Sign in

    Regal Rexnord Corp (RRX)

    You might also like

    Business Description

    Regal Rexnord Corporation (NYSE: RRX) is a global leader in engineering and manufacturing solutions that power, transmit, and control motion. Headquartered in Milwaukee, Wisconsin, the company specializes in providing sustainable and energy-efficient products and systems to customers across diverse industries, including industrial automation, HVAC, aerospace, and data centers. Regal Rexnord's offerings include electric motors, power transmission components, automation systems, and specialty electrical components, designed to enhance operational efficiency and sustainability.

    1. Industrial Powertrain Solutions (IPS) - Designs, produces, and services highly engineered power transmission products, including mounted and unmounted bearings, couplings, gearboxes, gear motors, clutches, brakes, and industrial powertrain components. Serves markets such as general industrial, metals and mining, agriculture, construction, food and beverage, energy, and alternative energy.

    2. Power Efficiency Solutions (PES) - Specializes in fractional to approximately 5 horsepower AC and DC motors, electronic variable speed controls, electronic drives, fans, blowers, and integrated subsystems. Applications include residential and light commercial HVAC, water heaters, commercial refrigeration, building ventilation, pool and spa, irrigation, and agricultural uses.

    3. Automation & Motion Control (AMC) - Focuses on conveyor products, conveying automation subsystems, aerospace components, precision motion control solutions, miniature servo motors, controls, drives, and linear actuators. Also provides power management products like automatic transfer switches and paralleling switchgear for industrial automation, robotics, aerospace, medical, and data center markets.

    4. Industrial Systems - Designed and produced integral motors, alternators, switchgear, and transfer switches for industrial applications. Served markets including agriculture, marine, mining, oil and gas, food and beverage, data centers, and healthcare. The majority of this segment was divested on April 30, 2024.

    Q3 2024 Summary

    Initial Price$136.29July 1, 2024
    Final Price$163.72October 1, 2024
    Price Change$27.43
    % Change+20.13%

    What went well

    • Regal Rexnord expects adjusted free cash flow to increase to about $800 million in 2025, up from approximately $600 million expected for this year, driven by lower cash interest, cash taxes, reduced restructuring expenses, and working capital improvements.
    • EBITDA margins are projected to improve by about 200 basis points in 2025, benefiting from cost synergies and lower interest expenses, indicating stronger operational efficiencies and profitability growth.
    • Cross-selling and industrial powertrain initiatives in the IPS segment are contributing 1 to 2 percentage points of growth, with only about 15% of customers currently buying two or more products, highlighting significant potential for future revenue growth.

    What went wrong

    • Regal Rexnord reduced its full-year 2024 guidance, lowering adjusted diluted EPS by $0.30 to $9.30 and revising free cash flow down to $600 million, due to weaker-than-expected performance in key segments, particularly PES and AMC. Additionally, the company is planning for limited growth in 2025 due to persistent headwinds in several end markets, suggesting ongoing challenges in core markets. ,
    • The company was unprepared for the surge in residential HVAC demand due to prebuy activity ahead of regulatory changes, leading to an inability to ramp capacity fast enough and hurting service levels. This may risk damaging relationships with OEMs or losing market share. Furthermore, the prebuy surge is weighted towards smaller HVAC systems, where the company has less exposure, and may lead to softness in 2025 as demand is pulled forward. , ,
    • Continued weakness in important end markets, such as discrete automation, commercial HVAC outside the U.S., and general industrial markets, with the company not expecting significant improvement in 2025, could lead to ongoing revenue and margin pressures. The company noted that discrete automation short-cycle orders remain weak and that they do not forecast an improvement. They also stated that the European and China markets remain under pressure with ISM below 50 in both regions, and they do not see a lot of line of sight to great improvement in these markets in 2025. ,

    Q&A Summary

    1. Free Cash Flow Outlook
      Q: What's the outlook for free cash flow next year?
      A: Despite timing differences this year, management believes they have a good path to end next year at an exit rate of about $1 billion in free cash flow, as previously communicated. Primary drivers include decreasing cash interest and taxes, reducing cash restructuring, and expected working capital benefits.

    2. EBITDA Margin Expansion Next Year
      Q: Is a 200 bps margin expansion next year realistic?
      A: Management confirms expectations of approximately 200 basis points of EBITDA margin improvement next year. This includes around 100 bps from synergies and additional gains from volume leverage and lower interest expense.

    3. Residential HVAC Demand Surge and Preparedness
      Q: Why weren't you prepared for HVAC demand uptick?
      A: The sudden surge in residential HVAC demand was unexpected after two years of weak demand and false starts on recovery. Capacity ramp is lagging, but they expect to catch up by end of the fourth quarter. OEMs kept their strategies around the 2L transition under wraps, limiting visibility.

    4. Cross-Selling Synergies in IPS
      Q: What benefits are you seeing from cross-selling in IPS?
      A: Cross-selling and industrial powertrain initiatives contributed about 1 to 2 percentage points of growth in IPS this quarter. Only 15% of customers buy two or more products, so there's significant opportunity for further growth.

    5. European and Chinese Market Outlook
      Q: What's the outlook for Europe and China markets in PES?
      A: Management sees continued pressure in Europe and China, with ISM indices below 50 in both regions. They don't expect significant improvement in these markets next year and plan to be measured in their approach for 2025.

    6. Discrete Automation Orders and Outlook
      Q: What are you seeing in discrete automation orders?
      A: Longer-cycle orders are strong, with increased win rates and funnels, giving confidence into 2025. Short-cycle orders remain soft, and interest rate cuts haven't spurred expected capital projects due to market uncertainty.

    7. Residential HVAC Sales Growth Clarification
      Q: Was the 10% revenue increase in resi HVAC year-over-year?
      A: The 10% increase mentioned was sequential, indicating ramping improvement. Management expects continued sequential growth into the fourth quarter.

    8. Resi HVAC Inventory Levels and Next Year Outlook
      Q: Are higher inventories at OEMs affecting next year’s outlook?
      A: Higher inventory levels, especially in smaller systems, may soften next year’s demand. Management doesn't expect significant growth in 2025 due to inventory resets and flat end-market demand.

    9. AMC Margins and Discrete Automation Outlook
      Q: Was the third quarter the bottom for discrete automation?
      A: Management believes the third quarter was likely the bottom for discrete automation. They expect sequential margin improvement in the fourth quarter due to backlog, cost synergies, and better sales leverage.

    10. Long-cycle Orders in IPS and 2025 Outlook
      Q: Do strong long-cycle orders in IPS suggest strength into 2025?
      A: Longer-cycle orders, particularly in AMC sectors like factory automation, give confidence into 2025. IPS continues to outperform despite macro indicators like ISM below 50, reinforcing the value of recent acquisitions.

    11. Commercial Aspects of PES and International Performance
      Q: What's impacting international commercial and general commercial in PES?
      A: General commercial (31% of PES) correlates with ISM and is under pressure. Commercial HVAC outside North America (23% of PES) is down high single to low double digits in EMEA and Asia. Residential HVAC improvement is expected to uplift the segment into Q4 and 2025.

    12. Fourth Quarter Forecast for PES Segment
      Q: How does the fourth quarter forecast look for PES?
      A: Management forecasts mid-single-digit growth for PES in the fourth quarter. While last year had an OEM shutdown, they expect the quarter to be up year-over-year, noting the historical seasonality of Q4.

    13. Risks from Lagging Deliveries to Resi HVAC OEMs
      Q: Are there risks from delayed deliveries to OEMs?
      A: Management doesn't foresee material impact from lagging deliveries. They maintain strong relationships with OEMs and continue to grow in air moving solutions, feeling positive about long-term partnerships.

    14. Order-Revenue Gap and Business Cycle
      Q: When will the gap between orders and revenue align?
      A: The business has evolved, especially in AMC, which now has a backlog of around six months. Longer-cycle businesses like data center and aerospace have over a year of backlog, affecting alignment between orders and revenue.

    15. Growth Outlook for Next Year
      Q: Is the 'limited growth' comment about organic growth?
      A: Yes, the limited growth comment pertains to organic growth. Management plans to approach next year incrementally measured due to market uncertainties and the election results.

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Louis V. PinkhamChief Executive OfficerApril 2019Joined RRX as CEO in April 2019. Previously held leadership roles at Crane Co., Eaton Corporation, ITT Sherotec, and Molecular Biosystems, Inc. Holds degrees from Duke and Northwestern Universities.
    Robert J. RehardExecutive Vice President, Chief Financial OfficerJanuary 2015Joined RRX as VP, Corporate Controller, and Principal Accounting Officer in January 2015. Promoted to CFO in April 2018. Previously held financial leadership roles at Eaton, Baxter, Emerson, Masco, and Cooper.
    Thomas E. ValentynExecutive Vice President (Transitional Role)December 2013Joined RRX as Associate General Counsel in December 2013. Became General Counsel in May 2016. Transitioning to retirement, with a transitional role until July 12, 2024.
    Tim A. DicksonSenior Vice President, Chief Digital & Information OfficerOctober 2023Joined RRX in October 2023. Previously served as CIO at Generac Power Systems and held leadership roles at Astreya, Laureate International Universities, Motorola Solutions, Dell, and IBM.
    Cheryl A. LewisExecutive Vice President, Chief Human Resources OfficerMarch 2020Joined RRX in March 2020. Previously held HR leadership roles at Illinois Tool Works, Alcan Packaging, and Panduit Corporation.
    Brooke E. LangExecutive Vice President & President, Power Efficiency Solutions SegmentJuly 2022Joined RRX in July 2022. Previously held various roles at Eaton, including VP and General Manager of the Power Components Division.
    Jerrald R. MortonExecutive Vice President & President, Industrial Powertrain SolutionsFebruary 2015Joined RRX in February 2015 as part of Emerson's Power Transmission Solutions acquisition. Held various leadership roles and assumed his current role in March 2023.
    Kevin J. ZabaExecutive Vice President & President, Automation & Motion ControlOctober 2021Joined RRX in October 2021. Became President of Automation & Motion Control in March 2023 after the Altra Industrial Motion acquisition. Previously held leadership roles at Rockwell Automation.
    Hugo Dubovoy, Jr.Executive Vice President, General Counsel, and Corporate SecretaryApril 23, 2024 (expected)Appointed EVP, General Counsel, and Corporate Secretary effective April 23, 2024, following the retirement of Thomas E. Valentyn. Previously held other leadership roles within RRX.

    Questions to Ask Management

    1. Given the ongoing uncertainties in the market and the company's expectation of limited organic growth in 2025 , what specific strategies is management implementing to drive growth and mitigate these headwinds?

    2. With the challenges faced in ramping up capacity to meet the surge in residential HVAC demand , how is the company improving its demand forecasting and supply chain coordination to prevent future delays and potential loss of market share ?

    3. The European and Chinese markets continue to experience pressures with ISM below 50 and no significant improvement expected in 2025. How does the company plan to offset these headwinds and drive growth in these regions?

    4. Free cash flow was disappointing this year due to timing differences, yet management expects to exit next year at an annualized rate of $1 billion. What gives you confidence in achieving this target, and what are the key risks that could prevent you from reaching it?

    5. With the shift in AMC towards longer-cycle projects and extended backlogs, leading to a larger spread between orders and revenue growth , how is management addressing potential revenue realization delays and what steps are being taken to synchronize orders and revenue growth more effectively?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateOctober 26, 2021
    End Date/DurationNo expiration date
    Total Additional Amount$500.0 million
    Remaining Authorization$145.0 million as of September 30, 2024
    DetailsAuthorized by the Board of Directors; no expiration date

    Past Guidance

    Regal Rexnord (RRX) Guidance from the Last Four Earnings Calls

    1. Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Sales Outlook: Reduced due to weaker performance in Q3 and expectations for Q4, primarily in PES and AMC segments.
      2. Adjusted EBITDA Margin: 22%, reflecting lower sales volumes and a weaker mix.
      3. Adjusted Diluted EPS: Range of $9.15 to $9.45, with a midpoint of $9.30 (reduced by $0.30).
      4. Adjusted Free Cash Flow: Approximately $600 million, representing a 10% free cash flow margin.
      5. Effective Tax Rate: Decrease by 2.5 points due to a one-time tax benefit in non-U.S. operations.
      6. Interest Expense: Decline of approximately $50 million.
      7. Cash Flow for Next Year: Exit rate of about $1 billion in free cash flow.
      8. Debt Reduction: Majority of free cash flow to be deployed for debt reduction.

    2. Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Sales Guidance:
        • AMC: Full-year sales expected to be down low-single digits (revised from flat growth).
        • IPS: Full-year sales expected to be roughly flat.
        • PES: Full-year sales expected to decline at a mid-single-digit rate.
      2. Adjusted EBITDA Margin Guidance:
        • AMC: Approximately 24% (low end of prior target range).
        • IPS: Approximately 26%.
        • PES: Approximately 16.5% (near lower end of prior target range).
      3. Adjusted Diluted EPS: Range of $9.40 to $9.80, reduced from $9.60 to $10.40.
      4. Adjusted Free Cash Flow: Approximately $700 million.
      5. Debt Reduction: Plan to pay down approximately $900 million of debt.
      6. Interest Expense: Forecasted at $376 million, reflecting upward SOFR rate revisions.
      7. Segment-Specific Q3 2024 Guidance:
        • AMC: Sales of approximately $420 million and adjusted EBITDA margin of 24%.
        • IPS: Sales of approximately $655 million and adjusted EBITDA margin of 26%.
        • PES: Sales of approximately $455 million and adjusted EBITDA margin of 18%.

    3. Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Debt Reduction: Plan to reduce debt by approximately $900 million in 2024.
      2. Adjusted Free Cash Flow: Expected to be $700 million.
      3. Adjusted EPS: Range of $9.60 to $10.40, with a midpoint of $10.
      4. Sales and EBITDA Margins by Segment:
        • AMC: Q2 sales of approximately $410 million with EBITDA margins of 23%; full-year sales expected to be flat, with adjusted EBITDA margins of 24% to 25%.
        • IPS: Full-year growth rates based on 2023 pro forma results.
        • PES: Margins expected to improve to mid-teens in Q2 and high teens in the second half.
      5. Impact of Industrial Systems Sale: Headwind to sales of approximately $345 million, but a benefit to adjusted EBITDA margin of 70 basis points for the year.
      6. Order and Book-to-Bill Ratios:
        • AMC: Book-to-bill ratio of 1.08 in Q1.
        • IPS: Book-to-bill ratio of 1.06 in Q1.

    4. Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      1. Adjusted EPS: Range of $9.75 to $10.55, with a midpoint of $10.15.
      2. Revenue: Expected to be slightly down, approximately $6.65 billion.
      3. Adjusted EBITDA Margin: Increase by just over 100 basis points, reaching approximately 22%.
      4. Free Cash Flow: At least $700 million.
      5. Net Debt to Adjusted EBITDA Ratio: Decrease from 3.8 to approximately 3.0 by year-end.
      6. Industrial Motors and Generators Businesses: Contribute $500 million in revenue and $40–$45 million in adjusted EBITDA for the year.
      7. Interest Savings from Debt Paydown: Annualized savings of approximately $26 million.
      8. Segment-Level Guidance:
        • AMC: Low to mid-single-digit sales decline in Q1, with modest margin growth; full-year modest sales and margin growth.
        • IPS: Low to mid-single-digit sales decline in Q1, with flat margins; full-year sales down low single digits, margins up 200 basis points.
        • PES: Low double-digit to low teens sales decline in Q1, with margins up 300 basis points to mid-teens; full-year sales flat, margins up 50 basis points.
      9. Destocking and Market Dynamics: Destocking in residential HVAC and factory automation expected to persist into H1 2024, with improvement in H2.