RRX - NYSE

Hello. And welcome to the Regal Rexnord First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Barry, VP, Investor Relations. Please go ahead.

Great. Thank you, Operator. Good morning, and welcome to Regal Rexnord’s first quarter 2023 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Executive Vice President and 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 describe in greater detail in today’s press release and then our reports filed with the SEC, which are available on regalrexnord.com. On slide three, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors and we have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and earnings presentation materials. Turning to slide four. 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 provide an update to our 2023 guidance. We will then move to Q&A, after which, Louis will have some closing remarks. And with that, I will turn the call over to Louis.

Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our first quarter earnings to get an update on our business and for your continued interest in Regal Rexnord. Before getting into our first quarter results, I would like to spend a few minutes on our recent acquisition of Altra, which we closed expeditiously on March 27th. I will begin by extending an enthusiastic welcome to our new Regal Rexnord colleagues who joined us from Altra. We are extremely excited about how together as part of a larger and strategically better positioned One Regal Rexnord team, we can accelerate our company’s ongoing transformation into a faster growing and more profitable enterprise. For the second time in two years, we have thoughtfully deployed capital to effect a positive step change in our business, with so much progress in such a short period of time, I would like our key stakeholders to pause for a moment and take stock of what Regal Rexnord has become. One of the most impactful elements of our transformation is the evolution of our sales mix by application. As you can see in the chart on the left, the Regal Rexnord portfolio is now weighted to automation, power transmission and industrial powertrain solutions, which together represent over 60% of our sales. These are businesses with highly attractive growth and margin dynamics underpinned by differentiated technology that customers value. The remaining portfolio is a combination of air moving subsystems and motors which after three years of 80/20 management and targeted R&D investments is now an offering that is defined by differentiated technologies and sold to customers whose needs are well aligned with our value proposition. Another way to think about how the Regal Rexnord portfolio has evolved is to consider its exposure to markets with secular growth tailwinds illustrated on the middle chart. The exposure of the legacy portfolio plus Altra raises our exposure to secular growth markets to over 35%. If you also include the residential HVAC market with its consistent march towards higher minimum energy efficiency standards that require consistent innovation in motors, blowers and total systems design, our secular exposure is just under 50%. Adjusting for the faster growth we foresee in these markets puts us on track to having over 50% of our sales generated in secular growth markets by 2025. In short, our market exposure today is inherently stronger than it was just a few years ago. The chart on the right illustrates our evolution by revenue through the addition of Rexnord PMC, then Arrowhead and now Altra, along with organic growth in 2021 and 2022 of 17% and 9%, respectively. We are poised to be a $7 billion plus enterprise this year. Regal Rexnord is now positioned to serve a wider range of customers and end markets do so with a broader portfolio of more technology-rich subsystems and digital solutions and go-to-market with enhanced channel positions that support higher service levels for our customers. Said another way, our transformation allows us to start approaching customers as a trusted adviser, a dramatic evolution from our legacy market position as more of a component provider. Our customers are experiencing this evolution through our enhanced offering and service levels. Our shareholders will experience it through better organic growth, higher margins and stronger free cash flow. Our associates will experience it as a member of a team that is expanding its most important customer relationships and is poised to more consistently win in the markets we serve. One way we plan to help investors better appreciate how legacy Regal plus Altra leads to growth acceleration, is to spend a few minutes on each of our next several earnings calls introducing the product portfolios of our principal automation businesses. I will start this quarter with Kollmorgen, our factory automation and controls business. The Kollmorgen business designs and manufactures high-performance motion systems for applications that include factory automation, aerospace and defense, automated guided vehicles or AGVs, medical imaging and robotics among others. Its principal products pictured on the right include machine control hardware and software plus highly engineered servo and stepper drives and motors. The business competes on its differentiated technology in precision engineering and focuses on customers in high growth markets that have demanding performance standards. The fact that customers can count on Kollmorgen products to reliably perform to exacting specifications and do so consistently over time, has created extremely sticky customer relationships and annuity revenue streams with attractive margins. We see so much opportunity to help a business like Kollmorgen grow faster. By leveraging the customer relationships, channel partners and global sales organization of a $7 billion global enterprise, we plan to bring Kollmorgen’s offering to new customers and leverage its technology in a wider variety of applications, including as part of subsystems that include other Regal Rexnord products. A great example of where we are seeing such opportunities only six weeks in, is in our aerospace business where the legacy Regal and Kollmorgen teams are already collaborating on how best to leverage our expanded portfolio with our customers. I look forward to updating you on our progress as we get further along, including once we define an outlook for Altra sales synergies likely later this year. Now let’s turn to the first quarter. Last night, we reported results that delivered on our prior commitment. Organic sales declined by 4% in the quarter, while we did see pressure from destocking and pockets of weaker underlying demand in PES. We also saw strong growth in AMC and industrial and solid performance in our IPS segment, driven by continued strong price realization, broad-based tailwinds from new products and rising industrial powertrain cross-selling synergies. The tailwinds we are seeing from our AMC and IPS teams executing PMC and Arrowhead sales synergies also bolsters my confidence in our enhanced growth prospects with Altra. Our adjusted EBITDA margins in the quarter were solid, coming in at 19.7%, in line with our previously stated expectations. When comparing these results to the prior year, it is important to remember that the annual cost role provided a favorable impact in the prior year, but an unfavorable impact in the current year. Despite a modest topline decline, we saw resilient margin performance tied to our ongoing 80/20 and lean efforts and merger synergies. So perhaps the best example of our team’s strong performance in the quarter is cash flow generation, underpinned by significant progress lowering working capital and inventory in particular. In a quarter that typically faces seasonal headwinds on free cash flow, we delivered $174 million. That allowed us to end the quarter with net debt to adjusted EBITDA of 3.96 on track with our expectations. We are putting a particular emphasis on inventory reduction and on free cash flow generation more broadly in order to delever our balance sheet quickly, which includes tying a greater portion of our leader’s variable compensation incentives to this goal. In short, what gets measured gets done. We will remain laser focused on cash flow generation and debt reduction to achieve our post 2024 target of less than $2.5 million. A solid start to 2023 and for this strong execution pursued with a sense of urgency, as well as continued adherence to our Regal Rexnord values I want to say thank you to our Regal Rexnord associates around the world. Next, let’s turn to orders. While our organic orders were down 9% in first quarter, this is slightly better performance than we anticipated and resulted in a book-to-bill for the quarter just north of 1.0 and a marginal growth to our backlog. Destocking and market headwinds in our PES segment in particular residential HVAC, pool pump and certain short-cycle industrial markets posed a significant headwind as expected. But performance elsewhere was on the whole, a bit stronger and included positive momentum in markets such as Arrow, energy, marine, solar and non-res construction. We see this dynamic continuing into second quarter with destock and softer demand weighing on our consumer and short-cycle industrial markets, but better performance in later-cycle industrial, aerospace, energy, medical device and non-res markets. We also continue to model better orders performance in the back half, especially in the fourth quarter as destock headwinds likely abate, comps become easier and our growth initiatives continue to gain momentum. These include progress towards our goal of doubling our new product vitality by 2025, our maturing 80/20 growth initiatives and rising PMC plus early Altra cross-marketing synergies. The bottomline is our focus in 2023 and beyond will remain uncontrollable execution. Between our still ample backlog, a healthy new product pipeline, sizable M&A cost and cross-marketing synergies, significant ongoing 80/20 and lean initiatives, and accelerating improvement in our working capital metrics, we have so many opportunities under our control to create value for our key stakeholders. Executing this self-help is where our focus will be, regardless of what the macro does. And with that, I will now turn the call over to Rob to take you through our first quarter performance and our updated outlook for 2023, which now includes Altra.

Thanks, Louis, and good morning, everyone. I will also begin by thanking our global team for their strong execution and by welcoming our new colleagues joining us from Altra. We are excited to have you on Board and about where we plan to take the company together. Before getting into our first quarter results, I’d like to discuss a few administrative items. First, as we announced, when we closed the Altra transaction on March 27th, we implemented a new segment structure concurrent with closing the transaction. For reference, our new segments are listed on the right-hand side of this slide, in green, along with the percentage of our pro forma 2022 sales that they represent. How we map to these new segments from our old structure is detailed on the left. In the appendix of this earnings call slide presentation, we provided segment financials for 2022 by quarter for our legacy Regal Rexnord businesses under this new segment structure. I would also like to remind you that while we are reporting our Q1 results under this new segment structure, these results are only for our legacy Regal Rexnord business. Because we closed the acquisition of Altra in the last week of the first quarter and that period’s impact is considered immaterial to our first quarter performance. Those few days of Altra’s Q1 performance will be reported with our second quarter results. We estimate the impact of this shift to be roughly $0.06 of adjusted earnings per share that will be included in our second quarter results. Now let’s proceed to discussing our first quarter results by segment. Starting with Automation and Motion Control or AMC, organic sales in the first quarter were up 11.7% from the prior year. The result reflects growth in data center, aerospace and food and beverage markets. Adjusted EBITDA margin in the quarter for AMC was 23%, up 290 basis points versus the prior year, factoring benefits from price, mix and volume. Orders in AMC for the quarter were down 4% on a daily FX neutral basis. Book-to-bill in the quarter was 1.1. In April, book-to-bill tracked at roughly 0.9 inclusive of the Altra business. Our AMC business is more of a long-cycle business, and therefore, order patterns do tend to be a bit lumpy. In fact, overall comparable backlog for AMC is up roughly 3% year-over-year at the end of April. Turning to Industrial Powertrain Solutions or IPS, Organic sales in the first quarter were up 1.3% from the prior year. Growth in the quarter reflects strong performance in global metals and mining and energy end markets largely offset by project timing in alternative energy and weaker demand in agriculture and forestry markets. The adjusted EBITDA margin in the first quarter for IPS was 29.3% up 290 basis points from the prior year. Margin benefited from merger synergies and lower freight costs. Segment orders for the first quarter were down 4% on a daily FX-neutral basis, tied largely to pressure in short-cycle industrial markets. Book-to-bill in the quarter was 1.0. In April, book-to-bill also tracked at 1.0, inclusive of the Altra business. Turning to Power Efficiency Solutions or PES. Organic sales in the first quarter were down 15.9% from the prior year. The decline was driven by significant channel destocking activity, particularly in the North America pool pump, residential HVAC and shorter-cycle general commercial and general industrial markets in North America and China. This destock activity was fully anticipated and is largely in line with the expectations that we outlined in our fourth quarter earnings call. Note that we expect further headwinds from destocking in the second quarter, roughly on par with what we saw in the first quarter. But see this pressure moderating in the back half, especially in the fourth quarter. The adjusted EBITDA margin in the quarter for PES was 13.7%. This performance was as expected and closely aligns to the guidance provided on our fourth quarter earnings call. As a reminder, when comparing to the prior year, in addition to lower volumes, this margin performance largely reflects the year-over-year impact of the annual cost roll in that we saw a favorable impact last year and an unfavorable impact this year. As we look ahead to second quarter, we anticipate a significant sequential improvement in this segment’s adjusted EBITDA margin to a mid-teens level. Shifting to orders. Orders in PES for the first quarter were down 20% on a daily FX-neutral basis. Book-to-bill in the quarter was 1.0. Book-to-bill in April also tracked at 1.0. On the following slide, we highlight some additional financial updates. On the right side of this page, you will see that we ended the quarter with a net debt to adjusted EBITDA ratio of 3.96 times, which reflects impacts from Altra financing net of our strong free cash flow generation in the first quarter. This metric is in line with the net leverage target we announced at close. Free cash flow in the quarter was very strong, coming in at $174.4 million. As Louis mentioned, the team did a great job improving free cash flow performance in the quarter, owing in part to significant progress improving working capital and in particular, lowering inventories. We continue to see significant opportunities to augment our cash flow in 2023 by lowering inventory. As we previously stated, use of cash flow will remain heavily weighted to paying down our debt. Moving to the outlook. On this slide, we are updating our weighted average 2023 end market growth expectation to include Altra. Note that our outlook for each legacy Regal Rexnord end market are unchanged. For reference, we have added a column in the center of this table, representing how our end market exposures changed by adding Altra. Broadly speaking, our portfolio now has greater exposure to end markets with secular growth tailwinds. Regarding 2023 specifically, you can see in the last two columns on the right-hand side, that by adjusting our end market exposures to add Altra, our weighted average estimated end market growth rate for 2023 rises by 50 basis points to down 3%. This benefit is captured in our estimates for Altra accretion in 2023. On this slide, we are updating our financial guidance to include Altra. As you can see in this table, starting on the left, we present our outlook for revenue, adjusted EBITDA and adjusted earnings per share for our legacy Regal Rexnord business, which is not changing. In the next two columns, we define our expectations of how adding Altra will impact our revenue, adjusted EBITDA and adjusted EPS in 2023. Note that these impacts only reflect our ownership of Altra from the transaction closing date of March 27th. The last two columns simply had the outlooks for legacy Regal plus Altra to arrive at our current guidance, which calls for revenue in a range of approximately $6.5 billion to $6.8 billion, adjusted EBITDA in a range of $1.4 billion to $1.5 billion and adjusted earnings per share in a range of $10.20 to $11.10. At the bottom of the table are various below the line modeling items. For reference, our assumption is that Altra will add $0.15 to $0.25 to our adjusted earnings per share and factor sales at Altra being flat to up 100 basis points versus 2022 levels or slightly above our expectations for legacy Regal Rexnord. We have also factored approximately $20 million of cost synergies which equates to about $40 million on an annualized run rate basis exiting 2023. Finally, as you can see at the bottom of this slide, we are expecting free cash flow conversion of this year of at least 100%. Our expectation in dollar terms is to generate at least $600 million in free cash flow. Lastly, in light of the closing the Altra transaction and simultaneously revising our segment structure, we decided to provide more specific expectations for our second quarter performance by segment to make it easier for the investment community to understand our near-term financial expectations for the business. Note that we are not planning to adopt this approach on a go-forward basis but felt it did make sense at this time. In the table presented on this slide, we provide second quarter revenue and adjusted EBITDA margin expectations for each of our segments under our revised segment structure. The expectations outlined for adjusted EBITDA margin factor a significant sequential improvement in performance and include benefits from PMC and Altra M&A synergies, along with our ongoing 80/20 and lean initiatives. In summary, we are continuing to air on the side of caution as we forecast market-related performance for our legacy business and as we add the Altra business to our outlook. However, we do have line of sight to significant cost synergies, along with other cost savings initiatives that are well within our control. We also continue to gain traction on our growth initiatives, and as I mentioned earlier, our portfolio now has greater exposure to end markets with secular growth tailwinds, which further strengthens our resiliency. So on the whole, we are very pleased with the way we ended Q1 and while the macro outlook remains a bit uncertain as we enter Q2, our outlook for the company remains very positive, considering the tremendous amount of self-help we have in front of us, on growth, margin and cash flow. And with that, I would like to turn the call back to the Operator so we can take questions. Operator?

Thank you very much. [Operator Instructions] Today’s first question comes from Mike Halloran with Baird. Please go ahead.

Hey. Good morning, everyone.

Good morning, Mike.

So a couple of questions here. First, just a lot of moving pieces. Last quarter, we would have talked about, call it, 8% year one type accretion, I think, mid-teens for 2024 cumulatively for the Altra transaction. You gave guidance for this nine months? Can you just right-size us relative to those expectations and if there are any puts and takes, what would be driving the change either way?

Sure, Mike. Hey. Thanks for the question. So the -- first of all, the accretion outlined on the slides for the first three quarters of ownership. In the first 12 months, we would say, maybe roughly expect about 4% to 6% accretion in that time frame. You referenced the 8% estimate that we talked about last quarter. And that assumed that we were only going to adjust at that point to get that 8% for the lower than originally assumed financing costs. And now that we have got a more holistic view of Altra fundamentals and tax and other interest rate increases in that, we are seeing that look more like 4% to 6% over that 12-month period. Now I think what’s most relevant is that, the tremendous accretion that we expect over the next few years, the value creation and getting to that $18 earnings per share forecast for 2025 remains very much intact. And so, yeah, we are a little bit behind kind of to start relative to that first 8%, because of some of the assumptions that I mentioned, but very much still in line with that $18 earnings per share target that we put out there.

Just to clarify, Rob, were those more below the line, so tax, interest rate was the biggest driver of that and then fundamentals may be slightly lower or do I have that backwards?

It is mostly below the line that you are referencing. That is almost all of the difference and what we have changed in our estimate on accretion.

And then…

Fundamentals are smaller.

Perfect. And then I will dovetail into the next question I think. So the orders expecting, call it, stabilization in the next couple of quarters, better in the fourth quarter. What’s underpinning that? What are you seeing from an environment perspective to get to there? And I suppose, obviously, you can see the destocking impact that’s happening in the PS side now. Is it mostly just clearing that out and getting to a point where you are getting something more normalized relative to market demand? Is this also holding true for your more short-cycle industrial type pieces? Just any context to understand the confidence would be great.

Yeah. It’s really all that you said, Mike. I think you summed it up nicely. The orders were slightly better in Q1, actually, orders sequentially improved from Q4. We do think there’s still destocking going on, especially in resi HVAC. A pool is only 1%, but it’s clearly destocking going on in coal as well. That’s really what gives us confidence that the bottom hit in Q2. From a short-cycle industrial perspective, we are seeing some headwinds there, but I will tell you that we still see from our distribution channels that our COGS to them, meaning our sales to them, are slowing a bit, but they are still seeing growth and so we feel pretty good from even short-cycle industrial. And then when you look at the overall drivers of the business, early-cycle is where I really focus most of my comments, mid and late, Altra actually mixes us up a bit more than mid and late. And when you look at some of the proxies that we use for overall market trends, general industrial, ISM is below 50, China PMI is up now. And so we are starting to see in second quarter, some strength there. Like I said, on industrial distribution, continued growth, but certainly caution, resi HVAC bottoming out in second quarter. Non-res commercial, which is about 6% of our portfolio now still strike. So we feel good there. Food and beverage strength more so on food. Beverage a bit weaker. Alternative energy strength. We like the space. Actually, one of our customers came out stating that with IRA, their demand might be up more than 25% this year. And then we like our aerospace position. 5% of our business is in aerospace and aerospace is definitely growing and medical is growing. So, again, Mike, we do think Q2 will be the bottom of our orders and then we will grow from there. I hope that helped.

No. That was great. Really appreciate the time. Congrats again on the quarter.

Thanks. Yeah. Thanks, Mike.

The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.

Hi. Thanks. Good morning and nice work on the re-segmented information that recast. Nice and clean. I did want to…

Thanks.

… also comment on the free cash flow very strong, obviously. Louis, you mentioned a little change in incentive compensation structure to channel efforts on debt reduction. I am wondering if there’s kind of an interim accelerated aspect to that, obviously, there’s long-term emphasis on it too, but there’s always trade-offs. So I am wondering how you are staging that and if we would expect similar quarters of magnitude to your first quarter free cash flow, maybe not every quarter this year, but, yeah?

Yeah, Chris. So thanks for your comments and thanks for your question. Specific to compensation, we do believe what gets measured gets done. Trade working capital is a measurement that we have had historically in all of our compensation measures. We have increased that from about 20% of the variable pay -- annual variable pay bonus to 35% for this year. Will reassess at the end of this year if we want to make a different change. But we felt it was important to make it very clear to our organization that we need to reduce our inventory and free up cash, because we are on a laser focus of reducing our net debt-to-EBITDA to below 2.5 by 20 -- by the end of 2024. So that was the whole rationale and we feel good about first quarter performance.

And I will just add on, Chris, just on the inventory side. So we talked about that we are estimating somewhere between $150 million to $200 million of cash generated from lowering our inventories the year. We saw about $47 million of that come from inventory and contributed in the first quarter, which certainly puts us on a nice track for the rest of the year. As far as the cadence of cash as we go through the year, normally, in the first quarter and second quarter, it is a little lower and it starts to ramp up in the back half. I think from a modeling perspective you can assume that, we will see the remaining cash that kind of goes to that above $600 million in the year. maybe it trends up slightly more in the back half than the first half or at least from Q2 to Q3 in particular. But fairly flat line as we go through the year.

Thanks, Rob. Could you clarify what the $600 million reference was, I didn’t catch it?

Yeah. During my prepared remarks, I mentioned that we expect to see free cash flows of at least $600 million in the year.

Oh! Got it. Thanks.

The next question comes from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, guys.

Good morning, Jeff.

Congrats on all those done. Just on PES and the destocking, I mean, it seemed more stark than what we had in our models, I think, you said in line. I think 2Q typically is seasonally stronger, but you have it still muted. Just trying to understand kind of what you are building in for additional destock? And then just the margin cadence and really or activity -- your revenue cadence for this business as you look into the second half?

Yeah. So, Jeff, from a destock perspective, we definitely -- well, first of all, for Q1, we think Q1 hit exactly where we expected from a sales perspective for PES. When you think about the overall segment, it really -- it will end exactly with our guidance that we had given at the end of Q4. Now specific to what our view is on Q2 and going forward, we still believe there’s destock pressure. We think we are probably in the sixth or seventh inning. We also believe there’s a bit more caution than a couple of years ago in the consumer space and so some underlying demand moderation. You certainly probably have read the -- our HVAC OEM customers saying down high-single digits for the year. We are forecasting, because we area component supplier in, we are forecasting more low-teens and so really very much aligned. We expect that Q3 will be slightly better than Q2 and that Q4 will return to orders growth.

Let me just add on, if I could, Jeff, for you, just a little bit on your question about margin performance as we move forward. We provided the second quarter look by segment. But let me give you a sense of where we see full year rate. So how we see by segment, each of the segments are performing and where we expect their full year rate to land based on our current guidance. So I will just give you the four segments here. At the AMC, we expect them to be somewhere in the low 20s. So certainly a bit ahead of the second quarter expectations with sequential progression as we move through the year. For IPS, we are thinking mid-20s, again, ahead of second quarter expectations that we laid out with nice progression. PES, which is specific to your question, high-teens for the year with strong sequential progression throughout the year, but more weighted towards the fourth quarter. And then industrial, low-double digits, again, with nice sequential progression. So, hopefully, that gives you a good sense of the margins that we are expecting as we move through the year.

Rob, that’s very helpful. Just on Altra, I think, they reported their 4Q that was kind of in line with how we were modeling. I think you said 1Q in line. Can you just talk about any puts and takes you are seeing in their businesses, anything acting better or worse? And then just as you look at the accretion, what are you baking in for synergies for that first nine months? I know public company costs kind of come out right away? Thanks.

Yeah. So let me touch on Altra first overall. We couldn’t be more excited. As we closed, as we get to know the teams even more culturally a great fit we feel really good at this point. As you know, we -- our integration teams worked together from both the Altra side and the Regal Rexnord side for a few months, getting ready for close. We leverage the playbook from our PMC merger that went so well and we hit the ground running on day one. We are already finding ways early on, on how to collaborate and feel really excited as I said in my prepared remarks. We are not -- we are really excited about the $160 million of cost saves. We are more excited about the cross-marketing opportunities between the business and feel that, that’s going to accelerate. One item that I will emphasize here is that, Altra did not at all run their business from an 80/20 perspective. And we feel strongly that, that’s going to help them in the way they prioritize both from a growth perspective and a service perspective. So right now, we are very, very focused on understanding the evaluation, the analysis and then putting our plans together of how we are going to drive the Altra business from an 80/20 perspective.

And I will just add one other piece to that and that is the second half of your question on synergies. We do expect to realize the $20 million of synergies for Altra in the year, which would equate to a $40 million exit rate as we exit 2023. And so far on the PMC side, which we also have synergies flowing through, we realized about $10 million of synergies in the first quarter related to the PMC merger. We expect $45 million in the year from PMC related synergies, which equates to about $120 million exit rate on PMC. So that -- all of that said, summarized, would be about $65 million realized between both acquisitions in the year and about $160 million exit rate for synergies between both of those. Now one thing to bear in mind is on the Altra synergies in terms of modeling where those would hit from a segment standpoint, you would assume about 80% of that goes to IPS and about 20% of that goes to AMC. So, hopefully, that helps.

Okay. And then just any puts and takes in the base business end markets for Altra?

No. I mean the purpose of putting the slide in the deck was to give a perspective on our market assumptions. We absolutely think that the Altra markets mix us up a bit stronger. Our original 2023 assumptions was a weighted average market down 3.5%. Altra weights us to 3%. We think the Altra markets are likely down a couple of percent and we are guiding right now that Altra is going to be flat to up. So we feel good about their market positions and where they are going.

Okay. Appreciate it, guys.

Thank you.

The next question is from Nigel Coe with Wolfe Research. Please go ahead.

Oh! Thanks. Good morning. Just a quick -- okay. Congratulations on getting Altra done. Just a quick one.

Thank you.

Just a follow-up to Jeff’s sort of math on Altra. So the EBITDA range you gave for Altra on slide 15. Does that include the synergies, I mean, it’s a small number, but just -- does that include the $20 million?

Yeah. It does.

It does. Okay. Good. Just -- I feel -- just want to make sure. And then on the sort of the power efficiency of the PE segments. I mean, if you look at the flat sequential sales, it implies maybe high-teens organic decline versus mid-teens in 1Q. Is that the right way to think about it? And that flat sequential sales will be very unusual, so I am just wondering, are we seeing even greater pressure on inventory. I think you said similar pressure, it feels like there’s even greater pressure, what are you baking in for that? And then just on that second half ramp, it seems like you are pointing towards like 20% plus margins in the back half of the year, just as kind of what gets us from mid-teens to high-teens?

Yeah. So from a revenue perspective, it -- we do believe there’s going to be continued pressure on destocking in Q2, but no worse than what we are seeing in Q1. And again, that’s why we are guiding to flat overall sales sequentially Q1 to Q2. Now from a year-over-year perspective, I will remind you that from a stacking perspective, the stack here is a compare of 40% growth on a two-year stack in 2022. And so 2023 Q2 is a tough compare. But, yeah, right now, we are not seeing any further deterioration. We are saying that yet, there is some destocking still to go and that will allow us to clear it out in Q2 and in Q3 start to see some return to normalized revenue levels.

And from a margin perspective, sure, we have absolutely see that the first half is heavily weighted by the volume that we are seeing that decline in volume, but also that the year-over-year impact of the cost roll hitting in that first quarter. But you take that out, and you are right, in the back half of the year, we would expect to see the low 20s to get to that teens level by end of year. So your math is correct.

I am glad that’s correct. And then a quick follow-on with the industrial business, so I can stick it by absence in the slides. Where are we in that divestment process?

Yeah. I don’t think too conspicuous since it’s really only 8% of our sales and 4% of our EBITDA. But right now with regards to where we are with the strategic review, there’s not much we are ready to say at this point, we are continuing the review and expect to be able to provide an update on the process relatively soon.

Okay. Thanks, Louis. Thanks, Rob.

Yeah. Thank you.

[Operator Instructions] The next question comes from Julian Mitchell with Barclays. Please go ahead.

Thanks a lot and congratulations on closing the deal. There’s been a lot of sort of multilayer questions, maybe one, hopefully, simple one for me. Just when I am thinking about the orders and sales, so are we assuming the orders year-on-year in Q2 are down sort of 9% or 10% similar to the first quarter and then a sort of flattish in Q4 and then organic sales down kind of low-single digits second quarter and third quarter and maybe sort of close to flat by Q4. Is that the way to think about the year-on-year for orders in the sales?

Yeah. So, certainly, it is the way to think about it for Q2 on orders. And we are thinking about orders in Q2 to maybe a little bit more than down that 9%, 10%, maybe low-teens in Q2 and then when you start building from there year-over-year, certainly, sequential growth Q2 to Q3, Q3 to Q4 and then year-over-year, slightly down in Q3 and then up in Q4 on easier. From a revenue perspective, yeah, you profiled it maybe a little bit lighter than what we would expect. We do expect growth year-over-year in Q4 in the mid-single digits.

That’s extremely helpful. Thank you. And then just my second question, trying to look more, I guess, at a couple of markets. One is general industries, which I think is 21% of your sales and then warehouse, which I think is about $5 million. So general industry sort of perspectives there on when did you see the destocking start, when do you think it will end? And then on warehouse, you have got some very good sort of macro numbers on CapEx growth recently, but a lot of companies’ bottom-up sounding worse and worse. So maybe update us on what you are seeing there?

Yeah. So I will hit warehouse first, to your point, it’s about 5% of our sales. We are forecasting it to be down low-teens and so we do feel pressure coming from the warehouse markets in 2023. But what I love about the space is, we have great differentiated product and we are winning against our competitors because of our technology, but from a macro market perspective, we are expecting to be down. For general industrial, I will tell you, you got to again remember that, within that space there’s a lot of different markets and there’s short-, mid- and late-cycle. Now from a distribution standpoint, we don’t expect there’s a lot of destocking left to do here. We definitely think, from that perspective that, the inventory normalization will occur in Q2. So like I said, our distributors are seeing -- still seeing sales growth, so therefore, demand. They are lowering their inventory, but there’s not a big adjustment that’s needed. So -- at least for our products. And so we would say if there’s a slight decline, it’s going to be Q2 with recovery going forward.

That’s great. Thank you.

Sure.

You bet.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to CEO, Louis Pinkham for any closing remarks.

Thank you, Operator, and thanks to our investors and analysts for joining us today. I hope a key takeaway from today’s presentation is that Regal Rexnord has transformed into an enterprise position to deliver faster growth higher margins and greater cash flow. With Altra, we are clearly on a path to outgrow our markets, raised our gross margins to about 40%, our adjusted EBITDA margins to 25% and generate substantial free cash flow, allowing us to rapidly reduce our net leverage. Thank you again for joining us today and thank you for your interest in Regal Rexnord.