Regal Rexnord (RRX) Q3 2025 Earnings Transcript

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Date

Thursday, October 30, 2025 at 10:00 a.m. ET

Call participants

Chief Executive Officer — Louis Pinkham

Chief Financial Officer — Robert Rehard

Chairman of the Board — Rakesh Sachdev

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Risks

Full-year adjusted EBITDA margin guidance was lowered to 22% from 22.5%, driven by "net unfavorable tariff impacts" and "mix impacts of rare earth magnet-related shipment delays."

Free cash flow guidance for the current year lowered to $625 million due to expanded tariffs, working capital tied to large data center orders, increased inventory for rare earth magnets, and higher cash interest costs.

Gross annual unmitigated tariff costs increased to $175 million from $125 million as of fiscal 2025, primarily due to the increase in India tariffs to 50% in 2025 and a broader tariff scope.

Rare earth magnet supply constraints are now expected to continue into early 2026, impacting shipments, especially for high-margin products in medical and defense markets.

Takeaways

Reported sales growth -- Sales rose about 2% year-over-year, and organic sales grew 70 basis points, with particular strength in energy, discrete automation, and aerospace, partially offset by medical and data center project timing.

Orders and backlog -- Orders increased 9.8% on a daily basis; backlog was up 6% year-over-year at quarter end, with a company-wide book-to-bill ratio of 1.05, indicating sales acceleration into future periods.

Data center orders -- $135 million in data center orders booked, plus a $60 million data center order in October 2025, bringing total recent data center orders to $195 million as of October 2025.

Adjusted gross margin -- Adjusted gross margin was 37.6%, a decline of 80 basis points versus the prior-year period, attributed to unfavorable mix and issues with rare earth magnet availability and tariffs.

Segment performance -- AMC sales declined 1% organically versus the prior-year period, IPS sales grew 1.6% organically versus the prior year, and PES sales grew just under 1% organically; segment-level results reflected project timing, market strength and weakness, and input constraints.

Adjusted EBITDA margin -- Adjusted EBITDA margin reached 22.7%, with an $11 million synergy benefit mostly offset by mix, tariffs, and rare earth supply issues.

Adjusted earnings per share -- Adjusted EPS totaled $2.51, an increase versus the comparable prior-year period.

Free cash flow -- Free cash flow was $174 million, used primarily for debt repayment; no variable rate debt remained at period end.

Data center revenue run rate -- Thompson Power Systems' data center business within AMC is on track to reach $130 million in revenue in 2025, growing from $30 million five years ago.

Tariff outlook and mitigation -- Net tariff impact for the year is projected at approximately $17 million for 2025; management expects to be dollar cost neutral on tariffs by mid-2026 and margin neutral by year-end.

Guidance for 2025 -- Adjusted EPS guidance was narrowed and lowered to $9.50-$9.80 for 2025, but offset by rare earth and tariff shipment delays.

2026 growth expectations -- Sales are expected to grow at a low- to mid-single-digit rate in 2026, backed by strong backlogs, order strength, and anticipated additional cost synergies of $40 million in 2026 and progress on delevering.

CEO succession plan -- CEO Louis Pinkham announced his forthcoming departure; internal and external candidates are under consideration, with the transition expected within four to six months for continuity in strategy and execution.

Summary

Regal Rexnord (NYSE:RRX) announced a CEO transition as Louis Pinkham prepares to step down, with the board working on a structured search for his successor. The company’s data center business is scaling rapidly, with Thompson Power Systems expected to double revenue in two years and contribute up to 1.5 percentage points to enterprise growth in 2026. Margin pressure from tariffs and rare earth supply disruptions is expected to persist into early 2026, but mitigation actions are underway to achieve margin neutrality by year-end 2026. Rigorous capacity investments are being made in North America to support expanding bid pipelines in the data center and ePod modular solutions markets. Guidance for adjusted EPS and free cash flow was lowered for this year based on updated tariff and supply chain impacts, while management reiterated confidence in achieving low teens free cash flow margins and reducing net leverage to 2.5 times in 2026. Strategic investments in secular growth markets, especially data centers, are driving a rising backlog and positioning Regal Rexnord for sustainable sales acceleration and operating leverage in coming periods.

Chairman Sachdev stated, “we'll be very thoughtful and very deliberate in appointing the successor to Louis,” emphasizing no rush and cultural continuity during executive transition.

Management noted that the opportunity in ePods for modular data centers represents a $10 billion market, with the company’s current data center-related bid pipeline exceeding $1 billion as of fiscal 2025.

Segment guidance for AMC, IPS, and PES was reduced marginally for fiscal 2025 due to newly introduced and increased tariffs, as well as continued rare earth constraints, with pricing actions anticipated to offset impacts once affected inventory is sold.

Expanded North American capacity, especially a new Dallas facility for AMC launching in mid-2026, is designed to support accelerated delivery and margin-accretive product growth in data center markets.

Industry glossary

ePod: Modular, pre-assembled units integrating power management solutions, including switchgear, transfer switches, and air movement systems for data center deployment.

Book-to-bill ratio: The ratio of orders received to units billed in the same period, indicating future sales growth potential if above 1.0.

Rare earth magnets: Critical components utilizing rare earth elements (such as neodymium or samarium-cobalt) in high-efficiency electric motors and advanced industrial applications.

Adjusted EBITDA margin: Earnings before interest, taxes, depreciation, and amortization margin, adjusted for extraordinary or nonrecurring items, as a percentage of sales.

Full Conference Call Transcript

Turning to Slide three, let me briefly review the agenda for today's call. Louis will lead off with opening comments, an overview of our 3Q performance, and an update on our data center business. Robert Rehard will then present our third quarter financial results in more detail, review our 2025 guidance, provide an update on tariffs, and offer some initial thoughts on 2026. We will then move to Q&A. 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 results and to get an update on our business. We appreciate your continued interest in Regal Rexnord. Before discussing our third quarter results, I would like to make some brief comments about the news regarding my succession, which we announced last night concurrently with our third quarter earnings release. It has been an immense honor to lead the company for the past six-plus years.

We have achieved a lot, inclusive of two major acquisitions and the divestiture of the segment, transformation of our portfolio, significant revenue growth, gross margin expansion, and free cash flow acceleration, and have positioned Regal Rexnord as a valued partner serving our customers' most critical needs. We have assembled a strong team of leaders who have built great teams that are focused on leveraging 80/20, expanding secular growth opportunities, and driving continuous improvement. Our portfolio is well-positioned to grow, especially when the ISM returns to an expansionary period for industrial production. With third-quarter sales up about 2% and orders up about 10%, along with our improving top-line momentum, there is a lot to be excited about.

So with that, and in light of some personal decisions that I recently made, the board and I have agreed that this is a good time to initiate a transition plan to pass the baton to a new leader who will guide Regal Rexnord through the next phase of our growth journey over the coming several years. I look forward to continuing to lead the company until the board identifies my successor. Rest assured, we have a strong team and will continue to execute on our profitable growth initiatives for the benefit of our customers, our associates, and our shareholders. In short, it is business as usual. And now on to the quarter.

Our team delivered solid third-quarter performance nicely ahead of our expectations on orders and roughly in line on sales and adjusted EBITDA. Driven by over-execution in PES, and strong execution in IPS and AMC. Performance would have tracked even stronger if it were not for larger-than-expected pressures from two items out of our control: additional tariffs announced in August just after our Q2 earnings call, and incremental challenges sourcing rare earth magnets. Looking forward, our growth potential took a significant step higher in the quarter driven by strong orders. These results plus our expectation for further order strength in the fourth quarter are setting us up for solid growth in 2026. In short, good results, great momentum.

So before continuing, I want to take a moment to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution. Our associates continue to overmanage the impacts of tariffs and rare earth magnet constraints and are doing a great job working our commercial funnels to drive improved orders and performance. Now let me provide some specifics on our third quarter. Orders in the quarter on a daily basis were up 9.8% versus the prior year. And book to bill was 1.05. We ended the quarter with our backlog up 6% versus the prior year.

As I will elaborate on shortly, in the quarter, we booked $135 million of data center orders and then an additional $60 million order in October. This is the market where we are clearly gaining traction and we are investing to support further growth. We also saw strong order growth in discrete automation, and in our air moving business in PES for the data center and semicon markets, while IPS posted its fifth quarter in a row of positive orders growth against the backdrop of generally sluggish end markets. Our sales in the quarter were up 70 basis points versus the prior year on an organic basis, in line with our expectations for an inflection to growth.

In the quarter, we saw particular strength in energy markets, discrete automation, and aerospace. Net of headwinds in medical, as well as some project timing in data center. The latter clearly temporary as recent orders show we are building tremendous momentum in our data center business. For reference, on a year-to-date basis, enterprise organic sales are up slightly and are expected to be up low single digits for the year. Turning to margins, our third quarter adjusted gross margin was 37.6%, down 80 basis points versus the prior year period. On mix and impacts related to rare earth magnet availability and tariffs.

Adjusted EBITDA margin was 22.7%, roughly flat versus the prior year and reflects an $11 million synergy benefit mostly offset by mix tariffs and rare magnet pressure. Adjusted earnings per share for the quarter was $2.51, up versus the prior year. And lastly, we generated $174 million of free cash flow in the third quarter, which was used primarily to pay down debt. We ended the quarter with no variable rate debt. In summary, a solid third quarter. During which we delivered strong orders and a rising backlog which keeps us optimistic about accelerating top-line and earnings growth in the fourth quarter and into 2026.

Next, I'd like to elaborate on the significant momentum we are gaining in the data center market, which we believe can be needle-moving to our enterprise sales growth. On the left side of this slide, we provide an overview of our diverse capabilities in the data center market. You can see that all three segments play. But our largest presence today is in our Thompson Power Systems business. In AMC. Where we are providing switchgear and transfer switches to support standby and backup power. In data centers. This was a $30 million business five years ago. And is on track to hit $130 million this year.

The traction we are seeing in this fast-growing secular market is being driven by the factors listed on the lower left of this slide. It starts with the quality of our product. Demonstrated over five decades of service. What differentiates us is our ability and willingness to customize this system designed to best meet the needs of our customer. Our lead times are competitive, and in a market being fueled by remarkable levels of AI investment, lead times matter a lot. Our enterprise scale has been critical to getting us in the door with new and larger customers because it helps them get comfortable that we can deliver on our service. And delivery commitment.

Aftermarket service capabilities are a growing part of our value proposition as we invest in our service footprint. Lastly, and highly relevant in today's market, we are willing and able to make investments to flex our manufacturing capacity which supports future growth and bolsters our service levels. On the right side of the slide, we describe our which combined with our enterprise scale has allowed us to grow our bid pipeline to what today is approaching a billion dollars. We are also seeing good data center growth in PES. Which won a $20 million order in the quarter to provide HVAC chiller subsystems to cool hyperscale data centers.

For perspective, PES's commercial HVAC business has been benefiting from data center growth for some time especially in North America. What is different with this order is its scale. In short, our value proposition of technology-differentiated subsystems to achieve the high levels of energy efficiency required by data center operators is resonating. You may remember that part of our growth strategy for PES is leveraging proven technologies in new secular markets. While not mentioned on this slide, the PES team also won a $7 million project in the quarter for a semi-clean room customer. That included multiple fan solutions including fan filter units.

Our PES team is gaining traction growing its business in new secular markets, and as you can see on the slide, it's currently working a $100 million data center-related bid pipeline. As you know, we have been directing the majority of our growth investment to secular markets. In data centers, that has included funding portfolio expansion into modular electric pods, or ePods. These turnkey power management solutions can help expedite data center construction by making the installation of our critical power management content more plug and play. These ePods would typically contain our switchgear, transfer switches, power distribution units, as well as air moving content.

Regal is also project managing the assembly of these ePods, including content from third parties to part of our value proposition is providing a single source of contact for the customer. And allowing the customer to procure power management content with a single SKU. We estimate the market size for ePods is roughly $10 billion. There are two particularly compelling attributes of this opportunity. One, it helps customers expedite their installation of new hyperscale data centers today. And two, it positions us to serve a market that many expect will evolve towards a network of smaller data centers that sit closer to the applications they are supporting.

These edge data centers are forecast to number in the thousands and will likely be constructed using a few modular building blocks that contain all the requisite data center. Our commercial team has been actively engaged with potential ePod customers and our bid pipeline currently exceeds $400 million. So nearly half of AMC's total $1 billion data center bid pipeline I referenced earlier. In short, a tremendous new product opportunity for our customers and for Regal. To support the growth we have secured in our bidding on, we are investing to expand our capacity. Both in our legacy power management systems and to support ePods.

As you can see on this slide, the current footprint for our data center business in AMC includes two locations, one in British Columbia and one in Mexico. We recently started developing new capacity by expanding our British Columbia footprint. And also developing a new site near Dallas, Texas. Which will grow our footprint by over 50%. The Dallas facility is scheduled to begin shipping products by mid-2026. As a reminder, this business is relatively CapEx light and so our investment is centered on light manufacturing, assembly, and test equipment as well as adding the talent to support our expanding operation.

This is a good example of how our significant enterprise resources allow us to respond quickly to attractive market opportunities. While our data center business today represents a small percentage of our enterprise sales, it is growing quickly. And we are investing across the spectrum of resources needed to support and fuel further growth. Starting in the coming quarters, we believe our data center business can contribute a point or more growth to our enterprise growth rate at company accretive margins. In short, a huge opportunity for Regal that we are extremely excited about. And with that, I'll turn the call over to Rob.

Robert Rehard: Thanks, Louis, and good morning, everyone. Now let's review our operating performance by segment. Starting with automation and motion control, or AMC, sales in the third quarter were down 1% versus the prior year period on an organic basis. Which was just shy of our expectation. The performance primarily project timing and data center, weakness, in the medical end market, and further challenges sourcing rare earth magnets. Which continued to limit our ability to ship certain high-margin products. In the medical and defense market. These headwinds were largely offset by strength in discrete automation and in aerospace. Regarding the challenges around rare earths, last quarter, we expected these were diminishing. Especially for non-defense products.

Where we were making good progress with license approvals for exports from China. And with our efforts to find alternative sources of supply. However, the situation worsened in the quarter. As the rate of China license approvals slowed considerably. And it became clear that even in the absence of an official policy change, China was not approving export license applications for India. Where we have a large facility making product for surgical applications. At this point, we are continuing to work on securing alternative sources of supply and making strategic production moves that facilitate exports from China.

Given our experience navigating rare earth magnet we've described, which is worse than we anticipated coming out of the second quarter we now believe these headwinds will impact us through the end of the year and into early 2026. After which, we expect to see net benefits in the P&L. From working down our past due backlog associated with these impacted products. I'll share more on this in the guidance section. Turning to margins. AMC's adjusted EBITDA margin in the quarter was 20.5%. Which was on the lower end of our guidance range. The primary pressure was related to securing rare earth magnets. Orders in AMC in the third quarter were up a strong 31.7% versus prior year.

On a daily basis. For a book to bill of 1.23. As discussed earlier, this performance is largely tied to winning two large orders in the data center market. Worth a combined $115 million. Excluding these orders, orders in AMC, would have been up 1%. Reflecting strength in discrete automation with orders up 17% net of weakness in medical, and ordered lumpiness in the aerospace business. As Louis indicated earlier, this strong momentum in data center continued in October. When we booked an additional order for $60 million for a total of $175 million of recent data center orders in AMC. A further note in the quarter we received our first electromechanical actuator production order for eVTOL.

And we booked $8 million of humanoid-related orders. Adding to our momentum in both of these spaces. As a reminder, to the extent humanoid or eVTOL adoption grows, we are very well positioned to address this demand. Turning to industrial powertrain solutions or IPS, sales in the third quarter were up 1.6% versus the prior year on an organic basis. Which was modestly above our expectation. The growth largely reflects strength in energy, and metals and mining. With this segment's other markets relatively flat. Adjusted EBITDA margin for IPS in the quarter was 26.4%. About 50 basis points below our expectation and down slightly versus the prior year.

Performance reflects synergy gains, offset by weaker than expected mix including product and channel mix, along with the impact of tariffs. Orders in IPS on a daily basis were up 2.3% in the third quarter. This marks the fifth rough quarter in a row of positive orders growth for the segment. And has contributed to the backlog growing 5% year over year. Book to bill in the third quarter for IPS was 0.96. Turning to power efficiency solutions or PES. Sales in the third quarter were up just under 1% versus prior year on an organic basis. Which was in line with our expectations. The result primarily reflects strong growth in pool, and in commercial HVAC.

Within the residential HVAC portion of this of the business, which represents roughly one-third of the segment, sales of air conditioning units were down over 20%. Which was offset by strength in furnace. Resulting in residential HVAC overall being flat in the quarter. We would attribute the relative outperformance to our continued strong position in this market. Turning to margins. Adjusted EBITDA margin in the quarter for PES was 19%. Which was above our expectation enough. A 120 basis points. Versus the prior year period. Aided by favorable mix and strong cost management. Orders in PES for the third quarter were up 1.7% on a daily basis.

As Louis highlighted in his remarks, this team is accelerating its growth in new secular markets. Semicon and data center. Book to bill in the quarter for PES was 1.02. Turning to the outlook. On Slide 13. We are narrowing and lowering our adjusted EPS guidance to the range of $9.50 to $9.80. Or $9.65 in the midpoint. Our revised assumptions are outlined in the table on this slide. Notably, our sales guidance is writing modestly. Primarily to reflect initial revenue from our recent data center project win, and some additional tariff pricing net of incremental impact from delayed shipments of products with rare earth magnets. Our adjusted EBITDA margin is now expected to be 22%.

Versus our prior assumption of 22.5%. Factoring what we now forecast to be net unfavorable tariff impacts in the year on a dollar basis. And the mix impacts of rare earth magnet-related shipment delays. We have also made some adjustments to certain below-the-line items which are outlined in the table. With all of this said, the majority of our guidance changes due to margin headwinds caused by newly introduced and increased tariffs, along with additional rare earth magnets supply chain constraints. Regarding free cash flow, we are now expecting to generate $625 million this year. The decline versus our prior guidance largely reflects the impact of the following three items.

One, higher tariff costs associated with the expanded scope of section 232 tariffs coupled with the significantly increased India tariffs, two, the impact of strategic working capital particularly those tied to the large data center orders we announced, along with supply assurance inventory for rare earth magnets, and three, higher cash interest costs given the timing amount of cash flows relative to prior expectations. We see both the tariffs and the working capital investments as timing related. As we expect the impact of pricing on tariffs to flow through. Once that inventory is sold in 2026. On slide 14, we are updating our expectations regarding tariff impact. The gross annual unmitigated cost impact from tariffs as of our last update.

When we reported second quarter was $125 million. Based on tariffs in place today, that value has risen to $175 million, largely reflecting the rise in India tariffs to 50% and the expanded scope. Given the extent of the tariff increases and the limited time left in the year, to implement mitigation actions in price changes. We now expect to have a net tariff impact on a dollar cost basis. Of approximately $17 million this year. Furthermore, we now expect to be dollar cost neutral on tariffs by the middle of next year. And to be margin neutral on tariffs by the end of next year.

We see opportunity for this to accelerate especially if the India tariff is meaningfully reduced. On the right-hand side of the slide, we lay out our principal mitigation actions which we shared last quarter and which our teams continue to overmanage on a daily basis. On slide 15, we provide more specific expectations for our performance by segment. On revenue, and adjusted EBITDA margin. For the fourth quarter and for the full year. Let me outline the primary changes to our full-year outlook. Since our last update by segment. For AMC, we are now expecting sales to be up low single digits versus flat to up single. Previous.

Reflecting stronger shipments in data center, and discrete automation net of impacts from rare earth availability on shipments to medical and defense markets. Our adjusted EBITDA margin outlook for AMC is now 50 basis points lower at the midpoint. Mainly reflecting incremental rare earth volume and mix impacts worth approximately $8 million. Of which we recognized about $3 million in the third quarter. We expect the recovery of rare earth magnet supply. To continue into early 2026 versus by the end of this year as this in our last earnings call. Through resourcing efforts aimed at eliminating the need for China to approve export licenses for shipments to India.

For IPS, our outlook for the segment's adjusted EBITDA margin is now 50 basis points lower. At the midpoint. Mainly factoring and an unfavorable net tariff impact. Primarily associated with the expanded scope. Of the section 232 tariffs. Lastly, for PES, our outlook for the segment's adjusted EBITDA margin is now 50 basis points lower at the midpoint. Also factoring an unfavorable net tariff impact primarily associated with an increase in tariff rates on India to 50% including a 25% penalty tariff added in August. While we are experiencing some margin pressures from tariffs in rare earth, we remain confident in our midterm ability to achieve our 40% gross margin and 25% adjusted EBITDA margin target.

Our teams continue to execute well on what is in our control. Finally, as I wrap up my prepared remarks, I would like to share a few high-level thoughts on our outlook for 2026. From a sales perspective, we are clearly building momentum as we enter next year. Given our strong orders in the third quarter, the order strength we're already seeing in the fourth quarter, sizable 2026 shippable backlogs in our IPS and AMC segments, and growing tailwinds. From our cross-sell synergies. Their pricing should also be a tailwind as with any recovery in our end markets which for the most part we believe are at or near trough levels of demand.

Given ongoing macro and tariff-related we are going to remain measured in our approach to framing out the year. And for now, we think sales in 2026 should grow at a low to mid-single-digit rate. From a margin perspective, we have an additional $40 million of cost synergies anticipated in 2026 and would expect upside from achieving price cost and then margin neutrality on tariff headwinds. But, again, the margin neutrality is not expected until 2026. We would expect organic growth to lever at roughly 35% overall higher in AM and IPS, and lower in PES. Consistent with the gross margin difference between these businesses. Finally, from a balance sheet perspective, we expect meaningful further progress in 2026 on delevering.

And for our net debt leverage to end the year at roughly two and a half times. This assumes we generate almost $900 million free cash flow in the year. Which would represent free cash flow margins in the low teens. In short, we are increasingly enthusiastic about our prospects in 2026 especially the potential for improved top-line performance. But also more broadly about an ability to drive improvement throughout the P&L. On the balance sheet, and in our cash flow. And with that, operator, we are now ready to take questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Robert Rehard: The first question today is from Mike Halloran with Baird. Please go ahead.

Mike Halloran: Hey, good morning, everyone.

Louis Pinkham: Morning, Mike.

Mike Halloran: You know, first off, Louis, thanks for everything. Sorry to hear you're leaving, but you're absolutely leaving the company in a better spot. I wish you nothing but the best moving forward.

Louis Pinkham: Really appreciate that. Thanks, Mike.

Mike Halloran: So first, you know, I certainly appreciate Rob's comments on the puts and takes in the fourth quarter. Could you reframe that a little bit and talk more about what that looks like sequentially? What is accelerating from 3Q? How are you framing the furnace versus the air cooling piece within PES? How do the data center pieces roll in? And just maybe talk about what getting better, what's getting worse in some of the assumptions around the sequential?

Louis Pinkham: Yeah. Happy to do that, Mike. When you first look at PES, but, you know, it's solid quarter. Fourth quarter, we're resi HVAC to be down low double digits. Closer to 30, though. On top of that, we're expecting should. And so when you think about the sequential, the biggest driver of the change and why we're now guiding PES down about 1%. It's really the fact that resi HVAC in the third quarter was flat and it will be down in the fourth quarter. If you then go to AMC, Mike, it's really a big part of the discussion is data centers. Data center actually was down for us. In the third quarter by 40%.

It's gonna be up more than 50% in the fourth quarter. We have it in the backlog. It's just around timing and scheduled shipments. That's the biggest driver of what's driving the fourth quarter and some nice improvement that we're continuing to see in discrete automation, in aerospace, but we will continue to have headwinds in medical and we're starting to ramp production in anything that uses rare magnets. And we saw some slight improvement in Q3, and we're getting stronger in Q4 as Rob commented in his prepared remarks. And then lastly, going to IPS. And the sequential for IPS. It's really project orders that are in our backlog. Actually, distribution for us in Q3 was down.

So aftermarket, we would define aftermarket was down about 1% in Q3. We're not expecting that to take up in Q4. What we are expecting is to execute on our project backlog that is in the backlog. So that's how we're thinking about the guide for Q4.

Mike Halloran: Thanks for all those. And then...

Louis Pinkham: Yeah. No. It's super helpful.

Mike Halloran: And then follow-up is just the data center content you put out there. Obviously, those are some pretty big numbers you're putting on the table as far as what the opportunity set looks like. I think you said this year is somewhere around $130 million. We had $190 million plus of orders. What does that look like from a ramp into next year based on what you see now? And then maybe more importantly, this $1 billion between a couple of segments of potential. How does that shake out in terms of being meaningful to the Regal portfolio over the next few years? What kind of ramp are we talking to? What's the win rate? Entitlement, things like that?

Just kind of any framing that can give us on a multiyear would be helpful.

Louis Pinkham: Yeah. Let me try to give you my thoughts on it. We're really excited. We're excited. We've been investing in kind of all coming to some fruition. Here. You know, first, I want to say in my prepared remarks that our top-end data center business has actually been growing at a very It's at about $130 million. We would expect that to actually grow maybe even double over the next two years. And so that'll give you a little perspective of how we're thinking that translates. The backlog is strong. We're winning because of the scale of our company, our commitment to service, but also our willingness to customize to the specific needs of our customers.

And some of our competitors are not as willing to do that. And so that has been a benefit. I think there and, of course, right, we're investing in capacity expansion. In both Texas and in our facility in British Columbia. Probably the biggest challenge in the market is the chain, though, of components and switching components but beyond that, we feel really good about our potential here. And so we're, as I said in my prepared remarks, we would expect this to have a meaningful impact on our growth maybe one and a half one to one and a half points for next year, and we'll continue to invest and grow here.

I think it could be a large part of Regal Rexnord's overall business for the future. Hopefully, that's helpful, Mike.

Mike Halloran: Louis. Appreciate it. Thank you.

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

Julian Mitchell: Thanks very much, and Louis, sorry to see you go, but I wish you well and thanks for all the efforts down the years.

Louis Pinkham: Thanks, Julian.

Julian Mitchell: Maybe just wanted to start off with the commentary sort of into next year. You've spoken to that low to mid-single-digit organic sales growth firm-wide. It seems like point to point and a half of that is coming from data centers. So a couple of points from the rest of the company. So maybe a couple of things. One is help us understand the sort of data center overall, you know, percent of revenue or dollar revenue this year. So we can understand the jumping-off point into 2026? And then should we expect the operating leverage on that volume growth is very limited in the first half because of tariffs and rare earths and so...

Louis Pinkham: Well, specific to data center, tariff in rare earth wouldn't have an impact, Julian. Data center for us today, and we it is the, you know, the Thompson business, as I spoke to, is about $130 million. Outside of that, data center is about 3% of all of our Regal. So you would say about an incremental $50 million. We do expect that to become a more meaningful part in '26 and as we move forward. I think that answers the majority of your I think the only other part would be that the margins on the data center business. And so you know, we've seen that to be accretive margin.

Julian Mitchell: That's helpful. And, yeah, just to follow-up. Sorry. My question was on the operating leverage for next year was more around total enterprise because I guess you've got this extra headwind, you know, affecting the 2025 guidance from rare earths and tariffs for Regal firm-wide. So maybe help us understand kind of the phasing of that headwind to profits, you know, as we step through the next couple of quarters versus what you saw in Q3? I'm just trying to understand if there should be overall much margin expansion the next few quarters from volume leverage or it's all offset by the tariffs and rare earth headwinds?

Louis Pinkham: Well, overall, the leverage we expect around 35% overall for the business. I'm gonna give you there's two parts to my answer. 35% in the business. It's roughly 40 to 45% for AMC and IPS. And lower for PES. The way that would phase in is you'd get a little better benefit in the back half, obviously, as we become more as we get to margin neutrality. So it would be more back half-weighted than front half-weighted, but overall, about 30 to 35% for the year is what our expect be. But the first couple quarters will be margin challenged as we expect to be dollar neutral as we talked about.

And by the time we get to the end of the first half, of next year, margin neutral, not till back half. So that's the way it would phase from half to half.

Julian Mitchell: That's great. Thank you.

Louis Pinkham: Thanks, Julian.

Operator: The next question is from Jeffrey Hammond with KeyBanc. Please go ahead.

Jeffrey Hammond: Hey, good morning, guys. Louis, best of luck and it in Aleco.

Louis Pinkham: Thanks, Jeff.

Jeffrey Hammond: Just maybe staying on, you know, the margin dynamic. Think you said $40 million of integration savings. And then Rob, I think you said you think the tariff thing is maybe a net or price cost is maybe a net tailwind in the 26. So how should we think about, you know, price cost or this tariff noise, you know, maybe getting less bad or better and the rare earth kind of fixing itself in terms of delta 25 to '26?

Robert Rehard: I think it's a bit early. To get too specific at this time. I think that we do absolutely expect that rare earth we will get through the rare earth challenges, you know, early in '26. That should not be a problem. As I said, we've got about $13 million now of rare earth headwinds as we exit this year, which is incremental $8 million from what we said coming out of the second quarter. Know, we do think that most of that will be able to get through pretty quickly, maybe by the first half of next year. And then we'll move through the back half at a much better rate. Than we're seeing first half.

But as far as more detail than that, we're not ready to get to that level of detail until we put out fourth quarter results. And provide official guidance.

Jeffrey Hammond: Okay. Great. And then I guess, as your tear you know, I know India may come down, but I guess as your tariff pressures kind of moved higher, are you finding it harder to get price and maybe, you know, more particularly in PES? Given the customer concentration? And then just separately, if you could just touch on what's driving the furnace growth I don't know if they're share gains or, you know, there's no destocking dynamic or what. Thanks.

Louis Pinkham: Yeah. So let me comment on tariffs first outside of PES. We will be priced we will be tariff neutral, and we'll work to be margin neutral. Just the timing of that the $2.32 derivative tariff coming out right after our last earnings call, it just takes time for it. To implement for IPS and AMC. And so we would expect, as Rob said, that will ramp. In the first half of next year. Same for PES. However, a little bit more pressure because of the India. And so feel good about and we've talked about this. Our global footprint and the differentiated of that global footprint.

If tariffs stay at 50% for India, we will need to move that production. But we have not made that decision yet. But if we have to, we will. And so I'm not worried about our ability to offset it. But to Rob's point, it will be margin neutral by the end of next year and cost neutral. By the middle of next year. That gives us a little time to manage. Now let me address your furnace question. You know, furnace is about 40% of our resi HVAC business. And I'll just remind you that furnace was down pretty significantly in 2023, and we think there's actually some more room to return to normal levels.

We believe our outperformance in this market, though, is we are gaining share due to our differentiated and high technology. And so from that standpoint, we feel very good about furnace and our position in that market. Hopefully, Jeff, that helps.

Jeffrey Hammond: No. That's perfect. Appreciate it. Thank you.

Operator: The next question is from Kyle Menges with Citigroup. Please go ahead.

Kyle Menges: Thank you, guys. And Louis, this see you go. It's great working with you, and then best of luck.

Louis Pinkham: Yeah. Thank you.

Kyle Menges: Yep. Yeah. I mean, I would love to just maybe unpack the $1 billion or so data center pipeline that you identified. I suppose, how did you guys kind of arrive at that figure? And then just what's your sense of what win rate could be or maybe what a respectable win rate would be for you guys would be helpful.

Louis Pinkham: Yeah. Kyle, it's really quite a great question. But it's hard to give you a very clear answer. I can tell you, though, that the funnel is made up of a number of large projects with a number of customers. We have been investing significantly in our commercial op team. And so this is not a focused view. There's a number out there. There's a couple that are big projects. They're hyperscale related. We've also invested pretty significantly in expanding our portfolio into ePods and being able to provide that solution set. To give you a number on win rate would be tough. It really would. The reason to really nice bigger orders that we received.

We were hopeful and, you know, negotiating and feeling good, but that was a big win for us. And so I think where I would go with this for now is be assured we're investing in our commercial team. We're investing in capacity. And we're gonna continue to drive growth. In this space. And so we believe it will be a meaningful part of Regal for the future. And then we'll have to come back to give you a little more clarity on how we think about win rates after a bit of time.

Kyle Menges: Makes sense. And then maybe turning to free cash flow. I can appreciate some of the reasons why free cash flow guide was lowered for this year. But I am just curious your confidence level and free cash flow being better next year and then ability to execute on further deleveraging and I guess, you be helpful to hear a ballpark of how much lower interest expense could potentially be next year as well. Thank you.

Robert Rehard: Yeah. So the free cash flow going into next year, so if we bridge off of this year, which we're saying $625 million, and I said in my prepared remarks that we expect to be at almost $900 million next year. The way we get there is, you know, we would expect some growth or some EBITDA expansion, and then we would expect maybe another $60 to $70 million coming through working capital to help us bridge the gap a bit along with lower cash restructuring, you know, cash interest comes down. We expect by a good $40 million next year.

And then there's some offsets, of course, you know, on cash taxes and a bit of CapEx but those are the main bridge items get to $900 million. So we feel pretty good. I mean, the free cash flow this year was certainly hampered by some of the inventory challenges that I've talked about. And while we're still expecting this year that we'll get some improvement in working capital as we close out the year, it was not where we expected it to be as we entered the year from a working capital standpoint. And so we feel good about next year being able to drive out more of that inventory and bridge in more of that gap.

As far as the leverage standpoint, from a leverage standpoint, we expect that we'll end next year at roughly two and a half times. That incorporates the $900 million that we have in free cash flow. Helping to pay down the debt. We have a bond that's coming due that we are currently working through and finalizing the strategy. Here, we expect to have that done here in the next month or so. And then we will have, you know, a term loan that is also prepayable. We expect that to be, you know, as much maybe about $900 million. And so that should exit in the first quarter. And then we will then make progress paying down that loan.

Which would come from the $900 million free cash. So that's what we're thinking about. And so our ability to get down to two and a half times, we think, is very good. And we do expect that we can generate this cash flow and have good visibility on how to get there.

Kyle Menges: Helpful. Thanks, guys.

Robert Rehard: Great. Thank you.

Operator: The next question is from Tomohiko Sano with JPMorgan. Please go ahead.

Tomohiko Sano: Hello, this is Tomo. Louis, although we have only just recently met, I wanted to say thank you for your leadership and wish you continued success.

Louis Pinkham: Thank you, Tom. Thank you so much.

Tomohiko Sano: Thank you. My question is could you share more details on the CEO succession process, including timeline criteria for the new leader and how you are ensuring continuity and strategies and execution, please?

Louis Pinkham: Yeah. Tomo, thank you. And you know, I'm actually gonna pass it initially to Rakesh Sachdev, our chairman of the board who has some pre-remarks that he'd like to share. So, Rakesh?

Rakesh Sachdev: Thanks, Louis, and good morning. Yes. You know, I think as you look at where the company is and the work that Louis and the team have done over the last six years, it's really quite remarkable, the transformation that has taken place. You know, this is a company that is now very decentralized. There's a strong bench of leaders. You heard Louis talk about the cash flow generation in the business. It's a high gross margin business. We've got scale and we are at the heels of seeing some significant growth. So we are in a great place.

You know, Louis and the board we've been having this discussion about the next phase of growth in this company for the next several years. And we decided this might be a good time. And we have started a process. We have recruited a leading executive search firm. They've kicked off the process just now. And we'll be very thoughtful and very deliberate in appointing the successor to Louis. And Louis is, of course, gonna stay on, and he's as he said, it's business as usual until we find and appoint the new CEO leader. So I expect it will take about, you know, four to six months. Before we appoint somebody. But there is no rush.

We wanna make sure we find and appoint the best leader. We have a search committee in the board. There are four of us, three CEOs. One active CEO, two former CEOs. So we've got some great eyes on making this decision and rest assured, we will find a great person to fill in this role. So with that, Louis, I'll turn it back to you.

Louis Pinkham: Yeah. Thanks, Rakesh. And, Tom, just to emphasize, Rakesh's point there, and as I said earlier, we are going to ensure it's a smooth and orderly transition. And with our team, our team has never been stronger deep into the organization, and the message is business as usual. That's where we're gonna be focused on what's in our control and continue to execute as we have done in the past. So, hopefully, that was helpful, Tomo.

Tomohiko Sano: This is really helpful. Thank you very much.

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

Nigel Coe: Good morning. Maybe a question for the chairman again. Are you fully committed to an external candidate or are there other internal options as well? And when you're thinking about the profile of the person you're seeking, would it be with a very similar background to Louis in terms of operational chops or are you looking for maybe slightly different attributes? Thanks.

Rakesh Sachdev: Thanks for the question. Yeah. Absolutely. You know, we are doing a comprehensive search. Know, we are looking at external candidates. We're not gonna rule out internal candidates. But you can imagine that this is gonna be a very comprehensive search, a thoughtful search. And we will be looking for a candidate who has demonstrated strong leadership skills. Like Louis has had. Running complex global businesses. You know, we're gonna be focused on growth. Operations has always been in the DNA of Regal Rexnord. And we've got some great folks leading that. But we also need commercial and growth leadership we'll be looking for in the next leader who's gonna lead this company.

So and the cultural aspect is also very important. We have created a great culture in this company. And we wanna make sure that whoever leads this company will continue to foster that culture going forward.

Nigel Coe: That's great. Thanks for the color there. Louis, look I've covered the stock for twenty years. And the last seven years have easily been the best. So you've done an incredible job of really changing the game for this company. So it'll be a fast you go. Thank you, man. But maybe no. No. The data center I know we've on the back of your building? And can you maybe just be a little bit this new silky upper month?

Louis Pinkham: Yeah. So we're I'm gonna go backwards. And, Nigel, you're cutting out a little bit, but I We are the program for setting up that new facility as we speak. We will be hiring personnel through this quarter into next. Starting training, and we would expect that we will have product flowing through the facility in Q1 but not that's the shipping until Q2 and later part of Q2. That's the initial project plan. From a contribution margin perspective, you know, all of our evaluation at this point, Nigel, based on what we've bid and quoted is that this will be fleet average margins for AM's which is actually accretive for Regal.

This will be a benefit for Regal as a total business. Now really, when you think about the pods, a big part of the bill of material is our regal product. Our paralleling switchgear, our automatic transfer switches, our PDUs, and also, I want to emphasize that we're gonna put our air moving product in these systems as well. And so we feel really good about where they're positioned and the margin that we will receive.

Robert Rehard: And I would just add that the investments we're making today that we mentioned earlier are very CapEx light. You know, this is more of an assembly and test. And so that's important to note. This should not weigh on margins. As we move forward.

Nigel Coe: Alright. Thanks, guys.

Louis Pinkham: Yeah. Thanks, Nigel.

Operator: The next question is from Christopher Glynn with Oppenheimer. Please go ahead.

Christopher Glynn: Hi. Thanks. Lewis, it's been a pleasure working with you, and best of luck there.

Louis Pinkham: Thanks, Chris.

Christopher Glynn: Sounds like we'll be with you for a couple more quarters anyway. I had a question on the street automation orders. I think you said they're seven per. Just curious, you know, characterize that narrow project lumpy or pretty diversified a hockey stick, or did you have a pretty, you know, an easier comparison? I can't recall three q last year. This just a sequential move is really kind of. And on top of that, that we talked about this at our Investor Day. We did lose. We are starting to get orders in this is just another indicator we are investing more in technology.

We're trying to expand our search market and feel really good about our position in discrete automation. But, again, probably the one piece I would call it emphasis is the point is defense was quite strong in the quarter.

Christopher Glynn: Thank you for that. And then quick follow-up on the eVTOL initial order there is. Is that going to be, you know, kind of very sporadic? Or is that starting to ramp?

Louis Pinkham: It's sporadic for now. It's not ramping. The point of emphasizing it though and I know you all know this, but in the aerospace industry, when you start a production order, that means you're moving forward. And if you listen to some of the announcements, you know, for example, the LA Olympics has a contract out for 50 eVTOLs for Cassie. We'll see if that comes to true fruition. But this is a market that if it accelerates, Regal Rexnord is well-positioned. So that's why we shared it in the prepared remarks.

Christopher Glynn: Great. Talk soon.

Louis Pinkham: Great. Thanks, Chris.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Louis Pinkham for any closing remarks.

Louis Pinkham: Thank you, operator. And thanks to our investors and analysts for joining us today. Our team delivered strong performance in the third quarter. In all segments, for what was in our control. Most importantly, strong orders in the quarter and order strength in the fourth quarter. Should set us up for solid growth in 2026. Stronger growth anticipated additional margin gains, including improved tariff and rare earth mitigation, expectations for further cash flow growth and plans to reduce net leverage ratios below three times means we are poised to create increasingly significant value for our shareholders and other key stakeholders in 2026. And beyond. Thank you again for joining us today. And thank you for your interest in Regal Rexnord.

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

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