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Good morning and welcome to Regal Rexnord Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] 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 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 100 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 after-market opportunity for our business, which we forecasted approximately six times than 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 we -- 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 reflects 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 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 resi 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 resi-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 fourth quarter on our now healthy resi-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 resi-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. Moving to the outlook. As we stated at our Investor Day on September 17, we were tracking lower in our guidance range. Today, we are updating our guidance to factor some incremental headwinds. We're reducing our sales outlook to factor weaker performance in third quarter and our latest expectations for fourth quarter. The primary drivers of the lower sales outlook are top-line performance in PES and in AMC. There are two main drivers of our revision in PES. One, sustained weakness in the non-US commercial HVAC and US general commercial markets. And two, the slower-than-expected ramp in our residential HVAC capacity, which I discussed earlier. Our lower sales outlook for AMC is largely related to a more protracted recovery in discrete automation versus our prior expectations, as well as the incremental caution among our customers across the segment related to factors including persistent ISM pressure and a lower-than-expected demand acceleration benefit tied to interest-rate changes. Our outlook for adjusted EBITDA margin is now 22% due to the lower sales volumes and slightly weaker mix. We are also making minor adjustments to our below-the-line estimates as detailed in the table. Notably, our effective tax rate is coming down by 2.5 points, driven primarily by a one-time tax benefit in non-US operations. The net impacts of these changes reduced the mid-point of our adjusted diluted EPS guidance range by $0.30 to $9.30. Our new adjusted diluted EPS guidance range for full-year 2024 is now $9.15 to $9.45. Finally, we now expect adjusted free cash flow to be approximately $600 million this year, down from our prior expectation. The primary drivers of the revised cash-flow expectation are our lower EBITDA outlook, higher inventory investments, largely tied to the resi-HVAC background and sell-through in our PES segment and timing of receivable collections associated with the expected timing of shipments in the quarter. For reference, our updated free cash flow guide still represents a 10% free cash flow margin and we believe we continue to have a clear path to a low-to-mid teens cash-flow margin over the next two to three years as we continue to realize synergies, repay debt, reduce cash restructuring costs and drive stronger top-line growth. On this slide, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for fourth quarter and for the full year. Note that the 2024 guided growth rates for AMC and IPS are all calculated versus 2023 pro-forma sales results. While we are disappointed to be trimming our outlook, we are all -- we are pleased with the continued strength of IPS while continuing to see market headwinds at AMC and PES. With that said, we are staying focused on what is under our control, working the many outgrowth initiatives we outlined at Investor Day, continuing to deliver synergies and execute our 80:20 and lean initiatives to expand margins and generating healthy free cash flow and paying down our debt. So despite some temporary near-term frictions, confidence in our Regal Rexnord value creation opportunity remains high. And before taking questions, many of you may be interested in our thoughts for 2025. And while we are not planning to provide 2025 guidance today, I'm happy to share a few guideposts to help with modeling next year. We will provide a fuller update as we typically do when we report fourth quarter results. From a sales perspective, we are currently planning for limited growth in 2025 because a number of our end-markets are experiencing headwinds that for now at least we assume persist into next year. Markets that fall into this category include discrete automation, non-US commercial HVAC, general commercial, general industrial and machinery off-highway. Regarding residential HVAC, demand appears to be roughly flat this year at the end user level. And for now, we are assuming that remains the case or potentially modestly better in 2025. That said, we believe the refrigerant transition is creating some uncertainty in the demand outlook, which may vary at different points of the value stream. We plan to provide additional thoughts on this topic when we guide 2025. From a margin perspective, a key driver will be incremental cost synergies that we expect to realize next year. We would also expect any organic growth to lever at an enterprise average in the low-30s. Below the line, the primary drivers in the bridge will be a roughly $50 million decline in interest expense and a reversion to our longer -- to our long-term expected effective tax rate of 24%. Again, we will provide more details with our fourth quarter report. And with that, operator, we are now ready to take questions.

[Operator Instructions] And our first question comes from Mike Halloran at Baird.

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.

The next question comes from Jeff Hammond at KeyBanc Capital Markets.

Hey, good morning, guys.

Good morning, Jeff.

I'm still struggling a little bit with HVAC. I mean, one, just trying to understand why you guys weren't more prepared for an uptick? It seemed pretty well telegraphed that there was going to be pre-buy here and your order rates kind of indicate, you know, continued softness relative to not being able to ramp, and I'm seeing like 30% -- 20% to 30% order growth from the OEMs. So you know, maybe it's the other stuff, but I'm just trying to get my arms around it.

I really want to break this up into two, if I could, Jeff. First of all, we have seen 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.

The next question comes from Kyle Menges at Citigroup.

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

Hey, Randy.

Yeah. So, I have a quick question about the cross-selling synergies in -- particularly in IPS. I was just hoping you could talk through what kind of incremental benefits that you've been seeing from these synergies? And how that has trended versus your expectations this year and if you expect that to continue stepping up 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. In addition, our focus on -- and this is why I emphasized in my prepared remarks, the project win in the industrial powertrain because it gives another example of the strength of the scale and scope of our portfolio. Hopefully, that helps.

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?

Yeah, it really is across the board. It does reflect what we see in our backlog today along with the cost synergies we expect in the quarter. We also see that we're going to get better sales in fourth quarter versus third quarter and so leverage on that will be stronger. And then the business did implement some cost actions in response to the slower near-term demand environment, which we expect to more fully realize. And finally, the third quarter did have the impact that I commented on during the call of some FX exposure on the -- at the EBITDA line that was not in our expectation initially, so -- which -- and I would maybe characterize that as maybe a third of the difference that we saw relative to our expectations. So, all of that combined, we feel good about the ramp that we've got going on. And to your question specifically, do we see that third quarter as a bottom, I'd say, yeah, pretty close to the bottom there moving forward. We would not expect that performance going forward.

Got it. Super helpful. Thank you guys.

Thanks, Randy.

The next question is from Julian Mitchell at Barclays.

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 bps 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?

Yeah. So first of all, on fourth quarter, which I think where you were going first, it is a little lower, but we're a little bit -- we're going to be a little bit measured as we kind of go through the fourth quarter here based on what we've seen. But we -- it is still within our normal decremental margins. So, it does reflect the mix of sales coming out, which is weighted to higher-margin AMC. So, moving into next year, yeah, you characterized it correctly and we do believe that we have a good path based on both the synergy expectation, the volume that we expect to realize as we go through the year from an EBITDA perspective. And then from an earnings perspective, the interest coming out -- the interest expense coming out next year, which should drive a nice benefit as well. So, yes, we do expect to come out next year at that a couple of 100 basis points relative to where we finish this year of improvement as an exit rate and still feel very strongly about that.

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.

The next question comes from Nigel Coe, Wolfe Research.

Thanks. Good morning, everyone. Thanks for the details in '25. Rob, maybe talk about -- I think you mentioned $1 billion of free cash flow as an exit rate for '25. Just curious what that means because obviously, there's a lot of seasonality on free cash flow? So, just wondering what you meant by that? But just want to kick off with a question on the -- we've got pressures in commercial broadly speaking and then Europe and China. Maybe just kind of bit double click into that a little bit more so we understand exactly what's going on there. And then, what's the visibility in '25 to those end-markets getting better 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 to 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?

Except that our comments on longer-cycle orders were more AMC-centric. And so our cycle factory automation, so discrete automation, excuse me, that we sell into aero, defense, our medical, our data center business, that's where much of that commentary was about, which gives us some confidence into '25. IPS though, to your point, I mean, look, the -- probably the biggest macro driver that we look at for IPS is ISM that's been below 50 for many, many months. Yet IPS continues to execute and outperform. And we believe that that just reinforces the thesis of the rationale for the Rexnord and the Altra acquisition and it's all about our scale and scope of go-to-market and the portfolio of products that we have. And so, we'll continue to drive that activity and think that's a, long-term benefit for IPS and Regal.

Okay. Thanks, Louis.

Yeah, sure. Thank you.

The next question comes from Joe Ritchie at Goldman Sachs.

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.

Yeah. I think the way to think about it, Joe, is think about $800 million number for next year. So, a couple of hundred million dollars of benefit, maybe even a little bit better than that depending on the working capital contribution as we go through the year is one of the determining factors there. And I said -- like I said, we're going to get a little bit of that trickle over from this year from a timing perspective. But again, that's really kind of the one area where it could flex a little bit, but I still think $800 million is about the right number.

Okay, very clear. Thanks for that, Rob. And then I guess maybe just a near-term question on the fourth quarter because not to pin you down to a number necessarily by segment, but so PES last year had that, they had a -- one of your customers had cut production for a few weeks. And so, there should be a pretty good, nice little benefit there. And so, I don't know, in my model, I was forecasting PES to be up double-digits in the fourth quarter. When you think about the build-up by segment, how does kind of like the forecast for the fourth quarter shake out by segment ballpark?

Yeah. Well, I don't think that it would be double digit in the fourth quarter for PES. I think it's going to be in the range that we provided in the guide there that we put out by segment, which would be kind of low -- lower in the fourth quarter, lower single-digit.

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 resi-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.

The next question comes from Christopher Glynn at Oppenheimer.

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 see 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.