Good day, and welcome to the Regal Rexnord First Quarter 2022 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference call over to Mr. Robert Barry, Vice President, Investor Relations. Mr. Barry, the floor is yours.

Great. Thank you, operator. Good morning and welcome to Regal Rexnord's first quarter 2022 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. 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 the presentation. We believe 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 first quarter financial results in detail and discuss updates to our 2022 guidance. We'll then move to Q&A, after which, Louis will have some closing remarks. And with that, I'll turn the call over to Louis.

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 Rexnord. I am really pleased to report that 2022 got off to a very strong start for Regal Rexnord, with solid first quarter operating performance plus significant progress on our M&A integration and longer-term growth and margin initiatives. In the quarter, the company achieved 15% organic top line growth, posted 280 basis points of adjusted gross margin expansion and realized 250 basis points of adjusted EBITDA margin expansion. Our top line performance was boosted by clearly identified bold share gains in many parts of our business, while our margin expansion was underpinned by, among other factors, achieving positive price cost and realizing strong merger synergies in MCS. And with first quarter orders up 10% and a record backlog, our revenue prospects are solid. Our PMC and Arrowhead integration activities are progressing nicely, and I'd like to congratulate the PMC integration team that through strong execution was able to accelerate a number of our synergy actions allowing us to start realizing savings a bit sooner than we had previously planned. While our results in the first quarter were strong, the global supply chain continues to be challenged, and new supply chain headwinds arose during the quarter related to COVID containment efforts in China. The good news is that our Regal Rexnord team has been successful confronting all challenges head on, and I believe that is apparent in our results and updated outlook. So before going any further, I'd like to say a sincere thank you to our 30,000 associates around the world. It is your disciplined execution, embrace of our 80/20 principles and continued adherence to our Regal Rexnord values even as we faced persistent personal and professional challenges, that is allowing us to serve our customers at a high level, gain share and meet our financial commitments while continuing to invest in our business. One of the things I am most proud of and most excited about as I look ahead, are the share gains our teams have been achieving in recent quarters. I attribute these gains to a number of factors, including execution that's a little better than some of our competitors. Our 80/20 mindset and our digital investments that are making it easier for our customers to transact with us. New product development has also been gaining momentum as our teams strengthened the muscle around driving customer intimacy and leveraging voice of the customer to make products that are purposeful for our customers and deliver value they are willing to pay for. Value we measure with the gross margins we earn on selling them. A common denominator of all new product development at Regal Rexnord is being mindful of our business purpose, creating a better tomorrow by energy efficiently converting power into motion. And while driving energy efficiency is essential to our purpose, our teams are also thinking more broadly about the environmental impact of our products. A great example is pictured on this slide. Our Rexnord branded Gear Drive sold through our MCS segment, which is commonly used in metals and mining, pulp and paper, and aggregates end markets. In the example pictured, a customer in the aggregates market was having to perform excessive oil changes because it did not have a good way of measuring oil quality in its prior gear drives. While run time is typically used to time oil changes, this is a rudimentary approach and often results in excessive cost and oil waste. In response, our Regal Rexnord engineers developed a continuous oil monitoring solution with an IoT sensor and control board that uses proprietary algorithms to identify when oil degradation has occurred. The result is increased run time, reduced frequency of oil changes, lower operating costs, and lower hazardous waste disposal. The gear drive is also equipped with remote monitoring capabilities, which connects to an online dashboard and enables robust diagnostics and prognostics resulting in further operating efficiency gains for the customer. A real win. Before turning the call over to Rob, I'd like to share some perspective on the operating environment expected in the second quarter. As you may remember, when we set our guidance for this year, we decided to take a more conservative approach capturing our strong orders and record backlog, but retaining some caution around supply chain constraints and inflation. In short, I am glad we did because unfortunately, the operating environment became riskier during the first quarter related mainly to the situation in Ukraine and to a lesser extent, the China government's COVID containment efforts. The situation we are experiencing in China included a whole city lockdown in Shanghai starting on April 1. The local port is open, but logistics around it have been restricted. For Regal, a couple of our facilities were impacted, but we're able to resume partial production earlier this week and should be fully operational in May. However, we continue to confront challenges related to a number of our suppliers not being fully operational. Fortunately, all of our associates in the region are safe. Notably, vaccination rates among our team in China are nearly 100%. As a result of the lockdown, our sales have seen a modest negative impact to start the second quarter. However, net of expected catch-up activity and assuming current plans for relaxing recent government COVID containment protocols, we believe the ultimate net impact will be minimal for Regal Rexnord. Turning to Ukraine, I think it goes without saying that the situation is both horrifying and saddening, and our thoughts and prayers are with the people of Ukraine. From a business perspective, Regal Rexnord has very little exposure to either Russia or Ukraine. That said, the macroeconomic ripple effects of the crisis are just starting to be felt, but likely raise risk to the macro outlook in Europe and perhaps more broadly. I'm not going to speculate. But rest assured that we are monitoring the situation closely and will remain focused on what's under our control, keeping our associates safe, executing our M&A synergy plans, continuing to pursue our numerous growth and margin expansion initiatives, and remaining balanced when it comes to capital deployment. And with that, I'll turn the call over to Rob to take you through our first quarter performance in more detail.

Thanks, Louis and good morning, everyone. As you heard, Regal Rexnord had very strong results in Q1 despite having to navigate a number of persistent headwinds. So I'd also like to send my thanks to our global team for executing with discipline in this challenging environment. So now let's turn to our first quarter segment financial performance. Starting with our Motion Control Solutions segment, or MCS, Organic sales in the first quarter were up 9.9% from the prior year. The result reflects broad-based growth but with particular strength in the general industrial, forestry, and agricultural end markets, partially offset by lapping prior year large project activity in the wind and helicopter aerospace markets. As in recent quarters, supply chain disruptions continued to impact our ability to deliver, resulting in increased backlog and posing a headwind to the top line. And this theme of supply chain-related backlog build can be said for all of our segments. Adjusted EBITDA margin for the quarter for MCS was 24.8%, down 140 basis points compared to the prior year, factoring in commodity inflation, higher freight costs, updated corporate cost allocations, and FX headwinds, largely offset by tailwinds related to favorable price realization, merger synergies, restructuring actions, higher volumes, and mix. These results were in line with our expectations, and we remain on track to deliver the targets we set when we announced this transformative merger. Orders in MCS for the quarter were up approximately 7% and are tracking slightly down in April due primarily to some of the lumpiness resulting from a few large project orders in the prior year month, both on a daily basis. Turning to Climate Solutions. Organic sales in the first quarter were up 14.9% from the prior year. The increase was driven by broad-based strength, but particularly in North America residential HVAC and in EMEA and North America general industrial. The business also continued to achieve nice market share gains in the quarter. The adjusted EBITDA margin in the quarter for climate was 21.1%, down 20 basis points versus the prior year period. Factors impacting this margin include commodity inflation, higher freight costs, and supply chain-related frictions, largely offset by price realization, restructuring savings, and positive mix. Orders in climate for the quarter were up approximately 11% and are down modestly in April, which we see as timing related, and we fully expect to move back to at least neutral within the next few weeks, despite tough order comps based on our customers' forecasts. Turning to Commercial Systems. Organic sales in the first quarter were up 24.8% from the prior year. Growth in the quarter reflects strong performance in North America General Industrial, pump, and large commercial HVAC. Our commercial business also continues to achieve meaningful share gains in the North America general industrial market tied to some of our digital investments. The adjusted EBITDA margin in the first quarter for Commercial Systems was 21.1%, up 510 basis points compared to the prior year, reflecting favorable price realization, positive mix, and volume growth, partially offset by commodity, freight, and other non-material inflation in addition to costs associated with supply chain disruptions. While performance was strong in the Commercial Systems segment during the quarter, and the team is executing extremely well, a portion of the strong EBITDA margin performance was related to the annual inventory revaluation at the beginning of this year and the timing of the associated inventory movement. We expect the segment's EBITDA margins to return to more normal levels in a range of roughly 15% to 17% through the remainder of the year, as the inventory included in the annual revaluation is sold. Shifting to orders. Segment orders for the first quarter were up 11% and April is tracking roughly flat, which is also consistent with our Q2 expectation. In Industrial Systems, Organic sales in the first quarter were up 7.1% versus the prior year. Principal drivers include strength in Americas general industrial markets, partially offset by weakness in Asia. The adjusted EBITDA margin in the quarter for Industrial was 8.4% as we continue to improve the operational performance of this segment. Orders in Industrial for the quarter were up approximately 16%, and are tracking at a similar rate in April, both on a daily basis. On the following slide, we highlight some key financial metrics for your review. A couple of notable highlights. First, on the right side of this page, you'll see that we ended the quarter with a net debt-to-EBITDA ratio of 1.7 times or 1.5 times on a pro forma basis. Second, our free cash flow in the quarter was negative $19.3 million. While we historically see a slow start to free cash flow at the beginning of the year, these results were slightly below our expectations. The supply chain headwinds have impacted our inventory balances at quarter end, a bit more than initially expected. We see this as timing related and fully expect to achieve at least a 100% free cash flow conversion rate for the year. Finally, we spent $114 million on purchasing our shares in the first quarter and now have $320 million remaining on our share purchase authorization. Moving to the outlook. We are raising our expectation for adjusted earnings per share to a range of $10.10 to $10.70 from our prior range of $10 to $10.60. The range continues to assume a mid- to high-single digit revenue growth rate. Now before we go to questions, I'd like to touch briefly on our decision to align our inventory accounting approach from LIFO or last in, first out to the FIFO or first-in first-out method. As of January 1, 2022, the company had just under 50% of its inventory, all in the U.S. accounted for under the LIFO method and the remaining 50% under FIFO. Aligning the enterprise on one methodology provides for better consistency, resulting in improved comparability across segments, regions, and business units. Making this adjustment now at the start of the first full year following the recent merger with Rexnord PMC and the acquisition of Arrowhead Systems also makes sense. In addition to the consistency and improved comparability benefits, FIFO allows for better matching of cost of goods sold revenues in a given period, and it reduces the administrative burden of determining LIFO equivalent valuations. From a guidance perspective, this accounting change has only a negligible impact because we had not anticipated any additional LIFO related expense in our 2022 outlook to begin with. And the cash tax implications resulting from this change should not impact our ability to achieve our targeted 100% annual free cash flow conversion. We've included a table in the appendix of this presentation to reconcile the moderate impact of this change on our P&L. I will wrap up this call by saying that we are very pleased with the Q1 results and our team's ability to execute in an extremely challenging environment. We are meeting all of our expectations with the merger as well as the newly acquired Arrowhead business. And our outlook remains very positive, considering we are still in the early stages of our continued transformation. And with that, operator, we are now ready to take questions.

Thank you. We will now start the question-and-answer session. The first question will come from Mike Halloran of Baird. Please go ahead.

Hey. Good morning, everyone.

Good morning.

Industrial orders up, it sounds like the rest of them were closer to flattish cumulatively. But you also have a pretty robust backlog. Maybe talk about the relationship you see between the orders and the backlog as you work through the year here. Obviously, some level of slowing and orders was inevitable given how the backlog has materialized, but maybe put that in context of how you're thinking about the revenue growth, the underlying demand and how this matching or mismatching materializes as you move forward, if that question makes sense.

Yeah. Completely, Mike. I will clarify a couple of things, though orders were up 10% in Q1. And actually it was actually...

Yeah. Sorry, Louis. I apologize. I meant in April, I apologize. What that your

No, that's okay. That's okay. I will make a point though, when you think about some of the businesses and you look at the compares year-over-year, for example, April last year, orders were up 100% for our Climate business. And so the compares are a little bit tough. Nevertheless, you're right, we've built a pretty strong backlog. Our backlog is roughly up 30% year-over-year in Q1. And if you looked at it at ending backlog, the end of the year was actually up 60% year-over-year. And so the backlog is quite healthy and strong. We are not anticipating a significant reduction in backlog through this year in our current guidance. And that's a conservative approach bluntly. It's all around the supply chain and the murkiness and volatility that we see. We still believe that there's strong demand in most of our markets served. And so from that perspective, we're feeling pretty good about the opportunity for this year and the progression through the year and the backlog will certainly support it. Does that help, Mike?

Yes. No, that does. And the follow-up, I suppose, is when you think about the order patterns from a customer perspective, do you get a sense that there was a pull forward of some of these orders? And so inevitably, you get maybe an order air pocket, but that's already assumed in backlog? And maybe just a discussion on inventory levels and purchasing patterns at your customer level?

Yes. So it's a great question. As lead times have extended, the ERP systems of our customers ramp up their minimum order quantities and demand requirements. Really no different than what we're dealing with our supply chain as well as our supply chain lead times have increased. We've certainly ramped up our needs as well. So I think there's some of that. When we think about Q2 as an example, we're forecasting orders in Q2 to be relatively flat compared to last year. Now from a full year perspective, we do expect orders to be up year-over-year, but Q2, we expect them to be relatively flat. So yes, I absolutely believe because of the supply chain challenges that our customers have and the longer lead times, our customers have placed a bit stronger demand on us to satisfy those requirements.

Thanks for the color. I appreciate it.

Next, we have Jeff Hammond of KeyBanc.

Hey. Good morning, guys.

Good morning.

Good morning, Jeff.

Regarding the order movement you mentioned, Louis, some markets are still performing well, while others may be experiencing a slowdown. Can you discuss where you see genuine demand challenges versus just temporary fluctuations or supply chain issues?

And I would tell you, Jeff, it's already embedded in our guidance, but wind is a market that we've seen soften mostly because of larger projects last year and the compares. We are seeing some softening in China, moderating, certainly concerns around COVID lockdowns. And then we have concerns around EMEA as well. Now, we haven't really seen that in a demand or order slowdown bluntly. We did initially, but that rebounded through the quarter at our European operations and businesses, but that's a current concern for us. Otherwise, everything is quite strong and positive. And so yeah, we feel good and part of the reason why we raised our guidance slightly because we feel good that the demand is still there and there's still strengthening that demand. So really, from a market perspective, other than wind and a little bit in China, we think the overall demand is still healthy.

Okay. Very helpful. And then, just in MCS, Rob, I think you mentioned some corporate allocation. I'm just wondering what the core incremental margins were in MCS? And if there was a synergy number that you were able to give us in 1Q and kind of how that builds through the year.

Sure. The incremental margins in MCS were slightly lower than usual due to the inflation impacting the business, including freight costs and other inflationary pressures. We anticipate that business will perform above 30%. Regarding synergies, we realized about $8 million to $10 million in the first quarter, which aligns well with our expectations and is tracking slightly ahead in terms of synergy realization.

Okay. And how do you see that building? I mean, I guess on the point of kind of the temporary price cost dynamics, freight and then the build in synergies, like just trying to get a better sense of kind of how the margins kind of trend through the year? Is this the low point, et cetera.

Yeah. So let me give you some color on that. So the margins in MCS the expectations there that the margins will continue to improve every quarter as we go through the year. And that is absolutely tied to the performance that we're talking about and on the synergies and realizing those synergies. And as we said, we have good visibility and are very confident in our ability to achieve the $70 million exit rate as we come out of this first year.

Okay. I appreciate it, guys.

Great. Thank you, Jeff.

And next, we have Nigel Coe of Wolfe Research.

Thanks. Good morning, everyone.

Good morning, Nigel.

Good morning, guys. Going back to the orders, I mean, you've got really, really impossible comps coming up. So I want to just focus more on the book-to-bill. I mean you talked about the backlog build during 1Q, very healthy. But what about April? Even though you had down orders, are you still building backlog in April?

We do not expect to build additional backlog in April. Our book-to-bill was around $1.1 million in the first quarter, and we anticipate it will remain relatively stable in the second quarter.

Okay. Thanks. That's helpful. And then just going back to FIFO, the commercial margins. So it sounds like this was maybe a consequence of this change from LIFO to FIFO the push through on the commercial margins. Number one, is that correct? And then secondly, any way to think about what the benefit would have been intra quarter for 1Q from that change?

Thank you for the question. Let me clarify that the first quarter commercial margin was primarily influenced by the annual inventory revaluation and the timing of the inventory movements included in that revaluation. When performing your cost roll, there is an assumption of perfect timing with your inventory turns. However, when there is a timing discrepancy, as occurred in commercial, it results in higher flow rates. In simpler terms, less inventory passed through in the quarter than we anticipated during the revaluation process. This situation is unrelated to the shift from LIFO to FIFO. Regarding your second question about the impact of that change on the business, it is minimal. The impact for Q1 would have been very minor and is not the reason for the improvement in commercial margins. We estimate that the effect in commercial was around $10 million. If you adjust for that amount, the commercial margins would be around 17% compared to the reported 21%.

Nigel, I want to add to that because when you consider our commercial systems business, I've mentioned several times that it's a diamond in the rough. We are beginning to see some of the benefits. Even when we exclude the cost reroll, we achieved around 17% to 18% EBITDA margins this quarter, which is solid. Our performance was strong across the board, with robust new products. Our digital customer capabilities have improved, allowing us to gain market share and enhance our service levels, which have helped us outperform competitors. Thus, commercial had a very strong quarter. As Rob mentioned, we anticipate a slight moderation, and we believe that EBITDA margins will settle into the 15% to 17% range for the rest of the year, but Q1 was an excellent quarter for our Commercial Systems business, and I am extremely proud of that team.

Yeah. 15% to 17% is still very healthy. Okay, Louis. Thank you very much.

Sure.

Next, we have Chris Glynn of Oppenheimer.

Thank you and Good morning.

Good morning, Chris.

Curious in MCS, if you think about the Rexnord piece here, they've got a nice aerospace business. I think it's OE centric. So a little bit of a delay versus the aftermarket cycle. But how is that looking for ramp intensity as you move through the quarters this year and what effect might that have on EBITDA margins relative to the first quarter, maybe a bit similar to how you talked about commercial subsequent to 1Q?

Yes. So we do have a solid strong aerospace business pre-Covid, it's about $250 million in revenue, that's about $50 million from the legacy Regal and $200 million from Rexnord. That business has been rebounding strong orders growth. We expect revenue to continue to grow through the year. I would tell you the margins in that business are not quite at our fleet average. And so we're working those and we see a clear path to get those to our fleet average. More of the benefit of the MCS EBITDA improvement is going to come from the synergy. And we see a step function every quarter as the quarter progressed this year. And again, more from synergy benefit than from aerospace.

Great. Thanks. And then overall, just going back to the FIFO change. So as product expenses and inflation push a little right, how should we think of that impact? Do you expect to maintain price cost positive every quarter this year, like for the last five plus?

Yeah. Short answer on that one is absolutely. We have great confidence in our team's ability to implement price increases on our non-contracted business effectively to cover off on inflation and then our two way material price formula as well. There is often a bit of a lag, we're very confident that those will catch up, but we think we will be price/cost positive every quarter this year.

And Chris, it's actually been 18 quarters that we've been price/cost positive, and I couldn't agree with Rob more the way we manage our business, our cadence, our 80/20 approach, we will manage through the inflationary period, which we do expect, but we will be price/cost positive.

Great. Appreciate the color. Thanks.

Sure.

The next question we have will come from Julian Mitchell of Barclays.

Hi. Good morning.

Good morning.

Good morning. Maybe just the first question around what you're seeing and sort of expecting in the U.S. consumer or resi facing businesses. You did not call those out as a narrow of concern. It's clearly something investors that were extremely concerned about right now. So maybe help us understand kind of how you see those resi orders in climate playing out this quarter and also sort of expectations around the pool segment within commercial? And just sort of how you're assessing kind of sell-through, sell-in dynamics in that U.S. resi market.

Julian, I'll handle that. First, we believe the underlying demand in the market is very strong. We expected a slower growth rate in orders for climate, mainly due to challenging comparisons. As I mentioned earlier, orders were up 100% year-over-year in April. Our climate backlog increased by 20% year-over-year at the end of the first quarter and was up 60% year-over-year at the end of last year, indicating a robust backlog. We also see opportunities for restocking due to supply chain issues. We collaborate closely with our OEMs and have a clear understanding of their work-in-progress inventories. We've been unable to supply enough variable speed motors to meet their demand. Given the strong residential new construction, we believe we are gaining market share, particularly in the variable speed motor sector, where we can stand out due to our technology and service levels. We are optimistic about the future. Long-term trends such as remote work, indoor air quality, and the regulatory changes in 2023 will positively impact our climate business, particularly in 2022. Regarding pools, it’s important to note that this segment represents only about 3% of our sales. While some inventories in the channel are high, those do not belong to us, and we have verified this. We maintain strong connections with our distribution channel and OEMs. Considering the pooled DOE regulations that were implemented in the first half of last year and the favorable secular trends, such as the movement toward the South, backyard living, millennials entering the housing market, and urbanization, we see significant benefits. Our OEMs and distributors are performing well, and our new product development efforts have led to a recently launched product that is more compact and energy efficient than our competitors, providing us with a strong tailwind. Even though pools constitute a small portion of our business, we see a significant positive impact.

Thanks. And then just my second question would be sort of any high level context you could give us around the second quarter expectations. I realize you don't give explicit sort of quarterly financial guidance, but there is a sort of a fast-moving macro context here. So should we think about second quarter being sort of sales up slightly sequentially, maybe margins down slightly sequentially. Is that the right kind of framework.

Yes, Julian. Rob here. I'll address that. You are correct that we typically do not provide much detail about the upcoming quarter. However, given the market volatility, it is certainly beneficial to share some insights. To start, we anticipate the top line to be relatively stable or slightly increasing from the first to the second quarter. Regarding margins, we expect the EBITDA margin to remain largely unchanged in the second quarter compared to the first quarter, although there may be some fluctuations across segments. As previously mentioned, we foresee commercial margins to be in the range of approximately 15% to 17% over the next few quarters, which will also apply to the second quarter. We expect industrial performance to continue improving in Q2 and beyond due to the operational enhancements made in that area. Climate is expected to remain flat compared to the first quarter, and as I mentioned earlier, MCS is showing moderate improvement as we progress through the year. When developing our forecast, we are considering the current supply chain challenges, which we assume will remain relatively stable. However, we also anticipate a slight recovery in China around May. Ultimately, the situation could be slightly better or worse than what I have outlined, but this represents our current perspective.

Very helpful. Thank you.

Great.

The next question we have will come from Chris Dankert of Loop Capital.

Hey. Thanks for taking the question.

Hi, Chris.

I guess zooming out a little bit to a higher level here. A couple of years back, we highlighted some of the product rationalization efforts and some targets there. I guess any kind of update as specifically as you want to get by segment or kind of overall just on how far we are along down that path on product rationalization here?

Yes. Good question, Chris. I'd say different by different segments, climates and really good, solid position, probably not much more to do. Commercial is still working through and really driving 80/20 and thinking, as we've talked previously, Regal is a formation of a number of different motor companies and then rationalizing the SKU levels there. I'd say we're probably halfway to slightly above that. Industrial will continue to work pruning and managing our SKU counts and to drive to higher margins. That's a big part of our 80/20 initiatives there. And then lastly, our MCS, the nice part about MCS of bringing these two strong businesses together is product line simplification in a number of spaces. We've just reviewed something the other day that will be able to take more than 50% of our SKUs out of a product line and see over time, $10 million of incremental savings that we haven't even baked into our plans yet. And so there's opportunities still out there. What you can be assured of Regal Rexnord is that we drive 80/20, and we will constantly evaluate segment reevaluate to understand how best to service our highly valued customers, but also to move more and more of our products to a more streamlined product landscape. So I'm not giving you exact numbers here, Chris, but I'd tell you there's still plenty of self-help that we have here.

No, that's a really helpful update. Thank you for walking through that. The follow-up I have is about footprint consolidation, specifically for industrial. The historical plan was to cut out about eight locations. Looking back at your filings, it seems we haven't made much progress there, if any at all. Am I misreading something in the filings? Have there been closures? Is the supply chain slowing down some of that footprint consolidation? Any comments on industrial and how that square footage rationalization is progressing would be appreciated.

I'm not sure where the eight number is coming from. Since I've been at Regal Rexnord for three years, that has never been a significant part of our plans. Our main focus has been on moving much of our production out of China to establish a regional capability with our MGM facility in Monterrey. There, we consolidated two facilities into one and expanded that site. While there might be one more consolidation in the future, I don't think we are looking at a lot of additional footprint rationalization in industrial. Most of our efforts have been on starting up the Monterrey facility, and I'm very satisfied with its production and output, which is also helping to improve our supply chain. Our supply chain in industrial has been lengthy, and we've been significantly rationalizing it over the last two years by getting our suppliers closer to our manufacturing facilities. I hope that answers your question; again, I don't know where that eight site rationalization is coming from. Sorry about that.

Yes. No worries. I'll follow up a little bit offline, but thanks so much for the color. And again, congrats on a really nice start to the year here.

Yeah. Thank you very much.

Next, we have Walt Liptak of Seaport Research.

Hey. Good morning, guys. I'll chime in with a congratulations to a strong start too.

Thanks, Walt.

I wanted to ask first about the pricing strategy. And in the first quarter of the organic revenue growth, can you give us an idea of how much was unit volume growth versus selling price increases?

Sure. So the growth in the first quarter was primarily the market and price. Now price made up the majority of the organic growth that we're seeing and what we communicated during the call.

Okay. Great. Okay. Perfect. And then inventory levels, you had the nice build in the quarter to protect against uncertainty. Are you expecting inventories will come down later in the year or will you continue to build them or keep them at this level?

We absolutely expect inventory levels to decrease by the end of the year. In fact, we anticipate that inventory will generate cash as we finish this year, and it will be a strong contributor to our free cash flow conversion and operating cash flows.

Okay. Great. And then, excuse me, of the $70 million in synergies, can you give us an update just on how much are you into that, to getting to that $70 million target? You mentioned the $8 million to $10 million so far that you got in the first quarter. But where are we in that journey to the $70 million?

We have a very clear path ahead. We’ve been able to achieve the general and administrative indirect and footprint-related synergies faster than anticipated, which makes me feel optimistic. There is some uncertainty regarding the timing of sourcing savings; we might be a bit behind on direct material. However, overall, we are ahead of our targets. As Rob mentioned, we expect $8 million to $10 million in the first quarter, and that figure will improve as the year continues. This will contribute to the EBITDA margin enhancement in MCS, and we have a clear plan to reach a $70 million run rate by the year’s end, possibly even exceeding that.

Okay. Great. Okay. Thanks for the color.

Sure.

Thanks, Walt.

Sorry, no additional questions at this time. We'll go and conclude our question-and-answers session. I would now like to turn the conference call back over to Mr. Louis Pinkham, CEO, for any closing remarks. Sir?

Great. Thanks, operator. And thanks to our investors and analysts for joining us today. As I look ahead to the remainder of 2022, despite the many challenges we are facing, what keeps me excited is the sizable opportunity for value creation that is under our control. From our new product development pipelines, our outgrowth initiatives, ongoing restructuring actions, sizable merger synergies to a tremendous opportunity tied to capital deployment. I am confident that the best days for Regal Rexnord for our customers, our shareholders, and our associates remain firmly ahead of us. Thank you again for joining us today, and thank you for your interest in Regal Rexnord. Have a good day.

And we thank you also, sir, to yourself and to the rest of the management team for your time. Again, the conference call has now concluded. At this time, you may disconnect your lines. Thank you. Take care and have a blessed day, everyone. Thank you.