Q2 2025 Regal Rexnord Corp Earnings Call
Good morning and welcome to the Regal Rexnord second-quarter 2025 earnings conference call.
All participants will be in listen-only mode.
Should you need assistance please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star, then 1 on your telephone keypad.
To withdraw your question. Please. Press star. Then 2
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 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 described in Greater detail in. Today's press release and in our reports filed with the SEC which are available on the Regal, Rex store.com website also on this slide we state that we are presenting a 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 Gap equivalent in the press release. And in these presentation materials,
Your name is slide 3. Let me briefly review the agenda for today's call. Lewis will lead off with his opening comments. An overview of our second quarter performance and an update on our proso initiatives. Rob Ray heart will then present our second quarter Financial results in more detail review our 2025 guidance and provide an update on tax. We will then move to Q&A after which Lewis will have some closing remarks.
And with that, I'll turn the call over to Lewis.
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 Rich Nord.
In short, our team delivered a 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, Rush Nord Associates for their hard work and disciplined execution.
I am also especially proud of the job. Our Associates have been doing to over-manage 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 Evita and earnings.
and be adjusted ibida 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.
Commercial HVAC and in Aerospace.
Or 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 markets is at or near trough levels.
And we're 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 booked 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 compared, 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, second quarter orders, great, 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 Direction, Nord broadly.
The order is for switch gear. 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 and data center.
Turning to margins our second quarter adjusted gross margin with 38.2% up 10 basis points versus the prior year, excluding Industrial Systems.
Our progress on gross margin was aided by achieving 17 million dollars of cost synergies in the quarter.
Temporary impact related to rare earth magnet availability, where a modest 10 win.
Adjusted ibida, 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 pre-cast flow in the second quarter, of which 368.5% was 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.
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 expected growing contribution to our sales performance.
Bottom line, we are on track to deliver. At least the 250 million dollars of crosselle synergies. We announced following the Rex Nord and Ultra transactions.
As you can see on the chart on this slide, we achieved 120 million of crosselle synergies through the end of last year and are on track to add incremental 50 million dollars this year.
As a reminder, principal crosselle 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 powertrains.
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, translate to sim translates to significant estimated lifetime. Aftermarket sales worth about 12 million dollars which come with nicely accredited margins.
We won by making an 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 1 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 in power transmission is gaining momentum. Evident in the orders and backlog growth, we have been experiencing an IPS and AMC
And with that, I will turn the call over to Rob.
Thanks for listening. 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. We're 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 in 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 strengthened Aerospace which tracked above our expectations.
AMC's adjusted ebit to margin in the quarter was 19.5%, which was below our expectations.
The primary driver of the shortfall was delayed shipments of high margin products. Containing rare earth magnets due to challenges securing these materials.
We also encountered higher costs such as expedited freight to secure magnets.
Mix Rich products in the medical in Market.
We believe both of these impacts are temporary.
Our ability to secure, magnets 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, we're 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 reflect D, stocking in the medical market, and timing of a large data center project order, which as Lewis indicated earlier slipped into early July.
Importantly, had we received the large data center order in second quarter, AMC's second quarter orders, would have been up slightly.
AMC's July orders were up, approximately 21.5% reflective in multiple data center wins.
As I wrap up this slide, we expect to keep building momentum in AMC. Based on our higher mixed possible, positive shippable backlog for the second half of the year, which is up mid single digits versus this time last year.
And waited until the fourth quarter. This, coupled with the momentum we are seeing in Data Center and additional order traction in humanoids, 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 mostly 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 in Market is purely timing related.
Adjusted Eva margin for IPs in the quarter was 26.9%.
About a 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 or up. 3% in the second quarter.
Roughly half of this growth was tied to large project wins and is contributing to the segments, growing backlog.
Bookings in our IPS segments are increasingly weighted toward longer cycle projects, given our strategic focus on selling industrial powertrain systems.
IPS is 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 and 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, with 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 Prebiotic activity.
The adjusted EBIT margin in the quarter for PES was 17.1%.
Which was above our expectation. And up a point versus the prior year, period, aided by higher volumes and strong cost management.
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
Booked a 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 docking.
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 30th. Tolls, $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 a creative to adjusted earnings and free cash flow by providing approximately dollars in net. Annualized interest savings.
We expect almost $1 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 and a half to 2 times.
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 10 cents on each end to arrange 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 ebit, the 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 allow you on shortly.
The Tariff impacts reflects neutralizing. Tariffs on the TA on a dollar basis which has a slightly diluted 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, 1 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 turns 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 5th was $130 million.
Today, we estimate that value has fallen to approximately 125 million.
we still expect our mitigation actions to result in tariffs having a neutral p&l impact within this year and a neutral IBA the 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 today 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. 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 Eva to margin for third quarter, and for the full year,
The primary change since our last update is that we are now expect AMC's 2025 adjusted, Eva to 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 cost. Incurred procure. Rare earth magnets?
The footprint optimization project that we pushed to 2026 due to ongoing tariff funds. Certainty.
As well as weaker mix.
The negative mix impacts related to softer sales and medical and the latest margin profile of our backlog, scheduled the ship in the second half.
However, once we move past these temporary headwinds, we continue to see a path to AMC. Adjusted Eva de margins in the 246% 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 pees 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 residential 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.
Apple leverages to accelerate growth, including cross-sell synergies and a clear shift to selling their 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.
We will now begin the question-and-answer session.
to ask a question, you may press star then 1 on your telephone keypad,
If you are using a speaker-phone, please pick up your handset before pressing the keys.
To withdraw your question. Please. Press star. Then 2
At this time, we will pause momentarily to assemble our roster.
The first question is from Mike herin with beard. Please go ahead.
Hey, good morning, everyone.
um but also what you're expecting from an order perspective and and any variability, you're seeing across the segments
Yeah, Mike hey this is Lewis and thanks for the question.
Um you know, we we don't think much is change from a market situation, maybe a bit weaker in medical space, but that will we expect to recover at the end of the year, you know, what has been strong continues to be strong. So, energy, Aerospace, and defense data center? Um, we we feel, those are are pretty solid markets and continue to be so, um, and then uh, from the standpoint of General industrial. So tied to ISM, we do expect that to pick up towards, uh, 2026, but we have not assumed any Improvement in general industrial and then you heard from Rob the Viewpoint around, um, HVAC, uh, especially residential HVAC. And then commercial HVAC, we expect to be relatively
No, from an order perspective, though, I think a couple of things I would say here. Um, we are expecting orders to be up, mid-single digits in the second half.
Uh, mid-single-digit and IPS.
Upload double digit in AMC, really driven by the accelerating markets data center. Uh in particular and then PES will likely be relatively flat to slightly up.
Uh, that's how we're thinking about it based on. Um, you know, the momentum we're seeing coming out of Q2, our discussions, with our customers and and where we see the the business performing for the uh, 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 fine know that does that does and then I guess to to full question and admittedly unrelated, could you just give some context on the exposure to the rare earth magnets? Um, you know, it seems like a a bigger component than I was expecting the portfolio and then also give some context to the data center wins and and why those are starting to roll through now all our SQL and and and what the
Differentiation has been for why you're getting those wins.
Yeah. Um happy to to provide a little bit more color there, so rare earth, magnets.
Uh, you know, 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. In fact, 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, uh, the 1% of sales exposure. We, we expect to close this to a neutral impact in the year, but, but did have an impact to us in Q2 will ramp in Q3. And then we'll, uh, accelerate for Q4.
So that's rare earth, like, um, moving to data centers, you know? Honestly, um, we're well positioned in the data center market and, uh,
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 a solution of controls in switchgear and paralleling switchgear. This specific project was a nice win for us in our AFC segment, in our power management business in particular, and we expected to, um, uh, be a, um,
Ah, ah, ah, uh, ah, ah.
In the space for us to grow further. So, um, a nice win for us. Uh, it was the first of what we expect to be, uh, maybe 4 or 5 additional orders over the next 6 to 12 months. And, and I, you know, I want to clarify also that it's 1 order but we actually won 2 other orders in, um, in July, which gave us the 21% orders growth and we, uh, expect some strength in, uh, at this point orders to be up, uh, low double digits in the second half, a lot of that driven by data center. So hopefully that was helpful. Mike and uh,
Um, happy to answer any other questions.
Well, thanks, Lewis. I appreciate it. Thank you, thanks.
The next question is from Kyle Mangas with Citi Group. Please go ahead.
Good morning. Thanks for taking the question guys. Um,
Good morning, seems like gaining momentum and IPS with the backlog up here today 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 um what's the expectation for first half? 26 should we be extrapolating that 4K or run rate into the first half of next year?
Uh, and then 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 a re acceleration I suppose from July.
Yeah, you know, a couple of things there Kyle. Um and thanks for the question specific to uh, next year. It's, 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 and I think that's a good measure at this point. Um, specific to IPS, you know, I I always say with my team, um, 1 month does not make a trend, but you need to hit the quarter. And so, uh, I think that's the discussion around IPS for the month of, of July, uh, with no concern on, on on flat, uh, orders growth again. That's after 3% in, uh, roughly, 3% in Q2 8% in q1. We expect that just to be a 1-month and then for the, for the quarter, we'll still hit a mid single digit. So we're not, we're not concerned at at
That that point our funnel is strong in IPS. We talked about this on the call that the cross sell funnel being, you know, the majority of that is in IPS. Um, we we so again, the what gives us confidence on on the orders is we see it in our funnel. Uh, and if if I ISM improves a bit more um we'll see. Uh, we'll we'll see further orders growth and and just to close that off. Again our backlog is up 15% year to date uh in IPS and so that's what's giving us optimism.
Hopefully that helps. Thanks Lewis. Yeah, yeah. That's that's helpful. And then, um, I mean, it seems like really 2 Trends emerging in IPS and an AMC. So you have an an IPS sounds like
Delivering more systems versus components and then AMC really, uh, 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 and IPS delivering more systems, Data Center, and AMC. Um, how should we think about that impacting margins? Is that a positive or negative mix impact for your margins in those segments?
Yeah. Hey, thanks. Thanks for the question. I mean a couple of things. Um, it's, um,
Systems tend to be at um our average margins perhaps slightly above because we do bring value here. The the value around a, a complete solution that solves the problem with higher levels of reliability, um, in in the offering. Um,
And again, I, you know, I think the best way to model it would be at uh pure um margins but meaning pure average of the rest of our portfolio margins, but it certainly, we bring a lot of value in the, of course, then the long-term benefit for us is the aftermarket. And then, uh, any any component break, the aftermarket margin is even more positive.
Hopefully, that helped Kyle.
Yeah, and then sorry, the data center positive for negative to mix in AMC, I apologize. No, it's positive. It's positive to mix it. It's a benefit for that business.
Great to hear. Thanks for the time, guys.
Yeah, thank you.
The next question is from Jeff Hammond with keybanc capital markets, please go ahead.
Hey uh, good morning guys.
Morning morning, Jeff. Um
Just was hoping you could quantify the The Rare Earth impact on 2 Cube both revenue and profit. And then sounds like you're getting the revenue back. But there's some added maybe shipping or or you know, purchase costs, you know how how should we think about that impact into the second half, uh, as well?
Yeah. Hey thanks Jeff. Um, first of all in the, in the second quarter, there's about 6 million dollars of impact, um, which is really about 2/3 of the, uh, margin missed that we saw in AMC within that.
Um, now we do expect to mostly catch up for the year. However there will um continue to be some costs uh with some of our mitigation actions that that will remain so roughly about uh 5 million in the full year. Uh is what we're talking about.
And it had about a 10 million sales impact in the quarter. Yeah.
Okay, that's helpful. Um, and then just a couple of cleanups: the rest of the world tariff doubling. I just want to understand that a little bit better. And then, with the tax law changes, um, any kind of, you know, I think you reiterated your free cash flow, but we've seen a number of companies kind of...
See a benefit from from tax bill on on cash. So just, you know, either near term or long term, any any change there?
Yeah, so from um, a, a rest of world perspective. It's really just where, uh, our manufacturing aligns with where the tariffs are now falling out. So, uh, you know, a couple of comments there, India Thailand, those are, um, manufacturing locations for us. Now, I I, I, I,
Also, I would comment that, again, the rest of the world is relatively low. Um, and it shows you that our strategy around Region 4 has really paid off. Secondly, uh, both of those plants happen to be plants where we produce product in other locations as well. 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 I, those 2 in particular, um, uh, word and be able to work through fairly easily I'd say and on the tax side um as it relates to the 1, big, beautiful, bill act, um we do, uh we're still evaluating the impacts, but our initial view is that we would see a modest and material cash tax benefit this year with a neutral impact to the tax rate. So, uh, it is embedded in our guide, we do see, uh, like like I said, a modest benefit on cash taxes, um, but we also see a bit of headwind related to um, uh, tariff related timing, uh, and how that might impact cash in the year. And so that those kind of offset the way we're seeing it today, um, but we still are holding to our 700 million dollars of free cash flow outside of
The ARs that we talked about today.
Okay, appreciate the call.
Hey, Jeff.
The next question is from Julian Mitchell with Barclays. Please go ahead.
Hi, good morning, um morning, good morning um maybe start with um the AMC division. Um so um
Sort of 3, 3, bits of it, I wondered, if you could just give any brief comments on 1 on the The Rare Earth issues. So is that plant that was shot now back to close to full.
Um, so do you have good line of sight as to customer inventories, sort of real time? Or is it opaque and the then the automation part which is 1/3 of AMC
I'm not sure you've talked too much about that. Um, so far, I know that the recovery, there was a big part of the sort of Q4 ebit, D ramp in AMC. So maybe just how, how are you seeing sort of demand and um, you know, project conversion into Revenue there?
Alright, hey, thank you Julian. Let me take the first, um, part of your question, which, which was related to the the plant shift that, I, I believe you were questioning. Um, what that was. It was a, it was a
A footprint related shift.
That we had actually let me jump in. So this is around the planter that we shut down in Q2 because of rare earth got it.
And, Julian, that plan is back up and running. At this time, it is not at full volume. We do have a flow of rare earth at this point, um, and so this is why we are guiding, and what's in our guidance is a starting of recovery through Q3—feeling pretty good—but we will still strand a little bit in Q3 to make up that $10 million we talked about.
But that will catch up through Q4.
Um, specific to the medical market, you know, 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 um uh we we have very close relationships with our oems here we partner with them. Uh well uh 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. Uh, great. Great question and and thanks for it. Um, because this has gained momentum for us in continues to grow for us. Our, uh, automation was up about 4, uh, or our 12-month, order rolling rate in discrete, automations up 4, and a half percent.
Um, we see our backlog up low, double digits for shipment in the second. Uh it for for shipments and and it is up year-over-year, 12%
And so, um, 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.
That's very helpful. Thank you. Um, Lewis, and then one quick follow-up. Maybe a few, Lewis, again on the sort of environment, I guess, of conversion of orders to revenue. Because you and many of your sort of short-cycling industrial brethren have seen good orders for, or better orders for the best part of a year, but the revenues seem stuck in the mud still. So,
I suppose you know, maybe flesh out why you think that's happening. Is there maybe less visibility than in the past on the conversion rate of orders into revenue?
Yeah. So um
Julian and perhaps we can do a better job of trying to cut the data to provide uh, input here. But I I guess I would caution you on thinking we're short cycle industrial anymore.
Parts of our business for sure PES, short cycle, short cycle, um, IPS and AMC moving more longer cycle. So the majority of this, uh, Transit, the, the challenge of being able to translate orders in the sales are in our larger projects. Our system Solutions are longer cycle businesses. And so, um, this is, you know, we we feel like we're on the precipice of the second half showing uh, single digit, uh, you know, mid single digit growth in, um, both IPS and AMC. And so, uh, 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, um, projects and uh applications hopefully that helped
That's great. Thank you.
Thanks Julian.
The next question is from Sorry, Sorry. Sorry with Jeffrey's. Please go ahead.
Hi. Um, thanks for taking the question. Um, just building on the data centers. Um, could you just talk a little more about your competitive position and it was, are you seeing demand, um, broad-based or are you levered to 1 customer as I think you mentioned several large orders within the same customer
Yeah, we you so, uh, know it's, uh, yeah, sorry. Thank you for the question. Uh, so let me, let me take the second half of the question first. Uh, we did win a, a, a few, uh, orders in July that. We feel good at with different customers. So, we are not leveraged to 1 but we called out the the 35 million in particular because we've been working on that project for a while and expected that project uh, to close in second quarter. Uh, but instead closed in in July, I would tell you that uh our funnel uh, has never been stronger in the data center space. Certainly with the growth of the hyperscale data center, we're 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 um, we feel well positioned here and and expected to be a positive growth Tailwind for us in the 26th.
Hopefully, that helps.
Yeah, I appreciate the color, and then again, thanks for all the detail on the orders. The data center obviously helped in July. So if you could just provide some color on what you saw, excluding this large order, and anything regarding the underlying demand trends within July, because I think you provided the quarter but not just July without it. Thanks.
uh,
I believe that the orders would be up slightly, excluding that large data center order.
In July.
I appreciate the color.
Yeah. Yeah.
The next question is from Nigel Co. with Wolf Research. Please go ahead.
Thanks everyone, good morning. Um, can we just talk about the AMC? Um, second half margin ramp. Um, you widened out the, the, the margin range for AMC. So I think we now have a 4 point spread on um, on separate margins. I think somewhere between 21 and 25%. Um, just given the backlog visibility, you know, the rare earth metals, uh, sort of recovery. Um maybe just talked about, you know, what's driving the high and low end of that range? Um, and then just maybe on the, on the, on the, on the, the rarest. Um, you know, it doesn't seem like you know from what we're hearing that that's resolved for the you know for the us a lot of us manufacturers. So just maybe talk about the nature of what you've achieved here in terms of. Is it a multi-year sourcing agreement? Any help there would be good.
Sure. Well let me start by um, by pressing the
The guidance that we've put out. Um, we did we did extend the range slightly to to talk a little. So it's kind of incorporate a little more of what we've been.
We've been saying, in terms of the rare earth exposure, uh, within AMC, but the the backlog, I'm sorry. The the back half that you really in in particular fourth quarter, where there's more of a ramp,
Um, reflects higher shippable, backlog up low, double digits, if you will, um, Better Mix on that shippable backlog and also further progress catching up on deliveries of products with rare earth, magnets, which we say, um, we expect to, uh, to to neutralize by the end of the year. But again, a lot of that's coming in the fourth quarter, um, and all 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. Um, and and that has been a significant um, volume and margin headwind. So and also finally, I'd say cost pressure in uh, Rare Earth, uh should also subside. We, you know, you're paying premiums at this time, uh, above and beyond. And we believe that that that should come down as we move through the rest of the year.
And then, um, 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.
It 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 um, Supply. But 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.
Um, where it's easier to get approvals for the applications when the the product is produced in China. At this point, we feel confident, we've resolved all the commercial application end 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. Um, we feel a line of sight to that for this year, um, but that is absolutely a dual Source activity so I can. You know what, hopefully, um, you feel here is that, uh, Regal is disciplined, in our operations. We're disciplined in how we're managing, I couldn't think our teams enough for the work that they're doing here. Um,
But we feel good about resolving this through the year. Hopefully that gives you confidence. No, it doesn't uh well done on getting that resolved. Um, sounds like a nightmare. Um and then just a quick 1 on the uh accounts receivable facility. Um, uh, I understand, you know, the logic for doing it. I mean it's definitely helps your leverage ratios, um, but maybe just talk about some of the guardrails around, you know, the the you know, the sort of the um, capacity around, you know. So today, you know, roughly 4 million dollars. You know, what is the capacity on that going forwards? And I just want to make sure that the the cost associated with this program lands in interest. I think they do just want to confirm that.
Yeah, so the the program is uh is 1. That is renewable, it's it's it's annual renewal, it's annually renewable. Um, it's the, uh, the cost on it is, uh, is about 150 basis points below, um, the current revolver and Term Loan rate, so we're getting about $4 million of annualized savings on.
Uh, as it 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. Uh, 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.
In in, in terms of how to look at this from where these costs are represented in the financial statements, it that we have it in from a from the the standpoint of where does it fit uh per the accounting rules interest expense on the ARs facility is recorded in Esna but we plan to adjust this expense out when we calculate adjusted EBA because effectively it is interest expense.
Uh, but for the same reason, this cost will remain in adjusted EPS.
so again, all these details are in the appendix of
Okay. Thanks Rob.
The next question is from Tim thin with Raymond James. Please go ahead.
All right. Great, thank you. Um, the first question I had, uh, maybe you for you Lewis is on, um, on the AMC business and just this, your your thoughts around the notion that we, uh, you know, potentially get it down. The road, some sort of a
A domestic, you know, kind of manufacturing recovery, obviously. That's been been talked about for some time but you know, just given the the incentives uh as part of the the recent tax reform kind of you know should should potentially steer more around. Uh, kind of the domestic manufacturing activity. I'm just curious, you know, obviously that, that kind of wouldn't show up in Project quoting or, uh,
The pipelines overnight but just curious as to maybe your your longer term thoughts around the the the possibility around that and maybe just any conversations you're having with with customers on that.
And or AMC segments.
Now, the whole hypothesis of why we entered into the acquisition of ultra 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. Um, uh, unemployment rates being low, Etc, uh, specific to reassuring. I I, I we're we're, you know, certain Pockets. Yes, semiconductor for sure. Um, maybe we're, we're seeing a certainly data center in the acceleration, but I wouldn't call that reassuring. These will all benefit Regal. I, I don't think we've quite seen any acceleration and nor are we really hearing?
A lot of, uh, opportunity around reshoring at this time. Tim, my—that's my first perspective. That's what, in our discussion with our customers, that's what we're hearing.
Okay, understood and then maybe just a quick 1 on IPS the the call for kind of a pickup and activity. How how does that square with the feedback that you're hearing from your your uh, distributor customers? Um, especially you know, domestically just curious because it, um, well anyways, yeah, maybe just touch on that. Thank you. Yeah. Hey, I I think it's a, it's a great question but it, it really
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 um, heard a couple of the public uh uh companies come out and say uh uh uh, volume sales were down low, single digit. But I then linked that to again, we are 2 plus years of ism below. 50 wealthiest,
Any kind of Step Up around, um, our, uh, distribution uh, sales, hopefully that helps Tim.
It does. Thank you host.
Sure.
The next question is from Joe Richie. With Goldman Sachs, please go ahead.
Hey, good morning, guys.
Morning Morning, Joe.
No, I know we've, uh, we've talked about the rare topic. Um, maybe at nause at this point but I I do have another another question it. We we haven't really heard um much issues with rare earth um, from some of your peers or or really across the sector. I'm just I'm just wondering, you know, leis you provided some commentary. Um, around, you know, being dual sourced uh, for for for portions of it. I'm like, is it something about the way you're sourcing supply chain? Um, that it it was a bigger issue for you guys, this quarter than maybe some of your peers. And then the follow on to that is is, um, are you at all concerned about, um, any share loss associated with those programs?
Well, first of all, our peers in this space and and thanks for the question Joe, uh, 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 our typical public company space. We actually think we're in a better supply chain overall situation because of the the global nature Andor ability to transform
Production into China to be able to support this challenge. Um I so so we do not feel we're losing care if anything. Actually a couple of the private uh peers are in countries that have been um placed with significant tariffs
And as long as the tariffs stick, we think there might be opportunity in our quoting, on some projects that would allow us to win some Cher.
Uh that's interesting that's helpful color Lewis. And then just real quickly on the near term, uh, also for AMC just given that the guide is the widest there, both from a sales and ibida margin standpoint. And my guess is that it is related to like how quickly you get availability of of of, you know, the rear magnets that you're using. But maybe just provide some level of confidence um, in that range. And and um you know, what are kind of the biggest swing factors for the third quarter.
Yeah, hey so 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 the reason why there's potential upside is, um, some of these data center orders and being able to move a little bit faster in execution, towards the end of Q3, um, if that's possible. Uh so you you you're right, we opened it up for that reason, but we feel pretty good on the 6th of August
Um, today's the 6th, right? Or? Yeah, sorry, 6th of August. That, uh, the flow of reverse is what we expected based on the guide and, um, our opportunities are, uh, to, you know, um, hit the, uh, the midpoint, um, is.
Pretty confident.
Okay, great. Thank you.
Sure.
This concludes our question and answer session. I would like to turn the conference back over to Lewis pink, Pinkham for any closing remarks.
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 months order Trends, growing backlog, ample remaining cost, energies growing. Crosselle synergies a healthy new product Pipeline and Tailwind to earnings and cash flow from further balance sheet delivery.
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.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect