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| Statement |
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| In addition to leveraging our Micro Motion division’s long-standing technology leadership and deep application expertise, we have been making meaningful investments in R&D to significantly raise our new product vitality as our growth in outgrowth metrics demonstrate, we have solid momentum |
| It is one where our IPS segment, which will represent roughly 40% of our pro forma sales has unrivaled scale and scope across the industrial powertrain market, a powerful advantage that should allow us to provide a differentiated offering and service levels to our customers, helping us grow |
| But nevertheless, we feel very confident in our ability to get to that 25% EBITDA margin |
| This allowed us to make significant progress paying down debt and lowering our interest costs, truly outstanding performance much of it due to the team’s disciplined execution on working capital |
| We also made significant progress on margins with adjusted gross margins up 150 basis points versus prior year |
| There were many drivers of this strong margin performance, but a key contributor was our IPS and AMC teams achieving $65 million of cost synergies in 2023 |
| As a reminder, we expect to double our mortality coming out of ‘25 and showed all of those things plus a normalization of markets, in particular, short-cycle industrial, resi HVAC, all of that gives us confidence in our ability to execute to a 25% EBITDA margin |
| We expect modest growth in sales and margins for the year, implying incremental strength in the second half, mainly as our results in discrete automation are expected to improve |
| In 2023, we saw approximately $70 million of incremental sales from cross-marketing and the industrial powertrain subsystem solution which beat our expectations by roughly 10% |
| We also now have a meaningful presence in motion control with our AMC segment representing roughly 25% of our pro forma sales which has highly attractive secular growth characteristics, exceptional product and technology differentiation and provides a platform to support strong organic and inorganic growth opportunities |
| In short, we are proud of all that we have achieved in the past year, but more importantly, extremely excited about our future prospects |
| Overall, we see continued strength in the data center, aerospace and medical markets within AMC, net of headwinds in factory automation and food and beverage |
| Teams are executing incredibly well on the footprint rationalization and the product line simplification |
| Despite fourth quarter top margins in the quarter were strong |
| Our adjusted gross margin came in at 35.7%, reflecting synergy gains, 80/20 lean actions as well as some favorable segment mix |
| This translates to roughly a $1.4 billion annual run rate and highlights how we have built scale and scope into what we believe is a sustainable competitive advantage |
| Adjusted free cash flow in the quarter was very strong, coming in at $170.9 million and nicely above our expectations |
| That translates to a deleverage rate of 14.6% solid performance by our team |
| Lastly, what I believe was the key highlight of the quarter we delivered $171 million of free cash flow resulting in $683 million for the year, aided by overdriving working capital improvements, in addition to the strong operational execution sharing |
| In short, tremendous opportunities for our associates, our customers and shareholders |
| Strong free cash flow is a fundamental attribute of our Regal Rexnord portfolio |
| As we embark on 2024, our team remains excited about the value creation opportunities in front of us |
| With this strong free cash flow, we anticipate substantial value creation tied to capital deployment for many years to come |
| As we look ahead to 2024, our teams remain excited about the opportunities in front of us, controllable opportunities to drive significant margin upside to meaningfully lower our leverage and to advance our organic growth initiatives, many of which are tied to a healthy pipeline of differentiated and often more environmentally friendly new products |
| Our Micro Motion division grew 22% in 2023, and roughly 15 points of that growth can be directly tied to share gains supported by a robust pipeline of new products and improved service levels |
| As we reflect on 2023, we are very pleased with the disciplined execution of our PES team, which achieved relatively stable margins at a healthy high teens level despite sizable top line headwinds |
| I feel really good about our new product development and the mix positive gross margins |
| Service levels that had once restrained growth have now become a competitive advantage and are helping the business take share |
| And in one – only a few quarters, we accelerated key product launches and built a solid organic growth funnel to drive long-term growth |
| The division’s markets are also well positioned to benefit from strong secular growth tailwinds tied to increased access to medical care, transition to battery-powered equipment and making air travel more sustainable |
| Statement |
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| The shortfall in performance was driven almost entirely by continued channel destocking activity and weaker demand in the North America residential furnace market, which we attribute to warmer weather, higher-than-estimated channel inventories and weaker underlying demand |
| Turning to Power Efficiency Solutions or PES, organic sales in the fourth quarter were down 16% from the prior year, below our expectations |
| Second, as anticipated when we reported third quarter, we continue to see softness in our short-cycle discrete factory automation business |
| For PES, we anticipate a low double-digit to low teens top line decline in the first quarter, largely tied to furnace destocking and weak underlying HVAC end markets |
| We actually track closer to $4 million in the quarter, so below our initial expectations |
| Within PES, we assume a low single-digit decline in the resi HVAC portion of the business on furnace destock and weak underlying end market demand, with first quarter down, second quarter up slightly and the back half up mid-single digits on the absence of destocking headwinds |
| Orders of PES for the fourth quarter were down just under 10% on a daily basis |
| For perspective, we expected orders to decline in the quarter versus prior year, driven by a couple of factors |
| Orders in the quarter were down 6% on an organic daily basis |
| Pro forma organic orders in IPS were down 1.9% in the fourth quarter on a daily basis |
| Sales in the quarter were up 29.2%, but down 6.9% on a pro forma organic basis as we continue to see destock headwinds and weaker end market demand, particularly in our PES segment and in our factory automation business within AMC |
| This division had relatively flat sales for more than 5 years, mainly due to operational obstacles |
| And adjusted EBITDA margins on a pro forma basis were down 10 basis points versus prior year, even while facing market headwinds |
| For IPS, we also expect a low to mid-single-digit sales decline in the first quarter and roughly flat margins |
| In January, book-to-bill tracked at roughly 1.14, with orders down approximately 5% |
| Net of headwinds from lower volumes, weaker mix and as anticipated last quarter, cost to maintain quality and service levels for our customers during a period of peak synergy-related footprint moves |
| We expect furnish to remain a headwind in the first quarter |
| Lastly, for Industrial, we expect a low double-digit top line decline in first quarter, but stable margins versus the comparable prior year period |
| And while January was off to a somewhat stronger start, we expect first quarter orders to be down at a mid-single-digit rate versus prior year |
| But – the down for the full year, down volumes for the full year |
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