Regal Rexnord Aktie

Good morning, and thank you for joining us for RBC Bearings Fiscal Fourth Quarter 2026 Earnings Call. I'm Josh Carroll with the Investor Relations team. With me on today's call are Dr. Dr. Hartnett, Chairman, President and Chief Executive Officer; Daniel Bergeron, Director, Vice President and Chief Operating Officer; and Rob Sullivan, Vice President and Chief Financial Officer.

As a reminder, some of the statements made today may be forward-looking and under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied to a variety of factors. We refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. These factors are also listed in the press release, along with the reconciliation between GAAP and non-GAAP financial information.

With that, I'll now turn the call over to Dr. Hartnett.

Thank you, Josh, and good morning, and thank you all for joining us this morning. As usual, I'll begin today's call with a brief review of our financial results and highlight several key trends we see across the sectors. Now turn the call over to Rob Sullivan, who will provide additional details on our financial performance for the fourth quarter.

Fourth quarter net sales increased 18.3% year-over-year to $518 million, driven by continued momentum in our A&D segment and steady growth in our Industrial businesses. Consolidated gross margin was 44.4% for the quarter or 45.3% on an adjusted basis. Adjusted diluted EPS increased year-over-year to $3.62 compared to $2.83 in the prior year period. Adjusted EBITDA rose 21% to $168.9 million, up from $139.8 million last year. Free cash flow remained a strong $67.5 million, and we paid down an additional $116 million of debt during the quarter.

Now turning to our 2 business segments. Approximately 57% of our revenue during the quarter came from our Industrial segment, 43% came from our A&D segment. Our A&D business has continued to deliver exceptional performance with segment revenue increasing 41.2% compared to the prior year period. This strong momentum in Aerospace & Defense is further reflected in our backlog, which has continued to expand and currently stands at approximately $2.3 billion. This growth continues to be driven by robust demand across the defense and space markets. Along with unprecedented commercial aircraft build rates at the major builders. For the full year, A&D segment was up 32%, and of which 19.1% was organic.

With regard to our business segments, commercial aircraft was up 17.8%, 17.3% of which was organic. Defense was up 65.4% and 22.1% was organic. Our key revenue drivers, first, as many of you know, marine has been a significant contributor to our backlog growth driven by accelerating build-out of the submarine fleet. Given the strategic importance of submarines within today's defense strategies, we expect this to remain a meaningful tailwind as production rates continue to ramp across all subcontractors for both the Virginia and Columbia class programs, as well as fleet spares. We are adding machinery and floor space to accommodate increased production rates as we speak.

Next is missiles. Missile-related revenue was up significantly this year with revenue for this sector exceeding $45 million in the fiscal year. Some of this gain did come from our recent VACCO acquisition. This growth really reflects increased content we have across several top missile programs, and the expanding demand we are seeing given the current global conditions, we are planning for sustained growth and requirements for this sector in the current and future years.

We've also seen an impressive ramp in our space business as investments in this sector continue to hit record levels. During the year, we saw our space revenues come in just above $70 million, including $30 million from 8 months contribution by VACCO. This inventive growth, especially considering that space-related revenue was only $4 million for RBC back in 2021. As this trend accelerates and private investment grows, space infrastructure is being viewed not only as a major strategic national priority, but as a substantial and essential commercial reality.

On top of this strong momentum, we are also supporting the unprecedented production rates for commercial aircraft and engines. As you know, we are deeply embedded across these markets on 3 continents. And as a result, we expect to see continued growth at both the OEM and aftermarket levels.

Turning now to our Industrial business. Performance remained steady and up during the period with OEM revenue increasing 7.8% and distribution revenue growing at 4.5%. During the quarter, we saw strength in aggregates, warehousing, food and beverage, grain and semiconductor end markets. As we look to the fiscal year 2027, we are encouraged by the continued strength of our operating environment and the building momentum across many businesses.

We firmly believe our strong service levels, coupled with our brands, our renowned brands, market positions, and technical expertise provide for continued strong financial results along into the future. This was a record year for RBC. And as always, it is a true team effort. I want to thank our employees across the organization for their hard work, dedication and unwavering commitment to executing our strategy and serving our clients with excellence.

With that, I'll turn the call over to Rob, who will walk us through the financials.

Thank you, Mike. We closed fiscal year 2026 with another strong quarter that exceeded our expectations with net sales growing 18.3%, which led to an 18.9% increase in our reported gross margin. Gross margins were 44.4% for the quarter or 45.3% on an adjusted basis compared to 44.2% in the same period last year. Fourth quarter A&D sales increased 41.2% year-over-year, with the VACCO acquisition excluded, our A&D business saw an increase in sales of 22.8%, which highlights the continued strong growth in our legacy commercial and defense markets. A&D gross margins during the quarter were 41.6% or 44.2% on an adjusted basis and Industrial margins were 46.5% or 46.2% on an adjusted basis.

Excluding VACCO, our Aerospace & Defense gross margins were 43.7% during the period. We are encouraged by the margin improvement we've achieved within A&D, driven by increased efficiencies, volumes and newly awarded contracts in the period. Looking ahead, we expect these benefits to continue to further support margin improvement while recognizing the impact will be gradual as these benefits flow through.

On the SG&A line, we had total cost of $86.9 million or 16.8% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of $168.9 million or 32.6% of sales for the quarter. That represents an approximate 21% increase in adjusted EBITDA dollars during the quarter compared to the same period last year. Interest expense for the quarter was $11.2 million. This was down 12.5% year-over-year reflecting the improved leverage position achieved over the last 12 months, coupled with lower interest rates compared to this time last year.

We paid off $116 million of debt during the quarter and another $27 million since the end of the fourth quarter. The tax rate in our adjusted EPS calculation was 21% compared to last year's 21.7%. This led to adjusted diluted earnings per share of $3.62, representing growth of 27.9% year-over-year.

Free cash flow in the quarter came in at $67.5 million, with conversion of 73.6% compared to $55 million and 75.7% last year. For the full year, free cash flow was $342.6 million, with conversion of 119.1% compared to $243.8 million and 99% last year. Our capital allocation strategy continues to remain focused on deleveraging by using the cash that we generate to pay off our outstanding debt, and we continue to remain on track to pay off the remainder of the term loan by November of 2026.

Looking into the first quarter of fiscal year 2027, we are guiding revenues of $500 million to $510 million, representing year-over-year growth of 14.7% to 17%. Adjusted gross margin is expected to be in the range of 45.25% to 45.5%, and SG&A as a percentage of net sales is expected to be in the range of 16.5% to 16.75%.

with that, operator, please open the call for Q&A.

[Operator Instructions] And our first question comes from the line of Kristine Liwag with Morgan Stanley.

I wanted to dive a little bit deeper into your comments about the missile end markets. So first, you talked about how VACCO was able to increase share of content on programs. Can you expand more about what that looked like? And also the genesis of this question ultimately, with the multiyear agreements that we're seeing the Department of War, signed with the missile providers, we're seeing volumes of 200 to 1,000% growth in the next 5 to 7 years. So I just want to understand more how VACCO plays into that? And then also with VACCO's deeper relationships with some of these customers, are there avenues in which RBC Bearings can increase total company share into some of these end markets to solve for the shortages that the industry is facing.

Well, Kristine. There was a lot of questions in there.

Sorry. I hope you answered them all though, Mike.

Well, VACCO provides some pretty unique components to manage fuel sales. And in the case where the fuel system is generated by liquid propulsion VACCO has products that are pretty widely used, particularly on some of the more significant programs like the Tomahawk. So we expect to see more expansion with VACCO on these missile programs as time goes on and sort of enough said there.

But on the RBC side, I mean, we're probably we sort of took a little survey of around our plants to see exactly which systems we were servicing. And it's pretty broad range of systems. And it certainly gets the well-known Patriot and the GMLRS and the [ Hawks ] and but there's also the standard missile, the [ Jalans ], the [ Aster ] missile in Europe, and there's a next-gen missile that's recently been developed to replace the [ fire ]. So we're on all those systems. And it is -- and we are definitely expanding our production capability to participate further in all of these programs. So that's happening now. I'm not sure I got all of your questions answered, but I think I might have touched on a few of them.

Yes. That's super helpful to get the context for those programs. But I guess, Mike, as you kind of look at the significant growth the industry needs to build to be able to meet the capacity needs of the Pentagon. It just seems like a very big number, right? So I guess my follow-up question to that is you had your existing share and you've got this volume, and it sounds like you'll be prepared for that. But are there other avenues where you could take higher chipset content in these programs, so you would get the double benefit of the volume plus potential share increase?

Yes. The answer there is yes, and we're working on that now. And so we're working on both -- the volume is pretty substantial on some of these programs. I think one of the programs I didn't mention was the hypersonic missile program, which we're also part of, which is a significant program for us. So yes, I mean, we're going to have our hands full with volume. And at the same time, we're increasing mix. And increasing the mix is a little bit slower because it requires tooling and that sort of thing. But it's within -- it's within a 3-year -- certainly, within a 3-year period.

Great. That's super helpful. And you also called out your space revenue exposure, which is larger right now than your missile exposure. For this end market, can you give us an idea about your customer set? Are these traditional base companies? Are these the new space companies? What's your role in that ecosystem? And where do you see the growth coming from?

Well, it's both. It's both the existing people that service the space industry since Apollo, it's the Boeings and the Lockheeds and the [ Northrops ] and the Raytheons, the Collins and so on. So it's that standard group, which we been long associated with , but it's also the new people, such as of course, SpaceX and Blue and Rocket Lab and a few others whose names don't come to mind quickly.

So I mean, it's both sides of the street. It's -- right now, I'd like to think of it as 50 years ago when it was the Apollo program, the only table in the casino was NASA. And now it's a huge casino with many tables, NASA being one of the tables. And so there's just a lot of places to do business for our particular mix of talent and manufacturing skills. And so we're really very actively engaged in trying to determine how to take that forward in the best possible way for our shareholders.

Great. Very great to see a solid quarter from you.

Thank you.

Our next question are from the line of Steve Barger with KeyBanc Capital Markets.

Mike, for the last few quarters to include your comments today, you've talked about adding equipment and head count to support customer ramps. I'm curious, where are you tightest capacity-wise by end market or program? And what do you think the entire company is capacitized to from a revenue standpoint.

Well, you're asking even a bigger question, Steve. Well, certainly, we're tight on producing marine hardware. There's no question about that. It's got our attention, and we're adding equipment and floor space and test labs and people to accommodate that. I mean the submarine business has been sort of dormant since they canceled the [ Seawolf ]. And now it has to -- the entire support system is in this extremely aggressive ramp and doing everything they can to keep up with the priority right now being the Colombia. And so it's -- yes, it's taxing. We're up to it. We're making progress. We're adding capacity. We'll probably we're attempting to double our revenues over a short period of time, years, not months, Steve. It's all production related, but we're definitely going to double our revenues in that sector over the next 24 to 36 months.

And then just overall company, like you're running at $500 million run rate, so $2 billion annualized. How much does the current footprint with incremental kind of tweaks like support $2.5 billion or $3 billion? Just trying to get a sense for when you need a more robust and long life kind of capacity expansion or CapEx cycle?

Well, the CapEx cycle, this past year has been adding bricks and mortars and sort of move some plants around, because the infrastructure in existing plants got a little tired and it seemed better to build a new one than it did to fix the old one. So we spent a little bit of money on brick and mortar. And -- but going forward, it's going to go into equipment. And so we expect to be in that 3.5%, maybe 4% range, some years, and it will be hard equipment.

And in terms of production ability, we have some great plants in Mexico that are well staffed and well tooled, and our big production aids for us. And so -- and our ability to flex those plants was high. So that really helps with the capacity situation. It's more difficult to hire in the United States in many areas. It's taxing, it's less difficult in Mexico. And so it's -- that's been part of our strategy in terms of increasing our tool growth.

Got it. And then for a follow-up, with multiple programs ramping at the same time, are you seeing supply chain constraints for the things outside your control that could affect the programs you sell into? Any issues with castings or forgings or things that you source?

Yes. On the A&D side, there's always the issue of titanium. There may be -- we haven't seen it yet, but we're watching aluminum. High alloy steel is available at a price that's extraordinary. But if you have the money, you'll get this deal. So those are some of the areas to watch for us.

Next question is from the line of Scott Deuschle with Deutsche Bank.

Dr. Hartnett, can you give us any sense as to what level of commercial aerospace growth you're planning for in fiscal 2027?

Well, yes, certainly, the demand will be greater than our growth and our growth will be beyond what we're planning for growth in commercial aerospace 15%.

Okay. And would you expect defense and space together to grow faster or slower in commercial aerospace?

Faster.

Okay. Good news. And then there's been some recent notable strength in the industrial automation market recently. I guess, can you remind us as to how much exposure you have to industrial automation and then speak to the demand trends that RBC is seeing in that vertical specifically.

Industrial Automation as a supplier to industrial automation. Yes. Yes. Well, I mean, that part of it is a supplier to that, that's a little bit of a small sector for us, but it's we like it. I mean it's -- I think we're in the $40 million to $50 million a year range kind of in that mean -- that's space. And yes, certainly, semicon fits into that space nicely where we supply robotic components for chip manufacturing. And that demand has been strong. It hasn't shown up in FY '26. Is a significant contributor, but it will in '27.

Okay. And then can you share any detail on what the current level of annualized sales is for RBC into the humanoid robot sector? And what type of growth you've been seeing there recently?

It's small. It's for us, that's still sample making. And we continue to support the industry as it's being developed. We don't see any values there from anybody.

The next question is from the line of Peter Skibitski with Alembic Global.

Nice quarter. Mike, in the way of understanding kind of recent trends, are you guys seeing any headwinds in the commercial aerospace aftermarket, just from airlines kind of tightening their belts in this higher jet fuel environment, if we think about April and kind of May to date.

I'd say we haven't seen it yet. We're watching it. We're -- it's on the bubble.

Okay. And your aftermarket, is it more leverage to the engine than to the airframe?

Yes.

Okay. Okay. I guess last one for me. Just on -- can you update us on where you're at with the -- your commercial OEM, the LTA repricings. I'm just wondering if all of your LTAs have repriced at this point to sort of the post-COVID inflation environment. I think that written now that January 1, 2026, you'd have -- I don't know if it was 100% of your contracts would be repriced at that point or some lower percent. I'm just wondering if you could shed light on that.

Yes. I would say that's about 60%, there's still another 40% to go.

Okay. I guess by the end of this fiscal year or maybe 2 more fiscal years?

Effective January '27.

[Operator Instructions] The next question is from the line of Alexandra Mandery with Truist.

Nice results. I just want to see if you could provide any further details underpinning the fiscal 1Q guidance and any initial thoughts on fiscal 2027.

Yes. Just like we typically do when we put these together, we have a range of outcomes both in aerospace and industrial, and that's kind of where we led to the [ 5 to 5 ] on sales. The aerospace margins have obviously been accelerating, and we're very happy with that. That was contemplated when we were looking at the consolidated margins you see in Q1 -- the Industrial margins have obviously been coming in at a higher level. So as Aerospace & Defense has been growing faster, it just puts a little bit of dilutive effect on the consolidated margins. But for the full year, we think we can still expand the consolidated gross margins by about 50 basis points. So that's kind of how we put it together. And in SG&A, it's just a reflection of our kind of continued investment in the organization to effectively be able to achieve the growth that we see in front of us.

Great. And I guess what is your M&A appetite going forward? And what capabilities our company profile might you be looking for if you're interested.

Well, the profile is would be mechanical products, servicing a customer base similar to -- very similar to almost by name to the customer base that we currently service. It would be a company that would be preferred to be solvent. And it would be in a geography that would be easy for us to get to repair an insolvent company.

The next question is a follow-up from the line of Scott Deuschle with Deutsche Bank.

Rob, the SG&A costs came in a bit high relative to guidance this quarter. Can you speak to what drove that? It looks like stock comp is a piece of it, but I think...

It's really primarily personnel costs that kind of flow through just the timing and certain compensation matters that kind of flow through. Stock comp specifically was up notably and just a few other administrative costs that kind of came through.

Okay. Should we expect it to trend above $80 million a quarter going forward? It looks like that's what the first quarter guide implies, but just wanted to check if I should continue to have that in the model.

Yes. I think that's probably right. It will be a little bit above 80%.

Okay. And then last question for Dr. Hartnett. Just as SpaceX ramps up production of Starship, should we expect that to drive an acceleration in your space revenue growth?

Modestly, I think. I think we're still working on some Starship programs, but I'd say right now, the outlook there for us would be modest.

The next question is from the line of Steve Barger with KeyBanc.

Mike, last quarter, you were early versus other companies talking about an industrial inflection, saying demand improved in December and January. Has that momentum really held up exiting your 4Q into 1Q?

Yes, I would say it has. I mean it's modest, but it's held up.

I would say the story through industrial earnings has been kind of a broadening out of orders across automation, semis, power, some of the same things that you talked about. I guess are you seeing more breadth in the Industrial order book?

Breadth, in terms of sectors serviced?

Yes, across more end markets. Last year, aerospace, defense, I guess things related to data center were really the drivers. Is that broadening out to some degree?

Well, when I -- when you look at the amount of money that's going into the AI and the build-out of the server farms and it's -- there's an enormous amount of build-out that's occurring right now. And since our aggregate business is aggregate business up 20%, 17% or something like that. So you can see it through our aggregate business. That's something extraordinary is happening in some place in North America and -- yes, that has breadth.

Yes. No. I think that's an interesting comment on just kind of that should be a leading indicator to a lot of other industrial end markets as that kind of flows through. Does that make sense to you?

Yes, it does. Yes.

The next question is from the line of Ross Sparenblek with William Blair.

Just one quick question for me. Did I hear you right at the ex VACCO Aerospace & Defense gross margins were 43.7%

Correct.

1So that puts VACCO around 48% gross margins in the quarter?

VACCO was about -- it was over 46% this quarter, they had some really strong unique items flow through this quarter, great mix and that kind of pushed it. So I would not expect that to be the naturalized run rate. For the full year, I believe their adjusted margins were probably more in the mid-30s, which is their normal operational level. And that's been forecast for Q1.

Okay. Well said that's a pretty exceptional trajectory if we were to assume that into '27.

Yes, yes, don't assume that.

All right. Well, nice quarter.

Thank you. At this time, I'll turn the floor back to Dr. Hartnett for closing comments.

Okay. Well, we thank everybody for their participation and interest today in RBC and look forward to speaking again in late July. Good day.

Ladies and gentlemen, this will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.

Okay. Great. Thank you, Andrew, and welcome, everybody, to our fireside session with Regal Rexnord today. Special thanks to Louis Pinkham, Rob Rehard and Rob Barry for joining us, especially after just reporting yesterday, busy week, and thrilled to be able to have the chance to follow up from earnings and discuss all things Regal Rexnord.

So yes, just want to start out with a high level. Louis, Rob, just want you to describe, as you sit today, Regal Rexnord's strategic positioning, the overall goal of the scale consolidation, how you see that playing out versus your strategy case and the main milestones of the combination to date.

Yes. So Chris, great to be here, and thanks to those listening in and your interest in Regal Rexnord. We've been through quite a journey over the last 6, 7 years. It really all started with a mindset that you determine the value a customer places in your gross margin -- in your product by your gross margin. And so we've been working on improving our gross margin, which 7 years ago was 26%. Today, it's 38%, clear path to 40%. We did that through two large acquisitions and one divestiture and then leveraging 80/20 and lean to drive value in our business. So our business is very different than the past. Today, it's more weighted to secular markets. It's more durable through technology moats of competition as well as scale and scope.

And we're now pivoting more to system solution sales where we can integrate all of our products into a differentiated offering that nobody else can compete with. And that's our strategy, and we're working it hard. And it's not an overnight activity by any means, but we're making some good momentum. You certainly see that in 38% gross margin. You certainly see that with the orders growth we saw all through last year and the 8.5% orders growth we saw in first quarter. You certainly see that with some of the big wins and the verticals we've been investing in, data center and the incredible growth we're seeing with our data center offering in ePODs, our growth in integrated powertrain solutions.

We had -- in first quarter, we commented that we saw a funnel that has increased 18% year-over-year, and we're on track to meet our '27 sales objective in '26 through the activities of cross-sell in the industrial powertrain. So all of these things are making us a stronger, more durable, more bluntly competitive enterprise to grow for the future.

Okay. Louis, I wanted to jump on something you said in there offerings that no one else can compete with. Maybe there's a little semantics there. That's quite a high bar to put that out there in the most vibrant capitalist society the world has ever known here. So just maybe you could double-click on that nomenclature that you used.

Maybe it's a little strong. But when you think about our scale and scope across the industrial powertrain, nobody has that scale and scope. So we feel like we're in a leading competition perspective on that. When you think about humanoids, and we've talked about this quite a bit, where we have the ability to provide an entire joint with our solutions and integration of our servo motors, our brakes, our controls, all into one system. Nobody has those offerings that we can pull together in the integrated solution that we can.

Now there are other competitors that have offerings that we don't have. So I don't think it's an unfair statement, Chris. It's just what we take the strength of our products and solution, and we find how we can pull that together to differentiate ourselves from our competitors. That's what we're trying to do.

Yes. No, I was just looking to tie it to a specific application just to land it there in the humanoids with the full joint ability that rings true and clear. And just building off that, kind of getting into the differentiation you have, I'm sure others have some. So curious to hear you describe today's industry competitive structure, the degree of fragmentation still out there and maybe 3 or 4 top heavy guys, maybe, I don't know, 1/4 of the market, just like to hear you out on a couple of those things. And also if your scale consolidation has altered the competitive dynamics of the day-to-day industry in any particular way.

Yes. So you really have to think about it and look at it segment by segment so IPS, we believe we are a scale and scope player. Nobody has the scope of portfolio of products and brands that we have nor the scale of manufacturing and capabilities worldwide that we have. However, it's a highly fragmented space. Do I think that puts us in a stronger position at times? Absolutely, especially as we sell an integrated solution where we can prove the value in quality and life cycle of the offering. So I think there's value there.

Go to PES. PES has been -- we've been a scale player for a while, but it's a less fragmented space. And we do lead, but there are other couple, 2, 3 that we would call out our major leaders as well. And then you go to AMC and AMC is highly fragmented, and it's all around technology and technology differentiation and how we position ourselves against competitors. And that's where, again, I'll parallel to we look for solutions that we can put together with our offering that nobody else can. Now is that a big part of our business? Not right now. But as we grow, we want it to be. So hopefully, that's helpful, Chris.

Great. Okay. And in terms of the organizational structure, you pulled a lot together. And curious where things lie right now in terms of the degrees of centralized administration of the organization versus decentralized. In nowhere is it exclusively one or the other. But just curious as you've evolved through this integration and joining Altra and Rexnord with legacy Regal, what have been the learnings along the way and where those kind of lanes of communication stand now in independence?

We call it smart decentralization, Chris, where it makes sense to be -- philosophically, we want our leaders making decisions as close to the customer as possible, but we are smart in the way we approach it. Some businesses have different profiles than others. For example, IPS' go-to-market is centralized. It's a global sales force, global sales and marketing force. However, PES is North America sales, but North America operations because it makes most sense in the scale and scope of our production in PES. Whereas AMC, it's completely decentralized. We run it as 6 independent divisions. And so we call that smart decentralization.

The day I started at Regal, Regal was centralized, highly centralized. Within 6 months, we were fairly decentralized. Rexnord and Altra ran their businesses decentralized. Rexnord more aligned with Regal's approach. Altra was completely decentralized. And so we pulled that back a little bit when it comes to smart decentralization. So for example, strategic sourcing, we have a $3 billion buy at Regal. We do that -- we do the large commodities from the center to leverage the scale and scope of Regal. That's smart decentralization for us.

Okay. All right. Great. And -- so Rob, you'll be bridging CEO tenure here shortly. And again, it's just been a lot of change, rapid pace of change, kind of nose to the grindstone here for several years. So as CFO, curious what might be your top couple of priorities as you kind of continuously envision the financial organization, the capabilities for long-term enterprise performance. Like where is the organization today versus a couple of years ago? And what are kind of the structural things that you think can move the ball forward in the years ahead?

Yes. So if I think about the last couple of years, I mean, I think, first of all, it all starts with talent. And we've made some great strides and some progress here, I'd say. Overall, for the organization, the finance organization, the function, we're probably maybe 3/4 of the way through where we want to be. We're building the bench. We've got some really strong talent that we've brought in. Each of our businesses, we have roughly 20 divisions that operate with a general manager, a CFO and an HR lead. And so we've embedded that structure throughout the entire organization.

We run to the P&L. Data is the part -- we drive the decisions through data, and that's always been the way that we've done things here over the -- since we've decentralized, we have P&Ls at every plant. This is the way we run the business today, and that wasn't the way it was run in the past. We didn't have P&Ls at every plant in the past. We've also recently introduced a new consolidation system for the company that we went live on this year, which has been run flawlessly. It also embeds an element of AI within our finance org, which we are -- it's kind of early stages still, but we're working through that functionality and finding the benefits of that as we move forward. And I continue to see that as an area that we'll continue to deploy and expand as we move forward.

And then we're just looking as a finance function to provide that value-added insight to help the business grow and partner. And that's an evolution and one that we and I, in particular, take very seriously and push very hard throughout the function to ensure that we've got that visibility and that business partnering to ensure that we're doing everything that we can to ensure that our general managers and our EVPs and CEOs are very successful in every -- all the strategic deployments that they have. That's where we focus, and that's what I'm most focused on. With a new CEO coming on board, keeping that CEO up with the cadence, we have great cadence and rigor within our organization at a fairly detailed level and keeping that cadence and ensuring that there's that ongoing cadence of review through all of the businesses is paramount for me right now.

And I think that as Aamir comes on board, we'll find comfort in that in knowing that it's really dialed in, and we have a very good pulse on the business.

Okay. And then curious how all that plays into the AMC margin story has been pretty interesting. I think the aspirational margins have been dialed back and pulled out. In the construct of what you just described as value-add insights and visibility to the GMs and stuff. Curious for a little more context on the AMC margin trends. I understand various macro factors, including supply chain and mix issues. But it also seems like maybe the type of stuff that certain degree of contingency planning and appreciation for natural vagaries might have a little tighter correlation between margin forecasting and margin results.

So with that sort of separation of those two ends over the past couple of years and varying degrees at different times, does what you just described as the value-add insight, is that a place -- is that a function that's sort of lagging at AMC because it's more decentralized compared to the other segments?

Well, look, I think, first of all, we've owned this business for a couple of years, and we certainly have learned along the process. I mean, as we've -- since we've owned them, I mean we've come a long way, and we've upgraded the talent across the board throughout the entire AMC segment. In fact, I think almost every one of our leaders within that segment is new to Regal Rexnord maybe over the last year or so. So yes, we've made some big strides in terms of bringing in really good talent and providing more data to help drive decision-making. I think that the business has seen -- the AMC segment has seen some really strong external forces that were absolutely tough to forecast. I mean if you think about how we came into last year, we thought that the year would have been gangbusters and you get $150 million worth of tariffs come through and where you just don't have that visibility.

So I know you kind of made the point, and I think it's valid that we had a lot of external factors that influence the business like rare earth magnets and tariffs and these things have been plaguing the business, but in AMC has been pretty darn impactful. The medical destocking, for example, has been very impactful. I think that the -- I do feel though that the strides that we've made on the system side will help tremendously here because we didn't have great visibility at the level we needed to drive decision-making in the past. We are now on one system to drive -- the data has to be consistent and the data management is critical. That's new in the last, let's just say, 6 months or so in terms of us getting on to one system. that is very beneficial for us. And I do think that's going to yield some nice benefits for us going forward.

Okay. So that's just been really kind of instituted about 6 months ago.

Yes. We went live actually at the beginning of this year, but we started to get some of the benefits of that consolidation view over the last 6 months.

Okay. Great. And yes, so you brought up the medical destocking and -- orders comparisons when there's been a destocking can be a little tough to interpret externally. But I got to ask you about that number. Medical orders, what was it up 53% in the quarter. Can you help put that in context? I mean, is that -- I know it's not going to grow 53% in sales. You have a range of lead times and maybe some blanket orders in there. But is medical like kind of a pretty V-shaped recovery in the cards?

No. I think -- I mean, you're right. The compare is easier for sure, Chris, because last year, it was a tough year. And I'll just add one other thing. The year before that, it was discrete automation was a tough year, if you recall, and the destocking of discrete automation, both AMC-centric product line. But medical for this year, we feel good about the business and the market rebounding. We think the demand is in the marketplace. We think the destocking is done. And so we would expect more of a natural rebound.

However, we are winning some business that's more longer cycle that gives us a little more visibility because we're selling a system, a solution that's not just an individual part, and that brings a little more stickiness, too. And that's all part of the strategy. But we do not expect a V-shaped recovery in medical. Hopefully, that answers your question.

Yes. And I was curious to hear you call the systems a stickier way of doing business with medical. I would have thought a lot of the -- I mean, you're getting designed into specific platforms, right? And so I would have thought in general, that would tend to be more single source type of business or certainly very high-quality dual source. So -- and maybe you implied that before the systems approach that might not have been the case. I'm not sure.

No. I mean, historically, we would have sold precision motors into medical. Now we're able to sell precision motors with micro gearing and micro sealing as an integrated solution. It's still sole sourced. It's still typically sole sourced. It's still spec-ed in, all those things. But now it's an integrated where we're helping with that design more than just supplying a component. We can do that because we have all of those products in our portfolio.

Right. Okay. So the stickier refers to the -- okay, you're a much higher profile of the next design cycle and the design cycle after that.

That's right. And we're actually helping with the design versus providing a component to the design, if that helps.

Yes, that's great. And then I want to get to data center because that is the hot topic. But once we get going on that, we probably won't have time for anything else. So I just wanted to hit any signs -- I think humanoids is kind of Steady Eddy, probably accelerate bits here and there. But what about eVTOL? I mean that's just kind of this like out there in the future, what a cool win. It's so emblematic of everything Regal Rexnord has been talking about for higher-value solutions. I think different geopolitical dynamics are pulling forward a lot of aviation technologies. I think eVTOL is maybe a little more civilian based. But curious if there's any opportunity that eVTOL horizon kind of pulls in.

The L.A. Olympics is still supposed to have eVTOLs moving visitors to the Olympics. Now that's '28. I am questioning that personally, but there's still a lot of dialogue that's going to happen. We're on those programs. That will accelerate things, I think. Now what you said, though, is why we really like our position here is we have a solution. It's a differentiated solution that's valued by our customer. And so then we're looking at adjacent spaces where that solution fits.

So we actually just recently won a program on a space unit and also on an electrical airplane with an electromechanical actuator. And so this is just moving up that value chain of providing our total solutions to different applications that can value what Regal brings to bear. EVTOL if that market takes off, we're in good shape. It's not going to be overnight. That's for sure.

Yes. Yes. Okay. And with the space unit program, is that -- you got a handful of kind of primes in space, then you have a vast supply chain. Is that space unit program referred to -- can that be horizontal across the primes? Or how does that fit? I haven't heard you mention that before. So I don't know.

No. And it's new and maybe we should have gone public with it before. I mean it's not a significant growth vector yet, but it just is another indicator of what we can do and the system solutions that we can bring to bear.

Okay. We'll pick that up in a broader venue. And then on to the data center. So I wanted to discuss the just really impressive advance of the data center business over the past couple of years and more so in the backlog, in particular, than the actual growth, which is good as it is. But what were the key decision junctures -- how do ePODs platform take shape for you guys?

Yes. I actually can go back 6 years. Rob and I were on a trip to see the facility and the technology, and we said we can do more here. And so we've been investing. That business has grown 30% CAGR over the last 5 years. Now that was off of a $30 million base. But last year, we did $120 million in switchgear. We expect to do probably double that by 2027. And so this is all around getting the right leadership, the right resources and growing in the space.

But a couple of years ago, and we run the business 80/20. So Quad 1 is very important. Quad 1, highly valued customers. A couple of our highly valued customers came to us and said, the market is moving in this direction, we want you to move with it because we value you as a supplier, your willingness to customize, your say-do on on-time delivery and commitments and your quality, and your quality. And I'll maybe double hit quality because we are known for providing quality product.

And so we developed our program. We launched it at the beginning of last year. We bid a number of projects, which we won the majority of in the fourth quarter of this last year, and that was the announcement that we made coming out of fourth quarter. And now it's about expanding the universe of potential customers, but we feel really good about our position, and that's also why we increased our capacity in our Canada facility by 50%, and we're doubling our capacity by a new facility in Texas.

And so that's really the genesis of -- Rob and I believe a good business is a good business. It may not be particularly core. Data center is not core to the industrial powertrain as an example, but it's a great business. And we're going to continue to invest there and continue to grow there.

Yes. And I think like maybe by the end of this year, you start to -- that's the timeline for customers that want to reserve supply for '28. So I think maybe the '27, that $700 million is probably not going to move a whole lot that delivery schedule. But in terms of that continuing to grow from that suddenly large level, how does that work in terms of like the foot forward with capital? And are you capacitizing for beyond '27 now? Or is that sort of like a dance with the customers? And what comes first, the commitment or your capital?

It's a capital -- fairly capital-light assembly process. And so our capital that we've invested would allow us to double the output from what we're saying is likely a $900 million plus 2027. So we're not worried about that capital, but we can grow capacity very quickly here, all assembly and test, all assembly and test, unlike many of our other businesses that are much more vertically integrated.

Right. Okay. So you're suggesting that you've kind of aligned the levers to pull where you can kind of double your output from the $900 million level. And is that an indication that you expect the demand will go to that scope over the longer term?

Yes. But it's a question of timing, Chris. I mean if you look at any of the current forecast in the data center space, it's an expectation to grow significantly. I think we saw a stat of 200 gigawatts of data center capacity by the end of 2030, more incremental, incremental. That's a lot. So we see this market as being certainly a double -- a strong double-digit grower. And we'd like to benefit from that as well.

Yes. So in that vein, this has caught up quite a bit with the white space now growing crazy on a little bit of a lag to some of the gray space in the early years of this cycle manifesting and arriving. Now you're seeing more suppliers come in and have some share and in some cases, pretty suddenly, you guys are a case in point, Generac, another one.

So with that backdrop, I'm curious if there are maybe other greenfield solutions, greenfield from your perspective that you're like, hey, we're evaluating 10 of these things and -- or well, we might have 1 or 2 that work or kind of ePODs where we're going to nest. So how would you kind of respond to that kind of?

It'd be a little unfair for me to say that we're going to have -- there are other opportunities that are going to grow the way that the data center and the ePOD space has grown for us. But we are -- we work on a number of them, and we've talked about a number of them. The access solution for humanoid, we're betting early on that. We're spending money to get ready for that market to take off. But if it takes off, we're in good shape. We're in great position.

We talked about eVTOL, so I won't talk about that again. We've been working this in air moving for a while. We haven't -- we're not a major -- we weren't a major player in air moving. We're more so of major player in air moving because of the new products and solutions that we've come out with. This is our strategy, is understanding the application very well, then leveraging the broad portfolio of our products to provide an integrated solution that brings value. The industrial powertrain is a great example of that, more bespoke to whatever the application is. So there's not a standard offering, but it's no different. And it's -- again, I'd emphasize, our goal is to grow our system sales as a greater percentage of our total sales, and that's a big part of our focus. Hopefully, that was helpful.

Yes. No, I think you took in a little different direction than I intended, but it was certainly helpful, nevertheless. I understand that broad strategy and humanoids and eVTOL. I think what's distinctive about the data center market is that the opportunities come quickly, maybe out of the blue, and they would scale at a quicker and more sudden level in some cases than eVTOL. You can see it coming a mile away and then you see it coming half a mile away. So...

Except when it takes off, it's going to take off quick that's our view.

But the kind of ideation to specification to selling cycle with data centers is a totally different ball game. So I was wondering if you have other specific applications named or unnamed that the data center, the integrators are saying, "Hey, we need you here."

Yes. I mean, other than to talk about the air moving solutions that we've been in and trying to position ourselves more in data center with those solutions. But beyond that, nothing is coming to mind.

Okay. Yes. So could PES start to see a very discernible growth curve from air moving in the data centers?

It could, and it has been seeing some of that. Our commercial HVAC business has been growing pretty well. North America, for sure, mid-teens for the last couple of years. And so could that even take off further? We think so. Now that's about 15%, 20% of PES is commercial HVAC North America.

Okay. Great. And then as we're winding down the last couple of minutes, I just wanted to kind of have a little capital allocation priorities, how you see them shifting over the next couple of years? Any maybe different balance sheet structures, converts, any sort of thoughts you're thinking about as you move ahead with -- interest expense is still a pretty large percent of EBIT.

Yes. So -- we do think we'll probably land at the end of this year about 2.7x net leverage. We think that we'll probably -- once we get into that range, I think early next year is a time where we'll look at some of these capital allocation priorities. We've been prioritizing debt for quite a number of years here as we should have to get down to where we are. I've made commitments to the ratings agencies that we wouldn't really do anything until we're closer to 2.5.

And then I think at that time, I think it makes sense to start looking at maybe some inorganic or possibly even buying back our shares, especially if we're trading at the multiple we are today. That would make a lot of sense. But that would be probably early next year at best. As far as the balance sheet and the way we're structured today, I mean, we -- our variable rate debt is -- should be largely extinguished here as we kind of exit this year into next year in short order. And the composition of the bonds past that point, pretty long tenured there. So we've got plenty of capacity as we continue to generate cash to do kind of whatever we need to do.

I don't see a point in the future. And again, I caveat everything by saying we've got a CEO transition going on. And so we'll obviously be -- one of the points of discussion here will be once Aamir arrives. But that I don't see us raising our leverage anywhere close to where it's been in the past. I think we could stay within that 2.5x or less on anything we want to do going forward. And our goal is to get under 2 and closer to 1.5x in the not-too-distant future, absent anything that we do that's kind of bolt-on and maybe some more sizable repos.

Great. Appreciate that color. We're at the hour. So great to see you guys. I appreciate the discussion and the timing running the meetings throughout the day with us here.

Thanks again, Chris. Good to see you.

Take care.

Good day, and welcome to the Regal Rexnord First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Robert Barry, Vice President of Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning. Welcome to Regal Rexnord's First Quarter 2026 Earnings Conference Call. Joining me today are Louis Pinkham, Chief Executive Officer; Rob Rehard, our Chief Financial Officer; and Rakesh Sachdev, Chairman of our Board of Directors.

I'd like to remind you that during today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on regalrexnord.com's 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 equivalent in the press release and in the presentation materials.

Turning to Slide 3. Let me briefly review the agenda for today's call. Louis will lead off with brief opening remarks. Rakesh will then share remarks on our CEO succession, after which, Louis will provide an overview of our first quarter performance. Rob will then present our first quarter financial results in more detail and discuss our updated 2026 guidance. We'll then move 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 first quarter results and to get an update on our business. We appreciate your continued interest in Regal Rexnord. Before we get into first quarter performance, I would like to invite our Chairman, Rakesh Sachdev to spend a few minutes discussing our CEO succession. Rakesh?

Thank you, Louis, and good morning, everyone. As you likely saw, we announced on April 22 that Aamir Paul will succeed Louis as Regal Rexnord's sixth CEO. Aamir is joining Regal from Schneider Electric, where he has been a member of the Executive Committee and responsible for managing and growing their North American business, a business with roughly $17 billion in sales, an impressive growth track record and deep product and technological capabilities, including in data center and discrete automation, 2 highly strategic growth vectors for Regal Rexnord.

But what really impressed my fellow board members and me about Aamir's background and why we believe that he is extremely well positioned to lead Regal through the next phase of growth is his sharp commercial acumen. His focus on driving innovation, guided by a deep understanding of customer needs and priorities makes us very confident that under Aamir's leadership, the strength of Regal Rexnord of unrivaled scale and scope, incredible brands, solid market positions and engineering and technological expertise can be leveraged to accelerate profitable growth.

Given Aamir's commitments to his current employer, we expect he will assume the CEO role at Regal Rexnord no later than July 1. And I'm excited to see what he will accomplish once he is leading the Regal Rexnord team.

I would also like to take this opportunity to thank Louis for many of his contributions to Regal Rexnord during his tenure as CEO. Seven years ago, we began a partnership that would reshape this company in ways few could have imagined from transformational changes to the portfolio, including creating a business with significant exposure to secular markets, more valuable technologies and unrivaled scale and scope to developing a deep bench of strong talent, Louis is leaving Regal much stronger and better positioned for growth than when he started.

For this, the Board and I sincerely thank you, Louis, and wish you the best of luck in your retirement and all that the future may hold for you.

And now I will turn the call back to Louis. Louis?

Great. Thank you, Rakesh. First, I would like to thank the Board of Directors and in particular, Rakesh, for giving me the opportunity to lead Regal Rexnord as well as for their guidance and partnership over these last 7 years as we worked hard to build the Regal Rexnord of today. It has been an incredible journey. And now I am excited to watch as Aamir leverages what we have built to take this business to what I am confident will be great and new heights.

Since this is my last earnings call, I want to also take the opportunity to reiterate what an honor it has been to lead this great company through a transformation that I believe has better positioned Regal Rexnord to create value for all stakeholders.

And to our analysts and shareholders in particular, thank you for your support and for your years of valuable feedback and robust dialogue. It has been a pleasure interacting with and in many cases, learning from you.

And now on to our results. Our team delivered solid first quarter performance, which exceeded our enterprise guidance. So before continuing, I want to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution, in particular, around achieving market share gains and executing strategic investments to support future growth.

Orders in the quarter on a daily basis were up 8.5% versus prior year, which resulted in our backlog rising 6.7% compared to the fourth quarter. In short, we are seeing evidence of both improving end markets and of our growth investments paying off.

Orders at AMC were a standout positive, up 34% versus the prior year period on strength across all key verticals. Orders in IPS were down slightly in the quarter, which is due to large project timing, offset by orders in our shorter-cycle OEM business, which were up high single digits and orders in distribution, which were up low single digits versus the prior year.

We attribute the strength in IPS short cycle and distribution orders to slowly recovering general industrial markets as well as to our outgrowth initiatives, including cross-sell synergies.

Finally, orders in PES were down but better than expected. We are seeing strength in our commercial HVAC business in the U.S. and Asia Pacific and tentative signs that residential HVAC markets are finding a floor. We believe this is encouraging for PES' growth potential. But as Rob will elaborate, we are remaining measured with our outlook, particularly as it relates to residential HVAC due to the very short-cycle nature of this business. Enterprise orders in April were up 4.6% on a daily basis. We are pleased to see continued strength and positive orders in all segments following a strong first quarter.

Shifting to sales. Our sales in the quarter were up 4.3% and up 1.6% on an organic basis versus the prior year. We saw broad-based growth outside of residential HVAC and with notable strength in data center, discrete automation and general industrial markets in IPS and AMC.

From a segment perspective, we saw particular strength in AMC, which grew over 12% organically versus the prior year. The AMC team continues to do an excellent job executing its backlog and driving share gains in its largely secular markets.

Turning to margins. Our first quarter adjusted gross margin was 37.7%, roughly in line with prior year. Our teams overcame headwinds from mix, higher-than-anticipated inflation, tariffs and rare earth magnets with solid execution on price realization, productivity, leverage from higher volumes and synergies.

Adjusted EBITDA margin was 20.6%, down 120 basis points versus prior year. This performance reflects relative stability in our gross margin, volume leverage and disciplined discretionary cost management, net of higher strategic growth investments.

As we have indicated previously, having achieved top quartile gross margins versus relevant industrial peers, we are shifting our strategic emphasis to driving stronger growth, including making targeted investments in new product development, our sales force and e-commerce technologies, among others. I believe the early fruits of such investments are apparent in multiple recent quarterly order rates, and we expect this dynamic to accelerate.

Shifting to earnings. Adjusted earnings per share for the quarter was $2.17, up roughly 1% over the same period last year despite significant year-over-year headwinds, including tariffs, rare earth magnet availability and inflation. The continued benefit of cost synergies was a nice tailwind in the first quarter, and we expect this to continue as we move through the remainder of this year.

Lastly, adjusted free cash flow was roughly flat in the quarter, consistent with our historical normal seasonality and our expectations, which included working capital investments to support our growing backlog. Of note, prior year results benefited from onetime working capital optimization initiatives. In summary, a really solid quarter.

And with that, I'll turn the call over to Rob.

Thanks, Louis, and good morning, everyone. Now let's review our operating performance by segment. Starting with Automation & Motion Control, or AMC, sales in the first quarter were up 12.1% versus the prior year period on an organic basis, which was above our expectations. The performance reflects broad-based strength, but with especially strong performance in data center, discrete automation and food and beverage. We would attribute the strength to improving underlying end market momentum in these secular markets as well as our growth investments, which are contributing to our sales growth.

Notably, it's good to see the medical market improving. This is a market where we have high-margin, technology-rich products and one where improving demand should help us on both the growth and margin front in the future.

Turning to margins. AMC's adjusted EBITDA margin in the quarter was 18.2%, which was roughly 2 points below our expectation, similar to a dynamic we experienced last quarter. We were pleased the team over executed on the top line, but where we saw the strongest growth in the quarter also resulted in greater-than-anticipated mix pressure. The majority of this pressure relates to stronger growth in OEM versus aftermarket and to a lesser extent, project timing in our small but high-margin industrial automation software business, where we now expect the majority of these deferred shipments to be delivered in Q2.

When considering margin performance versus the prior year period, the business also saw headwinds from the anticipated unfavorable tariff price cost overhang and to a lesser extent, continued rare earth magnet supply constraints, along with higher growth investments. This business is making targeted strategic investments to pursue highly attractive growth opportunities where adjusted EBITDA margins may at least initially be slightly below our mid-20s expectation for where AMC should operate longer term.

We saw some pressure related to this dynamic in the quarter, but expect it to alleviate as volumes associated with these opportunities rise. While not impacting the first quarter, ePODs are a great example with their targeted 20% plus adjusted EBITDA margins, but with high volumes that are expected to make meaningful contributions to EBITDA and earnings growth in future quarters.

Orders in AMC in the first quarter were up 34%, which, as Louis mentioned, reflects broad-based growth. Excluding data center, AMC's orders were up 28%. A few notable highlights include aerospace and defense orders up 76%, medical up 53% and discrete automation up 18%.

Book-to-bill in the first quarter for AMC was 1.24. The strong AMC order momentum carried into April with orders up 14% on a daily basis compared to April of the prior year. As in the quarter, growth remained broad-based with data center, aerospace and defense, discrete automation and medical, particularly strong. In summary, we are very pleased with the order strength we are seeing in AMC. Our growth investments are paying off and the secular tailwinds that characterize most of AMC's markets are increasingly apparent, which bolsters our confidence in the high single-digit organic growth outlook we have for this segment in 2026.

Turning to Industrial Powertrain Solutions or IPS, sales in the first quarter were up 2.8% versus the prior year on an organic basis, which was ahead of our expectations. Growth in the quarter was broad-based, but with particular strength in the general industrial market. We believe this is consistent with signs of recovery in U.S. industrial markets as reflected in recent ISM data and with the gains we continue to achieve from our cross-sell and powertrain initiatives. We see these dynamics impacting IPS orders as well, which I will discuss shortly.

Adjusted EBITDA margin for IPS in the quarter was 25%, within our margin guidance range, reflecting a higher mix of OEM versus aftermarket sales and modestly higher-than-planned commodity inflation. Versus prior year, margins were down as expected due to the impact of tariff price cost, higher growth investments and unfavorable mix, partially offset by synergy benefits.

Orders in IPS on a daily basis were down 1.4% in the quarter. The decline was driven by the cadence of large project orders in the mining industry, which were very strong in the prior year period and often can be lumpy. Orders from our short-cycle OEM customers were up almost 9%, with distribution orders up low single digits and project orders down in the low teens. These short-cycle OEM orders are where we would expect to see the earliest benefits from a U.S. industrial cycle recovery. Book-to-bill in the first quarter for IPS was 1.09. April orders were up about 2% on a daily basis versus the prior year period.

Turning to Power Efficiency Solutions or PES. Sales in the first quarter were down 10.3% versus the prior year on an organic basis, which was in line with our expectations. While the outlook for residential HVAC is showing some signs of brightening, including in the AHRI data, our sales in the quarter for this business were down over 20% as expected. On the flip side, we continue to see growth in our North America and Asia commercial HVAC businesses.

Now turning to margins. Adjusted EBITDA margin in the quarter for PES was 15.8%, which was above the high end of our guidance range and up 160 basis points versus the prior year. This strong performance was achieved despite challenging end market conditions and largely reflects positive mix benefits.

Orders in PES for the first quarter were down 60 basis points on a daily basis. And while down, exceeded our expectations on stronger performance in the residential distribution and commercial HVAC markets. Book-to-bill in the quarter for PES was 1.13. April orders in PES were up slightly on a daily basis.

Now turning to the outlook on Slide 10. The table on the left outlines our principal assumptions for 2026 with today's update compared to our original guidance when we reported fourth quarter results. Starting with sales, as outlined in the table on the upper right corner of this slide, our guidance now assumes growth of roughly 4.5%, up 150 basis points versus our prior assumption, reflecting better-than-expected performance with almost all of our markets improving from where we entered 2026, which we haven't seen for a number of years.

As we discussed last quarter, several of our end markets have the potential for stronger growth in 2026, in particular, general industrial and discrete automation given recent expansionary ISM readings. One quarter into the year, we believe we are seeing ISM-related tailwinds in our sales and orders, both in IPS and AMC and are also a bit more optimistic about commercial and residential HVAC markets in PES. In addition, in AMC, we are seeing acceleration in aerospace and defense, discrete automation and medical.

Shifting to the margin outlook. Our adjusted EBITDA margin is now forecast at 22.2% for this year, up 20 basis points over the prior year, but down modestly versus our prior guidance. This change largely reflects weaker assumed short-cycle mix in AMC, which we experienced in Q1 due to a mix that was more weighted to OEM versus aftermarket sales, which we now assume continues for the rest of the year. We see this as a more measured assumption for our full year guide. This change also contemplates stronger OEM growth in IPS and in our residential HVAC OEM business in PES.

At the midpoint of our guidance, we assume that as our end markets improve, growth is stronger in our OEM versus aftermarket sales, which creates unfavorable mix pressure on margin. At the higher end of our range, we assume a more favorable aftermarket OEM mix dynamic and a more historic short-cycle margin mix profile. In addition, our current backlog, particularly in AMC, supports an even stronger margin profile in the second half. However, we are intentionally remaining measured given what we have described, along with current geopolitical and macro uncertainties.

Further down in the table, we also outline relevant below-the-line items, which are fairly consistent with prior guidance. These assumptions result in an adjusted earnings per share guidance range of $10.20 to $11, which is unchanged, and the midpoint equates to approximately 10% adjusted earnings per share growth.

For 2026, our cash flow guidance also remains unchanged at $650 million. Our cash flow in the first quarter was roughly flat, which was consistent with our expectations and reflects normal seasonality in the business as well as investments in working capital that we are making to support our growth.

Finally, regarding tariffs. We are lowering our estimated unmitigated annual impact to $127 million from $155 million previously. The change since our fourth quarter report factors the replacement of IEEPA tariffs with Section 122 tariffs at 10% and recent revisions to Section 232 tariffs. This revised impact estimate neither accounts for new Section 301 tariffs, which could be implemented later this year nor potential IEEPA refunds.

Specific to the status of potential IEEPA tariff refunds, we are actively monitoring the refund process. However, it is new, complex and evolving. At this point, we have not received any tariff refunds. Despite these various fluctuations in tariffs, our outlook is consistent with our previous views. We still expect to be dollar cost neutral by the middle of 2026 and be margin neutral by the end of the year.

Before I leave this slide, it is noteworthy that the revisions to the 232 tariffs are creating new share gain opportunities for our PES business. We have high levels of U.S. steel content in many of our motors, which is enabled by our in-region manufacturing footprint. Some of our OEM customers are interested in buying these motors to increase the percentage of U.S. sourced metal content in their products to qualify for a lower tariff rate when those finished goods are imported into the U.S. We expect to comment more on this opportunity as it evolves.

On Slide 11, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for second quarter and for the full year. First, a few dynamics to note for the second quarter. In AMC, we expect sales to be modestly higher sequentially, consistent with AMC's strong orders and its shippable backlog. AMC margins should also improve sequentially on slightly better mix and less tariff price cost pressure.

For IPS, we expect sales to rise sequentially, mainly reflecting its shippable backlog, which we believe is benefiting from slowly recovering short-cycle industrial OEM markets and continued progress on our cross-sell initiatives. Margins should rise sequentially on improving tariff price/cost dynamics and higher volumes.

For PES, sales are also expected to rise sequentially due to normal seasonality and less pressure on residential HVAC volumes. PES margins are expected to rise on the higher volumes and improving tariff price cost.

Now let me flag annual assumptions that are changing. For AMC, we are raising our annual sales growth guidance to high single digits from mid-single digits, consistent with the stronger Q1 performance in this business. The improvement spans AMC's end markets, consistent with the broad-based strength in orders we have seen, but with more notable acceleration in our OEM markets.

As I stated earlier, this acceleration in our OEM markets contributes to us lowering the high end of AMC's guided adjusted EBITDA margin range for a midpoint of approximately 20.5%. And as I also stated previously, we see an opportunity to achieve the higher end of this range given our current backlog profile and potentially stronger shorter-cycle margins, but are intentionally remaining measured at this point in the year.

For IPS, we are raising our annual sales growth guidance to mid-single digits from low single digits, reflecting signs of improving short-cycle industrial end markets evident in our orders. However, the midpoint of our margin outlook for IPS is down 50 basis points versus our prior assumption, reflecting an expectation based on current run rates of stronger growth in the OEM business, which creates a modest mix headwind.

Finally, for PES, we are raising our sales growth guidance from flat to flat to low single-digit growth, which reflects an incrementally less weakness in residential HVAC. Specifically, we now assume residential HVAC volumes are down mid-single digits versus high single digits previously. Our revision reflects slightly more positive industry data points and recent OEM commentary.

Even with our strong first quarter margin execution, given the better performance we now see in residential HVAC and other mix headwinds, we have slightly lowered our margin guidance range midpoint.

As I close out my prepared remarks and reflect on our performance through the first quarter, we're off to a solid start. Our end markets are improving. Our growth investments are paying off, and these dynamics are visible in our orders. We are seeing particular strength in AMC, but also growth in our short-cycle OEM business within IPS and are encouraged by our April orders in PES stabilizing.

Margins faced a little more pressure than originally planned in the first quarter, but we see a path to sequential margin improvement in each of the next 3 quarters based on our current backlog position. We are holding our earnings guidance, but believe there are opportunities for upside if the positive demand momentum proves durable and if the margin mix currently in our backlog maintains.

Consistent with our prior approach, we are excluding our remaining cost synergies from our guidance, which continues to help derisk our forecast. In short, we feel very good about how the year is tracking and believe the growth potential for our transformed portfolio and its associated secular markets is accelerating, making an exciting time to be a part of Regal Rexnord.

And with that, operator, we are now ready to take questions.

[Operator Instructions] The first question today comes from Mike Halloran with Baird.

Congratulations, Louis. Enjoy the time off. Obviously, enjoyed working with you quite a bit and wish you nothing but the best moving forward. So can we start on the guidance a little bit here and just kind of dovetailing off of Rob's comments at the end there. I think it's essentially one of those. Can we just dig into the points of conservatism and the moving pieces here?

It seems like the daily order rates suggest there's upside potential to the guidance if the trajectory continues. Could you confirm that one way or another, but then maybe also talk about the moving pieces between mix, which seems like a bigger headwind, although there's some conservatism there maybe as well as the tariffs being a positive for you and then obviously, the synergies not being included. So can you just wrap that together with -- in a more holistic thought process on where the conservatism is in here and then why the philosophy behind that?

Yes, Mike, thanks for the question. So really, when you think about the conservatism as you look at the kind of midpoint of where we're staying on earnings at this point versus the high end of the range, it really -- the conservatism really is around -- it's really mix more than anything. It is look, we are seeing a mix closer to OEM versus aftermarket, which is primarily in AMC, which is most of the impact that you saw in the first quarter. And what we're doing is we're profiling the rest of the year based on that dynamic.

And so if the rest of the year ends up closer to our historical mix of OEM versus aftermarket and starts to pick up more aftermarket in that short-cycle demand, we will see likely closer to the higher end of the range, along with the profile of our current backlog does support a slightly higher margin profile in the back half of the year. But given where we are today with continued uncertainty, the geopolitical risk, everything else that we see going on in the world, we're feeling a little bit -- it's best to be a bit measured right now.

The other thing I would tell you, Mike, I don't want to lose sight of this is we continue to be very confident in our guide. The reason is because we don't have the cost synergies embedded for the rest of the year. We have potential for ePOD shipments coming into 2026 that have not been embedded in our guidance today. But if it does come in, it's a fourth quarter event, and the potential for IEEPA refunds, which, as I said, we don't have embedded because we haven't received any yet, but that could also be something that helps us either achieve or exceed the guidance that we've put out there today.

So hopefully, that helps a little bit, just kind of getting you to where we feel good about the guide and the potential for higher end. And I think, Louis, you also had a few things you wanted to add.

Yes. Thanks, Rob, and that's spot on. And then I would just add to the first part of your question, Mike. Yes, we feel good about our order rates right now. And this is the first time in a while we're confident in our revenues. I mean we always set what closest to the pin, but we see a path with 8.5% orders in the first quarter, 4.6% orders in April that if this momentum continues, revenue will help us as well get to the top end. Right now, though, we're going to be measured. We've got some changes going on, as you well know. And it's just the right thing to do, we think.

Yes. No, that makes sense. And then maybe just give a state of the union on the data center side of things. Last couple of quarters, you've been a little more forthcoming in the deck specifically about where you were in terms of ePOD, ePOD funnel, where the traditional business funnel was on the data center side and then where you were in the manufacturing plant build-out. Could you just update us on those topics holistically and anything else you think might be relevant to that conversation?

Sure, Mike. Happy to, and I might jump around. A couple of things. We talked about an expansion in our Canada facility. We're already using that operation. I was there at the beginning of April, and we're producing switchgear through that facility today. I then went on to our new Texas facility, and we're well on our path. We've got material already coming in. We will be producing in that facility by midyear. ERP is up and running. We're well suited to the capacity expansion that we need.

Specific to data center, I mean, we're still very, very bullish. This is a market where we're nicely positioned. We've been winning quite a bit. We had significant orders growth. But remember, the business is pretty lumpy. They tend to be larger projects, and they're getting even larger. The $735 million order we announced coming out of fourth quarter, beginning of first quarter is a great example of that.

I think the real question is -- so we really don't have any more of an update on the funnel itself. We talked about a $600 million switchgear funnel coming out of last quarter. It's about the same. Our win rates are pretty stabilized. And again, we had some nice orders growth in switchgear in first quarter.

Now specific to ePOD, nothing has changed in our expectation here. We are in discussion with our customers about future demand beyond 2027 when the majority of our current ePOD backlog will ship. Our customers expect this market to continue to grow into the foreseeable future.

And so the best way to think about this is our expectation is that our sales in '27 are probably somewhere around the $900-ish million. And we expect that we would be able to grow off of that in '28. And so therefore, even though we're not giving you clarity on the funnel, we would expect to see orders towards the end of this year or the beginning of next year to fill in the demand for '28. But everything we're hearing from our customers suggests that, that is going to occur. Hopefully, that packages everything in your question and happy to clarify anything if you'd like.

The next question comes from Jeff Hammond with KeyBanc.

This is David Tarantino on for Jeff. And Louis, I want to pass along our thanks and good luck from both Jeff and I. Maybe just on IPS, great to see some more positive momentum here. So maybe could you give us some color on what's reflected in the guide here relative to what you're hearing from your customers, particularly around the short-cycle distribution customers?

Yes. We're being a little more measured than maybe what you've heard from some of our distribution customers and the public statements. The distribution orders in the first quarter were up low single digits. Distribution orders in April were up mid-single digits. So it does feel like it's accelerating a little bit, but we're being measured with an expectation of full year sales for IPS at mid-single digit.

Okay. Great. And then maybe on the margins more specifically in AMC, could you give us some color on the degree of mix and rare earth headwinds and how you expect this to evolve moving forward? Any more color on that margin bridge year-over-year would be helpful.

Yes. So specific to rare earth, just I'll cover off, there's probably about 30 basis points of headwinds related to rare earth. But the mix impact that I described in my prepared remarks related to the short-cycle weighting towards OEM versus aftermarket. That mix was maybe just north of maybe 100 basis points of impact to EBITDA.

The second was really related to that high-margin automation software sales that slipped from Q1 to Q2. That's probably another 50 basis points of headwind in the first quarter. And then finally, there's another 50 basis points as well because we're about 2 full points below where we thought we would be. So there's about another 50 basis points related to the timing of tariff price cost. It's not -- it's never perfect. We're a little bit off by, as I said, about 50 basis points relative to what we had expected, but fully expect to resolve that as we move through Q2.

The next question comes from Kyle Menges with Citigroup.

I was hoping to get a little bit of clarification just on the data center sales cadence that you guys are laying out. It seems like data center sales might have been $175 million or so in 2025. And I'm curious what that will look like in 2026. And then I believe you had said $900 million for 2027. Is that total data center sales that you're referencing? And how much of that is the ePOD?

Yes. So Kyle, so actually, 2025 for data center was $120 million for Regal. And our expectation for data center for '26 is $180 million, no ePOD in that number. And our expectation for '27, but we're not guiding yet. We've got to figure it all out, would be to see growth on that piece. That's the switchgear piece with an expectation of switchgear probably being at about $240 million and ePOD then would be additive to that and anywhere from, call it, $700 million. And that's how we get to the $900 million plus for 2027. Hopefully, that was helpful.

That was helpful. And to think about just maybe margin as well in 2027 within AMC, if I think about maybe you're on a path to get to the higher end of the margin guide for this year closer to 21% with the ePOD and more switchgear sales coming in, in 2027. Maybe you get some growth from the other end markets in AMC. Just what's your level of confidence that AMC could continue to see margin expansion in '27?

Yes, Kyle, this is Rob. So I absolutely think we're going to continue to see margin expansion. Remember, we're battling through first half of this year where we're trying to catch up both on the rare earth side and on the tariff price cost side that we do expect, as I said, to be overall for the business and within AMC to be margin neutral by the time we exit the year.

Now from that point, and given the backlog profile and the orders performance in the higher-margin businesses within AMC, I would expect that mix will play a nice part in improving margins as we move through '27. It is a bit premature to guide at this time, but there's absolutely a path to get to that -- back to that range that we had previously provided within a reasonable period of time.

We aren't quite ready to say what that is yet because of the headwinds we have this year. But we -- and also the fact that we're bringing in so much in terms of the ePOD order, which in 2027, which we've said should be 20% plus margins. And so therefore, that's going to weigh a bit on the mix, but we will happily trade a bit of margin for the growth we're getting out of that business.

And Louis, best of luck to you, and it's been a pleasure working with you.

The next question comes from Julian Mitchell with Barclays.

Yes, I wish you well, Louis, and good to have you on the call, Rakesh. Maybe one first question is just trying to understand again the AMC margin framework. I understand there's some near-term headwinds, but I think this was the 11th quarter in a row of AMC margins falling year-on-year in Q1, and you're assuming that they expand year-on-year in the back half.

So I just wondered, there are those very specific items that might turn around, but there's been a longer-term margin deterioration. So maybe any context around the confidence that, that reverses? And then mix has been mentioned many, many times as to a firm-wide margin headwind. Maybe just help us understand the delta of OEM versus aftermarket margin for Regal company-wide, please?

Yes. Let me take the first part, and then Louis, you can add as we move forward. So let's talk a little bit about AMC margins because you brought up something in terms of the historical performance of this business and how we have this pressure. I think this is maybe 4 quarters now that we've had rare earth magnet supply issues. That certainly has weighed on margins within the business as have tariffs.

Last year, we were -- we saw a lot in terms of the medical destock that was much worse than what we planned. And then most recently, we've seen a stronger-than-expected growth in the OEM business. So that's -- and the OEM is at a lower margin profile than you would see on the aftermarket, some of the stronger margin businesses within AMC.

So the good news is that we're seeing acceleration across most of those AMC markets with some of those like medical and discrete automation having well above fleet average margin profile. So we have -- based on the profile of our backlog today, we feel very good about the improvements that we see going into the back half of the year, coupled with the fact that we do believe we'll be past the rare earth magnet issue that I just talked about, and we believe that tariff price cost will become neutral on a margin basis by the end of the year. All of that gives us confidence as we move into the back half.

And Julian, to the second part of your question, OEM versus aftermarket margin, there's anywhere from a 10- to 20-point differential between OEM and aftermarket. But as you well know with our business, we need the OEM to drive the installed base, and we expect over a 20-year period, 6x that revenue in aftermarket at 10 to 20 points higher. And so we're thrilled to see OEMs starting to accelerate as well because that is the long-term benefit for Regal.

That's very helpful color. And then just a follow-up on this point on data centers. A couple of things there. One is, Louis, you made it sound like maybe I misunderstood that there might not be ePOD orders of any scale before perhaps towards the end of the year. I just wanted to check if that's the base assumption. And also that $900 million of revenue-ish in 2027 for data center, am I right in thinking you have capacity to do a lot more? It's a sort of outsourced low vertical integration kind of assembly model. So I'm assuming you could do a lot higher than that if the orders come in.

And the answer is yes to both of your questions. We put a plan together and the Texas expansion does allow us to expand. Our first path is really a single shift of production that then would allow us to meet the current demand profile, and we could easily expand to a second shift. Specific to your order question, I mean, we're -- right now, our planning has us forecasted orders at -- large orders at the end of the year. You are spot on. It doesn't mean we're not talking to our customers and perhaps there'll be some drop-ins before that. But our expectation is that the orders to fill '28 will come in towards the end of this year, beginning of next.

The next question comes from Tomo Sano with JPMorgan.

This is Ethan on for Tomo, and we both want to say, thanks to Louis. So our question is today is orders were really strong in AMC regarding outside of the data centers. Can we get an update on maybe the $200 million pipeline? And potential progress within robotic actuation?

Yes. Ethan, you're absolutely correct. Orders were strong outside of data center. Orders in AMC, not including our data center business, were up 28%. Discrete automation was up 18%. The automation funnel is actually growing. So it's growing beyond that $200 million, but your question was specific to humanoid. Humanoid in the quarter, we only saw a little bit over $1 million of orders. But I remind you that last year, we saw $40 million of orders.

What gives us confidence in our position in humanoids is we're seeing more and more cross-sell opportunity. So we saw about $0.5 million in our micro gearing business to another OEM. We're seeing more positioning for our brake and clutches business. And that really reinforces the strength of Regal Rexnord in our scale and scope and leveraging our cross-sell drive to accelerate the growth of the business.

And I'll remind you, cross-sell strategically is important to Regal. In Q1 -- and so I'm pivoting a little bit because I think it's an important point, Ethan. Q1 '26, we saw a 34% increase in our cross-sell and our funnel grew by 18%. So we are well on our path to our target. Last year, we saw $210 million of cross-sell. This year, we'll likely get to our target a year early of $250 million plus. So maybe a little more answer than you wanted, Ethan. So I apologize for that, but hopefully, that was helpful.

Yes. That was helpful. And just following up on the cross-selling and potential synergies. Is there an update on the synergies that were realized during the quarter as well as potential ones for this year, if there's any additional outlook that we could see in the future potentially?

Well, listen, we're going to continue to drive our cross-sell initiatives. So we've said it many times that if a customer is buying one of our products, they need to buy all of our products, yet less than 20% of our customers are buying 2 or more of our product families. And so there's plenty of upside. And so for now, we're still on our path to a $250 million target of cross-sell. And like I said, we will achieve actually exceed that this year. And so feel really good about our cross-sell and the activity there.

[Operator Instructions] The next question comes from Joe Ritchie with Goldman Sachs.

And Louis, I can't believe it's been 7 years. Wish you the best, and thank you for everything.

Yes. Thanks, Joe. I can't believe it's been 7 years either.

Crazy. So my first question, look, it's great to see the order momentum across the other businesses outside of data center. I guess just with the disruption that we're seeing in the Middle East, I'm curious whether your customers have said anything about trying to secure their supply chains earlier, maybe kind of purchasing ahead of schedule. Just any commentary around that? Obviously, some of the end markets that you called out, things like discrete automation and aero have had supply chain issues in the past. So I'm just trying to understand that dynamic a little bit better.

Yes, Joe, we've really not heard any of that from our customers. A couple of things I would note. We -- first of all, our exposure to the Middle East is low. It's less than 1%. We do not leverage the Strait of Hormuz or any of the logistics in the region. Certainly, the oil and gas inflation is going to have an impact on logistics costs, but that's the only thing that we see as a concern.

And it's unfortunate to put it this way because I think it's an unfortunate situation. But the war likely will be a benefit to Regal. We're seeing incredible strength in our defense business. And although oil and gas is only a couple of percent of our revenue, we're seeing significant strength there right now. So unfortunately, it's -- the war is a benefit to Regal, and we're not hearing anything from our customers that says, they're pulling forward, they're concerned about the supply chain, at least not at this time.

Okay. Great. That's really good to hear. And then I guess my follow-up to Rob, just on the tariff impact going forward. So clear that the unmitigated piece has gone down since last quarter. Pricing has kind of remained the same. As you're thinking about kind of like the cadence for 2Q, I'm trying to understand whether we -- this is net positive in the second quarter? Is it positive from a margin standpoint in the second quarter? Just help me understand that just based on the impact that you saw in the first quarter.

Yes. No, there won't be much of any impact at all in the second quarter. We capitalize tariffs into our inventory. And therefore, based on our terms, we wouldn't expect to see much of anything until maybe the fourth quarter and even then. We're probably talking a few -- $3 million, $4 million if that as it comes through the year based on our capitalization and those turns. So we're not expecting anything in the second quarter. We would expect maybe a bit in the fourth.

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

Thank you, operator, and thanks to our investors and analysts for joining us today. It is with mixed emotions that I close my last earnings call. I am so proud of all that our team has accomplished. We have transformed Regal Rexnord into a higher-performing enterprise with a differentiated portfolio and incredibly strong team, well positioned to accelerate profitable growth.

I am also extremely excited about Regal's future under the leadership of our newly announced CEO, Aamir Paul. I believe that he will help our team capitalize on all that we have built to create tremendous value for our key stakeholders. Once I pass the baton, I am looking forward to watching Regal's journey progress as one of those stakeholders.

Thank you again for joining us today, and thank you for your interest in Regal Rexnord.

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

Okay. Good. We're going to move things along. Thanks, everyone, for joining. I'm Tim Thein here with Raymond James Industrials. Happy to have the team from Regal Rexnord with us here today, been very good and loyal contributors over the years. So thank you guys for coming.

And we're going to just do a Q&A with Rob Rehard, who's the CFO. I guess, been in the seat for, what, 7-ish years now. Seen a lot of changes certainly over the years. So maybe this conference tends to be a little bit more kind of generalist in nature. So maybe just start with a high level for those that are newer to the story, just been a lot of changes with Regal over the years. So just level set us in terms of where the business is today, and we'll go from there.

[Technical Difficulty] okay. Great. Thanks. Gross margin has gone from roughly 26%, we exited last year at 38%. We decentralized the business. We've we run at 3 different segments. During that time frame, we merged with Rexnord. We acquired the Ultra business primarily for the AMC platform, the automation platform. And it's all worked out for us very well over that time frame.

We run the business through an 80-20 lens. That was something that Louis also brought when he joined the company 7 years ago. And it's worked very well for us. That essentially means that we focus on A customers, A products. And historically, the company really was more about -- every customer is treated equally, and we don't run the business that way today. So a lot of change over that time frame. Free cash flow has always been a focus for us. We've always done quite well. We traded at a free cash flow margin of roughly 9%.

We see that growing here over the next year or 2 to low teens. And so this year, we've got a little more of investment related to data center, which I'm sure we'll get into a little bit here as we move through this presentation. But the business has transformed quite a bit, and we're really excited about where we are. We are exposed about 50% to secular markets today. And most of that sits in our AMC segment, which is the automation segment. And then we have also a fairly large part of our business is primarily in the power transmission side of the business that's also tied to distribution aftermarket.

So a really strong part of the business, highly correlated to the ISM, especially on the short-cycle side. So when we're starting to see the ISM now start to inflect for a couple of months now, good to see. But the business has transformed quite a bit, and we're very well positioned. We've got -- most of the markets that we operate have been at or near trough. And so we're starting to see some green shoots here, certainly on the data center side, more than just some green shoots, but in other parts of the business as well, which is great to see. And so we're cautious as we enter the year, but feel really good about our prospects as we move through '26.

Yes. Great. Maybe we can just continue on that thread just with the PMI or ISM number coming out yesterday, obviously, some geopolitical wins starting to swirl a bit. But as to how you frame the year kind of targeting flattish volumes, it again, seems like maybe there could be a little bit more momentum there. But talk us through maybe a couple of the puts and takes as to how you view the year based on these initial outlook.

Yes. When we came into the year, we saw the January ISM above 50%, but then a little contradictory, we saw our IPS segment with orders down 0.5 point in January. So hey, listen, that's a month. Let's not bake anything in. Let's set the guide a little less constructively as we move through the year to start at least so that if it inflects up, that's great. That's our assumption in our guide at the time we set our guidance is that the ISM, we weren't going to see a big inflection.

We're going to use the run rates that we had been seeing across the business to project the year. And therefore, anything above and beyond that is great to see. So 2 months now, great. We'd like to see 3. And I'm not necessarily going to be providing an update on order rates through February. But again, 2 months of ISM and being that roughly 40%, almost 50% of the business is correlated to the ISM should yield a nice benefit for us.

The other side of the business that's going quite well and what's got the highest growth projection in the year is the AMC segment. We saw a nice continuation, if you will, in discrete automation as we exited the fourth quarter with orders up there roughly 9%. And so I think a rolling 12 of about 6% on discrete automation. So that's great. We're seeing that come back for us a little bit as well as we saw the large data center orders that came through, which is also very good to see.

And that gives us a lot of confidence as we move through this year, not just in data center but other parts of the business and move into really '27 when that -- those new orders are going to start shipping, which is roughly $735 million worth of new orders just on the modular EPOS data center. So lots of great things going on in the business and some things that are starting to inflect nicely for us. But we entered the year really from a guidance standpoint, be very measured, especially across the IPS and the PES segments.

PES, we believe order -- the resi HVAC side of that business will be down high teens, even low 20s in the first quarter, still be down through the second quarter, start to inflect in the back half, but resi HVAC to be down high single digits in the year. That's weighing down on the PES performance. So we expect that to be flat basically in the year for PES, that segment.

And we expect IPS to be kind of that low single-digit rate from a growth standpoint. Again, there was no assumption that the ISM would continue to be above 50%. So should the ISM continue where it is, the opportunity for that to get better is pretty high. And I think -- and then for AMC, I talked a little bit about it.

Yes. No, that's good. Maybe just kind of the appetite for larger scale CapEx. The idea being you've got the Fed likely rates coming down, tax reform and presumably, and hopefully, we're kind of further from that shock to business confidence around tariff and trade uncertainty in the early part of last year. So it all sets up pretty nicely on paper.

But it feels like when you hear from CFOs in your seat, it's almost like very much a mixed read on that in terms of the willingness and the appetite to actually move forward. What's your lens from your seat as to how that is developing? I'm sure a very dynamic situation.

It is. And we're not really seeing much on the CapEx side that's going to free up any real volume from that standpoint in terms of anything as of late that's going to change any of that going forward. I'd say the ISM is the best indicator that we have in terms of the correlation. And so if that stays above 50, well, then we should start to see some inflection there. But from everything that's going on from the tax law changes in that, we haven't seen much in terms of benefit from that up to this point.

If it materializes, that's great. It didn't -- certainly doesn't influence any of the decisions we make from deployment -- from deploying capital or CapEx into our plants or anything like that. And so -- and I'm not hearing a lot of that feedback either from our commercial teams in terms of what our customers are communicating either. So that hasn't quite come through for us.

Got it. Maybe as you think about inventory levels in the channel, I'm thinking that the IPS segment maybe amongst the most relevant there. What's the feedback you're hearing from your large distributors, some of them will actually be here this afternoon. But in terms of their -- usually, when they start getting more confident, you start to see a little bit more aggressiveness in terms of them wanting to stock up in anticipation. What are you hearing from your team with respect to channel inventory and just the trends there?

Yes, we don't think there's a lot of inventory out there that's still being burned through. And so therefore, we see -- and we have good visibility in our large distributors to the COGS side of the business. So we know the ins and the outs. We did communicate in the first quarter that order rates were down a bit in the IPS segment, which is roughly 50% distribution aftermarket. However, we also talked about that we did start to see a little bit of strength there.

I mean a lot of the weakness that we were talking about in IPS was really on more of the longer cycle side of the business and so not so much on the short cycle or the distribution side. And so it's good to see that, that could start to play a bigger part as we move forward. And -- but it's still yet to see. But what we're seeing from an inventory standpoint, we believe we're through a lot of the inventory noise across the business.

I know there's still a little bit of noise in resi HVAC. But generally speaking, discrete automation, we think the inventory noise is behind us, and that includes the medical side of the business, which has been challenged for us. And so inventories across the rest of the business, we think are in pretty good shape right now. And so we're not seeing there's a lot of pressure there.

Got it. Maybe let's hit on some of the segments of the business that looked at where the growth has really accelerated, data center being one where we probably weren't talking a whole lot about it a year ago. Certainly, that's become a bigger part of the discussion. So maybe just help for those in the room level set in terms of where Regal plays and ultimately, just thinking from a visibility standpoint. I think like your old -- one of your old firms, Eaton would say there's a like 10-, 11-year backlog in terms of data center construction ahead of us. Where are you in terms of capturing that kind of opportunity?

Yes. So first of all, let's level set a little bit on -- there's 2 parts of the data center business that we participate, just the switchgear business that we participate. So we make switchgear and automatic transfer switches. And we've been in that business for 50 years. This is what we call our Thompson branded business. And so that business 5 years ago was roughly $30 million. Last year is about $120 million. It's been on this 30% CAGR over 5 years or so. This year, it should do about -- and I'm only talking about the standard switchgear automatic transfer switch side of the business is about $190 million or so.

And next year should be even stronger, maybe as much as $250 million. So still very, very strong growth in the standard -- in that standard product side of the business that we've been operating for roughly 50 years. We then started bidding on the modular solution or the ePOD solution and had orders come in of about $735 million as we exited last year. We had a funnel of about $400 million that we had communicated after Q3 and ended up with $735 million in orders there on ePODs.

And then we now have a funnel for both switchgear and ePODs going forward of about another $600 million. So not -- so outside of what we've already booked, there's a funnel of opportunity that we're bidding on that's about another $600 million. This solution -- so when it comes to, well, do we expect that this will continue? Well, these customers that we're working with today that we receive these orders from are customers that we've been working with for a number of years. And so there's a relationship there, and then they came to us and asked us if we could participate in this -- the way that they want to provide this solution going forward, which is in this modular solution.

We said, sure, all we're doing is providing the same products. We're just putting them in a different form within a box, if you will. About 50% of the content in that box is ours and the rest is co-sourced. And so that's how we landed it. And so the question is, how do we see this continuing in the future? Well, we're still talking to those same customers, and they're still building -- they have build schedules that currently, what has been bid and won for us is the volume for this group that's going through '27.

It could be more in '27, by the way. But this is for '27, primarily is what the shipping dates are expected to be. But we're talking to them about, well, what's the next phase. And so that's going to be '28. There's usually about a year or so cycle in terms of getting ahead of these things and getting the order into our backlog. So we do expect this to a large degree to continue, but there's no guarantees on any of this. It's a competitive process. We're going to continue to be competitive there.

And -- but it looks really good for us because, I mean, like I said, we've been doing this for a very long time. We're known for our willingness to customize, our quality, our service levels. And those are the types of things. And the capacity is a big deal, too, right now. We've doubled our capacity in our Canadian site. That's done. We added capacity in Texas. That's up and running today, building standard switchgear, but we've got the capacity in Texas.

We have capacity for anything that we have in backlog today, and we can scale that up. So it's really an assembly and test model when it comes to building these modular solutions. And so very low CapEx investment, variable model that you can scale up and down based on labor. That's how it works. And so we feel very confident in our ability going forward and feel good about this as a really nice market. For how many years, that's anybody's guess. But for now, we're very well positioned.

Maybe within A&D, certainly the D part, certainly more topical these days. The combination of Ultra and then Regal kind of gave a little complementary in terms of -- I think Ultra was strong with some of the primes and Regal historically more on the commercial side. Sometimes that business, the development cycle is so long that we can't see all the -- necessarily the program wins take some time to kind of play out. Maybe highlight an area, eVTOL would be one that stands out. But maybe just give us a minute or so just in terms of the A&D segment within Regal.

Yes. The aerospace and defense side of the business has been growing gangbusters. It's largely defense, -- quite frankly, most of the growth there has been in defense. We're very well positioned in terms of our ability to provide precise control, and that's kind of our [ Coll ] Morgan side of the business. That's the technology, the motor and control that we provide along with certain application software as well. So that side of the business is still growing very strong. We don't see that slowing down at all. We have backlog there that goes out multiple years, and we don't see that slowing down.

Humanoid robotics, another theme that gets the industrial crowd excited. What's the opportunity that you see there in terms of how Regal is positioned? And then one of the things we'll talk about is as you evolve to being more of a systems provider rather than just a component supplier. How does that factor into being able to participate in that specific market?

Yes. For humanoids, we have about -- we have a $200 million funnel right now that captures both humanoids and other robotics like surgical robotics, cobots, things like that. $100 million of that is humanoids. So how do we play in humanoids? We provide a solution, which is essentially a joint within a humanoid. So we can make any of the joints within a humanoid and it's a full joint, not -- we can provide components, but what our customers are asking for is a solution that provides the entire joint, which would include like the frameless motor or the actuator or whatever might be embedded within a joint on a humanoid robot. There's any axis.

So it's the elbow, it's the shoulder, the knees, right? -- anything that you need, we provide that joint. And it's a solution. They don't have to put the components together themselves. We're providing that solution. We're really well positioned because we have the scale to provide that at volume. We can do that to -- for our customers. And we are in discussions with some large OEMs within North America that we're providing prototypes for today. We had about $40 million of orders here in humanoids last year that's primarily prototyping and that sort of thing to kind of get the ball rolling. it's an option.

It's kind of like eVTOL. If it takes off, we're very well positioned and we can move at scale. And we are the only provider that can provide that entire solution for our customer, for the joint end-to-end in that solution. So that's a very nice competitive advantage for us at this time. I mean things change as we move down the road, but that's where we are, and that's where we're positioned today. If it takes off, we're in great shape, just like eVTOL with our partnership with Honeywell. If that takes off, that's also another one that we provide a solution. It's another -- it's kind of how we migrated the business.

Your first question of the day was what's changed in the business. We've gone from being a component provider where we -- legacy, we're providing motors for HVAC applications or whatever it might be, maybe a bearing to solutions, a Honeywell electromechanical device that goes into the -- moving the pitch and everything for the eVTOLs or the surgical applications. We're in the -- one of our businesses, the medical business is in providing the miniaturized powertrains. We talk about powertrains in multiple forms, very large powertrains that can drive mining applications, right, from an electric motor all the way through the gearing and the bearing and everything you need to drive whatever mining application to very small miniaturized solutions for surgical tools.

So you go and look at like a da Vinci machine used in bariatric surgery or whatever, we're providing the miniaturized powertrains that go into like the fingers of that da Vinci machine. So that's where we've come from this providing components to providing these solutions, and that's a big value prop for our customers and where we're starting to gain more and more traction.

I think I may get this wrong, but I seem to remember at the Analyst Day, which was 2-some years ago, I think Louis said something like 15% of your customers are buying more than one of your products, which seem awfully low. But is that just a function of just how the group has come into place, and it's just still early days in terms of just driving the synergies across those various operating segments? Or I mean, it would suggest there seem quite a bit of runway, but...

Yes. Cross-sell is becoming a very big part of our business, and that's part of the cross-sell opportunity where, yes, historically, we've sold maybe 1 or 2 components to a customer. But we know if they're buying a bearing, they're buying a gearing and a coupling or whatever it might be from someone else. The idea here is to communicate that we can provide all of those to the customer. And so therefore, we are gaining some really nice traction in our cross-selling over the years.

And I think we improved it by $90 million this last year just in cross-selling. So we've really moved the needle on this front, and that's a great example where it's just -- some of it is just awareness and getting our commercial teams. We incentivize our commercial teams differently than we did historically. We incentivize also on their ability to cross-sell. That wasn't part of the incentive structure in the past, and that's making a difference.

How do you think about the through-cycle growth? I think you put out a 4% number. Obviously, a very dynamic environment. But where do you think about -- or how do you think about that and the components that contribute to that, meaning...

So you're right. It's through the cycle about 4%. The way that breaks down is AMC, we see maybe 4% to 7% through the cycle. Obviously, that can change now depending on kind of data center and what we're seeing there and how that's going to contribute here at least in the short term, but maybe through the cycle, stay with the 4% to 7% range. 3% to 5% on the -- from an IPS segment, so the power transmission business and then 2% to 3%, maybe even a little bit better on the PES side of the business.

The legacy motors business, while there is roughly 1/4 of that business that goes through residential HVAC, there's a commercial HVAC side of that business, which is very strong for us. We've got an air moving side of the business that goes through and has applications that are relevant in data centers as well that go into an ePOD solution. We're building things like fan walls for data centers and fan filter units for clean rooms, things like that, that aren't often thought about within that PES segment, but there's some great opportunity there.

And about $20 million -- we had about $20 million in orders last year that were specific in PDS for data center applications. So really starting to see that move as well and move out of that legacy framework of mainly selling, again, components to more solutions and everything I'm talking about is a solution sell.

Going back to the growth algorithm, where do you see -- or how do you see pricing contributing to that? I mean, given your gross margin structure would suggest that you have pretty high level of pricing power, especially I would assume in IPS. But just overall, how do you view that through a cycle and then more near term, how are you managing the whole kind of price cost dynamic with tariffs here in '26?

Yes. So first of all, I'd say that we have really good pricing power, roughly 90% of the business. The only place where we don't have good pricing power is within that 10% of the business that sits in resi HVAC, which is on 2-way material price formulas. The rest of the business, we have great pricing power. And where it's best is where you have the higher exposure to distribution aftermarket. So 50% of our IPS segment is exposed to distribution. Well, you're going to get the best pricing within the distribution side, less so on the OEM side.

So -- and then within the rest of our business, even in AMC and that, we still have -- we've been able to capture price. We've been price/cost positive for over 4 years. I know that -- it's not -- that's just on material. If you talk about the tariff side, we got a little behind when the derivative tariffs came out towards the back end of last year and then the 50% originally on India, all of that. We got a little behind. And so now we weren't able to capture all that price as we exited last year.

We expect to be dollar neutral in terms of tariffs by the mid part of this year and margin neutral by the time we exit this year. So you're talking about margins. We exited last year with gross margins at roughly 38%. We do think we'll exit this year closer to 39% as we capture some of that price on those tariffs. And it's not just price that we're doing -- that we're getting the margins back, but a piece of it is certainly price. So price cost is still a muscle for us in terms of our ability to capture price, and we expect that going forward.

And we should see our margins get closer to that targeted 40% maybe next year when we are able to see that neutrality on tariffs and then start to see some of the mix come back and volume come back that we're looking for, especially in those higher-growth areas that have the higher margin profiles like within the AMC segment and also to a certain extent, the IPS segment. I mean we only have about a 3% growth on that this year for IPS. But IPS, the contribution or leverage on IPS volume is 40% plus. So if that comes back stronger, our margins will move much faster than what we're profiling today. So it's a great business to inflect.

Maybe we just start with the remaining time, just hit on free cash flow. There's been a little unevenness here recently, but the growth presumably factoring into that in terms of the investments. So maybe just touch on free cash.

Yes. So free cash flow did come down from our previous guide, primarily due to 2 main factors. One was we're investing about $100 million to $150 million working capital to support this new data center initiative. And then the other is we have inventory that we do think we can free up and become a source of cash for us. Historically, we've been a bit aggressive, I would say, in our -- because we have a history of being able to drive inventory out of the business. We're great operators.

We get a legacy industrial company, we can drive inventory out of the business. But we've learned in this supply chain environment, we need to be a little bit more cautious as we enter the year. So I'd say about $100 million plus is that we took down because we said we're not going to bank on that. If it happens, that's great, but we're not going to bank on it. So that's about $200 million, $250 million between those 2 items that have come down from our previous estimates for free cash flow.

That being said, we're still talking about generating good $650 million of free cash flow this year. Even with that -- all of that embedded, we should get to something closer to 12%, 13% next year. And next year is when we're thinking that the data center, at least based on the current expectations for shipping and when we can start invoicing, a lot of that cash is going to come through next year. So that's going to be a nice influx of cash for us as we move forward. It's a bit of a timing issue this year as we start to invest for that data center growth.

Excellent. We'll leave it there. There's a breakout downstairs for those interested. Thank you, Rob.

You got it. Thanks.

I'm Kyle Menges. I'm the U.S. machinery analyst at Citi. Pleased to be joined by the team from Regal Rexnord. I've got CEO, Louis Pinkham, who's to my immediate right; and then Rob Rehard, CFO. Thanks for being here with us today, guys, in sunny Miami.

Maybe starting with you, Louis, just with your time at Regal coming to an end, would be great just for you to talk a little bit about the company you inherited and how it's transformed over your tenure and really what excites you about opportunities ahead for Regal?

Yes. So thanks, Kyle, for the question. First of all, appreciate the invite from Citi and thanks for hosting us. And thanks to our investors who are here and listening for your interest. Yes, it's been a fantastic 7-year journey. The business has completely transformed. I'm pretty proud of things like our gross margins were 26% when I started, they're 38% today and a path to 40%. We sold some commodity product when I started. Today, we're a technology-driven competitive moat business that's moving from just being a component supplier to a solutions provider. I'm thrilled with our free cash flow margins and the potential for improving that over time.

But what I'm most proud of is how we run the business and the team that supports the business. When I started, the business was highly centralized. We now are fully decentralized. We run the business with 20 division leadership teams that focus on strategy, outgrowing markets by 50%, driving technology and product road maps and building a strong team for our future. So think about having 20 of them that report into 3 segments. And today, Rob and I spend most of our time orchestrating that activity. And the leaders of our organization are incredibly strong. And that's what I feel like if I could be humble enough to say, that is part of the legacy that I'll be leaving.

And maybe talk a little bit about just -- I think when you came in as CEO, you really doubled down on 80/20. Maybe talk about that journey and where we're at today versus where we were at 7 years ago.

Yes. And I think it's a really important point for how we've transformed the company. And you -- again, you see it in your gross margins. When I started at Regal, there was a belief that every customer and every product were important. But that just doesn't really make sense. So we went on a journey and a journey of driving 80/20 in the thought process around your quads, in particular, your Quad 1 and your highly valued customers and your A product and how do you grow with them.

All of our focus and investment is in Quad 1. And so it's been a journey. The nice part about the Rexnord merger was they also were on that journey, and so there was a really strong fit there. And then we brought that to Altra, and I'd tell you, we're sixth, seventh innings of driving 80/20, and it's absolutely ingrained in the culture and who we are.

And would love to hear, too, just maybe from both of you, your report card on the acquisitions that you've done, the Rexnord mergers as well as Altra and success you've had on the revenue and the cost synergy front?

Yes. I mean -- I'll start and Rob can add on. The industrial logic was spot on. When you think about where we've taken the businesses and certainly, 80/20 has been a driver, but the portfolio that we've got and from Rexnord now we're the scale and scope player in power transmission with Altra and moving into automation and motion control. I give us very high ranks. If you think about it from just the numbers, $325 million of synergies came out of those 2 acquisitions. A path to what we said in '27 would be -- sorry, in '28 would be $250 million incremental cross-sell. And yet in '25, we were at $210, and so lots of momentum.

And then moving from what was in 2024, high single digits of our growth, and I know we'll talk about ePods, but I'm not going to include ePods in this discussion, high single digit of our growth coming from solutions by '27, we said that would double, and that's absolutely the path we're on, whether it's electromechanical actuators for eVTOL or it's a powertrain system that goes into a mining application, where we sell the entire integrated solution that has higher reliability, lower energy consumption. This is who really Regal is. And I'd say they were great acquisitions.

Yes. I might add a couple of things. I think from the Rexnord acquisition, I think it was a home run. I mean, good timing, RMT, not a lot of debt. We just worked perfectly. And the synergies came straight through and the culture was very much aligned. Altra, hey, look, timing was always tough. The timing of that acquisition, if we would have known -- I don't think we would have done anything differently, quite frankly, but if we would have known that we were going into markets that we're going to go into a trough on automation and things like that, discrete automation that, I don't know if it would have changed anything per se, but it was tough.

And so I think, though, that, look, we stuck to our guns. We knew the strategy made a lot of sense. And I think hanging in there like we did and sticking to hey, let's integrate the businesses. We're going to get through this. We're going to adopt 80/20 across the board, and there's no more Altra. There's no more Rexnord. They're just RRX and bringing everybody together on that front so that when we do inflect, we're at a great point is what we're seeing now. And so here, as Louis leaves the organization at a point where we're really kind of at the precipice of something really amazing happening in this company.

And I know that the data center order is just one example, but there's many examples where we're just ready and we're poised to go. And we've set it up perfectly for that. And we've got the structure in place to support it, which I think is really critical when you have 20 divisions with presidents and support across the board, and we've got great talent on board who knows what good looks like and can advance us to that next phase is a really good time to be a part of Regal Rexnord.

Awesome. Maybe talk a little bit to you just on -- as the portfolio sits today, what percent do you think is still tied to the PMI? On top of that, just how should we think about the evolution going from maybe shorter cycle to a little bit longer cycle for some aspects of the portfolio? And you touched on also being -- evolving from an individual component supplier to delivering more systems, subsystems. Just how much runway do you think is left on this evolution? I know there's a lot of questions in there.

Yes. No worries. I appreciate the questions. We have historically been pretty well correlated to the PMI or to ISM. I'd say about 40% of the portfolio is. And now we, I think, managed through a tough last few years with the ISM being below 50% because of the successes we've had with cross-sell and sales synergies. I thought...

The other 2 were just what percent of the portfolio is moving to longer cycle versus shorter cycle, opportunity for that to go maybe more longer cycle over time still?

Yes. So this is back to the comment. We -- strategically, we are focused on driving solution sales. That's -- we have 65 brands in our portfolio. We have probably close to 100 product lines. Our goal is to integrate them together to be most efficient and effective. In '24, solution sales were about high single digits of our growth -- of our sales. Our goal is to be to -- to double that by '27. Now with ePod, it's going to accelerate that even further. But I would say solution sales as a part of Regal will just continue to grow, and that's what we want to have happen.

Yes. And what do you guys think is really driving that shift towards more solution sales? You've just gotten bigger with the customers? Is it just making it much easier for the customers? Is it saving them on their costs? Just how to think about that?

Well, it really depends on the application. So the electromechanical actuator that we're selling into eVTOL and partnering with Honeywell, they came to us. They can do a system like that, but they came to us because they wanted a supplier that they could partner with that could build at scale and understood the aerospace industry. So that's an example.

Selling a powertrain solution is about us understanding the applications as well -- and sometimes better than our customers and saying that the product solution set of an integrated powertrain is best, more efficient, more reliable, better cost coming from an integrated solution from Regal rather than buying individual pieces of components and putting it together. Now every market is different. Some markets want to see you do this and others don't. And we're okay. We'll do whatever it takes to satisfy our customers' needs.

There's also -- I'll just add one more thing. The portfolio has certainly evolved over time and being able to provide the solution that we can today is much different than we could in the past, right? And the commercial organization has matured in their ability to sell at that level. And so it takes some time to get everyone on board and understand and trained and understand the applications like we do today, and that's evolving at the same time. And so all of this works together.

Yes, makes sense.

And which takes you to more longer cycle projects, right? So about -- historically, Regal has been seen as a short-cycle industrial. Today, 1/3 of our business is long cycle. Our AMC segment, and again, forget ePods, because that just screws it all up in a very positive way. Our backlog is 6 months in AMC. Our backlog in IPS is about 4. Our backlog in PES is 2. I mean, it turns fast. Our move is to move more into those longer cycles and solution sales gets us there.

Great. I'm seeing how long I can wait until I ask a question on ePods. But maybe before I jump into that, let's just talk about the gross margin targets, 40% gross margin, 25% adjusted EBITDA margin. Just how should we think about the bridge to get to those targets from where we're supposed to be at the midpoint of the guide in 2026. I know tariffs have certainly not helped. So maybe talk about dynamics there as well. But yes, just help us maybe with a bridge to get from 26% to the Investor Day targets for margins.

Yes. So let's take a step to -- from 25% where we ended at gross margin is about 38%. And so the center point of our guide, if you look at it today, it will get you about 39% this year. So we're starting off lower in the first quarter, as we've communicated, largely due to the fact that we do have tariffs that we're still catching up on, and we expect to be dollar neutral by the mid part of the year and margin neutral by the end of the year. So that's part of the equation to get you there.

The other is around the rare earth magnet availability and supply challenges we've had, especially in our defense side of the business. And we expect that to be largely behind us by the time we exit the first half of the year. So get through the first half, we should be fine for the back half.

If you look at from -- just talk about EBITDA margins for a minute, EBITDA margins start in the first quarter at about 21% and then they go up about between the first quarter and the fourth quarter kind of fairly ratably, they should improve by about 200 to 250 basis points off that 21%. And so that's all attributable to what I just described as well as the growth that we're seeing, the highest growth that we're seeing in the year is coming through the AMC segment, which has businesses within that segment that we see -- we have a backlog profile that supports a ramp in top line growth at a higher margin profile.

So mix plays along with volume at the same time to get us there. So to go from the 39% as we exit this year to 40% is really not much of a bridge at that point. It's really just about volume and continuing down that path on mix because we should be where we need to be from a tariff standpoint, if you will, at that point. It will take us a little bit longer to get the EBITDA margins to the 25%. Again, it's volume. And when you're talking about the $735 million that we expect with data center, which you'll probably get to next, that you can see how that starts to come in line as you move into '27 and around that time frame, right, to get there.

Yes. Great. Yes. And let's -- we have to talk about the ePod product, certainly. Just maybe you can give a little bit of historical context on what products you're already making that fit really this data center market? And then how -- what drove you to develop this ePod product as well as -- yes, I mean, it would just be great to hear the demand traction you're seeing. And -- I mean, great orders last quarter. And how should we think about the capacity ramp, capacity constraints, the timing of those orders actually getting shipped?

Yes. So we're really excited about where we are in the data center marketplace and the potential for Regal. But it's a great example of 80/20 and how we apply 80/20. So 18 months ago, Quad 1, our highly valued customer, our A products. So this fits very well. And the products historically are low voltage and medium voltage switchgear paralleling switchgear, low voltage, medium voltage, power distribution units, automatic transfer switches. That's what we typically sold into data center markets, anything that needed backup power control.

18 months ago, we're talking to our highly valued customers. They see us, they're raving fans of us. I'm now talking 80/20 terminology, and they said, we're moving in this direction. You really need to be moving in this direction. And that's a modular solution that they would no longer buy individual switchgear component products. They wanted in a modular solution. And so we went down that process of developing our own, our own design and capabilities in this space.

And coming out of third quarter, you've got a little bit of a taste of it from us because we said, we feel pretty good. We're going to expand our Canada facility. We're going to start up a greenfield in Texas. By the way, the greenfield in Texas will have product rolling through it by middle of this year. The ERP goes live actually this week. The Canada facility has already expanded. And so it's already -- we're utilizing that space. We feel we have plenty of capacity for this growth. But we knew something was going to come, and we said $400 million funnel at the time. It turned out to be a little bit larger than that, and we're pleased with it.

And we -- now the reason why our customer sees us as a raving -- they're a raving fan of us is because we make it easier for them. We customize the solutions to their specific needs. And our say-do is quite high. Our service levels on traditional switchgear and switchgear products has been very high. And so we have a good reputation. Plus we have a strong company behind us, right? We're not a small OEM. We're not certainly a big company like some others who are in the space, but we're competing and we're competing on our service levels.

And so where do we see this going? We want to continue the momentum from this. Now we've got expectation. We don't have finalized schedules from the customers yet. We expect that we'll ship a majority of this in '27. Some may hang over to '28, possibly a little into '26, possibly not in our guide at this point. But then we want to build off of this for '28, and we have the capabilities to do so.

Got it. And what do you think the appetite is from additional customers as you're looking into 2028 and wanting to build off of this momentum?

The funnel today is $600 million, and it's multiple customers. And so when you look at '25, we received about $1 billion of orders in '25 for the data center industry from multiple customers. And so now it's how do we continue to build that out. And so right now, like I said, a $600 million funnel. Our commercial teams are incentivized to grow. And as long as we execute on these programs effectively, that's why we have a strong reputation. I think we have opportunity to grow from here.

And so that $600 million, is that just total data center? Or is that for ePods specifically?

No, it's actually total data center right now, and it's more leaning towards switchgear than it is to ePods because we absorbed a lot of the funnel of the ePod in fourth quarter.

Okay. Got it. And yes, I mean, I guess, how are those conversations going? And do you foresee that pipeline expanding over time as well?

I think it will definitely expand over time. We think this market has room for growth. We think this market likely is going to remain fairly strong for the next 5 to 10 years. I think a lot of our peers are saying something similar. Are we going to bet on it? We certainly are. But the bet is not that challenging of a bet. The factory that we're setting up in Texas, the cap expenditure to set it up is about $5 million. And '27, we'll probably see a couple of hundred million or more go through that factory. So the returns are good. We like the space. We have the capability. It's more application-centric product. And so we'd like to see it grow further.

And maybe you could touch on the margin profile. I think you guys said the margin profile on the ePod was 20% plus EBITDA margin. How should we think about that, especially as you ramp up production?

Yes. I think it is going to be about -- it is 20% plus. I think like any product that you launch like this, there's opportunity to improve that as we move through the cycle and we get some cadence of production that shows that we have some opportunities for cost out additional productivity. It could improve a little bit. I don't think it will improve a lot more than that, but a little bit, I think, is reasonable to assume. But that should be the margin profile that we're thinking going forward for ePods specifically.

And some service tail to that as well?

We would hope so. That wasn't part of the agreement upfront. But the current business that we have, which is roughly $120 million business, about 10% of it is service, and it's service maintenance. We like that model. And so we like the recurring revenue perspective of it as well. We would hope that we'd parlay these programs into that, but it wasn't part of the original scope.

Got it. All right. I'll pause there and see if there's any questions from the audience. All right. I can continue for now. Maybe we can dig into the 2026 guide a little bit. You are guiding 3% organic growth. Just maybe walk through some of the key assumptions embedded in that? How are you thinking about end markets? And then I know there's price, data center, just all that.

Yes. So the way it breaks down is we assume 1.5 points of price. We assume about largely tariffs, tariff-related price, about 1.5 points from data center, in particular, specifically for data center. And then the rest of the markets, we say is kind of net neutral in the year. There certainly is strength in things like discrete automation, aerospace, defense, we certainly see strength in those markets. But we also see quite a bit of pressure in markets like residential HVAC, which we know is going to be down fairly substantially in the first half of the year. It starts to come back a bit in the second half, but we expect to be down for the year high single digits, if you will.

So we think the net impact across all of our markets is fairly flat. Now that -- we also saw that the ISM, as we talked about, was close to 53% in January, which is great to see in a month. Unfortunately, where we have the highest degree of correlation, which is in our IPS segment, we actually saw order rates down about 0.5 point in January. So we want to give that a little bit of time and see if that's really going to take shape and the short-cycle side, in particular, start to improve. We haven't seen it yet. So we're being a bit measured the way we set guidance. And hoping that because we're at trough or near trough in most markets that we serve that we are going to see some level of inflection. We're just not banking on it yet. And so we want to see that come to fruition before we start making those calls and can be a little more constructive, if you will, in what we're seeing in the year.

The other thing that we've done just -- from just a guidance perspective is that we have about $40 million of cost synergies that we expect in the year. I think this is absolutely something that will accrue, but we did not bake that into our guide. We're using that as kind of a derisker, if you will, for the year, gives us a little bit of a hedge to offset some other noise that we do think could be out there. It normally does, right? I mean, look what happened to us in '25. You never know. There's no certainty in anything that's going on right now. We've embedded all the recent tariffs and everything like that. but there's always noise in what's going on right now, and that level of uncertainty gives us a bit of a pause. We want to have a little bit of a hedge in our back pocket. That's the way we set the guide for the year.

Got it. And level of confidence that rare earths won't become an issue as you get into the second half of the year?

Yes. I think that we have a really good plan right now to get through that in the first half. And we're doing that primarily by resourcing from other areas of the world, areas like Australia or Japan or others that also provide rare earth magnets. We still have all of our applications in for everything that we've requested, and we work through that channel as much as possible, but we aren't counting on it. And so we continue to work the other avenues to ensure that we don't have this issue in the second half of the year. So we feel good about where we're going on that.

Great. And IPS, I think you guided up around low single digits organic for the year. I mean you have seen, by and large, positive order trends in that segment over, I think, 6 quarters in a row, backlog is up, I want to say, mid- to high single digits exiting 2025. So yes, I mean, I guess with some of that positive momentum you're seeing in orders, backlog, why not a little bit better on the organic growth side for IPS?

And I really think it comes down to how Rob framed up the earlier answer around the ISM and the market. And so until we start seeing a little bit more momentum, but you touched on some important points. Backlog is up 6% going into the year. In addition, we did see some nice cross-sell, and we're going to continue to drive our cross-sell in our industrial powertrain strategy. but we really would like to see confidence in the market, and we're just not -- we're not confident yet.

Remember, half of IPS is tied to short cycle in nature, right? And so what's in our backlog, what we saw the growth in our backlog is in the longer cycle, which we profiled, and we see that path pretty clearly. But the short cycle, it's just not there. And so as soon as we see that, we'll start to be more constructive. But that's why it's a little -- it's sometimes hard to understand unless you put it into that perspective that half of that business is absolutely tied to that through what we call like the book turn within a given period. If you don't -- it's short cycles. So therefore, you just don't have that level of visibility you'd like. So we want to see that come to fruition first.

Maybe we can pivot to PES as well, just your thoughts on that business. It is a little bit lower margin than the other segments. You've seen a lot of volatility recently in residential HVAC as well. What do you still think is really to like about PES as far as yes, fit in the portfolio, the stability, growth trajectory? And at what point do you think we could get a return to growth in residential HVAC as well?

Yes. So PES is critical to our portfolio and critical to our strategy. You can't have an industrial powertrain without a motor and the motor comes from PES. I think it's important to recognize a couple of things on PES. One, PES did grow last year, about 1%. So we saw organic growth out of PES last year. You have to also remember that PES, the invested capital is quite low. So PES is funding a lot of our acquisitions, in particular, Altra. So cash flow that we're getting out of PES is helping us significantly to justify Altra, and that was important.

And we're investing -- PES was part of the old Regal, which believed all products and customers were great. Today, that's no longer true, and gross margins are about 33%, and we feel good about that, and they'll grow -- or with revenue growth, we'll see the benefits of that. And then lastly, we're also investing pretty heavily in new product. And so it's this pivot away from just selling a component to selling an air moving solution. And so we feel good about the future of PES and the growth potential.

Now specific to resi HVAC, we're not real bullish about that market this year. It grew 1% for us last year. We're not real bullish for that this year. We're expecting the market to be down high single digits. That then because of comps means that first quarter will be down mid-20s. First half will be down, and we'll start some recovery in the second half. We're not seeing the drivers that would suggest anything but down right now. Consumer confidence is down, mortgage rates are still high, new starts are down. So when that starts to turn, we'll benefit. We talked about on the last earnings call, and I think it's important to understand this, is that we gained share last year in resi HVAC. And so we like our position, and we like the business. But yes, it's going to be, we think, a little bit tougher '26.

It tends not to be as volatile as perhaps it's been in recent years.

Yes. Listen, COVID -- I know we're 4 years after COVID, but COVID caused havoc to this industry. And in a good way and a bad way. The supply chain definitely negative to have it. And so in time, this will balance out. But hey, we generate not to be supplier, but a lot of cash out of PES, and that's good for Regal.

Yes. And maybe turning to automation specifically, just what green shoots are you seeing in that market as you're entering 2026? And just any trends you're seeing in discrete, maybe in some of the end markets within discrete automation as well?

We have a great reputation in the automation space and the discrete automation and in particular, motion control. You look at the last 12 months, the order rates are up rolling 12 months, up 6%, fourth quarter up 9% gaining some really nice momentum in the defense space. We have -- we're well positioned in Europe with the drive to sovereignty in Europe. We're winning some nice projects and business there. And then we also include in automation, our humanoid offering. And so in 2026 -- sorry, 2025, we saw $40 million of orders to U.S.-based OEMs in this space. And so we're excited about the future for automation for Regal, and we're investing. We're investing in new product. Our R&D as a percentage of sales in this space is about 6%, 7%, specifically for motion control.

And we're known as a -- we solve the most difficult problems. That's what we're known for. And we do well there. But the available market is not huge. We launched in fourth quarter, Kollmorgen Essentials offering, which brings us down a little bit more and more standard offering for mid-high-tier marketplace. And we already saw $1 million of orders in fourth quarter. It was probably one of our strongest product launches in the history of Regal, which gives us some confidence that, that will gain momentum. And our goal right now is $50 million from that product line by 2028. So a lot going on in the automation space for us.

Yes. And maybe diving into some of those end markets within discrete, where are you seeing green shoots, areas where there's still some softness?

Yes, the greatest is defense, for sure. For us, the greatest green shoot is defense and the benefits that we're seeing there. We're honestly not seeing -- and we don't play in to the same extent, and this is why we launched the Kollmorgen Essentials offering. We don't play as strongly in factory automation, and we just haven't seen that really start to take off yet. But we do think with Kollmorgen Essentials, that will.

Got it. And that Kollmorgen product doesn't seem like there's really risk of cannibalization to the existing products in the portfolio. It's a new product for a lower tier?

Yes. No. And the feature function set is quite different from our higher-end product, and we don't see it cannibalizing at all.

Awesome. Maybe we can transition to humanoids. I mean it is a potentially exciting opportunity. $40 million of orders last year. That was really just for prototypes, right? Maybe you could talk about just what's your content on humanoids, yes, and just what are you hearing from customers in the space as well?

Yes. So we're pretty excited about the potential. This is a great example of proving out again the hypothesis of why we acquired Altra and Rexnord because if you look at what we can do on a humanoid, we can actually build joints. There's anywhere from 30 to 40 axes on a humanoid, and we can build that whole system. That whole system, though, comes from products from 2 out of our 3 segments, IPS and AMC. So again, an integrated solution where we bring value to the OEM.

And the value is we sit down with the OEM, and we're designing jointly with them to come up with a solution. Where do they want to focus? On the controls? They're not really so interested in focusing on the hardware, and that's what we bring to bear. Now if you believed exactly their forecast of volume, we would need to triple the size of Regal in the next 5 years. So we're not there. But we're well positioned. We think there's a good opportunity for growth, and we're really happy about the momentum we gained in '25, and we'll continue to focus efforts in '26.

Got it. And maybe you can talk about the products you're supplying into the humanoid market? And are these already products that you've had in the portfolio, I mean, by and large?

Listen, we -- if you look at our position in China, we've been on humanoid platforms for years. And so these are products such as Servo motors, linear actuators, brakes. But then when you integrate them together, you can get a joint. And that's what we're trying to do. But yes, no, we've been playing in this space for a while. We have the right products for this space.

And you guys are already producing these products at scale. It's just if humanoids does take off, you need to maybe make some investments in incremental capacity?

Yes. That's right. We already do produce them for scale. We also need to help because the driver for this space is going to be -- is there effective return on investment. And we're a pretty big part of the bill of material. So that volume, we need to help with getting the prices down so that we can try to grow. But the OEMs have to focus on what are those use cases where there's really a return on the investment. That's going to drive this market. Now if it takes off like I said it could take off, then yes, we're going to have to add some capacity.

Got it. I'll open it up for audience questions one more time. All right. Yes. I mean maybe to close, let's just talk a little bit about the eVTOL opportunity as well, what you're doing there, who you're partnering with?

Yes. Listen, if you are excited about some of these up-and-coming markets, then you want to invest in Regal. Humanoid is a great example of that. We proved out on data center, that's a pretty darn good market for us to be in. eVTOL is another one. If you believe in the eVTOL space, we're positioned. We can sell individual components or we can sell an electromechanical actuator.

And the partnership we announced about a year ago is with Honeywell. And hey, Honeywell can build this product. But they came to us because they saw a company that could build at scale an integrated solution. And if eVTOL takes off, you're going to need to build that scale. And so we're excited about the space. The L.A. Olympics are supposed to have 50 eVTOLs flying around. We would be in that mix. And hey, that would be a great future for this market.

We won't be in the eVTOL, we'll be in the mix.

Yes. We won't -- I'm not flying, anyway.

So 50, how much revenue is that for Regal?

The shipset on eVTOL on the programs that we're on is just over $200,000.

Per?

Per.

Got it. All right. Well, I think we can wrap it up there. Thanks so much to the Regal team for you guys joining us at our conference, and thanks to everyone who attended.

Yes. Thanks a lot.

Thank you.

Great. Well, thanks, everyone, for being here. It's my pleasure to have up next Regal Rexnord Corporation; Louis Pinkham, Chief Executive; and Rob Rehard, CFO.

Maybe start off with the broad demand backdrop specifically around the shorter cycle industrial activity in IPS and AMC. A lot of people sort of curious about if there's real green shoots in the U.S. industrial economy. Kind of what's your perspective on that?

I think the indicators are pretty mixed at this point. And by the way, Julian, thank you for hosting us. It's a pleasure to be here, and it's good to see all of our investors, but to your question, I think it's pretty mixed. It's good to see the ISM above 50. The commentary of the ISM though, would say that GI is still pretty sluggish, will correlate it to then what do our orders look like.

Our IPS orders were down about 50 basis points in January. They were up 3% in fourth quarter. Our backlog going into the year is up 6%. So some mixed signs. We feel good about what we've been driving and a big piece of our hypothesis through building the industrial powertrain and the IPS segment was around cross-sell.

Our cross-sell today is about $90 million incremental in 2025, that was about $210 million. We had put out a goal of $250 million by '27. So we're well on that path. So when the markets do turn 1 month does not make a trend, maybe 3 does. When those markets turn, we're very, very well positioned.

Got it. And within AMC, I suppose you had a good pickup in automation demand, and we've heard that from 1 or 2 other companies here as well. Were there any kind of specific verticals driving that? Was it just an easy comp seeing any color around that automation piece?

Yes. So our automation orders the -- last 12 months are about up 6%, fourth quarter, up 9%. The market, though, that's driving it more than any other is defense, defense vertical. In particular in Europe, we're nicely positioned and have a strong footprint in engineering content in Europe and with the sovereignty drive, it's a good position for us.

On top of that, we've been investing pretty heavily in new products -- in defense, it's often application-driven products, and so we feel good about our momentum there. for sure that, that vertical will grow for Regal for a number of years to come.

Great. And it's been a couple of years since the 3 years almost now since the Altra deal closed, kind of how satisfied are you with the automation portfolio as it is, the things that you have done to improve that sort of AMC business that came in to Regal?.

Yes. I mean we're very satisfied. And this was a fantastic acquisition for Regal. We were not in the automation space. The ability to acquire the power transmission part of the business gave us the synergies that allow us to fund and move into automation.

We've raised our R&D spend in automation. And so look at some of the programs we've talked about historically on our earnings call, eVTOL, our electromechanical actuator wouldn't have come out of anything but that integration of -- with Altra. And then when you think about our next steps of opportunities Kollmorgen Essentials. Kollmorgen is our brand and motion control that really plays in the ultra-premium space, and essentials moves us down and gives us a much greater served market, and we talked about on our last earnings call, about $1 million of orders in fourth quarter and a path to $50 million by 2028.

We're still driving that momentum. And so we love the technology that we got with Altra, especially in the automation space and expect to do much more with it as the years progress.

Great. And then, relatively small part of the business, but within PES, you've had that resi HVAC pressure seems like the OEMs are kind of saying the point of maximum decline for them was maybe 3 months ago now. What are your sort of perspectives on that market? And I think you've dialed in a pretty conservative guide for the year there.

We have. And we wanted to be very measured here. We're expecting the market to be down for us, high single digits. And that actually translates to down about mid-20s in the first quarter, down in the first half and then a slight rebound in the second half.

If the OEMs are correct, that's a positive upside for us. But we talked about in the last earnings call that we did gain some share in the resi HVAC space in 2025. It's a good market for us. We like the market, but nobody knows how to forecast it. And we're inclusive of that team. So 9% of our sales, I hope the OEMs are right.

Yes. And then I suppose that was most eye-catching at the results on the top line front was the data center orders maybe kind of remind the audience where you sit today, the total kind of percent of revenue, if you like, from data centers and how that sits in different products in AMC and then PES segment-wise?

Yes. So today, data center is only really about 3% of Regal. 2% power management. So paralleling switchgear, switchgear, automatic transfer switches, power distribution units and about 1% is in Hermetic motors and Air Moving solutions. Now we're very pleased with the nearly $1 billion of orders that we received in 2025 that likely translates to data center becoming low teens part of Regal in '27, and we want to build off of that.

We've got good technology. We're valued by our openness to customize, our say-do is strong. We've been in the industry for 50 years, so this is not new to us.

Now the ePOD solution that we announced a big win of $735 million of orders for multiple data centers in 2027. That is a new solution, but the reality is, it's 50% of our content in that solution, which is switchgear power distribution units, other automatic transfer, which is, along with the Air Moving side. And so yes, we're excited about the future of data center and how it's going to have an impact on Regal.

And how do you think sort of about your competitive position in that data center business? Kind of what allowed you think to win those large orders, which no one seems to be expecting from the outside?

Yes. So we have a good reputation in the business. Our say-do around -- oftentimes, it has to do with the ability to meet the schedule of the project and to ship on time bluntly. And we have a good reputation about being able to do that.

On top of that, we're very easy to do business with. And we will customize this -- meet the specific needs of the end user or the customer, and that is valued. And so those couple of things and the fact that we are a $6 billion company with a pretty strong balance sheet and capability.

We started -- we won a bit more than we expected. We talked about coming out of the third quarter earnings that our funnel was about $400 million of ePODs. We were kind of on the edge, and we weren't really sure. And in the end, we pretty much won everything we expected a little more. And so we're very pleased with that.

And you talked about how it's -- for delivery, a lot of that $700 million is for delivery or rev recognition, I mean, 2027 for Regal. How is your kind of capacity ramp up going for that data center business? How confident are you in your own suppliers being on time, in full there?

Yes. So we had some indication that we were likely going to win some portion of this, even coming out of third quarter. That's why we announced the expansion of our capacity in Canada about the same square footage in Texas. That is well on its path. And by the middle of this year, we'll be able to ship product out of Texas.

And so we feel good about the capacity and recognize this is light assembly and test. This is not significant CapEx investment. We talked about $5 million to set up the manufacturing facility or the assembly facility in Texas.

So this is not so difficult. It really is all around the supply chain and managing the supply chain. But we have excellent relationships at executive levels at the key suppliers, and I feel pretty confident that we're going to be able to meet those -- the requirements of '27 and beyond because, again, I want to emphasize, this is not -- this is all about Regal continuing to grow in this space and differentiating ourselves in this space. That's our goal.

And how would you frame the sort of remaining funnel of business that you're going for to try and win orders? You overperformed your goal wildly the last 3 or 4 months. How has that sort of led to a revision maybe of the view of how big the funnel is out there?

Well, we're still building on the funnel, honestly. The funnel today for us is about $600 million. It's more leaning towards switchgears than ePODs at this point because we won the majority of what we expected to or even more on ePODs, so the funnel today, but we plan on growing that funnel. The opportunity is significant here, and we believe this is a market that's going to continue to grow, but the reality is we're a very small share player. And so there's plenty of room for us.

And if you wanted to try and sort of help us frame the opportunity, you had that some $800 million of orders in the fourth quarter. again, it seems to sort of erupt from nowhere from the outside. So it's hard to kind of understand what could be left on new orders the year ahead, for example, or next 18 months, any way you'd frame the addressable market or...

We did come out and we said, I believe we said the addressable market was about $25 billion of potential. So compare that to where we play today right? The funnel is $600 million. We want to grow that funnel. We want -- we believe that our sales in '27 as a percentage of Regal could be low teens. So what does that mean for us?

Maybe $800 million, $900 million. We want to grow from there. So that means we're going to need to play some -- get some orders this year that will feed '28. That's how I would think about it. We're not going to try to put any more clarity on that because another question our investors like to ask us is, what's our win rate?

Well,. our win rate, if you go off of the $400 million funnel, was 175%. So we clearly don't have that locked down yet. This is nascent for us. We're trying to figure it out a little bit but I feel really good about our reputation, our position and the opportunity for us to grow.

And as you said, it's sort of a wide gap from the $600 million final to the $25 billion TAM. The delta there is what is a mix of -- assuming you don't capture a majority of things you go for? Or it's a constraint of capacity on your end to ramp like -- what are some of the factors...

The biggest delta is we know the market, it's visibility. So our visibility is you don't put it -- we don't put an opportunity in our funnel unless it's an active opportunity that we're working to win. So we're also trying to grow our sales force, and we're trying to grow our position. And so I would expect the funnel to grow. That's the biggest differentiator between $600 million and $25 billion.

Got it. And the profitability on this activity is sort of commensurate with segment, the respective kind of segment level or...

Yes. We say a little above 20%. I mean we've got about 50% of the content on the ePODs so it nets to about 20%. Of course, we'll continue to work productivity measures to improve that as we go forward, but that's kind of our starting point here as we kind of get through this and kick off the project. We'll get a little water under the bridge, and then we'll kind of true that up as we move along, but that's our expectation.

Great. And when you think about the top line, it's been a very hard market to forecast the last couple of years, not just PES, but the industrial side as well. So when you kind of went into this year and we're framing the guidance. Is there any kind of change in approach attempt to be more conservative, perhaps just given the last couple of years have been difficult to forecast revenue?

I would say, very similar to last year, measured. We came out for '25 to be flat. We were up 1 point. Most of that point was tariff pricing, but so we forecasted on the aggregate of Regal pretty well. We're coming into this year and thinking about the same thing. We're not seeing a lot of market tailwind.

We believe it should come but we're not betting on it. Pleased to see ISM above 50, but again, we're not betting on it. Where we are betting is it's pretty clear that data centers to grow for us. And so 1.5 points out of the data center. And it's pretty clear that we're going to get some price to still overcome some of the tariff challenges, so 1 point, 1.5 points, and that's why we came out and we said low single-digit growth for this year. Now we think we're at bottom in many of these markets. And as they inflect up, we're going to benefit from that.

And how should we think about the earnings or margin cadence through the year? Sort of comps move around with tariffs and some of the rare earth headwinds and that type of things. So if we're thinking about kind of sequential progression or quarterly sort of phasing of earnings or margin, anything we should bear in mind this year?

Yes. We came out and said first quarter is going to be a bit pressured. Think about 21% EBITDA margins in the first quarter. And then we progressively get better from there as we ellipse -- we are getting past the rare earth magnet supply chain issues by the -- mid part of the year. Tariffs, we get a little bit -- we should be priced which should be priced at $1 neutral by the middle of the year and work towards margin neutral by the end of the year.

Mix benefits us as we move towards the back half of the year, particularly in AMC where we would expect -- and where we see the highest growth opportunity in the year as we get to some of those higher margin businesses like automation and defense and medical, these others very higher margin relative to the rest of the business coming online.

If you look at it from just a cadence of improvement as we go through the year and we start with 21% we expect around 200 to 250 basis points from that 21% range to kind of move quarter-to-quarter pretty ratably as we move through the year. And so we'll end the year at a much better position than when we start the year. And that's what we have built into the guide.

The EPS -- by the way, it's about 45%, 55% first half, second half EPS. Remember, we also get about $30 million of interest expense savings as we move through the year as well. So that's benefiting the earnings side.

Great. And when you think about margin levers this year, price cost is sort of mutualist by midyear, so that's not really a factor. You have some synergies in there that I think you characterized as a sort of cushion effectively. So maybe help us understand kind of the levers there because you're not dialing in a lot of volume growth.

Yes. I think that -- so you called out the one, the $40 million of cost synergies, which we're saying, hey, we're going to use that as a hedge or as you get into the year just because it's not -- in other words, it's not in our guide today because we need a little buffer knowing that there's some unknowns out there that we're going to likely counter.

The other things that we're talking about are the main things on the margin side are what we just kind of went through quite frankly, had to do with the tariffs getting back to margin neutral, it's about the rare earth magnets getting behind us and in the mix and then volume comes in as well. The other things that are quite frankly, aren't built into our guidance today.

We've got -- we're assuming at this point that the markets in which we're participating are kind of where they are today, and we don't see a lot of inflection at this point. So ISM is a great example. We talked about it a little bit earlier.

We're not banking on anything inflecting yet, even though 50% of IPS, for example, is correlated to the ISM, we want a few months before we start seeing that. That would be a nice benefit to us in the year should that stay above 50 like it is in January. Again, as Louis mentioned, we were down a bit in January and IPS about 0.5 point. So again, wait and see a bit. And then the other markets that are coming back, as we talked about in AMC, in particular, are very good.

And so that could be a bit of a benefit to us as well. We're not banking on that at this point. It's not built into the guide, should I say, but certainly supports a better -- especially a better second half as we go through the year.

And how are we thinking about operating leverage, what's assumed in that second half margin guide for operating leverage at Regal? And what should we expect sort of medium term?

Look, we say about 30%, 35% in leverage. I think if you think about it from the standpoint of we exited '25 at about a 38% gross margin fall-through is pretty good. We should get 30%, 35% is very reasonable. Our current guide embeds about 39% gross margin for '26.

So again, very reasonable to assume that, and it's certainly a little stronger on the IPS side, and then from there, it steps down AMC and then PES. But overall, 35% is very reasonable, and that's what's embedded in our current guidance.

Great. And on the pricing front, you sounded pretty confident on getting that price. No signs of kind of fatigue by customers or them starting to push back? Is everyone kind of keeping rank competitively and handling costs the same way.

Yes. I wouldn't say there's no fatigue, and I wouldn't say there's no pushback because our sales leaders are doing an excellent job of managing this, but you'd be blind not to know that there's inflation and there's tariffs and there's things that you have to cover. And our customers are looking for us to try to put our best foot forward, which we always do.

One of the things that you're talking about margin potential and what we drive. We're -- Regal Rexnord business system is very important to how we run our business, and it's built off of 80/20, driving Quad-1and our customers are highly valued customers and a highly valued product. But it's also lean and it's taking waste over burning variation out of all processes.

Now think about what we've done over the last 3.5 years, we've combined 3 big, relatively large companies. And we had no more plans of consolidation going into 2027. I'm sure there will be 1 or 2 plant consolidation, but nothing to what we've been going through for the last few years. And so now it's doubling down on lean and driving lean in our factories. And I think we're at probably third, fourth innings of opportunities there to drive further margin growth.

Got it. And if you think about the sort of segments there for a second, is it fair that PES might be more leaned out than the rest just because they didn't have the acquisition.

That's very fair. Yes. And then it tends to be a bit higher volume, there's much mix. There's still plenty of mix, but it's not to the level of our AMC or IPS businesses. That's absolutely right.

And PES' place in the portfolio, you made a good case for it at the Investor Day a couple of years ago. I guess is the experience in the interim of the end markets or how you see it the motors there fit with the powertrain. Any sort of dilution of that view of the PES place in the business or not.

No, if anything, I think it's accelerating that. We're seeing some nice momentum moving more and more into Air Moving. We talked about coming out of the third quarter call, about $20 million of orders in data centers. We didn't talk about this in the fourth quarter call, but we're winning more in Air Moving, in data centers, in clean rooms. It's a business that will grow. It will grow with Regal. And we like the margin potential and our position in by the way, thank goodness for its cash flow because it's paying for the 2 big acquisitions we did.

Okay. Fair enough. And on the point on free cash flow, a bit of a hit to conversion this year partly for sort of funding the growth investments. When do we see that free cash you think normalized.

Absolutely, we expect that in '27. I mean, as we're going to make about $100 million, $150 million investment, working capital investment to support the $735 million ePOD data center order we've been talking about. We start -- that starts to come through in '27.

We would expect that to move to a much better position at that time. We also have some opportunity on just the rest of the working capital side of things in terms of inventory and that -- we absolutely have room to improve our inventory position and our days to free up some capital there as well.

So free cash flow, absolutely, we should see an improvement back to more of what we would expect and would have expected once we get past this -- the data center investment side.

And how are we thinking about kind of leverage? There was the securitization in 2025, cash flows increasing this year even with some of those headwinds investing for growth, any sort of contemplated measures to accelerate delevering or it's more around the EBITDA increase and that will bring leverage down naturally.

Yes. I think that we'll end this year probably around 2.7x on a net basis. We should be there for -- below 2x by the time we get through the next year. Once we get around 2.5x use of cash could change a bit. We're going to prioritize paying down debt at this time. We may change. We will likely once we get below 2.5x to start looking at maybe a little more opportunistic share buybacks.

Maybe look to increase the dividend, get back to that schedule again. And then we have a good funnel of opportunities in terms of smaller bolt-ons, nothing transformative, smaller bolt-ons that we certainly in our AMC segment along the automation side that would make a lot of sense for us.

But again, I see that we could get to below 2x and stay around below 2x with the cash that we generate, still doing all those things I just talked about. So I think it should be fairly balanced down the road. But we've got to get below that 2.5x quite frankly, which should happen early next year.

And Louis, you talked about the sort of leaning into 80/20 and lean in the IPS and AMC segments and has a clear view on products and customers to focus on. Just wondering if you thought that doing that organically was enough? Or is there some view to do you chip away any of the -- or divest any of the pieces of those 2 segments now you've seen how that played out for several years each after the 2 big acquisitions or you think actually now, what you have it all sort of fits together.

Yes. No, we like everything in our portfolio today. We think we have good scale and scope and IPS and PES. AMC, there's still some opportunities. So we would say, in time, when it makes sense, there's bolt-ons that could make us stronger.

We have no intent to see any kind of at least at this point of looking at any kind of divestiture in those 2 segments. My point earlier though, and I want to emphasize this, I think we're further along with 80/20. 80/20, we know how to run our business by 80/20, where there's opportunity still though, is lean, and that's what we're going to be driving.

Is that going to be a sort of a very centralized push? Or what's the mechanism to make sure...

No. I mean -- so we actually have a Regal Rexnord business system leadership team meeting going on right now. We have 100 plants roughly. Every plant above $25 million has an RBS leader that focuses on continuous improvement that reports to a plant manager.

Every division, we have 20 divisions, has an RBS Director who facilitates our CI road maps and are driving our plan. Every segment has an RBS SVP and then we have an SVP at my level. it's important to us. Continuous improvement is critically important, and we have invested there, and we will continue to invest there.

Great. And with that, we'll switch to audience response survey questions, please. So the first 1 is around the current ownership of Regal Rexnord? So popular name.

Secondly, it's around general bias to Regal at present? So generally very positive.

Thirdly is on through-cycle EPS growth versus the multi-industry average here? Slightly above the peer set.

Next question is around usage of cash? And we were just having that discussion a little bit. Mostly debt paydown still.

Next question is valuation, what's the appropriate PE multiple for Regal? Blends to 20-ish times.

And then last question, what's the biggest kind of anchor or a headwind on the valuation multiple today? Organic growth.

Great. So with that, thanks very much. I think Louis, it's maybe your last time here. So thanks for all the support down the years and really appreciate you being here answering these questions, and we wish you all the best. And thanks, Rob, as well for being here.

Yes. Thanks, Julian.

Thank you very much.

Thanks.

Good morning, and thank you for joining us for RBC Bearings Fiscal Third Quarter 2026 Earnings Call. I'm Josh Carroll with the Investor Relations team. With me on today's call are Dr. Hartnett, Chairman, President and Chief Executive Officer; Daniel Bergeron, Director, Vice President and Chief Operating Officer; and Rob Sullivan, Vice President and Chief Financial Officer.

As a reminder, some of the statements made today may be forward-looking and are under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Bearings recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. These factors are also listed in the press release, along with the reconciliation between GAAP and non-GAAP financial information.

With that, I'll now turn the call over to Dr. Hartnett.

Okay. Thank you, and good morning, everyone, and thank you for joining us. As usual, I'm going to start today's call with a short review of our financial results and the outlook for the industry with our sectors. Rob Sullivan will follow me with some details on the results. Third quarter net sales were $461 million or a 17% increase over last year. We experienced continued strong performance in our A&D segment and growth from our industrial businesses. Consolidated gross margin for the quarter was 44.3% and 45.1% on an adjusted basis.

Adjusted diluted EPS was $3.04 versus $2.34 a year ago, a 30% improvement. EBITDA came in at $149.6 million versus last year $122.6 million, up 22%. Free cash flow for the period is a strong $99.1 million and we paid down an additional $81 million of debt in the third quarter. 56% of our revenues were industrial, 44% from the A&D sector. Total A&D sales were up 41.5% year-on-year. Commercial aerospace expanded 21.5%, defense expansion was 86.2%. Rob Sullivan will talk more about these details later in the call.

Demand across the A&D sectors continues to be robust. As evidence, we have modestly exceeded our $2 billion backlog mark that we spoke about last call. Remember, most of our R&D business is contracted and managed through daily or weekly orders or poles, communicated to us electronically and as a result, represent only a modest footprint in today's backlog statement.

If these joint contract obligations were extended based upon the statement of work content awarded and projected build rates, they would likely exceed another $0.5 billion to $1 billion in backlog. Today, the strength and outlook on the A&D sector can only be described as extremely robust. Clearly, we are a national inflection point in the commercial Aircraft and Defense industries.

Let me explain with an overview of some of our key markets. So we'll start with submarines. Submarines are facing an accelerated fleet build-out. The #1 defense priority today is submarines. This drives an unprecedented demand for our proprietary quiet-running valves both for new construction and replacement to support the current fleet. 66 Virginia ships are planned, 25 have been commissioned to date and 12 Columbia class ships are planned.

Number two, missiles and guided arms support for broad multiyear refurbishment initiatives for offensive and defensive missiles and vision targeting systems, both here and overseas create a strong environment for our precision assemblies and fuel management products.

In Europe, NATO's 5% GDP initiative is growing demand for our products from the ground warfare system builders in Europe. This creates a strong new requirements for RBC products developed -- that would have been developed over the past decade.

In the U.S.A., the refurbishment of new and -- refurbishment and new construction of aircraft systems as well as the maintenance of untold number of helicopters and airframe platforms, including engines, creates strong and continuous needs for our proprietary components. We expect an expanded defense spending bill will likely accelerate the repair activities further.

We also support the expanding need for both engineering support and staple components for the systems that the big 3 space explorers are building as well as others. The racing to the moon and/or creating low earth satellite systems requiring sophisticated precision assemblies for targeting, thrust vectoring, fuel management, structural members, et cetera. I think you can see the picture that we're faced with right now in the A&D sector.

Of course, all of these macro extremes in space and defense are simultaneous with the unprecedented build rates for commercial aircraft, including engines. RBC is deeply embedded in all of these areas, which create a tremendous and continuous market for our products, both at the OEM and the pre-replacement levels.

We are working diligently to add machinery and staff to several of our existing sites, guided by our 5-year per site plan to support these growing A&D revenues. Well, I hope this brief abstract gives you a 40,000-foot view of what our world is today in the R&D sector -- A&D sector. We can certainly go into specific programs, outlook, products and proprietary positioning as well as the moats to any depth needed at another time. We've been working well over a generation to achieve industrialized catalog and fortify the portfolio that you see today.

So let's turn to the industrial businesses now. Overall, our industrial business was up 3.1%. Industrial distribution was up 1.5%, while OEM sector was up 7%. We saw strength in aggregate and cement, food and beverage and the warehousing markets during the period. Recently, we've been seeing positive trends in some of these markets in terms of order demand, which will show as revenue if they work their way through lead time. The semiconductor industry is the biggest standout in this regard. Broad industrial demand strengthened measurably in late December and continued throughout January.

In addition, we are introducing several new products to the industrial lineup for FY '27, many of which have been in testing and developments since the Dodge acquisition. Combined, a promise to bend our curve on industrial growth. Also, we are opening a service center in the Midwest to better attend the needs of our -- and tailor our product response to more customers in that region. So I hope I gave you a feel for our environment and the momentum that exists at RBC today. And I'll turn the call over to Rob Sullivan for more discussion on the third quarter and the fourth quarter outlook.

Thank you, Mike. As Dr. Hartnett mentioned, we had another strong quarter. Net sales grew 17%, which led to a 16.9% increase in our reported gross margin. Gross margins were 44.3% for the quarter or 45.1% on an adjusted basis compared to 44.3% in the same period last year. During the quarter, we delivered strong performance across our business segments, specifically within Aerospace and Defense, which has demonstrated strong growth, as Dr. Hartnett stated.

Third quarter A&D sales increased 41.5% year-over-year. And importantly, the increase was 21.7%, excluding sales from VACCO, demonstrating significant expansion from both our legacy commercial and defense markets. A&D gross margins during the quarter were 40.1% or 42% -- 42.2% on an adjusted basis and industrial margins were 47.5% or 47.4% on an adjusted basis. Excluding VACCO, our Aerospace and Defense gross margins were 43.4% during the period. We are encouraged by the margin progress we've achieved within A&D driven by increased efficiencies achieved in our plants, coupled with improving pricing on customer contracts.

Looking ahead, we expect these benefits to continue to further support margin improvement while recognizing the impact will be gradual as these benefits flow through. On the SG&A line, we had total cost of $77.9 million or 16.9% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of $149.6 million or 32.4% of sales for the quarter. That represents an approximate 22% increase in adjusted EBITDA dollars during the quarter compared to the same period last year. Interest expense for the quarter was $13 million. This was down 8.5% year-over-year, reflecting the improved leverage position achieved over the last 12 months, coupled with lower interest rates compared to this time last year.

We paid off $81 million of debt during the quarter and another $67 million since the end of the third quarter. The tax rate in our adjusted EPS calculation was 22.1% compared to last year's 22.2%. This led to adjusted diluted earnings per share of $3.04, representing growth of 29.9% year-over-year. Free cash flow in the quarter came in at $99.1 million, with conversion of 147% compared to $73.6 million and 127% last year. The higher conversion rate was due to the increased earnings and working capital management during the quarter.

As we've noted previously, our capital allocation strategy going forward will remain focused on deleveraging by using the cash that we generate to pay off outstanding debt. Our expectation is to pay off the remainder of the term loan by November of 2026. Looking into the fourth quarter, we are guiding revenues of $495 million to $505 million, representing year-over-year growth of 13.1% to 15.4%. On the gross margin side, we are projecting adjusted gross margins of 45% to 45.25% for the quarter and SG&A as a percentage of sales to be between 16% and 16.25% for the period.

With that, operator, please open the call for Q&A.

[Operator Instructions]

Our first question is from Kristine Liwag with Morgan Stanley.

I just wanted to follow up regarding your commentary on the industrial business. So you mentioned that you're seeing strength in aggregate and cement, food and beverage and warehousing. You've got the new products that you're introducing for fiscal year '27 and it sounds like semiconductor has been doing really well. I was wondering for these verticals, can you provide what is embedded in your 4Q revenue outlook? And also when we go into 2027, how do you think about growth for these end markets.

Yes, Kristine, the way we have our fourth quarter built out right now, it looks a lot like the third quarter in terms of what we're forecasting for year-over-year growth, maybe slightly conservative on the industrial side. So we're just expecting more of the same. Obviously, we saw the PMI this week was positive. So if that trend were to continue, that would be certainly a bullish sign for our business.

Okay. Great. And then if I could follow up with VACCO, the quiet running valve is a really differentiated technology. I was wondering outside submarines, are there other use cases for this product.

Mike, you on? So Kristine, it's Dan Bergeron. Yes. For Sargent Aerospace, their products are specifically for submarine. And on the VACCO side, there are some applications for them in space on satellites.

Got you. Super helpful. And then does it -- I mean, just following up on the industrial question, with the improving outlook and also when we think about the order activity that you faced, is it fair to say that fiscal year '27 would be a higher growth year for industrial than fiscal year '26?

We're expecting that, Kristine. Yes.

Our next question is from Michael Ciarmoli with Truist Securities.

This is Alexandra Mandery on for Michael Ciarmoli with Truist Securities. We've seen that backlog growth has been strong and at all-time highs, about 230% year-over-year growth. So could you add some more color in terms of order composition and submarket breakdown? And also, what is the relationship with backlog and revenue going forward?

Okay. There was a number of questions there. The first question was the composition of the backlog. And I think I think Rob has that.

Yes. What I can tell you is that over 90% of our backlog is really our A&D market. Most of our industrial business tends to move in and out and doesn't really get stuck in the backlog. And in terms of the duration, which I think was another part of your question, some of these contracts, specifically with Sargent or VACCO can be multiyear going well beyond the next 12 to 24 months?

Great. And then I guess, like can you break down the backlog further between submarkets within A&D?

I don't have all that detail right in front of me to share with you at this time. We just kind of look at it at the segment level. But obviously, with Sargent and VACCO, there is a significant portion of our backlog with the marine products.

That makes sense. And then I guess just one other one. On the fiscal 1Q '26 call, you mentioned using roughly a $30 million run rate for VACCO quarterly revenue. So given that, did you divest maybe from any contracts or make any other changes that would reflect that slight performance discrepancy?

I mean they were at $29 million this quarter. They're pretty close to that $30 million run rate. There's just timing. We're in the middle of integration and these contracts can be a little bit lumpy quarter-to-quarter. But I would say we feel pretty good with where that business is operating and are optimistic for the next year.

Our next question is from Steve Barger with KeyBanc Capital Markets.

This is Christian Zyla on for Steve Barger. Just following up on your industrial comments. It does seem like you guys started growing before we actually saw an industrial inflection or at least have been less impacted by recent weakness. But January PMI was strong a few days ago. U.S. industrial production is inflected positively. Sentiment in short-cycle manufacturing seems to be improving. So looking back, what do you think drove your outperformance? And then based on your business and your mix, do you think you can outgrow peers or continue your string of growth?

Well, I think one of -- the outperformance -- number one, the Dodge brand is a very strong brand in the industrial marketplace, particularly the industrial MRO marketplace. And that marketplace is pretty short cycle. And as a result of having -- being such short cycle, your product availability needs to be high in order to capture the sale. And so Dodge does an outstanding job at managing their product availability and their hit rates and stocking of their core products. So I think we're probably industry best in that regard. And so that helps performance when times are tough. There was a second part of your question, Steve, I forget what it was.

Yes, it was just based on like your current business mix, do you think that can continue into calendar 2026?

Yes, it should. I absolutely think it should. We're expecting a stronger industrial economy in '26. Certainly, it started -- in January, it started off well. Semicon has come back in a significant way, which was dormant for a long period of time, and it's an important sector for us. So yes, I think we're going to do better on the industrial side in calendar '26.

That's great. And then just switching gears to Aero and Defense. A couple of quarters ago, you mentioned some synergies on the space side with VACCO and legacy RBC. Just any quick update there. And maybe more broadly, any updates on how you're thinking about the broader space industry and what specific markets or applications that you currently are not exposed to or not involved in that could be interesting. Does that require more engineering expertise or capacity? Just any kind of thoughts there.

Yes. Well, VACCO is -- you know, it's a company we learn more about every month. And one of the things that we're learning about VACCO is they have a very good product program that services the space market with staples that the space market requires in order to build out satellites. And they have a tremendous brand and following in these staples. And so -- it's a little bit like the bearing business.

If you have a stocking position on these staples, you're liable to get the order and you're liable to significantly improve your sales. And so we're looking at their product offering and deciding exactly which products we should be stocking. And to some extent, we think if we had those products in stock, people would actually develop or design satellite systems around those products because when it's undefined, it's undefined. And people kind of grow their own spoke. So we could help guide the industry by making these products more available and at the same time, improve our sales to the satellite OEMs, and there's -- there's quite a few of these people.

Our next question is from Scott Deuschle with Deutsche Bank.

Dr. Hartnett, can you clarify whether the new Airbus contract included a meaningful ship-set content increase on any of your programs?

Yes, it did. I guess this is what do you define as meaningful? I mean, we -- and just running through some of the programs, the new programs that we captured in my own mind here on the Airbus contract. So yes, I would say it's probably increased Airbus content, 20%, that sort of thing.

Okay. Can you say when that might layer into your revenue? Is there maybe a 1- to 2-year lag as you tool up for that higher content? Or can you see it sooner?

We expect to see it in this particular quarter.

Okay. That's great. And then can you also give us a sense for how large the missile business is today relative to defense overall and would you expect missile revenue growth to outpace commercial aerospace, given some of these big contracts, Lockheed and Raytheon have gotten?

Yes. I mean, missiles are -- they're a funny greed. I mean there's -- they're used for all sorts of things. There's the HIMARS and there's the JDAMs and those are bombs and there's the hypersonics and then there's the standard missiles that go into -- just are part of the F-16 package. And so we're pretty much across the board on all of these programs.

I can't -- it's hard to see exactly how big this missile business can be, particularly when they start building out hypersonics. But all those -- a lot of those hypersonics are going to go on the Columbias and the Virginias.

So we're definitely going to be part of that program in a meaningful way. But I don't have an answer for you with regard to how big the overall missile business can be at RBC versus commercial aircraft. I don't think it's going to be as large -- anywhere near as large as our commercial aircraft business.

Okay. And then, Rob, I was wondering if you could pull apart the gross margin guidance by segment for the fourth quarter, and in particular, help us understand the rate of sequential gross margin improvement in A&D, given that pricing step-up you have coming through?

Yes. I mean I think one of the best ways to look at it is we're guiding you to a gross margin that's at the high-end incrementals where we were in Q3 and we would expect Aerospace and Defense to be growing at a rate faster than industrial, that should imply that there should be some increment to what we've seen in Aerospace and Defense. So as I said, it was about 42.2% this quarter. We should see some gradual improvement in this quarter that's getting us to that guidance. So that's how it breaks down.

I think industrials should more or less look where they have been. I think we have some opportunities, but we have a little bit of headwind just from some absorption challenges that we always have in the third fiscal quarter with the holidays and just fewer earned hours. But generally speaking, industrial should look like what it did in the third quarter, I would expect.

Our next question is from Pete Skibitski with Alembic Global.

Just a couple for me. Mike, can you update us or remind us kind of where you guys are at on the production rates right now for the core Boeing and Airbus programs?

Yes. Well, I think Boeing is -- I think they're pushing towards -- they're at 38 737s a month looking to go to 42, looking to go to 50 with an overall objective of getting to 60. The exact dates that those -- that occurs, I don't have them in front of me, but I do have in one of my files. But the 60 is not that far off.

And then the 787 is 6 -- as I remember, 6 going to 8 per month, and that's a significant step up for us. We have one plant that's very dependent upon the 787 shift. And so that's very helpful. And then the 777, 777X seems to be coming in to its own, but I think that's only a few ships a month in the distant future. I don't have that number in front of me.

Okay. And just are you guys producing kind of in line with where Boeing is? Or are you -- I think typically, you're, I don't know, 6 to 9 months ahead of their production rates. Is that where you're at right now? Or do you feel like you're -- they're maybe working off some inventory?

I think in one of our smaller plants, Boeing is working off some inventory and that sort of turns around in July. And all of the other plants, we're pretty much lockstep with their production rates.

Okay. Okay. Got it. One last one for me, maybe for Rob. Rob, you guys were kind of hot this quarter on the CapEx spend. It inflected up a bit. Are you still on -- is that just timing or you saw on tapped to be about 3.5% spend for the full year and maybe continuing that level into fiscal '27?

Yes. We made some strategic investments and some capacity build-outs, but I think we'll still end up 3.5%, less than 4% for the full year.

Our next question is from Tim Thein with Raymond James.

I just had two on the industrial business. On the -- I think, Rob, you said earlier that the -- what's embedded in the fourth quarter guide is a growth rate for that business comparable to what you did of, call it, 3% in the third, if I heard that correct. I'm just curious, is that -- in terms of your -- Obviously, this is a business that's a lot harder to predict than A&D in the short term. But I'm curious what you've seen kind of in recent month trends and just in terms of order activity. Does that get you to a similar kind of outcome? Or is that -- I don't know if you just maybe just help us in terms of what you've actually seen in terms of incoming order trends relative to that number?

Yes. What's built in for the fourth quarter is probably even a little bit below that 3%. But to be honest, the orders have been pretty good in the recent months. So we feel really comfortable with what we're forecasting.

Okay. And then just as part of -- as you integrate Dodge, there is a lot of investment that the company has made over the years in terms of making that more of a global business. Where are you in terms of realizing some of those growth initiatives. You highlighted the service center piece earlier. I don't know if that's -- it's obviously not international, but maybe just if there's a way to kind of help us in terms of the underlying growth prospects of Dodge. Yes, that's all.

Yes I think -- sorry, I think we're still in the middle innings on that process, and we realized a tremendous amount of synergy on the cost side with Dodge, as we've all talked about in the past. I think we're in the middle innings. And then some of those new initiatives are being put in place. We've got a lot of great meetings and discussions around that new service center, some new product initiatives that we're in the process of deploying. So I think there's some bright things ahead on that business.

Our next question is from Jordan Lyonnais with Bank of America.

I wanted to touch on missiles again. If we -- the frameworks that Lockheed and Raytheon now have, when we start to see those turn into real contracts in production, how are you guys thinking about CapEx? Or do you need additional investments to hit these quadruple production rates.

Well, it's -- the question you asked is the same question the missile builders ask us is do you guys have the capacity to take on this much demand. And we do. And so we do have to add some equipment. The equipment that we add is certainly within that 3.5% that Rob has been talking about. So it's modest. And it's usually -- it's just going to use our capital base that we have in place today for the most part to a more effective level. So yes, you shouldn't see any surprises on the capital side in order to tool up this business.

Our next question is from Ross Sparenblek with William Blair.

Just starting with VACCO, I mean it looks like some really strong performance on the margin side in the quarter. Can you maybe just help us parse out the success there. This is onetime and if we should expect that to be the largest kind of margin contributor to Aerospace and Defense gross margins in the fourth quarter.

Well, Aerospace gross margins in the fourth quarter ought to be pretty good. And it's a little bit difficult for us to predict how good, but I suspect they're going to be better than they were in the third quarter given volumes and pricing and sort of the other factors that go into the calculus to make it all work well. So yes, those margins will definitely expand.

When we put together the outlook for the fourth quarter, it implies a 7.5% organic growth rate and a 14% total growth rate versus last year's fourth quarter. The 7.5% sort of balances Aircraft and Defense out at 10%, whereas industrial is somewhere less than 5% in order to get to the 7.5%. So we're looking at an aircraft -- we use an aircraft a little bit north of 10% against the third quarter, which was 21.3%. So I think the fourth quarter outlook is very conservative, but we elected to make it conservative because really for no other reason to be conservative.

So notwithstanding that, I think we expect to have a very strong fourth quarter. We have great market positioning, strong teams, good order book, it's only a matter of execution. And just one thing about RBC, we always execute. So I think in the fourth quarter, I think our investors are going to be very pleased with the results.

Yes, that's pretty clear with the gross margins for VACCO in the quarter. I just -- I don't get the impression that it's a lot of operating leverage there. I mean, was it more cost-out? And what is kind of maybe the revised outlook on where those margins can go? It feels like we should be converging with consolidated Aerospace and Defense gross margins sooner rather than later?

Yes. I would -- yes, I would think those margins are going to -- the A&D margins are going to chase up towards the industrial margins. I don't know if they'll reach them, but they're going to close the gap.

Okay. That's helpful. And then maybe just another one on the industrial business. It looks like your peers are kind of guiding for low single digits for 2026. Can you maybe just help us think through kind of the more cyclical, sorry?

The peers are guiding to what for '26?

Looking like low single digits kind of consolidated. And I think a lot of that's kind of cyclicality and maybe the heavy machinery capital goods, and that is the more cyclical piece of your industrial business. Anything to call out in the channel there? I mean do you think inventory is balanced. And if we do start to see elevated build rates like the OEMs are expecting, how soon should we expect a catch-up there?

I think our Industrial business will be sort of better than the single digits. It will be -- we're expecting sort of the high single digits is worst case. So -- but we're not coming out with full year guidance. We never do and -- but we're looking at it. We're pretty optimistic about what's involved in the year ahead.

Congrats on the quarter.

With no further questions, I would like to turn the conference back over to Dr. Hartnett for closing remarks.

Okay. Well, this concludes our third quarter conference call, and we thank you all for taking the time today to participate and look forward to talking again probably late May. Good day.

Thank you. This will conclude today's conference. You may disconnect at this time.

Good day, and welcome to the Regal Rexnord Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rob Barry, Vice President, Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, and welcome to Regal Rexnord's Fourth Quarter 2025 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Chief Financial Officer. .

I would like to remind you that during today's call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the regalrexnord.com website.

Also on the slide, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors, and we have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in these presentation materials.

Turning to Slide 3, let me briefly review the agenda for today's call. Louis will lead off with opening comments and overview of our fourth quarter and full year performance and the discussion of our recent data center wins. Rob Rehard will then present our fourth quarter financial results in more detail and introduce our 2026 guidance. We'll then move to Q&A, after which, Louis will have some closing remarks.

And with that, I'll turn the call over to Louis.

Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our fourth quarter results and to get an update on our business. We appreciate your continued interest in Regal Rexnord.

Before we get into the quarter, I want to provide you with an update on the CEO search. The Board Search Committee has been working diligently and our process is progressing as expected. We will update you as new information becomes available.

Now on to our results. Our team delivered solid fourth quarter performance, ending the year on a high note. Fourth quarter aligned with our expectations on adjusted earnings per share. We saw tremendous order strength and a backlog exiting 2025 up 50% versus prior year giving us extremely positive momentum as we begin 2026.

While our data center business is clearly performing exceptionally well, we also saw healthy orders in other parts of our business, especially discrete automation and aerospace and defense. Before continuing, I want to take a moment to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution, in particular, driving our new product pipelines, our cross-sell initiatives and building our commercial funnels to drive stronger and more profitable growth.

Now let me provide some specifics on our fourth quarter performance, starting with orders. Orders in the quarter on a daily basis were up 53.8% versus prior year and book-to-bill was 1.48. In the quarter, we booked orders worth approximately $735 million for our new e-Pod solution, which comprises our proven power management content including switchgear, automatic transfer switches and power distribution units.

You may remember, we discussed e-Pods on our third quarter call when we mentioned an opportunity funnel worth over $400 million and $1 billion bundle for our data center business more broadly. In Q4, we also built momentum in discrete automation, which saw orders grow 9%; in aerospace and defense, with orders up 21%; and in IPS, where orders grew over 3% and which we believe reflects outperformance in end markets that were challenged by a sub-50 ISM. Excluding the large e-Pods orders, our enterprise orders grew 2.7% in the quarter.

Shifting to sales. Our sales in the quarter were up 2.9% versus the prior year on an organic basis, demonstrating accelerating organic growth. We saw particular strength in AMC, which grew over 15% organically. The AMC team did an excellent job executing its backlog and benefiting from share gains in its largely secular markets. We saw weakness in PES in the quarter, which was more severe than expected given headwinds in the residential HVAC market. IPS continued to achieve steady growth, outperforming sluggish industrial markets.

Turning to margins. Our fourth quarter adjusted gross margin was 37.6%, up 50 basis points versus the prior year. Our teams overcame tariff and mix headwinds with continued strong execution on synergies, good price realization and benefits from volume leverage. Adjusted EBITDA margin was 21.6%, roughly flat versus prior year, reflecting our gross margin expansion, volume leverage and disciplined discretionary cost management, which offset higher growth investments. Adjusted earnings per share for the quarter was $2.51, up 7.3% versus the prior year.

Lastly, we generated $141 million of free cash flow in the fourth quarter. We ended the quarter with our net debt leverage coming down to 3.1.

In summary, a strong fourth quarter characterized by solid adjusted EPS growth, exceptionally strong orders and a rising backlog giving us positive momentum as we begin 2026.

At the beginning of a new year, it is always good to reflect on the success of the prior year. In 2025, our orders grew 15.5% for the year on a daily basis, led by AMC up 53%; followed by IPS up 4%; and PES, which was down 5%. Sales for the year were up 80 basis points on an organic basis with acceleration as the year progressed, strength in aerospace and defense, discrete automation, energy, data center, commercial HVAC and an incremental $90 million of cross-sell and powertrain synergies were partially offset by headwinds in general and industrial and medical.

Turning to margins for 2025. Our adjusted EBITDA margins were 22%, roughly flat to the prior year on a comparable basis reflecting good execution in a tough operating environment. Our teams overcame headwinds from tariffs, rare-earth magnet availability and mix, by effectively executing on synergies worth at $54 million in addition to price realization discipline and good discretionary cost management.

Adjusted earnings per share for the year was $9.65, up nearly 6% versus the prior year. Adjusted free cash flow was $893 million, including the ARS program we launched in second quarter. Our cash flow allowed us to pay down over $700 million of debt in 2025.

In summary, I would characterize 2025 as a year of executing a wide range of growth initiatives, which are starting to pay off, giving us increasingly positive momentum. It was also a year of achieving margin stability in the face of external pressures outside of our control. As we enter 2026, I believe we are extremely well positioned; in particular, giving traction on our growth initiatives. One of these initiatives in the data center market is where I'd like to turn next.

On this slide, we are providing additional details on the orders we received during fourth quarter for our e-Pods offering. As discussed on our third quarter call, these turnkey power management solutions, which we launched in early 2025, are designed to expedite data center construction by making the installation of power management content more plug and play.

The pods, which are tailored to specific customer needs, comprised content drawn from our long-standing power management portfolio which include switchgear, transfer switches and power distribution units as well as from our thermal management offering, which includes hermetic motors and air-moving solutions.

Regal is also project managing assembly of the pods, including content from third parties. So part of our value proposition is providing a single source of contact for the customer and allowing customers to procure a suite of power management content with a single SKU.

As you can see on this slide, we were awarded orders for e-Pods with a base value of approximately $735 million. So why are we winning this business? It starts with our 50-year track record of quality and performance in power management. Our product solutions are tried and true. Second, our customization capabilities. This is a differentiator for Regal and ability and willingness to customize the system design to best meet the needs of our customers.

Third, the strength and durability of our supply chain relationships, which help enable the next success factor are high service levels around on-time delivery and lead time. Equally important, we have shown across our business an ability to support high service levels while manufacturing at scale.

Another driver of these wins, the scale and scope of Regal Rexnord. Orders of this magnitude are facilitated by the backing of our $6 billion enterprise. Customers value our ability to balance agility and velocity with disciplined execution as they contend with a feverish pace of AI-driven development.

In short, we are seeing the power of our evolved Regal Rexnord portfolio to support differentiated growth. As part of the new Regal Rexnord, what was a $30 million power management business 5 years ago and a $120 million business today, has a defined path to roughly $1 billion in sales over the next 2 years. Viewed more holistically, these wins demonstrate that our enterprise growth strategy is gaining momentum, in particular, investing to address rising demand in targeted secular markets. We are working the strategy in many areas, which is where I would like to turn next.

On this slide, we highlight key secular growth verticals where we are directing the majority of our new product, e-commerce and channel investments. In the middle column, we provide examples of new products we have launched to address relevant customer needs in each vertical. And on the right, we highlight a few notable examples where we are seeing traction in the marketplace.

We already discussed e-Pods in the data center market. Our electromechanical actuators for the emerging eVTOL tell market which we developed through a partnership with Honeywell is another great example. Various third-party forecasts are calling for significant growth in eVTOL all unit volumes in the coming years, and we are well positioned with over $200,000 of shipset potential per plane.

Next, our Kollmorgen Essentials product which launched at the end of 2025, where we are leveraging our motion control technology for the ultra premium market in an offering designed for the much larger, high- and mid-premium market segment. Initial market reception has been strong, and we believe we are on track to meet our goal for $50 million of sales from this new offering by 2028.

Finally, we have developed a range of differentiated solutions to support robotic actuation, which spans humanoid, cobots and robotic surgery applications. Our teams are currently working an opportunity funnel in excess of $200 million across these applications and have already been experiencing strong double-digit compounded growth in robotic actuation in recent years.

The common theme here is Regal Rexnord making a range of growth investments in the high potential secular market, which are starting to pay off. What we are experiencing in data center is one more advanced example. Positively, we see tremendous additional upside as both our offerings and earlier-stage markets such as eVTOL and humanoid continue to mature.

And with that, I will turn the call over to Rob.

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 fourth quarter were up 15.2% versus the prior year period on an inorganic basis, which was ahead of our expectations. The performance reflects broad-based growth but with particular strength in data center in aerospace and defense and in discrete automation. We would attribute the strength to underlying end market momentum in these secular markets as well as to our outgrowth initiatives, including cross-sell activities, which continue to gain traction.

I would also point out that the medical market was flat after 4 quarters of destocking-related declines. This is another secular market where we are extremely well positioned with high-margin, technology-rich products and are very happy to see this market appearing poised to improve. We continued to face headwinds in the quarter related to rare-earth magnet availability, but these were in line with our expectations and our plans to secure alternative sources of supply are on track.

Turning to margins. AMC's adjusted EBITDA margin in the quarter was 20.5%, which was below our expectations and down roughly 1 point versus the prior year. While we were pleased to see the team over-execute on its backlog during the fourth quarter, some of the incremental volume, which was weighted to OEM versus distribution sales, created mix headwinds.

Orders in AMC in the fourth quarter were up 190%, primarily reflecting the large e-Pod orders, Louis discussed earlier. Excluding the e-Pods orders, AMC's orders were up 19.2% versus the prior year on a daily basis, primarily reflecting the strength in Data Center, Aerospace & Defense and Discrete Automation.

Notably, orders in Discrete Automation were up just over 9% in the quarter and are up about 6% on a rolling 12-month basis, reflecting growing momentum in this market. The momentum we are building in automation bodes well for our growth and margin outlook given the above-average conversion rate on these products. January orders for AMC were up 3.9% on a daily basis.

Now before I leave AMC, I'd like to emphasize that the growth we saw as we exited the year reinforces our belief that the strength of the markets served, along with our differentiated products and solutions, help set up AMC to consistently achieve the mid- to high single-digit growth that we expect from this segment.

Now turning to Industrial Powertrain Solutions, or IPS. Sales in the fourth quarter were up 3.7% versus the prior year on an organic basis, which was in line with our expectations. The growth was broad-based, but with particular strength in the metals and mining and energy markets. We are encouraged by this performance, which we believe evidence is share gains given the ISM remain in contraction as we exited 2025.

In particular, the IPS team continues to work our various cross-sell and powertrain initiatives, and we can see these results showing up in our performance. Adjusted EBITDA margin for IPS in the quarter was 25.7%, within our expectations and just below the prior year. Performance versus prior year was impacted by weaker mix, the impact of tariffs and higher growth investments, partially offset by continued strong synergy gains.

Orders in IPS, on a daily basis, were up 3.3% in the fourth quarter, the sixth quarter in a row of positive orders growth for this segment, which contributed to the backlog ending the year up 6% versus prior year. Book-to-bill in the fourth quarter for IPS was $0.96. January orders were down 0.5% on a daily basis.

Turning to Power Efficiency Solutions, or PES. Sales in the fourth quarter were down 10.7% versus the prior year on an organic basis, which was below our expectation. The shortfall was due to weaker performance in residential HVAC which we would attribute primarily to more severe channel destocking after the A2L regulatory transition, which was partially offset by strength in commercial HVAC.

Speaking further on the residential HVAC market, it is important to note that if you follow the AHRI market volume data, central air conditioners were down about 26% year-to-date through November, but Regal was only down about 7%. We don't believe all of this is due to share gain, but 2025 was clearly a year of strong market outperformance for PES in the resi HVAC space.

Turning to margins. Adjusted EBITDA margin in the quarter for PES was 15.6%, which was above our expectations and up 30 basis points versus the prior year. This strong performance, achieved despite challenging end market conditions, reflects both strong cost management by the team as well as mix benefits. Orders in PES for the fourth quarter were down 15.9% on a daily basis, directionally consistent with views we had previously articulated tied to channel destocking and weak consumer and housing metrics. Book-to-bill in the quarter for PES was 0.91. January orders in PES were up 3.8% on a daily basis.

Turning to the outlook on Slide 12. The table on the left outlines our principal assumptions for 2026. Starting with sales, our guidance assumes growth of roughly 3%, comprised of 1 to 1.5 points from the large data center project we have won and roughly 1.5 points from price, which is largely tariff related.

Outside of data center, we assume that volume growth across all other end markets is roughly flat on a net basis. Several of our end markets have the potential for stronger growth in 2026, and we were pleased to see the January ISM above 50, which has generally been in contraction territory for roughly 3 years. That said, one month does not make a trend, and we are intentionally adopting a more measured approach at the beginning of the year.

This allows us to carefully monitor developments and make adjustments to our assumptions and guidance only when justified by new information or changing market dynamics. For example, we would like to see the ISM remain above 50 for a sustained period of time before becoming more constructive on our market growth assumptions.

Another area we are carefully monitoring is our data center business. We continue to actively pursue a robust pipeline of bids, which could translate into orders eligible for shipment within 2026. Additionally, as delivery schedules for the e-Pods orders already secured are finalized, there is the possibility that some of these sales may be recognized in late 2026 rather than in our current plan for 2027.

Should these factors materialize, they could offer upside potential to our existing guidance. However, until delivery dates are confirmed, we will maintain our prudent and measured outlook. Our adjusted EBITDA margin is forecast to rise 50 basis points to 22.5%. The increase reflects our mid-30s incremental margin applied to the growth we are forecasting.

Note that while we fully expect to realize $40 million of cost synergies this year, we are treating those as a contingency against unforeseen P&L pressures, which we believe helps derisk our guidance. The table also outlines relevant below-the-line items. These assumptions result in an adjusted earnings per share guidance range of $10.20 to $11.

The low and high ends of the range factor a combination of slower or faster top line growth and to a lesser extent, modestly lower or higher adjusted EBITDA margins. The midpoint of the range of $10.60 equates to approximately 10% adjusted earnings per share growth.

For 2026, our cash flow guidance is set at approximately $650 million. This figure reflects our need to invest in working capital throughout the year to support the robust growth occurring in our data center business.

Finally, regarding tariffs. Our guidance embeds all current tariffs in place today. It also reflects the recently announced update to India tariffs. With this update, our annualized unmitigated impact is now roughly $155 million. Consistent with our previous views, we expect to be dollar cost neutral on tariffs by the middle of 2026 and to be margin-neutral on tariffs by the end of this year.

On Slide 13, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for the first quarter and for the full year. Let me flag a few key assumptions that should help with modeling.

One, we assume modestly lower revenue in the first quarter relative to fourth quarter, largely reflecting normal seasonality across our businesses and expected destocking pressures in residential HVAC in PES. We expect annual sales to be weighted roughly 49% to 51% between the first half and the second half of the year.

Second, we expect enterprise adjusted EBITDA margins to be roughly 21% in the first quarter and to improve sequentially, tied primarily to improving tariff-related price cost, improving mix as we gain top line traction in our AMC segment and other cost productivity actions. A more steady sequential trend is expected for IPS and AMC, while PES margins are seen tracking at a cadence similar to what we saw in 2025 with a peak in third quarter related to seasonality.

Lastly, we expect first quarter to be the low point for adjusted EPS. And due to all of the items I just discussed and for our adjusted earnings per share to be weighted roughly 48% to 52% between the first half and second half of the year, which is comparable to the weighting we saw in 2025.

As I reflect on our guidance for the year, I believe we have outlined a compelling and achievable plan that delivers improved top line growth, some margin expansion and double-digit earnings per share growth. We attempted to balance our strong orders momentum, higher backlog, ample secular growth opportunities in markets largely at or near trough demand and a path to further margin expansion with a degree of measured prudence.

This view anticipates persistent weakness in global industrial markets and volatile global geopolitical and trade policy environments. For example, our guidance does not embed any improvement to the 2025 ending ISM. Rest assured, our teams remain focused on executing the many compelling opportunities in front of them, and we are confident we can deliver a year that result in meaningful value creation for our shareholders.

And with that, operator, we are now ready to take questions.

[Operator Instructions] The first question comes from Mike Halloran from Baird.

So can we start on the data center side of things and the e-Pods wins? Maybe frame it up in a couple of ways. One, how do you think about the margin profile of this type of business? Is it comparative to the segment level as well?

And then secondarily, could you just walk through what that opportunity looks like and frame it from here? You're talking about north of $1 billion last quarter. This is a $735 million transaction. It gets you pretty darn close to that. So what does this look like? What does this run rate look like from your perspectives? And how to think about the opportunity set after we just got such a great order number?

Yes, Mike, thanks for the question. I'll start with the second question first. We're thrilled with the $735 million order, and we talked about a $400 million funnel in the last quarter call and so clearly, we outperformed here. We want to build on that, and we believe we have the capability to do that.

And hence, part of the reason why we started expanding capacity and announced our capacity expansion in the last quarterly call. So we feel good about the offering here in our future potential and that it will grow from here.

Now specifically to margins and specific to these projects, these orders, we would expect adjusted EBITDA margins to be in the 20%-plus range. Our content is a little less than 50% of the bill of material, and we would expect our normal gross margins there. And then we are being compensated a fair margin for the product that's being sourced and then assembled and sold as the e-Pods.

So again, expect adjusted EBITDA margin to be in the 20%-plus range, but then expect also that in time as we drive productivity and supply chain actions that we would expect to ramp that program margins as well. Hopefully, that helps.

Yes. No, it did, certainly. And then if you ignore the data center side of things and we think back to where we were in the third quarter. Within the Industrial businesses as a whole, do you think you're seeing the right trend in trajectory to support a recovery? I know Rob's commentary said PMI 1 quarter -- 1 month doesn't make a trend, and it's not embedded in guidance necessarily any sort of improvement from here, but I'm curious if you're seeing the right signs in what you would point to in your business to support that?

It's mixed, honestly, Mike. We ended last quarter and our OEMs started accelerating, distribution slowed down. We didn't see much change of that in January, although we feel good about our order positions of January and our ability to make our guide for the year, but we didn't see a change of that.

We are optimistic about the strength of the ISM coming out of January. But we'd like to see a couple more months of that strung together and then a little bit more strength in the distribution channel as well before we say we think we're on a path to strong recovery. But based on our measured approach to our guide, we feel really good.

The next question comes from Julian Mitchell from Barclays.

Maybe my question -- you've given very good color on the top line. Maybe my first question would be around the margin outlook. Because I guess the margins were sort of down or flat to down in AMC and IPS in the fourth quarter. It looks like the first quarter is similar, year-on-year decline with solid revenue.

Just trying to understand within IPS and AMC how we should think about the margin improvement trajectory through the year? And kind of tied to that, what are you expecting or assuming on price cost, just given what's been happening with metals prices, chip prices and so forth? Just trying to understand what kind of operating leverage step-up we might get later in the year? That would be helpful, please.

Yes, Julian, thanks for the question. Let me start with a little bit. I think AMC is more of the story here than IPS and that IPS, we still see some strong margins moving forward and feel really good about where we're going there. I think AMC is one -- let me spend a minute here.

Fourth quarter product and channel mix certainly were the main factors. For example, we saw some slowdown in distributor sales into the year-end as customers, we saw them as managing the balance sheet. So that certainly played in. And we're seeing just stronger project growth. So for example, food and beverage, especially in Europe within our Conveying Division is one where we're continuing to see more volume that has a little bit lower margin profile.

The bottom line is until we lap the mix impact from the medical and discrete automation side of the business, which is largely tied to rare-earth magnet availability, we're going to continue to see a bit of pressure on our AMC margins. Now as you go into the first quarter of '26 and moved to the back half, the first half of the year, and especially in the first quarter, we do expect to see continued pressure related to rare-earth magnets especially in AMC, and that is, again, going to impact our medical side, in particular as well as some Defense and Discrete Automation.

So that will continue. However, as we move to the back half of the year, we do see that improving. And overall, for the year, we see that at the midpoint, AMC margins should improve by about 40 basis points. Again, we are not embedding that any improvement in our mix at this time because we are using our current mix to project future margins. So that we just haven't embedded anything new. There is opportunity for that to improve.

But at the same time, this is a business that we are going to continue to look to grow. And therefore, we do see that it could take a little bit longer to get back up to that range that we provided at Investor Day. There are really a few key things that need to happen in order to hit that number, which is about 24%-or-so. Number one, we need some more volume; number two, we need the mix, especially in medical and defense and Distribution to get back on track, which I just talked about.

Rare-earth magnets are about 50 basis points of headwind through -- we -- that's expected to go away midyear, great, that should help us out. And then tariff margin becomes -- tariffs become margin neutral by the end of the year. That's really what needs to happen in order to get back to that 24% range.

Now from a tariff impact and you asked a little bit about price cost, our assumption right now remains: Midyear, we will be price-cut dollar-neutral, end of year until we get to margin-neutral.

That's very helpful. And then just my follow-up. You mentioned sort of costs of growth and fully understand that approach, and you've laid out very clearly on the P&L margins. Maybe on the free cash flow side, I think you'd alluded a couple of times late last year to a $900 million-ish free cash number for this year. I think the formal guide is $650 million.

So just trying to understand the delta there because it looks like the revenue and EBITDA outlook is pretty similar maybe to what you thought a couple of months ago. So just maybe flesh out that delta in the free cash flow assumption today versus maybe what you were thinking a couple of months ago?

Yes. I think it's a great question, and let me draw it out for you. It really comes down to 2 main things. One is the investment that we're making that you just talked about in -- especially for this data center business. We expect about $50 million to $100 million of investment there as we move through the year. That's embedded in our current cash flow projection.

The other is we really -- at the time we set that the forecast or the close to $900 million expectation, quite a bit has changed in terms of the current supply chain landscape primarily due to tariffs and rare earth and all these things, the uncertainties that we're dealing with on a daily basis, we are taking a more measured approach to setting guidance for 2026, and therefore, we have created really a guide that we think we can absolutely hit without a lot of additional working capital benefit.

So we reduced our working capital impact that was in the prior forecast by roughly half. And that's the other side of what took down the the guide from the prior $900 million to the $650 million. Again, it would be closer to $750 million-or-so, if it wasn't for the working capital, the investment we're making for data centers. So hopefully, that helps. It really is just those 2 things, and it's all around working capital.

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

Yes. So just back on this e-Pods. It looks like you're going to ship all of this $735 million in '27. Is that correct?

And then just on Slide 7, maybe just level set us on individually or collectively, how you think what your percentage of mix of business is kind of in the secular growth bucket?

Yes. So Jeff, we do not have a firm schedule at this time. The expectation is that we would start shipping in beginning of 2027. We'll probably hang over a little bit into '28. There's also a possibility you could pool a little bit into '26 as well. So as we get a more firm path, we would expect those orders would ship over a 15- to 18-month period in total.

Specific to Slide 7, we talked about 40% to 50% of the markets that we serve are secular markets. Now with this data center opportunity and our acceleration of growth, that's just expanding. And so this is why we're putting so much investment in these specific markets is with new products and solutions and commercial initiatives, and we feel that this is going to help accelerate our growth for the future.

Okay. Great. And then just on this rare earth dynamic. It sounds like -- I just want to understand how buttoned up it is in terms of kind of coming to resolution. I know it's a headwind, maybe 1Q into 2Q, but maybe just talk through resolution? And then ultimately, how much you can get back from the headwind you had in '25?

Yes. Really, everything is proceeding as we talked about coming out of our third quarter call, Jeff. We remain on track to mitigate the majority of the exposure by end of '26 with a combination of alternate sourcing, so sourcing outside of China, shift to HRE-free alternatives that don't require China approval for export as well as permissible exports. So that would be magnets that we can ship as well as subassemblies that we can ship out of China.

Right now, we're absolutely, from a supply chain perspective, on path. What we're working with, though, and it's especially in the defense area, as you can imagine, any time you make any kind of change in the components of the bill of material, you have to go through a validation process. And so we're working with a number of our OEM partners to get through that testing.

And I would say it's going pretty much as expected, a little faster in some customers, a little bit slower than others. So that's what we're working through. I feel the teams are all over it. They're managing it well. And we should be -- well, we are improving as we -- every quarter getting more product and supply and the ability to ship more.

We do not feel that we have lost any material levels of share here. If anything, we feel like our supply chain has been very solid. But again, you got to think about the markets that we're applying these products to. The medical market and defense markets, in particular, where the validation process for our products are pretty onerous. And so once you're embedded in the platform, you stay on the platform. And so the teams are doing a nice job, and we feel like most of this will recover by the end of the year, for sure.

The next question comes from Kyle Mendez, [ Randy ] from Citigroup.

This is [ Randy ] for Kyle. Just starting with automation, I mean, the strength in orders again in this quarter was good to see. I was just hoping you guys could give us some color on the underlying demand trends underpinning those orders and maybe by forgetting between some of your new products and the robotics opportunity between some of the more traditional automation markets and how to frame up the shippable backlog for 2026 and automation would be helpful?

Yes. So thanks for the question, [ Randy ]. Our orders were up roughly 9% in the quarter on automation. Our 12-month rolling is up about 6%. We talked about the the Co Morgan Essentials product launch in the quarter, we feel really good about that gaining momentum and acceleration. But the reality is we only saw about $1 million of orders the quarter from that. And so it wasn't a big part of the 9% up.

We continue to gain traction with humanoid OEMs and selling our subassembled solutions. And so from of our expectation is double-digit growth in robotics. We've seen that for the last few years, and we expect to see it for the next few years as well. Hopefully, that helps.

Yes. Got it. That's very helpful. And then just shifting over to PES. I mean it sounds like destocking a little bit more than you expected in the fourth quarter. So just curious as to how that informs your outlook for in particular in 2026? And what is your confidence level and some of that pressure starting to alleviate in the second half of the year?

Yes. So our outlook really doesn't change, even though we saw more pressure in fourth quarter than we thought. We are expecting resi HVAC to be down high single digits for 2026, that's the compare in Q1, it's a tough compare for us. So the biggest part of that down is coming in first half with some rebounding in the second half.

At some point, this business, when you think about the market, it was down significantly in 2025. And so when you ask me the question of your confidence in the second half, the confidence comes from the compare. It doesn't come from our ability to forecast this market effectively. And so hopefully, that's a helpful perspective.

The next question comes from from JPMorgan.

Regarding robotics actuations and $200 million-plus pipeline, could you share the latest developments and your expectations for orders in 2026 and 2027, please?

Yes. No, we're really excited about our pipeline. We're excited about the new products we're launching when we talked about the Co-Morgan Essentials that moves us into a much larger TAM market. But right now, we're not suggesting anything different than what we've said in the past, which is low double-digit growth.

There's also lots of potential in humanoids, and that's gaining traction. But it's a little early for us to say it's going to accelerate. And so although we were really pleased with the order rates we saw in 2025, we feel we're nicely and well positioned with a number of OEMs in North America, but we're not going to provide any further guidance than low double digits for our automation business right now.

That's a helpful. And just a follow up on your net leverage target for 2026. And how are you thinking about the capital allocation priorities, please?

Yes. The net leverage target for 2026, as the guidance would suggest, is about 2.7x by the end of the year. It means that by mid part of the year, we should be right around 3x. And then we're starting to year about 3.1 coming out of last year. From a capital allocation standpoint, we would certainly continue to prioritize debt pay down as we move through the year.

Of course, we have other capital priorities as well as we've talked about earlier today in some of those investments that we're making in inventory and the like. So we expect to continue to do that and invest in great CapEx projects with very quick paybacks. But overall, that's the way we're thinking about it, and we'll continue down that path until we get to kind of our communicated range that we talked about, our target is less than 2.5x, until we start doing something that might include some other options on capital allocation.

The next question comes from Nigel Coe from Wolfe Research.

So going back to the e-Pods, I just want to just tie that one up. So I think you said EBITDA margin sort of like as what you expect. I'm guessing gross margin would be sort of like close to the 30% there. But is that sort of like we expect to realize on an average basis or where you expect to be on a -- kind of as you ramp up and go to the learning curve because, obviously, this is a very new business for you guys, so I wouldn't expect it to be 20% on day 1.

Just maybe clarify that. And secondly, do you have inflation protection here because, obviously, steel prices could move around pretty closely between now and then. So just wondering what sort of action you have on

Yes. So actually, Nigel, we should start out at around 20% and then improve from there. But we don't see this as getting much beyond where our targets are for the AMC business. But our margin potential looks like it's going to start at around 20. Specific to hedging. We do hedge. We hedge for steel, we hedge -- sorry, we hedge for copper and aluminum.

You're right that steel would not be one that is on our program. But we feel good about how we plan to head for this project, and we've embedded some risk around the supply chain and inflationary risk in the program. So right now, we feel good about the 20% margin starting point and then growing from there.

Great. Congratulations on the order, fantastic news. And then maybe just a follow-up on the CEO succession. Obviously, it's now been several months in progress, so just wondering where you are on finding the person to those big shoes?

Yes. No. As I said in my prepared remarks, the search committee has been working hard at this, and they're making progress. We're down to a select few and -- and so our expectation is that we should be able to make an announcement in the near future.

Next question comes from Joe Ritchie from Goldman Sachs.

So I'll focus my questions on the ePod offering. So Louis, I'm curious -- I know you referenced multiple data center projects, but I'm curious, are you selling into multiple customers to or is this one single customer? And who are your customers? Are you selling directly into just the integrators or the co-locators, hyperscalers? Just any color you can give to that would be great.

Joe, thanks for the question. Consistent with our prior practices though here, we're not going to provide a lot of detail. And of course, we have confidentiality agreements in place as well. And so we wouldn't be able to provide specifics. But you answered the question correctly. We are selling into co-lo, hyperscaler. It is multiple customers and multiple data center projects in North America.

Okay. Great. That's helpful. And then how do I think about like the content per megawatt? So it's a big number, right, the $735 million. How many like what content per megawatt are you actually providing with these e-Pods? And then also, I'm just very curious, is this mostly for like low voltage, medium voltage type switch gear and other power equipment that's going inside that?

Yes, Joe, it's a great question. And unfortunately, I'm not going to be able to answer the first part of the question. I don't have the specifics there. But as we've talked about in the past, Regal has low-voltage and mediumvoltage switchgear, paralleling switchgear, low-voltage power distribution units and automatic transfer switches. .

Our part of the bill of material is around 40% to 50%. The other part of the bill of material is going to be things like the container, UPSes. And so that's what makes up the project offering. I'll make sure that I'm better prepared next time, though, on the power question you asked. But hopefully, that gives you a little perspective.

The next question comes from Christopher Glynn from Oppenheimer.

Sticking with the e-Pods still. So $735 million out of a $400 million pipeline a few months ago. Curious if you could provide any color on what that pipeline looks like now? And could we see another quarter of orders like this or even more than one over the next year?

Yes, Chris, I appreciate the question. And my answer right now is likely not. The pipeline is about $600 million in size for all of our data center business. But when you think about capacity and the fact that we're pretty filled up through '27, I don't expect large orders, but I say that and our sales teams for this business are incentivized to grow this business beyond the projects that we've already won today. And so I do expect that this is going to be an area of focus for Regal and that we will talk about data center opportunities for many quarters to come.

Okay. And then I'm not sure if you gave the CapEx guide, I'd like to hear that. And also on the $200 million-plus robotic automation funnel, are you incumbent there? Is that final stuff you're already specified on?

So I'll take the second part of your question and pass the first to Rob. The $200 million funnel, the answer is yes, we are on some of it. We already specified on some of that funnel. And then others, we're working in building relationships. I just saw a report recently from our team on humanoid, as an example. There's 10 key OEMs that we're targeting in the U.S. Three of them, we are on their platforms, and we're selling subassemblies. Seven of them, we're still working on getting integrated. And so in my answer on the $200 million, maybe a little more detailed than you needed, was that it's a mix.

Great. And from a CapEx perspective, we're looking at about $120 million in CapEx in the year, primarily to support growth and then some of the SCOFR activities versus supply chain, realignments that are currently in the plan to achieve the $40 million of cost synergies that, as I stated earlier, are not embedded in our current guidance, but gives us a degree of risk mitigation, if you will, as we approach the year.

Okay. And then separately, and you said IPS backlog was up 6% year-over-year?

Yes, that's correct. Coming into the year, IPS backlog is up 6% as compared to the same period last year.

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. My closing message today is simple: Our growth strategy is working, and we are gaining momentum. This is apparent in our improving organic sales growth and in our tremendous order and backlog growth, and we see so much more opportunity ahead of us, as we continue to execute our growth playbook across our secular market with additional upside to the extent our end markets improve.

Encouragingly, we are seeing early positive signs in a number of key markets. In short, I believe we are better positioned than ever before to create increasingly significant value for our stakeholders in 2026 and beyond.

Thank you again for joining us today, and thank you for your interest in Regal Rexnord.

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

I'm here with Baird. Thanks for joining the Regal Rexnord session. Pretty standard operations here.

We have Louis Pinkham, CEO who's going to give some prepared remarks. Rob Rehard, CFO. Rob Barry is in the crowd. He's give some prepared remarks, then we're going to have a Q&A session. So please if you have any questions, fire me an e-mail, raise your hand. We'll make sure they get incorporated in the session. So with that, Louis, thanks for coming.

Yes. Great. Thanks, Mike. Thanks for having us. Louis Pinkham, CEO. We'll make this short, but I wanted to share a few things.

As many of you know, we've transformed the Regal Rexnord business over 6 years and have made tremendous progress improving our margins and free cash flow and building a much stronger portfolio. Stronger in terms of the markets we serve and the products and technology we offer. And so our focus has been shifting to accelerating profitable growth. We have been doing a lot on this front and our investments are paying off. But we remain in the early innings, both in terms of end market recovery and our outgrowth initiatives.

So before we go to Q&A, I want to cover a couple of things. You saw on Slide 2, the note of forward looking statements. This slide really gives you an overview of Regal. I know many of you know us well. We've included this slide for those who don't know us as well.

On this slide, on the right side, our principal end markets. We are pursuing growth opportunities across much of our portfolio. But on the left, our four strategic markets I will focus on today, Automation, which includes robotics, and then Aerospace, Data Center and Medical. Together, these represent roughly 1/3 of our business.

I'll start with Automation. On the left, we picture some of our most relevant products for these verticals. In short, we are providing highly engineered components and increasing solutions that enable high precision motion and do so reliably. Our verticals of focus are Cobots, AGVs, Surgical, Robotics and Humanoids.

One of our strategic verticals is clearly Humanoids to where we have very deep domain expertise cultivated over decades. Our products can control motion on 30 to 50 axes of motion on a humanoid robot. Most of our work historically has been one-off projects. But today, plans are being made to produce humanoid in large numbers. This year, we have booked about $30 million of humanoid-related orders with multiple OEM customers. and our working $100 million bid pipeline. Some forecast for the Humanoid market call for tremendous growth.

The bottom line here is we are well positioned for growing demand technologically and in our ability to produce at scale on a global basis.

Aerospace is another strategic focus. Our Aerospace business is roughly $350 million include products such as servo motors, actuators, bearings, couplings and seals. Consistent with our strategy of moving up the value chain by providing integrated solutions, late last year, we announced a partnership with Honeywell to provide electromechanical actuators for electric vertical takeoff and landing for eVTOL aircraft.

Similar to humanoid, this is a market with significant growth potential and where we are similarly well positioned technologically and with ample global production capability.

As we discussed on our third quarter call, we are gaining significant momentum in Data Center, which we believe will be needle-moving to our enterprise growth in the future. Our capabilities span all three of our segments. But our largest presence today is in our Thomson Power System business in AMC, where we produce switchgear and transfer switches to support standby and backup power. We have been in this business for over 5 decades. Our quality and technology are our strongest capabilities. This was a $30 million business 5 years ago and is on track to be $130 million this year. And we believe this business can double in the next 2 years, supported by nearly $1 billion pipeline.

Our PES business is also working in this space with a $100 million data center-related pipeline. On the right side of the slide, we described the recent wins in data center worth $195 million, so clearly gaining momentum.

We have been directing our growth investment into data center, including developing new product and adding capacity. One of our highest potential new products is modular ePODs or electrical pods. These turnkey power management solutions can help expedite data center construction by making the installation of critical power management content more plug and play. Our commercial team is currently working on an ePOD bid pipeline that exceeds $400 million. And I'm excited to share today that last week, we received our first ePOD order for $4 million.

The last market I will touch on is Medical, where our products pictured on the left, also enable high-precision, smooth and quiet motion. I'm sure you can appreciate the criticality of attributes such as positional accuracy when performing robotic surgeries or when dispensing microscopic fluid droplets inside a lab testing device.

Notably, our relevant products in Medical span, AMC and IPS. And while this dynamic occurs in all of our bidder calls, it is especially true in medical where applications presented here can each use over 50 Regal Rexnord products. creating sizable opportunities and cross-sell opportunities.

So I will conclude with an enterprise perspective on why I believe Regal Rexnord represents a compelling investment case. Regal Rexnord shares provide investors exposure to some truly substantial growth opportunities, Humanoid, Data Center, eVTOL, Medical technology, to name a few. Plus strong overall growth opportunities in the other parts of our portfolio, all at what we believe is a very attractive valuation. And with that, I look forward to questions and [indiscernible] more.

Let's get the simple one out of the way. Obviously, you announced the CEO transition. It's going to take a little time. I had a couple of questions come in already. Just -- maybe talk about the logic for you to go to the Board and say, you're ready just for the next phase of life and what the thought process was?

Yes, probably the toughest decision in my life, but a family decision, a personal decision. Worked with the Board partnered with the Board to decide the right timing. I couldn't be more proud of the portfolio transformation and the talent that we have in the organization. We do not run the organization from the center. Fully decentralized 20 divisions, three segments. Our leaders there run the business. And so we're going to work on a smooth transition. I always -- I've said I'm the one role that if we're going to look both externally and internally for, we have to go public. And so we've gone public.

Easy enough. So let's talk about two things. The first thought process here, we've known each other a while. I think based on conversation during the quarter, conversation at dinner last night, this is probably as excited as I've heard you talk about demand in a while. Maybe you could just frame the excitement for me. And I think part of it is what we're seeing in the orders, what we're seeing currently. Part of it is the growth initiatives that you've got a lot of that you laid out some of on those slides. But maybe just put that together in a package.

Yes, you summed it up quite well, and I'll just add on. Leaving a quarter at 10% orders growth feels really good. Backlog up 6% in IPS year-over-year, up 15% in AMC, up 18% shippable in fourth quarter. Plus, we've been driving significant investment in new technology and system solutions. And so a lot of those I covered, but there are many more. We didn't talk about our COPRA offering and fan filtering units that come out of PES that go into clean room applications where we're gaining momentum.

We didn't talk about some of the other parts of IPS, where we're selling skidded industrial powertrain solutions that are going out to remote mines, and we're providing perceptive technology for oversight and service.

This is where Regal is going. And so I couldn't be more excited about where we are, the opportunity. And yes, I have calm, around 10% orders growth in the belief that we'll see high single-digit order growth, and we already saw a part of that with a nice big data center order in October.

Yes. And frame those slides as well, right, because some of those Humanoid, eVTOL, really interesting for you if those work, but it's not like you're only relying on those from a growth vector perspective, from here. Those would be kickers. But at the same time, I think there's a lot of confidence that the outperformance versus market is still on the table. Maybe talk about some of those factors that give you that confidence. And if those things hit, then even more so, but...

Yes. Again, when you think about our acquisition of Altra and the Rexnord, it was about bringing together this portfolio of offering with almost 100 brands to be able to sell a solution to our customer base. So nobody has the scale and scope of go-to-market that Regal has.

Today, only about 20% of our customers buy more than one of our products. But if you're buying one of our products, you're likely buying all of them. And so the cross-sell opportunity here is significant. Year to date, 2025, we'll see about $175 million of cross-sell with Regal and Rexnord and Altra on path to close to $250 million by the end of next year. This is the momentum we're gaining because of the scale and scope of who we are. That's a big driver of our future.

Plus all those other things that I talked about in our increased investment in R&D. We've increased since I've been CEO. R&D as a percentage of sales was about 2%. Today, it's about 3%. We believe in technology and differentiating. And you see it in our gross margins. Our gross margins are 38% today versus 26%, we've changed the portfolio, and rightfully so, but we've got great technology. We're going to continue to invest there. That's going to allow us to accelerate growth.

So good order growth here, expectation for a solid fourth quarter based on the comments on the recent earnings call. Low to mid-single digit is the expectation for next year. Maybe help bridge that. There's a little bit of price in there. We've got the data center piece in there. What are the other factors that give you confidence in growth?

That's the simplest way of looking at it actually, which is say 1.5 points of price, 1.5 points from the Data Center opportunity. And if everything else stays the same, we'll grow 3%, that's low single digit. But there are some other things going on. You've got the AMC backlog up 15%. Discrete Automation grew 17%. Order growth grew 17% for us in Q3. We're seeing some momentum there that's coming out of a couple of spaces, Defense, Humanoid and it's coming out of just the discrete market starting to come back. The factory automation market starting to come back slowly, very slowly, ISM going above 50%, certainly would help us. And then when you look at IPS, backlog up 6% year-over-year. gives us confidence that we should see low single-digit growth.

Now the one headwind we are seeing right now is resi HVAC. Resi HVAC is 1/3 of PES, but we have a lot of activity and initiatives in the rest of and we're targeting to offset a high single-digit decline in resi HVAC next year with all those other initiatives plus market and believe PES should likely be about flat.

But to your earliest point, Mike, we're not ready to guide yet. We'll guide coming out of the fourth quarter, but that's how we're thinking about it right now. We're actually right in the middle of operating plan. PES with Monday, Tuesday, AMC is Thursday, Friday and IPS in next week. So we'll have a lot more clarity coming out of that.

Yes. And maybe this one is for Rob. Maybe you can bridge the free cash flow into next year from this year. certainly something we're getting a question about, but it feels like a healthy ramp coming.

It is. So you're talking about $625 million up to $900 million is those are the numbers. So if you break it up like this, 1/3 comes from the 35% contribution on the low single-digit top line. So I think that's EBITDA contribution. You got 1/3 of it coming from additional working capital improvement, a source of cash, primarily coming through inventory. And the last 1/3 is broken up, I'd say, primarily into $40 million of cash interest expense that should come down and about $25 million of cash restructuring that should come down and a couple of small things in there. But the -- that's how to break down that -- that's how to bridge it from 1 year to the next.

And then the last question, kind of bridging to next year before we transition to a couple of other things. Maybe talk to the tariff impact and specifically the rare earth process. I know you're confident that you're working through the rare earth and that when you get to the back half of next year, you're in a really good spot. But I think it's a dynamic that a lot of people don't understand necessarily. And so any help you can provide on that? What's happening and then why you're comfortable in the remediation.

Through second quarter earnings, we expected to be tariff cost neutral this year. And then within a few days of our second quarter, Indian tariffs went up 25% and the 232 tariffs came in. 232 will mostly impact IPS, but our ability to go get price for that takes minimum 60 to 90 days to get into the market with. So we've got some pressure there.

We have said at this point that we will be tariff cost neutral by middle of next year and margin neutral by the end of next year because of this, really India and 232.

Now go to rare earth. Rare Earth has been tougher than we anticipated. We felt at second quarter earnings call, in all the discussions that were going on between the China and U.S., that applications were getting approved or rare earth supply chain. We got many of those applications. The one space that got no application approvals with anything out of India. We have a large precision motion plant in India.

And so we have now made a decision and we were going down this path, but we've accelerated it. Today, we're sourcing 40%, been working on it year-to-date, 40% of our rare earths outside of China. By the end of the year, it will be 60% by the end of next year is 80%.

We are very clear, and we're starting the ramp in this quarter. We see good line of sight to this quarter and what we guided for the quarter and we'll ramp through first and second quarter of next year, and rarest won't be a China-related issue for us come the middle of next year.

Yes, makes sense. Maybe a conversation on the Data Center piece. I know you've been in that side for a while, but what is Regal's right to win in that space? And why are you being successful in participating in the build-out on that side.

Our right to win in the success. The business has grown at about a 30% CAGR over the last 5 years. A big driver of that is our customers' confidence in our quality and lead time, but our willingness to customize the controls to meet their specific needs. Many of our competitors provide a singular system set. And we'll work with our customer base to meet their specific control needs.

Then you add on top of that the scale and scope of Regal and our balance sheet and our capabilities and there's confidence from these larger projects An example was an $80 million project because they knew we could stand behind what we were signing up for delivery and quality.

No, that makes sense. And I think last night, you said you had to think about whether or not you've ever Greenfielded a facility personally before. And one of the challenges you're managing through is how to load the capacity fast enough to meet the demand, right? So maybe talk about the things you're doing there as well as if -- is there an ability to see upside to the thought process on the data center side in the next year?

Yes. So we have an integration team. We did two very successful acquisitions, and we've been driving the consolidation and taking capacity out. And we still have work to do there. But that integration team knows how to manage big projects and ramp big projects and bring in talent to support a greenfield. So we feel really confident in our ability to manage this Texas capacity. The one piece that could help us even accelerate further is if we gain some really nice momentum around ePOD.

We're pretty capacity constrained at this point for '26 around switchgear, but ePOD could be a nice step function for us. And so I'm pleased that we won our first order. We'll see where it goes from here.

Yes. And I think one thing that might be underappreciated is how much your scale in and of itself enables even the opportunity to sell an ePOD type application. So twofold question here. One, maybe give other examples of where the scale is coming together. But the second piece is -- also talk about how there's opportunities to start transitioning your products to other areas. I think one example is thing on the Data Center side is what you're trying to do in PES on the air moving side as well. So somewhat interrelated, but just talk about that innovation and how all these things are coming together.

Yes, it's a great question, and it's really our whole strategy. What we're trying to do is to leverage the strength across our entire portfolio into key verticals of growth. Aerospace, Honeywell and the eVTOL partnership is all about our technology, but our ability to scale and produce at volume. That's because we're an industrial manufacturer.

And so we -- that's the value of bringing together all these components into an electromechanical solution that we can then scale with. If you look at data center, for example, and you look at ePOD. ePOD is a great example of this. and ePOD is a container, a modular container and what's inside, Switchgear, Power Distribution Units, Automatic Transfer Switches as well as Air Moving and Air Moving Control. Now what don't we have? We don't have UPSs, we'll source it. We don't have batteries, we'll source it, but we know how to pull it all together as an integrated solution with a partner. That's what we're looking to try to do more and more of.

And the margin profile tracks appropriately?

The margin profile at is -- would be fleet average within AMC as an example.

Which considering the pass-through costs implies. Pretty healthy on your own content?

Yes.

So on the margin piece, maybe talk to what the aspirations are 40% plus on the gross, 25% plus on the EBITDA side. How do you think about the timeline? Obviously, the demand piece hasn't been as favorable as we were thinking a couple of years back. What does that timeline look like from here?

Yes, I'll take that one. So we expect to end '26 at about 40% gross margins. It's about a year behind, primarily due to what you just explained on the market side, but also just the tariff impact that we've had and the impact on margins. We also expect that the 25% EBITDA margins will come likely closer to the end of '27. So that's the timing. It's about a year off from what we had originally projected based on the items that you describe.

Yes. And maybe talk to switching gears here, talk to some of the things you're doing within PES to diversify away from the traditional resi refrigeration. I mean, less than 10% of your revenue today, but still get some more attention. So what are some of those diversification moves you're making?

We've been investing significantly here. We bought a company about 7 years ago that brings impeller technology. And that with our motors technology, we've integrated into package systems that go into fan filter units into any Air Moving commercial application. That's actually a smaller package with higher air flow and higher energy efficiency. And it competes against two fairly large European company. That's an example of us trying to move outside of just selling a motor or motor component.

That, along with the penetrating certain verticals that are starting to accelerate. A great example is the $20 million PES order of Q3 and in Data Center. That funnel is about $100 million large. We're going to continue to try to grow in those spaces that will bring us growth.

Resi HVAC 9% important. We need the business, the scale of the business but it's probably our toughest business from an overall gross margin price attainment part. But it's important to us. And so we'll continue to manage and invest there.

You referenced to the pricing. How do you think about the pricing and the price stickiness throughout the portfolio here. Obviously, moving pieces around the tariff side, and then you have some backlog that has to be worked through, I'm guessing. But just a generic thought process, how do you think about the stickiness of the price in the market right now.

The easiest way to look at it that we look at it is 40% of our business goes through aftermarket and you hold that price pretty darn well. We are the leader in our product and portfolio in particular in IPS. It's pretty sticky.

AMC, it's technology. I mean IPS is a 42%, 43% gross margin business. AMC will be north of 40% when the discrete automation volume starts coming back, good position. PES is the toughest. Now we are price cost positive in PES.

India tariffs will be the one challenge for us in PES into '26. I believe that has to go away. I think 25% is fine. We'll be able to -- we manage with our customers at 25%. We can't manage it with our customers at 50%.

Yes. So maybe talk to the discrete automation piece. And how you think about the recovery curve on that side, what gives you confidence that there could be some legs here?

It's slower than we anticipated. where we're seeing the acceleration is in certain verticals where we're really nicely penetrated, and we're growing defense. Defense will grow mid-double digit. Humanoid, $30 million of orders this year versus $5 million of sales last year. That's growing. But the factory piece is not growing at an accelerated pace. And I do think there's a correlation a bit to ISM, there needs to be that turn. So we're not -- by the way, it's up 6% on a 12-month rolling. So it's not -- I think we've hit bottom and we're coming back, but it's not coming back in a fast way. We're not planning on it coming back in any significant manner beyond where we're at right now next year.

And what are the drivers within IPS that are signaling growth for you as you look into the fourth quarter and next year, maybe just parse out some of the end market favorability versus where there still some headwinds?

Yes. We're certainly seeing -- first, I'll start with backlog being up 6%, moving more to a project-based business, longer cycle business. That certainly gives us some confidence. In the markets that are feeling pretty good are metals and mining in our ability to provide total solutions there. That has been a positive oil and gas.

I know we hear lots of noise about alternative energy. We put it all under energy. We put oil and gas, which has been quite positive actually for us and mostly in power gen and gen sets. And then in alternative energy, solar has been strong in '25 and the funnel we have with our customers suggests it's going to continue into '26.

Now if ISM terms positive, and I argue that I said has been down for almost 3 years now, and it's only been listed because of data center. At some point, that has to turn when that turn, that's going to be a big benefit Regal.

Growth has to broaden at some point. Agreed. So twofold question here. Maybe the first half for Rob in the second half for both of you. Rob, maybe just talk to how you look at the leverage and how it tracks. And then the second question is when you do get back towards a range you're comfortable with playing a little bit more offense, how do you think about buyback versus going after a tuck-in strategy?

Okay. First, from a timing perspective, we do expect to end the year close to about 3x and continue to pay down debt next year and therefore, in next year about 2.5x. From a capital deployment standpoint, look, once we get below 3x, buying back our shares is a pretty -- if we're trading at the multiple we are today, it's a pretty darn easy decision.

The question is, at what time do we start doing that? Quite frankly, it's probably going to get closer to the end of '26 should we opportunistically take that path because we'll be closer to that 2.5x range, which is a level that I've talked to the ratings agencies about that we'd look to get to before we start anything of significance moving forward.

And then last question here. How do you think about AI usage internally. What are you using to leverage it and pursue it internally? And then how do you ensure a return focus to the outlay associated with it?

So we have lots of use cases for AI. Most of them, though, that have proven now are around efficiency and productivity versus revenue growth. I mean if you go on to our website and you call out a gear drive, you're going to automatically get commercial around. Here's a motor that could go with it. Here's a coupling that could go with it, et cetera. But the use case hasn't really proven out to a significant growth. Bluntly, the last number I saw was $600,000 year-to-date. For a $6 billion business, my CDIO gets really excited about it. I don't get so excited, but that's okay. I think that will take off in time.

Worth paying off is though the efficiency is the productivity drivers. So for example, we have 28,000 suppliers. We have hundreds of thousands of SKUs. We have to manage the lead times, the safety stocks of all of that. Think about doing it in an automated fashion. That's what AI is doing for us. AI is helping to better plan our plants so that we can be more efficient and support our service to our customers. AI in the end will be very beneficial from a productivity and efficiency standpoint at Regal.

Great. Louis, Rob. Thank you for your time today.

Management will be available just outside here for a breakout session. So if you have any other questions, come join us. Thanks for your time.

Good morning, and thank you for joining us for RBC Bearings Fiscal Second Quarter 2026 Earnings Call. I'm Josh Carroll, the Investor Relations team. With me on today's call are Dr. Hartnett, Chairman, President and Chief Executive Officer; Daniel Bergeron, Director, Vice President and Chief Operating Officer; and Rob Sullivan, Vice President and Chief Financial Officer.

As a reminder, some of the statements made today may be forward-looking and under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Bearing's recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. These factors are also listed in the press release along with a reconciliation of the GAAP and non-GAAP financial information.

With that, I'll now turn the call over to Dr. Hartnett.

Good morning, and thank you -- so good morning, everyone, and thank you for joining us. As usual, I'm going to start today's call with a short review of our financial results with some comments, and I'll finish our outlook on the industry in fiscal 2026. Rob Sullivan will follow me with some more details on the results.

Second quarter net sales were $455.3 million, a 14.4% increase over last year, driven by continued strong performance in our Aerospace and Defense segment and steady performance from our industrial businesses. Consolidated gross margin for the quarter was 44.1% versus 43.7% for the same period last year. And adjusted EPS was $2.88 versus $2.29 last year.

Clearly, our performance exceeded our expectations for the second quarter of fiscal '26 and the company is showing good momentum moving into the second half of RBC's year. Free cash flow for the period was a strong $71.7 million. 56% of our revenues were industrial sector and 44% aerospace and defense, with the aerospace and defense sector now racing to parity, we think, next year.

Total A&D sales were up 38.8% and year-on-year. Commercial aerospace expanded 21.6%. Defense expansion was 73.3%. Organically, the performance looks like this, Commercial Aerospace increased by 21.2%, Defense increased by 22.4%. Demand across the A&D sector is impressive and momentum is strong. Backlog is up to $1.6 billion today from $940 million in March and $860 million last year at this time.

We fully expect to approach $2 billion in backlog by year's end, which will be an amazing milestone, especially when you consider that more than half of our revenues preclude backlog production. Although revenues are currently capped by production capacity, we are working hard to expand manufacturing capacities in our marine and aircraft RBC plants, adding more capacity each quarter. Clearly, this will be impactful to margins.

Primary drivers here are submarine, aircraft and engine customers. Proprietary components are quiet valves and actuators for submarines. That is the Virginia and Columbia boats as well as MRO supplies for existing fleets. Both Sargent and VACCO are the RBC contributors here. on airframe and engines as Boeing and Airbus and Embraer continue increasing build rates to unprecedented levels, production of our products, of course, must follow. As most of you know, we have substantial content in these airframes and engines where we supply precision and line bearings as well as integrated structural components across aircraft and engine spectrum.

And with Boeing's recent FAA approval to expand production rates, business is good and about to get better. It's important to understand that building rates of submarines and commercial aircraft are levels not seen in over a generation. Since the early 1980s for submarines for reasons both good and bad.

We are current -- we currently are booking some orders for deliveries into the 2030s. RBC is dead center in the middle of this effort today with considerable number of proprietary sole and single-source products, governed by multiyear contracts in the majority of cases.

Let's turn over to our industrial business now. Overall, our industrial business was up 0.7%. Industrial distribution was up 3.3% and while the OEM sector was off 4.7%. Continued weakness in the market of oil, semiconductor machinery and European machine tools continue. Our industrial OEM business is a 70-30 split with 30% being the OEM component.

We are encouraged to see the continued demand in the industrial aftermarket across many of the markets that we monitor. These include aggregates, metals, grain, food and beverage, forest products, warehousing to name a few.

I will now turn the call over to Rob Sullivan, who will give some color commentary on the financial treatments and the Q3 outlook.

Thank you, Mike. As Dr. Hartnett mentioned, this was another strong quarter for RBC Net sales grew 14.4%, driving a 15.4% increase in gross margin. Gross margins were 44.1% for the quarter or 44.9% on an adjusted basis compared to 43.7% in the same period last year.

During the quarter, we delivered strong performance across our business segments, specifically within A&D, which has been seeing strong growth, as Dr. Hartnett previously noted. A&D gross margins during the quarter were 38.7% or 42.3% on an organic basis and Industrial margins were 48.2%. Included in the aerospace results were $24.7 million of net sales from VACCO during the period, which was acquired on July 18 this quarter.

On the SG&A line, we had total costs of $77.4 million or 17% of net of sales for the quarter. This ultimately resulted in an adjusted EBITDA of $145.3 million or 31.9% for the quarter. That represents an approximate 17.7% increase in EBITDA dollars compared to last year. Interest expense for the quarter was $13.4 million, this was down 14.1% year-over-year, reflecting the impact of debt payments made over the last 12 months and lower interest rates, partially offset by the impact of borrowing $200 million on the revolver in July to assist in paying for the acquisition of VACCO.

During the second quarter, we paid off $45 million on our term loan balance. We made an additional $40 million payment on September 30, which will be reflected in next quarter's results. Diluted earnings per share were $1.90 compared to $1.65 for the same period last year. Adjusted diluted earnings per share were $2.88, representing a 25.8% increase over $2.29 for the same period last year. The tax rate in our adjusted EPS calculation was 22% compared to last year's 22.1%.

Free cash flow in the quarter came in at $71.7 million, with conversion of 119.5% and and compares to $26.8 million and 49.4% last year. The higher conversion rate was due to the increased earnings and working capital management during the quarter. As we have previously noted, our capital allocation strategy going forward will remain focused on deleveraging by using the cash that we are generating to pay off the term loan and then the revolver balance.

This week, we finalized an amendment to our credit facility, extending the revolver until 2030. We intend to pay the term loan off by November of 2026.

Looking into the third quarter, we are guiding revenues of $454 million to $462 million, representing year-over-year growth of 15.1% to 17.1%. This guidance embeds an operating environment that's been fairly similar to what we have been seeing over the past few quarters with the additional benefit of owning VACCO for a full quarter.

On an organic basis, net sales are expected to increase 7.4% to 9.5%. On the margin side, we are projecting adjusted gross margins of 44% to 44.25% for the quarter and SG&A as a percentage of sales to be between 17% and 17.25% for the period. We continue to remain well positioned to achieve our objectives and drive sustainable growth, leveraging our core strengths in engineering excellence, operational efficiency and innovative product development.

Looking ahead, our focus will remain squarely on executing on our organic growth strategy, further integrating VACCO, driving operational efficiencies and delivering strong free cash flow conversion that will create long-term value for all our stakeholders.

With that, operator, please open the call for Q&A.

[Operator Instructions]. And our first question is coming from the line of Kristine Liwag with Morgan Stanley.

Maybe following up on the backlog, you had a very strong backlog growth of 60% in the quarter. Can you provide any color regarding how much of that was just from the VACCO acquisition? And also what were the key drivers of that? -- increase? And then also, you alluded to -- actually, you actually said a $2 billion backlog by the end of your fiscal year. That's a significant step-up from where we are today. Any sort of color on what you're seeing there would be helpful.

Yes. So approximately $500 million of that increase is due to the VACCO acquisition. And then the remainder of the business is up more than 20% from this time last year. we're seeing extraordinarily strong growth in the A&D side of the business. Approximately 90% plus of our backlog is really all A&D. The industrial side has a much smaller component when you look at our backlog, and we expect that to continue through the rest of the year.

Yes, Kristine, we're currently -- we're currently negotiating contracts with -- and we're very far along. They're very mature in the negotiations, and we expect to conclude those within the month, which should kind of round the whole thing up to that $2 billion level, at least that neighborhood. Maybe it's $100 million less, maybe it's $100 million more, something like that. But it's to some extent, we've had a rollover of aircraft contracts, which all begin sort of next year. And there's still several marine contracts that we're working our way through.

And really, for the most part, have worked our way through and we're waiting for the conclusion of the signatures.

Great. Super helpful. And then I think you Dr. Hartnett last time when we talked, it seems like Boeing production rates are starting to move up to the right. And from Boeing's earnings this quarter, it seems like that's really truly materializing, can you just remind us regarding your production rates, what's the utilization of your aerospace plants? And when we think about this volume finally coming through, how should we think about incremental operating margins, especially with the changes in contract that you've had and of course, the inflation that's gone through the business in the past few years.

Well, I mean, it's -- right now, in terms of capacity utilization for the airframe business, we're pretty much at 100% everywhere. And so we're adding -- we're adding capacity. We're adding shifts. We're adding manpower and we're adding some capital to continue -- and we're going to be stepping up capacity every quarter going forward in several of the plants. Demand is strong.

There's -- so you're going to see -- obviously, when you add when you add shifts, you get better absorption of the overheads and so you get some margin expansion there. So the outlook for margin expansion overall is -- we just couldn't be more positive.

Yes, that's very exciting to hear.

The next question is from the line of Michael Ciarmoli, with Truist Securities.

Nice results. Maybe just housekeeping. I think I may have missed it, Rob. What was the aero OEM growth in the quarter in the Aero distribution growth in the quarter?

Sure. So the aero OEM on commercial or you're talking about the whole segment?

Just commercial. Sorry.

So commercial OEM grew 27.9% this quarter. And commercial distribution was basically flat. It's actually down 2%, but more or less flat.

Okay. Got it. And then just looking at industrial distribution, it looks like it was -- I think you had it up 3.3%, but down sequentially. Anything happening there? Was that any sort of seasonality, lumpy orders? I know it's usually down a little bit sequentially on a seasonal basis, but anything jump out with that industrial distribution side?

We had some really relatively strong performance in the industrial distribution business in the first quarter, some really strong orders on that end. So the fact is it's still growing. It's just probably quarter-over-quarter. That's what you're seeing there.

Okay. Okay. Got it. And then I think you guys called out the dilution from VACCO roughly $360 basis points or so. Can you give us any sense as to how we should think about the VACCO margins expanding? I know you kind of just answered Kristine's question with couldn't be more positive on the outlook for margin expansion. But how do we think about that maybe VACCO drag dissipating and getting those margins up to and in line of historic RBC margins?

Yes. So look, they're running in the mid-20s at this point on an adjusted basis, that's their normal run rate. It's going to take some time, but we think there's tremendous capacity for some operational synergy there over time to get those margins looking like the rest of the RBC business. That's what we picked up on when we were doing diligence and that's kind of the internal objectives, but these projects do take time.

Yes, Michael, I would say on that, too, that we -- as far as VACCO is concerned, we're still in the getting to know you phase and very encouraged by what we see. And lots of manufacturing synergy with Southern California plants which is needed because VACCO needs to substantially kick up production rates. And those rates will -- that manufacturing production will be done in the West Coast plants that have the floor space, and they'll need some added capacity. So we're working on that right now. So that's going to be very positive to margin absorption on the West Coast.

So -- and I think the -- right now, we're looking at some of the existing space contracts and renegotiating terms and conditions that are more aligned with RBC policies. And so we're just working through that one at a time. And that's part of the process. So -- we expect next year back to be a star player in our lineup.

The next question is from the line of Steve Barger with KeyBanc Capital Markets.

You talked about adding capacity to support all these aerospace and defense programs. And I'm sure planning for that growth is a moving target, but what revenue level did you direct the team to plan for?

For that group?

For -- let's start with A&D and then maybe talk about the whole company.

Why don't we just e-mail you our 5-year business plan, Steve.

Well, you're talking about needing to substantially ramp production across multiple programs. I'm just wondering, do you think that you need to be able to support $1.2 billion, $1.5 billion. I'm just talking A&D now? Or is this going to be a $3 billion capacity plan or is this going to be a situation where you're just continually kind of tacking it on and chasing that capacity as those programs evolve.

Well, I think that's a good question. There's -- we're doing it sort of business by business, and I haven't rolled it all up into what the final number is going to be. And a lot of that depends upon how quickly we can add the capacity and get the throughput.

But if you look at one of our businesses on the marine side of Sargent, I think 2 years ago, we're in the mid-30s in terms of annual revenue out of that marine program. And we need to be well over 100 as quickly as we can get there. And so it's a matter of how quickly can we get there. So that's kind of what's going on in Tucson.

And when we look at VACCO, we're still trying to figure out with the mature steady-state production rate needs to be in order to keep the MRO business and the shipbuilders Happy with the hardware output. So we have -- we have differences of opinion on what that number is right now. So I can't really be more specific about it, but it's much bigger than where they are. So yes, we're going to see substantial improvement in both airframe air engine and marine over the next couple of years, just almost no way to avoid it if they keep building airplanes and they keep building submarines. They're just -- there's no way to avoid it.

No, I guess that's the key takeaway here is that RBC has the potential to have a pretty significantly pure top line based on the slate of opportunities you see in front of you.

Correct. That's how we see it.

And when you look at those programs and opportunities out there, do you have enough engineering staff to support underwater, ground-based aircraft space. Like is that a capacity constraint as well on the engineering side?

Well, you never have enough engineers and you certainly never have enough good engineers. I don't think it's a capacity constraint. I think the design engineering work in the testing engineering work for the most part is done. And so there's probably incremental staff increases needed. Although when we acquired VACCO, we got a quite a few very, very capable engineering team. So that's going to be helpful.

I think on the -- on the production side, we have our MET program, where we hire college engineering graduates every year and put them into our plants. Into a 2-year training program. And we've been doing this for years. And I think the last time I looked at the numbers, the number of people that were in the 2-year training program was probably 100 folks.

So I mean, we've been solving engineering talent into the company for years. So we have a very deep bench of expertise and -- we're actually looking at that yesterday, and who's in the 10- to 15-year group with us and because that's the emerging management of the company. And it's -- it's quite salty.

That's good to hear. I don't remember ever hearing an AI-related question on one of your earnings calls, so I'm happy to be first. Are you leaning into AI from the engineering side or anywhere else in the organization to try and help optimize manufacturing or engineering or anything else?

I think AI is something that you almost can't avoid using, right? It's just you get too many good answers quickly. When you go to chat or you go to [ Groner ] 1 of the suppliers? And I personally -- I mean I asked my 5 questions every day.

I never subscribed at GPT, but they do give me 5 questions every day, and I use them up every day. And I think there's many, many of us that subscribe and use it productively. So yes, it's having an impact to measure -- how to measure exactly what that impact is right now. We don't have a good grip on that. But the other day, we were talking about designing a component that was failing in our tests. And so I personally asked AI, what kind of tribological coupling did beryllium copper make on steel -- and how would I improve that coupling through design.

In 30 seconds, I got a report that would have taken me a week to get from one of my engineering teams that was excellent. And we actually debated using some of those recommendations within the hour. So that's how -- that's the impact it's having here.

That's interesting detail.

Our next question is from the line of Scott Deuschle with Deutsche Bank.

Rob, when you restrike the Boeing and Airbus contracts, do we see the full benefit of that hit in the calendar first quarter? Or do you have to honor some pre-existing backlog ordered at lower prices is that it takes a few quarters for that benefit to show up in gross margins?

We should see most, if not all, of that right away on the shipments that started after January 1.

Okay. And in terms of what you all have been targeting to get out of those renegotiations, are you generally tracking to what you hoped for in terms of your ask? Or is there any just general update as it relates to the status of those negotiations you can offer?

Well, you never get what you asked. I mean, it's the airframe people are very tough negotiators. So let's just put it this way. We negotiated with them for 2 solid years. And that negotiation was scheduled every week for 2 solid years.

Got it. Okay. And go ahead --

And we were reasonably -- I think neither side was completely happy with the results. but we weren't disappointed.

Okay. And then just following up on the prior question on Caterpillar reported results earlier this week. They have an Investor Day next week. A big topic of conversation is the demand on the smaller and midsized power generators. I don't think on a large combined cycle generators, you have much content, correct me if I'm wrong. But on these smaller and midsized reciprocating engines, is that an all an area that RBC plays in?

No, we're not in that area at all.

Okay. And then last question for you, Dr. Hartnett. There's now a publicly traded company out there that's generating 30% EBITDA margins in the fasteners business. And the industry appears to have some supply constraints. And I believe you'll have some capabilities here. You got through Sargent and sharpens, so I'm just curious, like, is that an area of strategic interest for you as you think about organic investment in the business just given the margin potential others in the industry are demonstrating?

We've looked at fasteners many times. And yes, we have a business that sort of overlaps that market. And it's -- we don't see it as productive a market in terms of proprietary protection and in what our current capitalization tool to produce is -- let's put it this way. There's more interesting markets that we pursued.

The next questions are from the line of Pete Skibitski with Alembic Global.

Nice quarter. In defense, just with this government shutdown, we're about a month into your third quarter. Just wondering if you guys are seeing any headwinds on order flow from the shutdown.

None.

Subs are pretty protected. Okay. And then just on the 777X delay, shipped to the right Mike, I know you guys have a lot of content there. any meaningful impact to your prior plan over the next few quarters from that delay?

No, it hasn't been part of our plan at all just because the uncertainty of when that ship is going to be produced. So you just -- if it's produced sooner, it's -- we'd call that plan insurance.

Yes Okay. Last one for me, just on Mike, your bullish comments earlier about gross margin expansion. Are you still within the framework of the kind of your typical 50 to 100 basis point annual goal, or are you moving kind of beyond that organically and/or with the VACCO opportunity there? What's the right way to think about that?

Well, we ended last year at about 44.4% for the full year. Our first 2 quarters this year, $454 million, $449 million Obviously, VACCO as a little bit lower than the rest. So that will impact the second half of the year to a certain degree. But organically, we're right in line with that level of expansion. And even with VACCO, I think we're still going to be able to expand our margins year-over-year. So I think we're very pleased with where we are.

Our next question comes from the line of Ron Epstein with Bank of America.

Has there been any impact from critical minerals, parts on what you guys do? And if there is, how are you mitigating it?

No, we see no impact at all. I think we're -- our products don't use it. We saw more of an impact from the from the availability of the more exotic stainless steels, which that problem seems to have corrected itself. But that was a problem. 12 months ago, that was a bigger problem.

Got you. All right. Good to know. And then if I could follow up on that AI question. I found your answer fascinating, being an engineer myself, you get that answer from rock or whatever. What do you have to do to review it to actually trust I mean like -- and then when you get to a point where you can trust it, does this have an implication on the number of engineers that you're going to need? Or is -- how do you get confident that the AI is giving you something that's useful.

Well, I think -- I think when we -- if we use that, the answer that I got for that tribological coupling, it came out with suggestions that if we were thinking about it, we would come up with those answers. But it really, it's sort of gave us a reminder that said, "Hey, you could do it this way, you could do it that way. There's 3 or 4 different ways to improve it. And did you think of these? " And those were all sort of known and comfortable solutions for us.

So -- so it's sort of it's centered us a little bit and stimulated our stimulated our thinking on the subject. So that was -- I think it's a place you start. It's sort of like when you're researching a company, you pull out a value line, and that's always the place you start -- and then from that, you say, that's an interesting company. Maybe I should dig a little further. So that's how we're using AI right now.

Yes. Interesting. Interesting. I mean, -- can you imagine a world where it's doing more than that for you? Or is it just -- they just see kind of how it goes?

Yes. Well, it's funny because when we have our operations meetings, we'll have 30 people in the room and will be asked -- sometimes they get into how do we solve this problem? How do we solve that problem? And everybody is going to AI and coming up with suggestions and so it sort of feeds on it on itself. So you have 3 or 4 engineers that are using their phone to figure out how to solve a problem, all of a sudden, you've got suggestions on the table that you wouldn't have had. You wouldn't have thought about it that quickly.

And so the old days of driving up to the university to go through the library. I mean, that's over.

The next question is a follow-up from the line of Kristine Liwag with Morgan Stanley.

I mean, I guess with that comment, Dr. Hertnett, it sounds like you should pay for Chat and just stop doing the free stuff for now.

Well, I guess I tipped you off on how we manage expenses at RBC. Right.

Well, great. So with that, I mean, look, I think there's some pretty interesting themes going around in this with AI. And then you've got this full theme of embodied AI. And so I wanted to ask you a more -- I don't know, a different question. We haven't really discussed before.

Like have you guys -- how do you think about humanoid you're starting to see some pretty interesting machines out there, but right bearings are to machines as elbows and joint arthumans. How do you think of that world? Do you think that's a commoditized bearing? Or do you think that you have a role in something like that?

Well, I think if you've been through some of our plants, and there's a a healthy amount of robotics that are sort of co-robots with working beside a person who's doing work, right? So as that technology proves itself, we will adopt it. There's no question about it. And so I think ultimately, there'll be humanoid in the RBC plants doing what. I'm not sure. But it will be -- it will show up as a capital requisition at one of our ops meetings in the not-too-distant future, and that's how it will begin.

Right now, we use -- we're making use of liberally of robotic and noncontact measurement technologies.

I see super helpful. So you see yourself more as a user. But I guess my question is more as a supplier to that industry, similar to as your supplier for a lot of those robotic systems. Is this a potential business opportunity for you? -- as a supplier if that industry matures. Because I could imagine if you are using it for those kinds of industrial use cases, then quality and making sure the humanoid doesn't break down is going to be similar to the value that you add for for other industrial applications where you're a small dollar amount, a critical portion for functionality.

Yes. I think today, we supply bearings for robotics that are in some pretty sophisticated applications where there's either high temperature or vacuum or a little bit of both producing computer chips. And the way this always starts is somebody that's designing a robot doesn't have any production volume, and we'll go to one of our distributors and buy 1 of our bearings and use it in their prototype. And once it proves out, and they start getting into production, they'll continue to use that distributor until production gets to a certain rate and then they'll they'll trace back to the manufacturer or we'll find out about it from our distributor that this is an OEM that's using considerable amount of volume. And that's how all of these -- every one of these markets is developed.

And do you see this as an exciting market?

I really haven't thought that much about it. I think Elon Musk thinks it's an exciting market because we think cars are less of an exciting market, right? So he's going to turn Tesla into a humanoid robot machine. And I guess that works.

Great. Maybe we will spend the time talking more about that, but thank you for your thoughts today.

At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to management for closing remarks.

Okay. Well, I think that ends our conference call for today. think I'd like to thank everybody for their participation. And I guess our job now is to go back to work and make the third quarter happen. So thanks again.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.

Good morning, and welcome to the Regal Rexnord Third Quarter 2025 Earnings Conference Call.

[Operator Instructions]

Please note, this event is being recorded. I would now like to turn the conference over to Rob Barry, Vice President, Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning, and welcome to Regal Rexnord's Third Quarter 2025 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; Rob Rehard, our Chief Financial Officer; and Rakesh Sachdev, Chairman of our Board of Directors.

I would 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 these projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the regalrexsnord.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 have included reconciliations between the non-GAAP financial information and the GAAP equivalent 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 opening comments and overview of our 3Q performance and an update on our data center business. Rob 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, 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 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 6-plus years. We have achieved a lot inclusive of 2 major acquisitions and the divestiture of the Industrial 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 we'll 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 onto 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 2 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 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 on 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 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 a 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 a 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 prior year and reflects an $11 million synergy benefit, mostly offset by mix tariffs and rare earth 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 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 3 segments play, but our largest presence today is in our Thomson 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 5 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 success factors listed on the lower left of this slide. It starts with the quality of our products, demonstrated over 5 decades of service.

What differentiates us is our ability and willingness to customize the system design 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 this slide, we describe our recent wins in the data center market worth $195 million. We have been very focused on building our commercial organization, which combined with our enterprise scale, has allowed us to grow our bid pipeline to what today is approaching $1 billion. 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 is commercial HVAC business has been benefiting from data center growth for some time, especially in North America. What is different with disorder 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 semicon 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 is 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 center, that has included funding portfolio expansion into modular electrical 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 product managing 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 2 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 content. 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 2 locations, 1 in British Columbia and 1 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 product 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 operations. 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 a 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.

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 expectations. The performance primarily reflects project timing in 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 markets. 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 nondefense 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 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 approvals 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 2 large orders in the data center market with 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 order lumpiness in the aerospace space business. As Louis indicated earlier, this strong momentum in data center continued in October, when we booked an additional order were $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 EV [indiscernible] 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 expectations. The growth largely reflects strength in energy and metals and mining with the segment 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 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 the 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 1/3 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 expectations and up 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 such as 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 rising modestly primarily to reflect initial revenue from our recent data center project wins and some additional tariff pricing net of incremental impacts 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 magnet 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 3 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 investments 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 and amount of cash flows relative to prior expectations. We see both the tariffs and the working capital investments is timing related. As we expect the impact of pricing on tariffs to flow through once that inventory is sold in the first half of 2026.

On Slide 14, we are updating our expectations regarding tariff impacts. 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 of Section 232 tariffs on steel, aluminum and copper. Given the extent of the tariff increases and the limited time left in the year, to implement mitigation actions and 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 set 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 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 previously, reflecting stronger shipments in data center and discrete automation, net of impacts from rare earth availability on shipments to the 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 third quarter. We expect the recovery of rare earth magnet supply to continue into early 2026 versus by the end of this year as discussed 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 the 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 and rare earths, we remain confident in our midterm ability to achieve our 40% gross margin and 25% adjusted EBITDA margin targets. 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 fourth quarter, sizable 2026 shippable backlogs in our IPS and AMC segments and growing tailwinds from our cross-sell synergies. Tariff 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 uncertainties, 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 the end of 2026.

We would expect organic growth to lever at roughly 35% overall, higher in AMC and IPS and lower in PES consistent with the gross margin differences 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 roughly 2.5x. 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 improvements throughout the P&L on the balance sheet and in our cash flow performance. And with that, operator, we are now ready to take questions.

[Operator Instructions]

The first question today is from Mike Halloran with Baird.

First off, Louis, thanks for everything. Sorry to hear you're leaving, but you're absolutely leaving the company in a better spot, and I wish you nothing but the best moving forward.

I appreciate that. Thanks, Mike.

So first, 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's getting better, what's getting worse in some of the assumptions around the sequentials

Yes. Happy to do that, Mike. When you first look at PES, a solid third quarter, fourth quarter, we're expecting resi HVAC to be down low double digits. Air conditioning will be down closer to 30 though, but furnish will be up high teens. On top of that, we're expecting commercial HVAC to be up mid-single digits, pool down low single digits and general commercial should be slightly up as well. And so when you think about the sequential, the biggest driver of the sequential change and why we're now guiding PES down about 1%. It's really the fact that resi HVAC in third quarter was flat, and it will be down low double digits in 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 third quarter by 40%. It's going to be up more than 50% in 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 fourth quarter and some nice improvements 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 earth 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 tick up in Q4. What we are expecting is to execute on our project backlog that's in the backlog. So that's how we're thinking about the guide for Q4.

And then -- yes. No, super helpful. And the 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. You had 190 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 $1.1 billion between the couple of segments of potential, how does that shake out in terms of being meaningful to the Regal portfolio over the next few years? Like what kind of ramp are we talking to? What's the win rate entitlements, things like that? Just kind of any framing that you can give us on a multiyear would be helpful.

Yes. Let me try to give you my thoughts on it. We're really excited. We're excited we've been investing, and it's kind of all coming to some fruition here. First, I want -- and I said in my prepared remarks, but our Thomson data center business has actually been growing at a very nice CAGR over the last 5 years. It's at about $130 million. We would expect that to actually grow maybe even double over the next 2 years. And so that will give you a little perspective of how we're thinking that translates. The backlog is strong. We're winning because of our -- 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 supply 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 1.5 -- 1 to 1.5 points for next year. And we'll continue to invest and grow here. I think it could be a large part of Regal Rexnord overall business for the future. Hopefully, that's helpful, Mike.

The next question is from Julian Mitchell with Barclays.

And sorry to see you go, but I wish you well, and thanks for all the efforts down the years.

Thanks, Julien.

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 1 point, 1.5 points of that is coming from data center, 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 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 forth.

Well, specific to data center tariffs in rare earth wouldn't have an impact, Julian. Data center for us today, it is -- the Thomson business, as I spoke to, is about $130 million. Outside of that data center is about 3% of all of Regal. So you would say about 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 will be roughly segment average and so we see that to be accretive, margin accretive for the enterprise.

That's helpful. And yes, 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 affecting the 2025 guidance from rare earth and tariffs for Regal firm-wide. So maybe help us understand kind of the phasing of that headwind to profits 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 margin expansion in the next few quarters from volume leverage or it's all offset by the tariffs and rare earth headwinds.

Well, overall, the leverage we expect around 35% overall for the business. I'm going to give you -- there's 2 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 it 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 expectation would be. But the first couple of quarters will be margin challenged as we expect to be dollar neutral as we talked about by the time we get to the end of the first half of next year and margin neutral not until the back half. So that's the way it would phase from half to half.

The next question is from Jeff Hammond with KeyBanc.

Louis, Best of luck and [indiscernible] Julian and Mike's comments.

Thanks, Jeff.

Just maybe staying on the margin dynamic. I 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 into '26. So how should we think about price cost or this tariff noise maybe getting less bad or better and the rare earth kind of fixing itself in terms of a delta '25 to '26.

I think it's a bit early to get too specific at this time. I think that the -- we do absolutely expect that rare earth will get through the rare earth challenges 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. We do think that most of that we'll be able to get through pretty quickly, maybe 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.

Okay. Great. And then I guess as your tariff -- 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 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 there's share gains or there's no destocking dynamic or what?

Yes. So let me comment on tariffs first outside of PES. We will be price -- we will be tariff neutral and we'll work to be margin neutral. It's just the timing of that the 232 derivative tariff coming out right after our last earnings call, it just takes time for implementing for ITS and AMC. And so we would expect, as Rob said, that will ramp in the first half of next year. Same for PES, remember a little bit more pressure because of the India influence. And so we feel good about -- and we've talked about this, our global footprint and the differentiation of that global footprint. If the 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 in cost neutral by the middle of next year. That gives us a little time demand.

Now let me address your furnace question. Furnace is about 40% of our resi HVAC business and I'll just remind you that furnace was down pretty significantly in '23, a little bit stronger in '24. And we think there is 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 IP-protected technology. And so from that standpoint, we feel very good about furnace and our position in that marketplace. Hopefully, Jeff, that helps.

Next question is from Kyle Menges with Citigroup.

And Louis, sad to see you go. It was great working with you and best of luck.

Yes, thank you.

Yes, I mean I would love to just maybe unpack the $1 billion or so of 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.

Yes. 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 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 2 really nice bigger orders that we received. We were hopeful in 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 it. We've invested in our commercial teams. We're investing in capacity, and we're going to 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.

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, it'd be helpful to hear a ballpark of how much lower interest expense could potentially be next year as well.

Yes. 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 we would expect some growth to some EBITDA expansion and then we would expect maybe another $60 million, $70 million coming through working capital to help us bridge the gap a bit along with lower cash restructuring. Cash interest comes down. We expect by a good $40 million next year. And then there's some offsets, of course, on cash taxes and a bit of CapEx, but those are the main bridge items to 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 bridging more of that gap. As far as the leverage standpoint, from a leverage standpoint, we expect that we'll end next year at roughly 2.5x 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 the -- and finalizing the strategy. Here, we expect to have that done here in the next month or so.

And then we will have a term loan that is also prepayable. We expect that to be as much maybe about $900 million, and so that should execute in the first quarter and that we will then make progress paying down that loan, which would come from the $900 million of free cash. So that's where we're thinking about it. And so our ability to get down to 2.5x, we think is very good. And we do expect that we can generate this cash flow and good visibility on how to get there.

The next question is from Tomoh Sano with JPMorgan.

This is Tomo, Louis. Although we have only just recently met, I wanted to thank you for your leadership and wish you continued success.

Thank you, Tomo. Thank you so much.

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?

Yes, Tomo, thank you. And I'm actually going to pass it initially to Rakesh Sachdev, our Chairman of the Board, who has some prepared remarks that he'd like to share. So Rakesh?

Thanks, Louis, and yes, I think as you look at where the company is and the work that Louis and the team have done over the last 6 years, it's really quite remarkable, the transformation that has taken place. This is a company that is now very decentralized. There's a strong bench of leaders. You can you heard Louis talk about the cash flow generation in this 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're in a great place. 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. We have 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, going to stay on, and he's -- as we said, it's business as usual until we find and appoint the new CEO either. So I expect it will take about 4 to 6 months before we appoint somebody, but there is no rush. We want to make sure we find and appoint the best leader.

We have a search committee in the Board. There are 4 of us, 3 CEOs, one active CEO, two former CEO. 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.

Yes. Thanks, Rakesh. And Tomo 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 going to 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.

The next question is from Nigel Coe with Wolfe Research.

Maybe maybe a question for the Chairman again. Are you fully committed to an external candidates? 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 seen with a very similar background to Louis in terms of operational shops? Or are you looking for maybe slightly different attributes.

Thanks for the question. Yes, absolutely. We are doing a comprehensive search. We are looking at external candidates. We're not going to rule out internal candidates, but you can imagine that this is going to be a very comprehensive search, a thoughtful search and yes, we will be looking for a candidate who has demonstrated strong leadership skills like Louis has had, running complex global businesses, we're going to be focused on growth. Operations has always been in the DNA of Regal Rexnord, and we've got some great folks who are leading that. But we also need commercial and growth leadership, which we'll be looking for in the next leader who is going to lead this company. So -- and the cultural aspect is also very important. We have created a great culture in this company. And we want to make sure that whoever leads this company will continue to foster that culture going forward.

That's great. Louis, look, I covered the stock for 20 years. And the last 7 years have easily been the best. So you've done an incredible job of really changing the game for this company. So it will be sad for you to go. But no, no -- the data center, I mean, I know we've how should we think about the contribution margins on the back of your building. And can you maybe just be a little bit kind of a bit more precise on when you expect to have this new facility up and run.

Yes. So we're -- so I'm going to go backwards. And Nigel, you're cutting out a little bit, but I think I got the intent here. we are initiating 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 products flowing through the facility in Q1, but not shipping until Q2 and later part of Q2. That's the initial project plan.

From a contribution margin perspective, all of our evaluation at this point based on what we've bid and quoted is that this will be fleet average margins for AMC, which is actually accretive for Regal. This will be a benefit for Regal as a total business. Now realize, when you think about these pods, a big part of the bill of material is our legal product. our parallel and switch gear, the media transfer switches, our PDUs and also, I want to emphasize that we're going to put our air moving products in these systems as well. And so we feel really good about where they're positioned and the margins that we will receive.