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    REGAL REXNORD (RRX)

    Q1 2024 Earnings Summary

    Reported on Jan 10, 2025 (After Market Close)
    Pre-Earnings Price$157.19Last close (May 7, 2024)
    Post-Earnings Price$156.66Open (May 8, 2024)
    Price Change
    $-0.53(-0.34%)
    • Regal Rexnord's factory automation segment shows strong indicators for the second half of the year, with the funnel up 50%, win rates up about 300 basis points, and a book-to-bill ratio of 1.08 in Q1, increasing confidence in second-half sales.
    • The company is on track to achieve 40% gross margins and 25% EBITDA margins through internal actions such as synergies worth about 250 basis points, 80-20 initiatives, and mix improvements, demonstrating strong margin expansion independent of revenue growth.
    • The conveying business is performing strongly, with margins above average, and growth driven by rebounds in the food, beverage, and warehouse sectors. The integration of Arrowhead and Industrial Powertrain Solutions enhances their ability to win more business by providing total solutions.
    • Continued weakness in the discrete automation market is exerting pressure on the Automation & Motion Control (AMC) segment, with expectations of mid-teens decline in organic sales in Q2 2024. The company acknowledges that the order book improvement is more second half weighted, indicating near-term challenges.
    • Persistent headwinds in the Power Efficiency Solutions (PES) segment, notably in residential HVAC markets, are leading the company to lower its sales outlook and remain cautious about near-term performance. The company is witnessing channel destocking and weaker demand, and is being cautious about guidance due to uncertainties in market recovery.
    • The Industrial Powertrain Solutions (IPS) segment benefited from favorable mix due to strong distribution sales in Q1, but the company does not expect this strength to continue in Q2, which may lead to margin pressures. The positive mix impact from distribution over OEM sales in Q1 is not expected to persist.
    1. Margin Expansion Trajectory
      Q: How will margins expand over the next years?
      A: Management expects margins to improve through internal actions. Starting from 2023's 35% gross margin and 21% EBITDA, industrial lifts them by 100 basis points on both. Synergies add 250 basis points, with $90 million in synergies this year and $65 million next year. An additional 1–1.5 percentage points come from new product development, 80-20 initiatives, and mix. After reinvesting 100 basis points back into R&D, they achieve 40% gross margins and 25% EBITDA margins.

    2. Second Half Outlook and Guidance
      Q: What's your confidence in second half guidance?
      A: Management is cautiously optimistic about the second half, expecting a 48-52 split between the first and second half. For the 52% in the second half to materialize, they need PES sales, particularly residential HVAC, to rebound. Book-to-bill coming out of Q1 was 1.1, and April orders were down 2% in PES, providing some confidence. They also feel positive about order rates in factory automation, with the funnel up 50% and win rates significantly higher, supporting confidence into the second half and 2025.

    3. AMC Organic Decline and Outlook
      Q: Is AMC facing mid-teens organic decline in Q2?
      A: AMC is experiencing pressure due to comparisons and weakness in discrete automation, possibly leading to a mid-teens organic decline in Q2. While orders are improving, benefits are expected in the second half and into 2025. Accelerating markets like medical, data center, and the Arrow acquisition give confidence for improvement in the second half of this year.

    4. PES Market Share and Outlook
      Q: Are you seeing share shifts in PES due to regulations?
      A: Management feels good about their share position in PES, believing they've retained the share gained during COVID. Regulatory changes like the 2025 GWP regulations require OEMs to redesign products, favoring Regal's energy-efficient motors. While there's some 80-20 pruning, it's not a major factor. They note a disconnect between OEMs' consumer demand and their own demand, leading them to be cautious about recovery expectations.

    5. Free Cash Flow Outlook
      Q: How will free cash flow progress this year?
      A: The company expects $700 million in free cash flow for the year, with cash flow building from a slower start in Q1 to stronger inflows in late Q3 and Q4. While there's a working capital headwind this year compared to last year's $250 million benefit (expecting about $50 million this year), improvements come from higher EBITDA, lower cash interest expenses, reduced cash taxes, and lower restructuring costs.

    6. Factory Automation Leading Indicators
      Q: Are there signs of improvement in factory automation?
      A: In factory automation, which comprises 35% of the segment, leading indicators are positive: the sales funnel is up 50%, win rates have increased by 300 basis points, and the book-to-bill ratio is 1.08 coming out of Q1. These factors provide confidence for improvement in the second half.

    7. IPS Mix and Margins
      Q: What's driving IPS positive mix and margins?
      A: The positive mix in IPS was driven by strong distribution sales over OEM sales in Q1, benefiting margins. This mix strength isn't expected to continue into Q2. However, synergies are building, with $26 million achieved in Q1 and on track for $90 million for the year, supporting margin expansion.

    8. PES Q2 Outlook and Restructuring
      Q: Why is PES guidance cautious for Q2?
      A: Management remains cautious on PES for Q2 due to previous false starts in forecasting recovery. While a book-to-bill of 1.1 in Q1 and orders down 2% in April give some confidence, they're waiting for more data. Restructuring savings are embedded in the guidance but are not major drivers of margin improvement, which is expected to come more from volume and mix enhancements.

    9. Conveying Products Margins and Growth
      Q: Can you discuss margins and growth in conveying products?
      A: The conveying products business, with $400 million in sales, has margins above the segment average, with equipment and systems margins comparable to component margins. Installation and project management make up about 5% and are growing. Growth is driven by rebounds in food, beverage, and warehouse sectors, strengthened by the Arrowhead acquisition and their strategy of offering complete industrial powertrain solutions.

    10. Copper Prices and Stranded Costs
      Q: Is rising copper impacting margins, and are there stranded costs?
      A: The impact of rising copper prices on margins is minimal due to lag in two-way material price formulas and hedging strategies. Regarding stranded costs from the industrial segment divestiture, there are estimated costs of less than $5 million, partly covered by TSAs, which they plan to eliminate through productivity actions within 12 months.

    Research analysts covering REGAL REXNORD.