Regal Beloit Corporation (RBC) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and welcome to the Regal Beloit First Quarter 2021 Earnings Call. . Please note, this event is being recorded. I would now like to turn the conference over to Robert Barry. Please go ahead, sir. Robert Barry: Great. Thank you, operator. Good morning, everybody. Welcome to Regal Beloit's First Quarter '21 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Vice President and Chief Financial Officer. Before turning the call over to Louis, I'd like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. Louis Pinkham: Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our First Quarter Earnings and to get an update on our business, and thank you for your interest in Regal. I think, I can reasonably say that Regal had a great start to 2021. Our first quarter topline saw a step change in growth, accelerating to double-digit levels. Adjusted operating margins continued to post meaningful progress, rising over 300 basis points versus the prior year to a record level, aided significantly by a step-up in our gross margins. Free cash flow also remains strong, allowing us to bring our net leverage ratio below 1x and giving us the confidence to raise our quarterly dividend by 10%. We were also extremely pleased to see Regal acknowledged as a top supplier to one of our largest HVAC OEM customers. Congratulations to our Climate Solutions team. The highlight of the quarter, however, was Regal announcing a transformational merger with Rexnord's PMC business, which is poised to deliver best-in-class cost synergies, while opening up new avenues for growth and delivering significant benefits for our customers, our shareholders and our associates. Robert Rehard: Thanks, Louis, and good morning, everyone. As you can see from our first quarter results, Regal got off to a very strong start in 2021, achieving accelerating organic topline growth, significant margin expansion, strong leverage rates of 42%, which nicely exceeded our targets, and healthy cash flow when considered in the context of our normal historic seasonality. And all of this was achieved in the face of significant headwinds from inflation as well as continued supply chain frictions. In addition, with order rates accelerating meaningfully as we enter the second quarter, we believe this strong operating momentum likely continues, leaving us optimistic about the remainder of the year. Now let's discuss our results by segment, and then I'll walk through our latest guidance. Starting with Commercial Systems. Organic sales in the first quarter were up 15.9% from the prior year. The result was driven largely by strength in China and Asia Pacific, in our large commercial applied HVAC business on a global basis and in our Pool Pump business. Notably, sales in our Commercial China business were up over 100% in the quarter, partially due to recovery markets, but also strong share gains. In addition, sales in Pool were up almost 20% in the first quarter, benefiting from strong consumer demand, healthy sales of new products and some restock activity. We think the outlook for Pool remains healthy due to solid underlying demand and further opportunities for restocking. Operator: . And the first question will come from Mike Halloran with Baird. Michael Halloran: So first on the guidance here, just help to understand the 2Q thought process? Very strong 1Q. Typically, you see some kind of earnings ramp from 1 to 2Q. Guidance doesn't have a lot of it, unless you're a little bit above towards the high end of the range. Maybe just help us with some of the sequential puts and takes? How much of this is just conservatism, given some of the supply chain, price/cost dynamics? Is it price/cost? Doesn't seem like there's any concern really over the directional demand curve. So just some help on some of those puts and takes? Louis Pinkham: Yes. So Mike, this is Louis. Let me kick off. I think the way you're packaging this makes sense. First of all, I think we've proven our credibility over the last 8 quarters that we would like to set an objective for the quarter that we can achieve and then hopefully, overachieve. And so there's certainly a little bit of conservatism there. I don't think it's a normal quarter though, certainly compared to the COVID period of last year and this year is not going to follow normal seasonality. So I'm not so concerned about that. Certainly, orders are coming into the quarter extremely strong. Orders were really strong in first quarter. And so we feel good about second quarter. Of course, we do have some headwinds in commodity inflation. Now we -- our teams are doing a fantastic job, one, in just how we hedged our materials are -- then we have the benefits, tailwind of material price formulas, and then our teams are doing a really nice job of managing 80/20 and going after price. And so we feel pretty solid about the price/cost, at least being neutral for the quarter and certainly for the year. There are some constraints in the supply chain still, certainly, logistics constraints. There's definitely electronics constraints. Our visibility to that, though, is that it won't impact us in Q2, or it will be a minimal impact, if anything. And then lastly, there's still COVID. India is part -- I think the strength of Regal, and I've said it before, is our global manufacturing footprint. But India is a big part of that footprint. Now we do about $50 million of revenue locally, but it sources our global supply chain. And our thoughts go out to our Indian associates. They're dealing with personal and -- challenges for sure. And so we're a little concerned about COVID and certainly are working through this quarter. We're hoping that with the vaccines that are rolling out that COVID continues to get in the rearview mirror. But certainly, India is a concern for us. So with all of those things, that we felt -- we feel good about our guidance for the quarter and a little bit conservative. But again, we want to achieve it or hopefully beat it. Michael Halloran: That's all fair. And then second one, just maybe some thoughts on inventory levels in the channel and any -- given all the supply chain capacity constraints, is there a lot of channel inventory materializing today? And then it's post related, is there any pull forward of demand or any prebuying or people trying to get ahead of some of these supply chain constraints that you're seeing right now in the channel? Louis Pinkham: Yes. I would say there's still quite a bit of room in the channel for inventory build. And so I certainly think that's helping some of the demand we're seeing. And I also believe, although, we don't have any customer that's coming out specifically and stating this, but there's concern with the supply chain. So I wouldn't be surprised that some of the strength in our orders are being influenced by concerns in the supply chain. But the fact that our orders are up 90% year-over-year or 9% sequentially, it's still a strong demand environment that we're in right now and -- which gives us some nice optimism for Q2 and certainly for the rest of the year. Operator: The next question will come from Jeff Hammond with KeyBanc. Jeffrey Hammond: Just want to come at the sequential a little bit differently. So you said April orders up 9%, sequentially. Can you talk about where the greatest strength was sequentially in orders within the businesses and how that kind of flushes through to sequential revenue growth? Louis Pinkham: Yes. So the strength sequentially is really coming majority from 3 of these segments. And it's really pretty solid and across the board in those 3. It's PTS, Climate and Commercial. And so that's what's giving us some good confidence in Q2 and the performance expectation of being in the 20-plus percent growth year-over-year in Q2. Jeffrey Hammond: Okay. Great. And then so incrementals, 1Q, north of 40%. Can you just talk about what's embedded in the 2Q guide? And how much kind of haircut or caution you have around price costs within that? Robert Rehard: Yes, sure. No problem, Jeff. So first of all, we do have expectations that we'll see margins in the range of about 30%, overall, on the leverage side. The leverage is about 30%. And the way that would break by each of the segments would be, we would still expect PTS to come in on the high side 35% to 40%. And then the other businesses, Climate and Commercial in around the 30% range as well as Industrial. So each of those around 30%, maybe slightly below 30% and then 35% to 40% for PTS. Now as far as price/cost and how we're thinking about price/cost. Look, as Louis mentioned, we do have certain segments that are more tied to inflation and material price formulas and the lag associated with that, those being both Climate and Commercial. There's some of that as well in Industrial. But the MPFs in Climate are such that we are still catching up on them, but we do expect that we should get there within the second quarter. Within the Commercial and Industrial segments, we do see a little more pressure in those. And we had the benefit of the lag of inflation in the first quarter, which we do see now coming to -- will impact us in the second quarter. We have great price increases that we've announced, and we do expect to offset most of that with price. And as I said and Louis said, we do expect to be price/cost-neutral for Regal, and that's what's embedded within our guidance in the second quarter. Operator: The next question will come from Nigel Coe with Wolfe Research. Nigel Coe: Rob, if I put in high-single digit, low double-digit organic growth for 2Q with those incrementals, I come up with a bigger EPS on the book, but that's just math. So on your full year guidance for high-single digits, low double-digits organic growth, does that include the daily sales impact in 4Q? Because I think you do have maybe 4 days fewer in 4Q versus prior year. Robert Rehard: Yes, that would all be embedded in that assumption that we provided. Nigel Coe: Okay. Great. And then on the PMC transaction, I mean, obviously, we're on track for 4Q close. But what are the major stage gates we should look for in terms of regulatory approvals between now and then? And then if we snap the line today, get to close today, does -- with the transaction terms in terms of dividend payment, et cetera, be materially different to what we heard back in January? Louis Pinkham: So Nigel, I apologize. I got the first part of your question, but not the second. So let me answer the first part. Again, we're on schedule. We feel good about the fourth quarter closing period. Now you asked about what are the milestone. Certainly regulatory. We did receive U.S. antitrust clearance of the transaction. We've also received some clearances in certain non-U.S. jurisdictions. There's still a couple still outstanding, and we're rating foreign investment law clearances in some non-U.S. jurisdictions as well. Of course, we're waiting on the private letter ruling from the IRS. And then beyond that, I would tell you that we had further details in the Form S-4 that we'll be filing in the next couple of days. So hopefully, that helps to answer the progress and the milestones on the transaction, but excuse me, Nigel, just repeat the second part of your question. Nigel Coe: Sure. It was really, Louis, about the transaction terms and the special dividend. Obviously, there's a lot of -- the overlapping shareholder base is the key there. I don't know if you've got any update or insight in terms of how that might have changed versus January? And whether it's a deal close today, whether there'll be a material change in that dividend? Louis Pinkham: Okay, great. Yes, we're not going to go into that detail. I'd tell you we're on path. Things are pretty consistent with what we announced when we announced the merger back in February. So I'd say everything is going as planned. Operator: The next question will come from Joe Ritchie with Goldman Sachs. Joseph Ritchie: So I'd like to tackle the 2Q growth guidance that you guys gave us of high 20s. If I look at that compared to, let's say, 2019, it still implies like you're down call it, 5% to 10% versus 2019 levels. But if I think about your April order trends, and I fully respect the fact that you have an easy comp, if you normalize for that easy comp, you're still up, call it, 30% versus 2019 levels. So I guess, just -- I'm trying to understand like the level of conservatism just based on what you know today on even that high 20s-type growth number that you've thrown out for the second quarter? Louis Pinkham: I think this is becoming a common theme of the questions, Joe, and I understand why. We're seeing strong orders, high 20s, it's a conservative approach that we feel good about achieving even in light of perhaps some logistical challenges, minor logistical challenges and minor supply chain challenges. If orders continue at their current weight rate, I'd tell you, it's likely going to be stronger. But again, credibility is important to us. We like to set reasonable realistic -- little stretch, but reasonable realistic goals and objectives that we can achieve or overachieve. So the point is well stated, it's probably a little bit conservative, but we feel good about the numbers right now. Robert Rehard: One other thing, Joe, I would just highlight here. We're also building some room for some buy ahead on supply chain concerns. That has absolutely been something that we've been hearing from our customers and something that could have bolstered the 90% rate that we talked about. Joseph Ritchie: Got it. No, that's helpful. And maybe just my follow-on there. As you kind of think about the Climate Solutions business and you think about the trends, I think you called out North America furnace being really strong. I wouldn't think that you'd have any kind of like inventory build on the furnace side of the business. So I'm just curious like what have you started to see already for the HVAC side of the business and whether the cooling side of the business has started to pick up? Louis Pinkham: Yes. So Joe, here's how we're thinking about Climate. It was a colder-than-expected first quarter. And that, therefore, we did not see the build of inventory that was anticipated. And there were some supply chain constraints not with us, but with some of the other suppliers into that marketplace. So we absolutely believe that the inventory levels are not at a normal level yet, and that is helping with some of this demand. And one of the OEMs indicated that the sell-through in the market in the first quarter was more mid-teens and yet our sales were in the 20s, and our orders are in the 20s. So clearly, there's an inventory build going on there. So the demand is there, no question. Any market related to consumer base, the demand is there. The fact that our orders are up roughly 83% in April, I guess, roughly 83% is a little bit more exacting, but some roughly 80% in April, does give us some confidence that there's going to be continued strength in this space. And I would tell you, again, with the OEM saying mid-teens, high-teens sell-through in first quarter, there's clearly an inventory build going on. Operator: . Our next question will come from Chris Dankert with Longbow Research. Christopher Dankert: Louis, I guess -- excellent example earlier in the call. I guess just kind of highlight, can you give us an update on the price for value initiatives, particularly within Industrial? I mean what inning are we in there? Is the Industrial segment margin recovery kind of tracking in line with your internal schedule? Just any comments on just the price for value in particular and kind of that margin progression a little bit longer term, perhaps? Louis Pinkham: Yes. So we are gaining momentum on the Industrial side. It's very much aligned with where we expected to be at this point. We are successfully transitioning to our TeraMAX product line of industrial motors out of Mexico that are -- that's much better cost position as well as not dealing with the tariffs, the product coming into China. So I feel really good about that team and what they're trying to do to position ourselves for possible accelerated growth. I would add to that, though, that when you look at the industrial drivetrain and where we're positioned in the industrial drivetrain, we are certainly a leader as well. So we're pricing for value and getting stickier with our solutions around a total offering to the customer. And so I feel really good about that being really early innings like first inning, whereas the industrial margin improvement is more fourth bit. Christopher Dankert: Got it. That's super helpful. And then just kind of a touch-up here. I guess any comment on the sales pruning headwind into the second quarter, that looks similar to kind of what we saw in 1Q here? Robert Rehard: Yes. I think you can expect something around the same range, about 200 basis points for Regal would be pretty close to a level of expectation going into second. Christopher Dankert: Got it. And if I could just sneak 1 more here. Just thinking about working capital into the back half of the year. Everyone's kind of readjusting expectations on just-in-time inventory, given all the disruption we're seeing. Just any comments on working capital use in the back half would be great? Robert Rehard: Yes, sure, Chris, if you look at -- the good news is that we still have a nice path here on inventory, and we're very focused on reducing working capital. And that inventory is the biggest lever that we have. Even with the volumes that we're seeing, we still have a nice path to see trade working capital as a source of cash this year in '21. And it is largely due to the inventory that we're talking about here. Some of the challenges that we've seen early in the year have been around -- some of the supply chain friction, as we got through the first quarter, building a little bit of inventory there in certain areas, some of the port constraints. But that we see clearing, and we, as I said, we have a clear path. So working capital should be a nice source of cash for us. Christopher Dankert: Got it. Congrats on the quarter here. Robert Rehard: Thank you. Louis Pinkham: Thank you. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Louis Pinkham for any closing remarks. Please go ahead, sir. Louis Pinkham: Thank you, operator. Having delivered a stronger first quarter than expected, with record-breaking 13.9% operating margin and entering the second quarter with solid order and revenue momentum, I'm excited about what 2021 holds for Regal. We still have so much opportunity to improve our profitability, while Rexnord PMC is expected to add significant momentum. All these factors should benefit our free cash flow, fund further growth investment and deliver benefit for all our key stakeholders. And with increasing intention behind our plans to meet rising demand for more energy-efficient products and solutions, our growth strategy will be tied to a purpose bigger than Regal, doing our part to help our communities locally and environment globally. Thank you again for joining us today and for your interest in Regal, and have a good day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.RBC Ratings Summary
RBC Quant Ranking
Related Analysis
RBC Bearings Incorporated (NYSE:RBC) Surpasses Earnings Estimates
RBC Bearings Incorporated (NYSE:RBC) is a key player in the manufacturing industry, focusing on precision bearings and essential systems for industrial, defense, and aerospace sectors. The company is known for its robust product offerings and has a strong presence in these markets. Competitors in the precision bearings industry include companies like Timken and SKF, which also serve similar sectors.
On May 16, 2025, RBC reported earnings per share of $2.83, exceeding the estimated $2.68. This indicates strong profitability and efficient cost management. The company generated revenue of $437.7 million, slightly below the estimated $440.3 million. Despite this, RBC's net sales for the fourth quarter increased by 5.8%, driven by a 10.6% growth in the Aerospace/Defense segment and a 3.3% rise in the Industrial segment. RBC's financial metrics provide further insight into its performance.
The company has a price-to-earnings (P/E) ratio of 47.65, showing that investors are willing to pay $47.65 for every dollar of earnings. This high P/E ratio suggests strong investor confidence in RBC's future growth prospects. The price-to-sales ratio of 7.04 indicates that investors are paying $7.04 for every dollar of sales, reflecting the company's strong market position. The company's gross margin for the quarter stands at 44.2%, highlighting its ability to manage production costs effectively.
RBC's enterprise value to sales ratio is 7.65, and the enterprise value to operating cash flow ratio is 40.61, providing insights into its valuation and cash flow generation. With a debt-to-equity ratio of 0.36, RBC maintains a relatively low level of debt, which is favorable for financial stability. RBC's current ratio of 3.43 suggests a strong ability to cover short-term liabilities with short-term assets, indicating good liquidity.
The earnings yield of 2.10% represents the percentage of each dollar invested that was earned by the company, offering a perspective on its profitability relative to its stock price. These financial metrics collectively demonstrate RBC's solid financial health and growth potential.
