about two and a half.
Mike Halloran: And all of next year.
Mike Halloran: Perfect. Thanks, everyone appreciate it.
Mike Halloran: Thanks, Mike.
Speaker Change: The next question comes from Julian Mitchell from Barclays. Please go ahead.
Mike Halloran: Hi.
Julian Mitchell: Good morning, maybe just trying to stick to two questions. So my first one would just be trying to understand a little bit better.
Julian Mitchell: [noise] dynamics embedded for peak this.
Julian Mitchell: This year.
Julian Mitchell: If I look at the sort of sales.
Julian Mitchell: <unk> for example.
Julian Mitchell: You've got a Q1, which is starting out.
Julian Mitchell: Flat to up sort of year on year, the full year down low single digits.
Julian Mitchell: Year on year.
Julian Mitchell: So I understand that sort of a sequential hit from the a two well in the first quarter and then sort of a year on year hit in the fourth quarter I probably am.
Julian Mitchell: But if you could flesh out kind of how we should think about the seasonality of the sales and earnings for PFS. This year, because it is a bit of a sort of abnormal.
Julian Mitchell: Don and finish perhaps.
Don: Yeah, John Let me, let me kick this one off so first of all in the first quarter. You know you you laid out pretty well I mean, you do have that impact them from the EIA.
Don: The Hol transition and then just to just the weakness in general commercial that we talked about and non U S. Commercial HVAC. So that is absolutely on the top line noise and headwind for E. S. In Q1 as you move through the year, though.
Don: We do we do believe that remedy HVAC should improve.
Don: Improved from from the first quarter rate and so that that incrementally improves as you move through the through the year, maybe out like low single digits for the year.
Don: And then flattish on commercial HVAC through the year overall again stronger in North America continued weakness in China, and Europe, but flattish overall and then general commercials.
Don: About low single digits, but incrementally improves quarter over quarter, which also improves your mix and provides better margin benefit so hopefully that helps a bit.
Speaker Change: Yes, Thanks, very much and then just my second question would be around the kind of.
This seasonality I suppose through the year. So I think Q1 is.
Speaker Change: About I think 21% of the full years.
Speaker Change: EBITDA.
One that if that was kind of EPS should be a similar share of the year, well theres something moving around below the line.
Speaker Change: When we think about kind of first half.
Speaker Change: And alethia are we thinking kind of EBIT dollar or EPS as Mike had made.
Speaker Change: Ts.
Speaker Change: Share of the year.
Speaker Change: Well Youre your earnings are going to improve through the year as you as you pay down your interest your interest expense and so we have a.
Speaker Change: Plan to pay that down by $50 million in the year, so that get incrementally better as you move through the year your tax rate is.
Speaker Change: Is it relatively consistent as you move through the year. So those are the below the line drivers if you will.
Speaker Change: And then just the sequential improvement in EBIT.
Speaker Change: Especially in back half versus first half and related margins is fairly significant as mix improves in the back half of the year, especially as factory automation.
Speaker Change: Becomes a greater percentage of the mix in the AFC segment, and then finally synergies do accrue through the year about $54 million continued to accrue by quarter and so that will also weigh in on the the progression.
Speaker Change: Great. Thank you.
Speaker Change: Got it excellent.
Speaker Change: The next question comes from Tim <unk> from Raymond James. Please go ahead.
Tim: Hi, Good morning. Thank you yeah just.
Speaker Change: To follow up on an Ips as you think about kind of that the.
Speaker Change: The outlook that you've provided for 25 and I'm just curious you know thinking about.
Speaker Change: These push outs.
That impacted you in the fourth quarter.
Speaker Change: But and then it looks like the implied.
Speaker Change: I know, there's some probably a bigger currency impact, but the decline.
Speaker Change: A.
Speaker Change: Change in the fourth quarter, and the first quarters and a bigger step down so I'm just trying to marry that pushout comment.
Speaker Change: What looks to be a little bit more traction from an order perspective.
Speaker Change: Both in the quarter and then what you flagged for January relative to that that step down in the first quarter and then.
Speaker Change: Maybe I guess part B of the question is just with distribution being such a big component of that business.
Speaker Change: Is that the kind of flattish year over year number stood out because I think that at least the messaging from the public distributors, there's a bit more optimistic so maybe just your call.
Speaker Change: Your comments on those two parts again, just focusing on the Ips business. Thank you.
Speaker Change: Yes, So hey, Tim Thanks for the question I'm not I'm trying to go backwards with your question and I'll answer the second first which is you're right about 50% of our business does go through distribution, but listen I think overall, our guidance and forecasting for this year.
Speaker Change: As measured we're going to be measured.
Speaker Change: Want to make sure that we're coming out and have the ability to execute and perform in 2025, well and so that's really how I wanted to answer the second part of your question. The first part of your question, though is all around Ah Ips and you know we're pleased with the order.
Speaker Change: Rates of Ips, we're winning some nice projects I talked about one which was a mining application that will ship over 18 months that 4% growth in Q4, and it's continuing momentum.
However, when you look at Q4 push out the majority of the Pushout actually came from I guess $25 million $50 million came from IPF a lot of the loading of our orders right now are longer schedule their scheduled into the second half of the year even for Ips.
Speaker Change: And so that's why you see our.
Speaker Change: First quarter being a little bit lighter in Ips, but the backlogs building and giving us confidence in.
Speaker Change: That progression through the year, but again I'll add and I'll end with a comment.
Speaker Change: Uh huh.
Speaker Change: We're being very measured in our approach to forecasting topline for 2025.
Speaker Change: Okay.
Speaker Change: Makes sense given what we've endured the last couple of years again it. Thank you Louis yes. Thanks, Tim.
Speaker Change: The next question comes from Nigel Coe from Wolfe Research. Please go ahead.
Nigel Coe: Thanks, Good morning.
Speaker Change: I apologize if.
Speaker Change: Maybe you've covered this topic about it because I've been struggling to kohl's.
Speaker Change: On the <unk> with M. P. S. Obviously, you've had these headwinds from there.
Speaker Change: Non U S commercial Rea Tracy M B.
Speaker Change: You know kind of border commercial preparations. So just wondering what the visibility is far improvements are.
Speaker Change: And Theyre in and I don't know if you can be more specific in terms of what are you assuming for residential HVAC.
Speaker Change: In the first half of I'm trying to think about.
Speaker Change: Yes sure.
Nigel Coe: Nigel Thanks for the question you know, we believe that general commercial and P. S is very well linked to ISR.
Nigel Coe: And so as I S. M starts to strengthen we think North America will benefit we do not see any strengthening in Europe or China at this time.
Nigel Coe: And so that's really the most of the visibility as you well know Rps segment is our shortest cycle business and our backlog is only.
Nigel Coe: 60, plus days and so we're very reliant on book ship there.
Nigel Coe: But we're not we're not feeling real confident on outside the U S.
Nigel Coe: You know I'm cautiously optimistic about the industrial space in the U S, but we've got to see it sustained with.
Nigel Coe: We've got a few sustained through honest Sam.
Nigel Coe:
Nigel Coe: And then with regards to residential HVAC.
Nigel Coe: Rob comment on this a little bit.
Speaker Change: I appreciate you're you're juggling calls, but hopefully all mirror, what Rob said earlier, which was basically flat.
Speaker Change: First quarter is weighted down by a day to our transition and the pull forward into Q4 and now we feel a little bit confident though coming out of January because orders were up about 3% of the rest of the HVAC, but we're expecting first quarter to be down and then successively improve our progressively improve as the.
Speaker Change: The year progresses.
Speaker Change: Okay. That's helpful.
Speaker Change: And then just couple of quick ones couple of rapid fire ones here, you called out FX pressure to margins a N P. Yes, I think when a M C as well I just want to understand that bit better because that does seem that a weaker peso that that might help you Hawkins, our quality and manufacturing footprint in Mexico, and then just can you just clarify that.
Speaker Change: The AMC orders in January so so the short cycle.
Speaker Change: Business is picking up so.
Speaker Change: Yeah, So I'll take the second half and then we'll take Rob back to the first heat.
Speaker Change: So we saw a run rate of roughly 9% on factory automation short cycle orders over the last three months and so with AMC being up about six 3% in January.
Speaker Change: We do feel like it's gaining a little bit of strength, we're not ready yet to call. It on the short cycle factory automation piece, but we're certainly not at bottom.
Speaker Change: So we feel better there and then yeah. So let me take the the FX question So you're.
Speaker Change: Youre right to assume that the the the.
Speaker Change: Peso moving above 20 is certainly could be providing certain levels of benefit however for us as you may recall, we do hedge.
Speaker Change: Certain currencies pesos being one of them to satisfy expenses and so we've been hedging the peso overlap for about six quarters and so therefore, our position on the peso and at this time when these hedges settle as in an unfavorable position and will be we expect throughout the year.
Speaker Change: Pending on what happens with it with the peso going forward, but as it sits today. It is in an unfavorable position. That's the reason that we're not seeing the benefit that we do continue to layer in hedges as we move forward for certainty and as such we should start to see the benefit coming through this year going into 2026.
Speaker Change: This time, we still expect to see headwinds in 'twenty five.
Speaker Change: Okay makes sense thanks, Rob.
Nigel Coe: Thanks Nigel.
Speaker Change: The next question comes from Vivek <unk> from Goldman Sachs. Please go ahead.
Vivek: Hi, This is vivek on for George Thanks for the question.
Speaker Change: Wanted to start off at Ips.
Speaker Change: You had about 2% organic sales decline in fourth quarter and that is often talking about 25 million push out so like ex push out there was some growth in Ips.
Speaker Change: So why should imply guidance such as like down to the 6% organic.
Speaker Change: Organic step down given Argos way positive in fourth quarter and all of a sudden January plus pushout happened already in the fourth quarter.
Speaker Change: Yeah, Doug I. Appreciate the question, let me just clarify one point the pushout was $25 million for the entire enterprise about 15 million for Ips, but I think your question is still stands and you know we have if you think about visibility of basketball we have greatest visit.
Speaker Change: Billety, an AMC, but theres still book ship that we have to get in any quarter second two Ips and third to P. S.
Speaker Change: Yes, we're basing our forecast of Q1 based on what is shippable in our backlog and an assumption around book ship.
Speaker Change: And so that's the best way I can answer that right now, we absolutely feel like where we gain some nice momentum and share growth.
Speaker Change: In Ips and that that will continue through this year that we're outgrowing our market, but the way Q1 is coming together with what's in our backlog and our assumptions on book ship it.
Speaker Change: There is pressure on the top line in Q1.
Speaker Change: Okay. That's helpful. And then just on the exit rate for 2025, I think if I may.
Speaker Change: If I heard it right, you said, 25% or so EBITDA margin for Q, which would imply a late teen plus.
Speaker Change: Plus basis points of margin expansion year on year.
Speaker Change: So number one is my understanding correct that flow through margin expansion, it's pretty steep in.
Speaker Change: And then most of it really driven by AMC and Ips has like higher margin discrete automation comes back debt.
Speaker Change: So the short answer is yes. It is a is definitely a mix.
Speaker Change: Benefit as we exit the year and we do expect to be exiting at that echoes that 25% rate, hence the comment and yes. It does come through those two segments, primarily however, all segments, we expect to improve through the year just most of the benefit we see coming.
Speaker Change: A M C N I P S.
Speaker Change: So perhaps thanks.
Speaker Change: Thanks for that.
Speaker Change: The next question comes from Christopher Glynn from Oppenheimer. Please go ahead.
Christopher Glynn: Hey, good morning, guys.
Christopher Glynn: Question about the free cash flow.
Christopher Glynn: You know you've got a.
Christopher Glynn: And then the outlook.
Christopher Glynn: Outlook earlier in the year and then came in a little light.
Christopher Glynn: So just curious what some of the.
Christopher Glynn: You know misses their involvement there any process improvements for modeling and executing free cash flow as you consider your initial guidance for 2025.
Christopher Glynn: Yeah, It's a fair question. So so thanks, Chris.
Christopher Glynn: I think if you look at the fourth quarter and how we finished the year.
Christopher Glynn: Even though certainly was a contributor here it came in lower than our than the guy, but it's really a story of trade working cap.
Christopher Glynn: Some of it is related to timing on when those shipments occurred in that and the ability to collect.
Christopher Glynn: Based on our terms. So that is we don't do we just see that as timing, we don't see it as a sort of an issue there.
Christopher Glynn: Within the quarter and then there was some inventory.
Christopher Glynn: That we took as we entered the year in terms of what we believe we could reduce our inventory levels by we made some strategic decisions through the year two to invest a bit of inventory ahead of some of the tariff discussions and so that was some of the reason that we came off of the number we didn't anticipate that at the time that we set out.
Speaker Change: Got it.
Speaker Change: Okay do you feel like the.
Speaker Change: Incentive.
Speaker Change: Compensation packages for operators are aligned.
Speaker Change: Well to give confidence in the 25 outlook.
Speaker Change: We do because one of the metrics that we measure our teams on is free cash flow specifically from trade working capital as an operating metric.
Speaker Change: Okay. Thanks, Rob.
Speaker Change: Thanks, Chris.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Louis Pinkham for closing remarks.
Louis Pinkham: Thank you operator, and thanks to our investors and analysts for joining us today.
Louis Pinkham: As we look ahead to 2025, we are pleased with our forecast to grow earnings by 10%.
Louis Pinkham: And are optimistic about our future.
Louis Pinkham: Our improving orders momentum is encouraging.
Louis Pinkham: We are working many initiatives to accelerate outgrowth with clear signs of progress in our Ips cells and our AMC orders results.
Louis Pinkham: And early signs in parts of P. A.
Louis Pinkham: We still have lots of margin self help from synergies and we believe our ability to generate cash remains strong and is poised to accelerate in 2025, which bodes well for debt pay down and over time robust upside from other forms of capital deployment.
Louis Pinkham: In short we are confident in our growing momentum behind our ample value creation opportunities. It is becoming a more dominant part of our Regal Rexnord story.
Louis Pinkham: Thank you again for joining us today and thank you for your interest in Regal Rexnord.
Louis Pinkham: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.