Release Date: November 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Regal Rexnord Corp (RRX, Financial) achieved a record adjusted gross margin of 38.4% and a record adjusted EBITDA margin of 22.8%, up 110 basis points from the previous year.
- The IPS segment showed strong performance with positive organic growth and record adjusted EBITDA margins, driven by successful synergy initiatives.
- Orders in the third quarter increased by 2.5% on a daily basis, led by the IPS segment, indicating potential for better top-line performance in 2025.
- The company realized $27 million in synergies during the quarter and is on track to achieve $90 million for the year, with an additional $120 million expected in 2025 and 2026.
- Regal Rexnord Corp (RRX) generated $126 million in adjusted free cash flow, contributing to debt reduction efforts.
Negative Points
- Overall third-quarter sales were down 2.7% on a comparable organic basis, primarily due to headwinds in the AMC and PES segments.
- The AMC segment experienced a 4.1% decline in net sales on an organic basis, with weakness in discrete automation and larger-than-expected foreign exchange pressures.
- PES segment sales decreased by 6.2% year-over-year, impacted by weakness in non-US commercial HVAC markets and slower-than-expected capacity ramp in residential HVAC.
- The company revised its full-year sales outlook downward due to weaker performance in PES and AMC, with adjusted EBITDA margin expectations reduced to 22%.
- Free cash flow guidance for the year was lowered to approximately $600 million, reflecting lower EBITDA outlook and higher inventory investment.
Q & A Highlights
Q: Can you clarify if the limited growth comment for next year is organic or all-in, and how does it relate to the PES side?
A: Louis Pinkham, CEO: It is an organic comment. We are approaching next year with caution due to market uncertainties, including election results. We aim to be more measured than historically due to these uncertainties.
Q: The spread between orders and revenue growth in short-cycle business is larger today. When do you expect this to align?
A: Louis Pinkham, CEO: The business has shifted, especially in AMC, which is now longer cycle with a backlog of roughly six months. IPS is performing well with strong orders, and PES remains short-cycle, with a backlog of about 1.5 months.
Q: What are your thoughts on free cash flow for next year, given this year's challenges?
A: Robert Rehard, CFO: We expect to end next year at an exit rate of about $1 billion. This will be driven by reduced cash interest, cash taxes, and restructuring costs, along with some working capital benefits.
Q: Why wasn't Regal Rexnord more prepared for the HVAC uptick, given the prebuy activity?
A: Louis Pinkham, CEO: The recent surge in demand was unexpected after two years of weak demand. OEMs kept their strategies under wraps, limiting our visibility. We expect to catch up by the end of the fourth quarter.
Q: Can you discuss the cross-selling synergies in IPS and their impact?
A: Louis Pinkham, CEO: Cross-selling and industrial powertrain initiatives contributed 1 to 2 points of growth in IPS this quarter. Only 15% of our customers buy two or more products, indicating significant growth potential.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
