Regal Rexnord Corporation

Good day and welcome to the Regal Rexnord first quarter earnings 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 one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Rob Berry Vice President of Investor Relations. Please go ahead.

Great. Thank you, operator. Good morning and welcome to Regal Rexnord's first quarter 2025 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob Reihard, our Chief Financial Officer. I'd like to remind you that during today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from those projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the regalrexnord.com website. Also on this slide, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors, and we have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in the presentation materials. Turning to slide three, let me briefly review the agenda for today's call. Louis will lead off with his opening comment, an overview of our first quarter performance, and a discussion of our business serving the humanoid market. Rob Reihart will then present our first quarter financial results in more detail, review our 2025 guidance, and provide an update on tariffs. We'll then move to Q&A, after which Louis will have some closing remarks. I'll turn the call over to Louis.

Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our first quarter results and to get an update on our business. We appreciate your continued interest in Regal Rexnord. Before we dig into the material on this slide, let me share a few high-level thoughts on our first quarter performance in the current environment. We began 2025 feeling cautiously optimistic about our improving growth prospects. We had seen three quarters of positive orders growth and we believed, as we still do, that most of our end markets are at or near trough levels of demand and are starting to slowly rebound. This positive momentum continued in the first quarter. We saw further orders growth and all of our segments outperformed the targets we set last quarter. So a very strong start to the year, which we believe provides evidence of healthy underlying momentum in our business. This momentum contributed to our decision to reaffirm our earnings guidance for the year. Regarding tariffs, changes to U.S. trade policy have clearly raised uncertainty on several fronts, in particular regarding the macro outlook. And so during this period, we have been staying close to our customers. And while they broadly acknowledge the heightened uncertainty that tariffs have caused, to date we have seen little evidence of changes to planned spending. Now, perhaps it is too early to see material changes, which is why we will be monitoring demand patterns closely and aim to share more on this front if and when conditions materially change. For now, our teams are focused on executing our many growth, synergy, and cash flow acceleration plans. We are also hard at work implementing our robust tariff mitigation plans with urgency. Rob will share more on this topic But the punchline is that we expect our mitigation plans to fully neutralize current tariff impacts on our 2025 EBITDA and earnings with a goal to be EBITDA margin neutral in the first half of 2026. So before continuing, I want to take a moment to thank our 30,000 Regal Restaurant Associates for their hard work and disciplined, controllable execution. for delivering a really solid start to 2025, above our expectations, and for efforts underway to manage tariff impacts and pursue opportunities presented by the disruptions caused by tariffs that take share in the market. Now, let me provide some specifics on our first quarter performance, starting with sales. Our sales in the quarter were up 0.3%. 7% versus the prior year on an organic basis, or 2.3% on a daily organic basis. Strength in Resi-HVAC, aerospace and energy markets were key contributors, along with discrete automation, which inflected the growth after seven quarters of decline. Orders in the quarter on a daily basis and excluding currency impacts were up 3.3%, and book to bill was 1.07. Notably, IPS orders were up nearly 9%, with PES up just over 1%. AMC orders were down 3%, but up 2% excluding the data center business, where from time to time we can experience order lumpiness. On a 12-month rolling basis, AMC's orders are up nearly 7%. This marks our fourth quarter in a row of positive enterprise-level orders for Regal. In April, daily organic orders were down 1.8%, largely reflecting aerospace project timing in AMC and anticipated Resi HVAC order rebalancing in PES, while orders in IPS were up about 1% after a 9% increase in Q1. Rob will elaborate on the segment dynamics in his section. Turning to margins. In first quarter, our margins continued to expand. Our adjusted gross margin was 37.9%, up 50 basis points versus the prior year excluding industrial system. Our progress on gross margin was aided by achieving $18 million of cost energies in the quarter. Adjusted EBITDA margin was 21.8%. up 30 basis points versus the prior year excluding industrial systems, aided primarily by its synergy benefits. Notably, all three segments exceeded their margin targets in the quarter, helped by stronger volumes and good cost management by our teams. Adjusted earnings per share in the quarter was $2.15, up 7.5% versus prior year, or up approximately 10% adjusted for the net impact of the industrial systems divestiture. Lastly, we generated nearly $86 million of free cash flow in the quarter, up 32% versus prior year, which we consider strong performance in this seasonally weaker period, and contributed to Regal paying down $164 million of debt in the quarter. Cash generation and debt pay down remain an important part of our mid-term value creation story. In summary, a very strong start to the year that we believe supports the healthy underlying momentum in our business. Next, I'd like to shed some light on an exciting part of our portfolio that we have not spent a lot of time talking about in the past, our offering for the humanoid robot market. This market is still in the early stages of development, but is attracting substantial investments across a wide range of end markets. It should not surprise you to learn that Regal Rexnord is very well positioned in this space with our automation portfolio and that we are gaining momentum here. So much so that our humanoid offering could start moving the needle on our enterprise sales growth rate over the next few years. On the left-hand side of this slide, we outline why we are strongly positioned in this space. It starts with our deep domain expertise, in particular in our discrete automation business in AMC, but also in parts of IPS. Our automation teams have worked on humanoid projects for decades, including on some milestones in the history of humanoid development, such as creating rescue robots for the U.S. Defense Department or the first humanoid Robonaut. used in space by NASA. Our core expertise lies in product engineering quality and reliability. We are a quality leader in precision motion control, providing essential products that ensure the coordinated movement of the robot's axes, such as arm and leg joints. Our engineers have a history of working very closely with our customers and in many cases become an extension of an OEM's humanoid engineering team. While most of our work in this space has historically been on specific humanoid projects, we are starting to work with OEMs looking to produce units on a regular basis at scale. Producing at scale is one of our core competencies which we can execute on a global basis. The scale and scope of our portfolio puts us in the unique position of being able to offer integrated solutions, which is something our customers increasingly value and is very much aligned with Regal's strategy. In fact, some of our significant recent wins in the humanoid space are solution sales. On the right side of the slide is our product offerings. It includes a range of highly engineered components, including frameless motors and miniature servo motors sold in our AMC segment, along with high precision bearings and brakes from our IPS segment. We are also selling integrated solutions comprised of these components, such as the actuator system pictured on the slide. In fact, Regal Rexnord was recently selected to provide an integrated solution critical for performing tasks with human-like dexterity. This solution includes motors, bearings, and actuators, all areas where Regal Rexnord has extensive expertise. Outlined in the lower left, market forecasts for humanoid growth are wide-ranging. but they generally call for strong double-digit CAGRs north of 50% for at least the next decade. A recent Morgan Stanley industry report, for example, expects humanoid robot production and CapEx to grow to an $80 billion market over the next 10 years from less than a billion dollars today. Reshoring of manufacturing back to the United States should have a positive impact on this market and automation in general, where we are well positioned. Based on our business analysis and ongoing discussions with leading customers in this field, we foresee mid-term opportunities to provide solutions for developing all the joints essential for a humanoid robot's mobility. We have also secured several recent wins on this front with leading humanoid manufacturers worth over $20 million in sales annually, which are scheduled to ramp over the next 12 to 18 months. These WINS cover between 30 and 50 axes of motion per robot and include both regal retinol components and integrated solutions. In addition to these WINS, Our team has a funnel of opportunities worth approximately $100 million that we are actively working. I am extremely excited about our momentum in this space, so you can expect to hear more from us as this rapidly growing market evolves. And with that, I will turn the call over to Rob.