Earnings Call Transcript - RRX Q1 2021

Operator, Operator

Good day and welcome to the Regal Beloit First Quarter 2021 Earnings Call. Please note, this event is being recorded. I would now like to turn the conference over to Robert Barry. Please go ahead, sir.

Robert Barry, Senior Vice President of Investor Relations

Great. Thank you, operator. Good morning, everybody. Welcome to Regal Beloit's First Quarter '21 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Vice President and Chief Financial Officer. Before turning the call over to Louis, I'd like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. 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 think that we are presenting certain non-GAAP financial measures in this presentation. We believe that these are useful financial measures for providing you with additional insights 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. Now 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 more detail and discuss our second quarter guidance. We'll then move to Q&A, after which, Louis will have some closing remarks. I would also like to highlight that Regal management will be participating at 3 investor conferences in the second quarter. The Oppenheimer's 16th Annual Industrial Growth Conference on May 5, the Goldman Sachs' Industrials and Materials Conference on May 11 and the KeyBanc's Industrials and Basic Materials Conference on June 1. All conference participations will be virtual. And with that, I would like to turn the call over to Louis.

Louis Pinkham, CEO

Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our First Quarter Earnings and to get an update on our business, and thank you for your interest in Regal. I think I can reasonably say that Regal had a great start to 2021. Our first quarter topline saw a step change in growth, accelerating to double-digit levels. Adjusted operating margins continued to post meaningful progress, rising over 300 basis points compared to the prior year to a record level, aided significantly by a step-up in our gross margins. Free cash flow also remains strong, allowing us to bring our net leverage ratio below 1x and giving us the confidence to raise our quarterly dividend by 10%. We were also extremely pleased to see Regal acknowledged as a top supplier to one of our largest HVAC OEM customers. Congratulations to our Climate Solutions team. The highlight of the quarter, however, was Regal announcing a transformational merger with Rexnord's PMC business, which is poised to deliver best-in-class cost synergies while opening up new avenues for growth and delivering significant benefits for our customers, our shareholders, and our associates. All things considered, a great quarter for Regal. This strong performance is underpinned by the efforts of our global Regal team. And so before getting into much more detail on our results, I want to thank all my Regal colleagues around the world for their hard work and resourcefulness as they remain focused on serving our customers, executing on our restructuring plan, and cultivating growth opportunities, while continuing to battle COVID fatigue and maintaining our strict safety protocols to keep our workplace safe. Turning to our results. The standout positive in the first quarter was Regal delivering nearly 11% topline growth or 9.1% on an organic basis, with all four segments contributing, and two of them—Climate and Commercial—achieving organic growth rates in the mid-teens. Nearly all our end markets are contributing to this positive performance, with only a couple of pockets of weakness in demand for some of our larger late-cycle industrial motors, as well as some temporary headwinds in solar related purely to project timing, which held back growth rates in PTS. A few notable highlights by vertical include performance in our North America residential HVAC business, which was up over 20% in the first quarter, continued positive momentum in Pool Pump, which saw growth rates in the high-teens, and in unit material handling, which grew at a mid-teens rate. Regionally, our China business was a very strong contributor, growing above 60% in the quarter. Our China team is executing at a high level, capitalizing on recovering end markets and driving nice share gain. While much of this topline strength is tied to the resilience of the U.S. consumer and to recovering global end markets, we also see evidence that our 80/20 approach, combined with a strong focus on the voice of the customer and Regal's technology leadership, are driving share gains across our business. We have a lot of work to do on this front, as we make growth investments and build Regal's growth muscle, but I'm pleased to say that we are already seeing progress on outgrowth. In the near term, I have confidence that our strong topline momentum should strengthen even further, given accelerating order growth during the first quarter and as we enter the second quarter. Orders in the first quarter were up 17% on a daily basis and up almost 90% in April as we're comparing against COVID-pressed results of the prior year, coupled with recovering end markets and ongoing strength in residential HVAC, Pool Pump, alternative energy, data center, and unit material handling markets, among others. Given the magnitude of the order growth on a year-over-year basis, it is also helpful to view order performance sequentially. Our daily orders for April were up 9% versus our average daily orders for the first quarter of this year. Turning to margins, Regal posted a record 13.9% operating margins in the quarter. The addition of improving volumes, a steady cadence of progress on our 80/20 initiatives, executing our pre-COVID multiyear restructuring program, and even some early gains from our efforts around lean resulted in significant first quarter margin expansion. Regal's adjusted operating margin rose over 300 basis points compared to the prior year’s first quarter, supported by an adjusted gross margin, up almost 200 basis points compared to the prior year as well as healthy SG&A leverage. I should note this performance is happening despite experiencing isolated logistics challenges, including severe congestion at the Port of Los Angeles and tie-ups in the Suez Canal. It's also worth mentioning that our margin progress in the first quarter occurred despite significant and rising inflationary pressures. Like many of our peers, we're seeing inflation on key commodities, including steel, copper, and aluminum. Certain key components, particularly electronics, are also in short supply. This is a situation we're monitoring very closely across all levels of the organization. Regarding inflation, we're using our hedge program, buy-ahead strategies, material price formulas, and thoughtfully implemented price increases, guided by 80/20 to work towards price cost neutrality for the year. I'm very pleased to report that these approaches, coupled with the vigilance of our global team, helped us achieve a net favorable price cost position in the first quarter. That said, we did realize some benefits in the first quarter from the lag manner in which inflation impacts our P&L. While we continue to expect price cost neutrality for the year, we do think the timing and inflation headwinds versus the cadence of our mitigating tactics may result in slightly unfavorable price cost in a couple of our segments in Q2. Again, we are still targeting full year neutrality for Regal, and I am confident in our team's ability to achieve this objective. From a supply chain perspective, we're taking a similarly disciplined approach. While there are scattered examples of component shortages or needing to pay premiums to ensure source component availability, this is a dynamic we're managing effectively. As we sit here today, we do not anticipate any significant disruptions to our customers on this front. Turning briefly to COVID, I'm encouraged by the significant progress that has been made in the U.S. and in other key markets getting people vaccinated, raising optimism about global economic prospects and creating positive momentum in many of our end markets. That said, COVID is far from over. It remains a risk in all of our markets, particularly in India and to a much lesser extent in Mexico. The rising infection rates in India are troubling and present significant personal and professional challenges to our colleagues there. We're responding by adjusting our manufacturing plans in other locations, such as Mexico and China, as well as selectively building inventory where possible. We will continue to monitor this situation closely while providing support to our associates and their families in India. Before turning it over to Rob, I would like to provide an update on a couple of strategic fronts. First, regarding our planned merger with Rexnord's PMC business announced in mid-February, we are making good progress towards closing and our integration planning team is working diligently to ensure we can hit the ground running once closing occurs. While there's still much to do, I'm happy to say our merger plans remain on track for a fourth quarter close. We believe this transaction will be transformational for Regal, building on the already robust set of organic opportunities we have, along with significant improvements made in the operations of our business. We do not intend to make further comments on the PMC merger, as we plan to file an S-4 shortly, which will contain a lot of additional information about the transaction. Lastly, I wanted to add a subtle but meaningful refinement we made recently to our stated business purpose, which now specifies a focus on energy efficiency. Going forward, Regal will be more intentional about realizing the benefits that can arise at the intersection of growing demand for energy-efficient products, Regal's strong and differentiated technology and engineering resources, and a commitment to the larger purpose of helping the environment. To give investors a better sense of how we are helping our customers improve their operations and reduce energy and other resource consumption, I thought I'd share an actual customer example presented on Slide 6. This customer had a large distribution warehouse experiencing oil leaks on its conveyor system due to steel failures in a competitor's gear drive, which resulted in significant downtime. Regal was engaged to help, and after thoroughly assessing the situation using our prospective brand diagnostic tools, we replaced the faulty competitor's drives with Regal's Hub City HERA drive and Marathon Motor. This solution runs significantly cooler, given its higher efficiency, resulting in longer seal life, and is likely to save the customer over $200,000 annually in avoided downtime, replacement parts, and components. We also right-sized the conveyor motors, saving a quarter amp per motor, which is expected to translate into substantial energy savings for this customer worth $80,000 per year. This is a true win-win, helping our customer achieve significant savings and higher productivity while driving more profitable growth and a stronger customer relationship. Regal's strength in the industrial drivetrain, with deep system application knowledge and leading product solutions, differentiates us in the motion control space. We see many opportunities to create similar win-win solutions by aligning our technological capabilities and energy-saving solutions with solving our customers' problems. We've just kicked off our annual strategy process at Regal, and more so than in the past, we are intentionally focused on proactively creating the most energy-efficient products informed by the voice of the customer. This pursuit of higher efficiency products and solutions is one component of Regal's ESG journey, and our team is excited to lead. I look forward to keeping you updated on our progress in the quarters and years ahead. And with that, I'll turn it over to Rob, who will take you through our first quarter results in more detail and discuss our guidance.

Robert Rehard, CFO

Thanks, Louis, and good morning, everyone. As you can see from our first quarter results, Regal had a strong start in 2021, achieving accelerating organic top-line growth, significant margin expansion, strong leverage rates of 42%, which exceeded our targets, and healthy cash flow despite our usual seasonal patterns. This was accomplished amid considerable challenges from inflation and ongoing supply chain issues. Additionally, with order rates significantly increasing as we move into the second quarter, we are optimistic that this strong operating momentum will continue, making us hopeful for the rest of the year. Now let's break down our results by segment, and then I’ll go over our latest guidance. Starting with Commercial Systems, organic sales in the first quarter rose 15.9% compared to last year, driven largely by strong performance in China and Asia Pacific, particularly in our large commercial applied HVAC business and our Pool Pump business. Notably, sales in our Commercial China segment more than doubled this quarter, partly due to market recovery and gaining market share. Sales in our Pool segment also increased nearly 20% in the first quarter, benefiting from robust consumer demand, healthy sales of new products, and some restocking activity. We expect a healthy outlook for Pool due to solid underlying demand and opportunities for further restocking. The only significant headwind for growth in the quarter was a 160 basis point impact from our ongoing proactive reduction of a low-margin business as we continue our 80/20 initiatives. While these pruning initiatives may hinder top-line growth, they also contribute to margin expansion. The adjusted operating margin for Commercial Systems in the quarter was 11.7%, an increase of 410 basis points from the previous year, due to favorable volume, mix, and productivity, though slightly offset by freight challenges and atypical port congestion. Operating leverage for Commercial was 34% in the first quarter, which is a healthy level and slightly above our expectations. Orders in Commercial increased over 20% daily, reflecting broad-based strength, particularly in Asia. In April, orders nearly doubled, also backed by broad strength but especially strong growth in the Pool segment. It’s important to note that April 2020 was our weakest month for order growth last year, when we saw a decline of over 30%. In Industrial Systems, organic sales in the first quarter were up 1.5% compared to last year. This segment saw strength in China, India, and within the data center market, though there were slight declines in our large Commercial Motors business. Our pruning actions in this segment accounted for approximately 180 basis points of headwind in the quarter. The adjusted operating margin for Industrial was 3%, up 190 basis points from last year, with improvements driven by mix, higher volumes, and continued cost reductions, offset somewhat by negative net material costs. Operating leverage in Industrial was a strong 40% in the first quarter. While Industrial margins are not yet where we want them, the segment's performance in the first quarter aligned with the forecast shared during our last earnings call. We believe Industrial can achieve moderate margin improvement compared to first quarter levels, expecting mid-single-digit performance in the remaining quarters of 2021. Additionally, the Industrial business experienced some lagged inflationary impacts in the first quarter that are expected to nearly catch up in the second quarter. While we anticipate benefiting from additional price realization in the second quarter, we view this lag as a headwind. It’s also important to note that Industrial is more sensitive to longer cycle industrial demand than other areas of our portfolio, so its recovery is expected to lag behind our shorter-cycle businesses, such as Commercial or PTS. Orders in Industrial decreased 4% on a daily basis this quarter, but April saw a positive turn with order growth of 91% driven by broad strength, particularly from India, China, and demand in our data center business. We are cautiously optimistic about the strengthening Industrial recovery in Asia and anticipate accelerating demand in our core U.S. business in the forthcoming months. Moving to Climate Solutions, organic sales in the first quarter grew 14% compared to last year, primarily driven by our North America residential HVAC business, reflecting favorable end-user demand and some channel restocking. Recovery demand in Europe and the broader industrial and commercial refrigeration markets also contributed to this segment's growth. This strength was partially offset by our proactive pruning efforts, which presented about 300 basis points of headwind this quarter. In our North America residential HVAC business, orders were up 21% on a daily basis in the first quarter and nearly 85% in April, reflecting healthy underlying end-user demand and channel restocking, with further positive momentum expected as we approach the summer HVAC season. The adjusted operating margin for Climate in the quarter was 18.2%, a 300 basis point increase from the previous year, driven by strong volumes, continued cost reductions, and favorable mix, though net material costs presented some headwinds. The Climate segment had an operating leverage of 40% in the first quarter, exceeding our target levels. Orders in Climate for the first quarter were up 19% daily, showing broad-based strength, particularly from our China orders, which were nearly 100% in April, along with robust performance across the segment, especially in Asia and Europe, as well as North American furnace products. Turning to Power Transmission Solutions, or PTS, organic sales in the first quarter rose 1.8% compared to last year, supported by project wins in aerospace and strength in our conveying business alongside industrial demand in China. Headwinds included project lumpiness in solar and moderating pressures in the oil and gas markets, although our solar business continues to experience strong demand, and we believe we are gaining market share within that sector. The operating margin for PTS in the quarter was 18.7%, a 300 basis point increase from the previous year, setting a record level for this segment, driven by continued cost reductions, favorable price profits, and project wins. Operating leverage for PTS was 108%, indicating positive growth for this business benefited from restructuring actions. Orders in PTS increased by 25% in the quarter and rose nearly 70% in April, with order strength being broad-based, showing that shorter cycle restocking activities have begun as our channel partners express confidence in the cycle. On the next slide, we highlight some key financial metrics for your review. Notable highlights include our free cash flow of $39 million, or 59% of adjusted net income, which is a strong result given our usual seasonal patterns, and we anticipate conversion above 100% for the year. We also continue to reduce our debt and ended the quarter with a net debt to adjusted EBITDA ratio of 0.9x, providing us with significant financial flexibility. Now, regarding our outlook, we expect second quarter adjusted diluted earnings per share to be in the range of $1.85 to $2.05, indicating over 100% year-over-year growth at the midpoint. This suggests revenue growth in the high 20s and leverage of 30% to 35% as we move through this guidance range. While we aren’t ready to provide detailed guidance for the full year, we can share some broad performance expectations. We anticipate high single to low double-digit organic sales growth for the year, with strong performances in Q2 and Q3 and the effects of tougher comparisons in Q4. Most of the cost-cutting measures we undertook in 2020 are yielding permanent savings, aside from $6 million related to temporary pay cuts and furloughs in the second quarter. We also expect actions taken in 2021 to result in annualized cost savings of $25 million, having achieved roughly $6 million in Q1, with the remainder expected to occur throughout the year. At the bottom of this page, additional assumptions are included for modeling 2021. Before we move to Q&A, I want to express my gratitude to all of our Regal associates for their hard work in delivering for our key stakeholders: our customers, shareholders, and fellow associates. Regal's first quarter results demonstrate strong execution and significant progress in our goal of returning to structurally improving through-the-cycle profitability. Now I'll turn it back over to the operator. We are now ready to take questions.

Operator, Operator

And the first question will come from Mike Halloran with Baird.

Michael Halloran, Analyst

So first on the guidance here, just help to understand the 2Q thought process? Very strong 1Q. Typically, you see some kind of earnings ramp from 1 to 2Q. Guidance doesn't have a lot of it, unless you're a little bit above towards the high end of the range. Maybe just help us with some of the sequential puts and takes? How much of this is just conservatism, given some of the supply chain, price/cost dynamics? Is it price/cost? Doesn't seem like there's any concern really over the directional demand curve. So just some help on some of those puts and takes?

Louis Pinkham, CEO

Yes, this is Louis. To start, I believe the way you're presenting this makes sense. We have demonstrated our credibility over the past eight quarters, aiming to set achievable goals for the quarter and ideally exceed them. There is a slight element of conservatism, but I wouldn't classify this as a typical quarter, especially when compared to the COVID period of last year. It's clear that we are seeing strong orders going into the quarter, building on the solid performance from the first quarter, which gives us confidence in the second quarter. That said, we are facing some challenges due to commodity inflation. Our teams are managing this effectively, particularly through our material hedging strategies, and we're benefitting from material price formulas. Additionally, our teams are skillfully focusing on price management, which leads us to feel optimistic about maintaining a neutral price/cost relationship, at least for this quarter and the year ahead. While there are still supply chain constraints, especially in logistics and electronics, we expect minimal impact from these issues in Q2. Lastly, COVID remains a concern, particularly in India, which plays a significant role in our global manufacturing footprint. We generate about $50 million in local revenue there, and it supports our global supply chain. Our thoughts are with our Indian team members as they navigate their personal and professional challenges. We remain cautious about COVID's impact but hope the rollout of vaccines will help us move past it. Nonetheless, we feel confident about our guidance for the quarter, albeit conservatively, as we aim to meet or exceed our targets.

Michael Halloran, Analyst

That's all fair. Could you share some thoughts on inventory levels in the channel? Given the current supply chain capacity constraints, is there a significant amount of channel inventory being accumulated? Additionally, is there any indication of demand being pulled forward or pre-buying as people try to stay ahead of the supply chain issues you are currently observing in the channel?

Louis Pinkham, CEO

Yes. I believe there is still significant opportunity for inventory growth in the channel, which is likely contributing to the demand we are experiencing. Additionally, while we don't have specific statements from customers, there seems to be anxiety regarding the supply chain. It wouldn’t surprise me if some of the increase in our orders is related to these supply chain concerns. That said, our orders are up 90% year-over-year and 9% sequentially, indicating a strong demand environment at present, which gives us optimism for the second quarter and the remainder of the year.

Operator, Operator

The next question will come from Jeff Hammond with KeyBanc.

Jeffrey Hammond, Analyst

Just want to come at the sequential a little bit differently. So you said April orders up 9%, sequentially. Can you talk about where the greatest strength was sequentially in orders within the businesses and how that kind of flushes through to sequential revenue growth?

Louis Pinkham, CEO

Yes. So the strength sequentially is really coming majority from 3 of these segments. And it's really pretty solid and across the board in those 3. It's PTS, Climate and Commercial. And so that's what's giving us some good confidence in Q2 and the performance expectation of being in the 20-plus percent growth year-over-year in Q2.

Jeffrey Hammond, Analyst

Okay. Great. And then so incrementals, 1Q, north of 40%. Can you just talk about what's embedded in the 2Q guide? And how much kind of haircut or caution you have around price costs within that?

Robert Rehard, CFO

Yes, we anticipate margins to be around 30% overall, with leverage at about 30%. For the segments, we expect PTS to perform on the higher end at 35% to 40%, while Climate, Commercial, and Industrial will be near 30%, possibly slightly below that. Regarding price and cost, certain segments are more influenced by inflation and material price formulas, specifically Climate and Commercial, and there are also some effects in Industrial. In Climate, we're still catching up on material price fluctuations but expect to resolve this by the second quarter. The Commercial and Industrial segments are under a bit more pressure, and while we benefited from inflation lag in the first quarter, it will affect us in the second quarter. We’ve announced significant price increases and believe we can offset most of the inflation impact. We expect to maintain price/cost neutrality for Regal, which is reflected in our second quarter guidance.

Operator, Operator

The next question will come from Nigel Coe with Wolfe Research.

Nigel Coe, Analyst

Rob, if I put in high-single digit, low double-digit organic growth for 2Q with those incrementals, I come up with a bigger EPS on the book, but that's just math. So on your full year guidance for high-single digits, low double-digits organic growth, does that include the daily sales impact in 4Q? Because I think you do have maybe 4 days fewer in 4Q versus prior year.

Robert Rehard, CFO

Yes, that would all be embedded in that assumption that we provided.

Nigel Coe, Analyst

Okay. Great. Regarding the PMC transaction, we are on track for a fourth-quarter close. What major milestones should we be aware of in terms of regulatory approvals until then? Additionally, if we were to close today, would the transaction terms regarding dividend payments and other aspects be significantly different from what we discussed in January?

Louis Pinkham, CEO

So Nigel, I apologize. I got the first part of your question, but not the second. So let me answer the first part. Again, we're on schedule. We feel good about the fourth quarter closing period. Now you asked about what are the milestone. Certainly regulatory. We did receive U.S. antitrust clearance of the transaction. We've also received some clearances in certain non-U.S. jurisdictions. There's still a couple still outstanding, and we're waiting on foreign investment law clearances in some non-U.S. jurisdictions as well. Of course, we're waiting on the private letter ruling from the IRS. And then beyond that, I would tell you that we had further details in the Form S-4 that we'll be filing in the next couple of days. So hopefully, that helps to answer the progress and the milestones on the transaction, but excuse me, Nigel, just repeat the second part of your question.

Nigel Coe, Analyst

Sure. It was really about the transaction terms and the special dividend. The overlapping shareholder base is crucial in this context. Do you have any updates or insights on how that might have changed since January? Also, if the deal closes today, will there be any significant change in the dividend?

Louis Pinkham, CEO

Okay, great. Yes, we're not going to go into that detail. I'd tell you we're on path. Things are pretty consistent with what we announced when we announced the merger back in February. So I'd say everything is going as planned.

Operator, Operator

The next question will come from Joe Ritchie with Goldman Sachs.

Joseph Ritchie, Analyst

I would like to discuss the guidance for 2Q growth that you provided, which indicates high 20s. Compared to 2019, this suggests a decline of approximately 5% to 10% from those levels. However, if I examine your order trends from April and take into account the easier comparison, it seems you are still up around 30% compared to 2019. So, I’m trying to grasp the level of conservatism in the high 20s growth number you mentioned for the second quarter, given the information you have today.

Louis Pinkham, CEO

I believe this is a recurring theme in the questions, Joe, and I understand the rationale behind it. We are experiencing strong orders, in the high 20s, and we are taking a conservative approach that we feel confident in, despite some minor logistical and supply chain challenges. If orders maintain their current rate, I would suggest that we are likely to see even stronger results. However, maintaining credibility is crucial for us. We prefer to establish reasonable and realistic goals and objectives that we can achieve or exceed. Therefore, while the numbers may appear somewhat conservative, we are currently optimistic about them.

Robert Rehard, CFO

One other thing, Joe, I would just highlight here. We're also building some room for some buy ahead on supply chain concerns. That has absolutely been something that we've been hearing from our customers and something that could have bolstered the 90% rate that we talked about.

Operator, Operator

Our next question will come from Chris Dankert with Longbow Research.

Christopher Dankert, Analyst

Louis, could you provide an update on the price for value initiatives, especially in the Industrial sector? What stage are we at? Is the recovery of margins in the Industrial segment aligning with your internal timeline? Any insights on the price for value and the longer-term margin progression would be appreciated.

Louis Pinkham, CEO

Yes, we are gaining momentum in the Industrial sector, which aligns with our expectations at this stage. We are successfully transitioning to our TeraMAX product line of industrial motors sourced from Mexico, achieving a much better cost position and avoiding tariffs on products entering China. I have a lot of confidence in that team's efforts to position ourselves for potential accelerated growth. Additionally, in the industrial drivetrain segment, we are clearly a leader. We are focusing on pricing for value and enhancing our solutions for a comprehensive offering to customers. I feel optimistic about being in the early stages of this process, while the improvement in industrial margins feels more advanced.

Robert Rehard, CFO

Yes. I think you can expect something around the same range, about 200 basis points for Regal would be pretty close to a level of expectation going into the second.

Christopher Dankert, Analyst

Got it. And if I could just sneak one more here. Just thinking about working capital into the back half of the year. Everyone's kind of readjusting expectations on just-in-time inventory, given all the disruption we're seeing. Just any comments on working capital use in the back half would be great?

Robert Rehard, CFO

Yes, Chris, the good news is that we have a solid strategy for managing inventory, and we are focused on reducing working capital. Inventory is our main lever. Despite the volumes we are experiencing, we still anticipate trade working capital to provide a source of cash this year. This is largely due to the inventory we are discussing. Early in the year, we faced some challenges related to supply chain disruptions, particularly in the first quarter, which required us to build some inventory in specific areas due to port constraints. However, we expect these issues to resolve, and we have a clear plan moving forward. Working capital should be a great source of cash for us.

Christopher Dankert, Analyst

Got it. Congrats on the quarter here.

Robert Rehard, CFO

Thank you.

Louis Pinkham, CEO

Thank you.

Operator, Operator

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

Louis Pinkham, CEO

Thank you, operator. Having delivered a stronger first quarter than expected, with record-breaking 13.9% operating margin and entering the second quarter with solid order and revenue momentum, I'm excited about what 2021 holds for Regal. We still have so much opportunity to improve our profitability, while Rexnord PMC is expected to add significant momentum. All these factors should benefit our free cash flow, fund further growth investment and deliver benefit for all our key stakeholders. And with increasing intention behind our plans to meet rising demand for more energy-efficient products and solutions, our growth strategy will be tied to a purpose bigger than Regal, doing our part to help our communities locally and environment globally. Thank you again for joining us today and for your interest in Regal, and have a good day.

Operator, Operator

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