Regal Rexnord Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2023

There are 9 speakers on the call.

Operator

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Robert Barry, VP, Investor Relations. Please go ahead.

Speaker 1

Great. Thank you, operator. Good morning, and welcome to Regal Rexnord's Q1 2023 earnings conference call. Joining me today are Lewis Pinkham, our Chief Executive Officer and Rob Rehaut, our Executive Vice President and 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.

Speaker 1

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 then our Courts filed with the SEC, which are available on regalreichteneword.com. On Slide 3, we State 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 these presentation materials. Turning to slide 4, let me briefly review the agenda for today's call. Louis will lead off with his opening comments. Rob Rehaut will then provide our Q1 financial results in more detail and provide an update to our 2023 guidance.

Speaker 1

We will then move to Q and A, after which Louis will have some closing remarks. And with that, I will turn the call over to Louis.

Speaker 2

Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our Q1 earnings, to get an update on our business and for your continued interest in Regal Braixnord. Before getting into our Q1 results, I would like to spend a few minutes on our A fantastic welcome to our new Regal Rexnord colleagues who joined us from Altra. We are extremely excited about how together As part of a larger and strategically better positioned one Regal Rexnord team, We can accelerate our company's ongoing transformation into a faster growing and more profitable enterprise.

Speaker 2

For the second time in 2 years, we have thoughtfully deployed capital to effect a positive step change in our business. With so much progress in such a short period of time, I would like our key stakeholders to pause for a moment and take stock One of the most impactful elements Our transformation is the evolution of our sales mix by application. As you can see in the chart on the left, The Regal Rexnord portfolio is now weighted to automation, power transmission and industrial powertrain solutions, which together represent over 60% of our sales. These are businesses with highly attractive growth and margin dynamics, Underpinned by differentiated technology that customers value. The remaining portfolio is a Combination of air moving subsystems and motors, which after 3 years of eightytwenty And targeted R and D investments is now an offering that is defined by differentiated technologies and sold to customers The portfolio has evolved is to consider its exposure to markets with secular growth tailwinds, illustrated on the middle chart.

Speaker 2

The exposure of the legacy portfolio, plus Altra, raises our exposure to secular growth markets to over 30 5%. If you also include the residential HVAC market with its consistent march towards Higher minimum energy efficiency standards that require consistent innovation in motors, blowers And total systems design, our secular exposure is just under 50%. Adjusting for the Faster growth we foresee in these markets puts us on track to having over 50% of our sales generated in secular growth markets by 2025. In short, our market exposure today is inherently stronger than it was just a few years ago. The chart on the right illustrates our evolution by revenue.

Speaker 2

Through the addition of Rexnord PMC, Then Arrowhead and now Altra, along with organic growth in 2021 2022 of 17 percent and 9%, respectively. We are poised to be a $7,000,000,000 plus enterprise this year. Regal Rexnord is now positioned to serve a wider range of customers and end markets, do so with a broader portfolio of more technology rich sub Systems and digital solutions and go to market with enhanced channel positions that support higher service levels for our Said another way, our transformation allows us to start approaching customers as a trusted advisor, a dramatic evolution from our legacy market position as more of a component provider. Our customers are Experiencing this evolution through our enhanced offering and service levels. Our shareholders will experience it through better organic growth, Higher margins and stronger free cash flow.

Speaker 2

Our associates will experience it as a member of a team that is expanding its most important customer relationships and is poised to more consistently win in the markets we serve. One way we plan to help investors better appreciate how legacy Regal Plus Ultra leads to growth acceleration is to spend a few minutes on each of our next several earnings calls introducing the product portfolios of our Principal Automation Businesses. I will start this quarter with Kollmorgen, our factory automation Patients that include factory automation, aerospace and defense, automated guided vehicles or AGVs, medical imaging And robotics, among others. Its principal products pictured on the right include machine control hardware and software, Plus highly engineered servo and stepper drives and motors. The business The fact that customers can count on Kollmorgen products To reliably perform to exacting specifications and do so consistently over time has created extremely sticky customer relationships And annuity revenue streams with attractive margins.

Speaker 2

We see so much opportunity to help a business Like Kollmorgen grow faster. By leveraging the customer relationships, channel partners In global sales organization of a $7,000,000,000 global enterprise, We plan to bring Kollmorgen's offering to new customers and leverage its technology in a wider variety of applications, including as part of subsystems that include other Regal Rex Nord products. A great example of where we are seeing such opportunities only 6 weeks in is in our aerospace business where The Regal and Kollmorgen teams are already collaborating on how best to leverage our expanded portfolio with our customers. I look forward to updating you on our progress as we get further along, including once we define an outlook Now let's turn to the Q1. Last night, we reported results that delivered on our prior commitments.

Speaker 2

Organic sales declined by 4% in the quarter. While we did see pressure from destocking and And solid performance in our IPS segment, driven by continued strong price realization, broad based tailwinds from new products and rising industrial powertrain cross selling synergies. The tailwinds we are seeing from our AMC and IPS teams executing PMC and Arrowhead Sales synergies also bolsters my confidence in our enhanced growth prospects with Altra. Our adjusted EBITDA margins in the quarter were solid, coming in at 19.7%, in line with our previously stated expectations. When comparing these results to the prior year, It is important to remember that the annual cost roll provided a favorable impact in the prior year, but an unfavorable impact in the current year.

Speaker 2

Despite a modest top line decline, we saw resilient margin Performance tied to our ongoing eightytwenty and lean efforts and merger synergies. Perhaps the best example of our team's strong performance in the quarter is cash flow generation, Underpinned by significant progress lowering working capital and inventory in particular. In a quarter that typically faces seasonal headwinds on free cash flow, we delivered $174,000,000 That allowed us to end the quarter with net debt to adjusted EBITDA of 3.96 On track with our expectations, we are putting a particular emphasis on inventory reduction and on Free cash flow generation more broadly, in order to delever our balance sheet quickly, which includes tying a greater portion of our leaders' variable compensation incentives to this goal. In short, what gets measured gets done. We will remain laser focused on cash flow generation and debt reduction To achieve our post-twenty 24 target of less than 2.5.

Speaker 2

A solid start to 2023 and for this strong execution pursued with a sense of urgency As well as continued adherence to our Regal Reschtenor values, I want to say thank you to our Regal Reschtenor associates around the world. Next, let's turn to orders. While our organic orders were down 9% in 1st quarter, This is slightly better performance than we anticipated and resulted in a book to bill for the quarter Just north of 1.0 and a marginal growth to our backlog. Destocking and market headwinds in our PES segment, in particular residential HVAC, pool pump And certain short cycle industrial markets posed a significant headwind as expected. But performance elsewhere was, on the whole, a bit stronger and included positive momentum In markets such as aero, energy, marine, solar and non res construction.

Speaker 2

We see this dynamic continuing into Q2 with destock and softer demand weighing on our consumer and short cycle industrial markets, but better performance in later cycle industrial aerospace, energy, medical device In non res markets. We also continue to model better orders performance in the back half, Especially in the Q4, as destock headwinds likely abate, comps become easier And our growth initiatives continue to gain momentum. These include progress towards our goal of doubling our New product vitality by 2025, our maturing eightytwenty growth initiatives and rising PMC Plus early ultra cross marketing synergies. The bottom line is our focus in 2023 and Beyond will remain uncontrollable execution. Between our still ample backlog, A healthy new product pipeline, sizable M and A cost and cross marketing synergies, Significant ongoing eightytwenty and lean initiatives and accelerating improvement in our working capital metrics.

Speaker 2

We have so many opportunities under our control to create value for our key stakeholders. Executing this self help is where our focus will be regardless of what the macro does. And with that, I'll now turn the call over to Rob to take you through our Q1 performance and our updated outlook for 2023, Which now includes Altra.

Speaker 3

Thanks, Louis, and good morning, everyone. I'll also begin by thanking our global team for their strong execution and by welcoming our new colleagues joining us from We're excited to have you on board and about where we plan to take the company together. Before getting into our Q1 results, I'd like to discuss a few administrative items. First, as we announced, when we closed the Altra transaction on March 27, we implemented a new segment structure concurrent with closing the transaction. For reference, our new segments are listed on the right hand side of this slide.

Speaker 3

In green, along with the percentage of our pro form a 2022 sales that they represent. How we map to these new segments From our old structure is detailed on the left. In the appendix of this earnings call slide presentation, We provided segment financials for 2022 by quarter for our legacy Regal Rexnord businesses under this new segment structure. I would also like to remind you that while we are reporting our Q1 results under this new segment structure, these results are only for our The Regal Rexnord Business. Because we closed the acquisition of Altra in the last week of the Q1 and that period's impact is considered Immaterial to our Q1 performance, those few days of Altra's Q1 performance will be reported with our 2nd quarter results.

Speaker 3

We estimate the impact of this shift to be roughly $0.06 of adjusted earnings per share that will be included in our 2nd quarter results. Now, let's proceed to discussing our Q1 results by segment. Starting with Automation and Motion Control or AMC. Organic sales in the Q1 were up 11.7% from the prior year. The result reflects Growth in data center, aerospace and food and beverage markets.

Speaker 3

Adjusted EBITDA margin in the quarter for AMC was 23 up 2.90 basis points versus the prior year, factoring benefits from price, mix and volume. Orders in AMC for the quarter were down 4% on a daily FX neutral basis. Book to bill in the quarter was 1.1. In April, book to bill tracked at roughly 0.9 inclusive of the Ultra business. Our AMC business is more of a long cycle business and therefore order patterns do tend to be a bit lumpy.

Speaker 3

In fact, overall comparable backlog for AMC is up roughly 3% year over year at the end of April. Turning to Industrial Powertrain Solutions or IPS. Organic sales in the Q1 were up 1.3% from the prior year. Growth in the quarter reflects strong performance in Global Metals and Mining and Energy end markets, largely offset by project timing in alternative energy And weaker demand in agriculture and forestry markets. The adjusted EBITDA margin in the Q1 for IPS was 29.3%, up 2.90 basis points from the prior year.

Speaker 3

Margin benefited from merger synergies and lower freight costs. Segment orders for the Q1 were down 4% on a daily FX neutral basis, tied largely to pressure in short cycle industrial markets. Book to bill in the quarter was 1.0. In April, book to bill also tracked at 1.0 inclusive of the Altra business. Turning to Power Efficiency Solutions or PES.

Speaker 3

Organic sales in the Q1 were down 15.9% from the prior year. The decline was driven by significant channel destocking activity, America and China. This destock activity was fully anticipated and is largely in line with the expectations that we outlined in our Q4 earnings Note that we expect further headwinds from destocking in the 2nd quarter, roughly on par with what We saw in the Q1, but see this pressure moderating in the back half, especially in the 4th quarter. The adjusted EBITDA margin in the quarter for PES was 13.7%. This performance was as and closely aligns to the guidance provided on our Q4 earnings call.

Speaker 3

As a reminder, when comparing to the prior year, In addition to lower volumes, this margin performance largely reflects the year over year impact of the annual cost roll In that, we saw a favorable impact last year and an unfavorable impact this year. As we look ahead to Q2, We anticipate a significant sequential improvement in this segment's adjusted EBITDA margin to a mid teens level. Shifting to orders. Orders in PES for the Q1 were down 20% on a daily FX neutral basis.

Speaker 4

Book to bill in

Speaker 3

the quarter was 1.0. Book to bill in April also tracked at 1.0. On the following slide, we highlight some additional financial updates. On the right side of this page, This metric is in line with the net leverage target we announced at close. Free cash flow in the quarter was very strong coming in at $174,400,000 As Louis mentioned, the teams did a great job Improving free cash flow performance in the quarter, owing in part to significant progress improving working capital and in particular lowering inventories.

Speaker 3

We continue to see significant opportunities to augment our cash flow in 2023 by lowering inventory. As we previously stated, use of cash flow will remain heavily weighted to paying down our debt. Moving to the outlook. On this slide, we are updating our weighted average 2023 end market growth expectation to include Note that our outlooks for each legacy Regal Rexnord end market are unchanged. For reference, we have added a column in the center of this table representing how our end market exposures changed by adding Altra.

Speaker 3

Broadly speaking, our portfolio now has greater exposure to end markets with secular growth tailwinds. Regarding 2023 specifically, you can see in the last two columns on the right hand side that by adjusting our end market exposures to Altra, Our weighted average estimated end market growth rate for 2023 rises by 50 basis points to down 3%. This benefit is captured in our estimates for Altra accretion in 2023. On this slide, we are updating our financial guidance to include Altra. As you can see in this table, starting on the left, We present our outlook for revenue, adjusted EBITDA and adjusted earnings per share for our legacy Regal Rexnord business, which is not changing.

Speaker 3

In the next two columns, we define our expectations of how adding Altra will impact our revenue, adjusted EBITDA and adjusted EPS in 2023. Note that these impacts only reflect our ownership of For legacy Regal Plus Ultra to arrive at our current guidance, which calls for revenue in a range of approximately $6,500,000,000 to $8,000,000,000 adjusted EBITDA in a range of $1,400,000,000 to $1,500,000,000 and adjusted earnings per share In a range of $10.20 to $11.10 At the bottom of the table are various below the line modeling For reference, our assumption is that Altra will add $0.15 to $0.25 to our adjusted earnings per share and factor sales at Altra being flat to up 100 basis points versus 2022 levels or slightly above our expectations for legacy Regal Rexnord. We have also factored approximately $20,000,000 of cost synergies, which equates to about $40,000,000 on an annualized run rate basis Exiting 2023. Finally, as you can see at the bottom of this slide, we are expecting free cash flow Conversion of this year of at least 100%. Our expectation in dollar terms is to generate at least $600,000,000 Lastly, in light of the closing In closing the Altra transaction and simultaneously revising our segment structure, we decided to provide more Specific expectations for our 2nd quarter performance by segment to make it easier for the investment community to understand our near term Financial expectations for the business.

Speaker 3

Note that we are not planning to adopt this approach on a go forward basis, but felt it did make sense at this time. In the table presented on this slide, we provide 2nd quarter revenue and adjusted EBITDA margin expectations for each of our segments under our revised segment structure. The expectations outlined for adjusted EBITDA margin factor a significant sequential improvement in performance and include benefits from PMC and Altra M and A synergies along with our ongoing eightytwenty and lean initiatives. In summary, we are continuing to on the side of caution as we forecast market related performance for our legacy business And as we add the Altra business to our outlook. However, we do have line of sight to significant cost synergies along with Other cost savings initiatives that are well within our control.

Speaker 3

We also continue to gain traction on our growth initiatives. And as I mentioned earlier, our portfolio now has greater exposure to end markets with secular growth tailwinds, which further strengthens our resiliency. So on the whole, we are very pleased with the way we ended Q1. And while the macro outlook remains a bit uncertain as we enter Q2, Our outlook for the company remains very positive considering the tremendous amount of self help we have in front of us on growth, margin and cash flow. And with that, I would like to turn the call back to the operator so we can take questions.

Speaker 3

Operator?

Operator

Thank you very much. We will now begin the question and answer session. Today's first question comes from Mike Halloran with Baird. Please go ahead.

Speaker 4

Hey, good morning everyone.

Speaker 2

Good morning, Mike.

Speaker 4

So a couple of questions here. First, just a lot of moving pieces. Last quarter, we would have talked about, Call it 8% year 1 type accretion, I think mid teens for 2024 cumulatively for the Altra transaction. You gave guidance for this 9 months. Can you just right size us relative to those expectations?

Speaker 4

And if there are any puts and takes, What would be driving the change either way?

Speaker 3

Sure, Mike. Hey, thanks for the question. So first of all, the accretion outlined on the slides For the 1st three quarters of ownership, in the 1st 12 months, we would say maybe roughly expect about 4% to 6% accretion in that timeframe. You referenced the 8% estimate that we talked about last quarter and that assumed that we we were only going to adjust at that Point to get that 8% for the lower than originally assumed financing costs. And now that we've got a more holistic view of Altra's fundamentals and tax And other interest rate increases in that, we're seeing that look more like 4% to 6% over that 12 month Period.

Speaker 3

Now I think what's most relevant is that the tremendous accretion that we Over the next few years, the value creation in getting to that $18 earnings per share forecast for 2025 remains very much intact. And so yes, we are a little bit behind kind of to start relative to that first 8% because of some of the assumptions that I mentioned, but very much still in line with that $18 earnings per share target that we put out there.

Speaker 4

Just to clarify, Rob, were those more below the line, so tax, interest rate was the biggest driver of that and then fundamentals maybe slightly lower? Or do I have that backwards?

Speaker 3

It is mostly below the line that you're referencing. That is almost all of the difference in what we changed in our

Speaker 4

Perfect. And then I'll dovetail into the next question, I think. So the orders Expecting, call it, stabilization in the next couple of quarters, better in the Q4. What's underpinning that? What are you seeing from an environment I suppose, obviously, you can see the destocking impact that's happening in the PS side now.

Speaker 4

Is it mostly just clearing that out and getting to a point where you're getting something more normalized relative to the market demand? Is this also holding true for your More short cycle industrial type pieces, just any context to understand the confidence would be great.

Speaker 2

Yes, it's really all that you said, Mike, I think you summed

Speaker 5

it up

Speaker 2

nicely. The orders were slightly better in Q1 actually. Orders Sequentially improved from Q4. We do think there's still destocking going on especially in resi HVAC. Pool is only 1%, but it's clearly destocking going on in Pool as well.

Speaker 2

That's really what gives us confidence that the bottom hit in Q2. From a short cycle industrial perspective, we are seeing some headwinds there, but I'll tell you that we still see from our channels that our COGS to them, meaning our sales And then when you look at the overall drivers of the business, early cycle is where I really focus most of my comments mid and late. Ultra actually mixes us up a bit more to mid and late. And when you look at some of the proxies that we use for overall market trends, General Industrial, ISM is below 50. China PMI is up Now and so we're starting to see in the second quarter some strength there.

Speaker 2

Like I said on Industrial Distribution, Which is about 6% of our portfolio now, still strength. So we feel good there. Food and beverage strength More so on food, beverage a bit weaker, alternative energy strength. We like this space. Actually one of our customers came out Stating that with IRA, their demand might be up more than 25% this year.

Speaker 2

And then we like our aerospace 5% of our business is in aerospace and aerospace is definitely growing and medical is growing. So again, Mike, we do think Q2 will be the bottom of our orders and then we'll grow from there. I hope that helped.

Speaker 6

No, that was great. Really appreciate the time. Congrats on getting the close done.

Speaker 2

Thanks. Yes. Thanks, Mike.

Operator

The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.

Speaker 6

Hi, thanks. Good morning and nice work on the resegmented information that recast, nice and clean. I did want to also Comment on the free cash flow was very strong, obviously. Louis, you mentioned a little change in incentive compensation Structured channel efforts on debt reduction. I'm wondering if there's kind of an interim accelerated aspect to that.

Speaker 6

Obviously, there's long term emphasis on it too, but there's always trade offs. I'm wondering how you're staging that. And if we would expect similar quarters of magnitude to your Q1 free cash flow, Maybe not every quarter this year, but yes.

Speaker 2

Yes, Chris. So, hey, thanks for your comments and Thanks for your question. Specific to compensation, we do believe what gets measured gets done. Trade working capital is a measurement that we have had historically in all of our compensation measures. We've increased that from about 20% of the variable pay annual variable pay Bonus to 35% for this year.

Speaker 2

We'll reassess at the end of this year if we want to make a different change, But we felt it was important to make it very clear to our organization that we need to reduce our inventory and free up cash because we are On a laser focus of reducing our net debt to EBITDA below 2.5 by 20 by the end of 24. So that was the whole rationale.

Speaker 3

And we feel good about 1st quarter performance. And I'll just add on, Chris, just on the inventory side. So we talked about that we're estimating somewhere between $200,000,000 of cash generated from lowering our inventories in the year. We saw about $47,000,000 of that come from inventory, and contributed in the Q1, which certainly puts us on a nice track for the rest of the year. As far as the cadence of cash as we go through the year, normally in the first and second quarter, it is a little lower and it starts to ramp up in the back half.

Speaker 3

I think from a modeling perspective, you can assume that we'll see of the remaining cash that Kind of goes to that above $600,000,000 in the year. Maybe it trends up slightly more in the back half than in the first half, or at least from Q2 to Q3 in particular, but fairly flat line as we go through the year.

Speaker 6

Thanks. Rob, could you clarify what the $600,000,000 reference was? Didn't catch it.

Speaker 3

Yes. During my prepared remarks, I mentioned that we expect to see free cash flows of at least $600,000,000 in the year.

Speaker 6

Oh, copy. Thanks.

Operator

The next question comes from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Speaker 5

Hey, good morning, guys.

Speaker 2

Good morning, Jonathan.

Speaker 5

Congrats on getting all this done. Just on PES and the destocking, I mean, it seemed More stark than what we had in our models. I think you said in line. I think 2Q typically is seasonally stronger, but you have it still muted. Just trying to understand Kind of what you're building in for additional destock and then just the margin cadence And really activity your revenue cadence for this business as you look into the second half?

Speaker 2

Yes. So, Jeff, from a destock perspective, we definitely well, first of all, for Q1, we think Q1 hit exactly where we expected from a sales perspective for PES. When you think about the overall segment, It really it aligns exactly with our guidance that we had given at the end of Q4. Now Specific to what our view is on Q2 and going forward, we still believe there's destock pressure. We think we're probably in the 6th or 7th inning.

Speaker 2

We also believe there's a bit more caution than a couple of years ago in the consumer space. And so, some underlying demand moderation. You certainly probably have read our HVAC OEM customer Saying down high single digits for the year. We're forecasting because we're a component supplier end. We're Forecasting more low teens and so really very much aligned.

Speaker 2

We expect That Q3 will be slightly better than Q2 and that Q4 will return to orders growth.

Speaker 3

Let me just add on if I could, Jeff, for you. Just a little bit on your question about margin performance as we move forward. We provided the 2nd quarter look by segment, but let me give you a sense of where we see full year rates. So how we see by segment each of the segments performing and where we expect their full year rate to land based on our current guidance. So I'll just give you the 4 segments here.

Speaker 3

At the AMC, we expect them to be somewhere in the low 20s. So certainly a bit ahead of the second Our expectations with sequential progression as we move through the year. For IPS, we're thinking mid-20s, again ahead of second quarter That we laid out with nice progression. PES, which is specific to your question, High teens for the year with strong sequential progression throughout the year, but more weighted towards the 4th And then Industrial, low double digits, again, with nice sequential progression. So hopefully, that gives you a good sense of the margins that we're expecting as we move through the year.

Speaker 5

Rob, that's very helpful. Just on Altra, I think they reported their 4Q that was kind of in line With how we were modeling, I think you said 1Q in line. Can you just talk about any puts and takes you're seeing in And then just as you look at the accretion, what are you baking in for synergies for that 1st 9 months, I know public company costs kind of come out right away. Thanks.

Speaker 2

Yes. So let me touch on Altra First overall, we couldn't be more excited. As we closed, as we get to know the teams even more culturally a great We feel really good at this point. As you know, we our integration teams worked Together from both the Ultra side and the Regal Restonorde side for a few months, getting ready for close, we leveraged the playbook from our PMC merger that went so well and we hit the ground running on day 1. We're already finding ways early on And feel really excited as I said in my prepared remarks, We're not we're really excited about the $160,000,000 of cost saves.

Speaker 2

We're more excited about the cross marketing Opportunities between the business and feel that that's going to accelerate. One item I will emphasize here is that Altra did not at all run their business from an eightytwenty perspective. And we feel strongly That's going to help them in the

Speaker 7

way they

Speaker 2

prioritize both from a growth perspective and a service So right now, we're very, very focused on understanding the evaluation, the analysis And then putting our plans together of how we're going to drive the Ultra business from an eightytwenty perspective.

Speaker 3

And I'll just add one other piece to that and that is the second half of Question on synergies. We do expect to realize the $20,000,000 of synergies for Altra in the year, Which would equate to a $40,000,000 exit rate as we exit 2023. And so far on the PMC side, which we also have synergies We realized about $10,000,000 synergies in the Q1 related to the PMC merger. We expect $45,000,000 in the year from PMC related synergies, which equates to about $120,000,000 exit rate on PMC. So that all of that said, summarized would be about $65,000,000 realized between both in the year and about $160,000,000 exit rate for synergies between both of those.

Speaker 3

Now one thing to bear in mind is on the Ultra synergies in terms of modeling where those would hit from a segment stand You'd assume about 80% of that goes to IPS and about 20% of that goes to AMC. So hopefully that helps.

Speaker 5

And then just any puts and takes in the base business end markets for Altra?

Speaker 2

No, I mean, the purpose of putting the slide in the deck was to give a perspective on our market assumptions. We absolutely think that the Ultra markets mix us up to a bit stronger. Our original 23 assumptions was a weighted average market down 3.5. Ultra weighs us to 3. We think the Ultra markets are likely down a couple percent And we're guiding right now that Ultra is going to be flat to up.

Speaker 2

So we feel good about their market positions and where they're going.

Speaker 5

Okay. Appreciate it, guys.

Speaker 1

Thank you. Thank you.

Operator

The next question is from Nigel Coe with Wolfe Research. Please go ahead.

Speaker 7

Thanks. Good morning. Just a quick by the way, congratulations on getting Altra done. Just a quick one, just a follow-up to Jeff's sort of math on Altra. So the EBITDA range you gave for Altra on Slide 15, does that include the synergies?

Speaker 7

I mean, it's a small number, but just does that include the $20,000,000

Speaker 2

Yes, it does.

Speaker 7

It does. Okay, good. Just I thought it did. Just want to make sure. And then on the sort of the Power Efficiency of the PE segments, If you look at the flat sequential sales, it implies maybe high teens organic decline This is mid teens in 1Q.

Speaker 7

Is that the right way to think about it? And just that flat sequential sales will be very unusual. So I'm just wondering, are we Seeing even greater pressure from inventory. I think you said similar pressure. It feels like it's even greater pressure.

Speaker 7

What are you baking in for that? And then On that second half ramp, it seems like you're pointing towards that 20% plus margins in the back half of the year. Just kind of what Get us from mid teens to high teens.

Speaker 2

Yes. So from a revenue We do believe there's going to be continued pressure on destocking in Q2, but no worse than what we're seeing in Q1 and again that's why we're guiding to flat overall sales sequentially Q1 to Q2. Now from a year over year perspective, I'll remind you that From a stacking perspective, the stack here is a compare of 40% growth on a 2 year stack In 2022. And so 2023 Q2, it's a tough compare. But Yes.

Speaker 2

Right now, we're not seeing any further deterioration. We're saying that, yes, There is

Speaker 3

some destocking still to go and that will allow us to clear it out in Q2 and in Q3 start to see Some return to normalized revenue levels. And from a margin perspective, sure, we've absolutely see that the first half is heavily weighted By the volume that we're seeing, that decline in volume, but also that the year over year impact of the cost roll hitting that Q1. But you take that out, and you're right, in the back half of the year, we would expect to see those the low 20s To get to that team's level by end of year. So your math is correct.

Speaker 7

Well, I'm glad I'm asked correct. And then a quick follow on with the industrial business, sort of conspicuous by its absence in the slides. Where I'll be in that divestment process?

Speaker 2

Yes, I don't think too conspicuous since it's really only 8% of our sales and 4 But right now with regards to where we are with the strategic review, there's not much we're ready to say at this point. We're Continuing the review and expect to be able to provide an update on the process relatively soon.

Speaker 7

Okay. Thanks, Lewis. Thanks, Rob.

Speaker 2

Yes. Thank you.

Operator

The next question comes from Julian Mitchell with Barclays. Please go ahead.

Speaker 4

Thanks a lot.

Speaker 8

Congratulations on closing the deal.

Speaker 4

There's been a lot of

Speaker 8

sort of multilayer questions. Maybe one Hopefully, simpler one for me. Just when I'm thinking about the orders and sales, so we're assuming the orders year on year in Q2 2 were down sort of 9% or 10%, similar to the first quarter, and then a sort of Attish in Q4 and then organic sales, you're down kind of low single digits 2nd and third quarter and maybe sort of close to flat by Q4. Is that the way to think about The year on year for orders and the sales?

Speaker 2

Yes. So certainly it is the way to think about it For Q2 on orders and we're thinking about orders in Q3 to maybe a little bit More than down that 9, 10 maybe low teens in Q2. And then when you start building from there Year over year, certainly sequential growth Q2 to Q3, Q3, Q4 and then year over year Slightly down in Q3 and then up in Q4 on easier comps. From a revenue Yes, you profiled it maybe a little bit lighter than what we would expect. We do expect growth Year over year in Q4 in the mid single digits.

Speaker 8

That's extremely helpful. Thank you. And then just my second question, trying to look more, I guess, at a couple of markets. One is General Industries, which I think is 21% of your sales and then warehouse, which I think is about 5. So general industry sort of perspectives there on when did you see the destocking start?

Speaker 8

When do you think it will end? And then on warehouse, you got some very good sort of macro numbers on CapEx Growth recently, but a lot of companies bottom up sounding worse and worse. So maybe update us on what you're seeing there?

Speaker 2

Yes. So I'll hit warehouse first. To your point it's about 5% of our sales. We are forecasting it to be down Low teens. And so we do feel pressure coming from the warehouse It's in 2023.

Speaker 2

But what I love about this space is we have great differentiated product and we're winning against Our competitors because of our technology, but from a macro market perspective, we are expecting 23 to be down. For general industrial, I'll tell you, you've got to again remember that within that space, there's a lot of different markets and there's Sure, mid and late cycle. Now from a distribution standpoint, we don't expect there's a lot of destocking left We definitely think from that perspective that the inventory normalization will occur in So like I said, our distributors are seeing still seeing sales growth, so therefore demand. They are lowering their inventories, but there's not a big adjustment that's needed. So at least for our products.

Speaker 2

And so, we would say if there's a slight decline, it's going to be Q2 with recovery going forward.

Speaker 8

That's great. Thank you.

Speaker 5

Sure.

Operator

Thank you. This concludes our question and answer session. I would now like to turn the call back over to CEO, Louis Pinkham, for any closing remarks.

Speaker 2

Thank you, operator, and thanks to our investors and analysts I hope a key takeaway from today's presentation is that Regal Rexnord has transformed into an enterprise Positioned to deliver faster growth, higher margins and greater cash flow. With Altra, We are clearly on a path to outgrow our markets, raise our gross margins to about 40%, Our adjusted EBITDA margins to 25% and generate substantial free cash flow, allowing us to rapidly reduce our net leverage. Thank you again for joining us today and thank you for your interest in Regal Reschner.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now

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Earnings Conference Call
Regal Rexnord Q1 2023
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