Regal Rexnord Corporation (NYSE:RRX) Q3 2023 Earnings Call Transcript

Regal Rexnord Corporation (NYSE:RRX) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good morning, and welcome to the Regal Rexnord Third Quarter 2023 Earnings 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 like now to turn the conference over to Robert Barry, Vice President, Investor Relations. Please go ahead.

Robert Barry: Great. Thank you, Alan. Good morning, and welcome to Regal Rexnord’s third quarter 2023 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. On Slide 3, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors, and have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in the presentation materials.

Turning to Slide 4. Let me briefly review the agenda for today’s call. Louis will lead off with his opening comments and an overview of our 3Q performance. Rob Rehard will then provide our third quarter financial results in more detail and provide an update to our guidance. We will then move to Q&A, after which, Louis will have some closing remarks. And with that, I’ll turn the call over to Louis.

Louis Pinkham: Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our third quarter earnings to get an update on our business and for your continued interest in Regal Rexnord. Our third quarter can be characterized by strong controllable execution against an end market backdrop that became weaker than we expected in the quarter, causing us to fall short of our sales and earning expectations for the quarter and for the year. Our strong execution is most evident in our cash flow performance. We generated $162 million of free cash flow in the quarter, keeping us firmly on track to hit our target of at least $650 million for 2023, even with the lower sales and EBITDA expectations. What we generated in Q3, plus some cash on hand, allowed us to pay down $185 million of debt, which is further lowering our interest expense forecast.

Our team also delivered roughly flat adjusted EBITDA margins, down 10 basis points versus prior year on a pro forma basis, as our top line fell by 8.5% on a pro forma organic basis, implying a deleverage rate of 22%. We also made significant progress rebalancing the portfolio towards our most profitable growth opportunities by reaching an agreement to sell our industrial motors and generators businesses for cash proceeds of $400 million, which is on track to close in the first half of 2024. Adjusting for this sale, our enterprise gross and EBITDA margin should rise by over a 100 basis points. And because we intend to deploy all net proceeds to debt reduction, we should be able to accelerate our balance sheet deleveraging. At the same time, we believe our associates in these businesses will benefit by joining an organization that is more aligned with the growth strategy in global industrial motors and generators, which should allow them to excel in the future.

We have clearly transformed our portfolio with gross margins four years ago in the mid-20s to achieving mid-30s gross margins today, and a clear path to 40% gross margins, which will be helped by the industrial sale. As much as I am pleased with our controllable execution in the third quarter, I am disappointed that our financial performance is falling short of prior expectations, a dynamic largely explained by weaker end markets. Our sales in third quarter were up 24.5%, all in, but down 8.5% on a pro forma organic basis, four of our top five end markets representing roughly 50% of our sales were weaker than expected. This weakness was also apparent in our order rates, which on a daily pro forma basis, were down 10% in the quarter. We did face a fairly challenging 24%, two-year stack compare on orders, but performance was below our expected mid-single digit decline.

Normalizing global supply chains continued to impact orders, but a more cautious channel, and in some cases, weaker end user demand were also factors. Our orders and sales performance resulted in a quarter end backlog that remains above our normal levels in IPS and AMC with PES levels now close to what we would consider normal. Book-to-bill was 0.94 in the quarter. In October, we did start to see early signs of improvement in our order rates, particularly in IPS, which saw modest year-over-year growth and sequential growth in PES and AMC. This makes us cautiously optimistic that we may be approaching an inflection point, though an improvement versus what we saw in the third quarter. Our current guidance assumes fourth quarter orders are flattish to slightly down versus prior year.

Despite third quarter top line pressures, margins in the quarter were strong. Our adjusted gross margins came in at 34%. The third quarter adjusted EBITDA margin was 20.6%, down 10 basis points versus the prior year on a pro forma basis. Two of our segments also achieved nice year-over-year adjusted EBITDA margin expansion. PES was up 310 basis points to 19.7%. And pro forma margins at AMC rose 130 basis points to 24%. Drivers include price cost, improved operational efficiencies, various 80/20 initiatives, and disciplined cost management by our teams, where we struggled in the quarter was IPS, which saw margins fall 330 basis points versus prior year. The principal driver was mix pressure. Much of it tied to short cycle weakness in the higher margin aftermarket channel.

But another factor also emerged during the quarter, which relates to PMC footprint synergy realization. Those who have followed us for some time know that we like to set ambitious operational targets and then work with discipline and urgency to achieve them. I think our track record on margins in particular demonstrates our ability to execute in this manner. However, during the quarter, we decided to incur higher cost to minimize customer disruptions related to our footprint actions. This decision is resulting in some temporary pressure to IPS margins. But to be clear, there is no change to the permanent reductions to our cost structure that our PMC or for that matter, our Altra footprint synergy actions are expected to bring. Rob will elaborate on this topic a bit further in discussing segment performance and our updated outlook.

However, in total, I’m pleased with our team’s performance in the quarter, and I want to thank all of our associates for their disciplined execution in a tougher end market environment, and for their hard work and dedication to making Regal Rexnord stronger every day. Shifting focus, you may recall that each quarter I have been spending a few minutes introducing our principal AMC businesses to help investors better appreciate how we are well positioned to accelerate profitable growth for many years to come. This quarter, I’d like to spend a couple of minutes discussing aerospace and defense. Our A&D division, which grew 27% in Q3, sells highly engineered components used in commercial aerospace, air and land-based defense, helicopter and space exploration applications.

These markets are positioned to benefit from strong secular growth tailwinds tied to making air travel more sustainable to countries addressing rising geopolitical risk, into our OEM customers prioritizing suppliers with lower risk supply chains. In the realm of aircraft sustainability, we see greater electrification of commercial and military aircraft, the introduction of alternative fuels and increased use of hybrid propulsion systems. As global geopolitical tensions rise, countries are enhancing their domestic defense capabilities, which is driving demand for our defense products. And in the wake of recent periods of global supply chain disruptions, customers are shifting their business to supplier partners with better managed lower risk supply chains.

All of these trends play to Regal Rexnord’s strength. We have been making meaningful investments in R&D, in engineering and in talent to significantly raise our new product vitality and production capacity, and thereby, ensure we are well positioned to continue addressing our customers’ needs effectively. I am pleased to share that we have solid momentum. As you can see on the slide, our aerospace business sales are tracking up 20% in 2023, and roughly 1/4 of this growth reflects outgrowth tied to the new product investments the business has been making. Through the combination of our Legacy Regal Aerospace business with that of Rexnord PMC, and now Altra’s aerospace businesses, we have a more comprehensive product portfolio and a scalable global platform and footprint to expand from selling components to also providing vertically integrated electromechanical motion control solutions.

Today, after only a couple of quarters since the transaction closed, the combined Regal Rexnord A&D businesses have a robust funnel of synergistic bid opportunities. When it comes to our ability to provide differentiated service levels to our customers, our manufacturing footprint and supply chain are increasingly a competitive advantage at a time when such reliability is critically relevant to customers. To this end, we recently completed construction of a state-of-the-art manufacturing facility in Chihuahua, Mexico. We’re tapping into highly skilled local labor pools in a region that has become an aerospace center of excellence for many of our customers, expanding our capacity to address rising demand while improving our service levels and increasing the value we can offer to our customers.

I should add, the facility also incorporates a range of state-of-the-art energy and water efficiency features in its design, supporting our commitment to be good corporate stewards of the environment. So when we step back and connect the dots on the power of our A&D portfolio, differentiated highly engineered products, deep domain expertise, longstanding customer relationships and opportunities to leverage the combined capability of Regal Rexnord’s total portfolio, we see a business position for strong outgrowth into the foreseeable future. And with that, I will now turn the call over to Rob to take you through our third quarter segment financial performance and discuss our latest guidance.

Rob Rehard: Thanks, Louis, and good morning, everyone. I’ll also begin by thanking our global team for their hard work and disciplined execution at a time when we are facing challenging end market headwinds. Now, let’s review our segment operating performance. Starting with Automation and Motion Control or AMC, organic sales in the third quarter, pro forma for the Altra acquisition, roughly flat to the prior year, reflecting strength [ph] in the data center, aerospace and medical markets, tempered by weakness in general industrial and global factory automation, particularly the short cycle booking ship business. I will also point out that year-to-date organic sales growth for the AMC segment is up 5.1% on a pro forma basis.

Adjusted EBITDA margin in the quarter was 24%, in line with our expectation and up 130 basis points versus the prior year on a pro forma basis. The margin performance reflects pockets of strength in mix positive markets such as data center, aerospace, and medical, along with favorable price cost, strong operational synergy realization, and discretionary cost management. Orders in AMC, on a pro forma organic basis we’re down roughly 20% in the third quarter on a daily basis with book-to-bill at 0.86. We expected orders to decline in the quarter versus prior year as supply chain lead times and inventory levels normalize. However, order intake was lighter than expected in our book ship business as more cautious general industrial end markets pushed out inventory replenishment orders.

This was most pronounced in our businesses with factory automation exposure where blanket orders and inventory buildup had been more significant. In October, book-to-bill tracked at roughly 1.1, which we are pleased by, but the order mix is still weighted more towards new projects with longer shipment dates versus in-quarter book and turn. For perspective, AMC’s third quarter order decline is against a two-year stack just above 40%, and this segment’s backlog at the end of the third quarter remains the most elevated of all our segments, roughly 50% above normal. While this level of backlog gives us optimism, it’s longer cycle waiting will likely benefit AMC in 2024. In fact, the dynamic of weak, short cycle orders, mainly in automation-exposed businesses versus stronger long-cycle orders and backlog, in automation, aero, medical and data center was a key driver of AMC’s flat third quarter sales.

We expect this dynamic largely to continue in fourth quarter as well before starting to improve in early 2024. Turning to Industrial Powertrain Solutions or IPS. Pro forma organic sales in the third quarter were down 3.7% versus the prior year. Growth in the quarter mainly reflects weakness in the global industrial and ag markets partially offset by strength in energy, along with metals and mining. In particular, our book ship business was down more in the third quarter than anticipated, which was driven mostly by destocking. Adjusted EBITDA margin in the quarter for IPS was 21.7%, below our expectations due to weaker mix and volumes, net of favorable price cost and synergies. Mix in particular came in much weaker than our original expectations and presented a significant headwind to margins in the quarter.

The weakness in short-cycle industrial has a disproportionately large impact on our standard products, which are often sold through distribution and tend to carry well above average margins. At the same time, some of the IPS markets seeing strong growth such as metals and mining tend to drive demand for certain low-mix products. The good news is that the channel for standard product is destocking, and when it rebounds, should lever at very attractive rates. As Louis mentioned, we made a decision during the quarter to incur higher costs in IPS aimed at maintaining quality and service levels for our customers during a period of peak manufacturing footprint actions related to our PMC merger synergies. We are currently in the process of rationalizing multiple manufacturing facilities.

And during the quarter, we encountered lower-than-anticipated labor productivity in the catch plants that is at the site into which we are consolidating production lines. We estimate these higher customer service assurance costs are impacting IPS by approximately $16 million in the second half of this year, weighted roughly 60/40 between the third and fourth quarter. While these costs are masking some of the synergy benefits, they are temporary in a no way impact the permanent level of synergy savings that we ultimately expect to realize from the PMC and ultra transactions. Pro forma organic orders and IPS were down 4% in the third quarter on a daily basis, and book-to-bill was just above 1.0. In October, book-to-bill, once again tracked at 1.0, and orders were up low single digits.

For perspective, IPS’s third quarter order decline is against a two-year stack of nearly 30% and the segment’s backlog at the end of the third quarter remains well above normal. Turning to Power Efficiency Solutions or PES. Organic sales in the third quarter were down 19.1% from the prior year. The decline was driven by significant channel destocking activity and weaker demand in the North America residential HVAC market, weakness in China and Europe and destock pressure in the U.S. general commercial market. These destock pressures were anticipated and PES’s sales performance is directionally consistent, albeit modestly more severe versus the expectations we outlined on our last earnings call. The good news is that we now believe destocking in Residential AC is mostly behind us.

Although as the heating season begins, we believe there is still – likely still too much furnace inventory in the channel. The adjusted EBITDA margin in the quarter for PES was 19.7%, up 310 basis points versus the prior year period and modestly ahead of our expectation. Key contributors to the PES margin performance were favorable price cost, improved operational efficiency, lower freight and favorable mix, partially offset by lower volumes. We also continue to selectively deploy 80/20 across the business to move away from lower-margin Quad 4 business and focus on growing our Quad 1 business to better serve our most valued customers. Overall, strong margin performance despite sizable top-line headwinds achieved disciplined execution by our PES team.

Shifting to Orders, Orders in PES for the third quarter were down 9% on a daily basis. Book-to-bill in the third quarter was 1.0 and tracked at 0.97 in October. On the following slide, we highlight some additional financial updates for your reference. Notably, on the right side of this page, you’ll see we ended the quarter with total debt of $6.5 billion, down $185 million and net debt of $5.9 billion, down $124 million versus the end of the second quarter. Net debt to adjusted EBITDA is 3.86%, and our interest coverage ratio is 3.24 times. Free cash flow in the quarter was very strong, coming in at $161.5 million, up from $111.1 million in the prior year period. The teams continue to do a great job improving free cash flow performance, aided by improving working capital and in particular, by lowering inventories, where we continue to see lots of additional opportunities.

Moving to the outlook. I’d like to start by providing an update on how our principal end markets are tracking versus our expectations earlier this year. The table on this slide shows our end markets. The percent of our sales each represents from largest to smallest. And in the third column, our growth expectations for each end market as of the first quarter, which also guided our second quarter expectations. The fourth column indicates how the market was tracking as of the third quarter indicated a stronger, weaker or as expected versus our prior expectation. You can see that four of our top five end markets specifically general industrial, consumer, food and beverage and commercial are tracking weaker versus our prior expectation. The fourth of the top five nonresidential construction is tracking largely as expected.

These end market developments are the reason we now expect 2023 organic sales be down roughly 6% on a pro forma basis versus 2022 and versus our prior expectation of being down slightly. Finally, in the last column to the right, we are providing an early look on how we are thinking about end market growth rates in 2024, which we will update again when we report fourth quarter and provide our complete 2024 outlook. You can see that we expect generally more favorable end market conditions next year; a few things in this column that I would highlight. The consumer market, which largely reflects our residential HVAC business moved from red to green, implying an inflection to low- to mid-single-digit growth. The non-res construction market, which largely reflects our commercial HVAC, is forecast to be flat to slightly up.

The significant declines we are seeing this year in food and beverage are expected to subside. The commercial market, which was expected to be flat in 2023, but has been much weaker mostly due to destocking, is expected to slightly improve in 2024. And finally, we expect to see continued healthy end market growth in a number of our secular markets, including aerospace, medical, alternative energy and data center. As you can see on this slide, we are revising our guidance for adjusted earnings per share to a range of $9.05 to $9.25 versus a prior range of $10.20 to $10.60. The change primarily reflects weaker end markets, as outlined on the prior slide, mix and to a lesser extent the decisions we made to minimize customer impact as we move through the peak period of PMC synergy-related footprint moves in IPS.

Revenue for 2023 is now expected to be approximately $6.25 billion versus $6.5 billion previously. On a pro forma basis, 2023 revenue is expected to be approximately $6.7 billion versus $6.95 billion previously. Adjusted EBITDA margin is now expected to be approximately 21% versus roughly 22% previously or equivalent to the pro forma 2022 adjusted EBITDA margin, despite the topline pressures we are seeing. This represents an approximately 8% reduction on an EBITDA dollar basis, a smaller decline versus on EPS due to our temporarily elevated interest expense. Lastly, we are reiterating our expectation for generating at least $650 million of free cash flow this year, despite the reduction in EBITDA guidance. As a reminder, our capital deployment will remain heavily weighted to debt reduction.

Finally, at the bottom of this slide, we present our standard below-the-line modeling items, some of which have changed slightly since our last update. On this slide, we provide more specific expectations for our fourth quarter performance by segment to make it easier for the investment community to understand our near-term financial expectations for the business. While we do not plan to provide this level of detail going forward, we thought it would be useful given the newness of the re-segmentation along with the segment-specific headwinds we experienced in the third quarter. Notably, we assume revenues for the enterprise are down slightly versus third quarter, mainly as we continue to experience headwinds in short-cycle industrial in factory automation and in China and Europe, partially offset by strength in data center, aerospace, medical and energy along with metals and mining markets.

We expect adjusted EBITDA margins to be up modestly versus third quarter, aided by line of sight in our backlog to modestly improve mix, improved plant efficiencies, cost actions implemented late in third quarter in response to weaker end markets and lower customer service assurance costs in IPS versus in the third quarter. In summary, we are disappointed to be lowering our guidance, but we are pleased with the way our teams are managing what is under their control in particular, around cash flow and P&L deleverage rates. As we look ahead to the next couple of years, we remain motivated by the tremendous opportunities for value creation before us from delevering the balance sheet to progressing to approximately 40% gross margins and 25% adjusted EBITDA margins and to working the many strategies underway to improve our outgrowth.

Before we conclude, I’d like to connect a few dots on our cash flow expectations and the associated value creation opportunity we envision. If you look at the strong momentum we have on cash flow generation this year and how that level can grow next year on further sizable progress lowering our inventory. Picking up an extra quarter of Altra cash flows, since we only owned Altra for three quarters in 2023, plus stepped up synergy benefits not to mention using the proceeds from the industrial transaction to further pay down debt, it really does start to create a nice picture. Using the majority of this cash flow to reduce our debt and lower our interest costs has a couple of key implications. One, is a nice boost to EPS growth even before considering any help from end markets for our many growth initiatives.

The second is a nice potential benefit to our equity as debt becomes a smaller portion of our capital structure. At a time when in market noise is running high, I would urge investors to also keep these value creation levers in mind. And with that, I would now like to turn the call back to the operator so we can take questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Mike Halloran with Baird. Please go ahead.

Mike Halloran: Hey. Good morning, everyone.

Louis Pinkham: Good morning.

Rob Rehard: Good morning, Mike.

Mike Halloran: Yes. Let’s start on Slide 12 and kind of wrap what you’re seeing today into why there’s confidence in next year. You look at the year-over-year read on 2024, and it certainly reads more positive than some of the in-quarter trends that you were highlighting. So as we think about that picture you’re painting for 2024, how much of that is just destock comps? How much of that is Regal’s, in Regal’s control with some synergy benefits on the revenue side or some drivers of outperformance versus fundamentally thinking the market is going to get better from an end market perspective? And any color you could give there would be great?

Louis Pinkham: Yes. Great, Mike. Thanks for the question. We are feeling a little bit more bullish about 2024. And a big part of that is the destock and the destock especially in the consumer space. We’re not expecting a significant rebound in the NAND, if any, for that matter from an end-user demand perspective. But because of the destock we lived through in 2023, we expect positive momentum going into 2024. A lot of our markets that are more secular-driven, aerospace, data center, medical, alternative energy. Those are going to continue to be strong into 2024 and our efforts to expand our servable [ph] market with new product in those markets is going to help us as well. And then when we look at a couple of other markets, for example, non-res construction, which I think could have some additional tailwinds around some of the stimulus in the United States as well as the investments in data center, we will – we’re very well positioned there.

On top of that, I would say we’re bringing up new products, air handling products, products to support the heat pump market both in the United States and in Europe, as you probably know we do not have a strong residential HVAC positioning in Europe. And so this will be an opportunity for us next year. So overall, we’re feeling that 2024 should be a bit stronger. Short-cycle industrial is a bit of a question mark for us right now. And we certainly saw more than we expected destocking in Q3 and a little bit more slowdown in demand. We expect that destocking though is ending. And certainly, IPS’s orders being up in October year-over-year gave us some confidence, but hopefully that helps you understand how we’re thinking about 2024 and we’ll give much more guidance on this at the end of our Q4 earnings in July or excuse me, in January.

Rob Rehard: The only thing I would add, Mike, to that is that you also asked about synergies and how that might help benefit the business as well. And so I would add that we do expect to realize the $65 million in synergies here in 2023. And then there’s another $90 million of synergies in 2024, which is about $45 million for PMC and carryover and then about another $45 million for Altra. So that’s how you get to that extra $90 million that will certainly help on the bottom line as we move through2024.

Mike Halloran: That helps. Thanks. And then is there any way to quantify what the destocking impact was this year in dollar terms, percent terms, anything to help understand the magnitude?

Louis Pinkham: You know what, Mike it would be a little bit of a guess for us. We’re saying probably about two-thirds of the headwind in PES was likely due to destock this year. And then I would tell you the headwinds that we saw in IPS in Q3, I’d say two-thirds of the headwind specific to Q3. And the – on the factory automation side of AMC, I’d say about two-thirds as well was destock specific to Q3.

Mike Halloran: Okay. Thank you. Last one then; maybe just talk about the operational headwinds you saw in the quarter as you’re going through these, I think it’s natural to have quarters where everything doesn’t go smoothly, and you have to make some adjustments. So I suspect I’m just more interested in understanding why you think this is not going to linger into next year? And if there’s any remediation that’s necessary here, I’m going to guess no because again I think you directionally have your hands around it. But anything that you’ve gotten from a lesson here that we can take forward, and comfort level that this is behind you once you exit the year?

Louis Pinkham: Yes. So thanks, Mike. And we do think we have our arms around this. And we do not expect these inefficiencies to continue into next year. First of all, I want to emphasize that our goal is always to execute any of our restructuring actions with zero customer impact, and our track record has been pretty strong here. When you look back to our 303 plan a couple of years ago, we actually reduced in 23% of our manufacturing square footage and closed 21 facilities and had very little customer impact. And so that was the decision in Q3 is that there were actually four site consolidations going on at the same time. A couple of them were a little bit more complex than we anticipated. And so we took on more headcount and inefficiency at the receiving plants to ensure that we could have high quality and service levels to our customer.

About half of that will reduce in Q4, and it will go away fully into next year. And so it gives us an ability to think about the planning of next year a little bit differently we still have every expectation to achieve our synergy objectives. But this learning gives us an opportunity to be better prepared because we’ll be making moves next year as well. And so right now, we feel good about our approach. I’m proud of our team and the decision they made in Q3 and I feel confident that we’ll have this behind us by the end of the year.

Mike Halloran: Thanks for that. Track record speaks for itself prior to the quarter. So really do appreciate the color. Thank you.

Louis Pinkham: Yes. Thanks Mike.

Operator: The next question comes from Julian Mitchell from Barclays. Please go ahead.

Julian Mitchell: Thanks and good morning. Maybe my first question was just trying to think about next year again. So it sounds like based on Slide 12 and some of the comments around synergies that are kind of a base assumption should be maybe flat to slightly up core sales. And then on the EBITDA front, we have the $90 million of synergy incremental and then maybe sort of, I don’t know, $80-ish million maybe from sort of base EBITDA from the acquisition. And then on the rest of the sort of base business, should we get some operating leverage there? Are you accelerating any cost cutting or for now I think it’s safer just too sort of assume the quarter of Altra year-on-year and then the synergies?

Louis Pinkham: Yes. So I think the way you’re outlining it here makes a lot of sense and is how we’re thinking about 2024. Now to be clear, Julian, we go through our operating planning in the November timeframe. So we’ll give a lot more guidance on this in January. But I think you are painting the appropriate picture. I would tell you that from a PES standpoint, those stronger margins that we saw over the last couple of quarters will continue into next year, we did consolidate one factory in PES. So we have lower fixed overheads. So there’ll be, I would say continued nice leverage in our PES segment. And then really, the commentary around the synergies affects mostly IPS, but somewhat AMC as well. And as you can imagine, when things flow we tend to get very operationally focused and we tightened our belts. And so there will be some cost save that continues into next year also. So overall, the way you’re describing it is a great starting point.

Julian Mitchell: And maybe just my second follow-up would be around, in terms of – when you look at the history of Altra and your own history of the sort of some of the base motion control businesses, thinking about the sort of typical downturn, duration is maybe three, four quarters and you’re obviously entering it now in the second half of this year, IPS, I think you’re in the third quarter of that downturn now. AMC in the first one, it looks like. So are we assuming based on history and sort of your best guess it’s maybe a sort of a four-ish quarter downturn again on core sales? Or is there something different about this downturn versus history?