Good morning, and welcome to Regal Rexnord's Third Quarter 2021 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 would 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. For a list of factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our SEC filings. On Slide 3, we state that we are presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures to provide you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods and in the same manner as management. Please read this slide for information regarding these non-GAAP financial measures, and please see the appendix for reconciliations of these measures to the most comparable measures in accordance with GAAP. Turning to Slide 4, let me briefly review the agenda for today's call. Louis will lead off with his opening comments. Rob Rehard will then provide our third quarter financial results in detail and discuss updates to our 2021 and 2022 guidance. Louis will then come back to discuss the acquisition of Arrowhead Systems, which we announced today. We will then move to Q&A, after which, Louis will have some closing remarks. And with that, I'll turn the call over to Louis.

Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our third quarter earnings and to get an update on our business, and thank you for your interest in the new Regal Rexnord. While unprecedented levels of inflation and severe supply chain disruptions are surely top of mind, as they have been for Regal Rexnord, on the whole, I'm feeling upbeat, especially given our team's strong performance in the third quarter, along with strong market demand, but also because of the tremendous progress we are making, transforming Regal, now Regal Rexnord, into a higher-margin, faster-growing, more cash-generative and higher-return enterprise. Despite many external headwinds in the quarter, Regal Rexnord posted record operating margins and record earnings on a robust 16% organic top line growth. Many factors drove this performance, but a couple of highlights include being modestly price/cost positive and achieving market share gains across our portfolio. And with our third quarter's orders up 27% and up at a low 20s rate in October, we are confident we will have healthy top line momentum as we enter 2022. We also closed a transformational merger with Rexnord's Process & Motion Control business, synergies from which should add materially to our margins, free cash flow and organic growth profile over the next few years, particularly as we begin to deliver the benefits of selling our customers an integrated industrial powertrain solution, which, by the way, has already started to happen. I am also extremely excited to announce today our acquisition of Arrowhead, a highly strategic bolt-on that we expect to be accretive to adjusted EPS in year 1, to achieve an ROIC exceeding 10% before year 5 and which promises to open an array of growth vectors for our conveying business, both organic and inorganic. I will discuss Arrowhead in more detail later on this call. I'll note, however, that even after adding PMC and Arrowhead, our balance sheet remains very healthy at about 1x levered and, combined with our strong free cash flow, gives us lots of flexibility to create more shareholder value from various capital deployment initiatives going forward. Before turning it over to Rob, I want to spend a minute saying thank you to all our Regal Rexnord associates around the world. Our strong performance at its core is about talent. It's about our nearly 30,000 Regal Rexnord associates and their disciplined execution, leveraging their individual skills and diverse perspectives, exhibiting dedication and hard work and acting with urgency for our customers, always guided by our Regal Rexnord values. On October 5, the day after we closed the PMC merger, I and many Regal associates spent the day at the PMC headquarters in Milwaukee, now the headquarters of our combined PMC and PTS business, Motion Control Solutions or MCS. We spent significant time walking every floor of our 10-story building, meeting with hundreds of associates along the way. That was a great experience on so many levels. But one of the things that excited me most was all the talk of 80/20, of customer segmentation, of lean principles, of SKU rationalization, of the importance of diversity, engagement and inclusion and of using data to make decisions. Bluntly, I was thrilled because this is the language of legacy Regal and of the new Regal Rexnord. I think so many of our management tools, 80/20 prime among them, are helping us navigate these choppy times just a little bit better than our competition, but it is the disciplined execution of our associates using these tools that is helping us succeed. So again, a sincere thank you to all our associates, another welcome to our PMC associates, and I look forward to being able to welcome the approximately 300 Arrowhead associates to the Regal Rexnord team later this quarter. And now I'll turn the call over to Rob who will take you through the financials in more detail and discuss our guidance, after which, I'll be back to discuss Arrowhead.

Thanks, Louis, and good morning, everyone. Regal Rexnord had very strong results in Q3, and I want to congratulate our global team for executing effectively despite severe inflation and global supply chain disruptions. Let's now discuss our results by segment, followed by our latest guidance, which includes our ownership of the Rexnord PMC business starting from the merger close on October 4 and assumes we will complete the Arrowhead acquisition by the end of this year. We'll begin with our legacy Power Transmission Solutions segment. To clarify, these results reflect only legacy PTS. Starting in Q4, legacy PTS combined with the Rexnord PMC business will form our new Motion Control Solutions segment. Organic sales for PTS in the third quarter rose 23.7% from the previous year due to strong performance across all markets, especially in alternative energy, North American general industrial sectors, and the conveying business. The business benefited from share gains, including our industrial powertrain solutions. Pruning actions accounted for around 290 basis points of top-line headwind this quarter. The operating margin for PTS was 18.8%, a 600 basis point increase compared to the previous year, supported by volume, pricing, and permanent restructuring actions. Orders in PTS increased by 40%, and orders for the new MCS segment are tracking up over 30% in October on a daily basis. In Climate Solutions, organic sales in Q3 increased 14.2% from the prior year, driven by broad strength across all markets, particularly in North America residential HVAC, EMEA, and North American general industrial markets. The business also gained market share, primarily in North American HVAC distribution in Europe and Asia. Pruning actions were about 180 basis points of top-line headwind for the quarter. The adjusted operating margin for Climate was 19.4%, up 230 basis points compared to the previous year, thanks to the factors mentioned earlier, alongside a shift toward more energy-efficient variable speed motors. Permanent cost reductions and achieving slightly positive price-cost also supported the margin. Orders in Climate rose almost 20% on a daily basis and are tracking similarly in October due to broad strength, particularly in the EMEA and commercial refrigeration sectors. Based on our current backlog and insights from our HVAC OEM customers, we believe end-user demand is healthy and that significant restocking activity is anticipated in the first half of 2022. For Commercial Systems, organic sales in Q3 increased 20.9% from the prior year, reflecting growth in North American general industrial markets and strong performance in large commercial HVAC products, particularly in China. Our commercial business is capturing market share, especially in North America general industrial sectors. 80/20-related pruning was a 220 basis point sales headwind in the quarter. The adjusted operating margin for Commercial Systems was 11.5%, slightly down from the previous year, due to persistent inflation and supply chain disruptions impacting the year-over-year results. Despite overall price-cost being slightly favorable, it had a dilutive effect on margins. Orders in Commercial Systems rose 35% on a daily basis and are tracking up nearly 20% in October. In Industrial Systems, organic sales in Q3 were up 3.6% compared to the prior year. Key drivers included strength in China and improved momentum in North America's non-residential construction and general industrial markets, somewhat offset by the prior year's large project activity in the data center market. Pruning actions during the quarter were approximately 210 basis points of top-line headwind. The adjusted operating margin for Industrial was 3.4%. This segment’s margins are sensitive to small value shifts in performance. Orders in Industrial for this quarter increased roughly 14% on a daily basis, while order rates in October are seeing low teens growth, excluding some large prior-period project orders in the data center market. On the following slide, we present key financial metrics for your review. Notable highlights include further deleveraging of the balance sheet, ending the quarter with a net debt to adjusted EBITDA ratio of 0.5x. However, factoring in the impacts of closing the merger with Rexnord PMC and the Arrowhead transaction, we anticipate our net debt to adjusted EBITDA to be around 1.1x as we close the year, providing ample flexibility. Our free cash flow was $108 million, or 133% of adjusted net income, and we continue to expect cash conversion above 100% for the year. Moving to our outlook, we have various factors to consider and have aimed to provide clarity. We are giving guidance for the fourth quarter of 2021 and initial adjusted EPS guidance for 2022. Our outlook includes five factors: one, performance expectations for our legacy Regal business; two, anticipated results for the Rexnord PMC business starting in Q4; three, impacts from the PMC merger, including additional shares, interest, depreciation, amortization, and our expected post-merger tax rate; four, impacts in 2022 related to the acquisition of Arrowhead; and five, a redefined adjusted earnings per share, which from Q4 2021 will add back all amortization and stock-based compensation expenses, both after tax, in line with historical adjustments. We believe this new definition of adjusted EPS aligns with what investors refer to as cash EPS, and we will use this new definition for guidance and earnings commentary moving forward. Our discussions about operational performance will now concentrate on adjusted EBITDA, including stock-based compensation expense. To assist investors with adapting their models to our new approach, we are providing historic details on depreciation, amortization, and stock-based compensation for Regal Rexnord and by segment in the appendix of our third quarter press release and slide deck. For the fourth quarter of 2021, we expect total Regal Rexnord sales to grow at a mid-teens rate year-over-year, aiming for adjusted EPS in the range of $1.97 to $2.27. This outlook aligns with our previous projections for legacy Regal and the prior outlook for legacy PMC provided by Rexnord, with added impacts from the PMC merger and our updated definition of adjusted EPS. For 2022, we now expect approximately $5.1 billion in revenue, around $1.1 billion in adjusted EBITDA, and an adjusted EPS in the range of $9.95 to $10.35. This outlook is consistent with earlier expectations about revenue and adjusted EBITDA but now incorporates the Arrowhead impact. While we expect the Arrowhead acquisition to close in Q4, from a guidance perspective, we will not include it in our financials until January 1, 2022. If we close earlier than expected, there could be a modest positive impact on our Q4 outlook. Finally, I would like to emphasize that after the merger with PMC and acquiring Arrowhead, we expect a strong balance sheet with a net debt to adjusted EBITDA ratio of approximately 1.1x at the end of 2021. The table on the right summarizes our key guidance points for Q4 and 2022, including the additional impacts from Arrowhead, along with modeling details to help investors understand how adjusted EBITDA connects to the adjusted EPS value under our new definition. I will now turn the call back over to Louis to discuss Arrowhead.

Thanks, Rob. I am very excited about Arrowhead Systems becoming part of the new Regal Rexnord. As you can see on Slide 14, after sales growing at a high teens rate over the last few years, we believe the business is on track to generate roughly $100 million in sales in 2021, split about evenly between the conveyance subsystems and palletizers and depalletizers, which each represent about 40% of the total, and the remaining 20% of sales from aftermarket parts and services. For those who may be less familiar with palletizers, as the name suggests, they automatically load or unload products onto or off a pallet and often operate in conjunction with a conveyor system as products are conveyed to or from them. Regarding end markets, Arrowhead is focused on selling to food and beverage producers with a heavy weighting to makers of aluminum beverage cans, which represented nearly 60% of 2020 sales, with food, consumer staples and other beverage applications each representing roughly 15% of the remaining sales. These are very attractive end markets where we have been looking to gain more exposure. For perspective, our Regal Rexnord food and beverage exposure is about 9%, and we expect it to reach a low double-digit percent of total sales by adding Arrowhead. Within beverage, aluminum cans, in particular, are expected to rise in popularity from a strong secular shift away from single-use plastic bottles. Aluminum cans are lower cost for producers and are easy to recycle with extremely high recycling rates and yields, which drives meaningful environmental benefits, a big reason consumers increasingly prefer them. We see this shift from plastic to aluminum continuing for some time and also gaining traction with packaging formats for a variety of other products outside of beverage such as personal care and home cleaning products. Other defining features of Arrowhead are strong research, development and engineering capabilities in its core conveyance and palletizer product, plus deep domain expertise in the food and beverage and consumer staples industries. Its products are differentiated and highly valued by its customers, which include many leading blue chip food, beverage and personal care producers that have highly recognizable brands. The unique value-add of Arrowhead's products and services is evident in its long-term customer relationships, the top 10 averaging more than 20 years; as well as its attractive gross margins, which have been running in the 33% to 34% range very consistently over time. Arrowhead's adjusted EBITDA margins have been in the high teens. As many of you know, the conveyance space is one that has interested Regal Rexnord for some time. In addition to attractive secular growth drivers in many relevant verticals, including food and beverage, e-commerce, warehousing and metals and mining, we also see lots of opportunities to build on Regal Rexnord's current capability selling conveying component and our very successful ModSort transfer and diverter modules to serve customers in a more robust way by providing value-added solutions and related aftermarket services. By adding Arrowhead, our sales from conveying and related products, services and solutions are expected to rise from about 19% of our Motion Control Solutions segment to roughly 26% in 2022. Turning to Slide 15, I'll provide a little more color on the strategic rationale underpinning the transaction. We've already discussed many of the end market secular trends and product and solution capabilities that support Point 1, a strong growth outlook. We expect sales to grow at an organic low double-digit rate or greater, at least, over our planning period. The product portfolio is also very attractive. Products are highly engineered, differentiated, valued by customers and create lots of opportunity by high-margin aftermarket sales and services. Notably, the Arrowhead team launched a robust digitization effort several years ago that has added IoT and predictive maintenance capabilities that are a perfect fit with things we have been doing under our perceptive data collection and analytics platform. Arrowhead's products are also highly complementary with our Regal Rexnord portfolio and will help us build on our offering of components and modules to serve customers with more value-added solutions. From a financial perspective, the transaction metrics are attractive and consistent with our strict M&A criteria. We are paying $297 million for Arrowhead, which does not include a separate tax benefit related to an asset step-up that is worth a net $30 million in cash on a net present value basis. We anticipate delivering at least $8 million in cost and revenue synergies by year 3, plus have line of sight to an additional $4 million of cross-marketing synergies looking a couple of years further out. Adding Arrowhead is expected to be accretive to our adjusted EPS in year 1 and to achieve an ROIC exceeding 10% at least by year 5 and likely sooner. Finally, the conveying industry is highly fragmented. So adding Arrowhead should help Regal Rexnord build a platform for future organic and inorganic growth. On Slide 16, you can see our current Regal Rexnord offering on the left-hand side, which includes a series of highly engineered components, including gear motors, a highly efficient, integrated motor and gear solution tailored for conveying application that is another example of our powertrain offering. Also pictured are Regal Rexnord's ModSort transfer and diverter stations, which I'll discuss in more detail on the next slide. On the right-hand side is a sample of Arrowhead's products, which include palletizers, depalletizers, a wide variety of conveyance subsystems as well as aftermarket services. While being able to assemble an entire production line is not our play here, I believe the product illustrations make clear that Arrowhead will move us up the value chain into a more complex subsystem, which, along with our existing offering, should allow Regal Rexnord to offer more value-added solutions as well as more sophisticated aftermarket services, including predictive maintenance. One area where we see particularly attractive opportunities is around energy efficiency. After HVAC systems and pumps, conveying systems tend to be the largest users of electricity in facilities that have them. And increasingly, end-user customers are committing publicly to making their footprints more energy-efficient, often with a goal of net-zero. We envision being able to play a significant role on this front by leveraging our capabilities, creating industrial powertrain solutions comprised of our motors and the relevant power transmission components that connect them to what the motors are powering, in this case, conveying subsystems and systems. With our domain expertise in the conveying space, now greatly enhanced with Arrowhead, we expect to create more energy-efficient solutions designed to address the specific needs of our conveying customers. Layering on the data collection and analysis we do on our Perceptiv platform, also enhanced by Arrowhead's own market and service capabilities in this area, should allow these solutions to become even more robust over time. Moving to Slide 17. I'd like to provide a little more detail about the particular opportunities we see leveraging Arrowhead, along with our ModSort modules, because this is where we see significant potential cross-marketing synergies. These modules can be easily integrated into an existing conveyor line or system to steer whatever is being conveyed. For example, packages come down a central conveyor line in an e-commerce warehouse upon reaching the ModSort module can be steered off at whatever angle the application requires into a sortation bin or perhaps down another conveyor line in the facility. The ModSort module is easy to integrate, highly reliable, quiet and safer than many conventional applications and conveys light items, as light as a credit card, with precision, which is invaluable to many customers as polybag and lighter packaging in general is the trend. Our ModSort modules and Arrowhead are highly complementary. From an end-market perspective, the ModSort offering is strong in the e-commerce and warehousing vertical where Arrowhead has limited exposure. On the flip side, ModSort has some but rather limited exposure in the food and beverage market. But as we have discussed, other very attractive verticals across food and beverage, and personal care are areas where Arrowhead has strong domain expertise and customer relationships. While the end markets have limited overlap, we believe the product and services of Arrowhead and ModSort are highly relevant in each other's markets. We also see opportunities to pull through our current Regal Rexnord conveyor and conveyor-related offerings through these channels. So I hope this gives you some perspective on why we are so excited to be bringing Arrowhead and Regal Rexnord together. Arrowhead is another step in Regal Rexnord's ongoing transformation. It mixes us up into higher-growth end markets with differentiated, highly valued products and gross margins consistent with these attributes. Arrowhead is also a great example of innovation with purpose, one of our Regal Rexnord values, creating products and solutions that are purposeful for our customers and purposeful for our planet. Its growth in margins shows Arrowhead's products are clearly purposeful for its customers. And because many of its products support strong secular trends to more environmentally friendly packaging, Arrowhead's offering is clearly also purposeful for our planet. In short, Arrowhead is an example of where we are looking to take our business overall, so I couldn't be more excited. And with that, I'll turn the call back over to the operator, so Rob and I can take your questions.

Our first question comes from Mike Halloran with Baird.

Congrats on managing through all of these moving pieces here, really impressive.

Thanks, Mike.

Let's start with capital allocation. The positive announcement regarding Arrowhead, which you detailed extensively, is significant. There's also been an increase in the buyback plan. I have two questions: first, how do you approach the buyback plan, and how aggressive are you prepared to be with it? Secondly, what does your pipeline look like beyond this recent acquisition?

Sure, Mike. Thanks for the question. It's Rob. As you know, we don't preannounce plans for stock purchases, but we definitely want to have more flexibility in this area. For a while, we were somewhat limited in the buybacks we could engage in due to the timing of the merger. Therefore, we had to pause on that front for the last 6 to 9 months. However, moving forward, we expect to adopt a more balanced approach that will definitely include buybacks as part of our strategy. Now, regarding the M&A perspective and the funnel, I’ll let Louis provide additional insights.

Yes. Let me add on there, Mike. As we said and have continued to say, we're going to be very disciplined in our approach. Our funnels are strong. We are looking at assets that make us stronger. But they have to meet a strategic need, but also meet our financial metrics of being above 10% by year 5, EPS accretive year 1, and they need to make us stronger. And so I'd tell you, our funnels are in a very good position. Of course, we're very focused right now on the merger with PMC and achieving our integration synergies, and I couldn't be more excited and proud of our teams. We're well on our path. Arrowhead is another example of bringing on a great asset that's going to make us stronger. And I'm just going to emphasize Rob's comments about the buyback. The increase was stated because it shows how the Board and Rob and I feel, the high confidence we have in the value creation that we have at Regal Rexnord right now and the opportunities to buy back. So we'll be balanced, but we're really excited about where we are, the strength of our balance sheet and the opportunities coming forward.

Great answer. And then secondarily, kind of an open-ended question here. Obviously, the order trends remain very good through October. Based on the commentary, it seems like the inventory replenishment side is still ahead of you. But you also have a ton of challenges from an industry perspective, just managing through getting supply, getting things out the door, capacity constraints, logistics, everything, right? So how are you thinking about the demand cadence and the sustainability of the demand cadence as we move forward from here and what the sustainable health looks like of a lot of the markets you serve?

Yes. So there's quite a bit there, Mike. And honestly, it's what we deal with every day. There are lots of constraints in the supply chain. There's certainly inflation going on and logistics constraints as well. Demand is strong. Demand is strong across all of our markets, bluntly. Maybe Australia and Southeast Asia, which is a small part of Regal Rexnord, has been a bit more affected by COVID over the last 3 to 6 months. But everywhere else is strong. Europe has certainly rebounded. All of our North American markets are strong. Now from an inventory perspective and restocking, the supply chain constraints are challenging our ability to restock the HVAC market in particular. Pool has need for further restocking as well. But bluntly, there's been constraints in getting resources, contractors for new pool installations. And so we actually expect a little bit of a slowdown in pool demand in the fourth quarter because of that, not because of the underlying demand, but because of the constraints. And then our industrial markets are still restocking. And so all of this tells us right now that we're going to go into 2022 with a strong tailwind demand-related. So we're feeling pretty bullish going into '22 as long as we can effectively manage the supply chain constraints. And I couldn't be more proud of our teams and what they're doing. Every one of our sites has a war room around supply chain issues. But it's the over management, the disciplined over management that would ensure our success long term.

Our next question comes from Joe Ritchie with Goldman Sachs.

Kudos as well on executing the transaction and announcing another deal.

Thanks, Joe.

So Louis, I'm trying to understand the guidance better. I see the sales number of $5.1 billion for 2022, which suggests mid-single-digit organic growth based on my calculations. Can you provide more details on the organic growth factors and your thoughts on pricing as part of the full year guidance?

Sure. Joe, honestly, the top line guide at this point is a little premature. The point of showing that summary was to say that we are being consistent in our communication of where we think we can go with the business. We're just starting our operating plans that we'll be meeting with all of our teams over the next 3 weeks, and we'll get more clarity. So perhaps a little conservative on the top line, to be blunt. And so I don't really want to elaborate on how we got to that number other than saying we said that we would be at $5 billion of revenue roughly in 2022. And then with the addition of Arrowhead, it takes us to $5.1 billion. So hopefully, that's a sufficient answer for you now. We'll certainly elaborate on that much more as we give fourth quarter results. But let me talk about price/cost for a second. Again, I couldn't be more proud of our teams on how they're managing price/cost. There is no question we're in an unprecedented inflationary period. And we're leveraging our 80/20 tools to ensure that we are pricing strategically but ensuring that we're passing on price and not absorbing the full impact of inflation. And in the third quarter, we were price/cost positive, and we envision that continuing in fourth quarter and in 2022.

Got it. That's super helpful. Maybe my quick follow-on, just to clarify, on the synergies from the deal, are we still expecting $70 million to come through in 2022? Or is that more kind of like an annualized run rate number that you'll hit by the end of the year? I just want to make sure I've got that buttoned up.

Yes, we are anticipating a $70 million annualized run rate by the end of 2022, but our teams are aiming higher. We are extremely excited about the cost synergy opportunities from the merger. Additionally, we are equally thrilled about the cross-marketing synergies. The two teams have come together in the initial weeks to identify numerous opportunities for integrating legacy PMC and legacy PTS products across various channels and enhancing our industrial powertrain offerings. Our goal is to outpace market growth by 50% through these cross-marketing capabilities. We will share more details during our fourth quarter results in 2022, but I am very optimistic about the synergies for Regal Rexnord.

Our next question comes from Jeff Hammond with KeyBanc.

So just on supply chain and the pinch points. I guess, one, you had talked last quarter about being able to pick up market share. Is that still the case? And then outside of industrial, it didn't seem like there's really any things getting worse or impacting results. Maybe just level set us on that.

Yes, I agree with you. Our teams are doing an outstanding job managing the supply chain. I should mention that everyone is working incredibly hard to achieve this during such an unprecedented time. This might be my third or fourth time expressing gratitude to my team, but without them, we wouldn't be in this position, and our performance has been strong. I appreciate that acknowledgment. I believe we are capturing some market share, particularly on the margins. This is largely due to the hard work of our teams, whether it be in our HVAC and combustion business, where we're focusing on more efficient, advanced variable speed motors and air-handling solutions, or in our climate distribution and European business. On the Commercial Systems front, I'm very enthusiastic about our digital customer capabilities and the market share we are forming with our small- and medium-sized customers, particularly with the new product we launched to comply with the 2021 pool regulations. This product is highly differentiated, more compact, offers better performance, and is competitively priced, allowing us to gain share. Lastly, our PTS business, now our MCS business, is doing an excellent job with their dedicated team focused on the powertrain and achieving some significant successes in conveying as well. Overall, I’m really excited about where we stand as a team.

Okay. Great. And then just on the '22, one, I appreciate the early color and I know it's early, but just can you give us a sense of what you think the pro forma free cash flow generation of the business looks like?

Yes, we believe that the pro forma cash flow generation will be a full conversion like we experienced with our legacy business, and we expect this to continue in the future. It’s still early, and we are currently working through our annual planning process. We will keep you updated as we approach the announcement of our fourth quarter earnings and discuss guidance again.

Our next question comes from Nigel Coe with Wolfe Research.

You had us a bit concerned with the delayed results. Some companies might do that to conceal issues, but it seems the acquisition was likely the cause. So we appreciate that. The outlook for 2022 is strong. I want to explore Arrowhead further. The 18% start with CAGR seems solid without much support from end markets, so I'm curious about the confidence in achieving low double-digit growth rates over the next three years. Does this business have a significant backlog that supports that expectation? Additionally, the $8 million synergy target appears somewhat conservative. I'm also wondering if there’s a cost synergy from legacy Regal providing components to Arrowhead and if that contributes to the overall synergy.

Yes, absolutely. A few points, Nigel. You're correct that we waited until this morning to allow the Arrowhead team to be informed before making the announcement. There’s nothing suspicious about that. Regarding growth, I slightly disagree with your perspective. The business is heavily focused on aluminum cans, and there's a notable trend moving away from plastics towards aluminum. Additionally, there is currently a capacity constraint in the U.S. aluminum can market, which will increase the demand for palletizers, depalletizers, and conveying systems. This shift towards more environmentally friendly solutions will also benefit the business moving forward. Furthermore, this acquisition enhances our knowledge of control systems and allows us to integrate our ModSort technology into their markets while bringing their products into ours, creating a mutually beneficial situation. Lastly, as you mentioned, there are chances for us to utilize our product portfolio in power transmission not only to sell to Arrowhead but also to reach Arrowhead's customers, which is advantageous all around. Regarding synergies, we appreciate your expectations. We aim to set and exceed our objectives, so I will ensure our team pushes to achieve the projected $8 million by year 3 and $12 million by year 5.

Great. And then just digging a little bit more into price/cost. I agree with Joe's math; it looks like mid-single-digit core growth is sort of like what the $5 billion reflects. Just wondering how much of that, I guess, mechanically today could be price as we wrap into '22. And I'm just wondering if you could just bring us up to speed on where we are with the NPS within climate.

Yes, certainly, Nigel. Let me address the last question regarding the NPS on climate. We have now caught up on the two-way material price formulas within the climate segment and other areas of our business, which were addressed in the third quarter, late second, and early third quarters. However, inflation is still going in the wrong direction, and there is typically a 3- to 4-month lag. We are starting to see the advantages as we conclude the third quarter and anticipate this trend to continue into the fourth quarter, which should provide a positive boost as we head into 2022.

And so I think, Nigel, for that reason, we're not quite ready to give you any more specificity for '22 on the impact of price or growth beyond what we've said.

Our next question comes from Walt Liptak with Seaport Research.

Congratulations, guys.

Thanks, Walt.

I wanted to ask a couple of questions regarding the positive comments about 80/20. It seems like everyone is aligned on the 80/20 concept. As you announce the deal, I’m curious about what this means for synergies and particularly for cost savings. Are there specific areas of savings, such as in factories or procurement, that 80/20 will enhance?

Yes, I wouldn't say so, not yet. We entered this with a clear understanding that the former Rexnord PMC group and the legacy PTS group were well-versed in the 80/20 principle, and that was integral to our synergy planning. It influences everything we do. We refer to the Regal Rexnord business system as a bus, with 80/20 acting as the steering wheel. This principle guides all our efforts, whether in new product development, operational synergies, or purchasing synergies. At this point, I wouldn't say it has changed our perspective on achieving $120 million by year 3, along with a healthy margin for potential upside.

Okay. Great. I would like some clarification regarding the Arrowhead business. Are you selling to food and beverage customers, or are you selling to systems integrators? Also, is there a situation where you might conflict with some of the installers, including your current customers?

Yes. We are selling to both types of customers. The Arrowhead offering includes depalletizers and palletizers, which do not overlap at all. There is some slight overlap with conveying, but our customers expect us to provide additional subsystems, which has contributed to the significant growth of our ModSort product over the last two years. Its revenue quadrupled two years ago and doubled last year, as customers seek us for subsystem solutions, and Arrowhead enhances that capability. We anticipate very little conflict from this acquisition and do not see it as a concern.

Our next question comes from Christopher Glynn with Oppenheimer.

Nice presentation today. Wanted to talk about the share gain comments around the industrial powertrain offering. Wondering if we could get into some examples of specifications, wins and what maybe changes you're implementing in terms of go-to-market there.

Yes, of course, Chris. We intentionally omitted an example from this earnings call because we anticipated going long. However, I encourage you to revisit the last two calls where we provided specific examples. We are seeing successes in various areas, such as warehouses with conveying systems. A notable case involved a customer facing issues with their gearing failing. We leveraged our application experience to identify that they had oversized the motor and lacked an optimal gear solution. We presented them with a cost-saving solution that significantly reduced their downtime, and we can substantiate every one of those claims with numbers that the customer can confirm. These are the kinds of examples where we are experiencing success. Frankly, our customers no longer possess the same level of engineering expertise and capabilities as before, but we do. We understand those products and solutions, and we know the best way to integrate a motor with a gearing system, couplings, and bearings to deliver a complete industrial powertrain, which is where we are seeing achievements. We will continue to highlight these benefits as we move forward.

Okay. Great. And then a clarification on the positive price/cost comments. Is that for an actual margin rate or OP dollars?

That's based on dollars. On a dollar basis, it is actually dilutive to our margins and leverage. While the price we are receiving does cover the inflation costs, it is still dilutive to the margin.

Yes. Chris, I'll just add on there. Historically, Regal has been very focused on price/cost neutral and being positive. We are now focused on price/cost positive because of that reason. And so I couldn't be more proud of the team and their efforts in getting us an improved price/cost position in the third quarter.

Our next question comes from Chris Dankert with Loop Capital. Yes. Chris, I'll just add that historically, Regal has been very focused on maintaining a price/cost neutral position and achieving positive results. We are now aiming for a price/cost positive position for that reason. I couldn't be more proud of the team and their efforts in improving our price/cost position in the third quarter.

I would like to inquire about the cost actions in the commercial and industrial sectors, which are currently facing significant challenges due to costs and inflation. Can you provide an update on the structural actions being implemented and what we can anticipate in the next 6 to 9 months?

Yes. So let's take commercial and take them out very quickly because I'd say they're performing very well. And no question that there is some pressures, but the team is doing a great job of leveraging 80/20, of rationalizing our products and solutions and making sure that we're getting a sufficient price. So I think you will continue to see solid performance out of Commercial System. Industrial, it is our biggest challenge, no question. Now you also know it's our lowest gross margin business. And so when you have lower gross margins, that means you have a higher material cost as a percentage of sales and so, therefore, a higher impact of inflation. You add that with the fact that you've got global supply chain disruptions at a time when we launch a new product in a new manufacturing location in Mexico that still has a long supply chain right now. And those delays are being realized in tough margin performance. Now we still see value creation for this segment. We still see a path to 8% to 11% as we discussed at our Investor Day, but it's certainly delayed. And so I would not expect any grand improvement in the fourth quarter, but we will continue to improve through 2022. And again, our goal is to get this business to 8% to 11%. I'll make one last point about the industrial business. I realize that industrial's EBITDA is 5% of Regal and will be less than 4% of Regal Rexnord. So we talk about it because it's a segment, but the reality is it has a small impact on the overall strong performance of Regal Rexnord.

Could you provide any updates on the pruning actions? You've been taking a focused approach to some of the cuts. Should we expect the pruning to continue at the current rate for the foreseeable future, or do you anticipate it will start to taper as we enter the new year?

Yes, I'd say that we focus on an 80/20 approach in all our discussions. Pruning will continue into 2022, although it will moderate slightly. We're concentrating on the quad analysis, which we review quarterly. Even as we evaluate new quads, such as the fourth one dealing with B customers and B products, we will still need to take action since they don't fit within Regal Rexnord. These customers can be supported through distribution, but we need to transition them to A products and grow alongside them, or they won’t be a good fit for us. While I expect the situation to moderate somewhat, you will still see us emphasize the 80/20 approach and pruning moving forward.

Congrats on the results on the deals here, guys.

Yes. Thanks so much, Chris.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Louis Pinkham for any closing remarks.

Thank you, operator, and thanks to our investors and analysts for joining us today. I hope you got a better understanding of why, despite so many external pressures confronting our business, I am excited about and confident in the future of Regal Rexnord. These external pressures are real. We are battling them daily, but we're also being disciplined about our execution on our organic growth and restructuring programs, pursuing PMC merger synergies and vetting new capital deployment opportunities as we think about how best to leverage our clean balance sheet and strong cash flow to keep enhancing shareholder value. Thank you again for joining us today and for your interest in Regal Rexnord. Have a good day.

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