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DATE

Wednesday, Aug. 6, 2025, at 10 a.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Louis Pinkham
  • Chief Financial Officer — Rob Rehard

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RISKS

  • The company experienced a $10 million revenue impact and a $6 million margin impact in Q2 2025 due to rare earth magnet shortages, which led to a facility shutdown for several weeks.
  • Rob Rehard stated, "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."
  • Adjusted EBITDA margin for AMC was revised downward to a range of 20.5%-22.5% for 2025, approximately 150 basis points below prior expectations, reflecting ongoing rare earth supply challenges, and a postponed footprint optimization project.
  • The residential HVAC business in PES is expected to decline by more than 20% in the second half of 2025 and by over 25% in Q4 2025, due to regulatory pre-buy activity and anticipated market headwinds.

TAKEAWAYS

  • Organic Sales-- Declined 1.2% on an organic basis in Q2 2025, matching expectations, as project delays in IPS and rare earth magnet shortages in AMC were offset by strength in HVAC and aerospace.
  • Orders-- Fell 2.5% on a daily basis in Q2 2025, driven by a 7.5% decline in AMC due to the timing of a major data center order and tough comps. Book-to-bill was 0.98.
  • Data Center Order-- A $35 million switchgear order in July would have increased AMC's Q2 2025 orders by eight points and kept overall orders flat; this is the first of five anticipated similar orders.
  • Backlog-- IPS backlog was up 15% year to date.
  • Adjusted Gross Margin-- Adjusted gross margin was 38.2%, aided by $17 million in achieved cost synergies.
  • Free Cash Flow-- Reached $493 million of free cash flow, including $368.5 million from an accounts receivable securitization program finalized during the quarter.
  • Accounts Receivable Securitization-- The $400 million accounts receivable securitization facility, which closed in Q2 2025, generated net annualized interest savings of approximately $4 million and enabled faster debt reduction.
  • Cross-Sell Synergies-- $120 million achieved through the end of last year, with an additional $50 million targeted this year and a $300 million funnel at the end of Q2 2025.
  • Segment Performance-- AMC: Adjusted EBITDA margin was 19.5%, below expectations. IPS: Organic sales fell 4.4%, and adjusted EBITDA margin was 26.9%, up 110 bps year-over-year. PES: Organic sales rose 6.5%, and adjusted EBITDA margin reached 17.1%.
  • Guidance Update-- Adjusted EPS (non-GAAP) for 2025 is expected to range from $9.70 to $10.30. Adjusted EBITDA margin guidance for 2025 is now 22.5%, down from 23% previously.
  • Tariffs-- Unmitigated gross annual cost impact from tariffs decreased from approximately $130 million at the time of the Q1 2025 earnings release to approximately $125 million as of Q2 2025; mitigation efforts are expected to maintain a neutral P&L impact this year and EBITDA margin neutrality by mid-2026.
  • AMC July Orders-- Rose approximately 21.5% in July due to multiple data center wins. Daily organic orders for Regal Rexnord in July 2025 increased 4.4%, mainly due to data center strength.
  • Medical End Market-- Contributed to AMC order declines, but inventory levels are approaching balance and mix improvements are anticipated in the fourth quarter.

SUMMARY

Regal Rexnord (RRX 1.06%) management highlighted a pivotal $35 million data center order in July 2025 that initiated a series of sizable opportunities; four further potential orders of similar magnitude may impact future growth. The backlog in IPS, up 15% year to date, and expanded cross-sell pipelines demonstrate successful execution of multi-segment integration following recent transactions. The updated accounts receivable securitization facility drove $368.5 million in immediate cash -- with net annualized interest savings of roughly $4 million -- and accelerated variable bank debt repayment. Strategic cost management delivered $17 million of synergies supporting gross margin, and operating leverage was utilized effectively in the IPS segment, where adjusted EBITDA margin expanded by 110 basis points.

  • CEO Pinkham said, "our sales will improve and grow at a low single-digit rate in the back half of 2025 and into next year, based on multiple quarters of positive orders that have increased our backlog, particularly in our IPS and AMC segments. (Time period: back half of 2025 and into 2026; no explicit GAAP/non-GAAP designation provided.)"
  • AMC's adjusted EBITDA margin was revised to 20.5%-22.5% for 2025, with headwinds stemming from rare earth magnet sourcing and deferred footprint optimization.
  • The residential HVAC business is forecasted to decline by more than 20% in the second half of 2025, with a sharper contraction of over 25% expected in Q4 2025, due to challenging regulatory comparisons.
  • Rob Rehard emphasized, "We 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."

INDUSTRY GLOSSARY

  • Accounts Receivable Securitization (ARS): A financial arrangement where trade receivables are sold to a third party for immediate cash proceeds and reduced interest expense, enhancing liquidity and leveraging the balance sheet.
  • Book-to-Bill Ratio: The ratio of orders received to units shipped and billed in a specified period, indicating demand momentum.
  • Cross-Sell Synergy: Revenue or cost benefits obtained by selling complementary products or services to an expanded customer base after an acquisition or merger.
  • Data Center Order: A significant project-specific order for products—such as switchgear—supplied to large, often hyperscale, data center customers.
  • Rare Earth Magnets: High-strength magnets containing rare earth elements, essential in precision motion and defense products, often subject to global supply constraints.

Full Conference Call Transcript

Louis 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 Corporation. 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 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 be adjusted EBITDA margin neutral in 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 of 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 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 and 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 growth by roughly eight 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 Corporation 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 five 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 2025, and in '26 and 2027, this project alone could provide a meaningful boost to our enterprise growth rate next year. In July, daily organic orders for Regal Rexnord Corporation were up 4.4% driven primarily by strength in data center. Turning to margins. Our second quarter adjusted gross margin was 38.2%.

Our progress on gross margin was aided by achieving $17 million of cost synergies in the quarter. Excluding Industrial Systems, adjusted earnings per share in the quarter was 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 and 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 Ultra 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 an 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. 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 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 two examples are of wallet share gains. As we discussed at our Investor Day in September, 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 Corporation as a natural destination for spend consolidation. We expect the initial spend in new categories to ramp considerably as the customers validate our quality. Margins on the new categories are at least our OEM fleet average. Evident in the orders and backlog growth we have been. I will turn the call over to Rob.

Rob Rehard: Thanks, Louis, good morning, everyone. Now, let's review our operating performance by segment. Starting with automation and motion control, or AMC, 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 products 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 less 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 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 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, had 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 the 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 suggest a higher shippable backlog entering 2026 as compared to 2025.

Rob Rehard: 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 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 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' 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 the fourth quarter when we lap difficult compares tied to regulatory pre-buy activity.

The adjusted EBITDA 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. 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 two times. Additional details on the securitization facility are available. Turning to the outlook. In our 10-Q.

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 $9.7 to $10.3. 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 impacts reflect neutralizing tariff on a dollar basis, which has a slightly dilutive impact on 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 risk 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 IS 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 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 to date. 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 the 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 to 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 mid-term 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 the 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.

Operator: We will now begin the question and answer session. The first question is from Mike Halloran with Baird. Please go ahead.

Mike Halloran: Hey, good morning everyone.

Louis Pinkham: Good morning Mike.

Mike 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 Pinkham: Yes, Mike. Hey, this is Louis and thanks for the question. We 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 we continue to be so. And then 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, 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.

Mike Halloran: That does. That does. And then, I guess, two full question and admittedly unrelated. Could you just give some context on the exposure to the rare earth maintenance? You know, 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 for why you're getting those wins?

Louis Pinkham: Yeah. 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 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 the 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 a solution of controls in switchgear and parallel in switchgear. This specific project was a nice win for us in our AFC 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 four or five additional orders over the next six to twelve months.

And I want to clarify also that it's one order, but we actually won two 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, was helpful, Mike.

Mike Halloran: Thanks, Louis. Appreciate it. Thanks.

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

Kyle Menges: Good morning. Thanks for taking the question guys. 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 'twenty six? 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 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, one month does not make a trend. But you need to hit the quarter. And so I think that's the discussion around ITS for the month of July. With no concern on flat orders growth.

Again, that's after 3% roughly 3% in Q2 8% in Q1, 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, you know, $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, backlog is up 15% year to date in IPS and so that's what's giving us optimism. Hopefully, helpful.

Kyle Menges: Yeah. That's helpful. And then, I mean, it seems like really two 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 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 Pinkham: Yes. Hey, thanks for the question. I mean a couple of things. 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. You know, 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 system.

And again, you know, I think the best way to model it would be at pure margins, but like, 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 any component break, the aftermarket margin is even more positive. Hopefully, helped, Kyle.

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

Louis Pinkham: I apologize. No. It's positive. It's positive to mix. It's a benefit for that business.

Kyle Menges: Great to hear. Thanks for the time, guys.

Louis Pinkham: Yep. Thank you.

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

Jeff Hammond: Hey, good morning guys.

Louis Pinkham: Good morning. Good morning, Jeff.

Jeff Hammond: Just was hoping you could quantify the rare earth impact on 2Q both revenue and profit. And then 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?

Rob Rehard: Yes. Hey, thanks, Jeff. First of in the second quarter, there's about $6 million of impact is really about two-thirds of the margin miss that we saw in AMC within that. Now we do expect to mostly catch up for the year. However, there will, continue to be some cost 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 Pinkham: And it had about a $10 million sales impact in the quarter, yes.

Jeff Hammond: Okay. That's helpful. And then just a couple claims. 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 you know, 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 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 around where we produce, where we supply from, before we go and look just for price. And so those two in particular were going to be able to work through fairly easily I'd say.

Rob Rehard: And on the tax side, it relates to the one big beautiful bill act, we do we're still evaluating the impacts. 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 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 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.

Jeff Hammond: Okay. Appreciate the color.

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

Julian Mitchell: Hi, good morning.

Louis Pinkham: Good morning.

Julian Mitchell: Maybe start with the AMC division. So sort of three bits of it. I wonder 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 good line of sight as to customer inventories sort of real time? Or is it opaque? And then the automation part, which is one third 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?

Louis Pinkham: 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.

Rob Rehard: Got it.

Louis Pinkham: And Julian, that plan is back up and running. At this time. It is not at full volume. We do have flow of rare earth at this point. 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. 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, great question, and thanks for it. Because this has gained momentum for us and continues to grow for us. Our automation was up about four our twelve-month order rolling rate. In discrete automations up point 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, answers your questions.

Julian Mitchell: That's very helpful. Thank you, 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 for or better orders for the best part of a 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 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. Parts of our business, for sure, PES, cycle, short cycle. IPS and AMC moving more longer cycle. So the majority of this transit the challenge of being able to translate orders into sales are in our larger projects, our system solutions, our 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.

Julian Mitchell: That's great. Thank you.

Louis Pinkham: Thanks, Julian.

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

Saree Boroditsky: Hi, thanks for taking the question. Just building on the data centers, could you just talk a little more about your competitive position? And was there you seen demand broad-based? Or are you levered to one customer as I think you mentioned several large orders within the same customer?

Louis 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 the 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're nicely positioned.

Our value prop really is around our ability to provide customized solutions and customized controls 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 2026. Hopefully, that helped.

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

Rob Rehard: I believe that the orders, it would be up slightly, excluding that large data center order. In July.

Saree Boroditsky: I appreciate the color.

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

Nigel Coe: Thanks everyone. Good morning. 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 four-point spread on separate margins. I think somewhere between 21%, 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 it doesn't seem like from what we're hearing that's resolved for the U.S. Lot of US manufacturers. So just maybe talk about the nature what you've achieved here in terms of is it a multiyear sourcing agreements? Any help there because?

Rob Rehard: Sure. Well, 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 kinda incorporate a little more of what we've been 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 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. We've you're paying premiums at this time above and beyond, and we believe that should come down as we move through the rest of the year.

Louis 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 four months, I have been on one or two 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 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 agreement and relationship with China. That will have to be dual sourced. And we are working hard to get that done. We feel line of sight to that for this year. But that is absolutely a dual source activity. So I can what hopefully you feel here is that Regal is disciplined in our operations.

We're disciplined in how we're managing. I couldn't thank our teams 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 Coe: No. It does. And well done on getting that resolved. Sounds like a nightmare. And then just a quick one on the accounts receivable facility. I understand know, the logic for doing it. It definitely helps your leverage ratios. But maybe just talk about some of the guardrails around the sort of the capacity around today's, you know, roughly $4 million. What is the capacity on that going forward? And just want to make sure that the costs associated with this program land in interest I think they do just want to confirm that.

Rob Rehard: Yeah. So the program is one that is renewable. It's annual renewal. It's annually renewable. The cost on it is about a 150 basis points below the current revolver and term loan rates. We're getting about $4 million of annualized savings on that. And it relates to kind of the continuation, we can continue throughout the program on 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 we feel is appropriate.

There's more and there's more detail in the slide appendix in terms of in terms of how to look at this from where these costs are represented in the financial statement. It we have it in from a from the standpoint of where does it fit, per the accounting rule, interest expense on the ARS facility is recorded in ES and 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.

Nigel Coe: Okay. Thanks, Rob.

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

Tim Thein: Great. Thank you. 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, kind of, you know, should potentially steer more around the domestic manufacturing activity. I'm just curious obviously, kind of wouldn't show up in project quoting or pipelines overnight. But just curious as to cut maybe your longer term thoughts around the possibility around that and maybe just any conversations you're having with customers on that?

Louis Pinkham: You know, 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 two years and any kind of rebound for us is going to help both our ITS and our 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 unemployment rates being low, etcetera. 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 and nor are we really hearing a lot of opportunity around reshoring at this time. So my that's that's my perspective. That's what in our discussion with our customers, that's what we're hearing.

Tim 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, you know, domestically. Just curious, because it well, anyways, yeah, maybe just touch on that. Thank you.

Louis Pinkham: Hey, 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 two plus years of ISM below 50. We strongly feel industrial production is going to come back not in a, you know, 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 '25 any kind of step up. Around our distribution sales. Hopefully, that helps, Tim.

Tim Thein: It does. Thank you, Hos.

Louis Pinkham: Sure.

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

Joe Ritchie: Hey, good morning guys.

Louis Pinkham: Good morning. Good morning Joe.

Joe Ritchie: So I know we've talked about the rare earth topic. Maybe ad nauseam at this point, but I do have another question. We hadn't really heard, much issues with rare from some of your peers or really across the sector. I'm just wondering Lewis, you provided some commentary around being dual sourced for portions of it. I'm 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, may any share loss associated with those programs?

Louis 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, a couple of the private peers are in countries that have been placed with significant tariffs.

And as long as those tariffs stick, we think there might be opportunity in our quoting on some projects that would allow us to win some share. So no, it has been relatively challenging. But again, the team has done a great job managing through and we see this could actually be potential upside for us.

Joe Ritchie: That's interesting. That's helpful color, Lewis. 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 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 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 August 6. That today's the sixth. Right? Yeah. Yeah. Sorry. August 6. That the flow of errors is what we expected based on the guide. And our opportunities are hit the midpoint is pretty confident.

Joe Ritchie: Okay, great. Thank you.

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

Louis Pinkham: Thank you, operator, and thanks to our investors and analysts for joining us today. Our team delivered strong performance in the 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 twelve-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 Corporation a unique value creation opportunity for our investors. Thank you again for joining us today and thank you for your interest in Regal Rexnord Corporation.

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