Regal Rexnord Corporation

Good morning, and welcome to the Regal Rexnord Third 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 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, Investor Relations. Please go ahead.

Great. Thank you, Operator. Good morning, and welcome to Regal Rexnord's third quarter 2025 earnings conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, Rob Rehart, our Chief Financial Officer, and Rakesh Sakdev, Chairman of our Board of Directors. I would like to remind you that during today's call, you may hear forward-looking statements related to our future financial results, plans, and business operations. Our actual results may differ materially from these projected or implied due to a variety of factors, which we describe in greater detail in today's press release and in our reports filed with the SEC, which are available on the realrexnord.com website. Also on this slide, we state that we are presenting certain non-GAAP financial measures that we believe are useful to our investors, and we have included reconciliations between the non-GAAP financial information and the GAAP equivalent in the press release and in these presentation materials. Turning to slide three, let me briefly review the agenda for today's call. Lewis will lead off with opening comments, an overview of our 3Q performance, and an update on our data center business. Rob Rehart will then present our third quarter financial results in more detail, review our 2025 guidance, provide an update on tariffs, and offer some initial thoughts on 2026. We will then move to Q&A, after which Louis will have some closing remarks. And with that, I'll turn the call over to Louis.

Great. Thanks, Rob. And good morning, everyone. Thanks for joining us to discuss our third quarter results and to get an update on our business. We appreciate your continued interest in Regal Rexnords. Before discussing our third quarter results, I would like to make some brief comments about the news regarding my succession, which we announced last night concurrently with our third quarter earnings release. It has been an immense honor to lead the company for the past six plus years. We have achieved a lot, inclusive of two major acquisitions and the divestiture of the industrial segment, transformation of our portfolio, significant revenue growth, gross margin expansion, and free cash flow acceleration, and have positioned Regal Rexnord as a valued partner serving our customers' most critical needs. We have assembled a strong team of leaders who have built great teams that are focused on leveraging 80-20, expanding secular growth opportunities, and driving continuous improvements. our portfolio is well positioned to grow, especially when the ISM returns to an expansionary period for industrial production. With third quarter sales up about 2% and orders up about 10%, along with our improving top line momentum, there is a lot to be excited about. So with that, and in light of some personal decisions that I recently made, The board and I have agreed that this is a good time to initiate a transition plan to pass the baton to a new leader who will guide Regal Rexnord through the next phase of our growth journey over the coming several years. I look forward to continuing to lead the company until the board identifies my successor. Rest assured, we have a strong team. and will continue to execute on our profitable growth initiatives for the benefit of our customers, our associates, and our shareholders. In short, it is business as usual. And now, on to the quarter. Our team delivered solid third quarter performance, nicely ahead of our expectations on orders, and roughly in line on sales and adjusted EBITDA, driven by over-execution in PES and strong execution in IPS and AMC. Performance would have tracked even stronger if it were not for larger-than-expected pressures from two items out of our control. Additional tariffs announced in August just after our Q2 earnings call and incremental challenges sourcing rare earth magnets. Looking forward, our growth potential took a significant step higher in the quarter, driven by strong orders. These results, plus our expectation for further order strength in fourth quarter, are setting us up for solid growth in 2026. In short, good results, great momentum. So before continuing, I want to take a moment to thank our 30,000 Regal Resnord associates for their hard work and disciplined execution. Our associates continue to overmanage the impacts of tariffs and rare earth magnet constraints and are doing a great job working our commercial funnels to drive improved orders and performance. Now, let me provide some specifics on our third quarter. Orders in the quarter on a daily basis were up 9.8% versus prior year, and book to bill was 1.05. We ended the quarter with our backlog up 6% versus the prior year. As I will elaborate on shortly, in the quarter we booked $135 million of data center orders, and then an additional $60 million order in October. This is a market where we are clearly gaining traction and we are investing to support further growth. We also saw strong order growth in discrete automation and in our air moving business in PES for the data center and semi-con markets, while IPS posted its fifth quarter in a row of positive orders growth against a backdrop of generally sluggish end markets. Our sales in the quarter were up 70 basis points versus the prior year on an organic basis, in line with our expectations for an inflection to growth. In the quarter, we saw particular strength in energy markets, discrete automation, and aerospace, net of headwinds in medical, as well as some project timing in data centers. the latter clearly temporary as recent orders show we are building tremendous momentum in our data center business. For reference, on a year-to-date basis, enterprise organic sales are up slightly and are expected to be up low single digits for the year. Turning to margins, our third quarter adjusted gross margin was 37.6% down 80 basis points versus the prior year period on mixed and impacts related to rare earth magnet availability and tariffs. Adjusted EBITDA margin was 22.7%, roughly flat versus prior year, and reflects an $11 million synergy benefit, mostly offset by mixed tariffs and rare earth magnet pressure. Adjusted earnings per share for the quarter was $2.51, up versus the prior year. And lastly, we generated $174 million of free cash flow in third quarter, which was used primarily to pay down debt. We ended the quarter with no variable rate debt. In summary, a solid third quarter, during which we delivered strong orders and a rising backlog, which keeps us optimistic about accelerating top line and earnings growth in fourth quarter, and into 2026. Next, I'd like to elaborate on the significant momentum we are gaining in the data center market, which we believe can be needle moving to our enterprise sales growth. On the left side of this slide, we provide an overview of our diverse capabilities in the data center market. You can see that all three segments play. But our largest presence today is in our Thompson Power Systems business in AMC, where we are providing switchgear and transfer switches to support standby and backup power in data centers. This was a $30 million business five years ago and is on track to hit $130 million this year. The traction we are seeing in this fast-growing secular market is being driven by the success factors listed on the lower left of this slide. It starts with the quality of our products, demonstrated over five decades of service. What differentiates us is our ability and willingness to customize the system design to best meet the needs of our customer. Our lead times are competitive, And in a market being fueled by remarkable levels of AI investment, lead times matter a lot. Our enterprise scale has been critical to getting us in the door with new and larger customers because it helps them get comfortable that we can deliver on our service and delivery commitment. Aftermarket service capabilities are a growing part of our value proposition as we invest in our service footprint. Lastly, and highly relevant in today's market, we are willing and able to make investments to flex our manufacturing capacity, which supports future growth and bolsters our service levels. On the right side of the slide, we describe our recent wins in the data center market worth $195 million. We have been very focused on building our commercial organization. which combined with our enterprise scale has allowed us to grow our bid pipeline to what today is approaching a billion dollars. We are also seeing good data center growth in PES, which won a $20 million order in the quarter to provide HVAC chiller subsystems to cool hyperscale data centers. For perspective, PES is commercial HVACs HVAC business has been benefiting from data center growth for some time, especially in North America. What is different with this order is its scale. In short, our value proposition of technology differentiated subsystems to achieve the high levels of energy efficiency required by data center operators is resonating. You may remember that part of our growth strategy for PES is leveraging proven technologies in new secular markets. While not mentioned on this slide, the PES team also won a $7 million project in the quarter for a Semicon clean room customer that included multiple fan solutions, including fan filter units. Our PES team is gaining traction, growing its business in new secular markets, And as you can see on the slide, is currently working a $100 million data center-related bid pipeline. As you know, we have been directing the majority of our growth investment to secular markets. In data center, that has included funding portfolio expansion into modular electrical pods or E-pods. These turnkey power management solutions can help expedite data center construction by making the installation of critical power management content more plug and play. These E-pods would typically contain our switch gear, transfer switches, power distribution units, as well as air moving content. Regal is also project managing assembly of these E-pods, including content from third parties. So part of our value proposition is providing a single source of contact for the customer and allowing the customer to procure power management content with a single SKU. We estimate the market size for EPoDS is roughly $10 billion. There are two particularly compelling attributes of this opportunity. One, it helps customers expedite their installation of new hyperscale data centers today. And two, It positions us to serve a market that many expect will evolve towards a network of smaller data centers that sit closer to the applications they are supporting. These edge data centers are forecast to number in the thousands and will likely be constructed using a few modular building blocks that contain all the requisite data center content. Our commercial team has been actively engaged with potential EPOD customers And our bid pipeline currently exceeds $400 million. So nearly half of AMC's total $1 billion data center bid pipeline I referenced earlier. In short, a tremendous new product opportunity for our customers and for Regal. To support the growth we have secured in our bidding on, we are investing to expand our capacity, both in our legacy power management systems and to support EPoTS. As you can see on this slide, the current footprint for our data center business in AMC includes two locations, one in British Columbia and one in Mexico. We recently started developing new capacity by expanding our British Columbia footprint and also developing a new site near Dallas, Texas, which will grow our footprint by over 50%. The Dallas facility is scheduled to begin shipping product by mid-2026. As a reminder, this business is relatively CapEx light, and so our investment is centered on light manufacturing, assembly, and test equipment, as well as adding the talent to support our expanding operations. This is a good example of how our significant enterprise resources allow us to respond quickly to attractive market opportunities. While our data center business today represents a small percentage of our enterprise sales, it is growing quickly and we are investing across the spectrum of resources needed to support and fuel further growth. Starting in the coming quarters, we believe our data center business can contribute a point or more growth to our enterprise growth rate at company accretive margins. In short, a huge opportunity for Regal that we are extremely excited about. And with that, I'll turn the call over to Rob.