Regal Rexnord Corporation (NYSE:RRX) Q2 2025 Earnings Call Transcript

Regal Rexnord Corporation (NYSE:RRX) Q2 2025 Earnings Call Transcript August 6, 2025

Operator: Good morning, and welcome to the Regal Rexnord Second 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.

Robert Douglas Barry: Great. Thank you, operator. Good morning, and welcome to Regal Rexnord’s Second Quarter 2025 Earnings Conference Call. Joining me today are Louis Pinkham, our Chief Executive Officer; and Rob Rehard, our Chief Financial Officer. I’d like to remind you that during today’s call, you may hear forward-looking statements related to our future financial results, plans and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today’s press release and in our reports filed with the SEC, which are available on the regalrexnor.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 his opening comments and overview of our second quarter performance and an update on our cross-sell initiatives. Rob Rehard will then present our second quarter financial results in more detail, review our 2025 guidance and provide an update on tariffs. We will then move to Q&A, after which, Louis will have some closing remarks. And with that, I’ll turn the call over to Louis.

Louis Vernon Pinkham: Great. Thanks, Rob, and good morning, everyone. Thanks for joining us to discuss our second quarter results and to get an update on our business. We appreciate your continued interest in Regal Rexnord. In short, our team delivered solid second quarter performance in line with our expectations on sales and modestly ahead on adjusted earnings per share. So before continuing, I want to take a moment to thank our 30,000 Regal Rexnord associates for their hard work and disciplined execution. I am also especially proud of the job our associates have been doing to overmanage the impacts of tariffs and rare earth magnet constraints. Their efforts keep us confident that we can fully neutralize current tariff impacts on our adjusted 2025 EBITDA and earnings and the adjusted EBITDA margin neutral in the first half of 2026.

Now let me provide some specifics on our second quarter performance, starting with sales. Our sales in the quarter were down 1.2% versus the prior year on an organic basis, in line with our expectations. We faced a couple notable headwinds in the quarter related to project timing in metals and mining in our IPS segment and to temporary rare earth magnet availability, which delayed certain higher- margin shipments into the medical and defense markets, specifically in the AMC segment. These headwinds were largely offset by particular strength in residential and commercial HVAC and in aerospace. For reference, our sales in the first half were roughly flat on an organic basis. Regarding tariffs in the demand environment, we have been seeing limited customer spending and project timing impacts, which, in aggregate, are having only a modest impact on our business.

Bigger picture, we continue to believe that demand in most of our key end markets is at or near trough levels and were it not for various macro uncertainties, the industrial cycle would be gaining momentum at a firmer pace. Even so, we remain optimistic that our sales will improve and grow at a low single-digit rate in the back half of 2025 and into next year, given multiple quarters of positive orders that have grown our backlog, particularly in our IPS and AMC segments. Orders in the quarter on a daily basis were down 2.5% and book to bill was 0.98. Orders in the quarter were weighed down by AMC, which saw an orders decline of 7.5%. This decline was driven by the timing of a sizable data center order expected in the quarter and a tough compare as orders in AMC were up 12% in the second quarter of last year.

Specifically, a $35 million data center order that was expected in the quarter ended up booking early in July. It would have improved AMC’s second quarter orders grade — orders growth by roughly 8 points had it come a week earlier, and Regal’s overall orders for the quarter would have been flat. I would like to take a minute to acknowledge the significant achievement this data center order represents for our power management team within AMC and for Regal Rexnord broadly. The order is for switchgear that will be used in a hyperscale data center in North America. We believe this July, data center order will be the first of 5 similarly sized orders that the customer plans to award on this particular project and feel that we are well positioned to win some or all of this additional content.

And while any additional wins associated with this project would likely hit our P&L only at the end of 2025 and in ’26 and ’27, this project alone could provide a meaningful boost to our enterprise growth rate next year. In July, daily organic orders for Regal Rexnord were up 4.4%, driven primarily by strength in data center. Turning to margins. Our second quarter adjusted gross margin was 38.2%, up 10 basis points versus the prior year, excluding Industrial Systems. Our progress on gross margin was aided by achieving $17 million of cost synergies in the quarter. Temporary impacts related to rare earth magnet availability were a modest headwind. Adjusted EBITDA margin was 22%, down 20 basis points versus the prior year, excluding Industrial Systems.

Adjusted earnings per share in the quarter was $2.48, up 8.3% versus the prior year. Lastly, we generated $493 million of free cash flow in the second quarter, of which $368.5 million relates to an accounts receivable securitization program we completed in the quarter. This program, which Rob will elaborate on, is net accretive to our earnings by allowing us to accelerate paying down higher cost debt, which remains a top priority. In summary, a strong second quarter, which along with healthy recent orders in backlog growth makes us optimistic about improving top line and earnings momentum in the back half of this year and into 2026. Next, I’d like to spend a few minutes updating you on our cross-sell synergies where we are seeing positive momentum and expect a growing contribution to our sales performance.

Bottom line, we are on track to deliver at least the $250 million of cross-sell synergies we announced following the Rexnord and Altra transactions. As you can see on the chart on this slide, we achieved $120 million of cross-sell synergies through the end of last year and are on track to add incremental $50 million this year. As a reminder, principal cross-sell synergies include addressing the broader customer base of the combined business and taking advantage of the unrivaled scale and scope of our product portfolio and go-to-market to gain wallet share and to sell more solutions, including powertrain. This value proposition is resonating, which is evident from our growing funnel of cross-sell opportunities, which stood at nearly $300 million at the end of Q2.

Notably, the win rate on our cross-sell opportunities has been tracking about 10 points above the enterprise average. On the right-hand side of this slide, we provide a few recent examples of cross-sell wins. The first is a powertrain sold to a cement manufacturer valued at approximately $3 million. The harsh operating conditions in the cement industry translates to significant estimated lifetime aftermarket sales worth about $12 million, which come with nicely accretive margins. We won by making it easier for the customer to build out a new plant by receiving an engineered solution optimized for efficiency and durability versus individual power transmission components that the customer would have to assemble. The next 2 examples are of wallet share gains.

As we discussed at our Investor Day in September of last year, only 15% of our power transmission customers buy more than one product category from us. Even though in most cases, they use most, if not all of the categories we sell. This creates tremendous opportunities for spend consolidation. The scale and scope of our product portfolio, plus significant digital investments that are making it easier to do business with us, position Regal Rexnord as a natural destination for spend consolidation. We expect the initial spend in new categories to ramp considerably as the customers validate our quality and production volume capabilities for the newly added products. Margins on the new categories are at least our OEM fleet average. In short, we believe the value of our unrivaled scale and scope and power transmission is gaining momentum, evident in the orders and backlog growth we have been experiencing in IPS and AMC.

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

Robert J. Rehard: Thanks, Louis, and good morning, everyone. Now let’s review our operating performance by segment. Starting with Automation and Motion Control, or AMC, sales in the second quarter were down 3.4% versus the prior year period on an organic basis, which was in line with our expectations. The performance primarily reflects weakness in the medical end market, project timing and data center and temporary challenges related to rare earth magnet availability that limited shipments of certain higher-margin products in the medical and defense markets. These headwinds were largely offset by strength in aerospace, which tracked above our expectations. AMC’s adjusted EBITDA margin in the quarter was 19.5%, which was below our expectations.

The primary driver of the shortfall was delayed shipments of high-margin product containing rare earth magnets due to challenges securing these materials. We also encountered higher costs such as expedited freight to secure magnets. The other driver of the shortfall, while as severe, was related to the continued destocking of mix-rich products in the medical end market. We believe both of these impacts are temporary. Our ability to secure magnet has improved, and we feel that inventory levels in the medical channel are coming into balance, though most of the anticipated mix improvement tied to these factors will be realized in the fourth quarter. Orders in AMC in the second quarter were down 7.5% versus prior year on a daily basis for a book-to-bill of 1.0. The decline in AMC’s orders on top of tough year-over-year comps largely reflects destocking in the medical market and timing of a large data center project order, which, as Louis indicated earlier, slipped into early July.

Importantly, have we received the large data center order in the second quarter, AMC’s second quarter orders would have been up slightly. AMC’s July orders were up approximately 21.5%, reflecting multiple data center wins. As I wrap up this slide, we expect to keep building momentum in AMC based on our higher mix positive shippable backlog for the second half of the year, which is up mid- single digits versus this time last year and weighted to fourth quarter. This, coupled with the momentum we are seeing in data center and additional order traction in humanoids we saw during the second quarter, suggests a higher shippable backlog entering 2026 as compared to 2025. Turning to Industrial Powertrain Solutions, or IPS. Sales in the second quarter were down 4.4% versus the prior year period on an organic basis, which was modestly below our expectations.

The decline largely reflects project timing impacts in metals and mining. As a reminder, we noted last quarter seeing very healthy orders in metals and mining, which continued this quarter. So the sales weakness in this end market is purely timing related. Adjusted EBITDA margin for IPS in the quarter was 26.9%, about 1 point above our expectation and up 110 basis points versus the prior year. The upside versus our guide was largely tied to stronger mix and disciplined cost management with gains versus prior year driven mainly by synergies. Orders in IPS on a daily basis were up 3% in the second quarter. Roughly half of this growth was tied to large project wins and is contributing to the segment’s growing backlog. Bookings in our IPS segment are increasingly weighted to longer-cycle projects, given our strategic focus on selling Industrial Powertrain Systems.

IPS’s backlog is up 15% year-to-date, and is scheduled to begin converting at an increasing rate during the back half of this year and into 2026, which boosts our confidence in this segment’s sales growth outlook. Book-to-bill in the second quarter for IPS was 1.01. In July, orders on a daily basis were roughly flat. Turning to Power Efficiency Solutions, or PES. Sales in the second quarter were up 6.5% versus the prior year on an organic basis, which was above our expectations. The result primarily reflects strong growth in residential HVAC, which was up almost 20% in the quarter as well as strength in commercial HVAC, both of which tracked above our expectations. Overall, we were very pleased with this segment’s growth in the quarter. As a reminder, we continue to model residential HVAC end-user volume flat to up slightly this year, implying significant declines in the back half and especially in fourth quarter, when we lap difficult compares tied to regulatory prebuy activity.

The adjusted EBITDA margin in the quarter for PES was 17.1%, which was above our expectation and up 1 point versus the prior year period, aided by higher volumes and strong cost management. Orders in PES for the second quarter were down 5.4% on a daily basis, which is in line with our expectations, given anticipated headwinds in resi HVAC. Book-to-bill in the quarter for PES was 0.9. Daily orders for PES in July were down 3.6%, also consistent with our expectations related to resi HVAC destocking. On Slide 10, we are providing an update on our balance sheet and net leverage ratios in light of an accounts receivable securitization program we completed in the second quarter that allowed us to accelerate paying down our debt. The facility, which closed on June 30, totals $400 million.

Initial proceeds realized in the quarter were $368.5 million, all of which went towards paying down the vast majority of our variable bank debt. The decision to initiate the securitization facility is consistent with our mindset of regularly looking for new opportunities to enhance performance. The facility provides a range of benefits, as outlined on this slide. First and foremost, it is accretive to adjusted earnings and free cash flow by providing approximately $4 million in net annualized interest savings. We expect almost $2 million in net interest savings in the second half of this year. In addition, the facility enables access to cash from outstanding receivables on an expedited basis, which enhances our working capital profile. It also improves our debt to equity and certain leverage ratios.

Going forward, we remain committed to strengthening our balance sheet with a focus on deleveraging to our long-term target range of 1.5 to 2x. Additional details on securitization — on the securitization facility are available in our 10-Q. Turning to the outlook. Today, we are reaffirming the midpoint of our 2025 adjusted earnings per share guidance and narrowing our adjusted EPS range by $0.10 on each end to a range of $9.70 to $10.30. Our principal assumptions are outlined in the table on the left-hand side of this slide. Notably, our sales guidance is rising modestly, primarily to reflect improved translational FX rates and to incorporate the impact of tariff-related pricing. Our adjusted EBITDA margin is now expected to be 22.5% versus our prior assumption of 23%, reflecting the impact of transactional FX, tariffs and our latest view on margins in AMC, which I will elaborate on shortly.

The tariff impact reflects neutralizing tariffs on a dollar basis, which has a slightly dilutive impact to margin. We still expect to be margin neutral by the middle of next year. Now as it relates to the low versus the high end of our range, let me share a few thoughts on how we are assessing the risks and opportunities. Aside from market performance, one factor impacting the low end of our range is a slower pace of recovery associated with rare earth magnet availability from China. At the high end of the range, we see revenue upside from the recent data center wins and other potential data center opportunities in our funnel, along with further upside if the ISM turned positive. We have also made small adjustments to certain below-the-line items as detailed in the table.

Regarding interest expense, please note that there are specific accounting rules for recording the interest expense associated with the accounts receivable securitization facility, which we have summarized on a slide in the appendix of this presentation to help with financial modeling. Overall, we are continuing to take a measured approach to guidance for the year, considering the ongoing macroeconomic and geopolitical uncertainties. On Slide 12, we are updating our expectations regarding tariff impacts. The gross annual unmitigated cost impact from tariffs in place at the time of our first quarter earnings release on May 5 was $130 million. Today, we estimate that value has fallen to approximately $125 million, broken down as outlined on the table.

We still expect our mitigation actions to result in tariffs having a neutral P&L impact within this year and a neutral EBITDA margin impact by mid-2026. 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 execute with a sense of urgency. Before I leave this slide, I would also like to note that to date, we have not seen clear signs of tariff-related demand deterioration in our business. While there have been scattered examples of customers slowing their decision-making or delaying projects in the face of tariff or other macro uncertainties, in aggregate, these actions have only had a modest impact on our business today. Even so, this is something we are continuing to monitor closely, and we intend to provide an update if and when material new information becomes available.

On Slide 13, we provide more specific expectations for our performance by segment on revenue and adjusted EBITDA margin for third quarter and for the full year. The primary change since our last update is that we now expect AMC’s 2025 adjusted EBITDA margin to be in a range of 20.5% to 22.5%, which is down roughly 150 basis points versus prior expectations. This change largely reflects higher costs incurred to procure rare earth magnets, a footprint optimization project that we pushed in 2026 due to ongoing tariff uncertainty as well as weaker mix. The negative mix impacts related to softer sales in medical and the latest margin profile of our backlog scheduled to ship in the second half. However, once we move past these temporary headwinds, we continue to see a path to AMC adjusted EBITDA margins in the 24% to 26% range, consistent with the midterm guidance provided at our 2024 Investor Day.

While not as impactful, but of note, IPS revenue is expected to be up low single digits in Q3 and low to mid-single digits in the second half. This implies fourth quarter will be the strongest growth quarter for this segment, largely due to the longer cycle engineered to order content in the backlog. Also of note, we expect PES to be up low single digits in third quarter, but down low single digits in the back half, implying fourth quarter will be down low to mid-single digits. Embedded in these assumptions, the resi HVAC business is expected to be down over 20% in the second half and down over 25% in the fourth quarter. Finally, as I wrap up my prepared remarks, I’d like to share a few high-level thoughts on our performance and outlook. In short, we believe the underlying momentum in our business is positive and improving, given our growing backlog.

We also still have many opportunities to create shareholder value, which include ample levers to accelerate growth, including cross-sell synergies and a clear shift to selling a richer mix of subsystem solutions, a greater emphasis on new product launches and related vitality, over $70 million of remaining cost synergies and further progress shifting our capital structure to equity as we generate cash and pay down our debt. In summary, we are confident we can create value for our shareholders in 2025 and many years to come. And with that, operator, we are now ready to take questions.

Q&A Session

Operator: [Operator Instructions] The first question is from Mike Halloran with Baird.

Michael Patrick Halloran: Can you give some context on what you’re expecting in the back half of the year from an end market recovery perspective at the midpoint? I know Rob gave the highs and the lows, but also what you’re expecting from an order perspective and any variability you’re seeing across the segments?

Louis Vernon Pinkham: Yes, Mike, this is Louis, and thanks for the question. We don’t think much has changed from a market situation. Maybe a bit weaker in medical space, but that will — we expect to recover at the end of the year. What has been strong, continues to be strong. So energy, aerospace and defense, data center, we feel those are pretty solid markets and will continue to be so. And then from the standpoint of general industrial, so tied to ISM. We do expect that to tick up towards 2026, but we have not assumed any improvement in general industrial. And then you heard from Rob the viewpoint around HVAC, especially residential HVAC and then commercial HVAC, we expect to be relatively flat. Now from an order perspective, though, I think — a couple of things I would say here.

We are expecting orders to be up mid-single digit in the second half. Mid-single digit in IPS, up low double digit in AMC, really driven by the accelerating markets, data center in particular. And then PES will likely be relatively flat to slightly up. That’s how we’re thinking about it based on the momentum we’re seeing coming out of Q2, our discussions with our customers and where we see the business performing for the second half. What that should translate to and we’re forecasting is revenue up in the second half for Regal in low single digits and going into 2026. Hopefully, that helps, Mike.

Michael Patrick Halloran: No, that does. That does. And then I guess twofold question and admittedly unrelated. Can you just give some context on the exposure to the rare earth magnets? It seems like a bigger component than I was expecting in the portfolio. And then also give some context to the data center wins and why those are starting to roll through now, all else equal and what the differentiation has been sort of why you’re getting those wins?

Louis Vernon Pinkham: Yes. Happy to provide a little bit more color there. So rare earth magnets, from an enterprise perspective, actually, rare earth magnets are in products that represent only about 1% of our sales. However, in the quarter, we certainly experienced challenges. And actually, we had to shut down the facility for a couple of weeks in the quarter because we did not have inventory. And this is completely due to the challenges of procuring magnets given the volatile trade policy situation with China. We have largely addressed these challenges at this point and expect to catch up on these shipments in the back half, especially in fourth quarter. And so even with the 1% of sales exposure, we expect to close this to a neutral impact in the year, but did have an impact to us in Q2, will ramp in Q3 and then will accelerate for Q4.

So that’s rare earth, Mike. Moving to data center. Honestly, we’re well positioned in the data center market. And this is a market that you win large projects. And bluntly, in the first half of the year, we’ve been down on orders in the data center market as we’ve been working on these large projects and winning these projects. The funnel is significant. Our differentiation is around our ability to customize the solution of controls in switchgear, in parallel and switchgear. This specific project was a nice win for us in our AMC segment, in our power management business, in particular. And we expect it to be a momentum in the space for us to grow further. So a nice win for us. It was the first of what we expect to be maybe 4 or 5 additional orders over the next 6 to 12 months.

And I want to clarify also that it’s one order, but we actually won 2 other orders in July, which gave us the 21% orders growth, and we expect some strength in, at this point, orders to be up low double digits in the second half, a lot of that driven by data center. So hopefully that was helpful, Mike, and happy to answer any other questions.

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

Kyle David Menges: It seems like gaining momentum in IPS with the backlog up year-to-date and expecting, I think, to be exiting the year, it sounds like, just in the fourth quarter for IPS organic growth in that kind of mid-single-digit range. So I’m curious just what’s the expectation for first half ’26? Should we be extrapolating that 4Q run rate into the first half of next year? And then it seems like July orders, I think you said were flattish in IPS, but you said to expect orders up mid-single digits in IPS. So I guess just what’s giving confidence in the reacceleration, I suppose, from July?

Louis Vernon Pinkham: Yes. A couple of things there, Kyle, and thanks for the question. Specific to next year, it’s a little early for us to be providing a forecast. What I did say in my prepared remarks is that we would hope to enter or we expect to enter next year with low single-digit growth. And I think that’s a good measure at this point. Specific to IPS, I always say with my team, 1 month does not make a trend, but you need to hit the quarter. And so I think that’s the discussion around IPS for the month of July, with no concern on flat orders growth. Again, that’s after 3% in — roughly 3% in Q2, 8% in Q1, we expect that just to be a 1 month. And then for the quarter, we’ll still hit a mid-single digit. So we’re not concerned at all on that point.

Our funnel is strong in IPS. We talked about this on the call that the cross-sell funnel being $300 million, the majority of that is in IPS. So again, what gives us confidence on the orders is we see it in our funnel. And if ISM improves a bit more, we’ll see further orders growth. And just to close that off, again, our backlog is up 15% year-to-date in IPS. And so that’s what’s giving us optimism. Hopefully that helps, Kyle.

Kyle David Menges: Yes, that’s helpful. And then, I mean, it seems like really 2 trends emerging in IPS and in AMC. So you have an IPS sounds like delivering more systems versus components. And then AMC, really the data center strength, and it sounds like it could actually be a pretty meaningful contributor to revenues. And I’m just curious on both of those trends you’re seeing in IPS delivering more systems, data center and AMC. How should we think about that impacting margins? Is that a positive or negative mix impact for your margins in those segments?

Louis Vernon Pinkham: Yes. Thanks for the question. I mean a couple of things. It’s — systems tend to be at our average margins, perhaps slightly above because we do bring value here, the value around a complete solution that solves the problem with higher levels of reliability in the offering. The other piece of the story, I would say, is it tends to be highly technically beneficial. So hopefully, you saw an announcement we just came out with yesterday of a partnership with ABB around providing a seventh access automated solution. That’s a great example of the value we bring in our systems. And again, I think the best way to model it would be at peer margins, but meaning peer average of the rest of our portfolio margins, but certainly, we bring a lot of value in this. Of course, then the long-term benefit for us is the aftermarket. And then any component break, the aftermarket margin is even more positive. Hopefully, that’s helped, Kyle.

Kyle David Menges: Yes. And then sorry, the data center positive or negative to mix in AMC?

Louis Vernon Pinkham: I apologize. No, it’s positive. It’s positive to mix. It’s a benefit for that business.

Operator: The next question is from Jeff Hammond with KeyBanc Capital Markets.

Jeffrey David Hammond: Just was hoping you could quantify the rare earth impact on 2Q both revenue and profit. And then it sounds like you’re getting the revenue back, but there’s some added maybe shipping or more purchase costs. How should we think about that impact into the second half as well?

Robert J. Rehard: Yes. Thanks, Jeff. First of all, in the second quarter, there’s about $6 million of impact, which is really about 2/3 of the margin miss that we saw in AMC within that quarter. Now we do expect to mostly catch up for the year. However, there will continue to be some costs with some of our mitigation actions that will remain. So roughly about $5 million in the full year is what we’re talking about.

Louis Vernon Pinkham: And it had about a $10 million sales impact in the quarter, Jeff.

Jeffrey David Hammond: Okay. That’s helpful. And then just a couple of cleanups. The rest of world tariff doubling, I just want to understand that a little bit better. And then with the tax law changes, any kind — I think you reiterated your free cash flow, we’ve seen a number of companies kind of see a benefit from tax bill on cash. So just either near term or long term, any change there?

Louis Vernon Pinkham: Yes. So from a rest of world perspective, it’s really just where our manufacturing aligns with where the tariffs are now falling out. So a couple of comments there. India, Thailand, those are manufacturing locations for us. Now I’ll also comment that, again, rest of world is relatively low, and it shows you that our strategy around in region, for region has really paid off. Secondly, both of those plants happen to be plants or that we produce product in other locations as well. And so what we’re framing up for you is the impact, given our current supply chain. But what we’re trying to do, of course, is mitigate and mitigate around where we produce, where we supply from before we go and look just for price. And so those 2 in particular, we’re going to be able to work through fairly easily, I’d say.

Robert J. Rehard: And on the tax side, as it relates to the One Big Beautiful Bill Act, we do — we’re still evaluating the impact. But our initial view is that we would see a modest immaterial cash tax benefit this year with a neutral impact to the tax rate. So it is embedded in our guide. We do see, like I said, a modest benefit on cash taxes. But we also see a bit of headwind related to tariff-related timing and how that might impact cash in the year. And so those kind of offset the way we’re seeing it today, but we still are holding to our $700 million of free cash flow outside of the ARS that we talked about today.

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

Julian C.H. Mitchell: Maybe start with the AMC division. So sort of 3 bits of it. I wondered if you could just give any brief comments on, one, on the rare earth issue. So is that plant that was shut now back to close to full production? And then on medical, I think it’s 10% of AMC revenue. Sort of do you have a good line of sight as to customer inventories sort of real-time? Or is it opaque? And then the automation part, which is 1/3 of AMC, I’m not sure you’ve talked too much about that so far. I know that the recovery there was a big part of the sort of Q4 EBITDA ramp in AMC. So maybe just how are you seeing sort of demand and project conversion into revenue there?

Robert J. Rehard: Great. Thanks, Julian. Let me take the first part of your question, which was related to the plant shift that I believe you’re questioning. What that was? It was a footprint-related shift that we had. Isn’t it?

Louis Vernon Pinkham: Actually, let me jump in. This is around the plant that we shut down in Q2 because of rare earth.

Robert J. Rehard: Got it.

Louis Vernon Pinkham: And Julian, that plant is back up and running at this time. It is not at full volume. We do have flow of rare earths at this point. And so this is why we are guiding and what’s in our guidance is starting of recovery through Q3, feeling pretty good, but we will still stand a little bit in Q3 to make up that $10 million we talked about. But that will catch up through Q4. Specific to the medical market, it’s actually not as opaque as you would think, but it’s a little opaque sometimes when your OEMs think they have less inventory than they really do. And so that has been — we have very close relationships with our OEMs here. We partner with them well. So we feel pretty good, though, about what we’re seeing is their demand and our supply that this will balance out as we exit this year and go into next year.

And then specific to automation, Julian, great question, and thanks for it because this has gained momentum for us and continues to grow for us. Our automation was up about 4 — our 12-month order rolling rate in discrete automation is up 4.5%. We see our backlog up low double digits for shipment in the second — for shipments and is up year-over-year, 12%. And so you’re right, that is what’s also giving us a little bit of confidence or is giving us confidence in the margin step in the second half. Hopefully, that answers your questions.

Julian C.H. Mitchell: That’s very helpful, Louis. And then one quick follow-up, maybe for you, Louis, again, on the sort of environment, I guess, of conversion of orders to revenue because you and many of your sort of short-cycle industrial brethren have seen good orders or better orders for the best part of the year, but the revenues seem stuck in the mud still. So I suppose maybe flesh out why you think that’s happening? And is there maybe less visibility than in the past on the conversion rate of orders into revenue?

Louis Vernon Pinkham: Yes. So Julian, and perhaps we can do a better job of trying to cut the data to provide input here. But I guess I would caution you on thinking we’re short-cycle industrial anymore. As parts of our business, for sure, PES, short cycle. IPS and AMC moving more longer cycle. So the majority of this — the challenge of being able to translate orders into sales are in our larger projects, our system solutions are longer cycle businesses. And so this is — we feel like we’re on the precipice of the second half showing single digit — mid-single-digit growth in both IPS and AMC. And so it’s starting to move in the right direction. But it’s all for me linked to — our order strength in both AMC and IPS have come from longer cycle projects and applications. Hopefully, that helped.

Operator: The next question is from Saree Boroditsky with Jefferies.

Saree Emily Boroditsky: Just building on the data centers, could you just talk a little more about your competitive position? And it was — are you seeing demand broad-based? Or are you levered to one customer, as I think you mentioned several large orders within the same customer?

Louis Vernon Pinkham: Yes. No, it’s — yes, sorry, thank you for the question. So let me take the second half of the question first. We did win a few orders in July that we feel good with different customers, so we are not levered to one. But we called out the $35 million in particular because we’ve been working on that project for a while and expected that project to close in second quarter, but instead closed in July. I would tell you that our funnel has never been stronger in the data center space. Certainly, with the growth of the hyperscale data center, we are nicely positioned. Our value prop really is around our ability to provide customized solutions and customized controls. Some of our larger peers, because we do compete with some large peers here, tend to be a bit more focused on standard offering.

But our value prop is our engineers partnering with the data center designers around custom solutions, which is valued. So we feel well positioned here and expect it to be a positive growth tailwind for us into ’26. Hopefully, that helped.

Saree Emily Boroditsky: Yes, I appreciate the color. And then again, like thanks for all the detail on the orders. The data center obviously helped in July. So could you just provide some color on what you saw excluding this large order? And just anything on underlying demand trends within July because I think you provided the quarter, but not just July without it.

Robert J. Rehard: I believe that the orders would be up slightly, excluding that large data center order in July.

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

Nigel Edward Coe: Can we just talk about the AMC second half margin ramp? You’ve widened out the margin range for AMC. So I think we now have a 4-point spread on segment margins, I think, somewhere between 21% and 25%. Just given the backlog visibility, the rare earth metals sort of recovery. Maybe just talk about what’s driving the high and low end of that range. And then just maybe on the rare earth, it doesn’t seem like from what we’re hearing that, that’s resolved for the U.S. — a lot of U.S. manufacturers. So just maybe talk about the nature of what you’ve achieved here in terms of, is it a multiyear sourcing agreement? Any help there would be good.

Robert J. Rehard: Sure. Let me start by touching base on the AMC margin and the guidance that we put out. We did extend the range slightly to talk a little — to kind of incorporate a little more of what we’ve been saying in terms of the rare earth exposure within AMC. But the backlog — I’m sorry, the back half, really, in particular, fourth quarter, where there’s more of a ramp, reflects higher shippable backlog, up low double digits, if you will, better mix on that shippable backlog and also further progress catching up on deliveries of products with rare earth magnets, which we say we expect to neutralize by the end of the year. But again, a lot of that’s coming in the fourth quarter. And all of these tend to be higher margins.

And so we also believe conditions in the medical market will start to normalize as we progress through the second half. And that has been a significant volume and margin headwind. So — and also, finally, I’d say cost pressure in rare earth should also subside. You’re paying premiums at this time above and beyond, and we believe that, that should come down as we move through the rest of the year.

Louis Vernon Pinkham: And then let me take on your question around rare earth and I’ll do it in a very summary form. For the last 4 months, I have been on 1 or 2 calls every week working with our teams to manage this situation. There is no question that this is not a great use of time. But our team, what we do well is we’re disciplined in our actions. So we’ve had to — we’ve been dual source, but we’ve had to work with other suppliers to ramp up supply. But let’s be clear, 90% of supply comes out of China. So you can do that just to only a certain extent. We’ve also moved production to do more assembly in China, where it’s easier to get approvals for the applications when the product is produced in China. At this point, we feel confident we’ve resolved all of the commercial application and product demand needs for this year.

Defense is a different question. Defense is more challenging. And this, again, is all due to the trade agreements and relationship with China. That will have to be dual sourced, and we are working hard to get that done. We feel a line of sight to that for this year. But that is absolutely a dual source activity. So I think what hopefully you feel here is that Regal is disciplined in our operations. We’re disciplined in how we’re managing. I couldn’t think our team is enough for the work that they’re doing here, but we feel good about resolving this through the year. Hopefully, that gives you confidence.

Nigel Edward Coe: No, it does, and well done on getting that resolved. It sounds like a nightmare. And then just a quick one on the accounts receivable facility. I understand the logic for doing it. I mean it definitely helps your leverage ratios. But maybe just talk about some of the guardrails around the sort of the capacity around — so today, it’s roughly $4 million. What is the capacity on that going forward? I just want to make sure that the costs associated with the program land in interest. I think they do. Just want to confirm that.

Robert J. Rehard: Yes. So the program is one that is renewable. It’s annually renewal — it’s annually renewable. The cost on it is about 150 basis points below the current revolver and term loan rates. So we’re getting about $4 million of annualized savings on that. As it relates to kind of the continuation, we can continue throughout the program on the renewal or we can go ahead and dial it back. It doesn’t extend above $400 million. It only goes to $400 million, but we can always bring it back to a level — whatever level we feel is appropriate. There’s more — and there’s more detail in the slide appendix in terms of how to look at this from where these costs are represented in the financial statements. We have it in — from the standpoint of where does it fit per the accounting rule, interest expense on the ARS facility is recorded in ES&A.

But we plan to adjust this expense out when we calculate adjusted EBITDA because effectively, it is interest expense. But for the same reason, this cost will remain in adjusted EPS. Again, all these details are in the appendix of the presentation.

Operator: The next question is from Tim Thein with Raymond James.

Timothy W. Thein: The first question I had, maybe for you, Louis, is on the AMC business and just this — your thoughts around the notion that we potentially get down the road some sort of a domestic kind of manufacturing recovery. Obviously, that’s been talked about for some time. But just given the incentives as part of the recent tax reform should potentially steer more around kind of the domestic manufacturing activity. I’m just curious, obviously, that kind of wouldn’t show up in project quoting or pipelines overnight. But just curious as to maybe your longer-term thoughts around the possibility around that and maybe just any conversations you’re having with customers on that.

Louis Vernon Pinkham: Yes. I think we’re seeing it more related to that being — the industrial production markets need to start rebounding. ISM has been below 50% for over 2 years. And any kind of rebound for us is going to help both our IPS and our AMC segment. Now the whole hypothesis of why we entered into the acquisition of Altra is we wanted to move into the automation space because we feel and believe strongly that automation will accelerate, especially when you see macro trends around labor inflation, unemployment rates being low, et cetera. Specific to reshoring, we’re — certain pockets, yes, semiconductor, for sure. Maybe we’re seeing certainly data center and the acceleration, but I wouldn’t call that reshoring. These will all benefit Regal.

I don’t think we’ve quite seen any acceleration in nor are we really hearing a lot of opportunity around restoring at this time. Tim, I — that’s my perspective. That’s what in our discussion with our customers, that’s what we’re hearing.

Timothy W. Thein: Okay. Understood. And then maybe just a quick one on IPS. The call for kind of a pickup in activity, how does that square with the feedback that you’re hearing from your distributor customers, especially domestically? Just curious, is it — well, anyway, yes, maybe just touch on that.

Louis Vernon Pinkham: Yes. I think it’s a great question. But it really does answer an earlier question we got, which is so much of our second half growth expectation is coming from longer cycle projects stepping up. You’re right, the distribution space, we heard a couple of the public companies come out and say volume sales were down low single digit. But I then link that to — again, we are 2-plus years of ISM below 50%. We strongly feel industrial production is going to come back not in a significant way, but 2026, we’re thinking industrial production is a bit more positive and ISM goes above 50%. Now we’re in August, and I’m giving you our forecast for what happens in ’26. We are not expecting in the second half of ’25 any kind of step-up around our distribution sales. Hopefully, that helps, Tim.

Timothy W. Thein: It does.

Operator: The next question is from Joe Ritchie with Goldman Sachs.

Joseph Alfred Ritchie: So I know we’ve talked about the rare earth topic maybe at nauseam at this point, but I do have another question. We haven’t really heard much issues with rare earth from some of your peers or really across the sector. I’m just wondering, Louis, you provided some commentary around being dual-sourced for portions of it. Like is it something about the way you’re sourcing supply chain that it was a bigger issue for you guys this quarter than maybe some of your peers? And then the follow-on to that is, are you at all concerned about any share loss associated with those programs?

Louis Vernon Pinkham: Well, first of all, our peers in this space — and thanks for the question, Joe. Our peers in this space actually tend to be more private companies than public companies. You’re not going to see a direct peer here in providing ultra-high precision motors that you can compare to, certainly not in our typical public company space. We actually think we’re in a better supply chain overall situation because of the global nature and our ability to transform production into China to be able to support this challenge. So we do not feel we’re losing share. If anything, actually, a couple of the private peers are in countries that have been placed with significant tariffs, and as long as the tariffs stick, we think there might be opportunity and are quoting on some projects that would allow us to win some share.

So no, we’re — it has been relatively challenging. But again, the team has done a great job managing through, and we see this could actually be a potential upside for us.

Joseph Alfred Ritchie: That’s interesting. That’s helpful color, Louis. And then just real quickly on the near term. Also for AMC, just given that the guide is the widest there, both from a sales and EBITDA margin standpoint. And my guess is that it is related to like how quickly you get availability of the rare earth magnets that you’re using. But maybe just provide some level of confidence in that range? And what are kind of the biggest swing factors for the third quarter?

Louis Vernon Pinkham: Yes. So you’re spot on around why we opened up the range a little bit more in Q3. Right now, the flow of magnets is pretty strong. And I would say the reason why there’s potential upside is some of these data center orders and being able to move a little bit faster in execution towards the end of Q3, if that’s possible. So you’re right, we opened it up for that reason, but we feel pretty good on the 6th of August that the flow of rare earth is what we expected based on the guide, and our opportunities are to hit the midpoint is pretty confident.

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

Louis Vernon Pinkham: Thank you, operator. And thanks to our investors and analysts for joining us today. Our team delivered strong performance in second quarter, and we look ahead to the back half of the year and into 2026. We are optimistic about the positive momentum we are building, given our last 12-month order trends, growing backlog, ample remaining cost synergies, growing cross-sell synergies, a healthy new product pipeline and tailwinds to earnings and cash flow from further balance sheet delevering. We believe this momentum, coupled with our valuation makes Regal Rexnord a unique value creation opportunity for our investors. Thank you again for joining us today, and thank you for your interest in Regal.

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