REGAL REXNORD CORP Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Controllable Execution: Strong execution with outgrowth initiatives, synergy realization, gross margin expansion, order acceleration, and debt reduction despite market headwinds.
• Synergy Realization: Exceeded 2024 cost synergy goal, with $101M recognized, ahead of $90M goal.
• Order Performance: Orders accelerated in Q4, with AMC up 8.8% daily, IPS up nearly 4% daily, and PES up 1% daily.
• Partnership Announcement: Partnership with Honeywell Aerospace for advanced air mobility solutions, focusing on electromechanical actuator solutions.

Segment Performance

• Automation and Motion Control (AMC): Net sales in Q4 down 2.3% organic year-over-year, adjusted EBITDA margin 21.6% (below expectations due to weaker mix and FX), orders up 8.8% daily in Q4, January orders up ~6% daily.
• Industrial Powertrain Solutions (IPS): Net sales in Q4 down 1.9% organic year-over-year, adjusted EBITDA margin 26% (up 200bps), orders up nearly 4% daily in Q4, January orders up nearly 2% daily.
• Power Efficiency Solutions (PES): Net sales in Q4 slightly up organic year-over-year, driven by residential HVAC growth but offset by general commercial weakness, adjusted EBITDA margin 15.3% (below expectations due to FX and labor inefficiencies), orders up 1% daily in Q4, January orders down 3.4% but resi HVAC up 3%.

Guidance

• Sales: Midpoint assumes flat organic growth with back half weighted, book to bill entering 2025 at 1.0 vs 0.93 in 2024.
• EBITDA Margin: Target 23% for 2025, driven by $54M incremental synergies and productivity initiatives net of ~$20M FX headwind.
• EPS: Diluted adjusted EPS midpoint $10.00, range $9.60-$10.40, ~10% growth vs prior year.
• Free Cash Flow: ~$700M in 2025, net leverage to ~3x by end of 2025.

Risks

• Tariffs: Uncertainty around Mexico/Canada tariffs, with a cross-functional team monitoring impacts and planning to leverage global footprint and price actions.
• Market Headwinds: Persistent weakness in global general industrial markets, particularly in China and Europe, impacting certain segments.
• FX Pressures: Adverse FX movements affecting margins in segments like PES and AMC.

Question and Answer

Q: Should we think of the upside to synergies in 2024 as a pull forward of sales synergies for 2025?

A: No, synergies realized in 2024 were not pulled forward; 2025 goal is $54M, a reduction from prior $65M.

Q: What are the risks associated with tariffs and how to navigate them?

A: Tracking tariffs closely, leveraging global footprint, operational efficiencies, and potential price actions.

Q: Where is the outgrowth seen and confidence in 1 point of outgrowth in 2025?

A: Outgrowth in IPS, AMC, and PES; cross-selling opportunities and longer cycle orders provide confidence.

Q: Explain sequential cadencing through the year and first quarter challenges?

A: First quarter is typically low, with PES impacted by H2L transition and AMC's longer cycle orders weighted to back half.

Q: Dynamics for PES sales and earnings seasonality?

A: PES Q1 impacted by H2L transition and general commercial weakness, with improvement expected through the year; Q1 EBITDA ~21% of full year, improving as year progresses.