REGAL REXNORD CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• The company achieved a record adjusted gross margin of 38.4% and record adjusted EBITDA margin of 22.8% in Q3, up 110 basis points vs prior year.
• IPS had strong organic growth in weak markets, achieving record adjusted EBITDA margins aided by planned synergies.
• Despite sales down 2.7% on a comparable organic basis, cross-sell initiatives helped IPS achieve positive growth.
• Recognized $27 million of synergies in Q3, on track to achieve $90 million this year with $120 million more to realize in 2025-2026.
• Highlighted a powertrain win for a mining customer as an example of differentiated value-add and value pricing.
• Thanked associates for their hard work in navigating choppy end markets while advancing long-term value-creation drivers.

Segment Performance

• Automation and Motion Control (AMC): Net sales in Q3 were down 4.1% on an organic basis. Adjusted EBITDA margin was 21.8% in Q3, below expectations due to lower volumes, weaker mix, and foreign-exchange pressures. Orders in AMC were up 4.5% daily in Q3, with book-to-bill at 0.9. October orders were down 11.5% daily organic.
• Industrial Powertrain Solutions (IPS): Net sales were up almost 1% on an organic basis in Q3, reflecting strength in energy, aerospace, and metals and mining, offset by weakness in alternative energy and machinery off-highway. Adjusted EBITDA margin was 26.8% in Q3, above expectations. Orders in IPS were up nearly 6% daily in Q3, with book-to-bill ~1.0. October orders were up 6.6% daily organic.
• Power Efficiency Solutions (PES): Net sales were down 6.2% on an organic basis in Q3, below expectations due to weakness in general commercial and non-US commercial HVAC markets, and slower-than-expected capacity ramp in residential HVAC. Adjusted EBITDA margin was 17.8% in Q3. Orders in PES were down 1.5% daily in October, but resi-HVAC orders showed sequential improvement.

Guidance

• Reduced sales outlook due to weaker performance in Q3 and expectations for Q4, primarily driven by PES and AMC.
• Adjusted EBITDA margin outlook is now 22% due to lower sales volumes and weaker mix.
• Effective tax rate coming down by 2.5 points due to a one-time tax benefit in non-US operations.
• Revised adjusted diluted EPS guidance range to $9.15-$9.45, mid-point reduced by $0.30.
• Expect adjusted free cash flow for 2024 to be approximately $600 million.

Risks

• End-market headwinds in AMC (discrete automation, ISM weakness) and PES (non-US commercial HVAC, US general commercial).
• Slower-than-expected ramp in residential HVAC capacity.
• Persistent ISM weakness and lower-than-expected demand acceleration from interest-rate changes.
• Election uncertainty impacting customer spending decisions.

Question and Answer

Q: Good morning, everyone. So, just a clarification on the 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 when all else equal and then kind of adjusting for some of the moving pieces you're seeing in the PES side?

A: 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 are 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.

Q: Hey, good morning, guys. I'm 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 I'm seeing like 30%--20% to 30% order growth from the OEMs. So you know, maybe it's the other stuff, but I'm just trying to get my arms around it.

A: I really want to break this up into two, if I could, Jeff. First of all, we have seen rebound in resi-HVAC and sales have increased about 10%. But after two years of weak demand and fall, starts some 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. And 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. The last point I'll make to your comments about this, also a disconnect between maybe some of the growth at an OEM versus us. First of all, remember, our OEMs get price 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. So, I think it's really those two items that I think that's to answer your question.

Q: Hi, good morning. This is Randy on for Kyle. Yeah. So, I have a quick question about the cross-selling synergies in-- particularly in IPS. I was just hoping you could talk through 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?

A: So, we think our outperformance in IPS is greatly driven by our cross-sell and our industrial powertrain initiatives. We believe 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. And so, we think this will continue to accelerate. 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.