Good morning and welcome to Regal Rexnord's Third Quarter 2024 Earnings Call. All participants will be in 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 over to Rob Barry, Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning and welcome to Regal Rexnord's third quarter 2024 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Chief Financial Officer. I'd like to remind you that during today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we described in greater detail in today's press release and in our reports filed with the SEC, which are available on the regalrexnord.com website. Also, on this slide, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors and we've included reconciliations between the non-GAAP financial information and the GAAP equivalents in the press release and in these presentation materials. Turning to Slide 3, let me briefly review the agenda for today's call. Louis will lead off with his opening comments, an overview of our 3Q performance and an update on our powertrain business. Rob Rehard will then present our third quarter financial results in more detail and review our latest guidance. We'll then move on 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 third quarter results and get an update on our business and for your continued interest in Regal Rexnord. I believe our third quarter can be characterized by significant and strong controllable execution by our team. As an enterprise, we achieved a record adjusted gross margin of 38.4% and a record adjusted EBITDA margin of 22.8%, which is up 110 basis points versus prior year on a comparable basis. Our largest segment, IPS, had a very strong quarter, achieving positive organic growth in weak markets, which we believe provides clear evidence its outgrowth initiatives are gaining momentum. In addition, IPS posted another quarter of very strong, record adjusted EBITDA margins aided in large part by achieving planned synergies. That said, we were disappointed in our overall third quarter sales results with sales down 2.7% on a comparable organic basis, driven mainly by our AMC and PES segments facing end-market headwinds that continued to be more severe than we expected. In particular, we saw larger headwinds in discrete automation in AMC and in general commercial and non-US commercial HVAC markets in PES. And while our residential HVAC business within PES has started to see signs of stronger demand, we have not been able to ramp our capacity fast enough to keep up with it, weighing on our service levels. We expect this to be largely resolved during fourth quarter. Despite these headwinds, we are seeing growing momentum behind our various cross-sell initiatives, which helped IPS achieve positive growth in the quarter. I will highlight a notable example later in the presentation. And before digging deeper into our results, I want to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution, navigating through persistently choppy end markets, while also continuing to advance our many longer-term value-creation drivers. We discussed these value-creation opportunities in some detail at our September 17 Investor Day. For those who were not able to attend, I think you would find it worthwhile to review the materials, which are available on our investor site. Expanding on third quarter results. Orders in the quarter on a daily basis were up 2.5%. The growth was led by IPS, followed by AMC and while weighted to longer-cycle bookings helps give us confidence that we will see better top-line performance in 2025. In October, daily orders were down less than 1%. Despite third quarter top-line pressures, margins in the quarter were strong. Our adjusted gross margin came in at a record 38.4%. Adjusted EBITDA margin was 22.8%, up 110 basis points versus the prior year on lower volumes. That translates to $7 million of adjusted EBITDA growth on a roughly $44 million revenue decline. We think very strong performance for our business with over 38% gross margins and reflects achieving $27 million of synergies in the quarter, along with strong cost management by our teams. Regarding synergies, we remain on track to achieve $90 million this year, after which we will have another $120 million of cost synergies to realize, largely in '25 and '26 and worth about 2 points of margin. Adjusted earnings per share in the quarter were $2.49, which is up 18.6% versus prior year and a clear inflection point for Regal. Lastly, we generated $126 million of adjusted free cash flow in the quarter, which contributed towards paying down debt. In summary, a good quarter of controllable execution by our team, coupled with some encouraging performance on orders. At our September Investor Day, we presented our detailed strategy for accelerating profitable growth. Each quarter going forward, I plan to highlight a product, case study, or initiative that shows our growth strategy in practice. This quarter, it is a powertrain win that demonstrates how we are providing differentiated value-add for our customers and getting paid for it through value pricing. Pictured on the left side of this slide is a powertrain we designed for a mining customer. Its principal components are called out on the diagram. Nearly a hundred of these powertrains will be installed to power and control motion across the mine's vast network of conveying infrastructure, which will move potash from deep inside the mine and then, once on the surface, through a network of ore-processing operations. Various pieces of the conveying infrastructure are being direct shipped to the mine site where they will be assembled. To help minimize the degree of on-site assembly, the customer valued being able to receive the powertrain from us as a fully-assembled, fully-integrated solution. Our engineers were also able to address all of the mine's power and motion needs with only three sizes of the powertrain pictured, down from the five originally conceived by a third-party integrator, further reducing complexity. This is a great example of how our team's understanding of the customers' application resulted in valuable design enhancements. While not directly part of the powertrain and not pictured on this slide, our innovative RexPro conveyor chain is also being sold as part of the project. The RexPro solution arrives in a manageable length that can be easily assembled into longer strands using simple fasteners and tools, a much easier, safer, and faster assembly process versus competing products. Winning this RexPro business also reinforces how we are selling Regal's broader portfolio to our valued customers. A notable feature of this powertrain win is that we are being paid a premium specifically tied to integrating the motor into the drivetrain, leveraging our motors and powertrain expertise. The motor's precise alignment in the subsystem is critical to its functionality and efficiency under the harsh operating conditions at the mine. As you can see on the lower right portion of the slide, the value of our complete solution engineered for ease of install by a customer coordinating content from a global set of suppliers for assembly at a remote site all earned Regal Rexnord a nice price premium above the individual component cost, while still helping our customers save time, money, and reduce project risk. This win helps validate our powertrain strategy and our strategic focus on a subset of high-value verticals where we have deep domain expertise, motors expertise and a highly engineered power transmission components that are truly valued by our customer. On top of all of this, the harsh-duty nature of this application leads to a significant aftermarket opportunity for our business, which we forecasted to be approximately six times the value of the initial product sell, at even stronger margins. This is another example of what we discussed at Investor Day, creating a more durable business through stronger and stickier relationships with our customers, along with significant aftermarket revenue potential. My congrats to the team for this fantastic win. And with that, I'll turn the call over to Rob.

Thank you, Louis, and good morning, everyone. I would also like to express my gratitude to our global team for their hard work and disciplined execution during the quarter. Now, let's go over our operating performance by segment. Starting with Automation and Motion Control, or AMC, net sales in the third quarter decreased by 4.1% compared to the previous year on an organic basis. This decline reflects weakness in discrete automation, which was partially offset by strength in the aerospace and defense, food and beverage, data center, and medical markets. In Discrete Automation, where our growth expectations were not met, the shorter-cycle business remained weak as distributors maintained low inventory levels for smaller projects, which are developing slower due to increased caution in the market. This caution seems to be linked to persistent weakness in the ISM, slower benefits from interest rate cuts, and uncertainty related to the upcoming US elections. AMC's adjusted EBITDA margin for the quarter was 21.8%, falling short of our expectations due to lower volumes, a weaker mix, particularly in discrete automation, and larger-than-anticipated foreign exchange pressures. Orders for AMC in the third quarter increased by 4.5% compared to the previous year on a daily basis, marking the second consecutive quarter of positive orders. The book-to-bill ratio for AMC in the third quarter was 0.9. We are encouraged by the positive orders trend in discrete automation for the second consecutive quarter. Although some large project orders aided this growth, automation orders would have been largely flat even without these wins. The third quarter also saw a positive shift in order growth in food and beverage, which is promising after a prolonged period of weakness in that sector. Additionally, we continue to see strong performance in aerospace, data centers, and medical. In October, orders for AMC were down 11.5% on a daily organic basis, primarily due to inconsistent, longer-cycle project activity in discrete automation. Given these factors, we believe that the October order performance should be viewed relative to AMC's recent order trends. The weighted average of orders from the second quarter, third quarter, and October, all weighted toward longer cycles, is about 5%, which enhances our confidence that AMC will deliver stronger top-line performance in 2025. Moving on to Industrial Powertrain Solutions or IPS, net sales for the third quarter rose by nearly 1% on an organic basis compared to the prior year. This increase was driven by strong performance in energy, aerospace, and metals and mining, offset by weakness in alternative energy and machinery off-highway markets. Cross-marketing synergies contributed a couple of points of growth during the quarter. We believe IPS's third quarter results reflect outperformance compared to our end-markets. However, it fell slightly short of our expectations due to some incremental weakness in certain short-cycle general industrial end-markets that tend to correlate with the ISM. The adjusted EBITDA margin for this quarter was 26.8%, exceeding our expectations and improving from the previous year. This strong performance is due to higher volumes, a better mix, and cost synergies. Orders in IPS on a daily basis climbed nearly 6% in the third quarter, indicating we are gaining some sequential momentum, reflecting growth in both the distributor and OEM channels. The book-to-bill ratio for IPS in the third quarter was approximately 1.0. In October, orders on a daily organic basis increased by 6.6%, which we believe continues the positive momentum and market outgrowth noted in the quarter. Turning to Power Efficiency Solutions or PES, net sales in the third quarter fell by 6.2% compared to the previous year on an organic basis, which was below our expectations. This decline primarily reflects challenges in the general commercial market and in commercial HVAC outside of the US. The shortfall compared to our previous forecast is attributed to additional weakness in both markets and a slower-than-anticipated ramp in residential HVAC capacity. Let me elaborate on the residential HVAC situation. This market has faced pressure for nearly two years due to weak end-user demand and significant inventory destocking. While we believe that destocking has concluded, end-user demand continues to be weak, and forecasts from our OEM customers indicate this trend will persist into next year. However, in recent months, we have begun to observe a strengthening in demand, mainly from a segment of our customers who seem to be pre-building residential HVAC units in anticipation of upcoming regulatory changes. Our team is working to increase production in response but has faced challenges in keeping up with demand for several reasons. Firstly, we did not foresee the significant pre-buying activity from our OEM customers, partly due to limited visibility and fluctuating messages about their demand plans linked to the refrigerant transition. Secondly, some suppliers have struggled to boost their own production capacity after two years of demand declines. We are actively working to increase our capacity as quickly as possible. In the third quarter, our residential HVAC sales saw a sequential increase of over 10%, notably higher than the typically flat seasonal demand pattern. We are continuing to make progress and, as Louis mentioned, we should be able to catch up in the fourth quarter with our now strong residential HVAC backlog, which will help enable positive growth for PES this quarter. Additionally, it's worth noting that the surge in market demand driven by pre-buying activity is largely focused on smaller HVAC systems, where we are less concentrated, while larger systems, which align with our premium efficiency solutions, saw a year-over-year decline in the quarter. These trends are reflected in the AHRI data. Regarding segment margins, the adjusted EBITDA margin for PES in the quarter was 17.8%, which aligns with our expectations but is down from the previous year due to lower volumes and a weaker mix. We appreciated the team's efforts to meet our third quarter margin commitment for PES, demonstrating strong cost management. As for orders, orders in PES for the second quarter were down 3% on an organic daily basis, though there was sequential improvement. The decline in orders reflects the end-market challenges I previously mentioned as well as our slower ramp-up in residential capacity. The book-to-bill ratio for PES in the quarter was 1.01, which is encouraging and aligns with our expectations for positive growth in this segment for the fourth quarter. Daily orders for PES in October decreased by 1.5%, also reflecting the same dynamics that impacted the performance in the third quarter. However, we noted improved residential HVAC orders sequentially in October and anticipate further improvements as the fourth quarter progresses. On the following slide, we provide additional financial updates for your reference. Notably, we concluded the quarter with total debt of approximately $5.7 billion and net debt of $5.2 billion. We repaid about $114 million of gross debt in the quarter, totaling $730 million year-to-date, and we remain on schedule to reduce our debt by $700 million this year. Adjusted free cash flow for the quarter was $125.5 million. We have consistently directed the majority of our free cash flow towards debt reduction, and that will continue to be our strategy moving forward.

In summary, a good quarter of controllable execution by our team, coupled with some encouraging performance on orders. At our September Investor Day, we presented our detailed strategy for accelerating profitable growth. Each quarter going forward, I plan to highlight a product, case study, or initiative that shows our growth strategy in practice. This quarter, it is a powertrain win that demonstrates how we are providing differentiated value-add for our customers and getting paid for it through value pricing. Pictured on the left hand side of this slide is a powertrain we designed for a mining customer. Its principal components are called out on the diagram. Nearly a hundred of these powertrains will be installed to power and control motion across the mine's vast network of conveying infrastructure, which will move potash from deep inside the mine and then once on the surface through a network of ore-processing operations. Various pieces of the conveying infrastructure are being direct shipped to the mine site where they will be assembled. To help minimize the degree of on-site assembly, the customer valued being able to receive the powertrain from us as a fully-assembled, fully-integrated solution. Our engineers were also able to address all of the mine's power and motion needs with only three sizes of the powertrain pictured, down from the five originally conceived by a third-party integrator, further reducing complexity. This is a great example of how our team's understanding of the customers' application resulted in valuable design enhancements. While not directly part of the powertrain and not pictured on this slide, our innovative RexPro conveyor chain is also being sold as part of the project. The RexPro solution arrives in a manageable length that can be easily assembled into longer strands using simple fasteners and tools, a much easier, safer, and faster assembly process versus competing products. Winning this RexPro business also reinforces how we are selling Regal's broader portfolio to our valued customers. A notable feature of this powertrain win is that we are being paid a premium specifically tied to integrating the motor into the drivetrain, leveraging our motors and powertrain expertise. The motor's precise alignment in the subsystem is critical to its functionality and efficiency under the harsh operating conditions at the mine. As you can see on the lower right portion of the slide, the value of our complete solution engineered for ease of install by a customer coordinating content from a global set of suppliers for assembly at a remote site all earned Regal Rexnord a nice price premium above the individual component cost, while still helping our customers save time, money, and reduce project risk. This win helps validate our powertrain strategy and our strategic focus on a subset of high-value verticals where we have deep domain expertise, motors expertise and a highly engineered power transmission components that are truly valued by our customer. On top of all of this, the harsh-duty nature of this application leads to a significant aftermarket opportunity for our business, which we forecasted to be approximately six times the value of the initial product sell, at even stronger margins. This is another example of what we discussed at Investor Day, creating a more durable business through stronger and stickier relationships with our customers, along with significant aftermarket revenue potential. My congrats to the team for this fantastic win.

And with that, I'll turn the call over to Rob. Thanks, Louis, and good morning, everyone. I'd also like to thank our global team for their hard work and disciplined execution in the quarter. Now, let's review our operating performance by segment. Starting with Automation and Motion Control or AMC, net sales in the third quarter were down 4.1% to the prior year on an organic basis. The results reflect weakness in discrete automation, partially offset by strength in the aerospace and defense, food and beverage, data center, and medical markets. Within Discrete Automation, where the growth was below our expectations, the shorter-cycle business continued to remain weak with distributors retaining lean stocking levels in smaller projects slower to materialize due to heightened caution in the channel we believe tied to factors such as persistent ISM weakness, slower-to-materialized benefits from interest rate reductions and US election uncertainty. AMC's adjusted EBITDA margin in the quarter was 21.8%, which was below our expectations on lower volumes, weaker mix, particularly with discrete automation, and larger-than-expected foreign-exchange pressures. Orders in AMC in the third quarter were up 4.5% versus prior year on a daily basis, the second quarter in a row of positive orders. Book-to-bill in the third quarter for AMC was 0.9. We are encouraged by the fact that for the second quarter in a row, we saw positive orders in discrete automation. While aided by a couple of large project orders, automation orders would have been roughly flat even excluding these wins. Third quarter also saw an inflection to positive order growth in food and beverage, which was also encouraging to see after a long period of pressure in that end-market. Finally, we continue to see strength in aero, data center and medical. October orders for AMC were down 11.5% on a daily organic basis and largely reflect lumpy, longer-cycle project activity in discrete automation. Given these characteristics, we believe October's orders performance is best considered in the context of AMC's recent order trend. The weighted average of second quarter, third quarter and October orders, which were all weighted to longer cycle is about 5% and actually helps boost our confidence that AMC will be able to deliver stronger top-line performance in 2025. Turning to Industrial Powertrain Solutions or IPS. Net sales in the third quarter were up almost 1% versus the prior year on an organic basis. The results reflect strength in energy, aerospace, and metals and mining, net of weakness in the alternative energy and machinery off-highway markets. Cross-marketing synergies continued to contribute a couple of points of growth in the quarter. We believe this segment's third quarter results reflect outperformance versus our IPS end-markets. Even so, it was slightly below our expectations due to incremental weakness in certain short-cycle general industrial end-markets that tend to correlate with the ISM. Adjusted EBITDA margin in the quarter was 26.8%, above our expectations and up nicely from prior year. This strong performance reflects higher volumes, stronger mix, and cost synergies. Orders in IPS on a daily basis were up nearly 6% in the third quarter, which suggests we are building some sequential momentum. This solid performance reflects growth in the distributor and OEM channels. Book-to-bill in the third quarter for IPS was roughly 1.0. In October, orders on a daily organic basis were up 6.6%, we believe continuing the positive momentum and market outgrowth we saw in the quarter. Turning to Power Efficiency Solutions or PES. Net sales in the third quarter were down 6.2% versus the prior year on an organic basis, which was below our expectations. The decline versus prior year primarily reflects weakness in the general commercial market and in commercial HVAC outside the US. The shortfall versus our prior forecast relates to incremental weakness in both these markets and to a slower-than-expected capacity ramp in residential HVAC. So, let me provide a little more color on what we are seeing in residential HVAC. This market has been under pressure for almost two years due to weak underlying end-market demand and significant destocking. We believe destocking is over, but end-user demand remains weak, and forecasts from our OEM customers suggest it will remain so into next year. However, in the last three months, we started to see strengthening in demand, mostly from a subset of our customers that appear to be pre-building residential HVAC units in advance of the end-of-year regulatory change. Our team has been ramping our production in response, but has been challenged to keep pace with demand for a couple of reasons. One, we did not anticipate the significant level of pre-buy activity by our OEM customers, in part because we have had low visibility and shifting messages from them about their demand plans ahead of the refrigerant transition. And two, some of our suppliers have struggled to increase their own capacity coming off two years of demand declines. We are currently working to ramp our capacity as fast as possible. And saw our third quarter residential HVAC sales up over 10% sequentially, well above the typically flattish seasonal demand pattern. We continue to make further progress and as Louis mentioned, should be able to catch up in the fourth quarter on our now healthy residential HVAC backlog, helping enable positive growth for PES this quarter. Also, an important perspective, is that the surge in market demand that appears driven by pre-buy activity is weighted to smaller HVAC systems, where we are less focused and actually larger systems where we are more focused with our premium efficiency solutions were down year-over-year in the quarter. These dynamics are apparent in the AHRI data. Turning to segment margins. The adjusted EBITDA margin in the quarter for PES was 17.8%, consistent with our expectation, but down from the prior year on lower volumes and weaker mix. We were pleased with the team's effort to hit our third quarter margin commitment for PES, a testament to strong cost management. Shifting to orders. Orders in PES for the second quarter were down 3% on an organic daily basis, however, did improve sequentially. The orders' decline reflects the end-market headwinds I mentioned earlier for this segment as well as our slower capacity ramp in residential. Book-to-bill in the quarter for PES was 1.01, which is encouraging and consistent with our expectation for positive growth in this segment for the fourth quarter. Daily orders for PES in October were down 1.5%, also reflecting the dynamics I outlined impacting third quarter performance. However, we saw improved residential HVAC orders sequentially in October and we expect to see further improvements as fourth quarter unfolds. On the following slide, we highlight some additional financial updates for your reference. Notably, on the right side of this page, you will see we ended the quarter with total debt of approximately $5.7 billion and net debt of $5.2 billion. We repaid approximately $114 million of gross debt in the quarter or $730 million on a year-to-date basis and remain on track to pay down $700 million of our debt this year. Adjusted free cash flow in the quarter was $125.5 million. We have continued to deploy the majority of our free cash flow to debt reduction and that is our plan going forward.

In summary, a good quarter of controllable execution by our team, coupled with some encouraging performance on orders. At our September Investor Day, we presented our detailed strategy for accelerating profitable growth. Each quarter going forward, I plan to highlight a product, case study, or initiative that shows our growth strategy in practice. This quarter, it is a powertrain win that demonstrates how we are providing differentiated value-add for our customers and getting paid for it through value pricing. Pictured on the left hand side of this slide is a powertrain we designed for a mining customer. Its principal components are called out on the diagram. Nearly a hundred of these powertrains will be installed to power and control motion across the mine's vast network of conveying infrastructure, which will move potash from deep inside the mine and then, once on the surface, through a network of ore-processing operations. Various pieces of the conveying infrastructure are being direct shipped to the mine site where they will be assembled. To help minimize the degree of on-site assembly, the customer valued being able to receive the powertrain from us as a fully-assembled, fully-integrated solution. Our engineers were also able to address all of the mine's power and motion needs with only three sizes of the powertrain pictured, down from the five originally conceived by a third-party integrator, further reducing complexity. This is a great example of how our team's understanding of the customers' application resulted in valuable design enhancements. While not directly part of the powertrain and not pictured on this slide, our innovative RexPro conveyor chain is also being sold as part of the project. The RexPro solution arrives in a manageable length that can be easily assembled into longer strands using simple fasteners and tools, a much easier, safer, and faster assembly process versus competing products. Winning this RexPro business also reinforces how we are selling Regal's broader portfolio to our valued customers. A notable feature of this powertrain win is that we are being paid a premium specifically tied to integrating the motor into the drivetrain, leveraging our motors and powertrain expertise. The motor's precise alignment in the subsystem is critical to its functionality and efficiency under the harsh operating conditions at the mine. As you can see on the lower right portion of the slide, the value of our complete solution engineered for ease of install by a customer coordinating content from a global set of suppliers for assembly at a remote site all earned Regal Rexnord a nice price premium above the individual component cost, while still helping our customers save time, money, and reduce project risk. This win helps validate our powertrain strategy and our strategic focus on a subset of high-value verticals where we have deep domain expertise, motors expertise and a highly-engineered power transmission components that are truly valued by our customer. On top of all of this, the harsh-duty nature of this application leads to a significant aftermarket opportunity for our business, which we forecasted to be approximately six times the value of the initial product sell, at even stronger margins. This is another example of what we discussed at Investor Day, creating a more durable business through stronger and stickier relationships with our customers, along with significant aftermarket revenue potential. My congrats to the team for this fantastic win.

And with that, I'll turn the call over to Rob.

Hey, good morning, everyone.

Good morning, Mike.

So, just a clarification on the thoughts for next year. First, the limited growth comment. Is that an organic comment or an all-in comment? And then on an organic basis, is the thought here just relatively normal sequentials when all else equal and then kind of adjusting for some of the moving pieces you're seeing in the PES side?

Yeah. So, Mike, it is an organic comment. And we think it's best right now to go into next year very measured given uncertainties in the markets, given the election results, just a lot going on. We are going to move into next year likely a little bit more incrementally measured than we have historically and again because of the level of uncertainty.

Got it. And then, you know, if you look back, typically short-cycle business, the spread between orders and kind of revenue growth, it's bigger today than it would have been historically. At what point in time do you think that starts matching up? And maybe talk to how the business has morphed a little bit and gotten a little longer cycle? And you know, I'm sure there's some other things behind it, but when do you think that kind of syncs up?

Yeah. It has morphed a bit from the historic, especially in AMC. And so AMC much longer cycle, our backlogs, you know, roughly six months. Some of our business is data center, aerospace, we have more than a year of backlog. So, that takes a bit more time. IPS, we feel pretty good though about the fact that our orders have been strong, and we beat by about a percent this quarter and feel good about the momentum there. And PES continues to be a short-cycle business. And so, it's when orders ramp, we will ramp. The one piece I'd say, even within the quarter, as much of our business is booked and shipped the next day. Now, the backlog there is about a month and a half, but it's certainly our shorter-cycle business, PES.

And then one more if I may. Just thoughts on free cash flow into next year. I know a little disappointing than this year because of moving pieces. How does next year track and maybe just put that in the context of previous guidance you've given?

Sure. Thanks, Mike. So, we absolutely still have a good path on next year despite the fact that we've got some timing differences this year. We do believe we could end next year at an exit rate at about $1 billion, which is what we've previously communicated. Again, the primary drivers will be cash interest coming down, cash taxes. And then of course, we're going to reduce our cash restructuring as well and expect to get a little working capital benefit, especially given the fact that we've got some timing differences this year. So, all of those contribute to continuing to deliver next year's commitment.

Thank you. Appreciate it everyone.

Thanks, Mike.

Hey, good morning, guys.

Good morning, Jeff.

I am still having some difficulty with HVAC. I mean, I am trying to understand why you weren't better prepared for the increase. It seemed clear that there would be some pre-buying, and your order rates suggest ongoing weakness in your ability to ramp up. I'm noticing around 20% to 30% order growth from the OEMs. So, it could be related to other factors, but I'm just trying to get a clearer understanding of the situation.

I really want to break this up into two, if I could, Jeff. First of all, we have seen a rebound in resi-HVAC and sales have increased about 10%. But after two years of weak demand and fall, starts some recovery. The recent surge in demand was not something we could have or would have wanted to get ahead of. So, our capacity ramp is lagging this demand surge. And however, we expect to be caught up through the end of fourth quarter, I'll also reference that many of our OEMs kept their strategy around the A2L transition pretty under wraps. And so, we didn't have a lot of visibility to this, and it takes time to ramp up volumes and the supply-chain. The last point I'll make to your comments about this, also a disconnect between maybe some of the growth at an OEM versus us. First of all, remember, our OEMs get price in the market. We do not, and so there's always a disconnect there. And then secondly, as Rob said in his prepared remarks, it's notable as outlined in AHRI that the pre-buy activity appears weighted to smaller HVAC systems where we have relatively lower exposure given our focus on premium and actually larger systems year-to-date and in the quarter have been down. So, I think it's really those two items that I think that's to answer your question.

Okay. And then discrete automation, you know, I heard good things and bad things on the order front. I'm just wondering, as you check with your customers and the channel, what you're seeing there in terms of signs of an inflection, or maybe just continued choppiness?

Yeah. Longer cycle orders and we're winning and seeing some growth. And actually our win rates, our funnels are up. So, this gives us confidence into '25. I would say short-cycle book-ship-type orders are not and we're not forecasting them too. Now, we had expected that with the interest rate cuts that we would see some more release of capital projects than we have. And I just think as we finished this year, uncertainty with the elections, ISM still being below 50%, I think it's the longest stretch for over 33 years. It's just waiting on people's desire to go back in with projects. And so, that's putting a weight on the more short-cycle book-ship discrete automation. Hopefully, that helps.

Okay. Thanks.

Thanks, Jeff.

Hi, good morning. This is Randy on for Kyle.

Hey, Randy.

I have a quick question about the cross-selling synergies, particularly in IPS. Could you discuss the incremental benefits you’ve observed from these synergies? How have they trended compared to your expectations this year, and do you anticipate that they will continue to improve going forward?

So, we think our outperformance in IPS is greatly driven by our cross-sell and our industrial powertrain initiatives. We believe that is worth about one to two points of our growth in this quarter. I'll remind you that only about 15% of our customers buy two or more of our products. And if they were only buying one more, the opportunity is significant. And so, we think this will continue to accelerate.

Great. That's helpful. And then another quick one on shifting gears to AMC a little bit. I assume you guys are expecting some sequential margin improvement in the fourth quarter. So with that, is it fair to say that the third quarter was kind of a bottom for discrete automation? Or is it some of the other end-markets that will drive the improvement sequentially?

It really is across the board. It reflects our current backlog and the cost synergies we anticipate in the quarter. We also expect improved sales in the fourth quarter compared to the third quarter, which will result in stronger leverage. Additionally, the business has taken some cost measures in response to the slower near-term demand environment, which we expect to fully benefit from. Lastly, the third quarter was affected by some foreign exchange exposure at the EBITDA line that we hadn't initially anticipated, which I would say accounts for about a third of the difference we observed compared to our expectations.

Got it. Super helpful. Thank you guys.

Thanks, Randy.

Hi, good morning. Maybe just my first question on the EBITDA margin outlook because I don't know if that's been touched on yet. So, it looks like you're ending this year in the fourth quarter with a sort of, you know, 100, 150 basis points of margin increase year-on-year. So, maybe a sort of 23% margin in Q4. Next year, you're saying exiting at sort of 25%. So, you've got a sort of a 200-point increase in the margin next year, at least year-end to year-end. Just wanted to sort of understand if that's roughly the right ballpark of kind of margin expansion next year and the composition of that would be sort of 100 bps from the synergies and then 50-bps-plus coming from volume leverage or price cost. Is that the right way to think about kind of margin expansion and should it be fairly linear through the year?

In the fourth quarter, we anticipate slightly lower performance, but we're taking a cautious approach based on our observations. However, we're still maintaining our usual decremental margins, which reflects a sales mix favoring higher-margin AMC products. Looking ahead to next year, your characterization is accurate. We believe we have a solid pathway for growth supported by expected synergies and anticipated volume increases from an EBITDA perspective. Additionally, the reduction in interest expenses next year should contribute positively. We do expect to see a couple of hundred basis points of improvement next year compared to this year, and we are confident in that expectation.

That's great. Thank you. And then just my quick follow-up. Circling back unfortunately to the PES division and this sort of resi-HVAC back-and-forth, but I think, Louis, you'd mentioned maybe that that 10% revenue increase in resi-HVAC sales. So, I just wanted to clarify, was that a sort of a Q3 year-on-year comment? And then anything you could flesh out for us on the resi-HVAC sales growth year-on-year assumption for the fourth quarter and anything maybe for '24 as a whole? Just so we can understand kind of going into next year, how to think about pre-buy normalizing versus sell-through demand accelerating perhaps that type of thing?

Yeah. Sure, Julian, we'll try to help here. So, first of all, the comment on 10% was a sequential comment, so stating that we are ramping and we're getting better. And so, we expect a sequential into fourth quarter as well. The year-on-year, it's an important part of our business, Julian, but it's 10% of our business and I don't have that level of detail in front of me. So, we're going to have to follow up with you separately to give you that information.

Okay, no worries, but your point would be, Louis, that the sort of inventory balances, you know, with the OEMs and distributors, let's say, in that market maybe a little bit higher, but only at the kind of smaller systems' end of the spectrum as you exit this year.

Yes. I mean that's what we're seeing right now that's what we're seeing in our demand. And I'm sorry, I didn't elaborate on one other part of your question, which is what do we think about next year? We do think some of that will occur, meaning the build in HVAC through the end of this year, which will make next year a little bit softer and we also believe end-market demand is likely, look, not improving in next year. And so, we think it's going to be, at least right now, an improvement for us partially because of the inventories that will have to be reset, but it won't be significant growth for '25. But we'll provide more on this when we get together in January.

That's great. Thank you.

Thanks Julian.

Thanks. Good morning, everyone. I appreciate the details for '25. Rob, could you elaborate on the $1 billion of free cash flow you mentioned as an exit rate for '25? I'm curious about what that entails, especially given the significant seasonality in free cash flow. Additionally, I would like to discuss the pressures we are facing in the commercial sector as well as in Europe and China. Can you provide more insight into these issues so we can better understand the situation? Also, what is the visibility for '25 regarding improvements in those end-markets within PES?

So, let me take the first part and just start there and then Louis, you want to maybe contribute more on the second half of the question. So, when it comes to the explanation around the free cash flow exit rate '25 that about $1 billion, we do see a path to incrementally improve our free cash flow through the year next year based on a lot of factors that I described previously. EBITDA certainly is going to contribute there along with cash interest, cash taxes, and lower cash restructuring as well as working capital. When I say I'm looking to exit the year '25 at $1 billion, I'm saying, likely in the fourth quarter annualized, you would see a number that would represent something closer to $1 billion.

Okay, that's clear. Thanks. And then on the PES, Louis?

Yeah. So the comments, Nigel, on, see, if we see outside the US, we serve a broad set of customers in Europe and in China, including local players. And we are seeing continued pressure in the European market and the China market. ISM is below 50 in both. China market is still heavily weighted because of some of the residential overbuild. We don't see a lot of line of sight to great improvement in Europe or China next year. And this is a little bit of why when we talked about '25, we're saying we're going to be measured in our thought process and we don't see a lot of opportunity for growth in those markets in '25 and not at this time.

Okay, that's helpful. And a quick follow-on. With an IPS, I mean, obviously IPS performance is being very different from the other two segments and I understand share gains have been part of that. But the long-cycle markets, metals and mining, aerospace, et cetera, are driving that to some degree. Your comment on long-cycle orders suggest that those end-markets remain strong into '25, is that the right interpretation?

Our comments on longer-cycle orders were primarily focused on AMC. Specifically, our factory automation, particularly discrete automation, which we supply to sectors like aerospace, defense, medical, and data centers, is where much of that discussion was centered. This gives us confidence looking into 2025. As for IPS, the key macro factor we monitor is the ISM, which has been below 50 for many months. Nevertheless, IPS continues to perform well and exceed expectations. This trend supports the rationale behind the Rexnord and Altra acquisition, emphasizing our scale, market approach, and product portfolio. We will keep pushing forward with this initiative, believing it will provide long-term advantages for both IPS and Regal.

Okay. Thanks, Louis.

Hey, good morning guys.

Good morning, Joe.

Hey, just sorry to harp on the free cash flow, but just I want to make sure I understand it. So, the exit rate for next year is going to be $1 billion exiting 4Q, so call it roughly a $250 million-plus number in the fourth quarter of next year if you annualize it. But the reality is like you're hitting that number this year. And so, it doesn't provide a lot of color on the full-year free cash flow number for 2025. And so, what I'm trying to understand is whether $750 million to $800 million is kind of like a reasonable starting point and seeing a lot of progress versus the $600 million that you're expecting for this year.

I think you should consider an $800 million figure for next year. This suggests a potential benefit of a couple of hundred million dollars, possibly even more, depending on the working capital contributions throughout the year. Additionally, we will see some carryover from this year due to timing. However, this area may have some variability, but I still believe that $800 million is a solid estimate.

Thank you for that clarification, Rob. I have a quick question regarding the fourth quarter. Last year, one of your customers in PES reduced production for a few weeks, which should provide a substantial benefit this time. In my projections, I expect PES to increase by double digits in the fourth quarter. How do you see the forecast for the fourth quarter shaping up by segment?

I don't believe PES will see double-digit growth in the fourth quarter. I anticipate it will remain within the range we provided in our guidance, which suggests a lower single-digit increase for that period.

Yeah, it's about mid-single digit, is the midpoint of our fourth quarter. I'll remind you though that fourth quarter historically is a lower quarter. And I agree with you last year, we did have one OEM shut down the facility for three weeks. But we are forecasting fourth quarter to be up about $20 million year-over-year. And so, that, I would say, addresses that along with our ramp in residential HVAC. And clearly too, if you look at the AHRI data year-to-date, the market is down. At least certainly in the larger units, the market is down. So, I don't think there's a lot of catalyst here that would say that fourth quarter should be up double-digit.

Okay, got it. Thank you.

Thanks, Joe.

Hi, thanks. Just wanted to dive into the commercial aspects of PES a little bit, with the resi-HVAC in North America, commercial doing a little better. The magnitude on the international commercial and general commercial seems a little striking. So, curious if you could talk about various factors like channel inventory, end-markets or maybe business selectivity and shared decisions type trade-offs?

Yeah. Just to be clear though, Chris, I think it's important to note just how that segment breaks down. 31% of that segment is general commercial, and we would say it links very well to ISM. A 23% of that segment is commercial HVAC, and we've been seeing North America commercial HVAC strong, but outside of North America, EMEA and Asia down and down high single-digits, low double-digits. And then pool is about 9% of that segment, and it's relatively flat, slightly down. And so resi that makes up 37%. And so, this is what when we have the pressure in general commercial and seeing HVAC outside of North America, that's really 58% of the business and that has been under pressure. No question. And now, we're starting to see resi-HVAC improve, and we think that will continue and that should uplift the segment certainly in Q4 and going into '25.

Okay, great. Thanks. And on the residential HVAC. Not sure if there's any share sensitivities there, but any possibility OEMs who you kind of lag delivery to that they hit back at some point in the future?

We're close with all our OEMs. We are working through the challenges of the ramp-up. We don't see a material impact whatsoever. If anything, we continue to work to grow with our OEMs and air-moving solutions. As we talked about at our Investor Day, we're gaining some nice momentum there. We feel good the long-term relationship with our resi-HVAC OEMs is positive.

Great. Thank you.

Yeah. Thank you.

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

Thank you, operator. And thanks to our investors and analysts for joining us today. Our teams remain highly engaged executing the many growth and margin-enhancement initiatives outlined at our September Investor Day, in particular leveraging our powerful enterprise to accelerate profitable growth, both organic and in time, inorganic. We are seeing clear signs of our progress in IPS and expect improving momentum in our other segments as well, as we look ahead to 2025 and beyond. Thank you again for joining us today and thank you for your interest in Regal Rexnord. Have a good day.

The conference is now concluded. Thank you for attending. You may now disconnect.